TAXREV CASES The project of partition (Exhibit K; see also pp.

1. ONA v. CIR 77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels
Republic of the Philippines of land with a total assessed value of
SUPREME COURT P87,860.00, six houses with a total assessed
Manila value of P17,590.00 and an undetermined
amount to be collected from the War Damage
Commission. Later, they received from said
EN BANC Commission the amount of P50,000.00, more
or less. This amount was not divided among
G.R. No. L-19342 May 25, 1972 them but was used in the rehabilitation of
properties owned by them in common (t.s.n., p.
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: 46). Of the ten parcels of land aforementioned,
RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA two were acquired after the death of the
B. OÑA and LORENZO B. OÑA, JR., petitioners, decedent with money borrowed from the
vs. Philippine Trust Company in the amount of
THE COMMISSIONER OF INTERNAL REVENUE, respondent. P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34
BIR rec.).

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Felicisimo R. Rosete, and Special Attorney Purificacion
Ureta for respondent.
The project of partition also shows that the
estate shares equally with Lorenzo T. Oña, the
administrator thereof, in the obligation of
P94,973.00, consisting of loans contracted by
the latter with the approval of the Court (see p.
3 of Exhibit K; or see p. 74, BIR rec.).

Although the project of partition was approved

BARREDO, J.:p by the Court on May 16, 1949, no attempt was
made to divide the properties therein listed.
Instead, the properties remained under the
Petition for review of the decision of the Court of Tax Appeals in
management of Lorenzo T. Oña who used said
CTA Case No. 617, similarly entitled as above, holding that
properties in business by leasing or selling
petitioners have constituted an unregistered partnership and are,
them and investing the income derived
therefore, subject to the payment of the deficiency corporate
therefrom and the proceeds from the sales
income taxes assessed against them by respondent
thereof in real properties and securities. As a
Commissioner of Internal Revenue for the years 1955 and 1956
result, petitioners' properties and investments
in the total sum of P21,891.00, plus 5% surcharge and 1%
gradually increased from P105,450.00 in 1949
monthly interest from December 15, 1958, subject to the
to P480,005.20 in 1956 as can be gleaned from
provisions of Section 51 (e) (2) of the Internal Revenue Code, as
the following year-end balances:
amended by Section 8 of Republic Act No. 2343 and the costs of
the suit,1 as well as the resolution of said court denying
petitioners' motion for reconsideration of said decision.
Y I L B
e n a u
The facts are stated in the decision of the Tax Court as follows: a v n i
r e d l
Julia Buñales died on March 23, 1944, leaving s d
as heirs her surviving spouse, Lorenzo T. Oña t i
and her five children. In 1948, Civil Case No. m n
4519 was instituted in the Court of First e g
Instance of Manila for the settlement of her n
estate. Later, Lorenzo T. Oña the surviving t
spouse was appointed administrator of the
estate of said deceased (Exhibit 3, pp. 34-41, A A A
BIR rec.). On April 14, 1949, the administrator c c c
submitted the project of partition, which was c c c
approved by the Court on May 16, 1949 (See o o o
Exhibit K). Because three of the heirs, namely u u u
Luz, Virginia and Lorenzo, Jr., all surnamed n n n
Oña, were still minors when the project of t t t
partition was approved, Lorenzo T. Oña, their
father and administrator of the estate, filed a
petition in Civil Case No. 9637 of the Court of
1949 — P87,860.00 P17,590.00
First Instance of Manila for appointment as
guardian of said minors. On November 14,
1949, the Court appointed him guardian of the 1950 P24,657.65 128,566.72 96,076.26
persons and property of the aforenamed
minors (See p. 3, BIR rec.). 1951 51,301.31 120,349.28 110,605.11
 2,010.50
1952 67,927.52 87,065.28 152,674.39 Compromise for non-filing
.......................... 50.00
1953 61,258.27 84,925.68 161,463.83 Total ...............................................................
P10,102.50
1954 63,623.37 99,001.20 167,962.04
1956
1955 100,786.00 120,249.78 169,262.52
Net income as per investigation
1956 175,028.68 135,714.68 169,262.52 ................ P69,245.23

Income tax due thereon ...............................

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50,
102-104)
From said investments and properties
petitioners derived such incomes as profits
from installment sales of subdivided lots, profits
from sales of stocks, dividends, rentals and
interests (see p. 3 of Exhibit 3; p. 32, BIR rec.;
t.s.n., pp. 37-38). The said incomes are
recorded in the books of account kept by
Lorenzo T. Oña where the corresponding
shares of the petitioners in the net income for
the year are also known. Every year, petitioners
returned for income tax purposes their shares
in the net income derived from said properties
and securities and/or from transactions
involving them (Exhibit 3, supra; t.s.n., pp. 25-
26). However, petitioners did not actually
receive their shares in the yearly income.
(t.s.n., pp. 25-26, 40, 98, 100). The income was
always left in the hands of Lorenzo T. Oña who,
as heretofore pointed out, invested them in real
properties and securities. (See Exhibit 3, t.s.n.,
pp. 50, 102-104).
On the basis of the foregoing facts, respondent
(Commissioner of Internal Revenue) decided
that petitioners formed an unregistered
partnership and therefore, subject to the
corporate income tax, pursuant to Section 24,
in relation to Section 84(b), of the Tax Code.
Accordingly, he assessed against the
petitioners the amounts of P8,092.00 and
P13,899.00 as corporate income taxes for 1955
and 1956, respectively. (See Exhibit 5,
amended by Exhibit 17, pp. 50 and 86, BIR
rec.). Petitioners protested against the
assessment and asked for reconsideration of
the ruling of respondent that they have formed
an unregistered partnership. Finding no merit in
petitioners' request, respondent denied it (See
Exhibit 17, p. 86, BIR rec.). (See pp. 1-4,
Memorandum for Respondent, June 12, 1961).
13,849.00
25% surcharge ..............................................
3,462.25
Compromise for non-filing
.......................... 50.00
Total ...............................................................
P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the
25% surcharge was eliminated in line with the
ruling of the Supreme Court in Collector v.
Batangas Transportation Co., G.R. No. L-9692,
Jan. 6, 1958, so that the questioned
assessment refers solely to the income tax
proper for the years 1955 and 1956 and the
"Compromise for non-filing," the latter item
obviously referring to the compromise in lieu of
the criminal liability for failure of petitioners to
file the corporate income tax returns for said
years. (See Exh. 17, page 86, BIR records).
(Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the
Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN
HOLDING THAT THE PETITIONERS
FORMED AN UNREGISTERED
PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN
NOT HOLDING THAT THE PETITIONERS
WERE CO-OWNERS OF THE PROPERTIES
INHERITED AND (THE) PROFITS DERIVED
FROM TRANSACTIONS THEREFROM (sic);

The original assessment was as follows: III.

1955 THE COURT OF TAX APPEALS ERRED IN

HOLDING THAT PETITIONERS WERE
LIABLE FOR CORPORATE INCOME TAXES
Net income as per investigation FOR 1955 AND 1956 AS AN UNREGISTERED
................ P40,209.89 PARTNERSHIP;
Income tax due thereon ...............................
8,042.00 IV.
25% surcharge ..............................................
 ON THE ASSUMPTION THAT THE
PETITIONERS CONSTITUTED AN
UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE
AN UNREGISTERED PARTNERSHIP TO
THE EXTENT ONLY THAT THEY INVESTED
THE PROFITS FROM THE PROPERTIES
OWNED IN COMMON AND THE LOANS
RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS
AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT
DEDUCTING THE VARIOUS AMOUNTS PAID
BY THE PETITIONERS AS INDIVIDUAL
INCOME TAX ON THEIR RESPECTIVE
SHARES OF THE PROFITS ACCRUING
FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF
THE UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following
questions: (1) Under the facts found by the Court of Tax Appeals,
should petitioners be considered as co-owners of the properties
inherited by them from the deceased Julia Buñales and the profits
derived from transactions involving the same, or, must they be
deemed to have formed an unregistered partnership subject to tax
under Sections 24 and 84(b) of the National Internal Revenue
Code? (2) Assuming they have formed an unregistered
partnership, should this not be only in the sense that they invested
as a common fund the profits earned by the properties owned by
them in common and the loans granted to them upon the security
of the said properties, with the result that as far as their respective
shares in the inheritance are concerned, the total income thereof
should be considered as that of co-owners and not of the
unregistered partnership? And (3) assuming again that they are
taxable as an unregistered partnership, should not the various
amounts already paid by them for the same years 1955 and 1956
as individual income taxes on their respective shares of the profits
accruing from the properties they owned in common be deducted
from the deficiency corporate taxes, herein involved, assessed
against such unregistered partnership by the respondent
Commissioner?
Pondering on these questions, the first thing that has struck the
Court is that whereas petitioners' predecessor in interest died way
back on March 23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949, and
presumably petitioners have been holding their respective shares
in their inheritance since those dates admittedly under the
administration or management of the head of the family, the
widower and father Lorenzo T. Oña, the assessment in question
refers to the later years 1955 and 1956. We believe this point to
be important because, apparently, at the start, or in the years
1944 to 1954, the respondent Commissioner of Internal Revenue
did treat petitioners as co-owners, not liable to corporate tax, and
it was only from 1955 that he considered them as having formed
an unregistered partnership. At least, there is nothing in the record
indicating that an earlier assessment had already been made.
Such being the case, and We see no reason how it could be
otherwise, it is easily understandable why petitioners' position that
they are co-owners and not unregistered co-partners, for the
purposes of the impugned assessment, cannot be upheld. Truth
to tell, petitioners should find comfort in the fact that they were not
similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate
of the deceased among themselves pursuant to the project of
partition approved in 1949, "the properties remained under the
management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income
derived therefrom and the proceed from the sales thereof in real
properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land
account" and P17,590.00 in "building account" in 1949 to
P175,028.68 in "investment account," P135.714.68 in "land
account" and P169,262.52 in "building account" in 1956. And all
these became possible because, admittedly, petitioners never
actually received any share of the income or profits from Lorenzo
T. Oña and instead, they allowed him to continue using said
shares as part of the common fund for their ventures, even as
they paid the corresponding income taxes on the basis of their
respective shares of the profits of their common business as
reported by the said Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to their
contention, merely limit themselves to holding the properties
inherited by them. Indeed, it is admitted that during the material
years herein involved, some of the said properties were sold at
considerable profit, and that with said profit, petitioners engaged,
thru Lorenzo T. Oña, in the purchase and sale of corporate
securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. In
these circumstances, it is Our considered view that from the
moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oña as a
common fund in undertaking several transactions or in business,
with the intention of deriving profit to be shared by them
proportionally, such act was tantamonut to actually contributing
such incomes to a common fund and, in effect, they thereby
formed an unregistered partnership within the purview of the
above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a
period when the heirs can be considered as co-owners rather than
unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and
distribution of the estate of the deceased, all the income thereof
does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not
necessarily follow that such status as co-owners continues until
the inheritance is actually and physically distributed among the
heirs, for it is easily conceivable that after knowing their respective
shares in the partition, they might decide to continue holding said
shares under the common management of the administrator or
executor or of anyone chosen by them and engage in business
on that basis. Withal, if this were to be allowed, it would be the
easiest thing for heirs in any inheritance to circumvent and render
meaningless Sections 24 and 84(b) of the National Internal
Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was
stated, among the reasons for holding the appellants therein to be
unregistered co-partners for tax purposes, that their common fund
"was not something they found already in existence" and that "it
was not a property inherited by them pro indiviso," but it is
certainly far fetched to argue therefrom, as petitioners are doing
here, that ergo, in all instances where an inheritance is not
actually divided, there can be no unregistered co-partnership. As
already indicated, for tax purposes, the co-ownership of inherited
properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the
incomes derived therefrom are used as a common fund with intent
to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either
duly executed in an extrajudicial settlement or approved by the
court in the corresponding testate or intestate proceeding. The
reason for this is simple. From the moment of such partition, the
heirs are entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to manage and
dispose of as exclusively his own without the intervention of the
other heirs, and, accordingly he becomes liable individually for all
taxes in connection therewith. If after such partition, he allows his
share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in
proportion to his share, there can be no doubt that, even if no
document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed. This is
exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph
(3), of the Civil Code, providing that: "The sharing of gross returns
does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in
any property from which the returns are derived," and, for that
matter, on any other provision of said code on partnerships is
unavailing. In Evangelista, supra, this Court clearly differentiated
the concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as "corporations"
under Sections 24 and 84(b) of the National Internal Revenue
Code. Mr. Justice Roberto Concepcion, now Chief Justice,
elucidated on this point thus:
To begin with, the tax in question is one
imposed upon "corporations", which, strictly
speaking, are distinct and different from
"partnerships". When our Internal Revenue
Code includes "partnerships" among the
entities subject to the tax on "corporations",
said Code must allude, therefore, to
organizations which are not
necessarily "partnerships", in the technical
sense of the term. Thus, for instance, section
24 of said Code exempts from the
aforementioned tax "duly registered general
partnerships," which constitute precisely one of
the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section
84(b) of said Code, "the term corporation
includes partnerships, no matter how created
or organized." This qualifying expression
clearly indicates that a joint venture need not
be undertaken in any of the standard forms, or
in confirmity with the usual requirements of the
law on partnerships, in order that one could be
deemed constituted for purposes of the tax on
corporation. Again, pursuant to said section
84(b),the term "corporation" includes, among
others, "joint accounts,(cuentas en
participacion)" and "associations", none of
which has a legal personality of its own,
independent of that of its members.
Accordingly, the lawmaker could not have
regarded that personality as a condition
essential to the existence of the partnerships
therein referred to. In fact, as above stated,
"duly registered general co-partnerships" —
which are possessed of the aforementioned
personality — have been expressly excluded
by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own
concept of a partnership.
Under the term "partnership"
it includes not only a
partnership as known in
common law but, as well, a
syndicate, group, pool, joint
venture, or other
unincorporated organization
which carries on any
business, financial
operation, or venture, and
which is not, within the
meaning of the Code, a trust,
estate, or a corporation. ... .
(7A Merten's Law of Federal
Income Taxation, p. 789;
emphasis ours.)
The term "partnership"
includes a syndicate, group,
pool, joint venture or other
unincorporated organization,
through or by means of
which any business,
financial operation, or
venture is carried on. ... . (8
Merten's Law of Federal
Income Taxation, p. 562
Note 63; emphasis ours.)
For purposes of the tax on corporations, our
National Internal Revenue Code includes these
partnerships — with the exception only of duly
registered general copartnerships — within the
purview of the term "corporation." It is,
therefore, clear to our mind that petitioners
herein constitute a partnership, insofar as said
Code is concerned, and are subject to the
income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs.
Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July
29, 1968, 24 SCRA 198, wherein the Court ruled against a theory
of co-ownership pursued by appellants therein.
As regards the second question raised by petitioners about the
segregation, for the purposes of the corporate taxes in question,
of their inherited properties from those acquired by them
subsequently, We consider as justified the following ratiocination
of the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is
alleged that, if there was an unregistered
partnership, the holding should be limited to the
business engaged in apart from the properties
inherited by petitioners. In other words, the
 taxable income of the partnership should be
limited to the income derived from the
acquisition and sale of real properties and
corporate securities and should not include the
income derived from the inherited properties. It
is admitted that the inherited properties and the
income derived therefrom were used in the
business of buying and selling other real
properties and corporate securities.
Accordingly, the partnership income must
include not only the income derived from the
purchase and sale of other properties but also
the income of the inherited properties.
Besides, as already observed earlier, the income derived from
inherited properties may be considered as individual income of
the respective heirs only so long as the inheritance or estate is
not distributed or, at least, partitioned, but the moment their
respective known shares are used as part of the common assets
of the heirs to be used in making profits, it is but proper that the
income of such shares should be considered as the part of the
taxable income of an unregistered partnership. This, We hold, is
the clear intent of the law.
Likewise, the third question of petitioners appears to have been
adequately resolved by the Tax Court in the aforementioned
resolution denying petitioners' motion for reconsideration of the
decision of said court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for
petitioners alleges:
Even if we were to yield to
the decision of this
Honorable Court that the
herein petitioners have
formed an unregistered
partnership and, therefore,
have to be taxed as such, it
might be recalled that the
petitioners in their individual
income tax returns reported
their shares of the profits of
the unregistered partnership.
We think it only fair and
equitable that the various
amounts paid by the
individual petitioners as
income tax on their
respective shares of the
unregistered partnership
should be deducted from the
deficiency income tax found
by this Honorable Court
against the unregistered
partnership. (page 7,
Memorandum for the
Petitioner in Support of Their
Motion for Reconsideration,
Oct. 28, 1961.)
In other words, it is the position of petitioners
that the taxable income of the partnership must
be reduced by the amounts of income tax paid
by each petitioner on his share of partnership
profits. This is not correct; rather, it should be
the other way around. The partnership profits
distributable to the partners (petitioners herein)
should be reduced by the amounts of income
tax assessed against the partnership.
Consequently, each of the petitioners in his
individual capacity overpaid his income tax for
the years in question, but the income tax due
from the partnership has been correctly
assessed. Since the individual income tax
liabilities of petitioners are not in issue in this
proceeding, it is not proper for the Court to pass
upon the same.
Petitioners insist that it was error for the Tax Court to so rule that
whatever excess they might have paid as individual income tax
cannot be credited as part payment of the taxes herein in
question. It is argued that to sanction the view of the Tax Court is
to oblige petitioners to pay double income tax on the same
income, and, worse, considering the time that has lapsed since
they paid their individual income taxes, they may already be
barred by prescription from recovering their overpayments in a
separate action. We do not agree. As We see it, the case of
petitioners as regards the point under discussion is simply that of
a taxpayer who has paid the wrong tax, assuming that the failure
to pay the corporate taxes in question was not deliberate. Of
course, such taxpayer has the right to be reimbursed what he has
erroneously paid, but the law is very clear that the claim and
action for such reimbursement are subject to the bar of
prescription. And since the period for the recovery of the excess
income taxes in the case of herein petitioners has already lapsed,
it would not seem right to virtually disregard prescription merely
upon the ground that the reason for the delay is precisely because
the taxpayers failed to make the proper return and payment of the
corporate taxes legally due from them. In principle, it is but proper
not to allow any relaxation of the tax laws in favor of persons who
are not exactly above suspicion in their conduct vis-a-vis their tax
obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court
of Tax Appeals appealed from is affirm with costs against
petitioners.
2. DPWH v. SORIANO
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 211666 February 25, 2015
REPUBLIC OF THE PHILIPPINES, represented by the
DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS,
Petitioners,
vs.
ARLENE R. SORIANO, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review under Rule 45 of the Rules
of Court assailing the Decision1 dated November 15, 2013 and
Order2 dated March 10, 2014 of the Regional Trial Court (RTC),
Valenzuela City, Branch 270, in Civil Case No. 140-V-10.
FACTS:
On October 20, 2010, petitioner Republic of the Philippines,
represented by the Department of Public Works and Highways
(DPWH), filed a Complaint3 for expropriation against respondent
Arlene R. Soriano, the registered owner of a parcel of land
consisting of an area of 200 square meters, situated at Gen. T De
Leon, Valenzuela City, and covered by Transfer Certificate of Title
(TCT) No. V-13790.4 In its Complaint, petitioner averred that
pursuant to Republic Act (RA) No. 8974, otherwise known as "An
Act to Facilitate the Acquisition of Right-Of-Way, Site or Location
for National Government Infrastructure Projects and for other
Purposes," the property sought to be expropriated shall be used
in implementing the construction of the North Luzon Expressway
(NLEX)- Harbor Link Project (Segment 9) from NLEX to
MacArthur Highway, Valenzuela City.5
Petitioner duly deposited to the Acting Branch Clerk of Court
the amount of ₱420,000.00 representing 100% of the zonal
value of the subject property. Consequently, in an Order6 dated
May 27, 2011, the RTC ordered the issuance of a Writ of
Possession and a Writ of Expropriation for failure of respondent,
or any of her representatives, to appear despite notice during the
hearing called for the purpose.
In another Order7 dated June 21, 2011, the RTC appointed the
following members of the Board of Commissioners for the
determination of just compensation: (1) Ms. Eunice O. Josue,
Officer-in-Charge, RTC, Branch 270, Valenzuela City; (2) Atty.
Cecilynne R. Andrade, Acting Valenzuela City Assessor,City
Assessor’s Office, Valenzuela City; and (3) Engr. Restituto
Bautista, of Brgy. Bisig, Valenzuela City. However, the trial court
subsequently revoked the appointment of the Board for their
failure to submit a report as to the fair market value of the property
to assist the court in the determination of just compensation and
directed the parties to submit their respective position
papers.8 Thereafter, the case was set for hearing giving the
parties the opportunity to present and identify all evidence in
support of their arguments therein.
According to the RTC, the records of the case reveal that
petitioner adduced evidence to show that the total amount
deposited is just, fair, and equitable. Specifically, in its Position
Paper, petitioner alleged that pursuant to a Certification
issued by the Bureau of Internal Revenue (BIR), Revenue
Region No. 5, the zonal value of the subject property in the
amount of ₱2,100.00 per square meter is reasonable, fair, and
just to compensate the defendant for the taking of her
property in the total area of 200 square meters. 9 In fact, Tax
Declaration No. C-018-07994, dated November 13, 2009
submitted by petitioner, shows that the value of the subject
property is at a lower rate of ₱400.00per square meter. Moreover,
as testified to by Associate Solicitor III Julie P. Mercurio, and as
affirmed by the photographs submitted, the subject property is
poorly maintained, covered by shrubs and weeds, and not
concretely-paved. It is located far from commercial or industrial
developments in an area without a proper drainage system, can
only be accessed through a narrow dirt road, and is surrounded
by adjacent dwellings of sub-standard materials.
Accordingly, the RTC considered respondent to have waived her
right to adduce evidence and to object to the evidence submitted
by petitioner for her continued absence despite being given
several notices to do so.
On November 15, 2013, the RTC rendered its Decision, the
dispositive portion of which reads: WHEREFORE, with the
foregoing determination of just compensation, judgment is hereby
rendered:
1) Declaring plaintiff to have lawful right to acquire possession of
and title to 200 square meters of defendant Arlene R. Soriano’s
parcel of land covered by TCT V-13790 necessary for the
construction of the NLEX – Harbor Link Project (Segment 9) from
NLEX to MacArthur Highway Valenzuela City;
2) Condemning portion to the extent of 200 square meters of the
above-described parcel of land including improvements thereon,
if there be any, free from all liens and encumbrances;
3) Ordering the plaintiff to pay defendant Arlene R. Soriano
Php2,100.00 per square meter or the sum of Four Hundred
Twenty Thousand Pesos (Php420,000.00) for the 200 square
meters as fair, equitable, and just compensation with legal
interest at 12% per annum from the taking of the possession
of the property, subject to the payment of all unpaid real property
taxes and other relevant taxes, if there be any;
4) Plaintiff is likewise ordered to pay the defendant consequential
damages which shall include the value of the transfer tax
necessary for the transfer of the subject property from the name
of the defendant to that of the plaintiff;
5) The Office of the Register of Deeds of Valenzuela City, Metro
Manila is directed to annotate this Decision in Transfer Certificate
of Title No. V-13790 registered under the name of Arlene R.
Soriano.
Let a certified true copy of this decision be recorded in the
Registry of Deeds of Valenzuela City.
Records of this case show that the Land Bank Manager’s Check
Nos. 0000016913 dated January 21, 2011 in the amount of
Php400,000.00 and 0000017263 dated April 28, 2011 in the
amount of Php20,000.00 issued by the Department of Public
Works and Highways (DPWH) are already stale. Thus, the said
Office is hereby directed to issue another Manager’s Check in the
total amount Php420,000.00 under the name of the Office of the
Clerk of Court, Regional Trial Court, Valenzuela City earmarked
for the instant case.10
Petitioner filed a Motion for Reconsideration maintaining that
pursuant to Bangko Sentral ng Pilipinas (BSP) Circular No. 799,
Series of 2013, which took effect on July 1, 2013, the interest
rate imposed by the RTC on just compensation should be
lowered to 6% for the instant case falls under a loan or
forbearance of money.11 In its Order12 dated March 10, 2014,
the RTC reduced the interest rate to 6% per annum not on the
basis of the aforementioned Circular, but on Article 2209 of the
Civil Code, viz.:
However, the case of National Power Corporation v. Honorable
Zain B. Angas is instructive.
In the aforementioned case law, which is similar to the instant
case, the Supreme Court had the occasion to rule that it is well-
settled that the aforequoted provision of Bangko Sentral ng
Pilipinas Circular applies only to a loan or forbearance of money,
goods or credits. However, the term "judgments" as used in
Section 1 of the Usury Law and the previous Central Bank Circular
No. 416, should be interpreted to mean only judgments involving
loan or forbearance of money, goods or credits, following the
principle of ejusdem generis. And applying said rule on statutory
construction, the general term "judgments" can refer only to
judgments in cases involving loans or forbearance of any money,
goods, or credits. Thus, the High Court held that, Art. 2209 of the
Civil Code, and not the Central Bank Circular, is the law
applicable.
Art. 2009 of the Civil Code reads:
"If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being
no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum."
Further in that case, the Supreme Court explained that the
transaction involved is clearly not a loan or forbearance of money,
goods or credits but expropriation of certain parcels of land for a
public purpose, the payment of which is without stipulation
regarding interest, and the interest adjudged by the trial court is
in the nature of indemnity for damages. The legal interest required
to be paid on the amount of just compensation for the properties
expropriated is manifestly in the form of indemnity for damages
for the delay in the payment thereof. It ultimately held that Art.
2209 of the Civil Code shall apply.13
On May 12, 2014, petitioner filed the instant petition invoking the
following arguments:
I.
RESPONDENT IS NOT ENTITLED TO THE LEGAL INTEREST
OF 6% PER ANNUM ON THE AMOUNT OF JUST
COMPENSATION OF THE SUBJECT PROPERTY AS THERE
WAS NO DELAY ON THE PART OF PETITIONER.
II.
BASED ON THE NATIONAL INTERNAL REVENUE CODE OF
1997 AND THE LOCAL GOVERNMENT CODE, IT IS
RESPONDENT’S OBLIGATION TO PAY THE TRANSFER
TAXES.
Petitioner maintains that if property is taken for public use before
compensation is deposited with the court having jurisdiction over
the case, the final compensation must include interests on its just
value computed from the time the property is taken up to the time
when compensation is actually paid or deposited with the
court.14 Thus, legal interest applies only when the property was
taken prior to the deposit of payment with the court and only to
the extent that there is delay in payment. In the instant case,
petitioner posits that since it was able to deposit with the court the
amount representing the zonal value of the property before its
taking, it cannot be said to be in delay, and thus, there can be no
interest due on the payment of just compensation.15 Moreover,
petitioner alleges that since the entire subject property was
expropriated and not merely a portion thereof, it did not suffer an
impairment or decrease in value, rendering the award of
consequential damages nugatory. Furthermore, petitioner claims
that contrary to the RTC’s instruction, transfer taxes, in the nature
of Capital Gains Tax and Documentary Stamp Tax, necessary for
the transfer of the subject property from the name of the
respondent to that of the petitioner are liabilities of respondent and
not petitioner.
HELD:
The petition is partly meritorious.
At the outset, it must be noted that the RTC’s reliance on National
Power Corporation v. Angas is misplaced for the same has
already been overturned by our more recent ruling in Republic v.
Court of Appeals,16 wherein we held that the payment of just
compensation for the expropriated property amounts to an
effective forbearance on the part of the State, to wit:
Aside from this ruling, Republic notably overturned the Court’s
previous ruling in National Power Corporation v. Angas which
held that just compensation due for expropriated properties is not
a loan or forbearance of money but indemnity for damages for the
delay in payment; since the interest involved is in the nature of
damages rather than earnings from loans, then Art. 2209 of the
Civil Code, which fixes legal interest at 6%, shall apply.
In Republic, the Court recognized that the just compensation due
to the landowners for their expropriated property amounted to an
effective forbearance on the part of the State. Applying the
Eastern Shipping Lines ruling, the Court fixed the applicable
interest rate at 12% per annum, computed from the time the
property was taken until the full amount of just compensation was
paid, in order to eliminate the issue of the constant fluctuation and
inflation of the value of the currency over time. In the Court’s own
words:
The Bulacan trial court, in its 1979 decision, was correct in
imposing interest[s] on the zonal value of the property to be
computed from the time petitioner instituted condemnation
proceedings and "took" the property in September 1969. This
allowance of interest on the amount found to be the value of the
property as of the time of the taking computed, being an effective
forbearance, at 12% per annum should help eliminate the issue
of the constant fluctuation and inflation of the value of the currency
over time.
We subsequently upheld Republic’s 12% per annum interest rate
on the unpaid expropriation compensation in the following cases:
Reyes v. National Housing Authority, Land Bank of the Philippines
v. Wycoco, Republic v. Court of Appeals, Land Bank of the
Philippines v. Imperial, Philippine Ports Authority v. Rosales-
Bondoc, and Curata v. Philippine Ports Authority.17
Effectively, therefore, the debt incurred by the government on
account of the taking of the property subject of an
expropriation constitutes a forbearance18 which runs contrary
to the trial court’s opinion that the same is in the nature of
indemnity for damages calling for the application of Article 2209
of the Civil Code.
Nevertheless, in line with the recent circular of the Monetary
Board of the Bangko Sentral ng Pilipinas (BSP-MB) No. 799,
Series of 2013, effective July 1, 2013, the prevailing rate of
interest for loans or forbearance of money is six percent (6%) per
annum, in the absence of an express contract as to such rate of
interest.
Notwithstanding the foregoing, We find that the imposition of
interest in this case is unwarranted in view of the fact that as
evidenced by the acknowledgment receipt19 signed by the Branch
Clerk of Court, petitioner was able to deposit with the trial court
the amount representing the zonal value of the property before its
taking. As often ruled by this Court, the award of interest is
imposed in the nature of damages for delay in payment
which, in effect, makes the obligation on the part of the
government one of forbearance to ensure prompt payment
of the value of the land and limit the opportunity loss of the
owner.20 However, when there is no delay in the payment of just
compensation, We have not hesitated in deleting the imposition
of interest thereon for the same is justified only in cases where
delay has been sufficiently established.21
The records of this case reveal that petitioner did not delay in its
payment of just compensation as it had deposited the pertinent
amount in full due to respondent on January 24, 2011, or four (4)
months before the taking thereof, which was when the RTC
ordered the issuance of a Writ of Possession and a Writ of
Expropriation on May 27, 2011. The amount deposited was
deemed by the trial court to be just, fair, and equitable, taking into
account the well-established factors in assessing the value of
land, such as its size, condition, location, tax declaration, and
zonal valuation as determined by the BIR. Considering, therefore,
the prompt payment by the petitioner of the full amount of just
compensation as determined by the RTC, We find that the
imposition of interest thereon is unjustified and should be
deleted.
Similarly, the award of consequential damages should likewise be
deleted in view of the fact that the entire area of the subject
property is being expropriated, and not merely a portion thereof,
wherein such remaining portion suffers an impairment or
decrease in value, as enunciated in Republic of the Philippines v.
Bank of the Philippine Islands,22thus:
x x x The general rule is that the just compensation to which the
owner of the condemned property is entitled to is the market
value. Market value is that sum of money which a person desirous
but not compelled to buy, and an owner willing but not compelled
to sell, would agree on as a price to be paid by the buyer and
received by the seller. The general rule, however, is modified
where only a part of a certain property is expropriated. In such a
case, the owner is not restricted to compensation for the portion
actually taken, he is also entitled to recover the consequential
damage, if any, to the remaining part of the property.
xxxx
No actual taking of the building is necessary to grant
consequential damages. Consequential damages are awarded if
as a result of the expropriation, the remaining property of the
owner suffers from an impairment or decrease in value. The rules
on expropriation clearly provide a legal basis for the award of
consequential damages. Section 6 of Rule 67 of the Rules of
Court provides:
x x x The commissioners shall assess the consequential damages
to the property not taken and deduct from such consequential
damages the consequential benefits to be derived by the owner
from the public use or public purpose of the property taken, the
operation of its franchise by the corporation or the carrying on of
the business of the corporation or person taking the property. But
in no case shall the consequential benefits assessed exceed the
consequential damages assessed, or the owner be deprived of
the actual value of his property so taken.
In B.H. Berkenkotter & Co. v. Court of Appeals, we held that:
To determine just compensation, the trial court should first
ascertain the market value of the property, to which should be
added the consequential damages after deducting therefrom the
consequential benefits which may arise from the expropriation. If
the consequential benefits exceed the consequential damages,
these items should be disregarded altogether as the basic value
of the property should be paid in every case.23
Considering that the subject property is being expropriated in its
entirety, there is no remaining portion which may suffer an
impairment or decrease in value as a result of the expropriation.
Hence, the award of consequential damages is improper.
Anent petitioner’s contention that it cannot be made to pay the
value of the transfer taxes in the nature of capital gains tax and
documentary stamp tax, which are necessary for the transfer of
the subject property from the name of the respondent to that of
the petitioner, the same is partly meritorious.
With respect to the capital gains tax, We find merit in petitioner’s
posture that pursuant to Sections 24(D) and 56(A)(3) of the 1997
National Internal Revenue Code (NIRC), capital gains tax due
on the sale of real property is a liability for the account of the
seller, to wit:
Section 24. Income Tax Rates–
xxxx
(D) Capital Gains from Sale of Real Property. –
(1) In General. – The provisions of Section 39(B) notwithstanding,
a final tax of six percent (6%) based on the gross selling price or
current fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, is hereby imposed
upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro
sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any,
on gains from sales or other disposition of real property to the
government or any of its political subdivisions or agencies or to
government-owned or controlled corporations shall be
determined either under Section 24(A)or under this Subsection,
at the option of the taxpayer.
xxxx
Section 56. Payment and Assessment of Income Tax for
Individuals and Corporations. – (A) Payment of Tax –
xxxx
(3) Payment of Capital Gains Tax. - The total amount of tax
imposed and prescribed under Section 24 (c), 24(D), 27(E)(2),
28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return
prescribed therefor is filed by the person liable thereto: Provided,
That if the seller submits proof of his intention to avail himself of
the benefit of exemption of capital gains under existing special
laws, no such payments shall be required : Provided, further, That
in case of failure to qualify for exemption under such special laws
and implementing rules and regulations, the tax due on the gains
realized from the original transaction shall immediately become
due and payable, subject to the penalties prescribed under
applicable provisions of this Code: Provided, finally, That if the
seller, having paid the tax, submits such proof of intent within six
(6) months from the registration of the document transferring the
real property, he shall be entitled to a refund of such tax upon
verification of his compliance with the requirements for such
exemption.
Thus, it has been held that since capital gains is a tax on passive
income, it is the seller, not the buyer, who generally would
shoulder the tax.24 Accordingly, the BIR, in its BIR Ruling No. 476-
2013, dated December 18, 2013, constituted the DPWH as a
withholding agent to withhold the six percent (6%) final
withholding tax in the expropriation of real property for
infrastructure projects. As far as the government is concerned,
therefore, the capital gains tax remains a liability of the seller since
it is a tax on the seller's gain from the sale of the real estate.25
As to the documentary stamp tax, however, this Court finds
inconsistent petitioner’s denial of liability to the same. Petitioner
cites Section 196 of the 1997 NIRC as its basis in saying that the
documentary stamp tax is the liability of the seller, viz.:
SECTION 196. Stamp Tax on Deeds of Sale and Conveyances
of Real Property. - On all conveyances, deeds, instruments, or
writings, other than grants, patents or original certificates of
adjudication issued by the Government, whereby any land,
tenement or other realty sold shall be granted, assigned,
transferred or otherwise conveyed to the purchaser, or
purchasers, or to any other person or persons designated by such
purchaser or purchasers, there shall be collected a documentary
stamp tax, at the rates herein below prescribed, based on the
consideration contracted to be paid for such realty or on its fair
market value determined in accordance with Section 6(E) of this
Code, whichever is higher: Provided, That when one of the
contracting parties is the Government, the tax herein imposed
shall be based on the actual consideration: (a) When the
consideration, or value received or contracted to be paid for such
realty, after making proper allowance of any encumbrance, does
not exceed One thousand pesos (₱1,000), Fifteen pesos
(₱15.00).
(b) For each additional One thousand pesos (₱1,000), or
fractional part thereof in excess of One thousand pesos (₱1,000)
of such consideration or value, Fifteen pesos (₱15.00).
When it appears that the amount of the documentary stamp tax
payable hereunder has been reduced by an incorrect statement
of the consideration in any conveyance, deed, instrument or
writing subject to such tax the Commissioner, provincial or city
Treasurer, or other revenue officer shall, from the assessment
rolls or other reliable source of information, assess the property
of its true market value and collect the proper tax thereon.
Yet, a perusal of the provision cited above does not explicitly
impute the obligation to pay the documentary stamp tax on the
seller. In fact, according to the BIR, all the parties to a transaction
are primarily liable for the documentary stamp tax, as provided by
Section 2 of BIR Revenue Regulations No. 9-2000, which reads:26
SEC. 2. Nature of the Documentary Stamp Tax and Persons
Liable for the Tax. –
(a) In General. - The documentary stamp taxes under
Title VII of the Code is a tax on certain
transactions.1âwphi1 It is imposed against "the person
making, signing, issuing, accepting, or transferring" the
document or facility evidencing the aforesaid
transactions. Thus, in general, it may be imposed on the
transaction itself or upon the document underlying such
act. Any of the parties thereto shall be liable for the full
amount of the tax due: Provided, however, that as
between themselves, the said parties may agree on who
shall be liable or how they may share on the cost of the
tax.
(b) Exception. - Whenever one of the parties to the
taxable transaction is exempt from the tax imposed
under Title VII of the Code, the other party thereto who
is not exempt shall be the one directly liable for the tax.27
As a general rule, therefore, any of the parties to a transaction
shall be liable for the full amount of the documentary stamp tax
due, unless they agree among themselves on who shall be liable
for the same.
In this case, there is no agreement as to the party liable for the
documentary stamp tax due on the sale of the land to be
expropriated. But while petitioner rejects any liability for the same,
this Court must take note of petitioner’s Citizen’s Charter,28 which
functions as a guide for the procedure to be taken by the DPWH
in acquiring real property through expropriation under RA 8974.
The Citizen’s Charter, issued by petitioner DPWH itself on
December 4,2013, explicitly provides that the documentary
stamp tax, transfer tax, and registration fee due on the
transfer of the title of land in the name of the Republic shall
be shouldered by the implementing agency of the DPWH,
while the capital gains tax shall be paid by the affected
property owner.29 Thus, while there is no specific agreement
between petitioner and respondent, petitioner's issuance of the
Citizen's Charter serves as its notice to the public as to the
procedure it shall generally take in cases of expropriation under
RA 8974. Accordingly, it will be rather unjust for this Court to
blindly accede to petitioner's vague rejection of liability in the face
of its issuance of the Citizen's Charter, which contains a clear and
unequivocal assumption of accountability for the documentary
stamp tax. Had petitioner provided this Court with more
convincing basis, apart from a mere citation of an indefinite
provision of the 1997 NIRC, showing that it should be respondent-
seller who shall be liable for the documentary stamp tax due on
the sale of the subject property, its rejection of the payment of the
same could have been sustained. WHEREFORE, premises
considered, the instant pet1t10n 1s PARTIALLY GRANTED. The
Decision and Order, dated November 15, 2013 and March 10,
2014, respectively, of the Regional Trial Court, Valenzuela City,
Branch 270, in Civil Case No. 140-V-10 are hereby MODIFIED, in
that the imposition of interest on the payment of just
compensation as well as the award of consequential damages are
deleted. In addition, respondent Arlene R. Soriano is ORDERED
to pay for the capital gains tax due on the transfer of the
expropriated property, while the documentary stamp tax, transfer
tax, and registration fee shall be for the account of petitioner.
SO ORDERED.
3. BDO v. CIR
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 198756 January 13, 2015
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING
CORPORATION, METROPOLITAN BANK & TRUST
COMPANY, PHILIPPINE BANK OF COMMUNICATIONS,
PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS
BANK AND PLANTERS DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC
CAPITAL CORPORATION, Petitioners-Intervenors,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-
Intervenor,
vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF
INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE,
SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE
NATIONAL TREASURER AND BUREAU OF
TREASURY, Respondent.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or
interest income arising from the ₱35 billion worth of 10-year zero-
coupon treasury bonds issued by the Bureau of Treasury on
October 18, 2001 (denominated as the Poverty Eradication and
Alleviation Certificates or the PEA Ce Bonds by the Caucus of
Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue
issued BIR Ruling No. 370-20111 (2011 BIR Ruling), declaring
that the PEACe Bonds being deposit substitutes are subject to the
20% final withholding tax. Pursuant to this ruling, the Secretary of
Finance directed the Bureau of Treasury to withhold a 20% final
tax from the face value of the PEACe Bonds upon their payment
at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus 2 filed
by petitioners under Rule 65 of the Rules of Court seeking to:
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7
October 2011 [and] other related rulings issued by BIR of similar
tenor and import, for being unconstitutional and for having been
issued without jurisdiction or with grave abuse of discretion
amounting to lack or excess of jurisdiction ... ;
b. PROHIBIT Respondents, particularly the BTr, from withholding
or collecting the 20% FWT from the payment of the face value of
the Government Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full
amount of the face value of the Government Bonds upon maturity
... ; and
d. SECURE a temporary restraining order (TRO), and
subsequently a writ of preliminary injunction, enjoining
Respondents, particularly the BIR and the BTr, from withholding
or collecting 20% FWT on the Government Bonds and the
respondent BIR from enforcing the assailed 2011 BIR Ruling, as
well as other related rulings issued by the BIR of similar tenor and
import, pending the resolution by [the court] of the merits of [the]
Petition.3
FACTS:
By letter4 dated March 23, 2001, the Caucus of Development
NGO Networks (CODE-NGO) "with the assistance of its financial
advisors, Rizal Commercial Banking Corp. ("RCBC"), RCBC
Capital Corp. ("RCBC Capital"), CAPEX Finance and Investment
Corp. ("CAPEX") and SEED Capital Ventures, Inc.
(SEED),"5 requested an approval from the Department of Finance
for the issuance by the Bureau of Treasury of 10-year zero
coupon Treasury Certificates (T-notes).6 The T-notes would
initially be purchased by a special purpose vehicle on behalf of
CODE-NGO, repackaged and sold at a premium to investors as
the PEACe Bonds.7 The net proceeds from the sale of the
Bonds" will be used to endow a permanent fund
(Hanapbuhay® Fund) to finance meritorious activities and
projects of accredited non-government organizations
(NGOs) throughout the country."8
Prior to and around the time of the proposal of CODE-NGO, other
proposals for the issuance of zero-coupon bonds were also
presented by banks and financial institutions, such as First Metro
Investment Corporation (proposal dated March 1,
2001),9 International Exchange Bank (proposal dated July 27,
2000),10 Security Bank Corporation and SB Capital Investment
Corporation (proposal dated July 25, 2001), 11 and ATR-Kim Eng
Fixed Income, Inc. (proposal dated August 25, 1999). 12 "[B]oth
the proposals of First Metro Investment Corp. and ATR-Kim Eng
Fixed Income indicate that the interest income or discount earned
on the proposed zero coupon bonds would be subject to the
prevailing withholding tax."13
A zero-coupon bond is a bond bought at a price substantially
lower than its face value (or at a deep discount), with the face
value repaid at the time of maturity.14 It does not make periodic
interest payments, or have so called "coupons," hence the term
zero-coupon bond.15 However, the discount to face value
constitutes the return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to
CODENGO’s letters dated May 10, 15, and 25, 2001, issued BIR
Ruling No. 020-200117 on the tax treatment of the proposed
PEACe Bonds. BIR Ruling No. 020-2001, signed by then
Commissioner of Internal Revenue René G. Bañez confirmed that
the PEACe Bonds would not be classified as deposit substitutes
and would not be subject to the corresponding withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of
funds must be obtained from twenty (20) or more individuals or
corporate lenders at any one time. In the light of your
representation that the PEACe Bonds will be issued only to one
entity, i.e., Code NGO, the same shall not be considered as
"deposit substitutes" falling within the purview of the above
definition. Hence, the withholding tax on deposit substitutes will
not apply.18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling
No. 020-2001 was subsequently reiterated in BIR Ruling No. 035-
200119 dated August 16, 2001 and BIR Ruling No. DA-175-
0120 dated September 29, 2001 (collectively, the 2001 Rulings).
In sum, these rulings pronounced that to be able to determine
whether the financial assets, i.e., debt instruments and securities
are deposit substitutes, the "20 or more individual or corporate
lenders" rule must apply. Moreover, the determination of the
phrase "at any one time" for purposes of determining the "20 or
more lenders" is to be determined at the time of the original
issuance. Such being the case, the PEACe Bonds were not to be
treated as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former
Treasurer Eduardo Sergio G. Edeza (Former Treasurer Edeza)
questioned the propriety of issuing the bonds directly to a special
purpose vehicle considering that the latter was not a Government
Securities Eligible Dealer (GSED).22 Former Treasurer Edeza
recommended that the issuance of the Bonds "be done through
the ADAPS"23 and that CODE-NGO "should get a GSED to bid in
[sic] its behalf."24
Subsequently, in the notice to all GSEDs entitled Public Offering
of Treasury Bonds25 (Public Offering) dated October 9, 2001, the
Bureau of Treasury announced that "₱30.0B worth of 10-year
Zero[-] Coupon Bonds [would] be auctioned on October 16,
2001[.]"26 The notice stated that the Bonds "shall be issued to not
more than 19 buyers/lenders hence, the necessity of a manual
auction for this maiden issue."27 It also required the GSEDs to
submit their bids not later than 12 noon on auction date and to
disclose in their bid submissions the names of the institutions
bidding through them to ensure strict compliance with the 19
lender limit.28 Lastly, it stated that "the issue being limited to 19
lenders and while taxable shall not be subject to the 20% final
withholding [tax]."29
On October 12, 2001, the Bureau of Treasury released a
memo30 on the "Formula for the Zero-Coupon Bond." The memo
stated in part that the formula (in determining the purchase price
and settlement amount) "is only applicable to the zeroes that are
not subject to the 20% final withholding due to the 19 buyer/lender
limit."31
A day before the auction date or on October 15, 2001, the Bureau
of Treasury issued the "Auction Guidelines for the 10-year Zero-
Coupon Treasury Bond to be Issued on October 16, 2001"
(Auction Guidelines).32 The Auction Guidelines reiterated that the
Bonds to be auctioned are "[n]ot subject to 20% withholding tax
as the issue will be limited to a maximum of 19 lenders in the
primary market (pursuant to BIR Revenue Regulation No. 020
2001)."33The Auction Guidelines, for the first time, also stated that
the Bonds are "[e]ligible as liquidity reserves (pursuant to MB
Resolution No. 1545 dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for
the 10-year zero-coupon bonds.35 Also on the same date, the
Bureau of Treasury issued another memorandum 36 quoting
excerpts of the ruling issued by the Bureau of Internal Revenue
concerning the Bonds’ exemption from 20% final withholding tax
and the opinion of the Monetary Board on reserve eligibility. 37
During the auction, there were 45 bids from 15 GSEDs. 38 The
bidding range was very wide, from as low as 12.248% to as high
as 18.000%.39 Nonetheless, the Bureau of Treasury accepted the
auction results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-
NGO was declared as the winning bidder having tendered the
lowest bids.42 Accordingly, on October 18, 2001, the Bureau of
Treasury issued ₱35 billion worth of Bonds at yield-to-maturity of
12.75% to RCBC for approximately ₱10.17 billion,43 resulting in a
discount of approximately ₱24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an
underwriting Agreement44 with CODE-NGO, whereby RCBC
Capital was appointed as the Issue Manager and Lead
Underwriter for the offering of the PEACe Bonds.45RCBC Capital
agreed to underwrite46 on a firm basis the offering, distribution
and sale of the 35 billion Bonds at the price of
₱11,995,513,716.51.47 In Section 7(r) of the underwriting
agreement, CODE-NGO represented that "[a]ll income derived
from the Bonds, inclusive of premium on redemption and gains on
the trading of the same, are exempt from all forms of taxation as
confirmed by Bureau of Internal Revenue (BIR) letter rulings
dated 31 May 2001 and 16 August 2001, respectively."48
RCBC Capital sold the Government Bonds in the secondary
market for an issue price of ₱11,995,513,716.51. Petitioners
purchased the PEACe Bonds on different dates.49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR
Ruling imposing a 20% FWT on the Government Bonds and
directing the BTr to withhold said final tax at the maturity
thereof, [allegedly without] consultation with Petitioners as
bond holders, and without conducting any hearing."50
"It appears that the assailed 2011 BIR Ruling was issued in
response to a query of the Secretary of Finance on the proper tax
treatment of the discount or interest income derived from the
Government Bonds."51 The Bureau of Internal Revenue, citing
three (3) of its rulings rendered in 2004 and 2005, namely: BIR
Ruling No. 007-0452 dated July 16, 2004; BIR Ruling No. DA-491-
0453 dated September 13, 2004; and BIR Ruling No. 008-
0554 dated July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe
Bonds should be subject to 20% Final Tax on interest income from
deposit substitutes. It is now settled that all treasury bonds
(including PEACe Bonds), regardless of the number of
purchasers/lenders at the time of origination/issuance are
considered deposit substitutes. In the case of zero-coupon
bonds, the discount (i.e. difference between face value and
purchase price/discounted value of the bond) is treated as
interest income of the purchaser/holder. Thus, the Php 24.3
interest income should have been properly subject to the 20%
Final Tax as provided in Section 27(D)(1) of the Tax Code of
1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001,
the BTr was not able to collect the final tax on the discount/interest
income realized by RCBC as a result of the 2001 Rulings.
Subsequently, the issuance of BIR Ruling No. 007-04 dated July
16, 2004 effectively modifies and supersedes the 2001 Rulings by
stating that the [1997] Tax Code is clear that the "term public
means borrowing from twenty (20) or more individual or corporate
lenders at any one time." The word "any" plainly indicates that
the period contemplated is the entire term of the bond, and not
merely the point of origination or issuance. . . . Thus, by taking the
PEACe bonds out of the ambit of deposits [sic] substitutes and
exempting it from the 20% Final Tax, an exemption in favour of
the PEACe Bonds was created when no such exemption is found
in the law.55
On October 11, 2011, a "Memo for Trading Participants No. 58-
2011 was issued by the Philippine Dealing System Holdings
Corporation and Subsidiaries ("PDS Group"). The Memo provides
that in view of the pronouncement of the DOF and the BIR on the
applicability of the 20% FWT on the Government Bonds, no
transfer of the same shall be allowed to be recorded in the
Registry of Scripless Securities ("ROSS") from 12 October 2011
until the redemption payment date on 18 October 2011. Thus, the
bondholders of record appearing on the ROSS as of 18 October
2011, which include the Petitioners, shall be treated by the BTr as
the beneficial owners of such securities for the relevant [tax]
payments to be imposed thereon."56
On October 17, 2011, replying to an urgent query from the Bureau
of Treasury, the Bureau of Internal Revenue issued BIR Ruling
No. DA 378-201157 clarifying that the final withholding tax due on
the discount or interest earned on the PEACe Bonds should "be
imposed and withheld not only on RCBC/CODE NGO but also
[on] ‘all subsequent holders of the Bonds.’"58
On October 17, 2011, petitioners filed a petition for certiorari,
prohibition, and/or mandamus (with urgent application for a
temporary restraining order and/or writ of preliminary
injunction)59 before this court.
On October 18, 2011, this court issued a temporary restraining
order (TRO)60 "enjoining the implementation of BIR Ruling No.
370-2011 against the [PEACe Bonds,] . . . subject to the condition
that the 20% final withholding tax on interest income there from
shall be withheld by the petitioner banks and placed in escrow
pending resolution of [the] petition."61
On October 28, 2011, RCBC and RCBC Capital filed a motion for
leave of court to intervene and to admit petition-in-
intervention62 dated October 27, 2011, which was granted by this
court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their
"Manifestation with Urgent Ex Parte Motion to Direct Respondents
to Comply with the TRO."64 They alleged that on the same day
that the temporary restraining order was issued, the Bureau of
Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the
amounts corresponding to the 20% final withholding tax on
interest income, and that the Bureau of Treasury refused to
release the amounts corresponding to the 20% final withholding
tax.65On November 15, 2011, this court directed respondents to:
"(1) SHOW CAUSE why they failed to comply with the October
18, 2011 resolution; and (2) COMPLY with the Court’s resolution
in order that petitioners may place the corresponding funds in
escrow pending resolution of the petition."66
On the same day, CODE-NGO filed a motion for leave to
intervene (and to admit attached petition-in-intervention with
comment on the petition in-intervention of RCBC and RCBC
Capital).67 The motion was granted by this court on November 22,
2011.68
On December 1, 2011, public respondents filed their
compliance.69 They explained that: 1) "the implementation of [BIR
Ruling No. 370-2011], which has already been performed on
October 18, 2011 with the withholding of the 20% final withholding
tax on the face value of the PEACe bonds, is already fait accompli
. . . when the Resolution and TRO were served to and received
by respondents BTr and National Treasurer [on October 19,
2011]";70 and 2) the withheld amount has ipso facto become
public funds and cannot be disbursed or released to petitioners
without congressional appropriation.71 Respondents further aver
that"[i]nasmuch as the . . . TRO has already become moot . . . the
condition attached to it, i.e., ‘that the 20% final withholding tax on
interest income therefrom shall be withheld by the banks and
placed in escrow . . .’has also been rendered moot[.]"72
On December 6, 2011, this court noted respondents'
compliance.73
On February 22, 2012, respondents filed their consolidated
comment74 on the petitions-in-intervention filed by RCBC and
RCBC Capital and On November 27, 2012, petitioners filed their
"Manifestation with Urgent Reiterative Motion (To Direct
Respondents to Comply with the Temporary Restraining
Order)."75
On December 4, 2012, this court: (a) noted petitioners’
manifestation with urgent reiterative motion (to direct respondents
to comply with the temporary restraining order); and (b) required
respondents to comment thereon.76
Respondents’ comment77 was filed on April 15,2013, and
petitioners filed their reply78 on June 5, 2013.
ISSUES:
I. Whether the PEACe Bonds are "deposit substitutes" and
thus subject to 20% final withholding tax under the 1997
National Internal Revenue Code. Related to this question is
the interpretation of the phrase "borrowing from twenty (20)
or more individual or corporate lenders at any one time"
under Section 22(Y) of the 1997 National Internal Revenue
Code, particularly on whether the reckoning of the 20 lenders
includes trading of the bonds in the secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes,"
whether the government or the Bureau of Internal Revenue is
estopped from imposing and/or collecting the 20% final
withholding tax from the face value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the
non-impairment clause of the Constitution?
b. Will it constitute a deprivation of property without due process
of law?
c. Will it violate Section 245 of the 1997 National Internal Revenue
Code on non-retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds
acting through the BTr, the Government is obligated . . . to pay
the face value amount of Ph₱35 Billion upon maturity without any
deduction whatsoever."79 They add that "the Government cannot
impair the efficacy of the [Bonds] by arbitrarily, oppressively and
unreasonably imposing the withholding of 20% FWT upon the
[Bonds] a mere eleven (11) days before maturity and after
several, consistent categorical declarations that such bonds are
exempt from the 20% FWT, without violating due process"80 and
the constitutional principle on non-impairment of
contracts.81 Petitioners aver that at the time they purchased the
Bonds, they had the right to expect that they would receive the full
face value of the Bonds upon maturity, in view of the 2001 BIR
Rulings.82 "[R]egardless of whether or not the 2001 BIR Rulings
are correct, the fact remains that [they] relied [on] good faith
thereon."83
At any rate, petitioners insist that the PEACe Bonds are not
deposit substitutes as defined under Section 22(Y) of the 1997
National Internal Revenue Code because there was only one
lender (RCBC) to whom the Bureau of Treasury issued the
Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings
"erroneously interpreted that the number of investors that
participate in the ‘secondary market’ is the determining factor in
reckoning the existence or non-existence of twenty (20) or more
individual or corporate lenders."85 Furthermore, they contend that
the Bureau of Internal Revenue unduly expanded the definition of
deposit substitutes under Section 22 of the 1997 National Internal
Revenue Code in concluding that "the mere issuance of
government debt instruments and securities is deemed as falling
within the coverage of ‘deposit substitutes[.]’"86 Thus, "[t]he 2011
BIR Ruling clearly amount[ed] to an unauthorized act of
administrative legislation[.]"87
Petitioners further argue that their income from the Bonds is a
"trading gain," which is exempt from income tax.88They insist that
"[t]hey are not lenders whose income is considered as ‘interest
income or yield’ subject to the 20% FWT under Section 27 (D)(1)
of the [1997 National Internal Revenue Code]" 89 because they
"acquired the Government Bonds in the secondary or tertiary
market."90
Even assuming without admitting that the Government Bonds are
deposit substitutes, petitioners argue that the collection of the final
tax was barred by prescription.91 They point out that under
Section 7 of DOF Department Order No. 141-95,92 the final
withholding tax "should have been withheld at the time of their
issuance[.]"93 Also, under Section 203 of the 1997 National
Internal Revenue Code, "internal revenue taxes, such as the final
tax, [should] be assessed within three (3) years after the last day
prescribed by law for the filing of the return." 94
Moreover, petitioners contend that the retroactive application of
the 2011 BIR Ruling without prior notice to them was in violation
of their property rights,95 their constitutional right to due
process96 as well as Section 246 of the 1997 National Internal
Revenue Code on non-retroactivity of rulings.97 Allegedly, it would
also have "an adverse effect of colossal magnitude on the
investors, both local and foreign, the Philippine capital market,
and most importantly, the country’s standing in the international
commercial community."98 Petitioners explained that "unless
enjoined, the government’s threatened refusal to pay the full value
of the Government Bonds will negatively impact on the image of
the country in terms of protection for property rights (including
financial assets), degree of legal protection for lender’s rights, and
strength of investor protection."99 They cited the country’s ranking
in the World Economic Forum: 75th in the world in its 2011–2012
Global Competitiveness Index, 111th out of 142 countries
worldwide and 2nd to the last among ASEAN countries in terms
of Strength of Investor Protection, and 105th worldwide and last
among ASEAN countries in terms of Property Rights Index and
Legal Rights Index.100 It would also allegedly "send a
reverberating message to the whole world that there is no
certainty, predictability, and stability of financial transactions in the
capital markets[.]"101 "[T]he integrity of Government-issued bonds
and notes will be greatly shattered and the credit of the Philippine
Government will suffer"102 if the sudden turnaround of the
government will be allowed,103 and it will reinforce "investors’
perception that the level of regulatory risk for contracts entered
into by the Philippine Government is high,"104 thus resulting in
higher interest rate for government-issued debt instruments and
lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that
respondent Commissioner of Internal Revenue "gravely and
seriously abused her discretion in the exercise of her rule-making
power"106 when she issued the assailed 2011 BIR Ruling which
ruled that "all treasury bonds are ‘deposit substitutes’ regardless
of the number of lenders, in clear disregard of the requirement of
twenty (20)or more lenders mandated under the NIRC." 107 They
argue that "[b]y her blanket and arbitrary classification of treasury
bonds as deposit substitutes, respondent CIR not only amended
and expanded the NIRC, but effectively imposed a new tax on
privately-placed treasury bonds."108Petitioners-intervenors RCBC
and RCBC Capital further argue that the 2011 BIR Ruling will
cause substantial impairment of their vested rights 109 under the
Bonds since the ruling imposes new conditions by "subjecting the
PEACe Bonds to the twenty percent (20%) final withholding tax
notwithstanding the fact that the terms and conditions thereof as
previously represented by the Government, through respondents
BTr and BIR, expressly state that it is not subject to final
withholding tax upon their maturity." 110 They added that "[t]he
exemption from the twenty percent (20%) final withholding tax
[was] the primary inducement and principal consideration for
[their] participat[ion] in the auction and underwriting of the PEACe
Bonds."111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital
also contend that respondent Commissioner of Internal Revenue
violated their rights to due process when she arbitrarily issued the
2011 BIR Ruling without prior notice and hearing, and the
oppressive timing of such ruling deprived them of the opportunity
to challenge the same.112
Assuming the 20% final withholding tax was due on the PEACe
Bonds, petitioners-intervenors RCBC and RCBC Capital claim
that respondents Bureau of Treasury and CODE-NGO should be
held liable "as [these] parties explicitly represented . . . that the
said bonds are exempt from the final withholding tax." 113
Finally, petitioners-intervenors RCBC and RCBC Capital argue
that "the implementation of the [2011 assailed BIR Ruling and BIR
Ruling No. DA 378-2011] will have pernicious effects on the
integrity of existing securities, which is contrary to the State
policies of stabilizing the financial system and of developing
capital markets."114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and
BIR Ruling No. DA 378-2011 are "invalid because they
contravene Section 22(Y) of the 1997 [NIRC] when the said
rulings disregarded the applicability of the ‘20 or more lender’ rule
to government debt instruments"[;]115 (b) "when [it] sold the
PEACe Bonds in the secondary market instead of holding them
until maturity, [it] derived . . . long-term trading gain[s], not interest
income, which [are] exempt . . . under Section 32(B)(7)(g) of the
1997 NIRC"[;]116 (c) "the tax exemption privilege relating to the
issuance of the PEACe Bonds . . . partakes of a contractual
commitment granted by the Government in exchange for a valid
and material consideration [i.e., the issue price paid and savings
in borrowing cost derived by the Government,] thus protected by
the non-impairment clause of the 1987 Constitution"[;]117 and (d)
the 2004, 2005, and 2011 BIR Rulings "did not validly revoke the
2001 BIR Rulings since no notice of revocation was issued to [it],
RCBC and [RCBC Capital] and petitioners[-bondholders], nor was
there any BIR administrative guidance issued and
published[.]"118CODE-NGO additionally argues that impleading it
in a Rule 65 petition was improper because: (a) it involves
determination of a factual question;119 and (b) it is premature and
states no cause of action as it amounts to an anticipatory third-
party claim.120
Arguments of respondents:
Respondents argue that petitioners’ direct resort to this court to
challenge the 2011 BIR Ruling violates the doctrines of
exhaustion of administrative remedies and hierarchy ofcourts,
resulting in a lack of cause of action that justifies the dismissal of
the petition.121 According to them, "the jurisdiction to review the
rulings of the [Commissioner of Internal Revenue], after the
aggrieved party exhausted the administrative remedies, pertains
to the Court of Tax Appeals."122 They point out that "a case similar
to the present Petition was [in fact] filed with the CTA on October
13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled, ‘Rizal
Commercial Banking Corporation and RCBC Capital Corporation
vs. Commissioner of Internal Revenue, et al.’"123
Respondents further take issue on the timeliness of the filing of
the petition and petitions-in-intervention.124 They argue that under
the guise of mainly assailing the 2011 BIR Ruling, petitioners are
indirectly attacking the 2004 and 2005 BIR Rulings, of which the
attack is legally prohibited, and the petition insofar as it seeks to
nullify the 2004 and 2005 BIR Rulings was filed way out of time
pursuant to Rule 65, Section 4.125
Respondents contend that the discount/interest income derived
from the PEACe Bonds is not a trading gain but interest income
subject to income tax.126 They explain that "[w]ith the payment of
the Ph₱35 Billion proceeds on maturity of the PEACe Bonds,
Petitioners receive an amount of money equivalent to about
Ph₱24.8 Billion as payment for interest. Such interest is clearly
an income of the Petitioners considering that the same is a flow
of wealth and not merely a return of capital – the capital initially
invested in the Bonds being approximately Ph₱10.2 Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on
the PEACe Bonds does not constitute an impairment of the
obligations of contract, respondents aver that: "The BTr has no
power to contractually grant a tax exemption in favour of
Petitioners thus the 2001 BIR Rulings cannot be considered a
material term of the Bonds"[;]128 "[t]here has been no change in
the laws governing the taxability of interest income from deposit
substitutes and said laws are read into every contract"[;] 129 "[t]he
assailed BIR Rulings merely interpret the term "deposit substitute"
in accordance with the letter and spirit of the Tax Code"[;]130 "[t]he
withholding of the 20% FWT does not result in a default by the
Government as the latter performed its obligations to the
bondholders in full"[;]131 and "[i]f there was a breach of contract or
a misrepresentation it was between RCBC/CODE-NGO/RCBC
Cap and the succeeding purchasers of the PEACe Bonds." 132
Similarly, respondents counter that the withholding of "[t]he 20%
final withholding tax on the PEACe Bonds does not amount to a
deprivation of property without due process of law."133 Their
imposition of the 20% final withholding tax is not arbitrary because
they were only performing a duty imposed by law; 134 "[t]he 2011
BIR Ruling is an interpretative rule which merely interprets the
meaning of deposit substitutes [and upheld] the earlier
construction given to the term by the 2004 and 2005 BIR
Rulings."135 Hence, respondents argue that "there was no need to
observe the requirements of notice, hearing, and publication[.]" 136
Nonetheless, respondents add that "there is every reason to
believe that Petitioners — all major financial institutions equipped
with both internal and external accounting and compliance
departments as well as access to both internal and external legal
counsel; actively involved in industry organizations such as the
Bankers Association of the Philippines and the Capital Market
Development Council; all actively taking part in the regular and
special debt issuances of the BTr and indeed regularly proposing
products for issue by BTr — had actual notice of the 2004 and
2005 BIR Rulings."137 Allegedly, "the sudden and drastic drop —
including virtually zero trading for extended periods of six months
to almost a year — in the trading volume of the PEACe Bonds
after the release of BIR Ruling No. 007-04 on July 16, 2004 tend
to indicate that market participants, including the Petitioners
herein, were aware of the ruling and its consequences for the
PEACe Bonds."138
Moreover, they contend that the assailed 2011 BIR Ruling is a
valid exercise of the Commissioner of Internal Revenue’s rule-
making power;139 that it and the 2004 and 2005 BIR Rulings did
not unduly expand the definition of deposit substitutes by creating
an unwarranted exception to the requirement of having 20 or more
lenders/purchasers;140 and the word "any" in Section 22(Y) of the
National Internal Revenue Code plainly indicates that the period
contemplated is the entire term of the bond and not merely the
point of origination or issuance.141
Respondents further argue that a retroactive application of the
2011 BIR Ruling will not unjustifiably prejudice
petitioners.142 "[W]ith or without the 2011 BIR Ruling, Petitioners
would be liable topay a 20% final withholding tax just the same
because the PEACe Bonds in their possession are legally in the
nature of deposit substitutes subject to a 20% final withholding tax
under the NIRC."143 Section 7 of DOF Department Order No. 141-
95 also provides that income derived from Treasury bonds is
subject to the 20% final withholding tax.144 "[W]hile revenue
regulations as a general rule have no retroactive effect, if the
revocation is due to the fact that the regulation is erroneous or
contrary to law, such revocation shall have retroactive operation
as to affect past transactions, because a wrong construction of
the law cannot give rise to a vested right that can be invoked by
a taxpayer."145
Finally, respondents submit that "there are a number of variables
and factors affecting a capital market." 146 "[C]apital market itself
is inherently unstable."147 Thus, "[p]etitioners’ argument that the
20% final withholding tax . . . will wreak havoc on the financial
stability of the country is a mere supposition that is not a
justiciable issue."148
On the prayer for the temporary restraining order, respondents
argue that this order "could no longer be implemented [because]
the acts sought to be enjoined are already fait accompli." 149 They
add that "to disburse the funds withheld to the Petitioners at this
time would violate Section 29[,] Article VI of the Constitution
prohibiting ‘money being paid out of the Treasury except in
pursuance of an appropriation made by law[.]’"150 "The remedy of
petitioners is to claim a tax refund under Section 204(c) of the Tax
Code should their position be upheld by the Honorable Court." 151
Respondents also argue that "the implementation of the TRO
would violate Section 218 of the Tax Code in relation to Section
11 of Republic Act No. 1125 (as amended by Section 9 of
Republic Act No. 9282) which prohibits courts, except the Court
of Tax Appeals, from issuing injunctions to restrain the collection
of any national internal revenue tax imposed by the Tax Code." 152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC,
RCBC Capital, and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the
1997 National Internal Revenue Code when it declared that all
government debt instruments are deposit substitutes regardless
of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
● It constitutes a unilateral amendment of a material term (tax
exempt status) in the Bonds, represented by the government as
an inducement and important consideration for the purchase of
the Bonds;
b) It constitutes deprivation of property without due process
because there was no prior notice to bondholders and hearing
and publication;
c) It violates the rule on non-retroactivity under the 1997 National
Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of
non-government organizations and development of the capital
market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with
grave abuse of discretion in issuing the challenged 2011 BIR
Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued
by virtue of the Commissioner of Internal Revenue’s power to
interpret the provisions of the 1997 National Internal Revenue
Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and
confirms the interpretations contained in previously issued BIR
Ruling Nos. 007-2004, DA-491-04,and 008-05, which have
already effectively abandoned or revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her
predecessor’s rulings especially when the latter’s rulings are not
in harmony with the law; and
d. The wrong construction of the law that the 2001 BIR Rulings
have perpetrated cannot give rise to a vested right. Therefore, the
2011 BIR Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any
plain, speedy, and adequate remedy in the ordinary course of law:
a. Petitioners had the basic remedy of filing a claim for refund of
the 20% final withholding tax they allege to have been wrongfully
collected; and
b. Non-observance of the doctrine of exhaustion of administrative
remedies and of hierarchy of courts.
HELD:
Procedural Issues
Non-exhaustion
administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code,
interpretative rulings are reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases. -The power to interpret the provisions of this
Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the
Secretary of Finance. (Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can]
grant the relief prayed for, [then] special civil actions are generally
not entertained."153 The remedy within the administrative
machinery must be resorted to first and pursued to its appropriate
conclusion before the court’s judicial power can be sought.154
Nonetheless, jurisprudence allows certain exceptions to the rule
on exhaustion of administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a
relative one and its flexibility is called upon by the peculiarity and
uniqueness of the factual and circumstantial settings of a case.
Hence, it is disregarded (1) when there is a violation of due
process, (2) when the issue involved is purely a legal
question,155 (3) when the administrative action is patently illegal
amounting to lack or excess of jurisdiction,(4) when there is
estoppel on the part of the administrative agency concerned,(5)
when there is irreparable injury, (6) when the respondent is a
department secretary whose acts as an alter ego of the President
bears the implied and assumed approval of the latter, (7) when to
require exhaustion of administrative remedies would be
unreasonable, (8) when it would amount to a nullification of a
claim, (9) when the subject matter is a private land in land case
proceedings, (10) when the rule does not provide a plain, speedy
and adequate remedy, (11) when there are circumstances
indicating the urgency of judicial intervention. 156 (Emphasis
supplied, citations omitted)
The exceptions under (2) and (11) are present in this case. The
question involved is purely legal, namely: (a) the interpretation of
the 20-lender rule in the definition of the terms public and deposit
substitutes under the 1997 National Internal Revenue Code; and
(b) whether the imposition of the 20% final withholding tax on the
PEACe Bonds upon maturity violates the constitutional provisions
on non-impairment of contracts and due process. Judicial
intervention is likewise urgent with the impending maturity of the
PEACe Bonds on October 18, 2011.
The rule on exhaustion of administrative remedies also finds no
application when the exhaustion will result in an exercise in
futility.157
In this case, an appeal to the Secretary of Finance from the
questioned 2011 BIR Ruling would be a futile exercise because it
was upon the request of the Secretary of Finance that the 2011
BIR Ruling was issued by the Bureau of Internal Revenue. It
appears that the Secretary of Finance adopted the Commissioner
of Internal Revenue’s opinions as his own.158 This position was in
fact confirmed in the letter159 dated October 10, 2011 where he
ordered the Bureau of Treasury to withhold the amount
corresponding to the 20% final withholding tax on the interest or
discounts allegedly due from the bondholders on the strength of
the 2011 BIR Ruling.
of Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the
rulings of the Commissioner of Internal Revenue pertains to the
Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011
and DA 378-2011 were issued in connection with the
implementation of the 1997 National Internal Revenue Code on
the taxability of the interest income from zero-coupon bonds
issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax
Appeals), as amended by Republic Act No. 9282, 160such rulings
of the Commissioner of Internal Revenue are appealable to that
court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein
provided:
1. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. -
Any party adversely affected by a decision, ruling or inaction of
the Commissioner of Internal Revenue, the Commissioner of
Customs, the Secretary of Finance, the Secretary of Trade and
Industry or the Secretary of Agriculture or the Central Board of
Assessment Appeals or the Regional Trial Courts may file an
appeal with the CTA within thirty (30) days after the receipt of such
decision or ruling or after the expiration of the period fixed by law
for action as referred to in Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil
proceeding involving matters arising under the National Internal
Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as herein
provided, until and unless an appeal has been previously filed with
the CTA and disposed of in accordance with the provisions of this
Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez
v. Blaquera,162 this court emphasized the jurisdiction of the Court
of Tax Appeals over rulings of the Bureau of Internal Revenue,
thus:
While the Court of Appeals correctly took cognizance of the
petition for certiorari, however, let it be stressed that the
jurisdiction to review the rulings of the Commissioner of Internal
Revenue pertains to the Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually
rulings or opinions of the Commissioner implementing the Tax
Code on the taxability of pawnshops.. . .
....
Such revenue orders were issued pursuant to petitioner's powers
under Section 245 of the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate
rules and regulations. — The Secretary of Finance, upon
recommendation of the Commissioner, shall promulgate all
needful rules and regulations for the effective enforcement of the
provisions of this Code.
The authority of the Secretary of Finance to determine articles
similar or analogous to those subject to a rate of sales tax under
certain category enumerated in Section 163 and 165 of this Code
shall be without prejudice to the power of the Commissioner of
Internal Revenue to make rulings or opinions in connection with
the implementation of the provisions of internal revenue laws,
including ruling on the classification of articles of sales and similar
purposes." (Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the
Collector of Internal Revenue, but merely an attempt to nullify
General Circular No. V-148, which does not adjudicate or settle
any controversy, and that, accordingly, this case is not within the
jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148
directs the officers charged with the collection of taxes and license
fees to adhere strictly to the interpretation given by the defendant
to the statutory provisions abovementioned, as set forth in the
Circular. The same incorporates, therefore, a decision of the
Collector of Internal Revenue (now Commissioner of Internal
Revenue) on the manner of enforcement of the said statute, the
administration of which is entrusted by law to the Bureau of
Internal Revenue. As such, it comes within the purview of
Republic Act No. 1125, Section 7 of which provides that the Court
of Tax Appeals ‘shall exercise exclusive appellate jurisdiction to
review by appeal . . . decisions of the Collector of Internal
Revenue in . . . matters arising under the National Internal
Revenue Code or other law or part of the law administered by the
Bureau of Internal Revenue.’"163
In exceptional cases, however, this court entertained direct
recourse to it when "dictated by public welfare and the
advancement of public policy, or demanded by the broader
interest of justice, or the orders complained of were found to be
patent nullities, or the appeal was considered as clearly an
inappropriate remedy."164
In Philippine Rural Electric Cooperatives Association, Inc.
(PHILRECA) v. The Secretary, Department of Interior and Local
Government,165 this court noted that the petition for prohibition
was filed directly before it "in disregard of the rule on hierarchy of
courts. However, [this court] opt[ed] to take primary jurisdiction
over the . . . petition and decide the same on its merits in view of
the significant constitutional issues raised by the parties dealing
with the tax treatment of cooperatives under existing laws and in
the interest of speedy justice and prompt disposition of the
matter."166
Here, the nature and importance of the issues raised 167 to the
investment and banking industry with regard to a definitive
declaration of whether government debt instruments are deposit
substitutes under existing laws, and the novelty thereof, constitute
exceptional and compelling circumstances to justify resort to this
court in the first instance.
The tax provision on deposit substitutes affects not only the
PEACe Bonds but also any other financial instrument or product
that may be issued and traded in the market. Due to the changing
positions of the Bureau of Internal Revenue on this issue, there is
a need for a final ruling from this court to stabilize the expectations
in the financial market.
Finally, non-compliance with the rules on exhaustion of
administrative remedies and hierarchy of courts had been
rendered moot by this court’s issuance of the temporary
restraining order enjoining the implementation of the 2011 BIR
Ruling. The temporary restraining order effectively recognized the
urgency and necessity of direct resort to this court.
Substantive issues
Tax treatment of deposit
substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997
National Internal Revenue Code, a final withholding tax at the rate
of 20% is imposed on interest on any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements.
These provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax
at the rate of twenty percent (20%) is hereby imposed upon the
amount of interest from any currency bank deposit and yield or
any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements; . . . Provided, further, That
interest income from long-term deposit or investment in the form
of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko
Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed
under this Subsection: Provided, finally, That should the holder of
the certificate pre-terminate the deposit or investment before the
fifth (5th) year, a final tax shall be imposed on the entire income
and shall be deducted and withheld by the depository bank from
the proceeds of the long-term deposit or investment certificate
based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes and from Trust Funds and
Similar Arrangements, and Royalties. - A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of
interest on currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar
arrangements received by domestic corporations, and royalties,
derived from sources within the Philippines: Provided, however,
That interest income derived by a domestic corporation from a
depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven
and one-half percent (7 1/2%) of such interest income. (Emphasis
supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(7) Tax on Certain Incomes Received by a Resident Foreign
Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit
from Deposit Substitutes, Trust Funds and Similar Arrangements
and Royalties. - Interest from any currency bank deposit and yield
or any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements and royalties derived from
sources within the Philippines shall be subject to a final income
tax at the rate of twenty percent (20%) of such interest: Provided,
however, That interest income derived by a resident foreign
corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at
the rate of seven and one-half percent (7 1/2%) of such interest
income. (Emphasis supplied)
This tax treatment of interest from bank deposits and yield from
deposit substitutes was first introduced in the 1977 National
Internal Revenue Code through Presidential Decree No.
1739168 issued in 1980. Later, Presidential Decree No. 1959,
effective on October 15, 1984, formally added the definition of
deposit substitutes, viz:
(y) ‘Deposit substitutes’ shall mean an alternative form of
obtaining funds from the public, other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose of relending or
purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer. These
promissory notes, repurchase agreements, certificates of
assignment or participation and similar instrument with recourse
as may be authorized by the Central Bank of the Philippines, for
banks and non-bank financial intermediaries or by the Securities
and Exchange Commission of the Philippines for commercial,
industrial, finance companies and either non-financial companies:
Provided, however, that only debt instruments issued for inter-
bank call loans to cover deficiency in reserves against deposit
liabilities including those between or among banks and quasi-
banks shall not be considered as deposit substitute debt
instruments. (Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement
Presidential Decree No. 1959, adopted verbatim the same
definition and specifically identified the following borrowings as
"deposit substitutes":
SECTION 2. Definitions of Terms. . . .
(h) "Deposit substitutes" shall mean –
....
(a) All interbank borrowings by or among banks and non-bank
financial institutions authorized to engage in quasi-banking
functions evidenced by deposit substitutes instruments, except
interbank call loans to cover deficiency in reserves against
deposit liabilities as evidenced by interbank loan advice or
repayment transfer tickets.
(b) All borrowings of the national and local government and its
instrumentalities including the Central Bank of the Philippines,
evidenced by debt instruments denoted as treasury bonds, bills,
notes, certificates of indebtedness and similar instruments.
(c) All borrowings of banks, non-bank financial intermediaries,
finance companies, investment companies, trust companies,
including the trust department of banks and investment houses,
evidenced by deposit substitutes instruments. (Emphasis
supplied)
The definition of deposit substitutes was amended under the 1997
National Internal Revenue Code with the addition of the qualifying
phrase for public – borrowing from 20 or more individual or
corporate lenders at any one time. Under Section 22(Y), deposit
substitute is defined thus:
SEC. 22. Definitions- When used in this Title: . . . .
(Y) The term ‘deposit substitutes’ shall mean an alternative form
of obtaining funds from the public (the term 'public' means
borrowing from twenty (20) or more individual or corporate
lenders at any one time) other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the
borrower’s own account, for the purpose of relending or
purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer. These
instruments may include, but need not be limited to, bankers’
acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and
between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation
and similar instruments with recourse: Provided, however, That
debt instruments issued for interbank call loans with maturity of
not more than five (5) days to cover deficiency in reserves against
deposit liabilities, including those between or among banks and
quasi-banks, shall not be considered as deposit substitute debt
instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress
specifically defined "public" to mean "twenty (20) or more
individual or corporate lenders at any one time." Hence, the
number of lenders is determinative of whether a debt instrument
should be considered a deposit substitute and consequently
subject to the 20% final withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC)
to whom the BTr issued the Government Bonds."169 On the other
hand, respondents theorize that the word "any" "indicates that the
period contemplated is the entire term of the bond and not merely
the point of origination or issuance[,]"170 such that if the debt
instruments "were subsequently sold in secondary markets and
so on, in such a way that twenty (20) or more buyers eventually
own the instruments, then it becomes indubitable that funds would
be obtained from the "public" as defined in Section 22(Y) of the
NIRC."171 Indeed, in the context of the financial market, the words
"at any one time" create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from
the surplus units (households and business firms that have
savings or excess funds) flow to the deficit units (mainly business
firms and government that need funds to finance their operations
or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into
financial assets, and the borrowers receive these funds now
considered as their financial liabilities. The transfer of funds is
represented by a security, such as stocks and bonds. Fund
suppliers earn a return on their investment; the return is
necessary to ensure that funds are supplied to the financial
markets.172
"The financial markets that facilitate the transfer of debt securities
are commonly classified by the maturity of the
securities[,]"173 namely: (1) the money market, which facilitates
the flow of short-term funds (with maturities of one year or less);
and (2) the capital market, which facilitates the flow of long-term
funds (with maturities of more than one year).174
Whether referring to money market securities or capital market
securities, transactions occur either in the primary market or in the
secondary market.175 "Primary markets facilitate the issuance of
new securities. Secondary markets facilitate the trading of
existing securities, which allows for a change in the ownership of
the securities."176 The transactions in primary markets exist
between issuers and investors, while secondary market
transactions exist among investors.177
"Over time, the system of financial markets has evolved from
simple to more complex ways of carrying out financial
transactions."178 Still, all systems perform one basic function: the
quick mobilization of money from the lenders/investors to the
borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance;
(2) semidirect finance; and (3) indirect finance.180
With direct financing, the "borrower and lender meet each other
and exchange funds in return for financial assets"181(e.g.,
purchasing bonds directly from the company issuing them). This
method provides certain limitations such as: (a) "both borrower
and lender must desire to exchange the same amount of funds at
the same time"[;]182 and (b) "both lender and borrower must
frequently incur substantial information costs simply to find each
other."183
In semidirect financing, a securities broker or dealer brings
surplus and deficit units together, thereby reducing information
costs.184 A Broker185 is "an individual or financial institution who
provides information concerning possible purchases and sales of
securities. Either a buyer or a seller of securities may contact a
broker, whose job is simply to bring buyers and sellers
together."186 A dealer187 "also serves as a middleman between
buyers and sellers, but the dealer actually acquires the seller’s
securities in the hope of selling them at a later time at a more
favorable price."188 Frequently, "a dealer will split up a large issue
of primary securities into smaller units affordable by . . . buyers . .
. and thereby expand the flow of savings into investment."189 In
semi direct financing, "[t]he ultimate lender still winds up holding
the borrower’s securities, and therefore the lender must be willing
to accept the risk, liquidity, and maturity characteristics of the
borrower’s [debt security]. There still must be a fundamental
coincidence of wants and needs between [lenders and borrowers]
for semidirect financial transactions to take place." 190
"The limitations of both direct and semidirect finance stimulated
the development of indirect financial transactions, carried out with
the help of financial intermediaries"191 or financial institutions, like
banks, investment banks, finance companies, insurance
companies, and mutual funds.192 Financial intermediaries accept
funds from surplus units and channel the funds to deficit
units.193 "Depository institutions [such as banks] accept deposits
from surplus units and provide credit to deficit units through loans
and purchase of [debt] securities."194 Nondepository institutions,
like mutual funds, issue securities of their own (usually in smaller
and affordable denominations) to surplus units and at the same
time purchase debt securities of deficit units.195 "By pooling the
resources of [small savers, a financial intermediary] can service
the credit needs of large firms simultaneously."196
The financial market, therefore, is an agglomeration of financial
transactions in securities performed by market participants that
works to transfer the funds from the surplus units (or
investors/lenders) to those who need them (deficit units or
borrowers).
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at
any one time" for purposes of determining the "20 or more
lenders" would mean every transaction executed in the primary or
secondary market in connection with the purchase or sale of
securities.
For example, where the financial assets involved are government
securities like bonds, the reckoning of "20 or more
lenders/investors" is made at any transaction in connection with
the purchase or sale of the Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in
the primary market;
2. Sale and distribution by GSEDs to various lenders/investors in
the secondary market;
3. Subsequent sale or trading by a bondholder to another
lender/investor in the secondary market usually through a broker
or dealer; or
4. Sale by a financial intermediary-bondholder of its participation
interests in the bonds to individual or corporate lenders in the
secondary market.
When, through any of the foregoing transactions, funds are
simultaneously obtained from 20 or more lenders/investors, there
is deemed to be a public borrowing and the bonds at that point in
time are deemed deposit substitutes. Consequently, the seller is
required to withhold the 20% final withholding tax on the imputed
interest income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do
not qualify as deposit substitutes under the 1997 National Internal
Revenue Code are subject to the regular income tax.
The phrase "all income derived from whatever source" in Chapter
VI, Computation of Gross Income, Section 32(A) of the 1997
National Internal Revenue Code discloses a legislative policy to
include all income not expressly exempted as within the class of
taxable income under our laws.
"The definition of gross income is broad enough to include all
passive incomes subject to specific tax rates or final
taxes."197 Hence, interest income from deposit substitutes are
necessarily part of taxable income. "However, since these
passive incomes are already subject to different rates and taxed
finally at source, they are no longer included in the computation
of gross income, which determines taxable income." 198 "Stated
otherwise . . . if there were no withholding tax system in place in
this country, this 20 percent portion of the ‘passive’ income of
[creditors/lenders] would actually be paid to the [creditors/lenders]
and then remitted by them to the government in payment of their
income tax."199
This court, in Chamber of Real Estate and Builders’ Associations,
Inc. v. Romulo,200 explained the rationale behind the withholding
tax system:
The withholding [of tax at source] 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. 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.201 (Citations omitted)
"The application of the withholdings system to interest on bank
deposits or yield from deposit substitutes is essentially to
maximize and expedite the collection of income taxes by requiring
its payment at the source."202
Hence, when there are 20 or more lenders/investors in a
transaction for a specific bond issue, the seller is required to
withhold the 20% final income tax on the imputed interest income
from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with
the "gains" contemplated under Section 32(B)(7)(g)203 of the 1997
National Internal Revenue Code, which exempts gains derived
from trading, redemption, or retirement of long-term securities
from ordinary income tax.
The term "gain" as used in Section 32(B)(7)(g) does not include
interest, which represents forbearance for the use of money.
Gains from sale or exchange or retirement of bonds or other
certificate of indebtedness fall within the general category of
"gains derived from dealings in property" under Section 32(A)(3),
while interest from bonds or other certificate of indebtedness falls
within the category of "interests" under Section 32(A)(4).204 The
use of the term "gains from sale" in Section 32(B)(7)(g) shows the
intent of Congress not to include interest as referred under
Sections 24, 25, 27, and 28 in the exemption.205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to:
(1) gain realized from the trading of the bonds before their maturity
date, which is the difference between the selling price of the
bonds in the secondary market and the price at which the bonds
were purchased by the seller; and (2) gain realized by the last
holder of the bonds when the bonds are redeemed at maturity,
which is the difference between the proceeds from the retirement
of the bonds and the price at which such last holder acquired the
bonds. For discounted instruments, like the zero-coupon bonds,
the trading gain shall be the excess of the selling price over the
book value or accreted value (original issue price plus
accumulated discount from the time of purchase up to the time of
sale) of the instruments.206
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in
the three 2001 BIR Rulings is not consistent with law. 207 Its
interpretation of "at any one time" to mean at the point of
origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated
(relying on the 2004 and 2005 BIR Rulings) that "all treasury
bonds . . . regardless of the number of purchasers/lenders at the
time of origination/issuance are considered deposit
substitutes."208
Being the subject of this petition, it is, thus, declared void because
it completely disregarded the 20 or more lender rule added by
Congress in the 1997 National Internal Revenue Code. It also
created a distinction for government debt instruments as against
those issued by private corporations when there was none in the
law.
Tax statutes must be reasonably construed as to give effect to the
whole act. Their constituent provisions must be read together,
endeavoring to make every part effective, harmonious, and
sensible.209 That construction which will leave every word
operative will be favored over one that leaves some word, clause,
or sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of
Internal Revenue in charge of executing the 1997 National
Internal Revenue Code is an authoritative construction of great
weight, but the principle is not absolute and may be overcome by
strong reasons to the contrary. If through a misapprehension of
law an officer has issued an erroneous interpretation, the error
must be corrected when the true construction is ascertained.
In Philippine Bank of Communications v. Commissioner of
Internal Revenue,211 this court upheld the nullification of Revenue
Memorandum Circular (RMC) No. 7-85 issued by the Acting
Commissioner of Internal Revenue because it was contrary to the
express provision of Section 230 of the 1977 National Internal
Revenue Codeand, hence, "[cannot] be given weight for to do so
would, in effect, amend the statute."212 Thus:
When the Acting Commissioner of Internal Revenue issued RMC
7-85, changing the prescriptive period of two years to ten years
on claims of excess quarterly income tax payments, such circular
created a clear inconsistency with the provision of Sec. 230 of
1977 NIRC. In so doing, the BIR did not simply interpret the law;
rather it legislated guidelines contrary to the statute passed by
Congress.
It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more specific
and less general interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal Revenue. It is widely
accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great
respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous.
Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement.213(Citations omitted)
This court further held that "[a] memorandum-circular of a bureau
head could not operate to vest a taxpayer with a shield against
judicial action [because] there are no vested rights to speak of
respecting a wrong construction of the law by the administrative
officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same."214 In
Commissioner of Internal Revenue v. Michel J. Lhuillier
Pawnshop, Inc.,215 this court nullified Revenue Memorandum
Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a
5% lending investor's tax on pawnshops.216 It was held that "the
[Commissioner] cannot, in the exercise of [its interpretative]
power, issue administrative rulings or circulars not consistent with
the law sought to be applied. Indeed, administrative issuances
must not override, supplant or modify the law, but must remain
consistent with the law they intend to carry out. Only Congress
can repeal or amend the law."217
In Misamis Oriental Association of Coco Traders, Inc. v.
Department of Finance Secretary,218 this court stated that the
Commissioner of Internal Revenue is not bound by the ruling of
his predecessors,219 but, to the contrary, the overruling of
decisions is inherent in the interpretation of laws:
[I]n considering a legislative rule a court is free to make three
inquiries: (i) whether the rule is within the delegated authority of
the administrative agency; (ii) whether it is reasonable; and (iii)
whether it was issued pursuant to proper procedure. But the court
is not free to substitute its judgment as to the desirability or
wisdom of the rule for the legislative body, by its delegation of
administrative judgment, has committed those questions to
administrative judgments and not to judicial judgments. In the
case of an interpretative rule, the inquiry is not into the validity but
into the correctness or propriety of the rule. As a matter of power
a court, when confronted with an interpretative rule, is free to (i)
give the force of law to the rule; (ii) go to the opposite extreme
and substitute its judgment; or (iii) give some intermediate degree
of authoritative weight to the interpretative rule.
In the case at bar, we find no reason for holding that respondent
Commissioner erred in not considering copra as an "agricultural
food product" within the meaning of § 103(b) of the NIRC. As the
Solicitor General contends, "copra per se is not food, that is, it is
not intended for human consumption. Simply stated, nobody eats
copra for food." That previous Commissioners considered it so, is
not reason for holding that the present interpretation is wrong. The
Commissioner of Internal Revenue is not bound by the ruling of
his predecessors. To the contrary, the overruling of decisions is
inherent in the interpretation of laws.220 (Emphasis supplied,
citations omitted)
Tax treatment of income
derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury
to RCBC/CODE-NGO at 10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on
behalf of CODE-NGO of the PEACe Bonds to undisclosed
investors at ₱11.996 billion.
It may seem that there was only one lender — RCBC on behalf of
CODE-NGO — to whom the PEACe Bonds were issued at the
time of origination. However, a reading of the underwriting
agreement221 and RCBC term sheet222reveals that the settlement
dates for the sale and distribution by RCBC Capital (as
underwriter for CODE-NGO) of the PEACe Bonds to various
undisclosed investors at a purchase price of approximately
₱11.996 would fall on the same day, October 18, 2001, when the
PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In
reality, therefore, the entire ₱10.2 billion borrowing received by
the Bureau of Treasury in exchange for the ₱35 billion worth of
PEACe Bonds was sourced directly from the undisclosed number
of investors to whom RCBC Capital/CODE-NGO distributed the
PEACe Bonds — all at the time of origination or issuance. At this
point, however, we do not know as to how many investors the
PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more
lenders/investors, the PEACe Bonds are deemed deposit
substitutes within the meaning of Section 22(Y) of the 1997
National Internal Revenue Code and RCBC Capital/CODE-NGO
would have been obliged to pay the 20% final withholding tax on
the interest or discount from the PEACe Bonds. Further, the
obligation to withhold the 20% final tax on the corresponding
interest from the PEACe Bonds would likewise be required of any
lender/investor had the latter turned around and sold said PEACe
Bonds, whether in whole or part, simultaneously to 20 or more
lenders or investors.
We note, however, that under Section 24 223 of the 1997 National
Internal Revenue Code, interest income received by individuals
from long term deposits or investments with a holding period of
not less than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the
coverage of deposit substitutes, the proper procedure was for the
Bureau of Treasury to pay the face value of the PEACe Bonds to
the bondholders and for the Bureau of Internal Revenue to collect
the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, or any lender or investor if such be the case,
as the withholding agents.
The collection of tax is not
barred by prescription
The three (3)-year prescriptive period under Section 203 of the
1997 National Internal Revenue Code to assess and collect
internal revenue taxes is extended to 10 years in cases of (1)
fraudulent returns; (2) false returns with intent to evade tax; and
(3) failure to file a return, to be computed from the time of
discovery of the falsity, fraud, or omission. Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection.
- Except as provided in Section 222, internal revenue taxes shall
be assessed within three (3) years after the last day prescribed
by law for the filing of the return, and no proceeding in court
without assessment for the collection of such taxes shall be begun
after the expiration of such period: Provided, That in a case where
a return is filed beyond the period prescribed by law, the three (3)-
year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed
on such last day. (Emphasis supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment
and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade
tax or of failure to file a return, the tax may be assessed, or a
proceeding in court for the collection of such tax may be filed
without assessment, at any time within ten (10) years after the
discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact
of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the
PEACe Bonds to 20 or more lenders/investors, the Bureau of
Internal Revenue may still collect the unpaid tax from RCBC
Capital/CODE-NGO within 10 years after the discovery of the
omission.
In view of the foregoing, there is no need to pass upon the other
issues raised by petitioners and petitioners-intervenors.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served
upon the parties affected."224 Moreover, service may be made
personally or by mail.225 And, "[p]ersonal service is complete upon
actual delivery [of the order.]"226This court’s temporary restraining
order was received only on October 19, 2011, or a day after the
PEACe Bonds had matured and the 20% final withholding tax on
the interest income from the same was withheld.
Publication of news reports in the print and broadcast media, as
well as on the internet, is not a recognized mode of service of
pleadings, court orders, or processes. Moreover, the news
reports227 cited by petitioners were posted minutes before the
close of office hours or late in the evening of October 18, 2011,
and they did not givethe exact contents of the temporary
restraining order.
"[O]ne cannot be punished for violating an injunction or an order
for an injunction unless it is shown that suchinjunction or order
was served on him personally or that he had notice of the
issuance or making of such injunction or order." 228
At any rate, "[i]n case of doubt, a withholding agent may always
protect himself or herself by withholding the tax due" 229 and return
the amount of the tax withheld should it be finally determined that
the income paid is not subject to withholding. 230 Hence,
respondent Bureau of Treasury was justified in withholding the
amount corresponding to the 20% final withholding tax from the
proceeds of the PEACe Bonds, as it received this court’s
temporary restraining order only on October 19, 2011, or the day
after this tax had been withheld.
Respondents’ retention of the
amounts withheld is a defiance
of the temporary restraining
order
Nonetheless, respondents’ continued failure to release to
petitioners the amount corresponding to the 20% final withholding
tax in order that it may be placed in escrow as directed by this
court constitutes a defiance of this court’s temporary restraining
order.231
The temporary restraining order is not moot. The acts sought to
be enjoined are not fait accompli. For an act to be considered fait
accompli, the act must have already been fully accomplished and
consummated.232 It must be irreversible, e.g., demolition of
properties,233 service of the penalty of imprisonment,234 and
hearings on cases.235When the act sought to be enjoined has not
yet been fully satisfied, and/or is still continuing in nature,236 the
defense of fait accomplicannot prosper.
The temporary restraining order enjoins the entire implementation
of the 2011 BIR Ruling that constitutes both the withholding and
remittance of the 20% final withholding tax to the Bureau of
Internal Revenue. Even though the Bureau of Treasury had
already withheld the 20% final withholding tax237 when it received
the temporary restraining order, it had yet to remit the monies it
withheld to the Bureau of Internal Revenue, a remittance which
was due only on November 10, 2011.238 The act enjoined by the
temporary restraining order had not yet been fully satisfied and
was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31,
2001 which prescribes to national government agencies such as
the Bureau of Treasury the procedure for the remittance of all
taxes it withheld to the Bureau of Internal Revenue, a national
agency shall file before the Bureau of Internal Revenue a Tax
Remittance Advice (TRA) supported by withholding tax returns on
or before the 10th day of the following month after the said taxes
had been withheld.240 The Bureau of Internal Revenue shall
transmit an original copy of the TRA to the Bureau of
Treasury,241which shall be the basis for recording the remittance
of the tax collection.242 The Bureau of Internal Revenue will then
record the amount of taxes reflected in the TRA as tax collection
in the Journal ofTax Remittance by government agencies based
on its copies of the TRA.243 Respondents did not submit any
withholding tax return or TRA to provethat the 20% final
withholding tax was indeed remitted by the Bureau of Treasury to
the Bureau of Internal Revenue on October 18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-
10-10395244 dated October 18, 2011 submitted to this court
shows:
Account Debit Amount Credit
Code Amount
Bonds Payable- 442-360 35,000,000,000.00
L/T, Dom-Zero
Coupon
T/Bonds
(Peace Bonds)
– 10 yr
Sinking Fund- 198-001 30,033,792,203.59
Cash (BSF)
Due to BIR 412-002 4,966,207,796.41
To record
redemption of
10yr Zero
coupon (Peace
Bond) net of the
20% final
withholding tax
pursuant to BIR
Ruling No.
378-2011, value
date, October
18, 2011 per
BTr letter
authority and
BSP Bank
Statements.
The foregoing journal entry, however, does not prove that the
amount of ₱4,966,207,796.41, representing the 20% final
withholding tax on the PEACe Bonds, was disbursed by it and
remitted to the Bureau of Internal Revenue on October 18, 2011.
The entries merely show that the monies corresponding to 20%
final withholding tax was set aside for remittance to the Bureau of
Internal Revenue.
We recall the November 15, 2011 resolution issued by this court
directing respondents to "show cause why they failed to comply
with the [TRO]; and [to] comply with the [TRO] in order that
petitioners may place the corresponding funds in escrow pending
resolution of the petition."245 The 20% final withholding tax was
effectively placed in custodia legiswhen this court ordered the
deposit of the amount in escrow. The Bureau of Treasury could
still release the money withheld to petitioners for the latter to place
in escrow pursuant to this court’s directive. There was no legal
obstacle to the release of the 20% final withholding tax to
petitioners. Congressional appropriation is not required for the
servicing of public debts in view of the automatic appropriations
clause embodied in Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a)
personnel retirement premiums, government service insurance,
and other similar fixed expenditures, (b) principal and interest on
public debt, (c) national government guarantees of obligations
which are drawn upon, are automatically appropriated: provided,
that no obligations shall be incurred or payments made from funds
thus automatically appropriated except as issued in the form of
regular budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the
National Treasury not otherwise appropriated, such amounts as
may be necessary to effect payments on foreign or domestic
loans, or foreign or domestic loans whereon creditors make a call
on the direct and indirect guarantee of the Republic of the
Philippines, obtained by:
 a. the Republic of the Philippines the proceeds of which
were relent to government-owned or controlled
corporations and/or government financial institutions;
b. government-owned or controlled corporations and/or
government financial institutions the proceeds of which
were relent to public or private institutions;
c. government-owned or controlled corporations and/or
financial institutions and guaranteed by the Republic of
the Philippines;
d. other public or private institutions and guaranteed by
government owned or controlled corporations and/or
government financial institutions.
The amount of ₱35 billion that includes the monies corresponding
to 20% final withholding tax is a lawfuland valid obligation of the
Republic under the Government Bonds. Since said obligation
represents a public debt, the release of the monies requires no
legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the
money to be used for the payment of Government Bonds may be
lawfully taken from the continuing appropriation out of any monies
in the National Treasury and is not required to be the subject of
another appropriation legislation: SEC. 2. The Secretary of
Finance shall cause to be paid out of any moneys in the National
Treasury not otherwise appropriated, or from any sinking funds
provided for the purpose by law, any interest falling due, or
accruing, on any portion of the public debt authorized by law. He
shall also cause to be paid out of any such money, or from any
such sinking funds the principal amount of any obligations which
have matured, or which have been called for redemption or for
which redemption has been demanded in accordance with terms
prescribed by him prior to date of issue. . . In the case of interest-
bearing obligations, he shall pay not less than their face value; in
the case of obligations issued at a discount he shall pay the face
value at maturity; or if redeemed prior to maturity, such portion of
the face value as is prescribed by the terms and conditions under
which such obligations were originally issued. There are hereby
appropriated as a continuing appropriation out of any moneys in
the National Treasury not otherwise appropriated, such sums as
may be necessary from time to time to carry out the provisions of
this section. The Secretary of Finance shall transmit to Congress
during the first month of each regular session a detailed statement
of all expenditures made under this section during the calendar
year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states
that payment for Treasury bills and bonds shall be made through
the National Treasury’s account with the Bangko Sentral ng
Pilipinas, to wit:
Section 38. Demand Deposit Account.– The Treasurer of the
Philippines maintains a Demand Deposit Account with the
Bangko Sentral ng Pilipinas to which all proceeds from the sale of
Treasury Bills and Bonds under R.A. No. 245, as amended, shall
be credited and all payments for redemption of Treasury Bills and
Bonds shall be charged.1âwphi1
Regarding these legislative enactments ordaining an automatic
appropriations provision for debt servicing, this court has held:
Congress . . . deliberates or acts on the budget proposals of the
President, and Congress in the exercise of its own judgment and
wisdom formulates an appropriation act precisely following the
process established by the Constitution, which specifies that no
money may be paid from the Treasury except in accordance with
an appropriation made by law.
Debt service is not included inthe General Appropriation Act,
since authorization therefor already exists under RA Nos. 4860
and 245, as amended, and PD 1967. Precisely in the light of this
subsisting authorization as embodied in said Republic Acts and
PD for debt service, Congress does not concern itself with details
for implementation by the Executive, butlargely with annual levels
and approval thereof upon due deliberations as part of the whole
obligation program for the year. Upon such approval, Congress
has spoken and cannot be said to havedelegated its wisdom to
the Executive, on whose part lies the implementation or execution
of the legislative wisdom.246 (Citation omitted)
Respondent Bureau of Treasury had the duty to obey the
temporary restraining order issued by this court, which remained
in full force and effect, until set aside, vacated, or modified. Its
conduct finds no justification and is reprehensible.247
WHEREFORE, the petition for review and petitions-in-
intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA
378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED
for its continued retention of the amount corresponding to the 20%
final withholding tax despite this court's directive in the temporary
restraining order and in the resolution dated November 15, 2011
to deliver the amounts to the banks to be placed in escrow
pending resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to
immediately ·release and pay to the bondholders the amount
corresponding-to the 20% final withholding tax that it withheld on
October 18, 2011.
4. WINEBRENNER v. CIR
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 206526 January 28, 2015
WINEBRENNER & IÑIGO INSURANCE BROKERS,
INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
In this petition for review under Rule 45 of the Rules of Court and
Rule 16 of the Revised Rules of the Court of Tax Appeals,
Winebrenner & Ifiigo Insurance Brokers, Inc. (petitioner) seeks
the review of the March 22, 2013 Decision1of the Court of Tax
Appeals En Banc (CTA-En Banc). In the said decision, the CTA-
En Banc affirmed the denial of petitioner's judicial claim for refund
or issuance of tax credit certificate for excess and unutilized
creditable withholding tax (CWT) for the 1st to 4th quarter of
calendar year (CJ} 2003 amounting to ₱4,073,954.00. In denying
the refund, the CTA-En Banc held that petitioner failed to prove
that the excess CWT for CY 2003 was not carried over to the
succeeding quarters of the subject taxable year. Under the 1997
National Internal Revenue Code (NJRC), a taxpayer must not
have exercised the option to carryover the excess CWT for a
particular taxable year in order to qualify for refund.
FACTS:
On April 15, 2004, petitioner filed its Annual Income Tax Return
for CY 2003.
About two years thereafter or on April 7, 2006, petitioner applied
for the administrative tax credit/refund claiming entitlement to the
refund of its excess or unutilized CWT for CY 2003, by filing BIR
Form No. 1914 with the Revenue District Office No. 50 of the
Bureau of Internal Revenue (BIR).
There being no action taken on the said claim, a petition for review
was filed by petitioner before the CTA on April 11, 2006. The case
was docketed as CTA Case No. 7440 and was raffled to the
Special First Division (CTA Division).
On April 13, 2010, CTA Division partially granted petitioner’s claim
for refund of excess and unutilized CWT for CY 2003 in the
reduced amount of ₱2,737,903.34 in its April 13, 2010
Decision2 (original decision). The dispositive portion of the
decision reads:
In view of the foregoing, the Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, respondent is hereby
ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE
in favor of the petitioner in the reduced amount of ₱2,737,903.34
representing its excess/unutilized creditable withholding taxes for
the year 2003.
SO ORDERED.3
Petitioner filed a Motion for Partial Reconsideration with Leave to
Submit Supplemental Evidence. It prayed that an amended
decision be issued granting the entirety of its claim for refund, or
in the alternative, that it be allowed to submit and offer relevant
documents as supplemental evidence.
Respondent Commissioner of Internal Revenue (CIR) also
moved for reconsideration, praying for the denial of the
entire amount of refund because petitioner failed to present
the quarterly Income Tax Returns (ITRs) for CY 2004. To the
CIR, the presentation of the 2004 quarterly ITRs was
indispensable in proving petitioner’s entitlement to the claimed
amount because it would prove that no carry-over of unutilized
and excess CWT for the four (4) quarters of CY 2003 to the
succeeding four (4) quarters of CY 2004 was made. In the
absence of said ITRs, no refund could be granted. In the CIR’s
view, this was in accordance with the irrevocability rule under
Section 76 of the NIRC which reads:
SEC. 76. Final Adjustment Return. – Every corporation liable to
tax under Section 27 shall file an adjustment return covering the
total taxable income for the preceding calendar or fiscal year. If
the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credits; or
(C) Be credited or refunded with the excess amount paid, as the
case may be.
In case the corporation is entitled to a tax credit or refund of the
excess estimated quarterly income taxes paid, the excess amount
shown on its final adjustment return may be carried over and
credited against the estimated quarterly income tax liabilities for
the taxable quarters of the succeeding taxable years. Once the
option to carry-over and apply the excess quarterly income tax
against income tax due for the taxable quarters of the succeeding
taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for cash
refund or issuance of a tax credit certificate shall be allowed
therefor.
On July 27, 2011, the CTA-Division reversed itself. In an
Amended Decision,4 it denied the entire claim of petitioner. It
reasoned out that petitioner should have presented as evidence
its first, second and third quarterly ITRs for the year 2004 to prove
that the unutilized CWT being claimed had not been carried over
to the succeeding quarters. Thus:
WHEREFORE, in view of the foregoing, petitioner’s Motion for
Partial Reconsideration is hereby DENIED while respondent’s
Motion for Reconsideration is hereby GRANTED. Accordingly, the
Decision dated April 13, 2010 granting petitioner’s claim in the
reduced amount of ₱2,737,903.34 is hereby REVERSED AND
SET ASIDE. Consequently, the instant Petition for Review is
hereby DENIED due to insufficiency of evidence.
SO ORDERED.5
Aggrieved, petitioner elevated the case to the CTA En Banc
praying for the reversal of the Amended Decision of the CTA
Division.
In its March 22, 2013 Decision,6 the CTA-En Banc affirmed the
Amended Decision of the CTA-Division. It stated that before a
cash refund or an issuance of tax credit certificate for unutilized
excess tax credits could be granted, it was essential for petitioner
to establish and prove, by presenting the quarterly ITRs of the
succeeding years, that the excess CWT was not carried over to
the succeeding taxable quarters considering that the option to
carry over in the succeeding taxable quarters could not be
modified in the final adjustment returns (FAR). Because petitioner
did not present the first, second and third quarterly ITRs for CY
2004, despite having offered and submitted the Annual ITR/FAR
for the same year, the CTA-En Banc stated that the petitioner
failed to discharge its burden, hence, no refund could be granted.
In justifying its conclusions, the CTA-En Banc cited its own case
of Millennium Business Services, Inc. v. Commissioner of Internal
Revenue (Millennium)7 wherein it held as follows:
Since the burden of proof is upon the claimant to show that the
amount claimed was not utilized or carried over to the succeeding
taxable quarters, the presentation of the succeeding quarterly
income tax return and final adjustment return is indispensable to
prove that it did not carry over or utilized the claimed excess
creditable withholding taxes. Absent thereof, there will be no basis
for a taxpayer’s claim for refund since there will be no evidence
that the taxpayer did not carry over or utilize the claimed excess
creditable withholding taxes to the succeeding taxable quarters.
Significantly, a taxpayer may amend its quarterly income tax
return or annual income tax return or Final Adjustment Return,
which in any case may modify the previous intention to carry-over,
apply as tax credit certificate or refund, as the case may be. But
the option to carry over in the succeeding taxable quarters under
the irrevocability rule cannot be modified in its final adjustment
return.
The presentation of the final adjustment return does not shift the
burden of proof that the excess creditable withholding tax was not
utilized or carried over to the first three (3) taxable quarters. It
remains with the taxpayer claimant. It goes without saying that
final adjustment returns of the preceding and the succeeding
taxable years are not sufficient to prove that the amount claimed
was utilized or carried over to the first three (3) taxable quarters.
The importance of the presentation of the succeeding quarterly
income tax return and the annual income tax return of the
subsequent taxable year need not be overly emphasized. All
corporations subject to income tax, are required to file quarterly
income tax returns, on a cumulative basis for the preceding
quarters, upon which payment of their income tax has been made.
In addition to the quarterly income tax returns, corporations are
required to file a final or adjustment return on or before the
fifteenth day of April. The quarterly income tax return, like the final
adjustment return, is the most reliable firsthand evidence of
corporate acts pertaining to income taxes, as it includes the
itemization and summary of additions to and deductions from the
income tax due. These entries are not without rhyme or reason.
They are required, because they facilitate the tax administration
process, and guide this Court to the veracity of a petitioner’s claim
for refund without which petitioner could not prove with certainty
that the claimed amount was not utilized or carried over to the
succeeding quarters or the option to carry over and apply the
excess was effectively chosen despite the intent to claim a refund.
In the same vein, if the government wants to disprove that the
excess creditable withholding tax was not utilized or carried over
to the succeeding taxable quarters, the presentation of the
succeeding quarterly income tax return and the annual income tax
return of the subsequent taxable year indicating utilization or
carrying over are [sic] indispensible. However, the claimant must
first establish its claim for refund, such that it did not utilize or carry
over or that it opted to utilize and carry over to the 1st, 2nd, 3rd
quarters and final adjustment return of the succeeding taxable
year.
Concomitantly, the presentation of the quarterly income tax return
and the annual income tax return to prove the fact that excess
creditable withholding tax was not utilized or carried over or opted
to be utilized and carried over to the 1st, 2nd, 3rd quarters and
final adjustment return of the succeeding taxable quarter is not
only for convenience to facilitate the tax administration process
but it is part of the requisites to establish the claim for refund.
Section 76 of the NIRC of 1997 provides that if the taxpayer
claimant carries over and applies the excess quarterly income tax
against the income tax due for the taxable quarters of the
succeeding taxable years, the same is irrevocable and no
application for cash refund or issuance of a tax credit certificate
shall be allowed.8
Hence, this petition.
Noteworthy is the fact that the CTA-En Banc ruling was met with
two dissents from Associate Justices Juanito C. Castañeda
(Justice Castañeda) and Esperanza R. Fabon-Victorino (Justice
Fabon-Victorino).
In his Dissenting Opinion9 which was concurred in by Justice
Fabon Victorino, Justice Castañeda expressed the view that the
CTA-En Banc should have reinstated the CTA-Division’s original
decision because in the cases of Philam Asset Management Inc.
v. Commissioner of Internal Revenue (Philam);10 State Land
Investment Corporation v. Commissioner of Internal Revenue
(State Land);11 Commissioner of Internal Revenue v. PERF
Realty Corporation (PERF Realty);12 and Commissioner of
Internal Revenue v. Mirant (Philippines) Operations, Corporation
(Mirant),13this Court already ruled that requiring the ITR or the
FAR for the succeeding year in a claim for refund had no basis in
law and jurisprudence. According to him, the submission of the
FAR of the succeeding taxable year was not required under the
law to prove the claimant’s entitlement to excess or unutilized
CWT, and by following logic, the submission of quarterly income
tax returns for the subsequent taxable period was likewise
unnecessary. He found no justifiable reason not to follow the
existing rulings of this Court. Petitioner’s reasoning in this petition
echoes the dissenting opinion of Justice Castaneda. It further
submits that despite the non-presentation of the quarterly ITRs, it
has sufficiently shown that the excess CWT for CY 2003 was not
carried over or applied to its income tax liabilities for CY 2004, as
shown in the Annual ITR for 2004 it submitted. Thus, petitioner
insists that its refund should have been granted. Petitioner further
avers, in its Reply,14 that even if Millennium Business case was
applicable, such must be given prospective effect considering that
this case was litigated on the basis of the doctrines laid down in
Philam, State Land and PERF Realty cases wherein the
submission of quarterly ITRs in a case for tax refund was held by
this Court as not mandatory.
In its Comment,15 the CIR counters that even if the taxpayer
signifies the option for either tax refund or carry-over as tax credit,
this does not ipso facto confer the right to avail of the option
immediately. There is a need, according to the CIR, for an
investigation to ascertain the correctness of the corporate returns
and the amount sought to be credited; and part of which is to look
into the quarterly returns so that it may be determined whether or
not excess and unutilized CWT was carried over into the
succeeding quarters of the next taxable year. Because the
pertinent quarterly ITRs were not presented, the CIR submits that
the petitioner failed to prove its right to a tax refund.
ISSUE:
The sole issue here is whether the submission and presentation
of the quarterly ITRs of the succeeding quarters of a taxable year
is indispensable in a claim for refund.
HELD:
The Court recognizes, as it always has, that the burden of proof
to establish entitlement to refund is on the claimant
taxpayer.16 Being in the nature of a claim for exemption, 17 refund
is construed in strictissimi juris against the entity claiming the
refund and in favor of the taxing power. 18 This is the reason why
a claimant must positively show compliance with the statutory
requirements provided for under the NIRC in order to successfully
pursue one’s claim. As implemented by the applicable rules and
regulations and as interpreted in a vast array of decisions, a
taxpayer who seeks a refund of excess and unutilized CWT must:
1) File the claim with the CIR within the two year period from the
date of payment of the tax;
2) Show on the return that the income received was declared as
part of the gross income; and
3) Establish the fact of withholding by a copy of a statement duly
issued by the payor to the payee showing the amount paid and
the amount of tax withheld.19
The original decision of the CTA-Division made plain that the
petitioner complied with the above requisites in so far as the
reduced amount of ₱2,737,903.34 was concerned. In the
amended decision, however, it was pointed out that because
petitioner failed to present the quarterly ITRs of the subsequent
year, there was an impossibility of determining compliance with
the irrevocability rule under Section 76 of the NIRC as in those
documents could be found evidence of whether the excess CWT
was applied to its income tax liabilities in the quarters of 2004.
The irrevocability rule under Section 76 of the NIRC means that
once an option, either for refund or issuance of tax credit
certificate or carry-over of CWT has been exercised, the same
can no longer be modified for the succeeding taxable years.20 For
said reason, the CTA-En Banc affirmed the conclusion in the
amended decision that because of the said impossibility, the claim
for refund was not substantiated.
The CIR agrees with the disposition of the CTA-En Banc,
stressing that the petitioner failed to carry out the burden of
showing that no carryover was made when it did not present the
quarterly ITRs for CY 2004.
Petitioner disagrees, as the dissents did, that the non-submission
of quarterly ITRs is fatal to its claim.
Hence, the issue on the indispensability of quarterly ITRs of the
succeeding taxable year in a claim for refund.
The Court finds for the petitioner.
There is no question that those who claim must not only prove its
entitlement to the excess credits, but likewise must prove that no
carry-over has been made in cases where refund is sought.
In this case, the fact of having carried over petitioner’s 2003
excess credits to succeeding taxable year is in issue. According
to the CTA-En Banc and the CIR, the only evidence that can
sufficiently show that carrying over has been made is to present
the quarterly ITRs. Some members of this Court adhere to the
same view.
The Court however cannot.
Proving that no carry-over has been made does not absolutely
require the presentation of the quarterly ITRs.
In Philam, the petitioner therein sought for recognition of its right
to the claimed refund of unutilized CWT. The CIR opposed the
claim, on the grounds similar to the case at hand, that no proof
was provided showing the non-carry over of excess CWT to the
subsequent quarters of the subject year. In a categorical manner,
the Court ruled that the presentation of the quarterly ITRs was not
necessary. Therein, it was written:
Requiring that the ITR or the FAR of the succeeding year be
presented to the BIR in requesting a tax refund has no basis in
law and jurisprudence.
First, Section 76 of the Tax Code does not mandate it. The law
merely requires the filing of the FAR for the preceding – not the
succeeding – taxable year. Indeed, any refundable amount
indicated in the FAR of the preceding taxable year may be
credited against the estimated income tax liabilities for the taxable
quarters of the succeeding taxable year. However, nowhere is
there even a tinge of a hint in any provisions of the [NIRC] that the
FAR of the taxable year following the period to which the tax
credits are originally being applied should also be presented to
the BIR.
Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-
85, merely provides that claims for refund of income taxes
deducted and withheld from income payments shall be given due
course only (1) when it is shown on the ITR that the income
payment received is being declared part of the taxpayer’s gross
income; and (2) when the fact of withholding is established by a
copy of the withholding tax statement, duly issued by the payor to
the payee, showing the amount paid and the income tax withheld
from that amount.
It has been submitted that Philam cannot be cited as a precedent
to hold that the presentation of the quarterly income tax return is
not indispensable as it appears that the quarterly returns for the
succeeding year were presented when the petitioner therein filed
an administrative claim for the refund of its excess taxes withheld
in 1997.
It appears however that there is misunderstanding in the ruling of
the Court in Philam. That factual distinction does not negate the
proposition that subsequent quarterly ITRs are not indispensable.
The logic in not requiring quarterly ITRs of the succeeding taxable
years to be presented remains true to this day. What Section 76
requires, just like in all civil cases, is to prove the prima facie
entitlement to a claim, including the fact of not having carried over
the excess credits to the subsequent quarters or taxable year. It
does not say that to prove such a fact, succeeding quarterly ITRs
are absolutely needed.
This simply underscores the rule that any document, other than
quarterly ITRs may be used to establish that indeed the non-
carry over clause has been complied with, provided that
such is competent, relevant and part of the records. The Court
is thus not prepared to make a pronouncement as to the
indispensability of the quarterly ITRs in a claim for refund for no
court can limit a party to the means of proving a fact for as long
as they are consistent with the rules of evidence and fair play. The
means of ascertainment of a fact is best left to the party that
alleges the same. The Court’s power is limited only to the
appreciation of that means pursuant to the prevailing rules of
evidence. To stress, what the NIRC merely requires is to
sufficiently prove the existence of the non-carry over of excess
CWT in a claim for refund.
The implementing rules similarly support this conclusion,
particularly Section 2.58.3 of Revenue Regulation No. 2-98
thereof. There, it provides as follows:
SECTION 2.58.3. Claim for Tax Credit or Refund.
(A) The amount of creditable tax withheld shall be allowed as a
tax credit against the income tax liability of the payee in the
quarter of the taxable year in which income was earned or
received.
(B) Claims for tax credit or refund of any creditable income tax
which was deducted and withheld on income payments shall be
given due course only when it is shown that the income payment
has been declared as part of the gross income and the fact of
withholding is established by a copy of the withholding tax
statement duly issued by the payer to the payee showing the
amount paid and the amount of tax withheld therefrom.
xxx xxx xxx
Evident from the above is the absence of any categorical
pronouncement of requiring the presentation of the succeeding
quarterly ITRs in order to prove the fact of non-carrying over. To
say the least, the Court rules that as to the means of proving it, It
has no power to unduly restrict it.
In this case, it confounds the Court why the CTA did not recognize
and discuss in detail the sufficiency of the annual ITR for
2004,21 which was submitted by the petitioner. The CTA in fact
said:
In the present case, while petitioner did offer its Annual ITR/Final
Adjustment Return for taxable year 2004, it appears that petitioner
miserably failed to submit and offer as part of its evidence the first,
second, and third Quarterly ITRs for the year 2004. Consequently,
petitioner was not able to prove that it did not exercise its option
to carry-over its excess CWT.22
Petitioner claims that the requirement of proof showing the non-
carry over has been established in said document.
Indeed, an annual ITR contains the total taxable income earned
for the four (4) quarters of a taxable year, as well as deductions
and tax credits previously reported or carried over in the quarterly
income tax returns for the subject period. A quick look at the
Annual ITR reveals this fact:
Aggregate Income Tax Due
Less Tax Credits/Payments
Prior Year’s excess Credits – Taxes withheld
Tax Payment (s) for the Previous Quarter (s) of the same taxable
year other than MCIT
xxx xxx xxx
Creditable Tax Withheld for the Previous Quarter (s)
Creditable Tax Withheld Per BIR Form No. 2307 for this Quarter
xxx xxx x x x23
It goes without saying that the annual ITR (including any other
proof that may be sufficient to the Court) can sufficiently reveal
whether carry over has been made in subsequent quarters even
if the petitioner has chosen the option of tax credit or refund in the
immediately 2003 annual ITR. Section 76 of the NIRC requires a
corporation to file a Final Adjustment Return (or Annual ITR)
covering the total taxable income for the preceding calendar or
fiscal year. The total taxable income contains the combined
income for the four quarters of the taxable year, as well as the
deductions and excess tax credits carried over in the quarterly
income tax returns for the same period.
If the excess tax credits of the preceding year were deducted,
whether in whole or in part, from the estimated income tax
liabilities of any of the taxable quarters of the succeeding taxable
year, the total amount of the tax credits deducted for the entire
taxable year should appear in the Annual ITR under the item
"Prior Year’s Excess Credits." Otherwise, or if the tax credits were
carried over to the succeeding quarters and the corporation did
not report it in the annual ITR, there would be a discrepancy in the
amounts of combined income and tax credits carried over for all
quarters and the corporation would end up shouldering a bigger
tax payable. It must be remembered that taxes computed in the
quarterly returns are mere estimates. It is the annual ITR which
shows the aggregate amounts of income, deductions, and credits
for all quarters of the taxable year. It is the final adjustment return
which shows whether a corporation incurred a loss or gained a
profit during the taxable quarter.24 Thus, the presentation of the
annual ITR would suffice in proving that prior year’s excess credits
were not utilized for the taxable year in order to make a final
determination of the total tax due.
In this case, petitioner reported an overpayment in the amount of
₱7,194,213.00 in its annual ITR for the year ended December
2003:
Annual ITR 2003
Income Tax Due 1,259,259.00
Less: Prior Year’s Excess Credits (2002 (4,379,518.00)
Annual ITR)
Creditable Tax Withheld for the 4th Quarter (4,073,954.00)
Tax Payable / (Overpayment) (7,194,213.00)
For the overpayment, petitioner chose the option "To be issued a
Tax Credit Certificate." In its Annual ITR for the year ended
December 2004, petitioner did not report the Creditable Tax
Withheld for the 4th quarter of 2003 in the amount of
₱4,073,954.00 as prior year’s excess credits. As shown in the
2004 ITR:
Annual ITR 2004
Income Tax Due 1,321,409.00
Less: Prior Year’s Excess Credits -
Creditable Tax Withheld for the 4th (3,689,419.00)
Quarter
Tax Payable / (Overpayment) (2,368,010.00)
Verily, the absence of any amount written in the Prior Year excess
Credit – Tax Withheld portion of petitioner’s 2004 annual ITR
clearly shows that no prior excess credits were carried over in the
first four quarters of 2004. And since petitioner was able to
sufficiently prove that excess tax credits in 2003 were not
carried over to taxable year 2004 by leaving the item "Prior
Year’s Excess Credits" as blank in its 2004 annual ITR, then
petitioner is entitled to a refund. Unfortunately, the CTA, in
denying entirely the claim, merely relied on the absence of the
quarterly ITRs despite being able to verify the truthfulness of the
declaration that no carry over was indeed effected by simply
looking at the 2004 annual ITR.
At this point, worth mentioning is the fact that subsequent cases
affirm the proposition as correctly pointed out by petitioner. State
Land, PERF and Mirant reiterated the rule that the presentation
of the quarterly ITRs of the subsequent year is not mandatory on
the part of the claimant to prove its claims.
There are some who challenges the applicability of PERF in the
case at bar. It is said that PERF is not in point because the Annual
ITR for the succeeding year had actually been attached to PERF’s
motion for reconsideration with the CTA and had formed part of
the records of the case. Clearly, if the Annual ITR has been
recognized by this Court in PERF, why then would the submitted
2004 Annual ITR in this case be insufficient despite the absence
of the quarterly ITRs? Why then would this Court require more
than what is enough and deny a claim even if the minimum burden
has been overcome? At best, the existence of quarterly ITRs
would have the effect of strengthening a proven fact. And as such,
may only be considered corroborative evidence, obviously not
indispensable in character. PERF simply affirms that quarterly
ITRs are not indispensable, provided that there is sufficient proof
that carrying over excess CWT was not effected.
Stateland and Mirantare equally challenged. In all these cases
however, the factual distinctions only serve to bolster the
proposition that succeeding quarterly ITRs are not indispensable.
Implicit from all these cases is the Court’s recognition that proving
carry-over is an evidentiary matter and that the submission of
quarterly ITRs is but a means to prove the fact of one’s entitlement
to a refund and not a condition sine qua non for the success of
refund. True, it would have been better, easier and more efficient
for the CTA and the CIR to have as basis the quarterly ITRs, but
it is not the only way considering further that in this case, the
Annual ITR for 2004 is sufficient. Courts are here to painstakingly
weigh evidence so that justice and equity in the end will prevail.
It must be emphasized that once the requirements laid down
by the NIRC have been met, a claimant should be considered
successful in discharging its burden of proving its right to
refund. Thereafter, the burden of going forward with the
evidence, as distinct from the general burden of proof, shifts
to the opposing party,25 that is, the CIR. It is then the turn of
the CIR to disprove the claim by presenting contrary evidence
which could include the pertinent ITRs easily obtainable from its
own files.
All along, the CIR espouses the view that it must be given ample
opportunity to investigate the veracity of the claims. Thus, the
Court asks: In the process of investigation at the administrative
level to determine the right of the petitioner to the claimed amount,
did the CIR, with all its resources even attempt to verify the
quarterly ITRs it had in its files? Certainly, it did not as the
application was met by the inaction of the CIR. And if desirous in
its effort to clearly verify petitioner’s claim, it should have had the
time, resources and the liberty to do so. Yet, nothing was
produced during trial to destroy the prima facie right of the
petitioner by counterchecking the claims with the quarterly ITRs
the CIR has on its file. To the Court, it seems that the CIR
languished on its duties to ascertain the veracity of the claims and
just hoped that the burden would fall on the petitioner’s head once
the issue reaches the courts.
This mindset ignores the rule that the CIR has the equally
important responsibility of contradicting petitioner’s claim by
presenting proof readily on hand once the burden of evidence
shifts to its side. Claims for refund are civil in nature and as such,
petitioner, as claimant, though having a heavy burden of showing
entitlement, need only prove preponderance of evidence in order
to recover excess credit in cold cash. To review,
"[P]reponderance of evidence is [defined as] the weight, credit,
and value of the aggregate evidence on either side and is usually
considered to be synonymous with the term ‘greater weight of the
evidence’ or ‘greater weight of the credible evidence.’ It is
evidence which is more convincing to the court as worthy of belief
than that which is offered in opposition thereto.26
The CIR must then be reminded that in Philam, the CIR’s "failure
to present [the quarterly ITRs and AFR] to support its contention
against the grant of a tax refund to [a claimant] is certainly fatal."
PERF reinforces this with a sweeping statement holding that the
verification process is not incumbent on PERF [or any claimant
for that matter]; [but] is the duty of the CIR to verify whether xxx
excess income taxes [have been carried over].
And should there be a possibility that a claimant may have
violated the irrevocability rule and thereafter claim twice from its
credits, no one is to be blamed but the CIR for not discharging its
burden of evidence to destroy a claimant’s right to a refund. At
any rate, a claimant who defrauds the government cannot escape
liability be it criminal or civil in nature.
Verily, with the petitioner having complied with the requirements
for refund, and without the CIR showing contrary evidence other
than its bare assertion of the absence of the quarterly ITRs,
copies of which are easily verifiable by its very own records, the
burden of proof of establishing the propriety of the claim for refund
has been sufficiently discharged. Hence, the grant of refund is
proper.
The Court does not, and cannot, however, grant the entire
claimed amount as it finds no error in the original decision of the
CTA Division granting refund to the reduced amount of
₱2,737,903.34. This finding of fact is given respect, if not finality,
as the CTA,27 which by the very nature of its functions of
dedicating itself exclusively to the consideration of the tax
problems has necessarily developed an expertise on the
subject.28 It being the case, the Court partly grants this petition to
the extent of reinstating the April 23, 2010 original decision of the
CTA Division.
The Court reminds the CIR that substantial justice, equity and fair
play take precedence over technicalities and legalisms. The
government must keep in mind that it has no right to keep the
Money not belonging to it, thereby enriching itself at the expense
of the law-abiding citizen29 or entities who have complied with the
requirements of the law in order to forward the claim for refund.
Under the principle of solutio in debiti provided in Article 2154 of
the Civil Code, the CIR must return anythihg it has received.30
Finally, even assuming that the Court reverses itself and
pronounces the indispensability of presenting the quarterly ITRs
to prove entitlement to the claimed refund, petitioner should not
be prejudiced for relying on Philam. The CTA En Banc merely
based its pronouncement on a case that does not enjoy the
benefit of stare decis et non quieta movere which means "to
adhere to precedents, and not to unsettle things which are
established."31 As between a CTA En Banc Decision (Millennium) Net Income Subject to Tax 499, 194,964.00
and this Court's Decision (Philam), it is elementary that the latter XTaxRate 10%
should prevail. Tax Due 49,919,496.40
Less: Tax Credits -
WHEREFORE, the Court partly grants the petition. The March 22, Deficiency Income Tax 49,919,496.40
2013 Decision of the Court of Tax Appeals En Banc is Add: Increments
REVERSED. The April 13, 2010 Decision of the Court of Tax 25% Surcharge 12,479,874.10
Appeals Special First Division is REINSTATED. Respondent 20% Interest Per Annum (4115/06-
Commissioner of Internal Revenue is ordered to REFUND to 19,995,151.71
4/15/08)
petitioner the amount of ₱2,737,903.34 as excess creditable
Compromise Penalty for Late Payment 25,000.00
withholding tax paid for taxable year 2003.
Total increments 32,500,025.81
Total Amount Due ?82,419,522.21
SO ORDERED.
For Taxable Year 2006:
ASSESSMENT NO. QA-07-000097
5. CIR v. FSM CINEMA PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees ?3,8 l
(see separate pdf) 5,922,240.00
Less: Cost of Sales/Services 2,760,518,437.00
6. CIR vs. St. Lukes G.R. No. 203514 | 2017-02-13 Gross Income From Operation 1,055,403,803.00
*DEL CASTILLO CASE Add: Non-Operating & Other Income -
Total Gross Income 1,055,403,803.00
SUPREME COURT Less: Deductions 640,147,719.00
FIRST DIVISION Net Income Subject to Tax 415,256,084.00
February 13, 2017 XTaxRate 10%
G.R. No. 203514 Tax.Due 41,525,608.40
COMMISSIONER OF INTERNAL REVENUE, Petitioner
Less: Tax Credits -
vs.
ST. LUKE’S MEDICAL CENTER, INC., Respondent Deficiency Income Tax 41,525,608.40
DECISION Add: Increments -
DEL CASTILLO, J.: 25% Surcharge 10,381,402.10
The doctrine of stare decisis dictates that "absent any powerful 20% Interest Per Annum (4/15/07-
8,327,875.44
countervailing considerations, like cases ought to be decided 4/15/08)
alike."1 Compromise Penalty for Late Payment 25,000.00
This Petition for Review on Certiorari2 under Rule 45 of the Rules Total increments 18,734,277.54
of Court assails the May 9, 2012 Decision3 and the September Total Amount Due ?60,259,885.9411
17, 2012 Resolution4 of the Court of Tax Appeals (CTA) in CTA Aggrieved, SLMC elevated the matter to the CTA via a Petition
EB Case No. 716. for Review,12 docketed as CTA Case No. 7789.
Factual Antecedents Ruling of the Court of Tax Appeals Division
On December 14, 2007, respondent St. Luke’s Medical Center, On August 26, 2010, the CTA Division rendered a Decision13
Inc. (SLMC) received from the Large Taxpayers Service- finding SLMC not liable for deficiency income tax under Section
Documents Processing and Quality Assurance Division of the 27(B) of the 1997 NIRC, as amended, since it is exempt from
Bureau of Internal Revenue (BIR) Audit Results/Assessment paying income tax under Section 30(E) and (G) of the same Code.
Notice Nos. QA-07-0000965 and QA-07-000097,6 assessing Thus:
respondent SLMC deficiency income tax under Section 27(B)7 of WHEREFORE, premises considered, the Petition for Review is
the 1997 National Internal Revenue Code (NIRC), as amended, hereby GRANTED. Accordingly, Audit Results/Assessment
for taxable year 2005 in the amount of ₱78,617,434.54 and for Notice Nos. QA-07-000096 and QA-07-000097, assessing
taxable year 2006 in the amount of ₱57,119,867.33. petitioner for alleged deficiency income taxes for the taxable
On January 14, 2008, SLMC filed with petitioner Commissioner of years 2005 and 2006, respectively, are hereby CANCELLED and
Internal Revenue (CIR) an administrative protest8 assailing the SET ASIDE.
assessments. SLMC claimed that as a non-stock, non-profit SO ORDERED.14
charitable and social welfare organization under Section 30(E) CIR moved for reconsideration but the CTA Division denied the
and (G)9 of the 1997 NIRC, as amended, it is exempt from paying same in its December 28, 2010 Resolution.15
income tax. This prompted CIR to file a Petition for Review16 before the CTA
On April 25, 2008, SLMC received petitioner CIR's Final Decision En Banc.
on the Disputed Assessment10 dated April 9, 2008 increasing the Ruling of the Court of Tax Appeals En Banc
deficiency income for the taxable year 2005 tax to On May 9, 2012, the CTA En Banc affirmed the cancellation and
₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94, setting aside of the Audit Results/Assessment Notices issued
computed as follows: against SLMC. It sustained the findings of the CTA Division that
For Taxable Year 2005: SLMC complies with all the requisites under Section 30(E) and
ASSESSMENT NO. QA-07-000096 (G) of the 1997 NIRC and thus, entitled to the tax exemption
PARTICULARS AMOUNT provided therein.17
Sales/Revenues/Receipts/Fees ?3,623,511,616.00 On September 17, 2012, the CTA En Banc denied CIR's Motion
Less: Cost of Sales/Services 2,643,049, 769.00 for Reconsideration.
Gross Income From Operation 980,461,847.00 Issue
Add: Non-Operating & Other Income - Hence, CIR filed the instant Petition under Rule 45 of the Rules
Total Gross Income 980,461,847.00 of Court contending that the CTA erred in exempting SLMC from
the payment of income tax.
Less: Deductions 481,266,883 .00
Meanwhile, on September 26, 2012, the Court rendered a
Decision in G.R. Nos. 195909 and 195960, entitled Commissioner
of Internal Revenue v. St. Luke's Medical Center, Inc., 18 finding
SLMC not entitled to the tax exemption under Section 30(E) and
(G) of the NIRC of 1997 as it does not operate exclusively for
charitable or social welfare purposes insofar as its revenues from
paying patients are concerned. Thus, the Court disposed of the
case in this manner:
WHEREFORE, the petition of the Commissioner of Internal
Revenue in G.R. No. 195909is PARTLY GRANTED. The
Decision of the Court of Tax Appeals En Banc dated 19 November
2010 and its Resolution dated 1 March 2011 in CTA Case No.
6746 are MODIFIED. St. Luke's Medical Center, Inc. is
ORDERED TO PAY the deficiency income tax in 1998 based on
the 10% preferential income tax rate under Section 27(B) of the
National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under
Sections 248 and 249 of the National Internal Revenue Code. All
other parts of the Decision and Resolution of the Court of Tax
Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960
is DENIED for violating Section I, Rule 45 of the Rules of Court.
SO ORDERED.19
Considering the foregoing, SLMC then filed a Manifestation and
Motion20 informing the Court that on April 30, 2013, it paid the BIR
the amount of basic taxes due for taxable years 1998, 2000-2002,
and 2004-2007, as evidenced by the payment confirmation21 from
the BIR, and that it did not pay any surcharge, interest, and
compromise penalty in accordance with the above-mentioned
Decision of the Court. In view of the payment it made, SLMC
moved for the dismissal of the instant case on the ground of
mootness.
CIR opposed the motion claiming that the payment confirmation
submitted by SLMC is not a competent proof of payment as it is a
mere photocopy and does not even indicate the quarter/sand/or
year/s said payment covers.22
In reply,23 SLMC submitted a copy of the Certification24 issued by
the Large Taxpayers Service of the BIR dated May 27, 2013,
certifying that, "[a]s far as the basic deficiency income tax for
taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are
concen1ed, this Office considers the cases closed due to the
payment made on April 30, 2013." SLMC likewise submitted a
letter25 from the BIR dated November 26, 2013 with attached
Certification of Payment26 and application for abatement,27 which
it earlier submitted to the Court in a related case, G.R. No.
200688, entitled Commissioner of Internal Revenue v. St. Luke's
Medical Center, Inc.28
Thereafter, the parties submitted their respective memorandum.
CIR 's Arguments
CIR argues that under the doctrine of stare decisis SLMC is
subject to 10% income tax under Section 27(B) of the 1997
NIRC.29 It likewise asserts that SLMC is liable to pay compromise
penalty pursuant to Section 248(A)30 of the 1997 NIRC for failing
to file its quarterly income tax returns.31
As to the alleged payment of the basic tax, CIR contends that this
does not render the instant case moot as the payment
confirmation submitted by SLMC is not a competent proof of
payment of its tax liabilities.32
SLMC's Arguments
SLMC, on the other hand, begs the indulgence of the Court to
revisit its ruling in G.R. Nos. 195909 and 195960 (Commissioner
of Internal Revenue v. St. Luke's Medical Center, Inc.)33 positing
that earning a profit by a charitable, benevolent hospital or
educational institution does not result in the withdrawal of its tax
exempt privilege.34 SLMC further claims that the income it derives
from operating a hospital is not income from "activities conducted
for profit."35 Also, it maintains that in accordance with the ruling of
the Court in G.R. Nos. 195909 and 195960 (Commissioner of
Internal Revenue v. St. Luke's Medical Center, Inc.), 36 it is not
liable for compromise penalties.37
In any case, SLMC insists that the instant case should be
dismissed in view of its payment of the basic taxes due for taxable
years 1998, 2000-2002, and 2004-2007 to the BIR on April 30,
2013.38
Our Ruling
SLMC is liable for income tax under
Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned
The issue of whether SLMC is liable for income tax under Section
27(B) of the 1997 NIRC insofar as its revenues from paying
patients are concerned has been settled in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.),39 where the Court ruled that:
x x x We hold that Section 27(B) of the NIRC does not remove the
income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section
30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the
introduction of Section 27(B) is to subject the taxable income of
two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals,
among the institutions covered by Section 30, to the 10%
preferential rate under Section 27(B) instead of the ordinary 30%
corporate rate under the last paragraph of Section 30 in relation
to Section 27(A)(l).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on
the income of (1) proprietary non-profit educational institutions
and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit.
'Proprietary' means private, following the definition of a
'proprietary educational institution' as 'any private school
maintained and administered by private individuals or groups' with
a government permit. 'Non-profit' means no net income or asset
accrues to or benefits any member or specific person, with all the
net income or asset devoted to the institution's purposes and all
its activities conducted not for profit.
'Non-profit' does not necessarily mean 'charitable.' In Collector of
Internal Revenue v. Club Filipino, Inc. de Cebu, this Court
considered as non-profit a sports club organized for recreation
and entertainment of its stockholders and members. The club was
primarily funded by membership fees and dues. If it had profits,
they were used for overhead expenses and improving its golf
course. The club was non-profit because of its purpose and there
was no evidence that it was engaged in a profit-making enterprise.
The sports club in Club Filipino, Inc. de Cebu may be non-profit,
but it was not charitable. Tue Court defined 'charity' in Lung
Center of the Philippines v. Quezon City as 'a gift, to be applied
consistently with existing laws, for the benefit of an indefinite
number of persons, either by bringing their minds and hearts
under the influence of education or religion, by assisting them to
establish themselves in life or [by] otherwise lessening the burden
of government.' A nonprofit club for the benefit of its members fails
this test. An organization may be considered as non-profit if it
does not distribute any part of its income to stockholders or
members. However, despite its being a tax exempt institution, any
income such institution earns from activities conducted for profit
is taxable, as expressly provided in the last paragraph of Section
30.
To be a charitable institution, however, an organization must meet
the substantive test of charity in Lung Center. The issue in Lung
Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction.
Charity is essentially a gift to an indefinite number of persons
which lessens the burden of government. In other words,
charitable institutions provide for free goods and services to the
public which would otherwise fall on the shoulders of government.
Thus, as a matter of efficiency, the government forgoes taxes
which should have been spent to address public needs, because
certain private entities already assume a part of the burden. This
is the rationale for the tax exemption of charitable institutions. The
loss of taxes by the government is compensated by its relief from
doing public works which would have been funded by
appropriations from the Treasury.
Charitable institutions, however, are not ipso facto entitled to a tax
exemption. The requirements for a tax exemption are specified by
the law granting it. The power of Congress to tax implies the
power to exempt from tax. Congress can create tax exemptions,
subject to the constitutional provision that '[n]o law granting any
tax exemption shall be passed without the concurrence of a
majority of all the Members of Congress.' The requirements for a
tax exemption are strictly construed against the taxpayer because
an exemption restricts the collection of taxes necessary for the
existence of the government.
The Court in Lung Center declared that the Lung Center of the
Philippines is a charitable institution for the purpose of exemption
from real property taxes. This ruling uses the same premise as
Hospital de San Juan and Jesus Sacred Heart College which says
that receiving income from paying patients does not destroy the
charitable nature of a hospital.
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, whether outpatient, or
confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve;
and no money inures to the private benefit of the persons
managing or operating the institution.
For real property taxes, the incidental generation of income is
permissible because the test of exemption is the use of the
property. The Constitution provides that '[c]haritable institutions,
churches and personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt
from taxation.' The test of exemption is not strictly a requirement
on the intrinsic nature or character of the institution. The test
requires that the institution use property in a certain way, i.e., for
a charitable purpose. Thus, the Court held that the Lung Center
of the Philippines did not lose its charitable character when it used
a portion of its lot for commercial purposes. The effect of failing to
meet the use requirement is simply to remove from the tax
exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real
property taxes. In the NIRC, Congress decided to extend the
exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section
28(3), Article VI of the Constitution. Section 30(E) of the NIRC
defines the corporation or association that is exempt from income
tax. On the other hand, Section 28(3), Article VI of the Constitution
does not define a charitable institution, but requires that the
institution 'actually, directly and exclusively' use the property for a
charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution
must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific
person.
Thus, both the organization and operations of the charitable
institution must be devoted 'exclusively' for charitable purposes.
The organization of the institution refers to its corporate form, as
shown by its articles of incorporation, by-laws and other
constitutive documents. Section 30(E) of the NIRC specifically
requires that the corporation or association be non-stock, which
is defined by the Corporation Code as 'one where no part of its
income is distributable as dividends to its members, trustees, or
officers' and that any profit 'obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation
was organized.' However, under Lung Center, any profit by a
charitable institution must not only be plowed back 'whenever
necessary or proper,' but must be 'devoted or used altogether to
the charitable object which it is intended to achieve.'
The operations of the charitable institution generally refer to its
regular activities. Section 30(E) of the NIRC requires that these
operations be exclusive to charity. There is also a specific
requirement that 'no part of [the] net income or asset shall belong
to or inure to the benefit of any member, organizer, officer or any
specific person.' The use of lands, buildings and improvements of
the institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock
and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's meets
the test of charity, a charitable institution is not ipso facto tax
exempt. To be exempt from real property taxes, Section 28(3),
Article VI of the Constitution requires that a charitable institution
use the property 'actually, directly and exclusively' for charitable
purposes. To be exempt from income taxes, Section 30(E) of the
NIRC requires that a charitable institution must be 'organized and
operated exclusively' for charitable purposes. Likewise, to be
exempt from income taxes, Section 30(G) of the NIRC requires
that the institution be 'operated exclusively' for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies
the words 'organized and operated exclusively' by providing that:
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed
under this Code.
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts 'any' activity for profit, such
activity is not tax exempt even as its not-for-profit activities remain
tax exempt. This paragraph qualifies the requirements in Section
30(E) that the '[n]on-stock corporation or association [must be]
organized and operated exclusively for . . . charitable . . . purposes
. . . . ' It likewise qualifies the requirement in Section 30(G) that
the civic organization must be 'operated exclusively' for the
promotion of social welfare.
Thus, even if the charitable institution must be 'organized and
operated exclusively' for charitable purposes, it is nevertheless
allowed to engage in 'activities conducted for profit' without losing
its tax exempt status for its not-for-profit activities. The only
consequence is that the 'income of whatever kind and character'
of a charitable institution 'from any of its activities conducted for
profit, regardless of the disposition made of such income, shall be
subject to tax.' Prior to the introduction of Section 27(B), the tax
rate on such income from for-profit activities was the ordinary
corporate rate under Section 27(A). With the introduction of
Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of ₱l,730,367,965 from
services to paying patients. It cannot be disputed that a hospital
which receives approximately ₱l.73 billion from paying patients is
not an institution 'operated exclusively' for charitable purposes.
Clearly, revenues from paying patients are income received from
'activities conducted for profit.' Indeed, St. Luke's admits that it
derived profits from its paying patients. St. Luke's declared
₱l,730,367,965 as 'Revenues from Services to Patients' in
contrast to its 'Free Services' expenditure of ₱218,187,498. In its
Comment in G.R. No. 195909, St. Luke's showed the following
'calculation' to support its claim that 65.20% of its 'income after
expenses was allocated to free or charitable services' in 1998.
x x xx
In Lung Center, this Court declared:
'[e]xclusive' is defined as possessed and enjoyed to the exclusion
of others; debarred from participation or enjoyment; and
'exclusively' is defined, 'in a manner to exclude; as enjoying a
privilege exclusively.' . . . The words 'dominant use' or 'principal
use' cannot be substituted for the words 'used exclusively' without
doing violence to the Constitution and thelaw. Solely is
synonymous with exclusively.
The Court cannot expand the meaning of the words 'operated
exclusively' without violating the NIRC. Services to paying
patients are activities conducted for profit. They cannot be
considered any other way. There is a 'purpose to make profit over
and above the cost' of services. The ₱l.73 billion total revenues
from paying patients is not even incidental to St. Luke's charity
expenditure of ₱2l8,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 is
65.20% of its operating income in 1998. However, if a part of the
remaining 34.80% of the operating income is reinvested in
property, equipment or facilities used for services to paying and
non-paying patients, then it cannot be said that the income is
'devoted or used altogether to the charitable object which it is
intended to achieve.' The income is plowed back to the
corporation not entirely for charitable purposes, but for profit as
well. In any case, the last paragraph of Section 30 of the NIRC
expressly qualifies that income from activities for profit is taxable
'regardless of the disposition made of such income.'
Jesus Sacred Heart College declared that there is no official
legislative record explaining the phrase 'any activity conducted for
profit.' However, it quoted a deposition of Senator Mariano Jesus
Cuenco, who was a member of the Committee of Conference for
the Senate, which introduced the phrase 'or from any activity
conducted for profit.'
P. Cuando ha hablado de la Universidad de Santo Tomas que
tiene un hospital, no cree V d que es una actividad esencial dicho
hospital para el funcionamiento def colegio de medicina
de dicha universidad?
x x x x x x xxx
R. Si el hospital se limita a recibir enformos pobres, mi
contestacion seria afirmativa; pero considerando que el hospital
tiene cuartos de pago, y a los mismos generalmente van
enfermos de buena posicion social economica, lo que se paga
por estos enfermos debe estar sujeto a 'income tax', y es una de
las razones que hemos tenido para insertar las palabras o frase
'or from any activity conducted for profit.'
The question was whether having a hospital is essential to an
educational institution like the College of Medicine of the
University of Santo Tomas.1awp++i1 Senator Cuenco answered
that if the hospital has paid rooms generally occupied by people
of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted
the phrase 'or any activity conducted for profit.'
The question in Jesus Sacred Heart College involves an
educational institution. However, it is applicable to charitable
institutions because Senator Cuenco's response shows an intent
to focus on the activities of charitable institutions. Activities for
profit should not escape the reach of taxation. Being a non-stock
and non-profit corporation does not, by this reason alone,
completely exempt an institution from tax. An institution cannot
use its corporate form to prevent its profitable activities from being
taxed.
The Court finds that St. Luke's is a corporation that is not
'operated exclusively' for charitable or social welfare purposes
insofar as its revenues from paying patients are concerned. This
ruling is based not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and plain text of
Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires
that an institution be 'operated exclusively' for charitable or social
welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities. Such
income from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax, previously at the
ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the
State because an exempt institution is spared from sharing in the
expenses of government and yet benefits from them. Tax
exemptions for charitable institutions should therefore be lin1ited
to institutions beneficial to the public and those which improve
social welfare. A profit-making entity should not be allowed to
exploit this subsidy to the detriment of the government and other
taxpayers.
St. Luke's fails to meet the requirements under Section 30(E) and
(G) of the NIRC to be completely tax exempt from all its income.
However, it remains a proprietary non-profit hospital under
Section 27(B) of the NIRC as long as it does not distribute any of
its profits to its members and such profits are reinvested pursuant
to its corporate purposes. St. Luke's, as a proprietary non-profit
hospital, is entitled to the preferential tax rate of 10% on its net
income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998
under Section 27(B) of the NIRC. However, St. Luke's has good
reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is 'a corporation for purely charitable and
social welfare purposes' and thus exempt from income tax. In
Michael J Lhuillier, Inc. v. Commissioner of Internal Revenue, the
Court said that 'good faith and honest belief that one is not subject
to tax on the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient
justification to delete the imposition of surcharges and interest.'40
A careful review of the pleadings reveals that there is no
countervailing consideration for the Court to revisit its aforequoted
ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.). Thus, under the
doctrine of stare decisis, which states that "[o]nce a case has
been decided in one way, any other case involving exactly the
same point at issue x x x should be decided in the same
manner,"41 the Court finds that SLMC is subject to 10% income
tax insofar as its revenues from paying patients are concerned.
To be clear, for an institution to be completely exempt from
income tax, Section 30(E) and (G) of the 1997 NIRC requires said
institution to operate exclusively for charitable or social welfare
purpose. But in case an exempt institution under Section 30(E) or
(G) of the said Code earns income from its for-profit activities, it
will not lose its tax exemption. However, its income from for-profit
activities will be subject to income tax at the preferential 10% rate
pursuant to Section 27(B) thereof.
SLMC is not liable for Compromise
Penalty.
As to whether SLMC is liable for compromise penalty under
Section 248(A) of the 1997 NIRC for its alleged failure to file its
quarterly income tax returns, this has also been resolved in G.R
Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
St. Luke's Medical Center, Inc.),42 where the imposition of
surcharges and interest under Sections 248 43 and 24944 of the
1997 NIRC were deleted on the basis of good faith and honest
belief on the part of SLMC that it is not subject to tax. Thus,
following the ruling of the Court in the said case, SLMC is not
liable to pay compromise penalty under Section 248(A) of the
1997 NIRC.
The Petition is rendered moot by the
payment made by SLMC on April 30,
2013.
However, in view of the payment of the basic taxes made by
SLMC on April 30, 2013, the instant Petition has become
moot.1avvphi1
While the Court agrees with the CIR that the payment
confirmation from the BIR presented by SLMC is not a competent
proof of payment as it does not indicate the specific taxable period
the said payment covers, the Court finds that the Certification
issued by the Large Taxpayers Service of the BIR dated May 27,
2013, and the letter from the BIR dated November 26, 2013 with
attached Certification of Payment and application for abatement
are sufficient to prove payment especially since CIR never
questioned the authenticity of these documents. In fact, in a
related case, G.R. No. 200688, entitled Commissioner of Internal
Revenue v. St. Luke's Medical Center, lnc.,45 the Court dismissed
the petition based on a letter issued by CIR confirming SLMC's
payment of taxes, which is the same letter submitted by SLMC in
the instant case.
In fine, the Court resolves to dismiss the instant Petition as the
same has been rendered moot by the payment made by SLMC of
the basic taxes for the taxable years 2005 and 2006, in the
amounts of ₱49,919,496.40 and ₱4 l,525,608.40, respectively. 46
WHEREFORE, the Petition is hereby DISMISSED.
SO ORDERED.
7. La Salle/Ateneo canteen case - G.R. No. 196596
SECOND DIVISION
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;3 and
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 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.10 On April 6, 2010, the CTA
Division denied the Commissioner's motion for reconsideration
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.13 The Commissioner did not promptly
object to the formal offer of supplemental evidence despite
notice.14
On July 29, 2010, the CTA Division, in view of the supplemental
evidence submitted, reduced the 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; 17 and (3) the CTA
Division erred 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. 20 The CTA En
Banc was satisfied with DLSU's supporting evidence confirming
that 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. 23
The CTA En Banc found that DLSU's DST payments had been
remitted 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)24 and Section 2 of 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.27 Thus, she
came to this court for relief through a petition for review on
certiorari (G.R. 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 ₱2,554,825.47 inclusive of
surcharge.28
On the validity of the Letter of Authority
The issue of the LOA' s validity was raised during trial; 29 hence,
the issue was deemed properly 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.30 The
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
The Commissioner submits the following arguments:
First, DLSU's rental income is taxable regardless of how such
income is derived, used or disposed of. 35 DLSU's operations of
canteens and bookstores within its campus even though
exclusively 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.
YMCA38 to support its conclusion that revenues however
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. 40 Thus,
DLSU's 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 payment42 and that it is 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.44 In 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
2003.47 DLSU objects to the CTA En 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 situated parties, the same set of
evidence should be appreciated and weighed in the same
manner.49 The CTA En Banc erred when it did not similarly
appreciate DLSU' s evidence as it did to 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;54 (2) Section 30 of the
1997 Tax Code is almost an exact replica of 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. 56 Section 30
(H) of the 1997 Tax 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.58 Unlike YMCA, which is not an
educational institution, DLSU is undisputedly a 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
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. 15-2001.61
In any case, DLSU argues that it cannot be 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. 64 That it was
asked on cross-examination during the trial does not make it an
issue that the CTA could resolve.65 The 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.67 In addition, DLSU prays that the 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.
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 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,71 the Court in the YMCA case had 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,73 the YMCA is not tax-exempt per se; " what
is 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
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 income78 for
 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.
We find that the text demonstrates the policy of the 1987
Constitution, discernible from the records of the 1986
Constitutional Commission79 to provide broader tax privilege to
non-stock, non-profit educational institutions as recognition of
their role in assisting the State provide a public good. The tax for educational purposes are not exempt from duties and taxes.
exemption was seen as beneficial to students who may otherwise To avail of the exemption, the taxpayer must factually prove that
be charged unreasonable tuition fees if not for the tax exemption it used actually, directly and exclusively for educational purposes
extended to all revenues and assets of non-stock, non-profit the revenues or income sought to be exempted.
educational institutions.80 The crucial point of inquiry then is on the use of the assets or on
Further, a plain reading of the Constitution would show that Article the use of the revenues. These are two things that must be
XIV, Section 4 (3) does not require that the revenues and income viewed and treated separately. But so long as the assets or
must have also been sourced from educational activities or revenues are used actually, directly and exclusively for
activities related to the purposes of an educational institution. The educational purposes, they are exempt from duties and taxes.
phrase all revenues is unqualified by any reference to the source The tax exemption granted by the
 Constitution to non-
of revenues. Thus, so long as the revenues and income are used
actually, directly and exclusively for educational purposes, then stock, non-profit
 educational institutions, unlike the
said revenues and income shall be exempt from taxes and exemption
 that may be availed of by
duties.81
We find it helpful to discuss at this point the taxation of revenues proprietary
 educational institutions, is not subject
versus the taxation of assets. to
 limitations imposed by law.
Revenues consist of the amounts earned by a person or entity
That the Constitution treats non-stock, non-profit educational
from the conduct of business operations.82 It may refer to the sale
institutions differently from proprietary educational institutions
of goods, rendition of services, or the return of an investment.
cannot be doubted. As discussed, the privilege granted to the
Revenue is a component of the tax base in income tax, 83 VAT,84
former is conditioned only on the actual, direct and exclusive use
and local business tax (LBT).85
of their revenues and assets for educational purposes. In clear
Assets, on the other hand, are the tangible and intangible
contrast, the tax privilege granted to the latter may be subject to
properties owned by a person or entity. 86 It may refer to real
limitations imposed by law.
estate, cash deposit in a bank, investment in the stocks of a
We spell out below the difference in treatment if only to highlight
corporation, inventory of goods, or any property from which the
the privileged status of non-stock, non-profit educational
person or entity may derive income or use to generate the same.
institutions compared with their proprietary counterparts.
In Philippine taxation, the fair market value of real property is a
While a non-stock, non-profit educational institution is classified
component of the tax base in real property tax (RPT).87 Also, the
as a tax-exempt entity under Section 30 (Exemptions from Tax on
landed cost of imported goods is a component of the tax base in
Corporations) of the Tax Code, a proprietary educational
VAT on importation88 and tariff duties.89
institution is covered by Section 27 (Rates of Income Tax on
Thus, when a non-stock, non-profit educational institution proves
Domestic Corporations).
that it uses its revenues actually, directly, and exclusively for
To be specific, Section 30 provides that exempt organizations like
educational purposes, it shall be exempted from income tax, VAT,
non-stock, non-profit educational institutions shall not be taxed on
and LBT. On the other hand, when it also shows that it uses its
income received by them as such.
assets in the form of real property for educational purposes, it
Section 27 (B), on the other hand, states that "[p]roprietary
shall be exempted from RPT.
educational institutions ... which are nonprofit shall pay a tax of
To be clear, proving the actual use of the taxable item will result
ten percent (10%) on their taxable income .. . Provided, that if the
in an exemption, but the specific tax from which the entity shall be
gross income from unrelated trade, business or other activity
exempted from shall depend on whether the item is an item of
exceeds fifty percent (50%) of the total gross income derived by
revenue or asset.
such educational institutions ... [the regular corporate income tax
To illustrate, if a university leases a portion of its school building
of 30%] shall be imposed on the entire taxable income ... " 92
to a bookstore or cafeteria, the leased portion is not actually,
By the Tax Code's clear terms, a proprietary educational
directly and exclusively used for educational purposes, even if the
institution is entitled only to the reduced rate of 10% corporate
bookstore or canteen caters only to university students, faculty
income tax. The reduced rate is applicable only if: (1) the
and staff.
proprietary educational institution is nonprofit and (2) its gross
The leased portion of the building may be subject to real property
income from unrelated trade, business or activity does not exceed
tax, as held in Abra Valley College, Inc. v. Aquino.90 We ruled in
50% of its total gross income.
that case that the test of exemption from taxation is the use of the
Consistent with Article XIV, Section 4 (3) of the Constitution, these
property for purposes mentioned in the Constitution. We also held
limitations do not apply to non-stock, non-profit educational
that the exemption extends to facilities which are incidental to and
institutions.
reasonably necessary for the accomplishment of the main
Thus, we declare the last paragraph of Section 30 of the Tax Code
purposes.
without force and effect for being contrary to the Constitution
In concrete terms, the lease of a portion of a school building for
insofar as it subjects to tax the income and revenues of non-stock,
commercial purposes, removes such asset from the property tax
non-profit educational institutions used actually, directly and
exemption granted under the Constitution.91 There is no
exclusively for educational purpose. We make this declaration in
exemption because the asset is not used actually, directly and
the exercise of and consistent with our duty93 to uphold the
exclusively for educational purposes. The commercial use of the
primacy of the Constitution.94
property is also not incidental to and reasonably necessary for the
Finally, we stress that our holding here pertains only to non-stock,
accomplishment of the main purpose of a university, which is to
non-profit educational institutions and does not cover the other
educate its students.
exempt organizations under Section 30 of the Tax Code.
However, if the university actually, directly and exclusively uses
For all these reasons, we hold that the income and revenues of
for educational purposes the revenues earned from the lease of
DLSU proven to have been used actually, directly and exclusively
its school building, such revenues shall be exempt from taxes and
for educational purposes are exempt from duties and taxes.
duties. The tax exemption no longer hinges on the use of the
asset from which the revenues were earned, but on the actual, II. The LOA issued to DLSU is
 not entirely void.
direct and exclusive use of the revenues for educational The
 assessment for taxable year
 2003 is valid.
purposes.
DLSU objects to the CTA En Banc 's conclusion that the LOA is
Parenthetically, income and revenues of non-stock, non-profit
valid for taxable year 2003 and insists that the entire LOA should
educational institution not used actually, directly and exclusively
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 liabilities95 and for the purpose of collecting the correct
amount of tax,96 in accordance with 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 process97 and 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.
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.100 DLSU then raised the
issue in its memorandum and motion for partial reconsideration
with the 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.101 Besides, the Commissioner had the
opportunity to argue 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.103 The
CTA Division admitted the supplemental evidence, which proved
that a 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.105 Because of a party's failure to timely object, the
evidence offered becomes part of the 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
As disclosed by DLSU, the Commissioner did not oppose the
supplemental formal offer of evidence despite notice.107 The
Commissioner objected to the admission of the supplemental
evidence only 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,109
the tax refund claimant attached to its 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.110 We thus admitted and gave weight to the Final
Adjustment 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 111
and that the paramount 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
Revenue113 and Commissioner of Internal Revenue v. PERF
Realty Corporation,114 where the taxpayers also submitted the
supplemental supporting document only upon 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,115
DLSU is claiming tax exemption based on the 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.
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. 116
We thus accord the findings of fact by the CTA with the highest
respect. These findings of 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, 119
which was used to build the 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),120 intended for the university's capital projects,
was not 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 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 2003.125 DLSU earned this income
from leasing a portion of its premises to: 1) MTG-Sports Complex,
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) ₱4,007,724.00127 used to pay the
loan obtained by 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%.130 The CTA held
as follows:
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
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)133 was derived by multiplying 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% ratio134 was the result of dividing the substantiated
disbursements from the CF-CPA 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)135 were used for educational purposes.
This 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, 136 which was
transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account
amounted to ₱23 .46 million.137 These figures, read in light of the
constitutional exemption, raises the question: does DLSU 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.
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:
Rental income
Less: Rent income used in construction of the Sports Complex
Rental income deposited to the CF-CPA Account
Less: Substantiated portion of CF-CPA disbursements
Tax base for deficiency income tax and VAT
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 issuances139 that required the educational
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.142 Thus,
the amount of tax assessment 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 faith on its part.145 To our mind, this admission is a good
indicator of how the Ateneo and the DLSU 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,146 can no longer be entertained at this late
stage of the 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.147 A tax is uniform when it operates with the same force and
effect in every place where the subject of it is found. 148 The
concept requires that all subjects of 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.150 The Tax Code provides
that 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 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.151
For the purpose of showing that the DST on the loan agreement
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.