Tax 1 Full Text A.G. To A.P

TAX VS.
OTHER FORMS OF EXTRACTIONS
G.R. No. L-36081 April 24, 1989
PROGRESSIVE DEVELOPMENT CORPORATION, petitioner ,

vs.
QUEZON CITY, respondent.
FELICIANO, J.:
On 24 December 1969, the City Council of respondent Quezon City adopted Ordinance No. 7997, Series of
1969, otherwise known as the Market Code of Quezon City, Section 3 of which provided:
Sec. 3. Supervision Fee.- Privately owned and operated public markets shall submit monthly
to the Treasurer's Office, a certified list of stallholders showing the amount of stall fees or
rentals paid daily by each stallholder, ... and shall pay 10% of the gross receipts from stall
rentals to the City, ... , as supervision fee. Failure to submit said list and to pay the
corresponding amount within the period herein prescribed shall subject the operator to the
penalties provided in this Code ... including revocation of permit to operate. ... .1
The Market Code was thereafter amended by Ordinance No. 9236, Series of 1972, on 23 March 1972,
which reads:
SECTION 1. There is hereby imposed a five percent (5 %) tax on gross receipts on rentals
or lease of space in privately-owned public markets in Quezon City.
xxx xxx xxx
SECTION 3. For the effective implementation of this Ordinance, owners of privately owned
public markets shall submit ... a monthly certified list of stallholders of lessees of space in
their markets showing ... :
a. name of stallholder or lessee;
b. amount of rental;
c. period of lease, indicating therein whether the same is on a daily, monthly or yearly basis.
xxx xxx xxx
SECTION 4. ... In case of consistent failure to pay the percentage tax for the (3) consecutive
months, the City shall revoke the permit of the privately-owned market to operate and/or take
any other appropriate action or remedy allowed by law for the collection of the overdue
percentage tax and surcharge.
xxx xxx xxx 2
On 15 July 1972, petitioner Progressive Development Corporation, owner and operator of a public market
known as the "Farmers Market & Shopping Center" filed a Petition for Prohibition with Preliminary Injunction
Taxation 1 Full Text Cases A.g.-A.p. | 1

against respondent before the then Court of First Instance of Rizal on the ground that the supervision fee or
license tax imposed by the above-mentioned ordinances is in reality a tax on income which respondent may
not impose, the same being expressly prohibited by Republic Act No. 2264, as amended.
In its Answer, respondent, through the City Fiscal, contended that it had authority to enact the questioned
ordinances, maintaining that the tax on gross receipts imposed therein is not a tax on income. The Solicitor
General also filed an Answer arguing that petitioner, not having paid the ten percent (10%) supervision fee
prescribed by Ordinance No. 7997, had no personality to question, and was estopped from questioning, its
validity; that the tax on gross receipts was not a tax on income but one imposed for the enjoyment of the
privilege to engage in a particular trade or business which was within the power of respondent to impose.
In its Supplemental Petition of 23 September 1972, petitioner alleged having paid under protest the five
percent (5%) tax under Ordinance No. 9236 for the months of June to September 1972. Two (2) days later,
on 25 September 1972, petitioner moved for judgment on the pleadings, alleging that the material facts had
been admitted by the parties.
On 21 October 1972, the lower court dismissed the petition, ruling 3 that the questioned imposition is not a tax on income, but
rather a privilege tax or license fee which local governments, like respondent, are empowered to impose and collect.
Having failed to obtain reconsideration of said decision, petitioner came to us on the present Petition for
Review.
The only issue to be resolved here is whether the tax imposed by respondent on gross receipts of stall
rentals is properly characterized as partaking of the nature of an income tax or, alternatively, of a license fee.
We begin with the fact that Section 12, Article III of Republic Act No. 537, otherwise known as the Revised
Charter of Quezon City, authorizes the City Council:
xxx xxx xxx
(b) To provide for the levy and collection of taxes and other city revenues and apply the same
to the payment of city expenses in accordance with appropriations.
(c) To tax, fix the license fee, and regulate the business of the following:
... preparation and sale of meat, poultry, fish, game, butter, cheese, lard vegetables, bread
and other provisions. 4
The scope of legislative authority conferred upon the Quezon City Council in respect of businesses like that of the petitioner, is comprehensive: the
grant of authority is not only" [to] regulate" and "fix the license fee," but also " to tax" 5
Moreover, Section 2 of Republic Act No. 2264, as amended, otherwise known as the Local Autonomy Act, provides that:
Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and
municipal districts shall have authority to impose municipal license taxes or fees upon
persons engaged in any occupation or business, or exercising privileges in chartered cities,
municipalities or municipal districts by requiring them to secure licenses at rates fixed by the
municipal board or city council of the city, the municipal council of the municipality, or the
municipal district council of the municipal district; to collect fees and charges for service
rendered by the city, municipality or municipal district; to regulate and impose reasonable
fees for services rendered in connection with any business, profession or occupation being

conducted within the city, municipality or municipal district and otherwise to levy for public
purposes just and uniform taxes licenses or fees: ... 6
It is now settled that Republic Act No. 2264 confers upon local governments broad taxing authority extending
to almost "everything, excepting those which are mentioned therein," provided that the tax levied is "for
public purposes, just and uniform," does not transgress any constitutional provision and is not repugnant to
a controlling statute. 7 Both the Local Autonomy Act and the Charter of respondent clearly show that respondent is authorized to fix the license
fee collectible from and regulate the business of petitioner as operator of a privately-owned public market.
Petitioner, however, insist that the "supervision fee" collected from rentals, being a return from capital
invested in the construction of the Farmers Market, practically operates as a tax on income, one of those
expressly excepted from respondent's taxing authority, and thus beyond the latter's competence. Petitioner
cites the same Section 2 of the Local Autonomy Act which goes on to state: 8
... Provided, however, That no city, municipality or municipal district may levy or impose any
of the following:
xxx xxx xxx
(g) Taxes on income of any kind whatsoever;
The term "tax" frequently applies to all kinds of exactions of monies which become public funds. It is often
loosely used to include levies for revenue as well as levies for regulatory purposes such that license fees are
frequently called taxes although license fee is a legal concept distinguishable from tax: the former is
imposed in the exercise of police power primarily for purposes of regulation, while the latter is imposed
under the taxing power primarily for purposes of raising revenues. 9 Thus, if the generating of revenue is the primary purpose
and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained
does not make the imposition a tax. 10
To be considered a license fee, the imposition questioned must relate to an occupation or activity that so
engages the public interest in health, morals, safety and development as to require regulation for the
protection and promotion of such public interest; the imposition must also bear a reasonable relation to the
probable expenses of regulation, taking into account not only the costs of direct regulation but also its
incidental consequences as well. 11 When an activity, occupation or profession is of such a character that inspection or supervision by
public officials is reasonably necessary for the safeguarding and furtherance of public health, morals and safety, or the general welfare, the legislature
may provide that such inspection or supervision or other form of regulation shall be carried out at the expense of the persons engaged in such
occupation or performing such activity, and that no one shall engage in the occupation or carry out the activity until a fee or charge sufficient to cover
the cost of the inspection or supervision has been paid. 12 Accordingly, a charge of a fixed sum which bears no relation at all to the cost of inspection
and regulation may be held to be a tax rather than an exercise of the police power. 13
In the case at bar, the "Farmers Market & Shopping Center" was built by virtue of Resolution No. 7350 passed on 30 January 1967 by respondents's
local legislative body authorizing petitioner to establish and operate a market with a permit to sell fresh meat, fish, poultry and other foodstuffs. 14 The
same resolution imposed upon petitioner, as a condition for continuous operation, the obligation to "abide by and comply with the ordinances, rules and
regulations prescribed for the establishment, operation and maintenance of markets in Quezon City." 15
The "Farmers' Market and Shopping Center" being a public market in the' sense of a market open to and
inviting the patronage of the general public, even though privately owned, petitioner's operation thereof
required a license issued by the respondent City, the issuance of which, applying the standards set forth
above, was done principally in the exercise of the respondent's police power. 16 The operation of a privately owned
market is, as correctly noted by the Solicitor General, equivalent to or quite the same as the operation of a government-owned market; both are
established for the rendition of service to the general public, which warrants close supervision and control by the respondent City, 17 for the protection
of the health of the public by insuring, e.g., the maintenance of sanitary and hygienic conditions in the market, compliance of all food stuffs sold therein
with applicable food and drug and related standards, for the prevention of fraud and imposition upon the buying public, and so forth.
We believe and so hold that the five percent (5%) tax imposed in Ordinance No. 9236 constitutes, not a tax
on income, not a city income tax (as distinguished from the national income tax imposed by the National

Internal Revenue Code) within the meaning of Section 2 (g) of the Local Autonomy Act, but rather a license
tax or fee for the regulation of the business in which the petitioner is engaged. While it is true that the
amount imposed by the questioned ordinances may be considered in determining whether the exaction is
really one for revenue or prohibition, instead of one of regulation under the police power, 18 it nevertheless will be
presumed to be reasonable. Local' governments are allowed wide discretion in determining the rates of imposable license fees even in cases of purely
police power measures, in the absence of proof as to particular municipal conditions and the nature of the business being taxed as well as other
detailed factors relevant to the issue of arbitrariness or unreasonableness of the questioned rates. 19 Thus:
[A]n ordinance carries with it the presumption of validity. The question of reasonableness
though is open to judicial inquiry. Much should be left thus to the discretion of municipal
authorities. Courts will go slow in writing off an ordinance as unreasonable unless the
amount is so excessive as to be prohibitory, arbitrary, unreasonable, oppressive, or
confiscatory. A rule which has gained acceptance is that factors relevant to such an inquiry
are the municipal conditions as a whole and the nature of the business made subject to
imposition. 20
Petitioner has not shown that the rate of the gross receipts tax is so unreasonably large and excessive and
so grossly disproportionate to the costs of the regulatory service being performed by the respondent as to
compel the Court to characterize the imposition as a revenue measure exclusively. The lower court correctly
held that the gross receipts from stall rentals have been used only as a basis for computing the fees or taxes
due respondent to cover the latter's administrative expenses, i.e., for regulation and supervision of the sale
of foodstuffs to the public. The use of the gross amount of stall rentals as basis for determining the
collectible amount of license tax, does not by itself, upon the one hand, convert or render the license tax into
a prohibited city tax on income. Upon the other hand, it has not been suggested that such basis has no
reasonable relationship to the probable costs of regulation and supervision of the petitioner's kind of
business. For, ordinarily, the higher the amount of stall rentals, the higher the aggregate volume of foodstuffs
and related items sold in petitioner's privately owned market; and the higher the volume of goods sold in
such private market, the greater the extent and frequency of inspection and supervision that may be
reasonably required in the interest of the buying public. Moreover, what we started with should be recalled
here: the authority conferred upon the respondent's City Council is not merely "to regulate" but also
embraces the power "to tax" the petitioner's business.
Finally, petitioner argues that respondent is without power to impose a gross receipts tax for revenue
purposes absent an express grant from the national government. As a general rule, there must be a
statutory grant for a local government unit to impose lawfully a gross receipts tax, that unit not having the
inherent power of taxation. 21 The rule, however, finds no application in the instant case where what is involved is an exercise of, principally,
the regulatory power of the respondent City and where that regulatory power is expressly accompanied by the taxing power.
ACCORDINGLY, the Decision of the then Court of First Instance of Rizal, Quezon City, Branch 18, is hereby
AFFIRMED and the Court Resolved to DENY the Petition for lack of merit.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Bidin and Cortes, JJ., concur.

G.R. No. L-16619 June 29, 1963
COMPAÑIA GENERAL DE TABACOS DE FILIPINAS, plaintiff-appellee,

vs.
CITY OF MANILA, ET AL., defendants-appellants.
DIZON, J.:
Appeal from the decision of the Court of First Instance of Manila ordering the City Treasurer of Manila to
refund the sum of P15,280.00 to Compania General de Tabacos de Filipinas.
Appellee Compania General de Tabacos de Filipinas — hereinafter referred to simply as Tabacalera — filed
this action in the Court of First Instance of Manila to recover from appellants, City of Manila and its
Treasurer, Marcelino Sarmiento — also hereinafter referred to as the City — the sum of P15,280.00
allegedly overpaid by it as taxes on its wholesale and retail sales of liquor for the period from the third
quarter of 1954 to the second quarter of 1957, inclusive, under Ordinances Nos. 3634, 3301, and 3816.
Tabacalera, as a duly licensed first class wholesale and retail liquor dealer paid the City the fixed license
fees prescribed by Ordinance No. 3358 for the years 1954 to 1957, inclusive, and, as a wholesale and retail
dealer of general merchandise, it also paid the sales taxes required by Ordinances Nos. 3634, 3301, and
3816.1äwphï1.ñët
In its sworn statements of wholesale, retail, and grocery sales of general merchandise from the third quarter
of 1954 to the second quarter of 1957, inclusive, Tabacalera included its liquor sales of the same period, and
it is not denied that of the taxes it paid on all its sales of general merchandise, the sum of P15,280.00
subject to the action represents the tax corresponding to the liquor sales aforesaid.
Tabacalera's action for refund is based on the theory that, in connection with its liquor sales, it should pay
the license fees prescribed by Ordinance No. 3358 but not the municipal sales taxes imposed by
Ordinances Nos. 3634, 3301, and 3816; and since it already paid the license fees aforesaid, the sales taxes
paid by it — amounting to the sum of P15,208.00 — under the three ordinances mentioned heretofore is an
overpayment made by mistake, and therefore refundable.
The City, on the other hand, contends that, for the permit issued to it granting proper authority to "conduct or
engage in the sale of alcoholic beverages, or liquors" Tabacalera is subject to pay the license
fees prescribed by Ordinance No. 3358, aside from the sales taxes imposed by Ordinances Nos. 3634,
3301, and 3816; that, even assuming that Tabacalera is not subject to the payment of the sales taxes
prescribed by the said three ordinances as regards its liquor sales, it is not entitled to the refund demanded
for the following reasons:.
(a) The said amount was paid by the plaintiff voluntarily and without protest;
(b) If at all the alleged overpayment was made by mistake, such mistake was one of law and arose
from the plaintiff's neglect of duty; .
(c) The said amount had been added by the plaintiff to the selling price of the liquor sold by it and
passed to the consumers; and

(d) The said amount had been already expended by the defendant City for public improvements and
essential services of the City government, the benefits of which are enjoyed, and being enjoyed by
the plaintiff.
It is admitted that as liquor dealer, Tabacalera paid annually the wholesale and retail liquor license fees
under Ordinance No. 3358. In 1954, City Ordinance No. 3634, amending City Ordinance No. 3420, and City
Ordinance No. 3816, amending City Ordinance No. 3301 were passed. By reason thereof, the City
Treasurer issued the regulations marked Exhibit A, according to which, the term "general merchandise as
used in said ordinances, includes all articles referred to in Chapter 1, Sections 123 to 148 of the National
Internal Revenue Code. Of these, Sections 133-135 included liquor among the taxable articles. Pursuant to
said regulations, Tabacalera included its sales of liquor in its sworn quarterly declaration submitted to the
City Treasurer beginning from the third quarter of 1954 to the second quarter of 1957, with a total value of
P722,501.09 and correspondingly paid a wholesaler's tax amounting to P13,688.00 and a retailer's tax
amounting to P1,520.00, or a total of P15,208.00 — the amount sought to be recovered.
It appears that in the year 1954, the City, through its treasurer, addressed a letter to Messrs. Sycip, Gorres,
Velayo and Co., an accounting firm, expressing the view that liquor dealers paying the annual wholesale and
retail fixed tax under City Ordinance No. 3358 are not subject to the wholesale and retail dealers' taxes
prescribed by City Ordinances Nos. 3634, 3301, and 3816. Upon learning of said opinion, appellee stopped
including its sales of liquor in its quarterly sworn declarations submitted in accordance with the aforesaid
City Ordinances Nos. 3634, 3301, and 3816, and on December 3, 1957, it addressed a letter to the City
Treasurer demanding refund of the alleged overpayment. As the claim was disallowed, the present action
was instituted.
The term "tax" applies — generally speaking — to all kinds of exactions which become public funds. The
term is often loosely used to include levies for revenue as well as levies for regulatory purposes. Thus
license fees are commonly called taxes. Legally speaking, however, license fee is a legal concept quite
distinct from tax; the former is imposed in the exercise of police power for purposes of regulation, while the
latter is imposed under the taxing power for the purpose of raising revenues (MacQuillin, Municipal
Corporations, Vol. 9, 3rd Edition, p. 26).
Ordinance No. 3358 is clearly one that prescribes municipal license fees for the privilege to engage in the
business of selling liquor or alcoholic beverages, having been enacted by the Municipal Board of Manila
pursuant to its charter power to fix license fees on, and regulate, the sale of intoxicating liquors, whether
imported or locally manufactured. (Section 18 [p], Republic Act 409, as amended). The license fees imposed
by it are essentially for purposes of regulation, and are justified, considering that the sale of intoxicating
liquor is, potentially at least, harmful to public health and morals, and must be subject to supervision or
regulation by the state and by cities and municipalities authorized to act in the premises. (MacQuillin, supra,
p. 445.)
On the other hand, it is clear that Ordinances Nos. 3634, 3301, and 3816 impose taxes on the sales of
general merchandise, wholesale or retail, and are revenue measures enacted by the Municipal Board of
Manila by virtue of its power to tax dealers for the sale of such merchandise. (Section 10 [o], Republic Act
No. 409, as amended.).
Under Ordinance No. 3634 the word "merchandise" as employed therein clearly includes liquor. Aside from
this, we have held in City of Manila vs. Inter-Island Gas Service, Inc., G.R. No. L-8799, August 31, 1956, that
the word "merchandise" refers to all subjects of commerce and traffic; whatever is usually bought and sold in
trade or market; goods or wares bought and sold for gain; commodities or goods to trade; and commercial
commodities in general.

That Tabacalera is being subjected to double taxation is more apparent than real. As already stated what is
collected under Ordinance No. 3358 is a license fee for the privilege of engaging in the sale of liquor, a
calling in which — it is obvious — not anyone or anybody may freely engage, considering that the sale of
liquor indiscriminately may endanger public health and morals. On the other hand, what the three
ordinances mentioned heretofore impose is a tax for revenue purposes based on the sales made of the
same article or merchandise. It is already settled in this connection that both a license fee and a tax may be
imposed on the same business or occupation, or for selling the same article, this not being in violation of the
rule against double taxation (Bentley Gray Dry Goods Co. vs. City of Tampa, 137 Fla. 641, 188 So. 758;
MacQuillin, Municipal Corporations, Vol. 9, 3rd Edition, p. 83). This is precisely the case with the ordinances
involved in the case at bar.
Appellee's contention that the City is repudiating its previous view — expressed by its Treasurer in a letter
addressed to Messrs. Sycip, Gorres, Velayo & Co. in 1954 — that a liquor dealer who pays the annual
license fee under Ordinance No. 3358 is exempted from the wholesalers and retailers taxes under the other
three ordinances mentioned heretofore is of no consequence. The government is not bound by the errors or
mistakes committed by its officers, specially on matters of law.
Having arrived at the above conclusion, we deem it unnecessary to consider the other legal points raised by
the City.
WHEREFORE, the decision appealed from is reversed, with the result that this case should be, as it is
hereby dismissed, with costs.
Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Paredes, Regala and Makalintal, JJ., concur.
Bengzon, C.J. and Concepcion, J., took no part.

G.R. No. 159796 July 17, 2007
ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and ENVIRONMENTALIST CONSUMERS

NETWORK, INC. (ECN), Petitioners,
vs.
DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY COMMISSION (ERC), NATIONAL POWER
CORPORATION (NPC), POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT GROUP (PSALM
Corp.), STRATEGIC POWER UTILITIES GROUP (SPUG), and PANAY ELECTRIC COMPANY INC.
(PECO), Respondents.
NACHURA, J.:
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers Network, Inc.
(ECN) (petitioners), come before this Court in this original action praying that Section 34 of Republic Act
(RA) 9136, otherwise known as the "Electric Power Industry Reform Act of 2001" (EPIRA), imposing the
Universal Charge,1 and Rule 18 of the Rules and Regulations (IRR) 2 which seeks to implement the said
imposition, be declared unconstitutional. Petitioners also pray that the Universal Charge imposed upon the
consumers be refunded and that a preliminary injunction and/or temporary restraining order (TRO) be issued
directing the respondents to refrain from implementing, charging, and collecting the said charge. 3 The
assailed provision of law reads:
SECTION 34. Universal Charge. — Within one (1) year from the effectivity of this Act, a universal charge to
be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users for the
following purposes:
(a) Payment for the stranded debts4 in excess of the amount assumed by the National Government
and stranded contract costs of NPC 5 and as well as qualified stranded contract costs of distribution
utilities resulting from the restructuring of the industry;
(b) Missionary electrification;6
(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy
vis-à-vis imported energy fuels;
(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour

(₱0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed
rehabilitation and management. Said fund shall be managed by NPC under existing arrangements;
and
(e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years.
The universal charge shall be a non-bypassable charge which shall be passed on and collected from all
end-users on a monthly basis by the distribution utilities. Collections by the distribution utilities and the
TRANSCO in any given month shall be remitted to the PSALM Corp. on or before the fifteenth (15th) of the
succeeding month, net of any amount due to the distribution utility. Any end-user or self-generating entity not
connected to a distribution utility shall remit its corresponding universal charge directly to the TRANSCO.
The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which shall be disbursed
only for the purposes specified herein in an open and transparent manner. All amount collected for the
universal charge shall be distributed to the respective beneficiaries within a reasonable period to be
provided by the ERC.

The Facts
Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect. 7
On April 5, 2002, respondent National Power Corporation-Strategic Power Utilities Group 8 (NPC-SPUG) filed
with respondent Energy Regulatory Commission (ERC) a petition for the availment from the Universal
Charge of its share for Missionary Electrification, docketed as ERC Case No. 2002-165. 9
On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-194, praying that
the proposed share from the Universal Charge for the Environmental charge of ₱0.0025 per kilowatt-hour
(/kWh), or a total of ₱119,488,847.59, be approved for withdrawal from the Special Trust Fund (STF)
managed by respondent Power Sector Assets and
Liabilities Management Group (PSALM)10 for the rehabilitation and management of watershed areas. 11
On December 20, 2002, the ERC issued an Order 12 in ERC Case No. 2002-165 provisionally approving the
computed amount of ₱0.0168/kWh as the share of the NPC-SPUG from the Universal Charge for Missionary
Electrification and authorizing the National Transmission Corporation (TRANSCO) and Distribution Utilities
to collect the same from its end-users on a monthly basis.
On June 26, 2003, the ERC rendered its Decision 13 (for ERC Case No. 2002-165) modifying its Order of
December 20, 2002, thus:
WHEREFORE, the foregoing premises considered, the provisional authority granted to petitioner National
Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the Order dated December 20, 2002 is
hereby modified to the effect that an additional amount of ₱0.0205 per kilowatt-hour should be added to the
₱0.0168 per kilowatt-hour provisionally authorized by the Commission in the said Order. Accordingly, a total
amount of ₱0.0373 per kilowatt-hour is hereby APPROVED for withdrawal from the Special Trust Fund
managed by PSALM as its share from the Universal Charge for Missionary Electrification (UC-ME) effective
on the following billing cycles:
(a) June 26-July 25, 2003 for National Transmission Corporation (TRANSCO); and
(b) July 2003 for Distribution Utilities (Dus).
Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount of ₱0.0373 per
kilowatt-hour and remit the same to PSALM on or before the 15th day of the succeeding month.
In the meantime, NPC-SPUG is directed to submit, not later than April 30, 2004, a detailed report to include
Audited Financial Statements and physical status (percentage of completion) of the projects using the
prescribed format. 1avvphi1
Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities (Dus).
SO ORDERED.
On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC, among others, 14 to set
aside the above-mentioned Decision, which the ERC granted in its Order dated October 7, 2003, disposing:

WHEREFORE, the foregoing premises considered, the "Motion for Reconsideration" filed by petitioner
National Power Corporation-Small Power Utilities Group (NPC-SPUG) is hereby GRANTED. Accordingly,
the Decision dated June 26, 2003 is hereby modified accordingly.
Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:
1. Projects for CY 2002 undertaken;
2. Location
3. Actual amount utilized to complete the project;
4. Period of completion;
5. Start of Operation; and
6. Explanation of the reallocation of UC-ME funds, if any.
SO ORDERED.15
Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the NPC to draw up to
₱70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation Budget subject to the availability of
funds for the Environmental Fund component of the Universal Charge. 16
On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO) charged
petitioner Romeo P. Gerochi and all other end-users with the Universal Charge as reflected in their
respective electric bills starting from the month of July 2003. 17
Hence, this original action.
Petitioners submit that the assailed provision of law and its IRR which sought to implement the same are
unconstitutional on the following grounds:
1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be implemented
under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be collected from all electric end-
users and self-generating entities. The power to tax is strictly a legislative function and as such, the
delegation of said power to any executive or administrative agency like the ERC is unconstitutional,
giving the same unlimited authority. The assailed provision clearly provides that the Universal
Charge is to be determined, fixed and approved by the ERC, hence leaving to the latter complete
discretionary legislative authority.
2) The ERC is also empowered to approve and determine where the funds collected should be used.
3) The imposition of the Universal Charge on all end-users is oppressive and confiscatory and
amounts to taxation without representation as the consumers were not given a chance to be heard
and represented.18
Petitioners contend that the Universal Charge has the characteristics of a tax and is collected to fund the
operations of the NPC. They argue that the cases 19 invoked by the respondents clearly show the regulatory
purpose of the charges imposed therein, which is not so in the case at bench. In said cases, the respective
funds20 were created in order to balance and stabilize the prices of oil and sugar, and to act as buffer to

counteract the changes and adjustments in prices, peso devaluation, and other variables which cannot be
adequately and timely monitored by the legislature. Thus, there was a need to delegate powers to
administrative bodies.21 Petitioners posit that the Universal Charge is imposed not for a similar purpose.
On the other hand, respondent PSALM through the Office of the Government Corporate Counsel (OGCC)
contends that unlike a tax which is imposed to provide income for public purposes, such as support of the
government, administration of the law, or payment of public expenses, the assailed Universal Charge is
levied for a specific regulatory purpose, which is to ensure the viability of the country's electric power
industry. Thus, it is exacted by the State in the exercise of its inherent police power. On this premise, PSALM
submits that there is no undue delegation of legislative power to the ERC since the latter merely exercises a
limited authority or discretion as to the execution and implementation of the provisions of the EPIRA. 22
Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor General
(OSG), share the same view that the Universal Charge is not a tax because it is levied for a specific
regulatory purpose, which is to ensure the viability of the country's electric power industry, and is, therefore,
an exaction in the exercise of the State's police power. Respondents further contend that said Universal
Charge does not possess the essential characteristics of a tax, that its imposition would redound to the
benefit of the electric power industry and not to the public, and that its rate is uniformly levied on electricity
end-users, unlike a tax which is imposed based on the individual taxpayer's ability to pay. Moreover,
respondents deny that there is undue delegation of legislative power to the ERC since the EPIRA sets forth
sufficient determinable standards which would guide the ERC in the exercise of the powers granted to it.
Lastly, respondents argue that the imposition of the Universal Charge is not oppressive and confiscatory
since it is an exercise of the police power of the State and it complies with the requirements of due
process.23
On its part, respondent PECO argues that it is duty-bound to collect and remit the amount pertaining to the
Missionary Electrification and Environmental Fund components of the Universal Charge, pursuant to Sec. 34
of the EPIRA and the Decisions in ERC Case Nos. 2002-194 and 2002-165. Otherwise, PECO could be held
liable under Sec. 4624 of the EPIRA, which imposes fines and penalties for any violation of its provisions or
its IRR.25
The Issues
The ultimate issues in the case at bar are:
1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and
2) Whether or not there is undue delegation of legislative power to tax on the part of the ERC. 26
Before we discuss the issues, the Court shall first deal with an obvious procedural lapse.
Petitioners filed before us an original action particularly denominated as a Complaint assailing the
constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and Rule 18 of the EPIRA's IRR. No
doubt, petitioners have locus standi. They impugn the constitutionality of Sec. 34 of the EPIRA because they
sustained a direct injury as a result of the imposition of the Universal Charge as reflected in their electric
bills.
However, petitioners violated the doctrine of hierarchy of courts when they filed this "Complaint" directly with
us. Furthermore, the Complaint is bereft of any allegation of grave abuse of discretion on the part of the
ERC or any of the public respondents, in order for the Court to consider it as a petition for certiorari or
prohibition.

Article VIII, Section 5(1) and (2) of the 1987 Constitution 27 categorically provides that:
SECTION 5. The Supreme Court shall have the following powers:
1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and
consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.
2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the rules of court
may provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law,
presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.
But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, and habeas
corpus, while concurrent with that of the regional trial courts and the Court of Appeals, does not give litigants
unrestrained freedom of choice of forum from which to seek such relief. 28 It has long been established that
this Court will not entertain direct resort to it unless the redress desired cannot be obtained in the
appropriate courts, or where exceptional and compelling circumstances justify availment of a remedy within
and call for the exercise of our primary jurisdiction. 29 This circumstance alone warrants the outright dismissal
of the present action.
This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised herein. We are
aware that if the constitutionality of Sec. 34 of the EPIRA is not resolved now, the issue will certainly
resurface in the near future, resulting in a repeat of this litigation, and probably involving the same parties. In
the public interest and to avoid unnecessary delay, this Court renders its ruling now.
The instant complaint is bereft of merit.
The First Issue
To resolve the first issue, it is necessary to distinguish the State’s power of taxation from the police power.
The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature
no limits, so that security against its abuse is to be found only in the responsibility of the legislature which
imposes the tax on the constituency that is to pay it. 30 It is based on the principle that taxes are the lifeblood
of the government, and their prompt and certain availability is an imperious need. 31 Thus, the theory behind
the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people. 32
On the other hand, police power is the power of the state to promote public welfare by restraining and
regulating the use of liberty and property. 33 It is the most pervasive, the least limitable, and the most
demanding of the three fundamental powers of the State. The justification is found in the Latin maxims salus
populi est suprema lex (the welfare of the people is the supreme law) and sic utere tuo ut alienum non
laedas (so use your property as not to injure the property of others). As an inherent attribute of sovereignty
which virtually extends to all public needs, police power grants a wide panoply of instruments through which
the State, as parens patriae, gives effect to a host of its regulatory powers. 34 We have held that the power to
"regulate" means the power to protect, foster, promote, preserve, and control, with due regard for the
interests, first and foremost, of the public, then of the utility and of its patrons. 35
The conservative and pivotal distinction between these two powers rests in the purpose for which the charge
is made. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is

a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the
imposition a tax.36
In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power,
particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34 which enumerates the
purposes for which the Universal Charge is imposed 37 and which can be amply discerned as regulatory in
character. The EPIRA resonates such regulatory purposes, thus:
SECTION 2. Declaration of Policy. — It is hereby declared the policy of the State:
(a) To ensure and accelerate the total electrification of the country;
(b) To ensure the quality, reliability, security and affordability of the supply of electric power;
(c) To ensure transparent and reasonable prices of electricity in a regime of free and fair competition
and full public accountability to achieve greater operational and economic efficiency and enhance
the competitiveness of Philippine products in the global market;
(d) To enhance the inflow of private capital and broaden the ownership base of the power
generation, transmission and distribution sectors;
(e) To ensure fair and non-discriminatory treatment of public and private sector entities in the
process of restructuring the electric power industry;
(f) To protect the public interest as it is affected by the rates and services of electric utilities and other
providers of electric power;
(g) To assure socially and environmentally compatible energy sources and infrastructure;
(h) To promote the utilization of indigenous and new and renewable energy resources in power
generation in order to reduce dependence on imported energy;
(i) To provide for an orderly and transparent privatization of the assets and liabilities of the National
Power Corporation (NPC);
(j) To establish a strong and purely independent regulatory body and system to ensure consumer
protection and enhance the competitive operation of the electricity market; and
(k) To encourage the efficient use of energy and other modalities of demand side management.
From the aforementioned purposes, it can be gleaned that the assailed Universal Charge is not a tax, but an
exaction in the exercise of the State's police power. Public welfare is surely promoted.
Moreover, it is a well-established doctrine that the taxing power may be used as an implement of police
power.38 In Valmonte v. Energy Regulatory Board, et al. 39 and in Gaston v. Republic Planters Bank,40 this
Court held that the Oil Price Stabilization Fund (OPSF) and the Sugar Stabilization Fund (SSF) were
exactions made in the exercise of the police power. The doctrine was reiterated in Osmeña v. Orbos41 with
respect to the OPSF. Thus, we disagree with petitioners that the instant case is different from the
aforementioned cases. With the Universal Charge, a Special Trust Fund (STF) is also created under the
administration of PSALM.42 The STF has some notable characteristics similar to the OPSF and the SSF, viz.:

1) In the implementation of stranded cost recovery, the ERC shall conduct a review to determine
whether there is under-recovery or over recovery and adjust (true-up) the level of the stranded cost
recovery charge. In case of an over-recovery, the ERC shall ensure that any excess amount shall be
remitted to the STF. A separate account shall be created for these amounts which shall be held in
trust for any future claims of distribution utilities for stranded cost recovery. At the end of the stranded
cost recovery period, any remaining amount in this account shall be used to reduce the electricity
rates to the end-users.43
2) With respect to the assailed Universal Charge, if the total amount collected for the same is greater
than the actual availments against it, the PSALM shall retain the balance within the STF to pay for
periods where a shortfall occurs.44
3) Upon expiration of the term of PSALM, the administration of the STF shall be transferred to the
DOF or any of the DOF attached agencies as designated by the DOF Secretary. 45
The OSG is in point when it asseverates:
Evidently, the establishment and maintenance of the Special Trust Fund, under the last paragraph of Section
34, R.A. No. 9136, is well within the pervasive and non-waivable power and responsibility of the government
to secure the physical and economic survival and well-being of the community, that comprehensive
sovereign authority we designate as the police power of the State.46
This feature of the Universal Charge further boosts the position that the same is an exaction imposed
primarily in pursuit of the State's police objectives. The STF reasonably serves and assures the attainment
and perpetuity of the purposes for which the Universal Charge is imposed, i.e., to ensure the viability of the
country's electric power industry.
The Second Issue
The principle of separation of powers ordains that each of the three branches of government has exclusive
cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in
the Latin maxim potestas delegata non delegari potest (what has been delegated cannot be delegated). This
is based on the ethical principle that such delegated power constitutes not only a right but a duty to be
performed by the delegate through the instrumentality of his own judgment and not through the intervening
mind of another. 47
In the face of the increasing complexity of modern life, delegation of legislative power to various specialized
administrative agencies is allowed as an exception to this principle. 48 Given the volume and variety of
interactions in today's society, it is doubtful if the legislature can promulgate laws that will deal adequately
with and respond promptly to the minutiae of everyday life. Hence, the need to delegate to administrative
bodies - the principal agencies tasked to execute laws in their specialized fields - the authority to promulgate
rules and regulations to implement a given statute and effectuate its policies. All that is required for the valid
exercise of this power of subordinate legislation is that the regulation be germane to the objects and
purposes of the law and that the regulation be not in contradiction to, but in conformity with, the standards
prescribed by the law. These requirements are denominated as the completeness test and the sufficient
standard test.
Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature
such that when it reaches the delegate, the only thing he will have to do is to enforce it. The second test
mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate's
authority and prevent the delegation from running riot.49

The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is
complete in all its essential terms and conditions, and that it contains sufficient standards.
Although Sec. 34 of the EPIRA merely provides that "within one (1) year from the effectivity thereof, a
Universal Charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-
users," and therefore, does not state the specific amount to be paid as Universal Charge, the amount
nevertheless is made certain by the legislative parameters provided in the law itself. For one, Sec. 43(b)(ii)
of the EPIRA provides:
SECTION 43. Functions of the ERC. — The ERC shall promote competition, encourage market
development, ensure customer choice and penalize abuse of market power in the restructured electricity
industry. In appropriate cases, the ERC is authorized to issue cease and desist order after due notice and
hearing. Towards this end, it shall be responsible for the following key functions in the restructured industry:
xxxx
(b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance with law, a
National Grid Code and a Distribution Code which shall include, but not limited to the following:
xxxx
(ii) Financial capability standards for the generating companies, the TRANSCO, distribution utilities and
suppliers: Provided, That in the formulation of the financial capability standards, the nature and function of
the entity shall be considered: Provided, further, That such standards are set to ensure that the electric
power industry participants meet the minimum financial standards to protect the public interest. Determine,
fix, and approve, after due notice and public hearings the universal charge, to be imposed on all electricity
end-users pursuant to Section 34 hereof;
Moreover, contrary to the petitioners’ contention, the ERC does not enjoy a wide latitude of discretion in the
determination of the Universal Charge. Sec. 51(d) and (e) of the EPIRA 50 clearly provides:
SECTION 51. Powers. — The PSALM Corp. shall, in the performance of its functions and for the attainment
of its objective, have the following powers:
xxxx
(d) To calculate the amount of the stranded debts and stranded contract costs of NPC which shall
form the basis for ERC in the determination of the universal charge;
(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other property
contributed to it, including the proceeds from the universal charge.
Thus, the law is complete and passes the first test for valid delegation of legislative power.
As to the second test, this Court had, in the past, accepted as sufficient standards the following: "interest of
law and order;"51 "adequate and efficient instruction;"52 "public interest;"53 "justice and equity;"54 "public
convenience and welfare;"55 "simplicity, economy and efficiency;"56 "standardization and regulation of medical
education;"57 and "fair and equitable employment practices." 58 Provisions of the EPIRA such as, among
others, "to ensure the total electrification of the country and the quality, reliability, security and affordability of
the supply of electric power"59 and "watershed rehabilitation and management" 60 meet the requirements for

valid delegation, as they provide the limitations on the ERC’s power to formulate the IRR. These are
sufficient standards.
It may be noted that this is not the first time that the ERC's conferred powers were challenged. In Freedom
from Debt Coalition v. Energy Regulatory Commission,61 the Court had occasion to say:
In determining the extent of powers possessed by the ERC, the provisions of the EPIRA must not be read in
separate parts. Rather, the law must be read in its entirety, because a statute is passed as a whole, and is
animated by one general purpose and intent. Its meaning cannot to be extracted from any single part thereof
but from a general consideration of the statute as a whole. Considering the intent of Congress in enacting
the EPIRA and reading the statute in its entirety, it is plain to see that the law has expanded the jurisdiction
of the regulatory body, the ERC in this case, to enable the latter to implement the reforms sought to be
accomplished by the EPIRA. When the legislators decided to broaden the jurisdiction of the ERC, they did
not intend to abolish or reduce the powers already conferred upon ERC's predecessors. To sustain the view
that the ERC possesses only the powers and functions listed under Section 43 of the EPIRA is to frustrate
the objectives of the law.
In his Concurring and Dissenting Opinion 62 in the same case, then Associate Justice, now Chief Justice,
Reynato S. Puno described the immensity of police power in relation to the delegation of powers to the ERC
and its regulatory functions over electric power as a vital public utility, to wit:
Over the years, however, the range of police power was no longer limited to the preservation of public
health, safety and morals, which used to be the primary social interests in earlier times. Police power now
requires the State to "assume an affirmative duty to eliminate the excesses and injustices that are the
concomitants of an unrestrained industrial economy." Police power is now exerted "to further the public
welfare — a concept as vast as the good of society itself." Hence, "police power is but another name for the
governmental authority to further the welfare of society that is the basic end of all government." When police
power is delegated to administrative bodies with regulatory functions, its exercise should be given a wide
latitude. Police power takes on an even broader dimension in developing countries such as ours, where the
State must take a more active role in balancing the many conflicting interests in society. The Questioned
Order was issued by the ERC, acting as an agent of the State in the exercise of police power. We should
have exceptionally good grounds to curtail its exercise. This approach is more compelling in the field of rate-
regulation of electric power rates. Electric power generation and distribution is a traditional instrument of
economic growth that affects not only a few but the entire nation. It is an important factor in encouraging
investment and promoting business. The engines of progress may come to a screeching halt if the delivery
of electric power is impaired. Billions of pesos would be lost as a result of power outages or unreliable
electric power services. The State thru the ERC should be able to exercise its police power with great
flexibility, when the need arises.
This was reiterated in National Association of Electricity Consumers for Reforms v. Energy Regulatory
Commission63 where the Court held that the ERC, as regulator, should have sufficient power to respond in
real time to changes wrought by multifarious factors affecting public utilities.
From the foregoing disquisitions, we therefore hold that there is no undue delegation of legislative power to
the ERC.
Petitioners failed to pursue in their Memorandum the contention in the Complaint that the imposition of the
Universal Charge on all end-users is oppressive and confiscatory, and amounts to taxation without
representation. Hence, such contention is deemed waived or abandoned per Resolution 64 of August 3,
2004.65 Moreover, the determination of whether or not a tax is excessive, oppressive or confiscatory is an
issue which essentially involves questions of fact, and thus, this Court is precluded from reviewing the
same.66

As a penultimate statement, it may be well to recall what this Court said of EPIRA:
One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It established a
new policy, legal structure and regulatory framework for the electric power industry. The new thrust is to tap
private capital for the expansion and improvement of the industry as the large government debt and the
highly capital-intensive character of the industry itself have long been acknowledged as the critical
constraints to the program. To attract private investment, largely foreign, the jaded structure of the industry
had to be addressed. While the generation and transmission sectors were centralized and monopolistic, the
distribution side was fragmented with over 130 utilities, mostly small and uneconomic. The pervasive flaws
have caused a low utilization of existing generation capacity; extremely high and uncompetitive power rates;
poor quality of service to consumers; dismal to forgettable performance of the government power sector;
high system losses; and an inability to develop a clear strategy for overcoming these shortcomings.
Thus, the EPIRA provides a framework for the restructuring of the industry, including the privatization of the
assets of the National Power Corporation (NPC), the transition to a competitive structure, and the
delineation of the roles of various government agencies and the private entities. The law ordains the division
of the industry into four (4) distinct sectors, namely: generation, transmission, distribution and supply.
Corollarily, the NPC generating plants have to privatized and its transmission business spun off and
privatized thereafter.67
Finally, every law has in its favor the presumption of constitutionality, and to justify its nullification, there must
be a clear and unequivocal breach of the Constitution and not one that is doubtful, speculative, or
argumentative.68 Indubitably, petitioners failed to overcome this presumption in favor of the EPIRA. We find
no clear violation of the Constitution which would warrant a pronouncement that Sec. 34 of the EPIRA and
Rule 18 of its IRR are unconstitutional and void.
WHEREFORE, the instant case is hereby DISMISSED for lack of merit.
SO ORDERED.

G.R. No. 173863 : September 15, 2010
CHEVRON PHILIPPINES, INC. (Formerly CALTEX PHILIPPINES, INC.), Petitioner, v. BASES

CONVERSION DEVELOPMENT AUTHORITY and CLARK DEVELOPMENT
CORPORATION, Respondents.
VILLARAMA, JR., J.:
This petition for review on certiorari assails the Decision1cralaw dated November 30, 2005 of the Court of
Appeals (CA) in CA-G.R. SP No. 87117, which affirmed the Resolution 2cralaw dated August 2, 2004 and the
Order3cralaw dated September 30, 2004 of the Office of the President in O.P. Case No. 04-D-170.
The facts follow.
On June 28, 2002, the Board of Directors of respondent Clark Development Corporation (CDC) issued and
approved Policy Guidelines on the Movement of Petroleum Fuel to and from the Clark Special Economic
Zone (CSEZ)4cralaw which provided, among others, for the following fees and
charges:chanroblesvirtuallawlibrar
1. Accreditation Fee
xxx
2. Annual Inspection Fee
xxx
3. Royalty Fees
Suppliers delivering fuel from outside sources shall be assessed the following royalty
fees:chanroblesvirtuallawlibrar
- Php0.50 per liter - those delivering Coastal petroleum fuel to CSEZ locators not sanctioned by CDC
- Php1.00 per liter - those bringing-in petroleum fuel (except Jet A-1) from outside sources
xxx
4. Gate Pass Fee
x x x x5cralaw
The above policy guidelines were implemented effective July 27, 2002. On October 1, 2002, CDC sent a
letter6cralaw to herein petitioner Chevron Philippines, Inc. (formerly Caltex Philippines, Inc.), a domestic
corporation which has been supplying fuel to Nanox Philippines, a locator inside the CSEZ since 2001,
informing the petitioner that a royalty fee of P0.50 per liter shall be assessed on its deliveries to Nanox
Philippines effective August 1, 2002. Thereafter, on October 21, 2002 a Statement of Account 7cralaw was

sent by CDC billing the petitioner for royalty fees in the amount of P115,000.00 for its fuel sales from Coastal
depot to Nanox Philippines from August 1-31 to September 3-21, 2002.
Claiming that nothing in the law authorizes CDC to impose royalty fees or any fees based on a per unit
measurement of any commodity sold within the special economic zone, petitioner sent a letter 8cralaw dated
October 30, 2002 to the President and Chief Executive Officer of CDC, Mr. Emmanuel Y. Angeles, to protest
the assessment for royalty fees. Petitioner nevertheless paid the said fees under protest on November 4,
2002.
On August 18, 2003, CDC again wrote a letter 9cralaw to petitioner regarding the latter's unsettled royalty
fees covering the period of December 2002 to July 2003. Petitioner responded through a letter 10cralaw dated
September 8, 2003 reiterating its continuing objection over the assessed royalty fees and requested a
refund of the amount paid under protest on November 4, 2002. The letter also asked CDC to revoke the
imposition of such royalty fees. The request was denied by CDC in a letter 11cralaw dated September 29,
2003.
Petitioner elevated its protest before respondent Bases Conversion Development Authority (BCDA) arguing
that the royalty fees imposed had no reasonable relation to the probable expenses of regulation and that the
imposition on a per unit measurement of fuel sales was for a revenue generating purpose, thus, akin to a
"tax". The protest was however denied by BCDA in a letter12cralaw dated March 3, 2004.
Petitioner appealed to the Office of the President which dismissed 13cralaw the appeal for lack of merit on
August 2, 2004 and denied14cralaw petitioner's motion for reconsideration thereof on September 30, 2004.
Aggrieved, petitioner elevated the case to the CA which likewise dismissed 15cralaw the appeal for lack of
merit on November 30, 2005 and denied16cralaw the motion for reconsideration on July 26, 2006.
The CA held that in imposing the challenged royalty fees, respondent CDC was exercising its right to
regulate the flow of fuel into CSEZ, which is bolstered by the fact that it possesses exclusive right to
distribute fuel within CSEZ pursuant to its Joint Venture Agreement (JVA) 17cralaw with Subic Bay
Metropolitan Authority (SBMA) and Coastal Subic Bay Terminal, Inc. (CSBTI) dated April 11, 1996. The
appellate court also found that royalty fees were assessed on fuel delivered, not on the sale, by petitioner
and that the basis of such imposition was petitioner's delivery receipts to Nanox Philippines. The fact that
revenue is incidentally also obtained does not make the imposition a tax as long as the primary purpose of
such imposition is regulation.18cralaw
Petitioner filed a motion for reconsideration but the CA denied the same in its Resolution 19cralaw dated July
26, 2006.
Hence, this petition raising the following grounds:chanroblesvirtuallawlibrar
I. THE ISSUE RAISED BEFORE THE COURT A QUO IS A QUESTION OF SUBSTANCE NOT
HERETOFORE DETERMINED BY THE HONORABLE SUPREME COURT.
II. THE RULING OF THE COURT OF APPEALS THAT THE CDC HAS THE POWER TO IMPOSE THE
QUESTIONED "ROYALTY FEES" IS CONTRARY TO LAW.
III. THE COURT OF APPEALS WAS MANIFESTLY MISTAKEN AND COMMITTED GRAVE ABUSE OF
DISCRETION AND A CLEAR MISUNDERSTANDING OF FACTS WHEN IT RULED CONTRARY TO THE
EVIDENCE THAT: (i) THE QUESTIONED "ROYALTY FEE" IS PRIMARILY FOR REGULATION; AND (ii)
ANY REVENUE EARNED THEREFROM IS MERELY INCIDENTAL TO THE PURPOSE OF REGULATION.

IV. THE COURT OF APPEALS FAILED TO GIVE DUE WEIGHT AND CONSIDERATION TO THE
EVIDENCE PRESENTED BY CPI SUCH AS THE LETTERS COMING FROM RESPONDENT CDC ITSELF
PROVING THAT THE QUESTIONED ROYALTY FEES ARE IMPOSED ON THE BASIS OF FUEL SALES
(NOT DELIVERY OF FUEL) AND NOT FOR REGULATION BUT PURELY FOR INCOME GENERATION,
I.E. AS PRICE OR CONSIDERATION FOR THE RIGHT TO MARKET AND DISTRIBUTE FUEL INSIDE
THE CSEZ.20cralaw
Petitioner argues that CDC does not have any power to impose royalty fees on sale of fuel inside the CSEZ
on the basis of purely income generating functions and its exclusive right to market and distribute goods
inside the CSEZ. Such imposition of royalty fees for revenue generating purposes would amount to a tax,
which the respondents have no power to impose. Petitioner stresses that the royalty fee imposed by CDC is
not regulatory in nature but a revenue generating measure to increase its profits and to further enhance its
exclusive right to market and distribute fuel in CSEZ.21cralaw
Petitioner would also like this Court to note that the fees imposed, assuming arguendo they are regulatory in
nature, are unreasonable and are grossly in excess of regulation costs. It adds that the amount of the fees
should be presumed to be unreasonable and that the burden of proving that the fees are not unreasonable
lies with the respondents.22cralaw
On the part of the respondents, they argue that the purpose of the royalty fees is to regulate the flow of fuel
to and from the CSEZ. Such being its main purpose, and revenue (if any) just an incidental product, the
imposition cannot be considered a tax. It is their position that the regulation is a valid exercise of police
power since it is aimed at promoting the general welfare of the public. They claim that being the
administrator of the CSEZ, CDC is responsible for the safe distribution of fuel products inside the
CSEZ.23cralaw
The petition has no merit.
In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of the
implemented measure. If the purpose is primarily to raise revenue, then it will be deemed a tax even though
the measure results in some form of regulation. On the other hand, if the purpose is primarily to regulate,
then it is deemed a regulation and an exercise of the police power of the state, even though incidentally,
revenue is generated. Thus, in Gerochi v. Department of Energy, 24cralaw the Court
stated:chanroblesvirtuallawlibrar
The conservative and pivotal distinction between these two (2) powers rests in the purpose for which the
charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does
not make the imposition a tax.
In the case at bar, we hold that the subject royalty fee was imposed primarily for regulatory purposes, and
not for the generation of income or profits as petitioner claims. The Policy Guidelines on the Movement of
Petroleum Fuel to and from the Clark Special Economic Zone 25cralaw provides:chanroblesvirtuallawlibrar
DECLARATION OF POLICY
It is hereby declared the policy of CDC to develop and maintain the Clark Special Economic Zone (CSEZ) as
a highly secured zone free from threats of any kind, which could possibly endanger the lives and properties
of locators, would-be investors, visitors, and employees.

It is also declared the policy of CDC to operate and manage the CSEZ as a separate customs territory
ensuring free flow or movement of goods and capital within, into and exported out of the
CSEZ.26cralaw (Emphasis supplied.)chanroblesvirtualawlibrary
From the foregoing, it can be gleaned that the Policy Guidelines was issued, first and foremost, to ensure
the safety, security, and good condition of the petroleum fuel industry within the CSEZ. The questioned
royalty fees form part of the regulatory framework to ensure "free flow or movement" of petroleum fuel to and
from the CSEZ. The fact that respondents have the exclusive right to distribute and market petroleum
products within CSEZ pursuant to its JVA with SBMA and CSBTI does not diminish the regulatory purpose of
the royalty fee for fuel products supplied by petitioner to its client at the CSEZ.
As pointed out by the respondents in their Comment, from the time the JVA took effect up to the time CDC
implemented its Policy Guidelines on the Movement of Petroleum Fuel to and from the CSEZ,
suppliers/distributors were allowed to bring in petroleum products inside CSEZ without any charge at all. But
this arrangement clearly negates CDC's mandate under the JVA as exclusive distributor of CSBTI's fuel
products within CSEZ and respondents' ownership of the Subic-Clark Pipeline. 27cralaw On this score,
respondents were justified in charging royalty fees on fuel delivered by outside suppliers.
However, it was erroneous for petitioner to argue that such exclusive right of respondent CDC to market and
distribute fuel inside CSEZ is the sole basis of the royalty fees imposed under the Policy Guidelines. Being
the administrator of CSEZ, the responsibility of ensuring the safe, efficient and orderly distribution of fuel
products within the Zone falls on CDC. Addressing specific concerns demanded by the nature of goods or
products involved is encompassed in the range of services which respondent CDC is expected to provide
under the law, in pursuance of its general power of supervision and control over the movement of all
supplies and equipment into the CSEZ.
Section 2 of Executive Order No. 8028cralaw provides:chanroblesvirtuallawlibrar
SEC. 2. Powers and Functions of the Clark Development Corporation. - The BCDA, as the incorporator and
holding company of its Clark subsidiary, shall determine the powers and functions of the CDC. Pursuant to
Section 15 of RA 7227, the CDC shall have the specific powers of the Export Processing Zone Authority as
provided for in Section 4 of Presidential Decree No. 66 (1972) as amended.
Among those specific powers granted to CDC under Section 4 of Presidential Decree No. 66
are:chanroblesvirtuallawlibrar
(a) To operate, administer and manage the export processing zone established in the Port of Mariveles,
Bataan, and such other export processing zones as may be established under this Decree; to construct,
acquire, own, lease, operate and maintain infrastructure facilities, factory building, warehouses, dams,
reservoir, water distribution, electric light and power system, telecommunications and transportation, or such
other facilities and services necessary or useful in the conduct of commerce or in the attainment of the
purposes and objectives of this Decree;
xxx
(g) To fix, assess and collect storage charges and fees, including rentals for the lease, use or occupancy of
lands, buildings, structure, warehouses, facilities and other properties owned and administered by the
Authority; and to fix and collect the fees and charges for the issuance of permits, licenses and the
rendering of services not enumerated herein, the provisions of law to the contrary notwithstanding;

(h) For the due and effective exercise of the powers conferred by law and to the extend (sic) [extent]
requisite therefor, to exercise exclusive jurisdiction and sole police authority over all areas owned or
administered by the Authority. For this purpose, the Authority shall have supervision and control over the
bringing in or taking out of the Zone, including the movement therein, of all cargoes, wares, articles,
machineries, equipment, supplies or merchandise of every type and description;
x x x x (Emphasis supplied.)chanroblesvirtualawlibrary
In relation to the regulatory purpose of the imposed fees, this Court in Progressive Development Corporation
v. Quezon City,29cralaw stated that "x x x the imposition questioned must relate to an occupation or activity
that so engages the public interest in health, morals, safety and development as to require regulation for the
protection and promotion of such public interest; the imposition must also bear a reasonable relation to the
probable expenses of regulation, taking into account not only the costs of direct regulation but also its
incidental consequences as well."
In the case at bar, there can be no doubt that the oil industry is greatly imbued with public interest as it vitally
affects the general welfare.30cralaw In addition, fuel is a highly combustible product which, if left unchecked,
poses a serious threat to life and property. Also, the reasonable relation between the royalty fees imposed
on a "per liter" basis and the regulation sought to be attained is that the higher the volume of fuel entering
CSEZ, the greater the extent and frequency of supervision and inspection required to ensure safety, security,
and order within the Zone.
Respondents submit that increased administrative costs were triggered by security risks that have recently
emerged, such as terrorist strikes in airlines and military/government facilities. Explaining the regulatory
feature of the charges imposed under the Policy Guidelines, then BCDA President Rufo Colayco in his letter
dated March 3, 2004 addressed to petitioner's Chief Corporate Counsel, stressed:chanroblesvirtuallawlibrar
The need for regulation is more evident in the light of the 9/11 tragedy considering that what is being moved
from one location to another are highly combustible fuel products that could cause loss of lives and damage
to properties, hence, a set of guidelines was promulgated on 28 June 2002. It must be emphasized also that
greater security measure must be observed in the CSEZ because of the presence of the airport which is a
vital public infrastructure.
We are therefore constrained to sustain the imposition of the royalty fees on deliveries of CPI's fuel products
to Nanox Philippines.31cralaw
As to the issue of reasonableness of the amount of the fees, we hold that no evidence was adduced by the
petitioner to show that the fees imposed are unreasonable.
Administrative issuances have the force and effect of law. 32cralaw They benefit from the same presumption
of validity and constitutionality enjoyed by statutes. These two precepts place a heavy burden upon any
party assailing governmental regulations. 33cralaw Petitioner's plain allegations are simply not enough to
overcome the presumption of validity and reasonableness of the subject imposition.
WHEREFORE, the petition is DENIED for lack of merit and the Decision of the Court of Appeals dated
November 30, 2005 in CA-G.R. SP No. 87117 is hereby AFFIRMED.
With costs against the petitioner.
SO ORDERED.

G.R. No. 189999 June 27, 2012
ANGELES UNIVERSITY FOUNDATION, Petitioner,

vs.
CITY OF ANGELES, JULIET G. QUINSAAT, in her capacity as Treasurer of Angeles City and ENGR.
DONATO N. DIZON, in his capacity as Acting Angeles City Building Official, Respondents.
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, which seeks to reverse and set aside the Decision dated July 28, 2009 and Resolution dated
1 2
October 12, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 90591. The CA reversed the
Decision dated September 21, 2007 of the Regional Trial Court of Angeles City, Branch 57 in Civil Case No.
3
12995 declaring petitioner exempt from the payment of building permit and other fees and ordering
respondents to refund the same with interest at the legal rate.
The factual antecedents:
Petitioner Angeles University Foundation (AUF) is an educational institution established on May 25, 1962
and was converted into a non-stock, non-profit education foundation under the provisions of Republic Act
(R.A.) No. 6055 on December 4, 1975.
4
Sometime in August 2005, petitioner filed with the Office of the City Building Official an application for a
building permit for the construction of an 11-storey building of the Angeles University Foundation Medical
Center in its main campus located at MacArthur Highway, Angeles City, Pampanga. Said office issued a
Building Permit Fee Assessment in the amount of P126,839.20. An Order of Payment was also issued by
the City Planning and Development Office, Zoning Administration Unit requiring petitioner to pay the sum of
P238,741.64 as Locational Clearance Fee. 5
In separate letters dated November 15, 2005 addressed to respondents City Treasurer Juliet G. Quinsaat
and Acting City Building Official Donato N. Dizon, petitioner claimed that it is exempt from the payment of the
building permit and locational clearance fees, citing legal opinions rendered by the Department of Justice
(DOJ). Petitioner also reminded the respondents that they have previously issued building permits
acknowledging such exemption from payment of building permit fees on the construction of petitioner’s 4-
storey AUF Information Technology Center building and the AUF Professional Schools building on July 27,
2000 and March 15, 2004, respectively. 6
Respondent City Treasurer referred the matter to the Bureau of Local Government Finance (BLGF) of the
Department of Finance, which in turn endorsed the query to the DOJ. Then Justice Secretary Raul M.
Gonzalez, in his letter-reply dated December 6, 2005, cited previous issuances of his office (Opinion No.
157, s. 1981 and Opinion No. 147, s. 1982) declaring petitioner to be exempt from the payment of building
permit fees. Under the 1st Indorsement dated January 6, 2006, BLGF reiterated the aforesaid opinion of the
DOJ stating further that "xxx the Department of Finance, thru this Bureau, has no authority to review the
resolution or the decision of the DOJ."
7
Petitioner wrote the respondents reiterating its request to reverse the disputed assessments and invoking
the DOJ legal opinions which have been affirmed by Secretary Gonzalez. Despite petitioner’s plea, however,
respondents refused to issue the building permits for the construction of the AUF Medical Center in the main
campus and renovation of a school building located at Marisol Village. Petitioner then appealed the matter to
City Mayor Carmelo F. Lazatin but no written response was received by petitioner. 8

Consequently, petitioner paid under protest the following:
9
Medical Center (new construction)
Building Permit and Electrical Fee P 217,475.20
Locational Clearance Fee 283,741.64
Fire Code Fee 144,690.00
Total - P 645,906.84
School Building (renovation)
Building Permit and Electrical Fee P 37,857.20
Fire Code Fee 5,967.74
Total - P 49,825.51
Petitioner likewise paid the following sums as required by the City Assessor’s Office:
Real Property Tax – Basic Fee P 86,531.10
SEF 43,274.54

Total – P130,930.64 10
[GRAND TOTAL - P 826,662.99]
By reason of the above payments, petitioner was issued the corresponding Building Permit, Wiring Permit,
Electrical Permit and Sanitary Building Permit. On June 9, 2006, petitioner formally requested the
respondents to refund the fees it paid under protest. Under letters dated June 15, 2006 and August 7, 2006,
respondent City Treasurer denied the claim for refund. 11
On August 31, 2006, petitioner filed a Complaint before the trial court seeking the refund of P826,662.99
12
plus interest at the rate of 12% per annum, and also praying for the award of attorney’s fees in the amount of
P300,000.00 and litigation expenses.
In its Answer, respondents asserted that the claim of petitioner cannot be granted because its structures are
13
not among those mentioned in Sec. 209 of the National Building Code as exempted from the building permit
fee. Respondents argued that R.A. No. 6055 should be considered repealed on the basis of Sec. 2104 of
the National Building Code. Since the disputed assessments are regulatory in nature, they are not taxes
from which petitioner is exempt. As to the real property taxes imposed on petitioner’s property located in
Marisol Village, respondents pointed out that said premises will be used as a school dormitory which cannot
be considered as a use exclusively for educational activities.
Petitioner countered that the subject building permit are being collected on the basis of Art. 244 of
the Implementing Rules and Regulations of the Local Government Code, which impositions are really taxes
considering that they are provided under the chapter on "Local Government Taxation" in reference to the
"revenue raising power" of local government units (LGUs). Moreover, petitioner contended that, as held in
Philippine Airlines, Inc. v. Edu, fees may be regarded as taxes depending on the purpose of its exaction. In
14
any case, petitioner pointed out that the Local Government Code of 1991 provides in Sec. 193 that non-
stock and non-profit educational institutions like petitioner retained the tax exemptions or incentives which
have been granted to them. Under Sec. 8 of R.A. No. 6055 and applicable jurisprudence and DOJ rulings,
petitioner is clearly exempt from the payment of building permit fees. 15
On September 21, 2007, the trial court rendered judgment in favor of the petitioner and against the
respondents. The dispositive portion of the trial court’s decision reads:
16
WHEREFORE, premises considered, judgment is rendered as follows:
a. Plaintiff is exempt from the payment of building permit and other fees Ordering the Defendants to
refund the total amount of Eight Hundred Twenty Six Thousand Six Hundred Sixty Two Pesos and
99/100 Centavos (P826,662.99) plus legal interest thereon at the rate of twelve percent (12%) per
annum commencing on the date of extra-judicial demand or June 14, 2006, until the aforesaid
amount is fully paid.
b. Finding the Defendants liable for attorney’s fees in the amount of Seventy Thousand Pesos
(Php70,000.00), plus litigation expenses.
c. Ordering the Defendants to pay the costs of the suit.

SO ORDERED. 17
Respondents appealed to the CA which reversed the trial court, holding that while petitioner is a tax-free
entity, it is not exempt from the payment of regulatory fees. The CA noted that under R.A. No. 6055,
petitioner was granted exemption only from income tax derived from its educational activities and real
property used exclusively for educational purposes. Regardless of the repealing clause in the National
Building Code, the CA held that petitioner is still not exempt because a building permit cannot be considered
as the other "charges" mentioned in Sec. 8 of R.A. No. 6055 which refers to impositions in the nature of tax,
import duties, assessments and other collections for revenue purposes, following the ejusdem generisrule.
The CA further stated that petitioner has not shown that the fees collected were excessive and more than
the cost of surveillance, inspection and regulation. And while petitioner may be exempt from the payment of
real property tax, petitioner in this case merely alleged that "the subject property is to be used actually,
directly and exclusively for educational purposes," declaring merely that such premises is intended to house
the sports and other facilities of the university but by reason of the occupancy of informal settlers on the
area, it cannot yet utilize the same for its intended use. Thus, the CA concluded that petitioner is not entitled
to the refund of building permit and related fees, as well as real property tax it paid under protest.
Petitioner filed a motion for reconsideration which was denied by the CA.
Hence, this petition raising the following grounds:
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED A QUESTION OF

SUBSTANCE IN A WAY NOT IN ACCORDANCE WITH LAW AND THE APPLICABLE DECISIONS OF THE
HONORABLE COURT AND HAS DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF
JUDICIAL PROCEEDINGS NECESSITATING THE HONORABLE COURT’S EXERCISE OF ITS POWER
OF SUPERVISION CONSIDERING THAT:
I. IN REVERSING THE TRIAL COURT’S DECISION DATED 21 SEPTEMBER 2007, THE COURT OF
APPEALS EFFECTIVELY WITHDREW THE PRIVILEGE OF EXEMPTION GRANTED TO NON-STOCK,
NON-PROFIT EDUCATIONAL FOUNDATIONS BY VIRTUE OF RA 6055 WHICH WITHDRAWAL IS
BEYOND THE AUTHORITY OF THE COURT OF APPEALS TO DO.
A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE AND EFFECT. HENCE,
THE COURT OF APPEALS ERRED WHEN IT RULED IN THE QUESTIONED DECISION
THAT NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE NOT EXEMPT.
B. THE COURT OF APPEALS’ APPLICATION OF THE PRINCIPLE OF EJUSDEM

GENERIS IN RULING IN THE QUESTIONED DECISION THAT THE TERM "OTHER
CHARGES IMPOSED BY THE GOVERNMENT" UNDER SECTION 8 OF RA 6055 DOES
NOT INCLUDE BUILDING PERMIT AND OTHER RELATED FEES AND/OR CHARGES IS
BASED ON ITS ERRONEOUS AND UNWARRANTED ASSUMPTION THAT THE TAXES,
IMPORT DUTIES AND ASSESSMENTS AS PART OF THE PRIVILEGE OF EXEMPTION
GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE LIMITED
TO COLLECTIONS FOR REVENUE PURPOSES.
C. EVEN ASSUMING THAT THE BUILDING PERMIT AND OTHER RELATED FEES
AND/OR CHARGES ARE NOT INCLUDED IN THE TERM "OTHER CHARGES IMPOSED
BY THE GOVERNMENT" UNDER SECTION 8 OF RA 6055, ITS IMPOSITION IS
GENERALLY A TAX MEASURE AND THEREFORE, STILL COVERED UNDER THE
PRIVILEGE OF EXEMPTION.

II. THE COURT OF APPEALS’ DENIAL OF PETITIONER AUF’S EXEMPTION FROM REAL PROPERTY
TAXES CONTAINED IN ITS QUESTIONED DECISION AND QUESTIONED RESOLUTION IS CONTRARY
TO APPLICABLE LAW AND JURISPRUDENCE. 18
Petitioner stresses that the tax exemption granted to educational stock corporations which have converted
into non-profit foundations was broadened to include any other charges imposed by the Government as one
of the incentives for such conversion. These incentives necessarily included exemption from payment of
building permit and related fees as otherwise there would have been no incentives for educational
foundations if the privilege were only limited to exemption from taxation, which is already provided under
the Constitution.
Petitioner further contends that this Court has consistently held in several cases that the primary purpose of
the exaction determines its nature. Thus, a charge of a fixed sum which bears no relation to the cost of
inspection and which is payable into the general revenue of the state is a tax rather than an exercise of the
police power. The standard set by law in the determination of the amount that may be imposed as license
fees is such that is commensurate with the cost of regulation, inspection and licensing. But in this case, the
amount representing the building permit and related fees and/or charges is such an exorbitant amount as to
warrant a valid imposition; such amount exceeds the probable cost of regulation. Even with the alleged
criteria submitted by the respondents (e.g., character of occupancy or use of building/structure, cost of
construction, floor area and height), and the construction by petitioner of an 11-storey building, the costs of
inspection will not amount to P645,906.84, presumably for the salary of inspectors or employees, the
expenses of transportation for inspection and the preparation and reproduction of documents. Petitioner thus
concludes that the disputed fees are substantially and mainly for purposes of revenue rather than regulation,
so that even these fees cannot be deemed "charges" mentioned in Sec. 8 of R.A. No. 6055, they should
properly be treated as tax from which petitioner is exempt.
In their Comment, respondents maintain that petitioner is not exempt from the payment of building permit
and related fees since the only exemptions provided in the National Building Code are public buildings and
traditional indigenous family dwellings. Inclusio unius est exclusio alterius. Because the law did not include
petitioner’s buildings from those structures exempt from the payment of building permit fee, it is therefore
subject to the regulatory fees imposed under the National Building Code.
Respondents assert that the CA correctly distinguished a building permit fee from those "other charges"
mentioned in Sec. 8 of R.A. No. 6055. As stated by petitioner itself, charges refer to pecuniary liability, as
rents, and fees against persons or property. Respondents point out that a building permit is classified under
the term "fee." A fee is generally imposed to cover the cost of regulation as activity or privilege and is
essentially derived from the exercise of police power; on the other hand, impositions for services rendered
by the local government units or for conveniences furnished, are referred to as "service charges".
Respondents also disagreed with petitioner’s contention that the fees imposed and collected are exorbitant
and exceeded the probable expenses of regulation. These fees are based on computations and
assessments made by the responsible officials of the City Engineer’s Office in accordance with the Schedule
of Fees and criteria provided in the National Building Code. The bases of assessment cited by petitioner
(e.g. salary of employees, expenses of transportation and preparation and reproduction of documents) refer
to charges and fees on business and occupation under Sec. 147 of the Local Government Code, which do
not apply to building permit fees. The parameters set by the National Building Code can be considered as
complying with the reasonable cost of regulation in the assessment and collection of building permit fees.
Respondents likewise contend that the presumption of regularity in the performance of official duty applies in
this case. Petitioner should have presented evidence to prove its allegations that the amounts collected are
exorbitant or unreasonable.

For resolution are the following issues: (1) whether petitioner is exempt from the payment of building permit
and related fees imposed under the National Building Code; and (2) whether the parcel of land owned by
petitioner which has been assessed for real property tax is likewise exempt.
R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which converted to non-
stock, non-profit educational foundations. Section 8 of said law provides:
SECTION 8. The Foundation shall be exempt from the payment of all taxes, import duties, assessments,
and other charges imposed by the Government onall income derived from or property, real or personal, used
exclusively for the educational activities of the Foundation.(Emphasis supplied.)
On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting the National Building Code
of the Philippines. The said Code requires every person, firm or corporation, including any agency or
instrumentality of the government to obtain a building permit for any construction, alteration or repair of any
building or structure. Building permit refers to "a document issued by the Building Official x x x to an
19
owner/applicant to proceed with the construction, installation, addition, alteration, renovation, conversion,
repair, moving, demolition or other work activity of a specific project/building/structure or portions thereof
after the accompanying principal plans, specifications and other pertinent documents with the duly notarized
application are found satisfactory and substantially conforming with the National Building Code of the
Philippines x x x and its Implementing Rules and Regulations (IRR)." Building permit fees refers to the basic
20
permit fee and other charges imposed under the National Building Code.
Exempted from the payment of building permit fees are: (1) public buildings and (2) traditional indigenous
family dwellings. Not being expressly included in the enumeration of structures to which the building permit
21
fees do not apply, petitioner’s claim for exemption rests solely on its interpretation of the term "other charges
imposed by the National Government" in the tax exemption clause of R.A. No. 6055.
A "charge" is broadly defined as the "price of, or rate for, something," while the word "fee" pertains to a
"charge fixed by law for services of public officers or for use of a privilege under control of government." As 22
used in the Local Government Code of 1991 (R.A. No. 7160), charges refers to pecuniary liability, as rents
or fees against persons or property, while fee means a charge fixed by law or ordinance for the regulation or
inspection of a business or activity.
23
That "charges" in its ordinary meaning appears to be a general term which could cover a specific "fee" does
not support petitioner’s position that building permit fees are among those "other charges" from which it was
expressly exempted. Note that the "other charges" mentioned in Sec. 8 of R.A. No. 6055 is qualified by the
words "imposed by the Government on all x x x property used exclusively for the educational activities of the
foundation." Building permit fees are not impositions on property but on the activity subject of government
regulation. While it may be argued that the fees relate to particular properties, i.e., buildings and structures,
they are actually imposed on certain activities the owner may conduct either to build such structures or to
repair, alter, renovate or demolish the same. This is evident from the following provisions of the National
Building Code:
Section 102. Declaration of Policy
It is hereby declared to be the policy of the State to safeguard life, health, property, and public welfare,
consistent with theprinciples of sound environmental management and control; and tothis end, make it the
purpose of this Code to provide for allbuildings and structures, a framework of minimum standards and
requirements to regulate and control their location, site, design quality of materials, construction, use,
occupancy, and maintenance.
Section 103. Scope and Application

(a) The provisions of this Code shall apply to the design,location, sitting, construction, alteration,
repair,conversion, use, occupancy, maintenance, moving, demolitionof, and addition to public and private
buildings andstructures, except traditional indigenous family dwellingsas defined herein.
xxxx
Section 301. Building Permits
No person, firm or corporation, including any agency orinstrumentality of the government shall erect,
construct, alter, repair, move, convert or demolish any building or structure or causethe same to be done
without first obtaining a building permittherefor from the Building Official assigned in the place where
thesubject building is located or the building work is to be done. (Italics supplied.)
That a building permit fee is a regulatory imposition is highlighted by the fact that in processing an
application for a building permit, the Building Official shall see to it that the applicant satisfies and conforms
with approved standard requirements on zoning and land use, lines and grades, structural design, sanitary
and sewerage, environmental health, electrical and mechanical safety as well as with other rules and
regulations implementing the National Building Code. Thus, ancillary permits such as electrical permit,
24
sanitary permit and zoning clearance must also be secured and the corresponding fees paid before a
building permit may be issued. And as can be gleaned from the implementing rules and regulations of the
National Building Code, clearances from various government authorities exercising and enforcing regulatory
functions affecting buildings/structures, like local government units, may be further required before a building
permit may be issued. 25
Since building permit fees are not charges on property, they are not impositions from which petitioner is
exempt.
As to petitioner’s argument that the building permit fees collected by respondents are in reality taxes
because the primary purpose is to raise revenues for the local government unit, the same does not hold
water.
A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to
be a tax rather than an exercise of the police power. In this case, the Secretary of Public Works and
26
Highways who is mandated to prescribe and fix the amount of fees and other charges that the Building
Official shall collect in connection with the performance of regulatory functions, has promulgated and issued
27
the Implementing Rules and Regulations which provide for the bases of assessment of such fees, as
28
follows:
1. Character of occupancy or use of building
2. Cost of construction " 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J)
3. Floor area
4. Height
Petitioner failed to demonstrate that the above bases of assessment were arbitrarily determined or unrelated
to the activity being regulated. Neither has petitioner adduced evidence to show that the rates of building
permit fees imposed and collected by the respondents were unreasonable or in excess of the cost of
regulation and inspection.

In Chevron Philippines, Inc. v. Bases Conversion Development Authority, this Court explained:
29
In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of the
implemented measure. If the purpose is primarily to raise revenue, then it will be deemed a tax even though
the measure results in some form of regulation. On the other hand, if the purpose is primarily to regulate,
then it is deemed a regulation and an exercise of the police power of the state, even though incidentally,
revenue is generated. Thus, in Gerochi v. Department of Energy, the Court stated:
"The conservative and pivotal distinction between these two (2) powers rests in the purpose for which the
charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does
not make the imposition a tax." (Emphasis supplied.)
30
Concededly, in the case of building permit fees imposed by the National Government under the National
Building Code, revenue is incidentally generated for the benefit of local government units. Thus:
Section 208. Fees
Every Building Official shall keep a permanent record and accurate account of all fees and other charges
fixed and authorized by the Secretary to be collected and received under this Code.
Subject to existing budgetary, accounting and auditing rules and regulations, the Building Official is hereby
authorized to retain not more than twenty percent of his collection for the operating expenses of his office.
The remaining eighty percent shall be deposited with the provincial, city or municipal treasurer and shall
accrue to the General Fund of the province, city or municipality concerned.
Petitioner’s reliance on Sec. 193 of the Local Government Code of 1991 is likewise misplaced. Said
provision states:
SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied.)
Considering that exemption from payment of regulatory fees was not among those "incentives" granted to
petitioner under R.A. No. 6055, there is no such incentive that is retained under the Local Government Code
of 1991. Consequently, no reversible error was committed by the CA in ruling that petitioner is liable to pay
the subject building permit and related fees.
Now, on petitioner’s claim that it is exempted from the payment of real property tax assessed against its real
property presently occupied by informal settlers.
Section 28(3), Article VI of the 1987 Constitution provides:
xxxx
(3) Charitable institutions, churches and parsonages 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.

x x x x (Emphasis supplied.)
Section 234(b) of the Local Government Code of 1991 implements the foregoing constitutional provision by
declaring that --
SECTION 234. Exemptions from Real Property Tax.– The following are exempted from payment of the real
property tax:
xxxx
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or
religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for
religious, charitable or educational purposes;
x x x x (Emphasis supplied.)
In Lung Center of the Philippines v. Quezon City, this Court held that only portions of the hospital actually,
31
directly and exclusively used for charitable purposes are exempt from real property taxes, while those
portions leased to private entities and individuals are not exempt from such taxes. We explained the
condition for the tax exemption privilege of charitable and educational institutions, as follows:
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the
petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b)
its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive"
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." If real property is
used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is
subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used
exclusively" without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. 1âwphi1
What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that is determinative of whether the property
is used for tax-exempt purposes. (Emphasis and underscoring supplied.)
32
Petitioner failed to discharge its burden to prove that its real property is actually, directly and exclusively
used for educational purposes. While there is no allegation or proof that petitioner leases the land to its
present occupants, still there is no compliance with the constitutional and statutory requirement that said real
property is actually, directly and exclusively used for educational purposes. The respondents correctly
assessed the land for real property taxes for the taxable period during which the land is not being devoted
solely to petitioner’s educational activities. Accordingly, the CA did not err in ruling that petitioner is likewise
not entitled to a refund of the real property tax it paid under protest.
WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009 and Resolution dated October 12,
2009 of the Court of Appeals in CA-G.R. CV No. 90591 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

CONSTRUCTION AND INTERPRETATION
G.R. No. 202789 June 22, 2015
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PUREGOLD DUTY FREE, INC., Respondent.
VELASCO, JR., J.:
At bar is a petition for review under Rule 45 of the 1997 Rules of Civil Procedure assailing the May 9, 2012
Decision and July 18, 2012 Resolution of the Court of Tax Appeals (CTA) en bane in CTA EB No. 723 (CTA
Case No. 7812). The CTA en bane upheld the November 25, 2010 and January 20, 2011 Resolutions of the
CTA Second Division stating that herein respondent Puregold Duty Free, Inc. (Puregold) is entitled to, and
properly availed of, the tax amnesty under Republic Act No. (RA) 9399 and so is no longer liable for
1
deficiency value-added tax (VAT) and excise tax for its importation of distilled spirits, wines, and cigarettes
from January 1998 to May 2004.
As culled from the records, the facts of this case are:
Puregold is engaged in the sale of various consumer goods exclusively within the Clark Special Economic
Zone (CSEZ), and operates its store under the authority and jurisdiction of Clark Development Corporation
2
(CDC) and CSEZ.
As an enterprise located within CSEZ and registered with the CDC, Puregold had been issued Certificate of
Tax Exemption No. 94-4, later superseded by Certificate of Tax Exemption No. 98-54, which enumerated
3 4
the tax incentives granted to it, including tax and duty-free importation of goods. The certificates were issued
pursuant to Sec. 5 of Executive Order No. (EO) 80, extending to business enterprises operating within the
5
CSEZ all the incentives granted to enterprises within the Subic Special Economic Zone (SSEZ) under RA
7227, otherwise known as the "Bases Conversion and Development Act of 1992."
Notably, Sec. 12 of RA 7227 provides duty-free importations and exemptions of businesses within the SSEZ
from local and national taxes. Thus, in accordance with the tax exemption certificates granted to respondent
6
Puregold, it filed its Annual Income Tax Returns and paid the five percent (5%) preferential tax, in lieu of all
other national and local taxes for the period of January 1998 to May 2004. 7
On July 25, 2005, in Coconut Oil Refiners v. Torres, however, this Court annulled the adverted Sec. 5 of EO
8
80, in effect withdrawing the preferential tax treatment heretofore enjoyed by all businesses located in the
CSEZ.
On November 7, 2005, then Deputy Commissioner for Special Concems/OIC-Large Taxpayers Service of
the Bureau of Internal Revenue (BIR) Kim Jacinto-Henares issued a Preliminary Assessment Notice
regarding unpaid VAT and excise tax on wines, liquors and tobacco products imported by Puregold from
January 1998 to May 2004. In due time, Puregold protested the assessment.
Pending the resolution of Puregold's protest, Congress enacted RA 9399, specifically to grant a tax amnesty
9
to business enterprises affected by this Court's rulings in John Hay People's Coalition v. Lim and Coconut
10
Oil Refiners. Under RA 9399, availment of the tax amnesty relieves the qualified taxpayers of any civil,
criminal and/or administrative liabilities arising from, or incident to, nonpayment of taxes, duties and other
charges, viz:

SECTION 1. Grant of Tax Amnesty. - Registered business enterprises operating prior to the effectivity of this
Act within the special economic zones and freeports created pursuant to Section 15 of Republic Act No.
7227, as amended, such as the Clark Special Economic Zone [CSEZ] created under Proclamation No. 163,
series of 1993 x x x may avail themselves of the benefits of remedial tax amnesty herein granted on all
applicable tax and duty liabilities, inclusive of fines, penalties, interests and other additions thereto, incurred
by them or that might have accrued to them due to the rulings of the Supreme Court in the cases of John
Hay People's Coalition v. Lim, et. al., G. R. No. 119775 dated 24 October 2003 and Coconut Oil Refiners
Association, Inc. v. Torres, et. al., G. R. No. 132527 dated 29 July 2005, by filing a notice and return in such
form as shall be prescribed by the Commissioner of Internal Revenue and the Commissioner of Customs
and thereafter, by paying an amnesty tax of Twenty-five Thousand pesos (₱25,000.00) within six months
from the effectivity of this Act: Provided, That the applicable tax and duty liabilities to be covered by the tax
amnesty shall refer only to the difference between: (i) all national and local tax impositions under relevant
tax laws, rules and regulations; and (ii) the five percent (5%) tax on gross income earned by said registered
business enterprises as determined under relevant revenue regulations of the Bureau of Internal Revenue
and memorandum circulars of the Bureau of Customs during the period covered: Provided, however, that
the coverage of the tax amnesty herein granted shall not include the applicable taxes and duties on articles,
raw materials, capital goods, equipment and consumer items removed from the special economic zone and
freeport and entered in the customs territory of the Philippines for local or domestic sale, which shall be
subject to the usual taxes and duties prescribed in the National Internal Revenue Code (NIRC) of 1997, as
amended, and the Tariff and Customs Code of the Philippines, as amended. (emphasis added)
Sec. 2. Immunities and Privileges. - Those who have availed themselves of the tax amnesty and have fully
complied with all its conditions shall be relieved of any civil, criminal and/or administrative liabilities arising
from or incident to the nonpayment of taxes, duties and other charges covered by the tax amnesty granted
under Section 1 herein. 11
On July 27, 2007, Puregold availed itself of the tax amnesty under RA 9399, filing for the purpose the
necessary requirements and paying the amnesty tax. 12
Nonetheless, on October 26, 2007, Puregold received a formal letter of demand from the BIR for the
payment of Two Billion Seven Hundred Eighty Million Six Hundred Ten Thousand One Hundred Seventy-
Four Pesos and Fifty-One Centavos (₱2, 780,610, 17 4.51 ), supposedly representing deficiency VAT and
excise taxes on its importations of alcohol and tobacco products from January 1998 to May 2004.
In its response-letter, PuregoJd, thru counsel, requested the cancellation of the assessment on the ground
that it has already availed of the tax amnesty under RA 9399. This notwithstanding, the BIR issued on June
23, 2008 a Final Decision on Disputed Assessment stating that the availment of the tax amnesty under RA
9399 did not relieve Puregold of its liability for deficiency VAT, excise taxes, and inspection fees under Sec.
13l(A) of the 1997 National Internal Revenue Code (1997 NIRC).
On July 22, 2008, Puregold filed a Petition for Review with the CT A questioning the timeliness of the
assessment and arguing that the doctrines of operative fact and non-retroactivity of rulings bar the
Commissioner of Internal Revenue (CIR) from assessing it of deficiency VAT and excise taxes. More
importantly, Puregold asserted that, by virtue of its availment of the tax amnesty granted by RA 9399, it has
been relieved of any civil, criminal and/or administrative liabilities arising from or incident to nonpayment of
taxes, duties and other charges.
Answering, the CIR argued that pursuant to Sec. 13 l(A) of the 1997 NIRC, only importations of distilled
spirits, wines, and cigarettes to the freeports in Subic, Cagayan, and Zamboanga, as well as importations by
government-owned duty free shops, are exempt from the payment of VAT and excise taxes.

Following an exchange of motions, the CTA 2nd Division issued on November 25, 2010 a Resolution
ordering the cancellation of the protested assessment against Puregold in view of its availment of tax
amnesty under RA 9399, viz:
In substantiating its compliance with Section 1 of Republic Act No. 9399, petitioner submitted Certificates of
Registration/Tax Exemption issued by the Clark Development Corporation, its Amnesty Tax Payment
2
Form and its BIR Tax Payment Deposit Slip .

3 4
Based on the foregoing, the Court finds that petitioner has sufficiently established its compliance with the
requirements provided under R.A. No. 9399.
As to whether or not petitioner's tax liabilities are excluded under R.A. 9399; it is significant to note that what
petitioner seeks to cancel in its petition for review and Motion for Early Resolution, is respondent's (CIR)
assessment of deficiency excise tax and Value Added Tax (VAT) on imported alcohol and tobacco products.
Clearly, these are not taxes on articles, raw materials, capital goods, equipment and consumer items
removed from the Special Economic Zones and Freeport Zones and entered into the customs territory of the
Philippines for local or domestic sale. This may be verified in respondent's Formal Letter of Demand where it
was stated that the assessment was made against petitioner's importation of wines, liquors and tobacco
products. In view thereof, the deficiency tax assessments made against petitioner, which were sought to be
cancelled in the instant petition, are not excluded under R.A. No. 9399.
As to respondent's contention that petitioner is not entitled to avail of the tax amnesty provided under R.A.
No. 9399 on the basis of Section 131 of the NIRC of 19971, this Court is not persuaded. The coverage of
the tax amnesty is the difference of all national and local taxes that petitioner is liable under the Local
Government Code, the Tax Code and other pertinent laws, and the 5% tax that petitioner had previously
been liable pursuant to Executive Order (EO) No. 80.
Being liable to VAT and excise taxes on importations of alcohol and cigars under Section 131 of the 1997
Tax Code is not a condition to be excluded from the tax amnesty. Contrarily, being liable to such taxes is
obviously contemplated by RA No. 9399 thru the phrase "all national and local tax impositions under
relevant tax laws, rules and regulations." If petitioner is liable to VAT and excise taxes pursuant to the
provision of Section 131 (A) of the 1997 Tax Code, then such amount of taxes will be used in determining
the difference mandated by R.A. 9399, which in turn, is the subject of the latter law. (emphasis added)
On December 15, 2010, the CIR moved for reconsideration reiterating her previous argument that the
national and local impositions mentioned in RA 9399 do not cover the deficiency taxes being assessed
against Puregold.
By Resolution of January 20, 2011, the CTA 2nd Division denied CIR's Motion for Reconsideration, holding:
After a close scrutiny of the arguments raised by respondent (CIR), this Court finds that the same
contentions were already raised in her "Comment (Re: Petitioner's Manifestation of Compliance)" filed on
November 15, 2010 and which have already been sufficiently addressed in the assailed Resolution dated
November 25, 2010.
To reiterate, the liability for VAT and excise taxes on importations of alcohol and cigars under Section 131 of
the NIRC of 1997, as amended, is contemplated under R.A. 9399 when it provides that "registered business
enterprises operation prior to the effectivity of this Act within the special economic zones and freeports
created pursuant to Section 15 of Republic Act No. 7227, as amended, such as the Clark Special Economic
Zone created under Proclamation No. 163, series of 1993, xxx may avail themselves of the benefits of

remedial tax amnesty herein granted on all applicable tax and duty liabilities, inclusive of fines, penalties,
interest and other additions thereto, incurred by them or that might have accrued to them due to the rulings
of the Supreme Court in the cases of John Hay Peoples Coalition vs. Lim, et al., G.R. No. 119775 dated 23
October 2003 and Coconut Oil Refiners Association, Inc. vs. Torres, et al. G.R. No. 132527 dated 29 July
2005.
Petitioner (Puregold) incurred liability for the assessed deficiency VAT, excise taxes and inspection fees
when its tax incentives was in effect removed by the Supreme Court when it ruled in the case of Coconut Oil
Refiners Association, Inc. vs. Torres, that the incentives provided under R.A. No. 7227 extends only to
business enterprises registered within the Subic Special Economic Zone (SSEZ). Since, petitioner's tax
liabilities accrued because of the said ruling, it is clear that petitioner's tax liabilities fall within the coverage
of R.A. No. 9399.
On February 25, 2011, the CIR filed a Petition for Review with the CT A en bane assailing the adverted
Resolutions of the CT A 2°d Division, predicating her recourse on the same arguments earlier presented. On
May 9, 2012, the CT A en bane promulgated its Decision denying the CIR' s petition, as follows:
After a careful review of the records and arguments raised by the petitioner, we agree with respondent's
(Puregold) contention that the same are merely a rehash of previous arguments already passed upon and
discussed by the Court.
Petitioner's arguments rely on (1) the applicability of Section 131 (A) of the National Internal Revenue Code
of 1997 (Tax Code); and, (2) that the subject deficiency taxes are not covered by the tax amnesty under R.A.
No. 9399. These contentions have been discussed and resolved by the CT A Second Division and there are
no compelling reasons to deviate from the said rulings. x x x
The CIR's motion for reconsideration was likewise denied by the CT A en bane in its Resolution dated July
18, 2012 on the ground that the same is a mere rehash of previous arguments already considered and
denied.
Unmoved by the CTA's repeated denial of its contention, the CIR filed with this Court the present petition
raising the following errors allegedly committed by the tax court, viz:
THE HONORABLE CT A EN BANC GRAVELY ERRED IN LIMITING THE REQUIREMENTS

UNDER REPUBLIC ACT NO. 9399 FOR THE AVAILMENT OF TAX AMNESTY OF (i) FILING OF
NOTICE AND RETURN FOR TAX AMNESTY WITHIN SIX (6) MONTHS FROM EFFECTIVITY OF
THE LAW AND (ii) PAYMENT OF THE TAX AMNESTY TAX OF PHP 25,000.00, AND TOTALLY AND
DELIBERATELY DISREGARDING THE MATERIAL AND SUBSTANTIAL FACT THAT PUREGOLD'S
PLACE OF BUSINESS IS IN METRO MANILA AND NOT CLARK FIELD, PAMPANGA, AS STATED
IN ITS ARTICLES OF INCORPORATION; THUS, PUREGOLD IS NOT ENTITLED TO THE
BENEFITS UNDER RA 9399.
II
ASSUMING WITHOUT ADMITTING THAT RESPONDENT IS A DULY CSEZ REGISTERED

ENTERPRISE WITH PRINCIPAL PLACE OF BUSINESS IN CLARK FIELD, P AMP ANGA, STILL
THE CT A EN BANC GRAVELY AND SERIOUSLY ERRED, AS ITS RULING IS CONTRARY TO
THE INTENT OF RA 9399 WHICH EXCLUDES DEFICIENCY TAX; THUS, PUREGOLD REMAINS
TO BE LIABLE FOR EXCISE TAXES ON ITS WINE, LIQUOR, AND TOBACCO IMPORTATIONS.

We find the petition bereft of merit.
The allegation of the CIR regarding the
principal place of business of Puregold
cannot be considered on appeal;
Puregold is entitled to avail of the tax
amnesty under RA 9399
In her petition, the CIR has introduced an entirely new matter, i.e., based on its Articles of Incorporation,
Puregold's principal place of business is in Metro Manila for which reason it cannot avail itself of the benefits
extended by RA 9399.
It is well settled that matters that were neither alleged in the pleadings nor raised during the proceedings
below cannot be ventilated for the first time on appeal and are barred by estoppel. To allow the contrary
13 14
would constitute a violation of the other party's right to due process, and is contrary to the principle of fair
play. In Ayala Land Incorporation v. Castillo, this Court held that:
15
It is well established that issues raised for the first time on appeal and not raised in the proceedings in the
lower court are barred by estoppel. Points of law, theories, issues, and arguments not brought to the
attention of the trial court ought not to be considered by a reviewing court, as these cannot be raised for the
first time on appeal. To consider the alleged facts and arguments belatedly raised would amount to trampling
on the basic principles of fair play, justice, and due process.
During the proceedings in the CT A, the CIR never challenged Puregold's eligibility to avail of the tax
amnesty under RA 9399 on the ground that its principal place of business, per its Articles of Incorporation, is
in Metro Manila and not in Clark Field, Pampanga. Neither did the CIR present the supposed Articles of
Incorporation nor formally offer the same in evidence for the purpose of proving that Puregold was not
entitled to the tax amnesty under RA 9399. Hence, this Court cannot take cognizance, much less consider,
this argument as a ground to divest Puregold of its right to avail of the benefits of RA 9399.
In any event, assuming arguendo that petitioner's new allegation can be raised on appeal, the same
deserves short shrift. RA 9399, as couched, does not prescribe that the amnesty-seeking taxpayer has its
principal office inside the CSEZ. It merely requires that such taxpayer be registered and operating within the
said zone, stating that "registered business enterprises operating xx x within the special economic zones
and freeports created pursuant to Section 15 of Republic Act No. 7227, as amended, such as the Clark
Special Economic Zone x x x may avail themselves of the benefits of remedial tax amnesty herein granted
The following documents sufficiently prove that Puregold is registered as a locator by the CDC to operate
business within the CSEZ, among others: (1) Exhibit "B" - Certificate of Registration, Certificate No. 94-16,
issued by the CDC, CSEZ in favor of Puregold; (2) Exhibit "C" -Certificate of Registration, Certificate No. 98-
54, issued by CDC, CSEZ in favor of Puregold; (3) Certificate of Tax Exemption, Certificate No. 94-16,
issued by CDC, CSEZ in favor of Puregold; and (4) Certificate of Tax Exemption, Certificate No. 98-54,
issued by CDC, CSEZ in favor of Puregold.
The following evidence also satisfactorily show that Puregold has been selling its goods exclusively within
the CSEZ: (1) Exhibit "T" – Puregold's BIR Certificate of Registration; (2) Exhibits "U", "U-1" to "U-6" –
Several BIR Permits issued to Puregold for use of cash registers; and (3) Exhibit "W" - BIR Certification that
Puregold has no branch. 16
Clearly, the location of Puregold's principal office is not, standing alone, an argument against its availment of
the tax amnesty under RA 9399 because there is no question that its actual operations were within the
jurisdiction of the CSEZ.

RA 9399 grants amnesty from liability
to pay VAT and excise tax under Section
131 of the 1997 NIRC
Anent the second error raised by petitioner, it is worth noting that the CT A has ruled that the amnesty
provision of RA 9399 covers the deficiency taxes assessed on Puregold and rejected the arguments raised
on the matter by the CIR. It cannot be emphasized enough that the findings of the CT A merit utmost
respect, considering that its function is by nature dedicated exclusively to the consideration of tax problems.
The Court said as much in Toshiba v. Commissioner of Internal Revenue: 17
Jurisprudence has consistently shown that this Court accords the findings of fact by the CT A with the
highest respect. In Sea-Land Service Inc. v. Court of Appeals, [G.R. No. 122605, 30 April 2001, 357 SCRA
441, 445-446], this Court recognizes that the Court of Tax Appeals, which by the very nature of its function is
dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise on the
subject, and its conclusions will not be overturned unless there has been an abuse or improvident exercise
of authority. Such findings 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 Tax Court. 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.
The issue on the coverage and applicability of RA 9399 to Puregold has already been addressed and
disposed of by the CT A when it pointed out that RA 9399 covers all applicable tax and duty liabilities,
inclusive of fines, penalties, interests and other additions thereto. Consequently, the government, through
the enactment of RA 9399, has expressed its intention to waive its right to collect taxes, which in this case is
the tax imposed under Sec. 131 (A) of the 1997 NIRC, subject to the condition that Puregold has complied
with the requirements provided therein.
The petitioner, however, would have this Court rule that Puregold's liability to pay the assessed deficiency
taxes remains since these were not incurred by respondent due to this Court's decisions in John Hay and
Coconut Oil, but are clearly imposable taxes and duties on Puregold's importation of alcohol and tobacco
products under the 1997 NIRC. As adopted by the dissent, it is the CIR's position that even without the
aforesaid rulings, respondent as a non-chartered SEZ remains liable for the payment of VAT and excise
taxes on its importation of alcohol and tobacco products from January 1998 to May 2004.
We cannot sanction the CIR's position as it would amount to nothing less than an emasculation of an
otherwise clear and valid law – RA 9399. Clearly, if the Court would uphold the CIR's argument that even
before the rulings in John Hay and Coconut Oil, respondent's duty-free privileges were already withdrawn by
the 1997 NIRC, this Court would in effect be negating the remedial measure contemplated in RA 9399
against these rulings.
It is worthy to note that Sec. 1 of RA 9399 explicitly and unequivocally mentions businesses within the CSEZ
as among the beneficiaries of the tax amnesty provided by RA 9399, viz:
SECTION 1. Grant (~f Tax Amnesty. - Registered business enterprises operating prior to the effectivity of
this Act within the special economic zones and freeports created pursuant to Section 15 of Republic Act No.
7227, as amended, such as the Clark Special Economic Zone created under Proclamation No. 163, series
of 1993 x x x may avail themselves of the benefits of remedial tax amnesty herein granted on all applicable
tax and duty liabilities, inclusive of fines, penalties, interests and other additions thereto, incurred by them or
that might have accrued to them due to the rulings of the Supreme Court in the cases of John Hay People's
Coalition v. Lim, et. al., G. R. No. 119775 dated 24 October 2003 and Coconut Oil Refiners Association, Inc.
v. Torres, et. al., G. R. No. 132527 dated 29 July 2005 xx x.

Hence, to conclude that respondent Puregold – a registered business enterprise operating within the CSEZ -
cannot avail of the amnesty extended by the law with regard to its liability under Section 13 l(A) of the 1997
NIRC simply goes against the plain and unambiguous language of RA 9399.
Furthermore, to review the factual milieu, Puregold enjoyed duty-free importations and exemptions from
local and national taxes under EO 80, a privilege which extended to business enterprises operating within
the CSEZ all the incentives granted to enterprises within SSEZ by RA 7227. Hence, Puregold was
repeatedly issued tax exemption certificates and the BIR itself did not assess any deficiency taxes from the
time the 1997 NIRC took effect in January 1998. Had the BIR believed that these tax incentives were
already withdrawn, it would have immediately assessed the required tax deficiency assessments against
Puregold after the promulgation of the 1997 NIRC. Yet, the BIR itself, one year after the 1997 NIRC took
effect, confirmed through BIR Ruling No. 149-99 signed by then CIR Beethoven L. Rualo that the tax
incentives extended to CSEZ operators by EO 80 were not affected by the 1997 NIRC:
While E.O. 80 and R.A. No. 7227, as implemented by Revenue Regulations No. 1-95, and as further
implemented by 12-97, were approved and made effective prior to January 1, 1998, the date of effectivity of
R.A. No. 8424, otherwise known as the Tax Code of 1997, the same are not covered by the above cited
repealing provision of the said Code. Since it is settled that a special and local statute, providing for a
particular case or class of cases, is not repealed by a subsequent statute, general in its terms, provisions
and applications, unless the intent to repeal or alter is manifest, although the terms of the general law are
broad enough to include the cases embraced in the special law. It is a canon of statutory construction that a
later statute, general in its terms and not expressly repealing prior special statute, will ordinarily not affect
the special provisions of such earlier statute. (Steamboat Company vs. Collector, 18 Wall (US)., 478; Cass
County vs. Gillet, 100 US 585; Minnesota vs. Hitchcock, 185 US 373, 396)
Such being the case, the special income tax re2ime or tax incentives granted to enterprises registered within
the secured area of Subic and Clark Special Economic Zones have not been repealed by R.A. 8424.
(emphasis supplied)
As respondent Puregold correctly points out, BIR Ruling 149-99 has not been reversed or overruled either
by the CIR or the Courts. In fact, the tax incentives enjoyed by businesses within CSEZ as provided for in
EO 80 were even upheld by the BIR through a succeeding ruling. 18
Without a doubt, the effectivity of Sec. 5, EO 80 and the privileges enjoyed by Puregold and similarly
situated enterprises were not put into question until this Court categorically voided that provision in Coconut
Oil on July 29, 2005.
In other words, without Our ruling in Coconut Oil, Puregold would have had continued to enjoy tax-free
importation of alcohol and tobacco products into the CSEZ. It cannot, therefore, be gainsaid that the subject
deficiency taxes first assessed by the BIR in November 2005, just months after the promulgation of Coconut
Oil, accrued because of such ruling. Hence, with more reason, these deficiency taxes are encompassed by
19
the remedial measure that is RA 9399.
A holding to the contrary, as proposed by the dissent, will only perpetuate the nauseating, revolting, and
circuitous exercise of governmental departments limiting, offsetting, and ultimately cancelling each other's
official acts and enactments. Consider: in Coconut Oil, this Court annulled Sec. 5 of EO 80; then, Congress
enacted RA 9399 to offset the full effect of such annulment by granting an amnesty; and, now, the petition
would have this Court nullify the amnesty in RA 9399 by withdrawing the protection extended by the law to
CSEZ operators from its liabilities for the period prior to the promulgation of John Hay and Coconut Oil.
It need not be emphasized that stability and predictability are the key pillars on which our legal system must
be founded and run to guarantee a business environment conducive to the country's sustainable economic

growth. Hence, this Court is duty-bound to protect the basic expectations taken into account by businesses
under relevant laws, such as RA 9399.
For this reason, this Court subscribes to the doctrine of operative fact, which recognizes that a judicial
declaration of invalidity may not necessarily obliterate all the effects and consequences of a void act prior to
such declaration. The seminal case of Serrano de Agbayani v. Philippine National Bank discusses the
20 21
application of the doctrine, thus:
The decision now on appeal reflects the orthodox view that an unconstitutional act, for that matter an
executive order or a municipal ordinance likewise suffering from that infirmity, cannot be the source of any
legal rights or duties. Nor can it justify any official act taken under it. Its repugnancy to the fundamental law
once judicially declared results in its being to all intents and purposes a mere scrap of paper. As the new
Civil Code puts it: "When the courts declare a law to be inconsistent with the Constitution, the former shall
be void and the latter shall govern. Administrative or executive acts, orders and regulations shall be valid
only when they are not contrary to the laws of the Constitution." It is understandable why it should be so, the
Constitution being supreme and paramount. Any legislative or executive act contrary to its terms cannot
survive.
Such a view has support in logic and possesses the merit of simplicity. It may not however be sufficiently
realistic. It does not admit of doubt that prior to the declaration of nullity such challenged legislative or
executive act must have been in force and had to be complied with. This is so as until after the judiciary, in
an appropriate case, declares its invalidity, it is entitled to obedience and respect. Parties may have acted
under it and may have changed their positions. What could be more fitting than that in a subsequent
litigation regard be had to what has been done while such legislative or executive act was in operation and
presumed to be valid in all respects. It is now accepted as a doctrine that prior to its being nullified, its
existence as a fact must be reckoned with. This is merely to reflect awareness that precisely because the
judiciary is the governmental organ which has the final say on whether or not a legislative or executive
measure is valid, a period of time may have elapsed before it can exercise the power of judicial review that
may lead to a declaration of nullity. It would be to deprive the law of its quality of fairness and justice then, if
there be no recognition of what had transpired prior to such adjudication.
In the language of an American Supreme Court decision: "The actual existence of a statute, prior to such a
determination [of unconstitutionality], is an operative fact and may have consequences which cannot justly
be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent
ruling as to invalidity may have to be considered in various aspects, with respect to particular relations,
individual and corporate, and particular conduct, private and official." This language has been quoted with
approval in a resolution in Araneta v. Hill and the decision in Manila Motor Co., Inc. v. Flores. An even more
recent instance is the opinion of Justice Zaldivar speaking for the Court in Fernandez v. Cuerva and Co. 22
In fact, as pointed out in Commissioner of Internal Revenue v. San Roque Power Corporation, the doctrine 23
of operative fact is incorporated in Section 246 of the 1997 NIRC, which provides:
SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.
Thus, under Section 246 of the 1997 NIRC, taxpayers may rely upon a rule or ruling issued by the
Commissioner from the time the rule or ruling is issued up to its reversal by the Commissioner or .this Court.
The reversal is not given retroactive effect.
24
Without a doubt, Our ruling in Coconut Oil cannot be retroactively applied to obliterate the effect of Section 5
of EO 80 and the various rulings of the former CIR prior to the promulgation of our Decision in 2005.
Furthermore, a tax amnesty, by nature, is designed to be a general grant of clemency and the only
exceptions are those specifically mentioned. In Philippine Banking Corporation v. Commissioner of Internal
Revenue, this Court held that:
25
A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of violation of a tax law. It partakes of an absolute waiver by the
government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start
with a clean slate.
We cannot now deflect from the foregoing decision by reading into a law granting tax amnesty a qualification
that is simply not there. To reiterate for emphasis, Sec. 1 of RA 9399 reads: SECTION 1. Grant of Tax
Amnesty. - Registered business enterprises operating prior to the effectivity of this Act within the special
economic zones and freeports created pursuant to Section 15 of Republic Act No. 7227, as amended, such
as the Clark Special Economic Zone created under Proclamation No. 163, series of 1993 x x x may avail
themselves of the benefits of remedial tax amnesty herein granted on all applicable tax and duty liabilities,
inclusive of fines, penalties, interests and other additions thereto, incurred by them or that might have
accrued to them due to the rulings of the Supreme Court in the cases of John Hay People's Coalition v. Lim,
et. al., G. R. No. 119775 dated 24 October 2003 and Coconut Oil Refiners Association, Inc. v. Torres, et. al.,
G. R. No. 132527 dated 29 July 2005, by filing a notice and return in such form as shall be prescribed by the
Commissioner of Internal Revenue and the Commissioner of Customs and thereafter, by paying an amnesty
tax of Twenty-five Thousand pesos (₱25,000.00) within six months from the effectivity of this Act: Provided,
That the applicable tax and duty liabilities to be covered by the tax amnesty shall refer only to the difference
between: (i) all national and local tax impositions under relevant tax laws, rules and regulations; and (ii) the
five percent (5%) tax on gross income earned by said registered business enterprises as determined under
relevant revenue regulations of the Bureau of Internal Revenue and memorandum circulars of the Bureau of
Customs during the period covered: Provided, however, that the coverage of the tax amnesty herein granted
shall not include the applicable taxes and duties on articles, raw materials, capital goods, equipment and
consumer items removed from the special economic zone and freeport and entered in the customs territory
of the Philippines for local or domestic sale, which shall be subject to the usual taxes and duties prescribed
in the National Internal Revenue Code (NIRC) of 1997, as amended, and the Tariff and Customs Code of the
Philippines, as amended.
It is significant to note that there is nothing in Sec. 1 of RA 9399 that excludes Sec. 131(A) of the 1997 NIRC
from the amnesty. In fact, there is no mention at all of any tax or duty imposed by the 1997 NIRC as being
1âwphi1
specifically excluded from the coverage of the tax amnesty.
Article 7 of the Department of Finance's Order (DO) 33-07, which operated to implement RA 9399, also has
clear exclusions and echoes RA 9399. It provides:
Article 7. Exclusions - The one-time remedial amnesty under RA 9399 shall not include applicable taxes and
duties on articles, raw materials, capital goods, equipment and consumer items removed from the Special
Economic Zones and Freeport Zones and entered into the customs territory of the Philippines for local or

domestic sale, which shall be subject to the usual taxes and duties, as prescribed in the National Internal
Revenue Code of 1997, as amended, and the Tariff and Customs Code of the Philippines, as amended.
Clearly, the only exclusions that RA 9399 and its implementing rules mention are those taxes on goods that
are taken out of the special economic zone. Yet, the petitioner herself admits that the assessment against
Puregold does not involve such goods, but only those that were imported by Puregold into the CSEZ. 26
If Congress intended Sec. 131 of the 1997 NIRC to be an exception to the general grant of amnesty given
under RA 9399, it could have easily so provided in either the law itself, or even the implementing rules. In
implementing tax amnesty laws, the CIR cannot now insert an exception where there is none under the law.
And this Court cannot sanction such action.
It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius. Hence, not being excepted, the taxes imposed under Sec. 131 (A) of the 1997 NIRC must be
27
regarded as coming within the purview of the general amnesty granted by RA 9399, expressed in the
maxim: exceptio firmat regulam in casibus non exceptis. Commissioner of Internal Revenue v. ROH Auto
28
Products Philippines is instructive in this regard. In that case, the President issued EO 41 on August 21,
29
1986, declaring a one-time tax amnesty for the unpaid income taxes for the years 1981 to 1985. The BIR,
arguing that the taxpayer was not covered, contended that the taxpayer received the tax assessments in
question on August 13, 1986, or before the promulgation of the EO. Resolving the issue, this Court held that
the EO granting the tax amnesty was quite clear in enumerating the exceptions. If assessments issued
before August 21, 1986 are not listed as among the exclusions under the
EO, then the BIR cannot insert it as such. We held, thus:
The real and only issue is whether or not the position taken by the Commissioner coincides with the
meaning and intent of executive Order No. 41.
We agree with both the Court of Appeals and Court of Tax Appeals that Executive Order No. 41 is quite
explicit and requires hardly anything beyond a simple application of its provisions. It reads:
xxxx
If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax
liabilities already assessed (administratively) prior to 22 August 1986, the law could have simply so provided
in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the executive order has
been designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically
excepted by it.
A final note. It has been declared that "the power to tax is not the power to destroy while this Court
sits." This Court cannot now shirk from such responsibility. It must at all times protect the right of the people
30
to exist and subsist despite taxes.
WHEREFORE, the instant petition is DENIED and the May 9, 2012 Decision and July 18, 2012 Resolution
of the Court of Tax Appeals (CTA) en bane in CTA EB No. 723 (CTA Case No. 7812) are hereby AFFIRMED.
Accordingly, the assessment against respondent Puregold Duty Free, Inc. in the amount of Two Billion
Seven Hundred Eighty Million Six Hundred Ten Thousand One Hundred Seventy-Four Pesos and Fifty-One
Centavos (₱2, 780,610, 17 4.51 ), supposedly representing deficiency value added tax (VAT) and excise

taxes on its importations of alcohol and tobacco products from January 1998 to May 2004, is hereby
CANCELLED and SET ASIDE. SO ORDERED.

DOCTRINES IN TAXATION
G.R. No. 149636 June 8, 2005
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BANK OF COMMERCE, respondent.
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R. SP No.
52706, affirming the ruling of the Court of Tax Appeals (CTA)2 in CTA Case No. 5415.
The facts of the case are undisputed.
In 1994 and 1995, the respondent Bank of Commerce derived passive income in the form of interests or
discounts from its investments in government securities and private commercial papers. On several
occasions during the said period, it paid 5% gross receipts tax on its income, as reflected in its quarterly
percentage tax returns. Included therein were the respondent bank’s passive income from the said
investments amounting to ₱85,384,254.51, which had already been subjected to a final tax of 20%.
Meanwhile, on January 30, 1996, the CTA rendered judgment in Asia Bank Corporation v. Commissioner of
Internal Revenue, CTA Case No. 4720, holding that the 20% final withholding tax on interest income from
banks does not form part of taxable gross receipts for Gross Receipts Tax (GRT) purposes. The CTA relied
on Section 4(e) of Revenue Regulations (Rev. Reg.) No. 12-80.
Relying on the said decision, the respondent bank filed an administrative claim for refund with the
Commissioner of Internal Revenue on July 19, 1996. It claimed that it had overpaid its gross receipts tax for
1994 to 1995 by ₱853,842.54, computed as follows:
Gross receipts subjected to

Final Tax Derived from
Passive Investment
₱85,384,254.51
x 20%
20% Final Tax Withheld 17,076,850.90

at Source x 5%
₱ 853,842.54
Before the Commissioner could resolve the claim, the respondent bank filed a petition for review with the
CTA, lest it be barred by the mandatory two-year prescriptive period under Section 230 of the Tax Code
(now Section 229 of the Tax Reform Act of 1997).
In his answer to the petition, the Commissioner interposed the following special and affirmative defenses:

…
5. The alleged refundable/creditable gross receipts taxes were collected and paid pursuant to law
and pertinent BIR implementing rules and regulations; hence, the same are not refundable.
Petitioner must prove that the income from which the refundable/creditable taxes were paid from,
were declared and included in its gross income during the taxable year under review;
6. Petitioner’s allegation that it erroneously and excessively paid its gross receipt tax during the year
under review does not ipso facto warrant the refund/credit. Petitioner must prove that the exclusions
claimed by it from its gross receipts must be an allowable exclusion under the Tax Code and its
pertinent implementing Rules and Regulations. Moreover, it must be supported by evidence;
7. Petitioner must likewise prove that the alleged refundable/creditable gross receipt taxes were
neither automatically applied as tax credit against its tax liability for the succeeding quarter/s of the
succeeding year nor included as creditable taxes declared and applied to the succeeding taxable
year/s;
8. Claims for tax refund/credit are construed in strictissimi juris against the taxpayer as it partakes
the nature of an exemption from tax and it is incumbent upon the petitioner to prove that it is entitled
thereto under the law. Failure on the part of the petitioner to prove the same is fatal to its claim for
tax refund/credit;
9. Furthermore, petitioner must prove that it has complied with the provision of Section 230 (now
Section 229) of the Tax Code, as amended.3
The CTA summarized the issues to be resolved as follows: whether or not the final income tax withheld
should form part of the gross receipts 4 of the taxpayer for GRT purposes; and whether or not the respondent
bank was entitled to a refund of ₱853,842.54.5
The respondent bank averred that for purposes of computing the 5% gross receipts tax, the final withholding
tax does not form part of gross receipts.6 On the other hand, while the Commissioner conceded that the
Court defined "gross receipts" as "all receipts of taxpayers excluding those which have been especially
earmarked by law or regulation for the government or some person other than the taxpayer" in CIR v. Manila
Jockey Club, Inc.,7 he claimed that such definition was applicable only to a proprietor of an amusement
place, not a banking institution which is an entirely different entity altogether. As such, according to the
Commissioner, the ruling of the Court in Manila Jockey Club was inapplicable.
In its Decision dated April 27, 1999, the CTA by a majority decision 8 partially granted the petition and ordered
that the amount of ₱355,258.99 be refunded to the respondent bank. The fallo of the decision reads:
WHEREFORE, in view of all the foregoing, respondent is hereby ORDERED to REFUND in favor of
petitioner Bank of Commerce the amount of ₱355,258.99 representing validly proven erroneously withheld
taxes from interest income derived from its investments in government securities for the years 1994 and
1995.9
In ruling for respondent bank, the CTA relied on the ruling of the Court in Manila Jockey Club, and held that
the term "gross receipts" excluded those which had been especially earmarked by law or regulation for the
government or persons other than the taxpayer. The CTA also cited its rulings in China Banking Corporation
v. CIR10 and Equitable Banking Corporation v. CIR.11

The CTA ratiocinated that the aforesaid amount of ₱355,258.99 represented the claim of the respondent
bank, which was filed within the two-year mandatory prescriptive period and was substantiated by material
and relevant evidence. The CTA applied Section 204(3) of the National Internal Revenue Code (NIRC). 12
The Commissioner then filed a petition for review under Rule 43 of the Rules of Court before the CA,
alleging that:
(1) There is no provision of law which excludes the 20% final income tax withheld under Section
50(a) of the Tax Code in the computation of the 5% gross receipts tax.
(2) The Tax Court erred in applying the ruling in Collector of Internal Revenue vs. Manila Jockey
Club (108 Phil. 821) in the resolution of the legal issues involved in the instant case. 13
The Commissioner reiterated his stand that the ruling of this Court in Manila Jockey Club, which was
affirmed in Visayan Cebu Terminal Co., Inc. v. Commissioner of Internal Revenue, 14 is not decisive. He
averred that the factual milieu in the said case is different, involving as it did the "wager fund." The
Commissioner further pointed out that in Manila Jockey Club, the Court ruled that the race track’s
commission did not form part of the gross receipts, and as such were not subjected to the 20% amusement
tax. On the other hand, the issue in Visayan Cebu Terminal was whether or not the gross receipts
corresponding to 28% of the total gross income of the service contractor delivered to the Bureau of Customs
formed part of the gross receipts was subject to 3% of contractor’s tax under Section 191 of the Tax Code. It
was further pointed out that the respondent bank, on the other hand, was a banking institution and not a
contractor. The petitioner insisted that the term "gross receipts" is self-evident; it includes all items of income
of the respondent bank regardless of whether or not the same were allocated or earmarked for a specific
purpose, to distinguish it from net receipts.
On August 14, 2001, the CA rendered judgment dismissing the petition. Citing Sections 51 and 58(A) of the
NIRC, Section 4(e) of Rev. Reg. No. 12-80 15 and the ruling of this Court in Manila Jockey Club, the CA held
that the ₱17,076,850.90 representing the final withholding tax derived from passive investments subjected to
final tax should not be construed as forming part of the gross receipts of the respondent bank upon which
the 5% gross receipts tax should be imposed. The CA declared that the final withholding tax in the amount of
₱17,768,509.00 was a trust fund for the government; hence, does not form part of the respondent’s gross
receipts. The legal ownership of the amount had already been vested in the government. Moreover, the CA
declared, the respondent did not reap any benefit from the said amount. As such, subjecting the said amount
to the 5% gross receipts tax would result in double taxation. The appellate court further cited CIR v. Tours
Specialists, Inc.,16 and declared that the ruling of the Court in Manila Jockey Club was decisive of the issue.
The Commissioner now assails the said decision before this Court, contending that:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE 20% FINAL WITHHOLDING TAX ON BANK’S
INTEREST INCOME DOES NOT FORM PART OF THE TAXABLE GROSS RECEIPTS IN COMPUTING
THE 5% GROSS RECEIPTS TAX (GRT, for brevity).17
The petitioner avers that the reliance by the CTA and the CA on Section 4(e) of Rev. Reg. No. 12-80 is
misplaced; the said provision merely authorizes the determination of the amount of gross receipts based on
the taxpayer’s method of accounting under then Section 37 (now Section 43) of the Tax Code. The petitioner
asserts that the said provision ceased to exist as of October 15, 1984, when Rev. Reg. No. 17-84 took
effect. The petitioner further points out that under paragraphs 7(a) and (c) of Rev. Reg. No. 17-84, interest
income of financial institutions (including banks) subject to withholding tax are included as part of the "gross
receipts" upon which the gross receipts tax is to be imposed. Citing the ruling of the CA in Commissioner of
Internal Revenue v. Asianbank Corporation18 (which likewise cited Bank of America NT & SA v. Court of
Appeals,19) the petitioner posits that in computing the 5% gross receipts tax, the income need not be actually

received. For income to form part of the taxable gross receipts, constructive receipt is enough. The petitioner
is, likewise, adamant in his claim that the final withholding tax from the respondent bank’s income forms part
of the taxable gross receipts for purposes of computing the 5% of gross receipts tax. The petitioner posits
that the ruling of this Court in Manila Jockey Club is not decisive of the issue in this case.
The petition is meritorious.
The issues in this case had been raised and resolved by this Court in China Banking Corporation v. Court of
Appeals,20 and CIR v. Solidbank Corporation.21
Section 27(D)(1) of the Tax Code reads:
(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 (7½%) of
such interest income.
On the other hand, Section 57(A)(B) of the Tax Code authorizes the withholding of final tax on certain
income creditable at source:
SEC. 57. Withholding of Tax at Source. –
(A) Withholding of Final Tax on Certain Incomes. – Subject to rules and regulations, the
Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the
filing of income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)
(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items
of income shall be withheld by payor-corporation and/or person and paid in the same manner and
subject to the same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. – The Secretary of Finance may, upon the
recommendation of the Commissioner, require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the
taxable year.
The tax deducted and withheld by withholding agents under the said provision shall be held as a special
fund in trust for the government until paid to the collecting officer. 22
Section 121 (formerly Section 119) of the Tax Code provides that a tax on gross receipts derived from
sources within the Philippines by all banks and non-bank financial intermediaries shall be computed in
accordance with the schedules therein:

(a) On interest, commissions and discounts from lending activities as well as income
from financial leasing, on the basis of remaining maturities of instruments from which
such receipts are derived:
Short-term maturity (not in excess of two (2) years) 5%

Medium-term maturity (over two (2) years but not exceeding four (4) years) 3%
Long-term maturity –
(1) Over four (4) years but not exceeding seven (7) years 1%
(2) Over seven (7) years 0%
(b) On dividends 0%
(c) On royalties, rentals of property, real or personal, profits from exchange and
all other items treated as gross income under Section 32 of this Code
5%
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pre-
termination, then the maturity period shall be reckoned to end as of the date of pre-termination for purposes
of classifying the transaction as short, medium or long-term and the correct rate of tax shall be applied
accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on
persons performing similar banking activities.
The Tax Code does not define "gross receipts." Absent any statutory definition, the Bureau of Internal
Revenue has applied the term in its plain and ordinary meaning.23
In National City Bank v. CIR,24 the CTA held that gross receipts should be interpreted as the whole amount
received as interest, without deductions; otherwise, if deductions were to be made from gross receipts, it
would be considered as "net receipts." The CTA changed course, however, when it promulgated its decision
in Asia Bank; it applied Section 4(e) of Rev. Reg. No. 12-80 and the ruling of this Court in Manila Jockey
Club, holding that the 20% final withholding tax on the petitioner bank’s interest income should not form part
of its taxable gross receipts, since the final tax was not actually received by the petitioner bank but went to
the coffers of the government.
The Court agrees with the contention of the petitioner that the appellate court’s reliance on Rev. Reg. No.
12-80, the rulings of the CTA in Asia Bank, and of this Court in Manila Jockey Club has no legal and factual
bases. Indeed, the Court ruled in China Banking Corporation v. Court of Appeals25 that:
… In Far East Bank & Trust Co. v. Commissioner and Standard Chartered Bank v. Commissioner, both
promulgated on 16 November 2001, the tax court ruled that the final withholding tax forms part of the bank’s
gross receipts in computing the gross receipts tax. The tax court held that Section 4(e) of Revenue
Regulations No. 12-80 did not prescribe the computation of the amount of gross receipts but merely
authorized "the determination of the amount of gross receipts on the basis of the method of accounting
being used by the taxpayer."

The word "gross" must be used in its plain and ordinary meaning. It is defined as "whole, entire, total,
without deduction." A common definition is "without deduction." 26 "Gross" is also defined as "taking in the
whole; having no deduction or abatement; whole, total as opposed to a sum consisting of separate or
specified parts."27 Gross is the antithesis of net. 28 Indeed, in China Banking Corporation v. Court of
Appeals,29 the Court defined the term in this wise:
As commonly understood, the term "gross receipts" means the entire receipts without any deduction.
Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any
deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless the
law itself makes an exception. As explained by the Supreme Court of Pennsylvania in Commonwealth of
Pennsylvania v. Koppers Company, Inc., -
Highly refined and technical tax concepts have been developed by the accountant and legal technician
primarily because of the impact of federal income tax legislation. However, this in no way should affect or
control the normal usage of words in the construction of our statutes; and we see nothing that would require
us not to include the proceeds here in question in the gross receipts allocation unless statutorily such
inclusion is prohibited. Under the ordinary basic methods of handling accounts, the term gross receipts, in
the absence of any statutory definition of the term, must be taken to include the whole total gross receipts
without any deductions, x x x. [Citations omitted] (Emphasis supplied)"
Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:
The word "gross" appearing in the term "gross receipts," as used in the ordinance, must have been and was
there used as the direct antithesis of the word "net." In its usual and ordinary meaning "gross receipts" of a
business is the whole and entire amount of the receipts without deduction, x x x. On the contrary, "net
receipts" usually are the receipts which remain after deductions are made from the gross amount thereof of
the expenses and cost of doing business, including fixed charges and depreciation. Gross receipts become
net receipts after certain proper deductions are made from the gross. And in the use of the words "gross
receipts," the instant ordinance, of course, precluded plaintiff from first deducting its costs and expenses of
doing business, etc., in arriving at the higher base figure upon which it must pay the 5% tax under this
ordinance. (Emphasis supplied)
Absent a statutory definition, the term "gross receipts" is understood in its plain and ordinary meaning.
Words in a statute are taken in their usual and familiar signification, with due regard to their general and
popular use. The Supreme Court of Hawaii held in Bishop Trust Company v. Burns that -
xxx It is fundamental that in construing or interpreting a statute, in order to ascertain the intent of the
legislature, the language used therein is to be taken in the generally accepted and usual sense. Courts will
presume that the words in a statute were used to express their meaning in common usage. This principle is
equally applicable to a tax statute. [Citations omitted] (Emphasis supplied)
The Court, likewise, declared that Section 121 of the Tax Code expressly subjects interest income of banks
to the gross receipts tax. "Such express inclusion of interest income in taxable gross receipts creates
a presumption that the entire amount of the interest income, without any deduction, is subject to the gross
receipts tax. Indeed, there is a presumption that receipts of a person engaging in business are subject to the
gross receipts tax. Such presumption may only be overcome by pointing to a specific provision of law
allowing such deduction of the final withholding tax from the taxable gross receipts, failing which, the claim
of deduction has no leg to stand on. Moreover, where such an exception is claimed, the statute is construed
strictly in favor of the taxing authority. The exemption must be clearly and unambiguously expressed in the
statute, and must be clearly established by the taxpayer claiming the right thereto. Thus, taxation is the rule
and the claimant must show that his demand is within the letter as well as the spirit of the law." 30

In this case, there is no law which allows the deduction of 20% final tax from the respondent bank’s interest
income for the computation of the 5% gross receipts tax. On the other hand, Section 8(a)(c), Rev. Reg. No.
17-84 provides that interest earned on Philippine bank deposits and yield from deposit substitutes are
included as part of the tax base upon which the gross receipts tax is imposed. Such earned interest refers to
the gross interest without deduction since the regulations do not provide for any such deduction. The gross
interest, without deduction, is the amount the borrower pays, and the income the lender earns, for the use by
the borrower of the lender’s money. The amount of the final tax plainly covers for the interest earned and is
consequently part of the taxable gross receipt of the lender. 31
The bare fact that the final withholding tax is a special trust fund belonging to the government and that the
respondent bank did not benefit from it while in custody of the borrower does not justify its exclusion from
the computation of interest income. Such final withholding tax covers for the respondent bank’s income and
is the amount to be used to pay its tax liability to the government. This tax, along with the creditable
withholding tax, constitutes payment which would extinguish the respondent bank’s obligation to the
government. The bank can only pay the money it owns, or the money it is authorized to pay. 32
In the same vein, the respondent bank’s reliance on Section 4(e) of Rev. Reg. No. 12-80 and the ruling of
the CTA in Asia Bank is misplaced. The Court’s discussion in China Banking Corporation33 is instructive on
this score:
CBC also relies on the Tax Court’s ruling in Asia Bank that Section 4(e) of Revenue Regulations No. 12-80
authorizes the exclusion of the final tax from the bank’s taxable gross receipts. Section 4(e) provides that:
Sec. 4. x x x
(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-
bank financial intermediaries not performing quasi-banking functions. - The rates of taxes to be imposed on
the gross receipts of such financial institutions shall be based on all items of income actually received. Mere
accrual shall not be considered, but once payment is received on such accrual or in cases of prepayment,
then the amount actually received shall be included in the tax base of such financial institutions, as provided
hereunder: x x x. (Emphasis supplied by Tax Court)
Section 4(e) states that the gross receipts "shall be based on all items of income actually received." The tax
court in Asia Bank concluded that "it is but logical to infer that the final tax, not having been received by
petitioner but instead went to the coffers of the government, should no longer form part of its gross receipts
for the purpose of computing the GRT."
The Tax Court erred glaringly in interpreting Section 4(e) of Revenue Regulations No. 12-80. Income may be
taxable either at the time of its actual receipt or its accrual, depending on the accounting method of the
taxpayer. Section 4(e) merely provides for an exception to the rule, making interest income taxable for gross
receipts tax purposes only upon actual receipt. Interest is accrued, and not actually received, when the
interest is due and demandable but the borrower has not actually paid and remitted the interest, whether
physically or constructively. Section 4(e) does not exclude accrued interest income from gross receipts but
merely postpones its inclusion until actual payment of the interest to the lending bank. This is clear when
Section 4(e) states that "[m]ere accrual shall not be considered, but once payment is received on such
accrual or in case of prepayment, then the amount actually received shall be included in the tax base of
such financial institutions x x x."
Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be physical
receipt or constructive receipt. When the depository bank withholds the final tax to pay the tax liability of the
lending bank, there is prior to the withholding a constructive receipt by the lending bank of the amount
withheld. From the amount constructively received by the lending bank, the depository bank deducts the

final withholding tax and remits it to the government for the account of the lending bank. Thus, the interest
income actually received by the lending bank, both physically and constructively, is the net interest plus the
amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies that the amount of the tax
withheld comes from the income earned by the taxpayer. Since the amount of the tax withheld constitutes
income earned by the taxpayer, then that amount manifestly forms part of the taxpayer’s gross receipts.
Because the amount withheld belongs to the taxpayer, he can transfer its ownership to the government in
payment of his tax liability. The amount withheld indubitably comes from income of the taxpayer, and thus
forms part of his gross receipts.
The Court went on to explain in that case that far from supporting the petitioner’s contention, its ruling
in Manila Jockey Club, in fact even buttressed the contention of the Commissioner. Thus:
CBC cites Collector of Internal Revenue v. Manila Jockey Club as authority that the final withholding tax on
interest income does not form part of a bank’s gross receipts because the final tax is "earmarked by
regulation" for the government. CBC’s reliance on the Manila Jockey Club is misplaced. In this case, the
Court stated that Republic Act No. 309 and Executive Order No. 320 apportioned the total amount of the
bets in horse races as follows:
87 ½% as dividends to holders of winning tickets, 12 ½% as "commission" of the Manila Jockey Club, of

which ½% was assigned to the Board of Races and 5% was distributed as prizes for owners of winning
horses and authorized bonuses for jockeys.
A subsequent law, Republic Act No. 1933 ("RA No. 1933"), amended the sharing by ordering the distribution
of the bets as follows:
Sec. 19. Distribution of receipts. – The total wager funds or gross receipts from the sale of pari-mutuel
tickets shall be apportioned as follows: eighty-seven and one-half per centum shall be distributed in the form
of dividends among the holders of win, place and show horses, as the case may be, in the regular races; six
and one-half per centum shall be set aside as the commission of the person, racetrack, racing club, or any
other entity conducting the races; five and one-half per centum shall be set aside for the payment of stakes
or prizes for win, place and show horses and authorized bonuses for jockeys; and one-half per centum shall
be paid to a special fund to be used by the Games and Amusements Board to cover its expenses and such
other purposes authorized under this Act. xxx. (Emphasis supplied)
Under the "distribution of receipts" expressly mandated in Section 19 of RA No. 1933, the gross receipts
"apportioned" to Manila Jockey Club referred only to its own 6 ½% commission. There is no dispute that the
5 ½% share of the horse-owners and jockeys, and the ½% share of the Games and Amusements Board, do
not form part of Manila Jockey Club’s gross receipts. RA No. 1933 took effect on 22 June 1957, three years
before the Court decided Manila Jockey Club on 30 June 1960.
Even under the earlier law, Manila Jockey Club did not own the entire 12 ½% commission. Manila Jockey
Club owned, and could keep and use, only 7% of the total bets. Manila Jockey Club merely held in trust the
balance of 5 ½% for the benefit of the Board of Races and the winning horse-owners and jockeys, the real
owners of the 5 1/2 % share.
The Court in Manila Jockey Club quoted with approval the following Opinion of the Secretary of Justice
made prior to RA No. 1933:

There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] of the bets registered by the
Totalizer. This portion represents its share or commission in the total amount of money it handles and goes
to the funds thereof as its own property which it may legally disburse for its own purposes. The 5% [sic]
does not belong to the club. It is merely held in trust for distribution as prizes to the owners of winning
horses. It is destined for no other object than the payment of prizes and the club cannot otherwise
appropriate this portion without incurring liability to the owners of winning horses. It can not be considered as
an item of expense because the sum used for the payment of prizes is not taken from the funds of the club
but from a certain portion of the total bets especially earmarked for that purpose. (Emphasis supplied)
Consequently, the Court ruled that the 5 ½% balance of the commission, not being owned by Manila Jockey
Club, did not form part of its gross receipts for purposes of the amusement tax. Manila Jockey Club correctly
paid the amusement tax based only on its own 7% commission under RA No. 309 and Executive Order No.
320.
Manila Jockey Club does not support CBC’s contention but rather the Commissioner’s position. The Court
ruled in Manila Jockey Club that receipts not owned by the Manila Jockey Club but merely held by it in trust
did not form part of Manila Jockey Club’s gross receipts. Conversely, receipts owned by the Manila Jockey
Club would form part of its gross receipts.34
We reverse the ruling of the CA that subjecting the Final Withholding Tax (FWT) to the 5% of gross receipts
tax would result in double taxation. In CIR v. Solidbank Corporation,35 we ruled, thus:
We have repeatedly said that the two taxes, subject of this litigation, are different from each other. The basis
of their imposition may be the same, but their natures are different, thus leading us to a final point. Is there
double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it should be taxed only once; that is, "xxx
taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer
is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes
must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period; and they must be of the same kind or character.
First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT
is the passive income generated in the form of interest on deposits and yield on deposit substitutes,
while the subject matter of the GRT is the privilege of engaging in the business of banking.
A tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather
than a property tax. It is not an income tax, unlike the FWT. In fact, we have already held that one
can be taxed for engaging in business and further taxed differently for the income derived therefrom.
Akin to our ruling in Velilla v. Posadas, these two taxes are entirely distinct and are assessed under
different provisions.
Second, although both taxes are national in scope because they are imposed by the same taxing
authority – the national government under the Tax Code – and operate within the same Philippine
jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The
FWT is deducted and withheld as soon as the income is earned, and is paid after
every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor
withheld, but is paid only after every taxable quarter in which it is earned.

Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by the same taxing authority, within
the same jurisdiction, for the same purpose, in different taxing periods, some of the property in the territory.
Subjecting interest income to a 20% FWT and including it in the computation of the 5% GRT is clearly not
double taxation.
IN LIGHT OF THE FOREGOING, the petition is GRANTED. The decision of the Court of Appeals in CA-G.R.
SP No. 52706 and that of the Court of Tax Appeals in CTA Case No. 5415 are SET ASIDE and REVERSED.
The CTA is hereby ORDERED to DISMISS the petition of respondent Bank of Commerce. No costs. SO
ORDERED.
G.R. No. L-22814 August 28, 1968
PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD,
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF BUTUAN, defendants-appellees.
CONCEPCION, C.J.:
Direct appeal to this Court, from a decision of the Court of First Instance of Agusan, dismissing plaintiff's
complaint, with costs.
Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with offices and principal
place of business in Quezon City. The defendants are the City of Butuan, its City Mayor, the members of its
municipal board and its City Treasurer. Plaintiff — seeks to recover the sums paid by it to the City of Butuan
— hereinafter referred to as the City and collected by the latter, pursuant to its Municipal Ordinance No. 110,
as amended by Municipal Ordinance No. 122, both series of 1960, which plaintiff assails as null and void,
and to prevent the enforcement thereof. Both parties submitted the case for decision in the lower court upon
a stipulation to the effect:
1. That plaintiff's warehouse in the City of Butuan serves as a storage for its products the "Pepsi-
Cola" soft drinks for sale to customers in the City of Butuan and all the municipalities in the Province
of Agusan. These "Pepsi-Cola Cola" soft drinks are bottled in Cebu City and shipped to the Butuan
City warehouse of plaintiff for distribution and sale in the City of Butuan and all municipalities of
Agusan. .
2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was subsequently
amended by Ordinance No. 122 and effective November 28, 1960. A copy of Ordinance No. 110,
Series of 1960 and Ordinance No. 122 are incorporated herein as Exhibits "A" and "B", respectively.
3. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc., of P0.10 per
case of 24 bottles of Pepsi-Cola and the plaintiff paid under protest the amount of P4,926.63 from
August 16 to December 31, 1960 and the amount of P9,250.40 from January 1 to July 30, 1961.
4. That the plaintiff filed the foregoing complaint for the recovery of the total amount of P14,177.03
paid under protest and those that if may later on pay until the termination of this case on the ground

that Ordinance No. 110 as amended of the City of Butuan is illegal, that the tax imposed is excessive
and that it is unconstitutional.
5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan City, has prepared
a form to be accomplished by the plaintiff for the computation of the tax. A copy of the form is
enclosed herewith as Exhibit "C".
6. That the Profit and Loss Statement of the plaintiff for the period from January 1, 1961 to July 30,
1961 of its warehouse in Butuan City is incorporated herein as Exhibits "D" to "D-1" to "D-5". In this
Profit and Loss Statement, the defendants claim that the plaintiff is not entitled to a depreciation of
P3,052.63 but only P1,202.55 in which case the profit of plaintiff will be increased from P1,254.44 to
P3,104.52. The plaintiff differs only on the claim of depreciation which the company claims to be
P3,052.62. This is in accordance with the findings of the representative of the undersigned City
Attorney who verified the records of the plaintiff.
7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24 bottles was increased
to P1.92 which price is uniform throughout the Philippines. Said increase was made due to the
increase in the production cost of its manufacture.
8. That the parties reserve the right to submit arguments on the constitutionality and illegality of
Ordinance No. 110, as amended of the City of Butuan in their respective memoranda.
xxx xxx xxx 1äwphï1.ñët
Section 1 of said Ordinance No. 110, as amended, states what products are "liquors", within the purview
thereof. Section 2 provides for the payment by "any agent and/or consignee" of any dealer "engaged in
selling liquors, imported or local, in the City," of taxes at specified rates. Section 3 prescribes a tax of P0.10
per case of 24 bottles of the soft drinks and carbonated beverages therein named, and "all other soft drinks
or carbonated drinks." Section 3-A, defines the meaning of the term "consignee or agent" for purposes of the
ordinance. Section 4 provides that said taxes "shall be paid at the end of every calendar month." Pursuant to
Section 5, the taxes "shall be based and computed from the cargo manifest or bill of lading or any other
record showing the number of cases of soft drinks, liquors or all other soft drinks or carbonated drinks
received within the month." Sections 6, 7 and 8 specify the surcharge to be added for failure to pay the taxes
within the period prescribed and the penalties imposable for "deliberate and willful refusal to pay the tax
mentioned in Sections 2 and 3" or for failure "to furnish the office of the City Treasurer a copy of the bill of
lading or cargo manifest or record of soft drinks, liquors or carbonated drinks for sale in the City." Section 9
makes the ordinance applicable to soft drinks, liquors or carbonated drinks "received outside" but "sold
within" the City. Section 10 of the ordinance provides that the revenue derived therefrom "shall be alloted as
follows: 40% for Roads and Bridges Fund; 40% for the General Fund and 20% for the School Fund."
Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of the nature of an
import tax; (2) it amounts to double taxation; (3) it is excessive, oppressive and confiscatory; (4) it is highly
unjust and discriminatory; and (5) section 2 of Republic Act No. 2264, upon the authority of which it was
enacted, is an unconstitutional delegation of legislative powers.
The second and last objections are manifestly devoid of merit. Indeed — independently of whether or not the
tax in question, when considered in relation to the sales tax prescribed by Acts of Congress, amounts to
double taxation, on which we need not and do not express any opinion - double taxation, in general, is not
forbidden by our fundamental law. We have not adopted, as part thereof, the injunction against double
taxation found in the Constitution of the United States and of some States of the Union. 1 Then, again, the
general principle against delegation of legislative powers, in consequence of the theory of separation of

powers2 is subject to one well-established exception, namely: legislative powers may be delegated to local
governments — to which said theory does not apply3 — in respect of matters of local concern.
The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of soft drinks or
carbonated drinks — in the production and sale of which plaintiff is engaged — or less than P0.0042 per
bottle, is manifestly too small to be excessive, oppressive, or confiscatory.
The first and the fourth objections merit, however, serious consideration. In this connection, it is noteworthy
that the tax prescribed in section 3 of Ordinance No. 110, as originally approved, was imposed upon dealers
"engaged in selling" soft drinks or carbonated drinks. Thus, it would seem that the intent was then to levy a
tax upon the sale of said merchandise. As amended by Ordinance No. 122, the tax is, however, imposed
only upon "any agent and/or consignee of any person, association, partnership, company or corporation
engaged in selling ... soft drinks or carbonated drinks." And, pursuant to section 3-A, which was inserted by
said Ordinance No. 122:
... — Definition of the Term Consignee or Agent. — For purposes of this Ordinance, a consignee of
agent shall mean any person, association, partnership, company or corporation who acts in the
place of another by authority from him or one entrusted with the business of another or to whom is
consigned or shipped no less than 1,000 cases of hard liquors or soft drinks every month for resale,
either retail or wholesale.
As a consequence, merchants engaged in the sale of soft drink or carbonated drinks, are not subject to the
tax, unless they are agents and/or consignees of another dealer, who, in the very nature of things, must be
one engaged in business outside the City. Besides, the tax would not be applicable to such agent and/or
consignee, if less than 1,000 cases of soft drinks are consigned or shipped to him every month. When we
consider, also, that the tax "shall be based and computed from the cargo manifest or bill of lading ... showing
the number of cases" — not sold — but "received" by the taxpayer, the intention to limit the application of the
ordinance to soft drinks and carbonated drinks brought into the City from outside thereof becomes apparent.
Viewed from this angle, the tax partakes of the nature of an import duty, which is beyond defendant's
authority to impose by express provision of law.4
Even however, if the burden in question were regarded as a tax on the sale of said beverages, it would still
be invalid, as discriminatory, and hence, violative of the uniformity required by the Constitution and the law
therefor, since only sales by "agents or consignees" of outside dealers would be subject to the tax. Sales by
local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales, and
even if the same exceeded those made by said agents or consignees of producers or merchants established
outside the City of Butuan, would be exempt from the disputed tax.
It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity or
equality under all circumstances, or negate the authority to classify the objects of taxation. 5 The classification
made in the exercise of this authority, to be valid, must, however, be reasonable 6 and this requirement is not
deemed satisfied unless: (1) it is based upon substantial distinctions which make real differences; (2) these
are germane to the purpose of the legislation or ordinance; (3) the classification applies, not only to present
conditions, but, also, to future conditions substantially identical to those of the present; and (4) the
classification applies equally all those who belong to the same class. 7
These conditions are not fully met by the ordinance in question. 8 Indeed, if its purpose were merely to levy a
burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales thereof by
sealers other than agents or consignees of producers or merchants established outside the City of Butuan
should be exempt from the tax.

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

G.R. No. 148191 November 25, 2003

vs.
SOLIDBANK CORPORATION, respondent.
PANGANIBAN, J.:
Under the Tax Code, the earnings of banks from "passive" income are subject to a twenty percent final
withholding tax (20% FWT). This tax is withheld at source and is thus not actually and physically received by
the banks, because it is paid directly to the government by the entities from which the banks derived the
income. Apart from the 20% FWT, banks are also subject to a five percent gross receipts tax (5% GRT)
which is imposed by the Tax Code on their gross receipts, including the "passive" income.
Since the 20% FWT is constructively received by the banks and forms part of their gross receipts or
earnings, it follows that it is subject to the 5% GRT. After all, the amount withheld is paid to the government
on their behalf, in satisfaction of their withholding taxes. That they do not actually receive the amount does
not alter the fact that it is remitted for their benefit in satisfaction of their tax obligations.
Stated otherwise, the fact is that if there were no withholding tax system in place in this country, this 20
percent portion of the "passive" income of banks would actually be paid to the banks and then remitted by
them to the government in payment of their income tax. The institution of the withholding tax system does
not alter the fact that the 20 percent portion of their "passive" income constitutes part of their actual
earnings, except that it is paid directly to the government on their behalf in satisfaction of the 20 percent final
income tax due on their "passive" incomes.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to annul the July 18, 2000
1
Decision and the May 8, 2001 Resolution of the Court of Appeals (CA) in CA-GR SP No. 54599. The
2 3 4
decretal portion of the assailed Decision reads as follows:
"WHEREFORE, we AFFIRM in toto the assailed decision and resolution of the Court of Tax Appeals." 5
The challenged Resolution denied petitioner’s Motion for Reconsideration.
The Facts
Quoting petitioner, the CA summarized the facts of this case as follows:

6
"For the calendar year 1995, [respondent] seasonably filed its Quarterly Percentage Tax Returns reflecting
gross receipts (pertaining to 5% [Gross Receipts Tax] rate) in the total amount of ₱1,474,691,693.44 with
corresponding gross receipts tax payments in the sum of ₱73,734,584.60, broken down as follows:
Period Covered Gross Receipts Gross Receipts Tax

January to March 1994 ₱ 188,406,061.95 ₱ 9,420,303.10
April to June 1994 370,913,832.70 18,545,691.63
July to September 1994 481,501,838.98 24,075,091.95

October to December 1994 433,869,959.81 21,693,497.98
Total ₱ 1,474,691,693.44 ₱ 73,734,584.60
"[Respondent] alleges that the total gross receipts in the amount of ₱1,474,691,693.44 included the sum of
₱350,807,875.15 representing gross receipts from passive income which was already subjected to 20% final
withholding tax.
"On January 30, 1996, [the Court of Tax Appeals] rendered a decision in CTA Case No. 4720 entitled Asian
Bank Corporation vs. Commissioner of Internal Revenue[,] wherein it was held that the 20% final withholding
tax on [a] bank’s interest income should not form part of its taxable gross receipts for purposes of computing
the gross receipts tax.
"On June 19, 1997, on the strength of the aforementioned decision, [respondent] filed with the Bureau of
Internal Revenue [BIR] a letter-request for the refund or issuance of [a] tax credit certificate in the aggregate
amount of ₱3,508,078.75, representing allegedly overpaid gross receipts tax for the year 1995, computed as
follows:
Gross Receipts Subjected to the Final Tax

Derived from Passive [Income] ₱ 350,807,875.15
Multiply by Final Tax rate 20%
20% Final Tax Withheld at Source ₱ 70,161,575.03
Multiply by [Gross Receipts Tax] rate 5%
Overpaid [Gross Receipts Tax] ₱ 3,508,078.75
"Without waiting for an action from the [petitioner], [respondent] on the same day filed [a] petition for review
[with the Court of Tax Appeals] in order to toll the running of the two-year prescriptive period to judicially
claim for the refund of [any] overpaid internal revenue tax[,] pursuant to Section 230 [now 229] of the Tax
Code [also ‘National Internal Revenue Code’] x x x.
xxx xxx xxx
"After trial on the merits, the [Court of Tax Appeals], on August 6, 1999, rendered its decision ordering x x x
petitioner to refund in favor of x x x respondent the reduced amount of ₱1,555,749.65 as overpaid [gross
receipts tax] for the year 1995. The legal issue x x x was resolved by the [Court of Tax Appeals], with Hon.
Amancio Q. Saga dissenting, on the strength of its earlier pronouncement in x x x Asian Bank Corporation
vs. Commissioner of Internal Revenue x x x, wherein it was held that the 20% [final withholding tax] on [a]
bank’s interest income should not form part of its taxable gross receipts for purposes of computing the
[gross receipts tax]." 7
Ruling of the CA
The CA held that the 20% FWT on a bank’s interest income did not form part of the taxable gross receipts in
computing the 5% GRT, because the FWT was not actually received by the bank but was directly remitted to
the government. The appellate court curtly said that while the Tax Code "does not specifically state any
exemption, x x x the statute must receive a sensible construction such as will give effect to the legislative
intention, and so as to avoid an unjust or absurd conclusion." 8
Hence, this appeal. 9

Issue
Petitioner raises this lone issue for our consideration:
"Whether or not the 20% final withholding tax on [a] bank’s interest income forms part of the taxable gross
receipts in computing the 5% gross receipts tax." 10
The Court’s Ruling
The Petition is meritorious.
Sole Issue:
Whether the 20% FWT Forms Part

of the Taxable Gross Receipts
Petitioner claims that although the 20% FWT on respondent’s interest income was not actually received by
respondent because it was remitted directly to the government, the fact that the amount redounded to the
bank’s benefit makes it part of the taxable gross receipts in computing the 5% GRT. Respondent, on the
other hand, maintains that the CA correctly ruled otherwise.
We agree with petitioner. In fact, the same issue has been raised recently in China Banking Corporation v.
CA, where this Court held that the amount of interest income withheld in payment of the 20% FWT forms
11
part of gross receipts in computing for the GRT on banks.
The FWT and the GRT:
Two Different Taxes
The 5% GRT is imposed by Section 119 of the Tax Code, which provides:
12 13
"SEC. 119. Tax on banks and non-bank financial intermediaries. – There shall be collected a tax on gross
receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in
accordance with the following schedule:
"(a) On interest, commissions and discounts from lending activities as well as income from financial leasing,
on the basis of remaining maturities of instruments from which such receipts are derived.
Short-term maturity not in excess of two (2) years……………………5%
Medium-term maturity – over two (2) years
but not exceeding four (4) years………………………………….…...3%
Long-term maturity:
(i) Over four (4) years but not exceeding
seven (7) years……………………………………………1%

(ii) Over seven (7) years………………………………….….0%
"(b) On dividends……………………………….……..0%
"(c) On royalties, rentals of property, real or personal, profits from exchange and all other items
treated as gross income under Section 28 of 14
this
Code………....................................................................5%
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru
pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for
purposes of classifying the transaction as short, medium or long term and the correct rate of tax shall be
applied accordingly.
"Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on
persons performing similar banking activities."
The 5% GRT is included under "Title V. Other Percentage Taxes" of the Tax Code and is not subject to
15
withholding. The banks and non-bank financial intermediaries liable therefor shall, under Section 125(a)
(1), file quarterly returns on the amount of gross receipts and pay the taxes due thereon within twenty
16
(20) days after the end of each taxable quarter.

17
The 20% FWT, on the other hand, falls under Section 24(e)(1) of "Title II. Tax on Income." It is a tax on
18 19
passive income, deducted and withheld at source by the payor-corporation and/or person as withholding
agent pursuant to Section 50, and paid in the same manner and subject to the same conditions as provided
20
for in Section 51. 21
A perusal of these provisions clearly shows that two types of taxes are involved in the present controversy:
(1) the GRT, which is a percentage tax; and (2) the FWT, which is an income tax. As a bank, petitioner is
covered by both taxes.
A percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value
in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any person
engaged in the sale of services. It is not subject to withholding.
22
An income tax, on the other hand, is a national tax imposed on the net or the gross income realized in a
taxable year. It is subject to withholding.
23
In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed; the payor, a
separate entity, acts as no more than an agent of the government for the collection of the tax in order to
ensure its payment. Obviously, this amount that is used to settle the tax liability is deemed sourced from the
proceeds constitutive of the tax base. These proceeds are either actual or constructive. Both parties herein
24
agree that there is no actual receipt by the bank of the amount withheld. What needs to be determined is if
there is constructive receipt thereof. Since the payee -- not the payor -- is the real taxpayer, the rule on
constructive receipt can be easily rationalized, if not made clearly manifest.25
Constructive Receipt
Versus Actual Receipt
Applying Section 7 of Revenue Regulations (RR) No. 17-84, petitioner contends that there is constructive
26
receipt of the interest on deposits and yield on deposit substitutes. Respondent, however, claims that even
27
if there is, it is Section 4(e) of RR 12-80 that nevertheless governs the situation.
28

Section 7 of RR 17-84 states:
"SEC. 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. –
‘(a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes
subjected to the withholding taxes in accordance with these regulations need not be included in the
gross income in computing the depositor’s/investor’s income tax liability in accordance with the
provision of Section 29(b), (c) and (d) of the National Internal Revenue Code, as amended.
29 30
‘(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for
purposes of imposing the withholding taxes in accordance with these regulations shall be allowed as
interest expense deductible for purposes of computing taxable net income of the payor.
‘(c) If the recipient of the above-mentioned items of income are financial institutions, the same shall
be included as part of the tax base upon which the gross receipt[s] tax is imposed.’"
Section 4(e) of RR 12-80, on the other hand, states that the tax rates to be imposed on the gross receipts of
banks, non-bank financial intermediaries, financing companies, and other non-bank financial intermediaries
not performing quasi-banking activities shall be based on all items of income actually received. This
provision reads:
"SEC. 4. x x x x x x x x x
"(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-
bank financial intermediaries not performing quasi-banking activities. – The rates of tax to be imposed on the
gross receipts of such financial institutions shall be based on all items of income actually received. Mere
accrual shall not be considered, but once payment is received on such accrual or in cases of prepayment,
then the amount actually received shall be included in the tax base of such financial institutions, as provided
hereunder x x x."
Respondent argues that the above-quoted provision is plain and clear: since there is no actual receipt, the
FWT is not to be included in the tax base for computing the GRT. There is supposedly no pecuniary benefit
or advantage accruing to the bank from the FWT, because the income is subjected to a tax burden
immediately upon receipt through the withholding process. Moreover, the earlier RR 12-80 covered matters
not falling under the later RR 17-84. 31
We are not persuaded.
By analogy, we apply to the receipt of income the rules on actual and constructive possession provided in
Articles 531 and 532 of our Civil Code.
Under Article 531: 32
"Possession is acquired by the material occupation of a thing or the exercise of a right, or by the fact that it is
subject to the action of our will, or by the proper acts and legal formalities established for acquiring such
right."
Article 532 states:
"Possession may be acquired by the same person who is to enjoy it, by his legal representative, by his
agent, or by any person without any power whatever; but in the last case, the possession shall not be

considered as acquired until the person in whose name the act of possession was executed has ratified the
same, without prejudice to the juridical consequences of negotiorum gestio in a proper case." 33
The last means of acquiring possession under Article 531 refers to juridical acts -- the acquisition of
possession by sufficient title – to which the law gives the force of acts of possession. Respondent argues
34
that only items of income actually received should be included in its gross receipts. It claims that since the
amount had already been withheld at source, it did not have actual receipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is
through the proper acts and legal formalities established therefor. The withholding process is one such act.
There may not be actual receipt of the income withheld; however, as provided for in Article 532, possession
by any person without any power whatsoever shall be considered as acquired when ratified by the person in
whose name the act of possession is executed.
In our withholding tax system, possession is acquired by the payor as the withholding agent of the
government, because the taxpayer ratifies the very act of possession for the government. There is thus
constructive receipt. The processes of bookkeeping and accounting for interest on deposits and yield on
deposit substitutes that are subjected to FWT are indeed -- for legal purposes -- tantamount to delivery,
receipt or remittance. Besides, respondent itself admits that its income is subjected to a tax burden
35
immediately upon "receipt," although it claims that it derives no pecuniary benefit or advantage through the
withholding process. There being constructive receipt of such income -- part of which is withheld -- RR 17-84
applies, and that income is included as part of the tax base upon which the GRT is imposed.
RR 12-80 Superseded by RR 17-84
We now come to the effect of the revenue regulations on interest income constructively received.
In general, rules and regulations issued by administrative or executive officers pursuant to the procedure or
authority conferred by law upon the administrative agency have the force and effect, or partake of the
nature, of a statute. The reason is that statutes express the policies, purposes, objectives, remedies and
36
sanctions intended by the legislature in general terms. The details and manner of carrying them out are
oftentimes left to the administrative agency entrusted with their enforcement.
In the present case, it is the finance secretary who promulgates the revenue regulations, upon
recommendation of the BIR commissioner. These regulations are the consequences of a delegated power to
issue legal provisions that have the effect of law.37
A revenue regulation is binding on the courts as long as the procedure fixed for its promulgation is followed.
Even if the courts may not be in agreement with its stated policy or innate wisdom, it is nonetheless valid,
provided that its scope is within the statutory authority or standard granted by the legislature. Specifically,
38
the regulation must (1) be germane to the object and purpose of the law; (2) not contradict, but conform to,
39
the standards the law prescribes; and (3) be issued for the sole purpose of carrying into effect the general
40
provisions of our tax laws. 41
In the present case, there is no question about the regularity in the performance of official duty. What needs
to be determined is whether RR 12-80 has been repealed by RR 17-84.
A repeal may be express or implied. It is express when there is a declaration in a regulation -- usually in its
repealing clause -- that another regulation, identified by its number or title, is repealed. All others are implied
repeals. An example of the latter is a general provision that predicates the intended repeal on a substantial
42
conflict between the existing and the prior regulations. 43

As stated in Section 11 of RR 17-84, all regulations, rules, orders or portions thereof that are inconsistent
with the provisions of the said RR are thereby repealed. This declaration proceeds on the premise that RR
17-84 clearly reveals such an intention on the part of the Department of Finance. Otherwise, later RRs are to
be construed as a continuation of, and not a substitute for, earlier RRs; and will continue to speak, so far as
the subject matter is the same, from the time of the first promulgation. 44
There are two well-settled categories of implied repeals: (1) in case the provisions are in irreconcilable
conflict, the later regulation, to the extent of the conflict, constitutes an implied repeal of an earlier one; and
(2) if the later regulation covers the whole subject of an earlier one and is clearly intended as a substitute, it
will similarly operate as a repeal of the earlier one. There is no implied repeal of an earlier RR by the mere
45
fact that its subject matter is related to a later RR, which may simply be a cumulation or continuation of the
earlier one.46
Where a part of an earlier regulation embracing the same subject as a later one may not be enforced without
nullifying the pertinent provision of the latter, the earlier regulation is deemed impliedly amended or modified
to the extent of the repugnancy. The unaffected provisions or portions of the earlier regulation remain in
47
force, while its omitted portions are deemed repealed. An exception therein that is amended by its
48
subsequent elimination shall now cease to be so and instead be included within the scope of the general
rule.
49
Section 4(e) of the earlier RR 12-80 provides that only items of income actually received shall be included in
the tax base for computing the GRT, but Section 7(c) of the later RR 17-84 makes no such distinction and
provides that all interests earned shall be included. The exception having been eliminated, the clear intent is
that the later RR 17-84 includes the exception within the scope of the general rule.
Repeals by implication are not favored and will not be indulged, unless it is manifest that the administrative
agency intended them. As a regulation is presumed to have been made with deliberation and full knowledge
of all existing rules on the subject, it may reasonably be concluded that its promulgation was not intended to
interfere with or abrogate any earlier rule relating to the same subject, unless it is either repugnant to or fully
inclusive of the subject matter of an earlier one, or unless the reason for the earlier one is "beyond
peradventure removed." Every effort must be exerted to make all regulations stand -- and a later rule will
50
not operate as a repeal of an earlier one, if by any reasonable construction, the two can be reconciled. 51
RR 12-80 imposes the GRT only on all items of income actually received, as opposed to their mere accrual,
while RR 17-84 includes all interest income in computing the GRT. RR 12-80 is superseded by the later rule,
because Section 4(e) thereof is not restated in RR 17-84. Clearly therefore, as petitioner correctly states,
this particular provision was impliedly repealed when the later regulations took effect. 52
Reconciling the Two Regulations
Granting that the two regulations can be reconciled, respondent’s reliance on Section 4(e) of RR 12-80 is
misplaced and deceptive. The "accrual" referred to therein should not be equated with the determination of
the amount to be used as tax base in computing the GRT. Such accrual merely refers to an accounting
method that recognizes income as earned although not received, and expenses as incurred although not yet
paid.
Accrual should not be confused with the concept of constructive possession or receipt as earlier discussed.
Petitioner correctly points out that income that is merely accrued -- earned, but not yet received -- does not
form part of the taxable gross receipts; income that has been received, albeit constructively, does. 53
The word "actually," used confusingly in Section 4(e), will be clearer if removed entirely. Besides, if actually
is that important, accrual should have been eliminated for being a mere surplusage. The inclusion of accrual

stresses the fact that Section 4(e) does not distinguish between actual and constructive receipt. It merely
focuses on the method of accounting known as the accrual system.
Under this system, income is accrued or earned in the year in which the taxpayer’s right thereto becomes
fixed and definite, even though it may not be actually received until a later year; while a deduction for a
liability is to be accrued or incurred and taken when the liability becomes fixed and certain, even though it
may not be actually paid until later. 54
Under any system of accounting, no duty or liability to pay an income tax upon a transaction arises until the
taxable year in which the event constituting the condition precedent occurs. The liability to pay a tax may
55
thus arise at a certain time and the tax paid within another given time.
56
In reconciling these two regulations, the earlier one includes in the tax base for GRT all income, whether
actually or constructively received, while the later one includes specifically interest income. In computing the
income tax liability, the only exception cited in the later regulations is the exclusion from gross income of
interest income, which is already subjected to withholding. This exception, however, refers to a different tax
altogether. To extend mischievously such exception to the GRT will certainly lead to results not contemplated
by the legislators and the administrative body promulgating the regulations.
Manila Jockey Club

Inapplicable
In Commissioner of Internal Revenue v. Manila Jockey Club, we held that the term "gross receipts" shall not
57
include money which, although delivered, has been especially earmarked by law or regulation for some
person other than the taxpayer. 58
To begin, we have to nuance the definition of gross receipts to determine what it is exactly. In this regard,
59
we note that US cases have persuasive effect in our jurisdiction, because Philippine income tax law is
patterned after its US counterpart. 60
"‘[G]ross receipts’ with respect to any period means the sum of: (a) The total amount received or accrued
during such period from the sale, exchange, or other disposition of x x x other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property
held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business, and (b)
The gross income, attributable to a trade or business, regularly carried on by the taxpayer, received or
accrued during such period x x x." 61
"x x x [B]y gross earnings from operations x x x was intended all operations xxx including incidental,
subordinate, and subsidiary operations, as well as principal operations." 62
"When we speak of the ‘gross earnings’ of a person or corporation, we mean the entire earnings or receipts
of such person or corporation from the business or operations to which we refer." 63
From these cases, "gross receipts" refer to the total, as opposed to the net, income. These are therefore
64 65
the total receipts before any deduction for the expenses of management. Webster’s New International
66 67
Dictionary, in fact, defines gross as "whole or entire."
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many
jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional,
68
unless it interferes with interstate commerce or violates the requirement as to uniformity of taxation. 69

Moreover, we have emphasized that the BIR has consistently ruled that "gross receipts" does not admit of
any deduction. Following the principle of legislative approval by reenactment, this interpretation has been
70 71
adopted by the legislature throughout the various reenactments of then Section 119 of the Tax Code. 72
Given that a tax is imposed upon total receipts and not upon net earnings, shall the income withheld be
73
included in the tax base upon which such tax is imposed? In other words, shall interest income
constructively received still be included in the tax base for computing the GRT?
We rule in the affirmative.
Manila Jockey Club does not apply to this case. Earmarking is not the same as withholding. Amounts
earmarked do not form part of gross receipts, because, although delivered or received, these are by law or
regulation reserved for some person other than the taxpayer. On the contrary, amounts withheld form part of
gross receipts, because these are in constructive possession and not subject to any reservation, the
withholding agent being merely a conduit in the collection process.
The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys amounts that
never became the property of the race track. Unlike these amounts, the interest income that had been
74
withheld for the government became property of the financial institutions upon constructive possession
thereof. Possession was indeed acquired, since it was ratified by the financial institutions in whose name the
act of possession had been executed. The money indeed belonged to the taxpayers; merely holding it in
trust was not enough. 75
The government subsequently becomes the owner of the money when the financial institutions pay the FWT
to extinguish their obligation to the government. As this Court has held before, this is the consideration for
the transfer of ownership of the FWT from these institutions to the government. It is ownership that
76
determines whether interest income forms part of taxable gross receipts. Being originally owned by these
77
financial institutions as part of their interest income, the FWT should form part of their taxable gross receipts.
Besides, these amounts withheld are in payment of an income tax liability, which is different from a
percentage tax liability. Commissioner of Internal Revenue v. Tours Specialists, Inc. aptly held thus: 78
"x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the
taxpayer which do not belong to them and do not redound to the taxpayer’s benefit; and it is not necessary
that there must be a law or regulation which would exempt such monies and receipts within the meaning of
gross receipts under the Tax Code." 79
In the construction and interpretation of tax statutes and of statutes in general, the primary consideration is
to ascertain and give effect to the intention of the legislature. We ought to impute to the lawmaking body the
80
intent to obey the constitutional mandate, as long as its enactments fairly admit of such construction. In fact, 81
"x x x no tax can be levied without express authority of law, but the statutes are to receive a reasonable
construction with a view to carrying out their purpose and intent." 82
Looking again into Sections 24(e)(1) and 119 of the Tax Code, we find that the first imposes an income tax;
the second, a percentage tax. The legislature clearly intended two different taxes. The FWT is a tax on
passive income, while the GRT is on business. The withholding of one is not equivalent to the payment of
83
the other.
Non-Exemption of FWT from GRT:
Neither Unjust nor Absurd

Taxing the people and their property is essential to the very existence of government. Certainly, one of the
highest attributes of sovereignty is the power of taxation, which may legitimately be exercised on the objects
84
to which it is applicable to the utmost extent as the government may choose. Being an incident of 85
sovereignty, such power is coextensive with that to which it is an incident. The interest on deposits and yield
86
on deposit substitutes of financial institutions, on the one hand, and their business as such, on the other, are
the two objects over which the State has chosen to extend its sovereign power. Those not so chosen are,
upon the soundest principles, exempt from taxation. 87
While courts will not enlarge by construction the government’s power of taxation, neither will they place
88
upon tax laws so loose a construction as to permit evasions, merely on the basis of fanciful and insubstantial
distinctions. When the legislature imposes a tax on income and another on business, the imposition must
89
be respected. The Tax Code should be so construed, if need be, as to avoid empty declarations or
possibilities of crafty tax evasion schemes. We have consistently ruled thus:
"x x x [I]t is upon taxation that the [g]overnment chiefly relies to obtain the means to carry on its operations,
and it is of the utmost importance that the modes adopted to enforce the collection of the taxes levied should
be summary and interfered with as little as possible. x x x." 90
"Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting the taxes, may
derange the operations of government, and thereby cause serious detriment to the public." 91
"No government could exist if all litigants were permitted to delay the collection of its taxes." 92
A taxing act will be construed, and the intent and meaning of the legislature ascertained, from its
language. Its clarity and implied intent must exist to uphold the taxes as against a taxpayer in whose favor
93
doubts will be resolved. No such doubts exist with respect to the Tax Code, because the income and
94
percentage taxes we have cited earlier have been imposed in clear and express language for that purpose. 95
This Court has steadfastly adhered to the doctrine that its first and fundamental duty is the application of the
law according to its express terms -- construction and interpretation being called for only when such literal
application is impossible or inadequate without them. In Quijano v. Development Bank of the
96
Philippines, we stressed as follows:

97
"No process of interpretation or construction need be resorted to where a provision of law peremptorily calls
for application." 98
A literal application of any part of a statute is to be rejected if it will operate unjustly, lead to absurd results, or
contradict the evident meaning of the statute taken as a whole. Unlike the CA, we find that the literal
99
application of the aforesaid sections of the Tax Code and its implementing regulations does not operate
unjustly or contradict the evident meaning of the statute taken as a whole. Neither does it lead to absurd
results. Indeed, our courts are not to give words meanings that would lead to absurd or unreasonable
consequences. We have repeatedly held thus:
100
"x x x [S]tatutes should receive a sensible construction, such as will give effect to the legislative intention
and so as to avoid an unjust or an absurd conclusion." 101
"While it is true that the contemporaneous construction placed upon a statute by executive officers whose
duty is to enforce it should be given great weight by the courts, still if such construction is so erroneous, x x x
the same must be declared as null and void." 102

It does not even matter that the CTA, like in China Banking Corporation, relied erroneously on Manila
103
Jockey Club. Under our tax system, the CTA acts as a highly specialized body specifically created for the
purpose of reviewing tax cases. Because of its recognized expertise, its findings of fact will ordinarily not be
104
reviewed, absent any showing of gross error or abuse on its part. Such findings are binding on the Court
105
and, absent strong reasons for us to delve into facts, only questions of law are open for determination. 106
Respondent claims that it is entitled to a refund on the basis of excess GRT payments. We disagree.
Tax refunds are in the nature of tax exemptions. Such exemptions are strictly construed against the
107
taxpayer, being highly disfavored and almost said "to be odious to the law." Hence, those who claim to be
108
exempt from the payment of a particular tax must do so under clear and unmistakable terms found in the
statute. They must be able to point to some positive provision, not merely a vague implication, of the law 109
creating that right.110
The right of taxation will not be surrendered, except in words too plain to be mistaken. The reason is that
1âwphi1
the State cannot strip itself of this highest attribute of sovereignty -- its most essential power of taxation -- by
vague or ambiguous language. Since tax refunds are in the nature of tax exemptions, these are deemed to
be "in derogation of sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption." 111
No less than our 1987 Constitution provides for the mechanism for granting tax exemptions. They certainly 112
cannot be granted by implication or mere administrative regulation. Thus, when an exemption is claimed, it
must indubitably be shown to exist, for every presumption is against it, and a well-founded doubt is fatal to
113
the claim. In the instant case, respondent has not been able to satisfactorily show that its FWT on interest
114
income is exempt from the GRT. Like China Banking Corporation, its argument creates a tax exemption
where none exists. 115
No exemptions are normally allowed when a GRT is imposed. It is precisely designed to maintain simplicity
in the tax collection effort of the government and to assure its steady source of revenue even during an
economic slump. 116
No Double Taxation
We have repeatedly said that the two taxes, subject of this litigation, are different from each other. The basis
of their imposition may be the same, but their natures are different, thus leading us to a final point. Is there
double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it should be taxed only once; that is, "x x x
taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the
117
taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the
118 119
two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority,
within the same jurisdiction, during the same taxing period; and they must be of the same kind or
character.120
First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the
passive income generated in the form of interest on deposits and yield on deposit substitutes, while the
subject matter of the GRT is the privilege of engaging in the business of banking.

A tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather than a
121
property tax. It is not an income tax, unlike the FWT. In fact, we have already held that one can be taxed for
122
engaging in business and further taxed differently for the income derived therefrom. Akin to our ruling in
123
Velilla v. Posadas, these two taxes are entirely distinct and are assessed under different provisions.
124
Second, although both taxes are national in scope because they are imposed by the same taxing authority --
the national government under the Tax Code -- and operate within the same Philippine jurisdiction for the
same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and
withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On
the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in
which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to withholding,
while the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by the same taxing authority, within
the same jurisdiction, for the same purpose, in different taxing periods, some of the property in the
territory. Subjecting interest income to a 20% FWT and including it in the computation of the 5% GRT is
125
clearly not double taxation.
WHEREFORE, the Petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals are
hereby REVERSED and SET ASIDE. No costs.
SO ORDERED.

G.R. No. 181845 August 4, 2009
THE CITY OF MANILA, LIBERTY M. TOLEDO, in her capacity as THE TREASURER OF MANILA and
JOSEPH SANTIAGO, in his capacity as the CHIEF OF THE LICENSE DIVISION OF CITY OF
MANILA, petitioners,
vs.
COCA-COLA BOTTLERS PHILIPPINES, INC., Respondent.
CHICO-NAZARIO, J.:
This case is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Civil Procedure
seeking to review and reverse the Decision 1 dated 18 January 2008 and Resolution 2 dated 18 February
2008 of the Court of Tax Appeals en banc (CTA en banc) in C.T.A. EB No. 307. In its assailed Decision, the
CTA en banc dismissed the Petition for Review of herein petitioners City of Manila, Liberty M. Toledo
(Toledo), and Joseph Santiago (Santiago); and affirmed the Resolutions dated 24 May 2007, 3 8 June
2007,4 and 26 July 2007,5 of the CTA First Division in C.T.A. AC No. 31, which, in turn, dismissed the Petition
for Review of petitioners in said case for being filed out of time. In its questioned Resolution, the CTA en
banc denied the Motion for Reconsideration of petitioners.
Petitioner City of Manila is a public corporation empowered to collect and assess business taxes, revenue
fees, and permit fees, through its officers, petitioners Toledo and Santiago, in their capacities as City
Treasurer and Chief of the Licensing Division, respectively. On the other hand, respondent Coca-Cola
Bottlers Philippines, Inc. is a corporation engaged in the business of manufacturing and selling beverages,
and which maintains a sales office in the City of Manila.
The case stemmed from the following facts:
Prior to 25 February 2000, respondent had been paying the City of Manila local business tax only under
Section 14 of Tax Ordinance No. 7794, 6 being expressly exempted from the business tax under Section 21
of the same tax ordinance. Pertinent provisions of Tax Ordinance No. 7794 provide:
Section 14. – Tax on Manufacturers, Assemblers and Other Processors. – There is hereby imposed a
graduated tax on manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and
compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever
kind or nature, in accordance with any of the following schedule:
xxxx
over ₱6,500,000.00 up to
₱25,000,000.00 - - - - - - - - - - - - - - - - - - - -- ₱36,000.00 plus 50% of 1%
in excess of ₱6,500,000.00
xxxx
Section 21. – Tax on Businesses Subject to the Excise, Value-Added or Percentage Taxes under the NIRC.
– On any of the following businesses and articles of commerce subject to excise, value-added or percentage
taxes under the National Internal Revenue Code hereinafter referred to as NIRC, as amended, a tax of
FIFTY PERCENT (50%) of ONE PERCENT (1%) per annum on the gross sales or receipts of the preceding
calendar year is hereby imposed:

(A) On persons who sell goods and services in the course of trade or business; and those who import goods
whether for business or otherwise; as provided for in Sections 100 to 103 of the NIRC as administered and
determined by the Bureau of Internal Revenue pursuant to the pertinent provisions of the said Code.
xxxx
(D) Excisable goods subject to VAT
(1) Distilled spirits
(2) Wines
xxxx
(8) Coal and coke
(9) Fermented liquor, brewers’ wholesale price, excluding the ad valorem tax
xxxx
PROVIDED, that all registered businesses in the City of Manila that are already paying the aforementioned
tax shall be exempted from payment thereof.
Petitioner City of Manila subsequently approved on 25 February 2000, Tax Ordinance No. 7988, 7 amending
certain sections of Tax Ordinance No. 7794, particularly: (1) Section 14, by increasing the tax rates
applicable to certain establishments operating within the territorial jurisdiction of the City of Manila; and (2)
Section 21, by deleting the proviso found therein, which stated "that all registered businesses in the City of
Manila that are already paying the aforementioned tax shall be exempted from payment thereof." Petitioner
City of Manila approved only after a year, on 22 February 2001, another tax ordinance, Tax Ordinance No.
8011, amending Tax Ordinance No. 7988.
Tax Ordinances No. 7988 and No. 8011 were later declared by the Court null and void in Coca-Cola Bottlers
Philippines, Inc. v. City of Manila 8 (Coca-Cola case) for the following reasons: (1) Tax Ordinance No. 7988
was enacted in contravention of the provisions of the Local Government Code (LGC) of 1991 and its
implementing rules and regulations; and (2) Tax Ordinance No. 8011 could not cure the defects of Tax
Ordinance No. 7988, which did not legally exist.
However, before the Court could declare Tax Ordinance No. 7988 and Tax Ordinance No. 8011 null and
void, petitioner City of Manila assessed respondent on the basis of Section 21 of Tax Ordinance No. 7794,
as amended by the aforementioned tax ordinances, for deficiency local business taxes, penalties, and
interest, in the total amount of ₱18,583,932.04, for the third and fourth quarters of the year 2000.
Respondent filed a protest with petitioner Toledo on the ground that the said assessment amounted to
double taxation, as respondent was taxed twice, i.e., under Sections 14 and 21 of Tax Ordinance No. 7794,
as amended by Tax Ordinances No. 7988 and No. 8011. Petitioner Toledo did not respond to the protest of
respondent.
Consequently, respondent filed with the Regional Trial Court (RTC) of Manila, Branch 47, an action for the
cancellation of the assessment against respondent for business taxes, which was docketed as Civil Case
No. 03-107088.

On 14 July 2006, the RTC rendered a Decision 9 dismissing Civil Case No. 03-107088. The RTC ruled that
the business taxes imposed upon the respondent under Sections 14 and 21 of Tax Ordinance No. 7988, as
amended, were not of the same kind or character; therefore, there was no double taxation. The RTC,
though, in an Order10 dated 16 November 2006, granted the Motion for Reconsideration of respondent,
decreed the cancellation and withdrawal of the assessment against the latter, and barred petitioners from
further imposing/assessing local business taxes against respondent under Section 21 of Tax Ordinance No.
7794, as amended by Tax Ordinance No. 7988 and Tax Ordinance No. 8011. The 16 November 2006
Decision of the RTC was in conformity with the ruling of this Court in the Coca-Cola case, in which Tax
Ordinance No. 7988 and Tax Ordinance No. 8011 were declared null and void. The Motion for
Reconsideration of petitioners was denied by the RTC in an Order 11 dated 4 April 2007. Petitioners received
a copy of the 4 April 2007 Order of the RTC, denying their Motion for Reconsideration of the 16 November
2006 Order of the same court, on 20 April 2007.
On 4 May 2007, petitioners filed with the CTA a Motion for Extension of Time to File Petition for Review,
praying for a 15-day extension or until 20 May 2007 within which to file their Petition. The Motion for
Extension of petitioners was docketed as C.T.A. AC No. 31, raffled to the CTA First Division.
Again, on 18 May 2007, petitioners filed, through registered mail, a Second Motion for Extension of Time to
File a Petition for Review, praying for another 10-day extension, or until 30 May 2007, within which to file
their Petition.
On 24 May 2007, however, the CTA First Division already issued a Resolution dismissing C.T.A. AC No. 31
for failure of petitioners to timely file their Petition for Review on 20 May 2007.
Unaware of the 24 May 2007 Resolution of the CTA First Division, petitioners filed their Petition for Review
therewith on 30 May 2007 via registered mail. On 8 June 2007, the CTA First Division issued another
Resolution, reiterating the dismissal of the Petition for Review of petitioners.
Petitioners moved for the reconsideration of the foregoing Resolutions dated 24 May 2007 and 8 June 2007,
but their motion was denied by the CTA First Division in a Resolution dated 26 July 2007. The CTA First
Division reasoned that the Petition for Review of petitioners was not only filed out of time -- it also failed to
comply with the provisions of Section 4, Rule 5; and Sections 2 and 3, Rule 6, of the Revised Rules of the
CTA.
Petitioners thereafter filed a Petition for Review before the CTA en banc, docketed as C.T.A. EB No. 307,
arguing that the CTA First Division erred in dismissing their Petition for Review in C.T.A. AC No. 31 for being
filed out of time, without considering the merits of their Petition.
The CTA en banc rendered its Decision on 18 January 2008, dismissing the Petition for Review of
petitioners and affirming the Resolutions dated 24 May 2007, 8 June 2007, and 26 July 2007 of the CTA
First Division. The CTA en banc similarly denied the Motion for Reconsideration of petitioners in a Resolution
dated 18 February 2008.
Hence, the present Petition, where petitioners raise the following issues:
I. WHETHER OR NOT PETITIONERS SUBSTANTIALLY COMPLIED WITH THE REGLEMENTARY

PERIOD TO TIMELY APPEAL THE CASE FOR REVIEW BEFORE THE [CTA DIVISION].
II. WHETHER OR NOT THE RULING OF THIS COURT IN THE EARLIER [COCA-COLA CASE] IS
DOCTRINAL AND CONTROLLING IN THE INSTANT CASE.

III. WHETHER OR NOT PETITIONER CITY OF MANILA CAN STILL ASSESS TAXES UNDER
[SECTIONS] 14 AND 21 OF [TAX ORDINANCE NO. 7794, AS AMENDED].
IV. WHETHER OR NOT THE ENFORCEMENT OF [SECTION] 21 OF THE [TAX ORDINANCE NO.
7794, AS AMENDED] CONSTITUTES DOUBLE TAXATION.
Petitioners assert that Section 1, Rule 7 12 of the Revised Rules of the CTA refers to certain provisions of the
Rules of Court, such as Rule 42 of the latter, and makes them applicable to the tax court. Petitioners then
cannot be faulted in relying on the provisions of Section 1, Rule 42 13 of the Rules of Court as regards the
period for filing a Petition for Review with the CTA in division. Section 1, Rule 42 of the Rules of Court
provides for a 15-day period, reckoned from receipt of the adverse decision of the trial court, within which to
file a Petition for Review with the Court of Appeals. The same rule allows an additional 15-day period within
which to file such a Petition; and, only for the most compelling reasons, another extension period not to
exceed 15 days. Petitioners received on 20 April 2007 a copy of the 4 April 2007 Order of the RTC, denying
their Motion for Reconsideration of the 16 November 2006 Order of the same court. On 4 May 2007,
believing that they only had 15 days to file a Petition for Review with the CTA in division, petitioners moved
for a 15-day extension, or until 20 May 2007, within which to file said Petition. Prior to the lapse of their first
extension period, or on 18 May 2007, petitioners again moved for a 10-day extension, or until 30 May 2007,
within which to file their Petition for Review. Thus, when petitioners filed their Petition for Review with the
CTA First Division on 30 May 2007, the same was filed well within the reglementary period for doing so.
Petitioners argue in the alternative that even assuming that Section 3(a), Rule 8 14 of the Revised Rules of
the CTA governs the period for filing a Petition for Review with the CTA in division, still, their Petition for
Review was filed within the reglementary period. Petitioners call attention to the fact that prior to the lapse of
the 30-day period for filing a Petition for Review under Section 3(a), Rule 8 of the Revised Rules of the CTA,
they had already moved for a 10-day extension, or until 30 May 2007, within which to file their Petition.
Petitioners claim that there was sufficient justification in equity for the grant of the 10-day extension they
requested, as the primordial consideration should be the substantive, and not the procedural, aspect of the
case. Moreover, Section 3(a), Rule 8 of the Revised Rules of the CTA, is silent as to whether the 30-day
period for filing a Petition for Review with the CTA in division may be extended or not.
Petitioners also contend that the Coca-Cola case is not determinative of the issues in the present case
because the issue of nullity of Tax Ordinance No. 7988 and Tax Ordinance No. 8011 is not the lis mota
herein. The Coca-Cola case is not doctrinal and cannot be considered as the law of the case.
Petitioners further insist that notwithstanding the declaration of nullity of Tax Ordinance No. 7988 and Tax
Ordinance No. 8011, Tax Ordinance No. 7794 remains a valid piece of local legislation. The nullity of Tax
Ordinance No. 7988 and Tax Ordinance No. 8011 does not effectively bar petitioners from imposing local
business taxes upon respondent under Sections 14 and 21 of Tax Ordinance No. 7794, as they were read
prior to their being amended by the foregoing null and void tax ordinances.
Petitioners finally maintain that imposing upon respondent local business taxes under both Sections 14 and
21 of Tax Ordinance No. 7794 does not constitute direct double taxation. Section 143 of the LGC gives
municipal, as well as city governments, the power to impose business taxes, to wit:
SECTION 143. Tax on Business. – The municipality may impose taxes on the following businesses:
(a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and

compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of
whatever kind or nature, in accordance with the following schedule:
xxxx

(b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature in
accordance with the following schedule:
xxxx
(c) On exporters, and on manufacturers, millers, producers, wholesalers, distributors, dealers or

retailers of essential commodities enumerated hereunder at a rate not exceeding one-half (1/2) of
the rates prescribed under subsections (a), (b) and (d) of this Section:
xxxx
Provided, however, That barangays shall have the exclusive power to levy taxes, as provided under
Section 152 hereof, on gross sales or receipts of the preceding calendar year of Fifty thousand
pesos (₱50,000.00) or less, in the case of cities, and Thirty thousand pesos (₱30,000) or less, in the
case of municipalities.
(e) On contractors and other independent contractors, in accordance with the following schedule:
xxxx
(f) On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of one
percent (1%) on the gross receipts of the preceding calendar year derived from interest,
commissions and discounts from lending activities, income from financial leasing, dividends, rentals
on property and profit from exchange or sale of property, insurance premium.
(g) On peddlers engaged in the sale of any merchandise or article of commerce, at a rate not
exceeding Fifty pesos (₱50.00) per peddler annually.
(h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian
concerned may deem proper to tax: Provided, That on any business subject to the excise, value-
added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax
shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year.
Section 14 of Tax Ordinance No. 7794 imposes local business tax on manufacturers, etc. of liquors, distilled
spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC. On the other hand,
the local business tax under Section 21 of Tax Ordinance No. 7794 is imposed upon persons selling goods
and services in the course of trade or business, and those importing goods for business or otherwise, who,
pursuant to Section 143(h) of the LGC, are subject to excise tax, value-added tax (VAT), or percentage tax
under the National Internal Revenue Code (NIRC). Thus, there can be no double taxation when respondent
is being taxed under both Sections 14 and 21 of Tax Ordinance No. 7794, for under the first, it is being taxed
as a manufacturer; while under the second, it is being taxed as a person selling goods in the course of trade
or business subject to excise, VAT, or percentage tax.
The Court first addresses the issue raised by petitioners concerning the period within which to file with the
CTA a Petition for Review from an adverse decision or ruling of the RTC.
The period to appeal the decision or ruling of the RTC to the CTA via a Petition for Review is specifically
governed by Section 11 of Republic Act No. 9282, 15 and Section 3(a), Rule 8 of the Revised Rules of the
CTA.
Section 11 of Republic Act No. 9282 provides:

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.
Appeal shall be made by filing a petition for review under a procedure analogous to that provided for under
Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from the receipt of the
decision or ruling or in the case of inaction as herein provided, from the expiration of the period fixed by law
to act thereon. x x x. (Emphasis supplied.)
Section 3(a), Rule 8 of the Revised Rules of the CTA states:
SEC 3. Who may appeal; period to file petition. – (a) A party adversely affected by a decision, ruling or the
inaction of the Commissioner of Internal Revenue on disputed assessments or claims for refund of internal
revenue taxes, or by a decision or ruling of the Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry, the Secretary of Agriculture, or a Regional Trial Court in the exercise of its
original jurisdiction may appeal to the Court by petition for review filed within thirty days after receipt of a
copy of such decision or ruling, or expiration of the period fixed by law for the Commissioner of Internal
Revenue to act on the disputed assessments. x x x. (Emphasis supplied.)
It is crystal clear from the afore-quoted provisions that to appeal an adverse decision or ruling of the RTC to
the CTA, the taxpayer must file a Petition for Review with the CTA within 30 days from receipt of said
adverse decision or ruling of the RTC.
It is also true that the same provisions are silent as to whether such 30-day period can be extended or not.
However, Section 11 of Republic Act No. 9282 does state that the Petition for Review shall be filed with the
CTA following the procedure analogous to Rule 42 of the Revised Rules of Civil Procedure. Section 1, Rule
4216 of the Revised Rules of Civil Procedure provides that the Petition for Review of an adverse judgment or
final order of the RTC must be filed with the Court of Appeals within: (1) the original 15-day period from
receipt of the judgment or final order to be appealed; (2) an extended period of 15 days from the lapse of the
original period; and (3) only for the most compelling reasons, another extended period not to exceed 15
days from the lapse of the first extended period.
Following by analogy Section 1, Rule 42 of the Revised Rules of Civil Procedure, the 30-day original period
for filing a Petition for Review with the CTA under Section 11 of Republic Act No. 9282, as implemented by
Section 3(a), Rule 8 of the Revised Rules of the CTA, may be extended for a period of 15 days. No further
extension shall be allowed thereafter, except only for the most compelling reasons, in which case the
extended period shall not exceed 15 days.
Even the CTA en banc, in its Decision dated 18 January 2008, recognizes that the 30-day period within
which to file the Petition for Review with the CTA may, indeed, be extended, thus:
Being suppletory to R.A. 9282, the 1997 Rules of Civil Procedure allow an additional period of fifteen (15)
days for the movant to file a Petition for Review, upon Motion, and payment of the full amount of the docket
fees. A further extension of fifteen (15) days may be granted on compelling reasons in accordance with the
provision of Section 1, Rule 42 of the 1997 Rules of Civil Procedure x x x. 17
In this case, the CTA First Division did indeed err in finding that petitioners failed to file their Petition for
Review in C.T.A. AC No. 31 within the reglementary period.

From 20 April 2007, the date petitioners received a copy of the 4 April 2007 Order of the RTC, denying their
Motion for Reconsideration of the 16 November 2006 Order, petitioners had 30 days, or until 20 May 2007,
within which to file their Petition for Review with the CTA. Hence, the Motion for Extension filed by petitioners
on 4 May 2007 – grounded on their belief that the reglementary period for filing their Petition for Review with
the CTA was to expire on 5 May 2007, thus, compelling them to seek an extension of 15 days, or until 20
May 2007, to file said Petition – was unnecessary and superfluous. Even without said Motion for Extension,
petitioners could file their Petition for Review until 20 May 2007, as it was still within the 30-day reglementary
period provided for under Section 11 of Republic Act No. 9282; and implemented by Section 3(a), Rule 8 of
the Revised Rules of the CTA.
The Motion for Extension filed by the petitioners on 18 May 2007, prior to the lapse of the 30-day
reglementary period on 20 May 2007, in which they prayed for another extended period of 10 days, or until
30 May 2007, to file their Petition for Review was, in reality, only the first Motion for Extension of petitioners.
The CTA First Division should have granted the same, as it was sanctioned by the rules of procedure. In
fact, petitioners were only praying for a 10-day extension, five days less than the 15-day extended period
allowed by the rules. Thus, when petitioners filed via registered mail their Petition for Review in C.T.A. AC
No. 31 on 30 May 2007, they were able to comply with the reglementary period for filing such a petition.
Nevertheless, there were other reasons for which the CTA First Division dismissed the Petition for Review of
petitioners in C.T.A. AC No. 31; i.e., petitioners failed to conform to Section 4 of Rule 5, and Section 2 of
Rule 6 of the Revised Rules of the CTA. The Court sustains the CTA First Division in this regard.
Section 4, Rule 5 of the Revised Rules of the CTA requires that:
SEC. 4. Number of copies. – The parties shall file eleven signed copies of every paper for cases before the
Court en banc and six signed copies for cases before a Division of the Court in addition to the signed
original copy, except as otherwise directed by the Court. Papers to be filed in more than one case shall
include one additional copy for each additional case. (Emphasis supplied.)
Section 2, Rule 6 of the Revised Rules of the CTA further necessitates that:
SEC. 2. Petition for review; contents. – The petition for review shall contain allegations showing the
jurisdiction of the Court, a concise statement of the complete facts and a summary statement of the issues
involved in the case, as well as the reasons relied upon for the review of the challenged decision. The
petition shall be verified and must contain a certification against forum shopping as provided in Section 3,
Rule 46 of the Rules of Court. A clearly legible duplicate original or certified true copy of the decision
appealed from shall be attached to the petition. (Emphasis supplied.)
The aforesaid provisions should be read in conjunction with Section 1, Rule 7 of the Revised Rules of the
CTA, which provides:
SECTION 1. Applicability of the Rules of Court on procedure in the Court of Appeals, exception. – The
procedure in the Court en banc or in Divisions in original or in appealed cases shall be the same as those in
petitions for review and appeals before the Court of Appeals pursuant to the applicable provisions of Rules
42, 43, 44, and 46 of the Rules of Court, except as otherwise provided for in these Rules. (Emphasis
supplied.)
As found by the CTA First Division and affirmed by the CTA en banc, the Petition for Review filed by
petitioners via registered mail on 30 May 2007 consisted only of one copy and all the attachments thereto,
including the Decision dated 14 July 2006; and that the assailed Orders dated 16 November 2006 and 4
April 2007 of the RTC in Civil Case No. 03-107088 were mere machine copies. Evidently, petitioners did not
comply at all with the requirements set forth under Section 4, Rule 5; or with Section 2, Rule 6 of the

Revised Rules of the CTA. Although the Revised Rules of the CTA do not provide for the consequence of
such non-compliance, Section 3, Rule 42 of the Rules of Court may be applied suppletorily, as allowed by
Section 1, Rule 7 of the Revised Rules of the CTA. Section 3, Rule 42 of the Rules of Court reads:
SEC. 3. Effect of failure to comply with requirements. – The failure of the petitioner to comply with any of the
foregoing requirements regarding the payment of the docket and other lawful fees, the deposit for costs,
proof of service of the petition, and the contents of and the documents which should accompany the petition
shall be sufficient ground for the dismissal thereof. (Emphasis supplied.)
True, petitioners subsequently submitted certified copies of the Decision dated 14 July 2006 and assailed
Orders dated 16 November 2006 and 4 April 2007 of the RTC in Civil Case No. 03-107088, but a closer
examination of the stamp on said documents reveals that they were prepared and certified only on 14
August 2007, about two months and a half after the filing of the Petition for Review by petitioners.
Petitioners never offered an explanation for their non-compliance with Section 4 of Rule 5, and Section 2 of
Rule 6 of the Revised Rules of the CTA. Hence, although the Court had, in previous instances, relaxed the
application of rules of procedure, it cannot do so in this case for lack of any justification.
Even assuming arguendo that the Petition for Review of petitioners in C.T.A. AC No. 31 should have been
given due course by the CTA First Division, it is still dismissible for lack of merit.
Contrary to the assertions of petitioners, the Coca-Cola case is indeed applicable to the instant case. The
pivotal issue raised therein was whether Tax Ordinance No. 7988 and Tax Ordinance No. 8011 were null and
void, which this Court resolved in the affirmative. Tax Ordinance No. 7988 was declared by the Secretary of
the Department of Justice (DOJ) as null and void and without legal effect due to the failure of herein
petitioner City of Manila to satisfy the requirement under the law that said ordinance be published for three
consecutive days. Petitioner City of Manila never appealed said declaration of the DOJ Secretary; thus, it
attained finality after the lapse of the period for appeal of the same. The passage of Tax Ordinance No.
8011, amending Tax Ordinance No. 7988, did not cure the defects of the latter, which, in any way, did not
legally exist.
By virtue of the Coca-Cola case, Tax Ordinance No. 7988 and Tax Ordinance No. 8011 are null and void and
without any legal effect. Therefore, respondent cannot be taxed and assessed under the amendatory laws--
Tax Ordinance No. 7988 and Tax Ordinance No. 8011.
Petitioners insist that even with the declaration of nullity of Tax Ordinance No. 7988 and Tax Ordinance No.
8011, respondent could still be made liable for local business taxes under both Sections 14 and 21 of Tax
Ordinance No. 7944 as they were originally read, without the amendment by the null and void tax
ordinances.
Emphasis must be given to the fact that prior to the passage of Tax Ordinance No. 7988 and Tax Ordinance
No. 8011 by petitioner City of Manila, petitioners subjected and assessed respondent only for the local
business tax under Section 14 of Tax Ordinance No. 7794, but never under Section 21 of the same. This
was due to the clear and unambiguous proviso in Section 21 of Tax Ordinance No. 7794, which stated that
"all registered business in the City of Manila that are already paying the aforementioned tax shall be
exempted from payment thereof." The "aforementioned tax" referred to in said proviso refers to local
business tax. Stated differently, Section 21 of Tax Ordinance No. 7794 exempts from the payment of the
local business tax imposed by said section, businesses that are already paying such tax under other
sections of the same tax ordinance. The said proviso, however, was deleted from Section 21 of Tax
Ordinance No. 7794 by Tax Ordinances No. 7988 and No. 8011. Following this deletion, petitioners began
assessing respondent for the local business tax under Section 21 of Tax Ordinance No. 7794, as amended. 1avvphi1

The Court easily infers from the foregoing circumstances that petitioners themselves believed that prior to
Tax Ordinance No. 7988 and Tax Ordinance No. 8011, respondent was exempt from the local business tax
under Section 21 of Tax Ordinance No. 7794. Hence, petitioners had to wait for the deletion of the
exempting proviso in Section 21 of Tax Ordinance No. 7794 by Tax Ordinance No. 7988 and Tax Ordinance
No. 8011 before they assessed respondent for the local business tax under said section. Yet, with the
pronouncement by this Court in the Coca-Cola case that Tax Ordinance No. 7988 and Tax Ordinance No.
8011 were null and void and without legal effect, then Section 21 of Tax Ordinance No. 7794, as it has been
previously worded, with its exempting proviso, is back in effect. Accordingly, respondent should not have
been subjected to the local business tax under Section 21 of Tax Ordinance No. 7794 for the third and fourth
quarters of 2000, given its exemption therefrom since it was already paying the local business tax under
Section 14 of the same ordinance.
Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to their own
detriment. Said exempting proviso was precisely included in said section so as to avoid double taxation.
Double taxation means taxing the same property twice when it should be taxed only once; that is, "taxing the
same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed
twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be
imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and the taxes must be of the same kind or character. 18
Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected
to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1)
on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose
– to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same
taxing authority – petitioner City of Manila; (4) within the same taxing jurisdiction – within the territorial
jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same
kind or character – a local business tax imposed on gross sales or receipts of the business.
The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance
No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the power of
municipalities and cities to impose a local business tax, and to which any local business tax imposed by
petitioner City of Manila must conform. It is apparent from a perusal thereof that when a municipality or city
has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other
article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject
the same manufacturers, etc. to a business tax under Section 143(h) of the same Code. Section 143(h) may
be imposed only on businesses that are subject to excise tax, VAT, or percentage tax under the NIRC, and
that are "not otherwise specified in preceding paragraphs." In the same way, businesses such as
respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is
based on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21
of the same Tax Ordinance [which is based on Section 143(h) of the LGC].
WHEREFORE, premises considered, the instant Petition for Review on Certiorari is hereby DENIED. No
costs. SO ORDERED.

G.R. No. 181277, July 03, 2013
SWEDISH MATCH PHILIPPINES, INC., Petitioner, v. THE TREASURER OF THE CITY OF

MANILA, Respondent.
SERENO, C.J.:
This is a Petition for Review on Certiorari1 filed by Swedish Match Philippines, Inc. (petitioner) under Rule 45
of the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc) Decision2
dated 1 October 2007 and Resolution3 dated 14 January 2008 in C.T.A. EB No. 241.
THE FACTS
On 20 October 2001, petitioner paid business taxes in the total amount of P470,932.21. 4 The assessed
amount was based on Sections 145 and 216 of Ordinance No. 7794, otherwise known as the Manila
Revenue Code, as amended by Ordinance Nos. 7988 and 8011. Out of that amount, P164,552.04
corresponded to the payment under Section 21.7
Assenting that it was not liable to pay taxes under Section 21, petitioner wrote a letter 8 dated 17 September
2003 to herein respondent claiming a refund of business taxes the former had paid pursuant to the said
provision. Petitioner argued that payment under Section 21 constituted double taxation in view of its
payment under Section 14.
On 17 October 2003, for the alleged failure of respondent to act on its claim for a refund, petitioner filed a
Petition for Refund of Taxes9 with the RTC of Manila in accordance with Section 196 of the Local
Government Code of 1991. The Petition was docketed as Civil Case No. 03-108163.
On 14 June 2004, the Regional Trial Court (RTC), Branch 21 of Manila rendered a Decision 10 in Civil Case
No. 03-108163 dismissing the Petition for the failure of petitioner to plead the latter’s capacity to sue and to
state the authority of Tiarra T. Batilaran-Beleno (Ms. Beleno), who had executed the Verification and
Certification of Non-Forum Shopping.
In denying petitioner’s Motion for Reconsideration, the RTC went on to say that Sections 14 and 21
pertained to taxes of a different nature and, thus, the elements of double taxation were wanting in this case.
On appeal, the CTA Second Division affirmed the RTC’s dismissal of the Petition for Refund of Taxes on the
ground that petitioner had failed to state the authority of Ms. Beleno to institute the suit.
The CTA En Banc likewise denied the Petition for Review, ruling as follows:cralavvonlinelawlibrary
In this case, the plaintiff is the Swedish Match Philippines, Inc. However, as found by the RTC as well as the
Court in Division, the signatory of the verification and/or certification of non-forum shopping is Ms. Beleno,
the company’s Finance Manager, and that there was no board resolution or secretary's certificate showing
proof of Ms. Beleno’s authority in acting in behalf of the corporation at the time the initiatory pleading was
filed in the RTC. It is therefore, correct that the case be dismissed.
WHEREFORE, premises considered, the petition for review is hereby DENIED. Accordingly, the assailed
Decision and the Resolution dated August 8, 2006 and November 27, 2006, respectively, are
hereby AFFIRMED in toto.

SO ORDERED.11nadcralavvonlinelawlibrary
ISSUES
In order to determine the entitlement of petitioner to a refund of taxes, the instant Petition requires the
resolution of two main issues, to wit:cralavvonlinelawlibrary
1) Whether Ms. Beleno was authorized to file the Petition for Refund of Taxes with the RTC; and
2) Whether the imposition of tax under Section 21 of the Manila Revenue Code constitutes double taxation
in view of the tax collected and paid under Section 14 of the same code. 12
THE COURT’S RULING
Authority from the board to sign the Verification

and Certification of Non-Forum Shopping
Anent the procedural issue, petitioner argues that there can be no dispute that Ms. Beleno was acting within
her authority when she instituted the Petition for Refund before the RTC, notwithstanding that the Petition
was not accompanied by a Secretary’s Certificate. Her authority was ratified by the Board in its Resolution
adopted on 19 May 2004. Thus, even if she was not authorized to execute the Verification and Certification
at the time of the filing of the Petition, the ratification by the board of directors retroactively applied to the
date of her signing.
On the other hand, respondent contends that petitioner failed to establish the authority of Ms. Beleno to
institute the present action on behalf of the corporation. Citing Philippine Airlines v. Flight Attendants and
Stewards Association of the Philippines (PAL v. FASAP),13 respondent avers that the required certification of
non-forum shopping should have been valid at the time of the filing of the Petition. The Petition, therefore,
was defective due to the flawed Verification and Certification of Non-Forum Shopping, which were
insufficient in form and therefore a clear violation of Section 5, Rule 7 of the 1997 Rules of Civil Procedure.
We rule for petitioner.
Time and again, this Court has been faced with the issue of the validity of the verification and certification of
non-forum shopping, absent any authority from the board of directors.
The power of a corporation to sue and be sued is lodged in the board of directors, which exercises its
corporate powers.14 It necessarily follows that “an individual corporate officer cannot solely exercise any
corporate power pertaining to the corporation without authority from the board of directors.” 15 Thus, physical
acts of the corporation, like the signing of documents, can be performed only by natural persons duly
authorized for the purpose by corporate by-laws or by a specific act of the board of directors. 16
Consequently, a verification signed without an authority from the board of directors is defective. However,
the requirement of verification is simply a condition affecting the form of the pleading and non-compliance
does not necessarily render the pleading fatally defective.17 The court may in fact order the correction of the
pleading if verification is lacking or, it may act on the pleading although it may not have been verified, where
it is made evident that strict compliance with the rules may be dispensed with so that the ends of justice may
be served.18
Respondent cites this Court’s ruling in PAL v. FASAP,19 where we held that only individuals vested with
authority by a valid board resolution may sign a certificate of non-forum shopping on behalf of a corporation.
The petition is subject to dismissal if a certification was submitted unaccompanied by proof of the signatory’s

authority.20 In a number of cases, however, we have recognized exceptions to this rule. Cagayan Valley
Drug Corporation v. Commissioner of Internal Revenue21 provides:cralavvonlinelawlibrary
In a slew of cases, however, we have recognized the authority of some corporate officers to sign the
verification and certification against forum shopping. In Mactan-Cebu International Airport Authority v.
CA, we recognized the authority of a general manager or acting general manager to sign the verification and
certificate against forum shopping; in Pfizer v. Galan, we upheld the validity of a verification signed by an
"employment specialist" who had not even presented any proof of her authority to represent the company;
in Novelty Philippines, Inc., v. CA, we ruled that a personnel officer who signed the petition but did not attach
the authority from the company is authorized to sign the verification and non-forum shopping certificate; and
in Lepanto Consolidated Mining Company v. WMC Resources International Pty. Ltd. (Lepanto), we ruled that
the Chairperson of the Board and President of the Company can sign the verification and certificate against
non-forum shopping even without the submission of the board’s authorization.
In sum, we have held that the following officials or employees of the company can sign the
verification and certification without need of a board resolution: (1) the Chairperson of the Board of
Directors, (2) the President of a corporation, (3) the General Manager or Acting General Manager, (4)
Personnel Officer, and (5) an Employment Specialist in a labor case.
While the above cases do not provide a complete listing of authorized signatories to the verification and
certification required by the rules, the determination of the sufficiency of the authority was done on a case to
case basis. The rationale applied in the foregoing cases is to justify the authority of corporate
officers or representatives of the corporation to sign the verification or certificate against forum
shopping, being “in a position to verify the truthfulness and correctness of the allegations in the
petition.” (Emphases supplied)
Given the present factual circumstances, we find that the liberal jurisprudential exception may be applied to
this case.
A distinction between noncompliance and substantial compliance with the requirements of a certificate of
non-forum shopping and verification as provided in the Rules of Court must be made. 22 In this case, it is
undisputed that the Petition filed with the RTC was accompanied by a Verification and Certification of Non-
Forum Shopping signed by Ms. Beleno, although without proof of authority from the board. However, this
Court finds that the belated submission of the Secretary’s Certificate constitutes substantial compliance with
Sections 4 and 5, Rule 7 of the 1997 Revised Rules on Civil Procedure.
A perusal of the Secretary’s Certificate signed by petitioner’s Corporate Secretary Rafael Khan and
submitted to the RTC shows that not only did the corporation authorize Ms. Beleno to execute the required
Verifications and/or Certifications of Non-Forum Shopping, but it likewise ratified her act of filing the Petition
with the RTC. The Minutes of the Special Meeting of the Board of Directors of petitioner-corporation on 19
May 2004 reads:cralavvonlinelawlibrary
RESOLVED, that Tiarra T. Batilaran-Beleno, Finance Director of the Corporation, be authorized, as she is
hereby authorized and empowered to represent, act, negotiate, sign, conclude and deliver, for and in the
name of the Corporation, any and all documents for the application, prosecution, defense, arbitration,
conciliation, execution, collection, compromise or settlement of all local tax refund cases pertaining to
payments made to the City of Manila pursuant to Section 21 of the Manila Revenue Code, as
amended;chanroblesvirtualawlibrary
RESOLVED, FURTHER, that Tiarra T. Batilaran-Beleno be authorized to execute Verifications and/or

Certifications as to Non-Forum Shopping of Complaints/Petitions that may be filed by the Corporation in the
above-mentioned tax-refund cases;chanroblesvirtualawlibrary

RESOLVED, FURTHER, that the previous institution by Tiarra T. Batilaran-Beleno of tax refund cases
on behalf of the Corporation, specifically Civil Cases Nos. 01-102074, 03-108163, and, 04-109044, all
titled “Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila” and pending in the
Regional Trial Court of Manila, as well as her execution of the Verifications and/or Certifications as to
Non-Forum Shopping in these tax refund cases, are hereby, approved and ratified in all
respects. (Emphasis supplied)
Clearly, this is not an ordinary case of belated submission of proof of authority from the board of directors.
Petitioner-corporation ratified the authority of Ms. Beleno to represent it in the Petition filed before the RTC,
particularly in Civil Case No. 03-108163, and consequently to sign the verification and certification of non-
forum shopping on behalf of the corporation. This fact confirms and affirms her authority and gives this
Court all the more reason to uphold that authority.23
Additionally, it may be remembered that the Petition filed with the RTC was a claim for a refund of business
taxes. It should be noted that the nature of the position of Ms. Beleno as the corporation’s finance
director/manager is relevant to the determination of her capability and sufficiency to verify the truthfulness
and correctness of the allegations in the Petition. A finance director/manager looks after the overall
management of the financial operations of the organization and is normally in charge of financial reports,
which necessarily include taxes assessed and paid by the corporation. Thus, for this particular case, Ms.
Beleno, as finance director, may be said to have been in a position to verify the truthfulness and correctness
of the allegations in the claim for a refund of the corporation’s business taxes.
In Mediserv v. Court of Appeals,24 we said that a liberal construction of the rules may be invoked in situations
in which there may be some excusable formal deficiency or error in a pleading, provided that the invocation
thereof does not subvert the essence of the proceeding, but at least connotes a reasonable attempt at
compliance with the rules. After all, rules of procedure are not to be applied in a very rigid, technical manner,
but are used only to help secure substantial justice.25
More importantly, taking into consideration the substantial issue of this case, we find a special circumstance
or compelling reason to justify the relaxation of the rule. Therefore, we deem it more in accord with
substantive justice that the case be decided on the merits.
Double taxation
As to the substantive issues, petitioner maintains that the enforcement of Section 21 of the Manila Revenue
Code constitutes double taxation in view of the taxes collected under Section 14 of the same code.
Petitioner points out that Section 21 is not in itself invalid, but the enforcement of this provision would
constitute double taxation if business taxes have already been paid under Section 14 of the same revenue
code. Petitioner further argues that since Ordinance Nos. 7988 and 8011 have already been declared null
and void in Coca-Cola Bottlers Philippines, Inc. v. City of Manila,26 all taxes collected and paid on the basis
of these ordinances should be refunded.
In turn, respondent argues that Sections 14 and 21 pertain to two different objects of tax; thus, they are not
of the same kind and character so as to constitute double taxation. Section 14 is a tax on manufacturers,
assemblers, and other processors, while Section 21 applies to businesses subject to excise, value-added, or
percentage tax. Respondent posits that under Section 21, petitioner is merely a withholding tax agent of the
City of Manila.
At the outset, it must be pointed out that the issue of double taxation is not novel, as it has already been
settled by this Court in The City of Manila v. Coca-Cola Bottlers Philippines, Inc.,27 in this
wise:cralavvonlinelawlibrary

Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to their own
detriment. Said exempting proviso was precisely included in said section so as to avoid double taxation.
Double taxation means taxing the same property twice when it should be taxed only once; that is, “taxing the
same person twice by the same jurisdiction for the same thing.” It is obnoxious when the taxpayer is taxed
twice, when it should be but once. Otherwise described as “direct duplicate taxation,” the two taxes must be
imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and the taxes must be of the same kind or character.
Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is
subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are
being imposed: (1) on the same subject matter – the privilege of doing business in the City of
Manila; (2) for the same purpose – to make persons conducting business within the City of Manila
contribute to city revenues; (3) by the same taxing authority – petitioner City of Manila; (4) within the
same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same
taxing periods – per calendar year; and (6) of the same kind or character – a local business tax
imposed on gross sales or receipts of the business.
The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance
No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the power of
municipalities and cities to impose a local business tax, and to which any local business tax imposed by
petitioner City of Manila must conform. It is apparent from a perusal thereof that when a municipality or
city has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines,
and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city
may no longer subject the same manufacturers, etc. to a business tax under Section 143(h) of the
same Code. Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT,
or percentage tax under the NIRC, and that are “not otherwise specified in preceding paragraphs.” In
the same way, businesses such as respondent’s, already subject to a local business tax under
Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer
be made liable for local business tax under Section 21 of the same Tax Ordinance [which is based on
Section 143(h) of the LGC].28 (Emphases supplied)
Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section 21 of the
Manila Revenue Code for the fourth quarter of 2001, considering that it had already been paying local
business tax under Section 14 of the same ordinance.
Further, we agree with petitioner that Ordinance Nos. 7988 and 8011 cannot be the basis for the collection of
business taxes. In Coca-Cola,29 this Court had the occasion to rule that Ordinance Nos. 7988 and 8011
were null and void for failure to comply with the required publication for three (3) consecutive days. Pertinent
portions of the ruling read:cralavvonlinelawlibrary
It is undisputed from the facts of the case that Tax Ordinance No. 7988 has already been declared by the
DOJ Secretary, in its Order, dated 17 August 2000, as null and void and without legal effect due to
respondents’ failure to satisfy the requirement that said ordinance be published for three consecutive days
as required by law. Neither is there quibbling on the fact that the said Order of the DOJ was never appealed
by the City of Manila, thus, it had attained finality after the lapse of the period to appeal.
Furthermore, the RTC of Manila, Branch 21, in its Decision dated 28 November 2001, reiterated the findings
of the DOJ Secretary that respondents failed to follow the procedure in the enactment of tax measures as
mandated by Section 188 of the Local Government Code of 1991, in that they failed to publish Tax
Ordinance No. 7988 for three consecutive days in a newspaper of local circulation. From the foregoing, it is
evident that Tax Ordinance No. 7988 is null and void as said ordinance was published only for one day in the
22 May 2000 issue of the Philippine Post in contravention of the unmistakable directive of the Local

Government Code of 1991.
Despite the nullity of Tax Ordinance No. 7988, the court a quo, in the assailed Order, dated 8 May 2002,
went on to dismiss petitioner’s case on the force of the enactment of Tax Ordinance No. 8011, amending Tax
Ordinance No. 7988. Significantly, said amending ordinance was likewise declared null and void by the DOJ
Secretary in a Resolution, dated 5 July 2001, elucidating that “[I]nstead of amending Ordinance No. 7988,
[herein] respondent should have enacted another tax measure which strictly complies with the requirements
of law, both procedural and substantive. The passage of the assailed ordinance did not have the effect
of curing the defects of Ordinance No. 7988 which, any way, does not legally exist.” Said Resolution
of the DOJ Secretary had, as well, attained finality by virtue of the dismissal with finality by this Court of
respondents’ Petition for Review on Certiorari in G.R. No. 157490 assailing the dismissal by the RTC of
Manila, Branch 17, of its appeal due to lack of jurisdiction in its Order, dated 11 August 2003. 30 (Emphasis in
the original)
Accordingly, respondent’s assessment under both Sections 14 and 21 had no basis. Petitioner is indeed
liable to pay business taxes to the City of Manila; nevertheless, considering that the former has already paid
these taxes under Section 14 of the Manila Revenue Code, it is exempt from the same payments under
Section 21 of the same code. Hence, payments made under Section 21 must be refunded in favor of
petitioner.
It is undisputed that petitioner paid business taxes based on Sections 14 and 21 for the fourth quarter of
2001 in the total amount of P470,932.21.31 Therefore, it is entitled to a refund of
P164,552.0432 corresponding to the payment under Section 21 of the Manila Revenue Code.
WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of Tax
Appeals En Banc Decision dated 1 October 2007 and Resolution dated 14 January 2008
are REVERSED and SET ASIDE.
SO ORDERED.

G.R. No. 127105 June 25, 1999

vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the
decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of
the Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
[Respondent], a domestic corporation organized and operating under the Philippine laws,
entered into a license agreement with SC Johnson and Son, United States of America
(USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the
[respondent] was granted the right to use the trademark, patents and technology owned by
the latter including the right to manufacture, package and distribute the products covered by
the Agreement and secure assistance in management, marketing and production from SC
Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology Transfer Board of the
Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration
No. 8064 (Exh. "A").
For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson
and Son, USA royalties based on a percentage of net sales and subjected the same to 25%
withholding tax on royalty payments which [respondent] paid for the period covering July
1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of
the BIR a claim for refund of overpaid withholding tax on royalties arguing that, "the
antecedent facts attending [respondent's] case fall squarely within the same circumstances
under which said MacGeorge and Gillete rulings were issued. Since the agreement was
approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to
the [respondent]. We therefore submit that royalties paid by the [respondent] to SC Johnson
and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation
clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West
Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the Court of Appeals],
par. 12). [Respondent's] claim for there fund of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance
——— ——— ——— ——— ———

July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461
———— ———— ———— ———
P6,421,770 P1,605,443 P642,177 P963,266 1
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C.
Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the case was docketed
as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992
to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the
Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00
representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. 2
The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which
rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and
affirming in toto the CTA ruling.
3
This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS
ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS
PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX
TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most
favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by

a resident of the United States from sources within the Philippines only if the circumstances of the resident
of the United States are similar to those of the resident of West Germany. Since the RP-US Tax Treaty
contains no "matching credit" provision as that provided under Article 24 of the RP-West Germany Tax
Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those
obtaining in the RP-West Germany Tax Treaty. Even assuming that the phrase "paid under similar
circumstances" refers to the payment of royalties, and not taxes, as held by the Court of Appeals, still, the
"most favored nation" clause cannot be invoked for the reason that when a tax treaty contemplates
circumstances attendant to the payment of a tax, or royalty remittances for that matter, these must
necessarily refer to circumstances that are tax-related. Finally, petitioner argues that since S.C. Johnson's
invocation of the "most favored nation" clause is in the nature of a claim for exemption from the application
of the regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1)
because it contains a defective certification against forum shopping as required under SC Circular No. 28-
91, that is, the certification was not executed by the petitioner herself but by her counsel; and (2) that the
"most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under similar
circumstances as those royalties subject to tax in other treaties; that the phrase "paid under similar
circumstances" does not refer to payment of the tax but to the subject matter of the tax, that is, royalties,
because the "most favored nation" clause is intended to allow the taxpayer in one state to avail of more
liberal provisions contained in another tax treaty wherein the country of residence of such taxpayer is also a
party thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the
same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks
of "royalties of the same kind paid under similar circumstances". S.C. Johnson also contends that the
Commissioner is estopped from insisting on her interpretation that the phrase "paid under similar
circumstances" refers to the manner in which the tax is paid, for the reason that said interpretation is
embodied in Revenue Memorandum Circular ("RMC") 39-92 which was already abandoned by the
Commissioner's predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95 which stated
that royalties paid to an American licensor are subject only to 10% withholding tax pursuant to Art 13(2)(b)
(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be given
retroactive effect except if such is prejudicial to the taxpayer pursuant to Section 246 of the National Internal
Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by
petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91
applies only to original actions and not to appeals, as in the instant case. Moreover, the requirement that the
certification should be signed by petitioner and not by counsel does not apply to petitioner who has only the
Office of the Solicitor General as statutory counsel. Petitioner reiterates that even if the phrase "paid under
similar circumstances" embodied in the most favored nation clause of the RP-US Tax Treaty refers to the
payment of royalties and not taxes, still the presence or absence of a "matching credit" provision in the said
RP-US Tax Treaty would constitute a material circumstance to such payment and would be determinative of
the said clause's application.
1âwphi1.nêt
We address first the objection raised by private respondent that the certification against forum shopping was
not executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through
one of its Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR

PETITIONS FILED WITH THE SUPREME
COURT AND THE COURT OF APPEALS TO
PREVENT FORUM SHOPPING OR

MULTIPLE FILING OF PETITIONS AND
COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and complaints
involving the same issues in the Supreme Court, the Court of Appeals or other tribunals or
agencies, with the result that said courts, tribunals or agencies have to resolve the same
issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of
Appeals, the petitioner aside from complying with pertinent provisions of the Rules of Court
and existing circulars, must certify under oath to all of the following facts or undertakings: (a)
he has not theretofore commenced any other action or proceeding involving the same issues
in the Supreme Court, the Court of Appeals, or any tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a
cause for the summary dismissal of the multiple petitions or complaints; . . .
The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed
before this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies only to
original actions and not to appeals as in the instant case is not supported by the text nor by the obvious
intent of the Circular which is to prevent multiple petitions that will result in the same issue being resolved by
different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any
other action involving the same issues in this Court or the Court of Appeals or any other tribunal or agency,
we are inclined to accept petitioner's submission that since the OSG is the only lawyer for the petitioner,
which is a government agency mandated under Section 35, Chapter 12, title III, Book IV of the 1987
Administrative Code to be represented only by the Solicitor General, the certification executed by the OSG
4
in this case constitutes substantial compliance with Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of
Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon
royalties received by a non-resident foreign corporation. The provision states insofar as pertinent
that —
1) Royalties derived by a resident of one of the Contracting States from

sources within the other Contracting State may be taxed by both Contracting
States.
2) However, the tax imposed by that Contracting State shall not exceed.
a) In the case of the United States, 15 percent of the gross

amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the

royalties;

(ii) 15 percent of the gross amount of the
royalties, where the royalties are paid by a
corporation registered with the Philippine
Board of Investments and engaged in
preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may

be imposed on royalties of the same kind paid
under similar circumstances to a resident of a
third State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the
concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty
which provides:
(2) However, such royalties may also be taxed in the Contracting State in
which they arise, and according to the law of that State, but the tax so
charged shall not exceed:
xxx xxx xxx
b) 10 percent of the gross amount of royalties arising from the

use of, or the right to use, any patent, trademark, design or
model, plan, secret formula or process, or from the use of or
the right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial,
commercial or scientific experience.
For as long as the transfer of technology, under Philippine law, is subject to approval, the
limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the
Republic of the Philippines, only apply if the contract giving rise to such royalties has been
approved by the Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross
amount of such royalties against German income and corporation tax for the taxes payable in the Philippines
on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-
Germany Tax Treaty states —
1) Tax shall be determined in the case of a resident of the Federal Republic

of Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law regarding

credit for foreign tax, there shall be allowed as a credit
against German income and corporation tax payable in
respect of the following items of income arising in the

Republic of the Philippines, the tax paid under the laws of the
Philippines in accordance with this Agreement on:
xxx xxx xxx
dd) royalties, as defined in paragraph 3 of

Article 12;
xxx xxx xxx
c) For the purpose of the credit referred in subparagraph; b)

the Philippine tax shall be deemed to be
xxx xxx xxx
cc) in the case of royalties for which the tax is

reduced to 10 or 15 per cent according to
paragraph 2 of Article 12, 20 percent of the
gross amount of such royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under
circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20
percent matching credit in the former convention and private respondent cannot invoke the concessional tax
rate on the strength of the most favored nation clause in the RP-US Tax Treaty. Petitioner's position is
explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on
income from sources within the Philippines is allowed as a credit against German income
and corporation tax on the same income. In the case of royalties for which the tax is reduced
to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax
Treaty, the credit shall be 20% of the gross amount of such royalty. To illustrate, the royalty
income of a German resident from sources within the Philippines arising from the use of, or
the right to use, any patent, trade mark, design or model, plan, secret formula or process, is
taxed at 10% of the gross amount of said royalty under certain conditions. The rate of 10% is
imposed if credit against the German income and corporation tax on said royalty is allowed in
favor of the German resident. That means the rate of 10% is granted to the German taxpayer
if he is similarly granted a credit against the income and corporation tax of West Germany.
The clear intent of the "matching credit" is to soften the impact of double taxation by different
jurisdictions.
The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-
West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not
paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty.
Therefore, the "most favored nation" clause in the RP-West Germany Tax Treaty cannot be
availed of in interpreting the provisions of the RP-US Tax Treaty.5

We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of
Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty
should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the reason that the
phrase "paid under similar circumstances" is followed by the phrase "to a resident of a third state". The
respondent court held that "Words are to be understood in the context in which they are used", and since
what is paid to a resident of a third state is not a tax but a royalty "logic instructs" that the treaty provision in
question should refer to royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to take into account the
purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent
to the payment of royalties, and none has been brought to our attention, which provides for the payment of
royalties under dissimilar circumstances. The tax rates on royalties and the circumstances of payment
thereof are the same for all the recipients of such royalties and there is no disparity based on nationality in
the circumstances of such payment. On the other hand, a cursory reading of the various tax treaties will
6
show that there is no similarity in the provisions on relief from or avoidance of double taxation as this is a
7
matter of negotiation between the contracting parties. As will be shown later, this dissimilarity is true
8
particularly in the treaties between the Philippines and the United States and between the Philippines and
West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for
the avoidance of double taxation. The purpose of these international agreements is to reconcile the national
9
fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of
10
international juridical double taxation, which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent
11
rationale for doing away with double taxation is of encourage the free flow of goods and services and the
movement of capital, technology and persons between countries, conditions deemed vital in creating robust
and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable
12
international investment climate and the protection against double taxation is crucial in creating such a
climate. 13
Double taxation usually takes place when a person is resident of a contracting state and derives income
from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In
order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective
rights to tax of the state of source or situs and of the state of residence with regard to certain classes of
income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states;
however, for other items of income or capital, both states are given the right to tax, although the amount of
tax that may be imposed by the state of source is limited. 14
The second method for the elimination of double taxation applies whenever the state of source is given a full
or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon
the state of residence to allow relief in order to avoid double taxation. There are two methods of relief — the
exemption method and the credit method. In the exemption method, the income or capital which is taxable in
the state of source or situs is exempted in the state of residence, although in some instances it may be
taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital. On
the other hand, in the credit method, although the income or capital which is taxed in the state of source is
still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter.
The basic difference between the two methods is that in the exemption method, the focus is on the income
or capital itself, whereas the credit method focuses upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up
a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the

other
country. Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances" in
16
the most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are
tax-related".
In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use
property or rights, i.e. trademarks, patents and technology, located within the Philippines. The United 17
States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under
the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties,
with a restraint on the tax that may be collected by the state of source. Furthermore, the method employed
18
to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States
(in an appropriate amount based upon the taxes paid or accrued to the Philippines) against the United
States tax, but such amount shall not exceed the limitations provided by United States law for the taxable
year. Under Article 13 thereof, the Philippines may impose one of three rates — 25 percent of the gross
19
amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the
Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine
tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a
third state.
Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the
concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes
imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar
circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants
similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned
from sources within the Philippines as those allowed to their German counterparts under the RP-Germany
Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article
24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation
tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article
23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does
not provide for similar crediting of 20% of the gross amount of royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the law
of the United States (as it may be amended from time to time without
changing the general principle thereof), the United States shall allow to a
citizen or resident of the United States as a credit against the United States
tax the appropriate amount of taxes paid or accrued to the Philippines and, in
the case of a United States corporation owning at least 10 percent of the
voting stock of a Philippine corporation from which it receives dividends in
any taxable year, shall allow credit for the appropriate amount of taxes paid
or accrued to the Philippines by the Philippine corporation paying such
dividends with respect to the profits out of which such dividends are paid.
Such appropriate amount shall be based upon the amount of tax paid or
accrued to the Philippines, but the credit shall not exceed the limitations (for
the purpose of limiting the credit to the United States tax on income from

sources within the Philippines or on income from sources outside the United
States) provided by United States law for the taxable year. . . .
The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b) (iii) of
the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the
fundamental purpose of such treaty which is to grant an incentive to the foreign investor by lowering the tax
and at the same time crediting against the domestic tax abroad a figure higher than what was collected in
the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be
achieved and that the general purpose is a more important aid to the meaning of a law than any rule which
grammar may lay down. It is the duty of the courts to look to the object to be accomplished, the evils to be
20
remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction
which will best effectuate its purpose. The Vienna Convention on the Law of Treaties states that a treaty
21
shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the
treaty in their context and in the light of its object and purpose.
22
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest
in the Philippines — a crucial economic goal for developing countries. The goal of double taxation
23
conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not
completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax
are lowered by the state of source, in this case, by the Philippines, there should be a concomitant
commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form
of a tax credit or exemption. Otherwise, the tax which could have been collected by the Philippine
24
government will simply be collected by another state, defeating the object of the tax treaty since the tax
burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some
form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment
resulting from a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the
investor, and it would be better to impose the regular rate rather than lose much-needed revenues to
another country.
At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the
two tax treaties in question should be considered in light of the purpose behind the most favored nation
clause.
The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable
than that which has been or may be granted to the "most favored" among other countries. The most 25
favored nation clause is intended to establish the principle of equality of international treatment by providing
that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to
those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail
26
of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is
also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in
the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2)
(b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark,
patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching
credit (20% for royalties) would derogate from the design behind the most grant equality of international
treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The
similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation
treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of
20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax

Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty
for the reason that there is no payment of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in
derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming
the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able
27
to justify his claim by the clearest grant of organic or statute law. Private respondent is claiming for a
28
refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim
that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on
royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of
the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET
ASIDE. SO ORDERED.
G.R. No. 188550 August 19, 2013
DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner) under Rule 45 of the
1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc) Decision 2 dated
29 May 2009 and Resolution3 dated 1 July 2009 in C.T.A. EB No. 456.
THE FACTS
In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of 1997, petitioner
withheld and remitted to respondent on 21 October 2003 the amount of PHP 67,688,553.51, which
represented the fifteen percent (15%) branch profit remittance tax (BPRT) on its regular banking unit (RBU)
net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years. 5
Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers
Assessment and Investigation Division on 4 October 2005 an administrative claim for refund or issuance of
its tax credit certificate in the total amount of PHP 22,562,851.17. On the same date, petitioner requested
from the International Tax Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax rate
of 10% under the RP-Germany Tax Treaty.6
Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review 7 with the CTA
on 18 October 2005. Petitioner reiterated its claim for the refund or issuance of its tax credit certificate for
the amount of PHP 22,562,851.17 representing the alleged excess BPRT paid on branch profits remittance
to DB Germany.
THE CTA SECOND DIVISION RULING8
After trial on the merits, the CTA Second Division found that petitioner indeed paid the total amount of PHP
67,688,553.51 representing the 15% BPRT on its RBU profits amounting to PHP 451,257,023.29 for 2002

and prior taxable years. Records also disclose that for the year 2003, petitioner remitted to DB Germany the
amount of EURO 5,174,847.38 (or PHP 330,175,961.88 at the exchange rate of PHP 63.804:1 EURO),
which is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the ground that the application for a tax treaty
relief was not filed with ITAD prior to the payment by the former of its BPRT and actual remittance of its
branch profits to DB Germany, or prior to its availment of the preferential rate of ten percent (10%) under the
RP-Germany Tax Treaty provision. The court a quo held that petitioner violated the fifteen (15) day period
mandated under Section III paragraph (2) of Revenue Memorandum Order (RMO) No. 1-2000.
Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation (formerly Southern
Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal Revenue 9 (Mirant) where the CTA
En Banc ruled that before the benefits of the tax treaty may be extended to a foreign corporation wishing to
avail itself thereof, the latter should first invoke the provisions of the tax treaty and prove that they indeed
apply to the corporation.
THE CTA EN BANC RULING10
The CTA En Banc affirmed the CTA Second Division’s Decision dated 29 August 2008 and Resolution dated
14 January 2009. Citing Mirant, the CTA En Banc held that a ruling from the ITAD of the BIR must be
secured prior to the availment of a preferential tax rate under a tax treaty. Applying the principle of stare
decisis et non quieta movere, the CTA En Banc took into consideration that this Court had denied the
Petition in G.R. No. 168531 filed by Mirant for failure to sufficiently show any reversible error in the assailed
judgment.11 The CTA En Banc ruled that once a case has been decided in one way, any other case involving
exactly the same point at issue should be decided in the same manner.
The court likewise ruled that the 15-day rule for tax treaty relief application under RMO No. 1-2000 cannot
be relaxed for petitioner, unlike in CBK Power Company Limited v. Commissioner of Internal Revenue. 12 In
that case, the rule was relaxed and the claim for refund of excess final withholding taxes was partially
granted. While it issued a ruling to CBK Power Company Limited after the payment of withholding taxes, the
ITAD did not issue any ruling to petitioner even if it filed a request for confirmation on 4 October 2005 that
the remittance of branch profits to DB Germany is subject to a preferential tax rate of 10% pursuant to Article
10 of the RP-Germany Tax Treaty.
ISSUE
This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 1-2000 will
deprive persons or corporations of the benefit of a tax treaty.
THE COURT’S RULING
The Petition is meritorious.
Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax of 15%
based on the total profits applied for or earmarked for remittance without any deduction of the tax
component. However, petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty, which
provides that where a resident of the Federal Republic of Germany has a branch in the Republic of the
Philippines, this branch may be subjected to the branch profits remittance tax withheld at source in
accordance with Philippine law but shall not exceed 10% of the gross amount of the profits remitted by that
branch to the head office.

By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines, remitting to
its head office in Germany, the benefit of a preferential rate equivalent to 10% BPRT.
On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment of the tax treaty relief
must be preceded by an application with ITAD at least 15 days before the transaction. The Order was issued
to streamline the processing of the application of tax treaty relief in order to improve efficiency and service to
the taxpayers. Further, it also aims to prevent the consequences of an erroneous interpretation and/or
application of the treaty provisions (i.e., filing a claim for a tax refund/credit for the overpayment of taxes or
for deficiency tax liabilities for underpayment).13
The crux of the controversy lies in the implementation of RMO No. 1-2000.
Petitioner argues that, considering that it has met all the conditions under Article 10 of the RP-Germany Tax
Treaty, the CTA erred in denying its claim solely on the basis of RMO No. 1-2000. The filing of a tax treaty
relief application is not a condition precedent to the availment of a preferential tax rate. Further, petitioner
posits that, contrary to the ruling of the CTA, Mirant is not a binding judicial precedent to deny a claim for
refund solely on the basis of noncompliance with RMO No. 1-2000.
Respondent counters that the requirement of prior application under RMO No. 1-2000 is mandatory in
character. RMO No. 1-2000 was issued pursuant to the unquestioned authority of the Secretary of Finance
to promulgate rules and regulations for the effective implementation of the NIRC. Thus, courts cannot ignore
administrative issuances which partakes the nature of a statute and have in their favor a presumption of
legality.
The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance with this
prerequisite is fatal to the taxpayer’s availment of the preferential tax rate.
We disagree.
A minute resolution is not a binding precedent
At the outset, this Court’s minute resolution on Mirant is not a binding precedent. The Court has clarified this
matter in Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue 14 as follows:
It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the
merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being questioned.
As a result, our ruling in that case has already become final. When a minute resolution denies or dismisses
a petition for failure to comply with formal and substantive requirements, the challenged decision, together
with its findings of fact and legal conclusions, are deemed sustained. But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it constitutes res
judicata. However, if other parties or another subject matter (even with the same parties and issues) is
involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel, the Court noted that a
previous case, CIR v. Baier-Nickel involving the same parties and the same issues, was previously disposed
of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the CA.
Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the latter case because the two
cases involved different subject matters as they were concerned with the taxable income of different taxable
years.
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision.
The constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the

facts and the law on which the judgment is based must be expressed clearly and distinctly applies only to
decisions, not to minute resolutions. A minute resolution is signed only by the clerk of court by authority of
the justices, unlike a decision. It does not require the certification of the Chief Justice. Moreover, unlike
decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso of Section 4(3)
of Article VIII speaks of a decision. Indeed, as a rule, this Court lays down doctrines or principles of law
which constitute binding precedent in a decision duly signed by the members of the Court and certified by
the Chief Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision cannot bind this Court in
cases of a similar nature. There are differences in parties, taxes, taxable periods, and treaties involved;
more importantly, the disposition of that case was made only through a minute resolution.
Tax Treaty vs. RMO No. 1-2000
Our Constitution provides for adherence to the general principles of international law as part of the law of the
land.15 The time-honored international principle of pacta sunt servanda demands the performance in good
faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is
binding upon the parties, and obligations under the treaty must be performed by them in good faith. 16 More
importantly, treaties have the force and effect of law in this jurisdiction. 17
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in
turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." 18 CIR v. S.C. Johnson and
Son, Inc. further clarifies that "tax conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for
doing away with double taxation is to encourage the free flow of goods and services and the movement of
capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such a climate." 19
Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical
double taxation, which is why they are also known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations undertaken." 20 Thus, laws
and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled
thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the RP-Germany Tax Treaty does not provide
for any pre-requisite for the availment of the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a deprivation of
entitlement to a tax treaty relief for failure to comply with the 15-day period. We recognize the clear intention
of the BIR in implementing RMO No. 1-2000, but the CTA’s outright denial of a tax treaty relief for failure to
strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to
ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations.
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as
required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a
violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax
relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance
would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should
merely operate to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000. Logically, noncompliance with tax treaties has negative implications on international relations, and
1âwphi1
unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000
involve an administrative procedure, these may be remedied through other system management processes,
e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of
a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax treaty
relief.
Prior Application vs. Claim for Refund
Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or application of the
treaty provisions. The objective of the BIR is to forestall assessments against corporations who erroneously
availed themselves of the benefits of the tax treaty but are not legally entitled thereto, as well as to save
such investors from the tedious process of claims for a refund due to an inaccurate application of the tax
treaty provisions. However, as earlier discussed, noncompliance with the 15-day period for prior application
should not operate to automatically divest entitlement to the tax treaty relief especially in claims for refund.
The underlying principle of prior application with the BIR becomes moot in refund cases, such as the present
case, where the very basis of the claim is erroneous or there is excessive payment arising from non-
availment of a tax treaty relief at the first instance. In this case, petitioner should not be faulted for not
complying with RMO No. 1-2000 prior to the transaction. It could not have applied for a tax treaty relief within
the period prescribed, or 15 days prior to the payment of its BPRT, precisely because it erroneously paid the
BPRT not on the basis of the preferential tax rate under
the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior application
requirement becomes illogical. Therefore, the fact that petitioner invoked the provisions of the RP-Germany
Tax Treaty when it requested for a confirmation from the ITAD before filing an administrative claim for a
refund should be deemed substantial compliance with RMO No. 1-2000.
Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax recovery when there has
been an erroneous payment of tax. The outright denial of petitioner’s claim for a refund, on the sole ground
1âwphi1
of failure to apply for a tax treaty relief prior to the payment of the BPRT, would defeat the purpose of
Section 229.
Petitioner is entitled to a refund
It is significant to emphasize that petitioner applied – though belatedly – for a tax treaty relief, in substantial
compliance with RMO No. 1-2000. A ruling by the BIR would have confirmed whether petitioner was entitled
to the lower rate of 10% BPRT pursuant to the RP-Germany Tax Treaty.
Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:
Based on the evidence presented, both documentary and testimonial, petitioner was able to establish the
following facts:
a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a corporation organized
and existing under the laws of the Federal Republic of Germany;
b. That on October 21, 2003, it filed its Monthly Remittance Return of Final Income Taxes Withheld
under BIR Form No. 1601-F and remitted the amount of ₱67,688,553.51 as branch profits
remittance tax with the BIR; and

c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a clearance, petitioner
remitted to Frankfurt Head Office the amount of EUR5,174,847.38 (or ₱330,175,961.88 at 63.804
Peso/Euro) representing its 2002 profits remittance. 22
The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its RBU net income,
due for remittance to DB Germany amounting to PHP 451,257,023.29 for 2002 and prior taxable years. 23
Likewise, both the administrative and the judicial actions were filed within the two-year prescriptive period
pursuant to Section 229 of the NIRC.24
Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of 10% BPRT in
accordance with the RP-Germany Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income amounting to PHP
451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT. Thus, it is proper to grant
petitioner a refund ofthe difference between the PHP 67,688,553.51 (15% BPRT) and PHP 45,125,702.34
(10% BPRT) or a total of PHP 22,562,851.17.
WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of Tax
Appeals En Banc Decision dated 29 May 2009 and Resolution dated 1 July 2009 are REVERSED and SET
ASIDE. A new one is hereby entered ordering respondent Commissioner of Internal Revenue to refund or
issue a tax credit certificate in favor of petitioner Deutsche Bank AG Manila Branch the amount of TWENTY
TWO MILLION FIVE HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FIFTY ONE PESOS AND
SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine currency, representing the erroneously paid
BPRT for 2002 and prior taxable years.
SO ORDERED.

G.R. Nos. 193383-84, January 14, 2015
CBK POWER COMPANY LIMITED, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.
[G.R. NOS. 193407-08]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CBK POWER COMPANY

LIMITED, Respondent.
PERLAS-BERNABE, J.:
Assailed in these consolidated petitions for review on certiorari1 are the Decision2 dated March 29, 2010 and
the Resolution3 dated August 16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. Nos. 469
and 494, which affirmed the Decision 4 dated August 28, 2008, the Amended Decision 5 dated February 12,
2009, and the Resolution6 dated May 7, 2009 of the CTA First Division in CTA Case Nos. 6699, 6884, and
7166 granting CBK Power Company Limited (CBK Power) a refund of its excess final withholding tax for the
taxable years 2001 to 2003.cralawred
The Facts
CBK Power is a limited partnership duly organized and existing under the laws of the Philippines, and
primarily engaged in the development and operation of the Caliraya, Botocan, and Kalayaan hydroelectric
power generating plants in Laguna (CBK Project). It is registered with the Board of Investments (BOI) as
engaged in a preferred pioneer area of investment under the Omnibus Investment Code of
1987.7chanRoblesvirtualLawlibrary
To finance the CBK Project, CBK Power obtained in August 2000 a syndicated loan from several foreign
banks,8 i.e., BNP Paribas, Dai-ichi Kangyo Bank, Limited, Industrial Bank of Japan, Limited, and Societe
General (original lenders), acting through an Inter-Creditor Agent, Dai-ichi Kangyo Bank, a Japanese bank
that subsequently merged with the Industrial Bank of Japan, Limited (Industrial Bank of Japan) and the Fuji
Bank, Limited (Fuji Bank), with the merged entity being named as Mizuho Corporate Bank (Mizuho Bank).
One of the merged banks, Fuji Bank, had a branch in the Philippines, which became a branch of Mizuho
Bank as a result of the merger. The Industrial Bank of Japan and Mizuho Bank are residents of Japan for
purposes of income taxation, and recognized as such under the relevant provisions of the income tax
treaties between the Philippines and Japan.
Certain portions of the loan were subsequently assigned by the original lenders to various other banks,
including Fortis Bank (Nederland) N.V. (Fortis-Netherlands) and Raiffesen Zentral Bank Osterreich AG
(Raiffesen Bank). Fortis-Netherlands, in turn, assigned its portion of the loan to Fortis Bank S.A./N.V. (Fortis-
Belgium), a resident of Belgium. Fortis-Netherlands and Raiffesen Bank, on the other hand, are residents of
Netherlands and Austria, respectively.10chanR
In February 2001, CBK Power borrowed money from Industrial Bank of Japan, Fortis-Netherlands, Raiffesen
Bank, Fortis-Belgium, and Mizuho Bank for which it remitted interest payments from May 2001 to May
2003.11 It allegedly withheld final taxes from said payments based on the following rates, and paid the same
to the Revenue District Office No. 55 of the Bureau of Internal Revenue (BIR): (a) fifteen percent (15%) for
Fortis-Belgium, Fortis-Netherlands, and Raiffesen Bank; and (b) twenty percent (20%) for Industrial Bank of
Japan and Mizuho Bank.

However, according to CBK Power, under the relevant tax treaties between the Philippines and the
respective countries in which each of the banks is a resident, the interest income derived by the
aforementioned banks are subject only to a preferential tax rate of 10%, viz.:13chanRoblesvirtualLawlibrary
BANK COUNTRY OF PREFERENTIAL RATE

RESIDENCE UNDER THE RELEVANT TAX TREATY
Fortis Bank S.A./N.V. Belgium 10% (Article 111, RP-Belgium Tax Treaty)
Industrial Bank of Japan Japan 10% (Article 113, RP-Japan Tax Treaty)
Raiffesen Zentral Bank Austria 10% (Article 113, RP-Austria Tax Treaty)
Osterreich AG
Mizuho Corporate Bank Japan 10% (Article 113, RP-Japan Tax Treaty)
Accordingly, on April 14, 2003, CBK Power filed a claim for refund of its excess final withholding taxes
allegedly erroneously withheld and collected for the years 2001 and 2002 with the BIR Revenue Region No.
9. The claim for refund of excess final withholding taxes in 2003 was subsequently filed on March 4,
The Commissioner of Internal Revenue’s (Commissioner) inaction on said claims prompted CBK Power to
file petitions for review before the CTA, viz.:15chanRoblesvirtualLawlibrary
(1) CTA Case No. 6699 was filed by CBK Power on June 6, 2003 seeking the refund of excess final
withholding tax in the total amount of P6,393,267.20 covering the year 2001 with respect to interest income
derived by [Fortis-Belgium], Industrial Bank of Japan, and [Raiffesen Bank]. An Answer was filed by the
Commissioner on July 25, 2003.
(2) CTA Case No. 6884 was filed by CBK Power on March 5, 2004 seeking for the refund of the amount
of P8,136,174.31 covering [the] year 2002 with respect to interest income derived by [Fortis-Belgium],
Industrial Bank of Japan, [Mizuho Bank], and [Raiffesen Bank]. The Commissioner filed his Answer on May
7, 2004.
x x x x
(3) CTA Case No. 7166 was filed by CBK [Power] on March 9, 2005 seeking for the refund of [the amount
of] P1,143,517.21 covering [the] year 2003 with respect to interest income derived by [Fortis-Belgium], and
[Raiffesen Bank]. The Commissioner filed his Answer on May 9, 2005. (Emphases supplied)
CTA Case Nos. 6699 and 6884 were consolidated first on June 18, 2004. Subsequently, however, all three
cases – CTA Case Nos. 6699, 6884, and 7166 – were consolidated in a Resolution dated August 3,
The CTA First Division Rulings
In a Decision17 dated August 28, 2008, the CTA First Division granted the petitions and ordered the refund
of the amount of P15,672,958.42 upon a finding that the relevant tax treaties were applicable to the case. 18 It
cited DA-ITAD Ruling No. 099-0319 dated July 16, 2003, issued by the BIR, confirming CBK Power’s claim
that the interest payments it made to Industrial Bank of Japan and Raiffesen Bank were subject to a final
withholding tax rate of only 10% of the gross amount of interest, pursuant to Article 11 of the Republic of the
Philippines (RP)-Austria and RP-Japan tax treaties. However, in DA-ITAD Ruling No. 126-03 20 dated August
18, 2003, also issued by the BIR, interest payments to Fortis-Belgium were likewise subjected to the same
rate pursuant to the Protocol Amending the RP-Belgium Tax Treaty, the provisions of which apply on income
derived or which accrued beginning January 1, 2000. With respect to interest payments made to Fortis-

Netherlands before it assigned its portion of the loan to Fortis-Belgium, the CTA First Division likewise
granted the preferential rate.
The CTA First Division categorically declared in the August 28, 2008 Decision that the required International
Tax Affairs Division (ITAD) ruling was not a condition sine qua non for the entitlement of the tax relief sought
by CBK Power,22 however, upon motion for reconsideration23 filed by the Commissioner, the CTA First
Division amended its earlier decision by reducing the amount of the refund from P15,672,958.42
to P14,835,720.39 on the ground that CBK Power failed to obtain an ITAD ruling with respect to its
transactions with Fortis-Netherlands.24 In its Amended Decision25 dated February 12, 2009, the CTA First
Division adopted26 the ruling in the case of Mirant (Philippines) Operations Corporation (formerly: Southern
Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal Revenue (Mirant),27 cited by the
Commissioner in his motion for reconsideration, where the Court categorically pronounced in its Resolution
dated February 18, 2008 that an ITAD ruling must be obtained prior to availing a preferential tax rate.
CBK Power moved for the reconsideration 28 of the Amended Decision dated February 12, 2009, arguing in
the main that the Mirant case, which was resolved in a minute resolution, did not establish a legal precedent.
The motion was denied, however, in a Resolution 29 dated May 7, 2009 for lack of merit.
Undaunted, CBK Power elevated the matter to the CTA En Banc on petition for review,30 docketed as C.T.A
E.B. No. 494. The Commissioner likewise filed his own petition for review, 31 which was docketed as C.T.A.
E.B. No. 469. Said petitions were subsequently consolidated. 32chanRoblesvirtualLawlibrary
CBK Power raised the lone issue of whether or not an ITAD ruling is required before it can avail of the
preferential tax rate. On the other hand, the Commissioner claimed that CBK Power failed to exhaust
administrative remedies when it filed its petitions before the CTA First Division, and that said petitions were
not filed within the two-year prescriptive period for initiating judicial claims for refund. 33chan
The CTA En Banc Ruling
In a Decision34 dated March 29, 2010, the CTA En Banc affirmed the ruling of the CTA First Division that a
prior application with the ITAD is indeed required by Revenue Memorandum Order (RMO) 1-2000, 35 which
administrative issuance has the force and effect of law and is just as binding as a tax treaty. The CTA En
Banc declared the Mirant case as without any binding effect on CBK Power, having been resolved by this
Court merely through minute resolutions, and relied instead on the mandatory wording of RMO 1-2000, as
follows:36chanRoblesvirtualLawlibrary
III. Policies:
xxxx
2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form
No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the
transaction i.e. payment of dividends, royalties, etc., accompanied by supporting documents
justifying the relief. x x x.
The CTA En Banc further held that CBK Power’s petitions for review were filed within the two-year
prescriptive period provided under Section 229 37 of the National Internal Revenue Code of 1997 38 (NIRC),
and that it was proper for CBK Power to have filed said petitions without awaiting the final resolution of its
administrative claims for refund before the BIR; otherwise, it would have completely lost its right to seek
judicial recourse if the two-year prescriptive period lapsed with no judicial claim filed.

CBK Power’s motion for partial reconsideration and the Commissioner’s motion for reconsideration of the
foregoing Decision were both denied in a Resolution39 dated August 16, 2010 for lack of merit; hence, the
present consolidated petitions.
The Issues Before the Court
In G.R. Nos. 193383-84, CBK Power submits the sole legal issue of whether the BIR may add a
requirement – prior application for an ITAD ruling – that is not found in the income tax treaties signed by the
Philippines before a taxpayer can avail of preferential tax rates under said
treaties.40chanRoblesvirtualLawlibrary
On the other hand, in G.R. Nos. 193407-08, the Commissioner maintains that CBK Power is not entitled to a
refund in the amount of P1,143,517.21 for the period covering taxable year 2003 as it allegedly failed to
exhaust administrative remedies before seeking judicial redress.41chanRoblesvirtualLawlibrary
The Court resolves the foregoing in seriatim.
A. G.R. Nos. 193383-84
The Philippine Constitution provides for adherence to the general principles of international law as part of
the law of the land. The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the agreement. In this
jurisdiction, treaties have the force and effect of law.
The issue of whether the failure to strictly comply with RMO No. 1-2000 will deprive persons or corporations
of the benefit of a tax treaty was squarely addressed in the recent case of Deutsche Bank AG Manila Branch
v. Commissioner of Internal Revenue43 (Deutsche Bank), where the Court emphasized that the obligation
to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000 , viz.:
recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright denial of a
tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of
the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled
persons or corporations.
required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute
a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of
tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance
would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR
should merely operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000. Logically, noncompliance with tax treaties has negative implications on international relations, and
unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000
involve an administrative procedure, these may be remedied through other system management
processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled
to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior
application for tax treaty relief.44 (Emphases and underscoring supplied)
The objective of RMO No. 1-2000 in requiring the application for treaty relief with the ITAD before a party’s
availment of the preferential rate under a tax treaty is to avert the consequences of any erroneous

interpretation and/or application of treaty provisions, such as claims for refund/credit for overpayment of
taxes, or deficiency tax liabilities for underpayment.45 However, as pointed out in Deutsche Bank, the
underlying principle of prior application with the BIR becomes moot in refund cases – as in the present
case – where the very basis of the claim is erroneous or there is excessive payment arising from the non-
availment of a tax treaty relief at the first instance. Just as Deutsche Bank was not faulted by the Court for
not complying with RMO No. 1-2000 prior to the transaction, 46 so should CBK Power. In parallel, CBK Power
could not have applied for a tax treaty relief 15 days prior to its payment of the final withholding tax on the
interest paid to its lenders precisely because it erroneously paid said tax on the basis of the regular rate
as prescribed by the NIRC, and not on the preferential tax rate provided under the different treaties. As
stressed by the Court, the prior application requirement under RMO No. 1-2000 then
becomes illogical.47chanRoblesvirtualLawlibrary
Not only is the requirement illogical, but it is also an imposition that is not found at all in the applicable tax
treaties. In Deutsche Bank, the Court categorically held that the BIR should not impose additional
requirements that would negate the availment of the reliefs provided for under international agreements,
especially since said tax treaties do not provide for any prerequisite at all for the availment of the benefits
under said agreements.
It bears reiterating that the application for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief. 49 Since CBK Power had requested for confirmation from
the ITAD on June 8, 2001 and October 28, 2002 50 before it filed on April 14, 2003 its administrative claim for
refund of its excess final withholding taxes, the same should be deemed substantial compliance with
RMO No. 1-2000, as in Deutsche Bank. To rule otherwise would defeat the purpose of Section 229 of the
NIRC in providing the taxpayer a remedy for erroneously paid tax solely on the ground of failure to make
prior application for tax treaty relief.51 As the Court exhorted in Republic v. GST Philippines, Inc.,52 while the
taxpayer has an obligation to honestly pay the right taxes, the government has a corollary duty to implement
tax laws in good faith; to discharge its duty to collect what is due to it; and to justly return what has been
erroneously and excessively given to it.
In view of the foregoing, the Court holds that the CTA En Banc committed reversible error in affirming the
reduction of the amount of refund to CBK Power from P15,672,958.42 to P14,835,720.39 to exclude its
transactions with Fortis-Netherlands for which no ITAD ruling was obtained. 54 CBK Power’s petition in G.R.
Nos. 193383-84 is therefore granted.
The opposite conclusion is, however, reached with respect to the Commissioner’s petition in G.R. Nos.
193407-08.
B. G.R. Nos. 193407-08
The Commissioner laments55 that he was deprived of the opportunity to act on the administrative claim for
refund of excess final withholding taxes covering taxable year 2003 which CBK Power filed on March 4,
2005, a Friday, then the following Wednesday, March 9, 2005, the latter hastily elevated the case on petition
for review before the CTA. He argues56 that the failure on the part of CBK Power to give him a reasonable
time to act on said claim is violative of the doctrines of exhaustion of administrative remedies and of primary
jurisdiction.
For its part, CBK Power maintains 57 that it would be prejudicial to wait for the Commissioner’s ruling before it
files its judicial claim since it only has 2 years from the payment of the tax within which to file both its
administrative and judicial claims.
The Court rules for CBK Power.

Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes. Section
204 applies to administrative claims for refund, while Section 229 to judicial claims for refund. In both
instances, the taxpayer’s claim must be filed within two (2) years from the date of payment of the tax or
penalty. However, Section 229 of the NIRC further states the condition that a judicial claim for refund may
not be maintained until a claim for refund or credit has been duly filed with the Commissioner. These
provisions respectively read:
SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. – The
Commissioner may –
xxxx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the
value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his
discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value
upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files
in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax
or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written
claim for credit or refund.
xxxx
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any
sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum
alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such
tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: x x x.
(Emphases and underscoring supplied)
Indubitably, CBK Power’s administrative and judicial claims for refund of its excess final withholding taxes
covering taxable year 2003 were filed within the two-year prescriptive period, as shown by the table
below:58chanRoblesvirtualLawlibrary
WHEN FINAL WHEN LAST DAY OF WHEN WHEN PETITION

INCOME REMITTANCE THE 2-YEAR ADMINISTRATIVE FOR REVIEW
TAXES WERE RETURN PRESCRIPTIVE CLAIM WAS WAS FILED
WITHHELD FILED PERIOD FILED
February 2003 03/10/03 03/10/05 March 4, 2005 03/09/05
May 2003 06/10/03 06/10/05 March 4, 2005 03/09/05
With respect to the remittance filed on March 10, 2003, the Court agrees with the ratiocination of the CTA En
Banc in debunking the alleged failure to exhaust administrative remedies. Had CBK Power awaited the
action of the Commissioner on its claim for refund prior to taking court action knowing fully well that the
prescriptive period was about to end, it would have lost not only its right to seek judicial recourse but its right

to recover the final withholding taxes it erroneously paid to the government thereby suffering irreparable
damage.59chanRoblesvirtualLawlibrary
Also, while it may be argued that, for the remittance filed on June 10, 2003 that was to prescribe on June 10,
2005, CBK Power could have waited for, at the most, three (3) months from the filing of the administrative
claim on March 4, 2005 until the last day of the two-year prescriptive period ending June 10, 2005, that is, if
only to give the BIR at the administrative level an opportunity to act on said claim, the Court cannot, on that
basis alone, deny a legitimate claim that was, for all intents and purposes, timely filed in accordance with
Section 229 of the NIRC. There was no violation of Section 229 since the law, as worded, only requires that
an administrative claim be priorly filed.
In the foregoing instances, attention must be drawn to the Court’s ruling in P.J. Kiener Co., Ltd. v.
David60 (Kiener), wherein it was held that in no wise does the law, i.e., Section 306 of the old Tax Code (now,
Section 229 of the NIRC), imply that the Collector of Internal Revenue first act upon the taxpayer’s claim,
and that the taxpayer shall not go to court before he is notified of the Collector’s action. In Kiener, the Court
went on to say that the claim with the Collector of Internal Revenue was intended primarily as a notice of
warning that unless the tax or penalty alleged to have been collected erroneously or illegally is refunded,
court action will follow, viz.:
The controversy centers on the construction of the aforementioned section of the Tax Code which reads:
SEC. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any
sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Collector of Internal Revenue; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty.
The preceding provisions seem at first blush conflicting. It will be noticed that, whereas the first sentence
requires a claim to be filed with the Collector of Internal Revenue before any suit is commenced, the last
makes imperative the bringing of such suit within two years from the date of collection. But the conflict is
only apparent and the two provisions easily yield to reconciliation, which it is the office of statutory
construction to effectuate, where possible, to give effect to the entire enactment.
To this end, and bearing in mind that the Legislature is presumed to have understood the language it used
and to have acted with full idea of what it wanted to accomplish, it is fair and reasonable to say without doing
violence to the context or either of the two provisions, that by the first is meant simply that the Collector of
Internal Revenue shall be given an opportunity to consider his mistake, if mistake has been committed,
before he is sued, but not, as the appellant contends that pending consideration of the claim, the period of
two years provided in the last clause shall be deemed interrupted. Nowhere and in no wise does the law
imply that the Collector of Internal Revenue must act upon the claim, or that the taxpayer shall not
go to court before he is notified of the Collector’s action. x x x. We understand the filing of the claim
with the Collector of Internal Revenue to be intended primarily as a notice of warning that unless the
tax or penalty alleged to have been collected erroneously or illegally is refunded, court action will
follow. x x x.61 (Emphases supplied)
That being said, the foregoing refund claims of CBK Power should all be granted, and, the petition of the
Commissioner in G.R. Nos. 193407-08 be denied for lack of merit.
WHEREFORE, the petition in G.R. Nos. 193383-84 is GRANTED. The Decision dated March 29, 2010 and
the Resolution dated August 16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. Nos. 469
and 494 are hereby REVERSED and SET ASIDE and a new one entered REINSTATING the Decision of the

CTA First Division dated August 28, 2008 ordering the refund in favor of CBK Power Company Limited the
amount of P15,672,958.42 representing its excess final withholding taxes for the taxable years 2001 to
2003. On the other hand, the petition in G.R. Nos. 193407-08 is DENIED for lack of merit.
SO ORDERED.

G.R. No. 147188 September 14, 2004

vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan
and Mario Luza Bautista, respondents.
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision 1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP
No. 57799 affirming the 3 January 2000 Decision 2 of the Court of Tax Appeals (CTA) in C.T.A. Case No.
5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income
tax of Cibeles Insurance Corporation (CIC) in the amount of ₱79,099,999.22 for the year 1989, and ordered
the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway
Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal
Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building
known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building
stands for an amount of not less than ₱90 million.4
On 30 August 1989, Toda purportedly sold the property for ₱100 million to Rafael A. Altonaga, who, in turn,
sold the same property on the same day to Royal Match Inc. (RMI) for ₱200 million. These two transactions
were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public. 5
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of ₱10 million. 6
On 16 April 1990, CIC filed its corporate annual income tax return 7 for the year 1989, declaring, among other
things, its gain from the sale of real property in the amount of ₱75,728.021. After crediting withholding taxes
of ₱254,497.00, it paid ₱26,341,2078 for its net taxable income of ₱75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for ₱12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks. 9 Three and a half years later, or on 16 January 1994,
Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice 10 and demand letter to
the CIC for deficiency income tax for the year 1989 in the amount of ₱79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old
CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover,
Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the
fiscal years 1987-1989.11

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna
Kapunan and Mario Luza Bautista, received a Notice of Assessment 12 dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of
₱79,099,999.22, computed as follows:
Income Tax – 1989

Net Income per return ₱75,987,725.00
Add: Additional gain on sale of real property taxable

under ordinary corporate income but were
substituted with individual capital gains(₱200M –
100M) 100,000,000.00
Total Net Taxable Income per investigation ₱175,987,725.00

Tax Due thereof at 35% ₱ 61,595,703.75
Less: Payment already made
1. Per return ₱26,595,704.00
2. Thru Capital Gains Tax made
by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of tax due
₱ 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total ₱ 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE ₱ 79,099,999.22

==============
The Estate thereafter filed a letter of protest.13
In the letter dated 19 October 1995, 14 the Commissioner dismissed the protest, stating that a fraudulent
scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the
additional gain of ₱100 million, which resulted in the change in the income structure of the proceeds of the
sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher
corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review 15 with the CTA alleging that the Commissioner
erred in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the
properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had
already prescribed.

In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the
property from CIC nor the seller of the same property to RMI. The additional gain of ₱100 million (the
difference between the second simulated sale for ₱200 million and the first simulated sale for ₱100 million)
realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at
the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to
evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR
only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period
prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may
be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud,
the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the
99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the
name of the individual directors of CIC, should be held liable for the deficiency income tax, especially
because the gains realized from the sale were withdrawn by him as cash advances or paid to him as cash
dividends. Since he is already dead, his estate shall answer for his liability.
In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed
fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived
scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There being
no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that prescribed in
Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the
return. Thus, the government’s right to assess CIC prescribed on 15 April 1993. The assessment issued on
9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of
99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate
personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax of
₱79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9
January 1995.
In its motion for reconsideration, 19 the Commissioner insisted that the sale of the property owned by CIC was
the result of the connivance between Toda and Altonaga. She further alleged that the latter was a
representative, dummy, and a close business associate of the former, having held his office in a property
owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for
representation services rendered. The CTA denied20 the motion for reconsideration, prompting the
Commissioner to file a petition for review21 with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA,
reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters
of taxation, is "better situated to determine the correctness, propriety, and legality of the income tax
assessments assailed by the Toda Estate."22
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking
the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO

FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES
INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO
ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD
PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the
Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of
purchasing it. She further points out that the documents themselves prove the fact of fraud in that (1) the two
sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between
Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former
registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of
1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early
as 4 May 1989, CIC received ₱40 million from RMI, and not from Altonaga. The said amount was debited by
RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of ₱40
million was withdrawn by Toda through the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of
Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if
any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be
used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used
outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional
civil or criminal liabilities.23
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less
than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is
due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or
"deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful. 24
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to
the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received ₱40 million
from RMI,25 and not from Altonaga. That ₱40 million was debited by RMI and reflected in its trial balance 26 as
"other inv. – Cibeles Bldg." Also, as of 31 July 1989, another ₱40 million was debited and reflected in RMI’s
trial balance as "other inv. – Cibeles Bldg." This would show that the real buyer of the properties was RMI,
and not the intermediary Altonaga. lavvphi1.net
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of
the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the

assistant accountant of CIC and an old timer in the company. 27 But Mr. Prieto did not testify on this matter,
hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either,
since the letter-request for investigation of Altonaga was unserved, 28 Altonaga having left for the United
States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the
admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That
admission is borne by the records. In its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one
hundred percent. But isn’t this precisely the definition of tax planning? Change the structure of the
funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of
property for stock, changing the structure of the property and the tax to be paid. As long as it is done
legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is
absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [ sic] cannot
be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e.,
from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such
scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue and unconscionable advantage is taken of
another."30
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual capital
gains tax, and not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and transferring title
of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property
and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a
sham, and without business purpose and economic substance. Doubtless, the execution of the two sales
was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability. lavvphi1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion. 31
Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by the
means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step
from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person
cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which
to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist
solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of
Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct
entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws.
Hence, the sale to Altonaga should be disregarded for income tax purposes. 34 The two sale transactions
should be treated as a single direct sale by CIC to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now
27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, and partnerships, no matter how created
or organized but not including general professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not exceed one
hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred
thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual
capital gains tax provided for in Section 34 (h) of the NIRC of 1986 35 (now 6% under Section 24 (D) (1) of the
Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the
BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case
of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court after the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal action for collection thereof… .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to
file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or
omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR
on the tax consequence of the two sale transactions. 36 Thus, the BIR was amply informed of the transactions
even prior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales
were openly made with the execution of public documents and the declaration of taxes for 1989. However,
these circumstances do not negate the existence of fraud. As earlier discussed those two transactions were
tainted with fraud. And even assuming arguendo that there was no fraud, we find that the income tax return
filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of
the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from
the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to
have been discovered only on 8 March 1991. 37 The assessment for the 1989 deficiency income tax of CIC
was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax
was well within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it.
Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of
a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It
has been held in a number of cases that personal liability of a corporate director, trustee, or officer along,
albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders,
or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action. 38
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and
voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987,
1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those
reported in its audited financial statement as of December 31, 1989, attached hereto as "Annex B"
and made a part hereof. The business of Cibeles has at all times been conducted in full compliance
with all applicable laws, rules and regulations. SELLER undertakes and agrees to hold the
BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years
1987, 1988 and 1989.39 [Underscoring Supplied].
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax
liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally
liable therefor. Respondent estate cannot, therefore, deny liability for CIC’s deficiency income tax for the
year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Toda’s
contractual undertaking, as contained in the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of
Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is
hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay ₱79,099,999.22 as deficiency
income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the
Costs against respondent.
SO ORDERED.

G.R. No. L-17725 February 28, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.
BARRERA, J.:
From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay to
plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of the filing
of the complaint until fully paid, plus costs, defendant Mambulao Lumber Company interposed the present
appeal.1
The facts of the case are briefly stated in the decision of the trial court, to wit: .
The facts of this case are not contested and may be briefly summarized as follows: (a) under the first
cause of action, for forest charges covering the period from September 10, 1952 to May 24, 1953,
defendants admitted that they have a liability of P587.37, which liability is covered by a bond
executed by defendant General Insurance & Surety Corporation for Mambulao Lumber Company,
jointly and severally in character, on July 29, 1953, in favor of herein plaintiff; (b) under the second
cause of action, both defendants admitted a joint and several liability in favor of plaintiff in the sum of
P296.70, also covered by a bond dated November 27, 1953; and (c) under the third cause of action,
both defendants admitted a joint and several liability in favor of plaintiff for P3,928.30, also covered
by a bond dated July 20, 1954. These three liabilities aggregate to P4,802.37. If the liability of
defendants in favor of plaintiff in the amount already mentioned is admitted, then what is the defense
interposed by the defendants? The defense presented by the defendants is quite unusual in more
ways than one. It appears from Exh. 3 that from July 31, 1948 to December 29, 1956, defendant
Mambulao Lumber Company paid to the Republic of the Philippines P8,200.52 for 'reforestation
charges' and for the period commencing from April 30, 1947 to June 24, 1948, said defendant paid
P927.08 to the Republic of the Philippines for 'reforestation charges'. These reforestation were paid
to the plaintiff in pursuance of Section 1 of Republic Act 115 which provides that there shall be
collected, in addition to the regular forest charges provided under Section 264 of Commonwealth Act
466 known as the National Internal Revenue Code, the amount of P0.50 on each cubic meter of
timber... cut out and removed from any public forest for commercial purposes. The amount collected
shall be expended by the director of forestry, with the approval of the secretary of agriculture and
commerce, for reforestation and afforestation of watersheds, denuded areas ... and other public
forest lands, which upon investigation, are found needing reforestation or afforestation .... The total
amount of the reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the
contention of the defendant Mambulao Lumber Company that since the Republic of the Philippines
has not made use of those reforestation charges collected from it for reforesting the denuded area of
the land covered by its license, the Republic of the Philippines should refund said amount, or, if it
cannot be refunded, at least it should be compensated with what Mambulao Lumber Company owed
the Republic of the Philippines for reforestation charges. In line with this thought, defendant
Mambulao Lumber Company wrote the director of forestry, on February 21, 1957 letter Exh. 1, in
paragraph 4 of which said defendant requested "that our account with your bureau be credited with
all the reforestation charges that you have imposed on us from July 1, 1947 to June 14, 1956,
amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber Company was
answered by the director of forestry on March 12, 1957, marked Exh. 2, in which the director of
forestry quoted an opinion of the secretary of justice, to the effect that he has no discretion to extend
the time for paying the reforestation charges and also explained why not all denuded areas are
being reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-appellant
company to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or applied to the
payment of the sum of P4,802.37 as forest charges due and owing from appellant to appellee. It is
appellant's contention that said sum of P9,127.50, not having been used in the reforestation of the area
covered by its license, the same is refundable to it or may be applied in compensation of said sum of
P4,802.37 due from it as forest charges. 1äwphï1.ñët
We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:
SECTION 1. There shall be collected, in addition to the regular forest charges provided for under
Section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six, known
as the National Internal Revenue Code, the amount of fifty centavos on each cubic meter of timber
for the first and second groups and forty centavos for the third and fourth groups cut out and
removed from any public forest for commercial purposes. The amount collected shall be expended
by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural Resources
(commerce), for reforestation and afforestation of watersheds, denuded areas and cogon and open
lands within forest reserves, communal forest, national parks, timber lands, sand dunes, and other
public forest lands, which upon investigation, are found needing reforestation or afforestation, or
needing to be under forest cover for the growing of economic trees for timber, tanning, oils, gums,
and other minor forest products or medicinal plants, or for watersheds protection, or for prevention of
erosion and floods and preparation of necessary plans and estimate of costs and for reconnaisance
survey of public forest lands and for such other expenses as may be deemed necessary for the
proper carrying out of the purposes of this Act.
All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and
from the sale of barks, medical plants and other products derived from plantations as herein
provided shall constitute a fund to be known as Reforestation Fund, to be expended exclusively in
carrying out the purposes provided for under this Act. All provincial or city treasurers and their
deputies shall act as agents of the Director of Forestry for the collection of the revenues or incomes
derived from the provisions of this Act. (Emphasis supplied.)
Under this provision, it seems quite clear that the amount collected as reforestation charges from a timber
licenses or concessionaire shall constitute a fund to be known as the Reforestation Fund, and that the same
shall be expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural
Resources for the reforestation or afforestation, among others, of denuded areas which, upon investigation,
are found to be needing reforestation or afforestation. Note that there is nothing in the law which requires
that the amount collected as reforestation charges should be used exclusively for the reforestation of the
area covered by the license of a licensee or concessionaire, and that if not so used, the same should be
refunded to him. Observe too, that the licensee's area may or may not be reforested at all, depending on
whether the investigation thereof by the Director of Forestry shows that said area needs reforestation. The
conclusion seems to be that the amount paid by a licensee as reforestation charges is in the nature of a tax
which forms a part of the Reforestation Fund, payable by him irrespective of whether the area covered by
his license is reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out
the purposes provided for thereunder, namely, the reforestation or afforestation, among others, of denuded
areas needing reforestation or afforestation.
Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code 2 is applicable,
such that the sum of P9,127.50 paid by it as reforestation charges may compensate its indebtedness to
appellee in the sum of P4,802.37 as forest charges. But in the view we take of this case, appellant and
appellee are not mutually creditors and debtors of each other. Consequently, the law on compensation is
inapplicable. On this point, the trial court correctly observed: .

Under Article 1278, NCC, compensation should take place when two persons in their own right are
creditors and debtors of each other. With respect to the forest charges which the defendant
Mambulao Lumber Company has paid to the government, they are in the coffers of the government
as taxes collected, and the government does not owe anything, crystal clear that the Republic of the
Philippines and the Mambulao Lumber Company are not creditors and debtors of each other,
because compensation refers to mutual debts. ..
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out
of the contract or transaction sued on. ... (80 C.J.S. 73-74. ) .
The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on which
the general rule is based, is that taxes are not in the nature of contracts between the party and party
but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of
which, the personal consent of individual taxpayers is not required. ... If the taxpayer can properly
refuse to pay his tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some legitimate and
necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the tax
must await and abide the result of a lawsuit, and meanwhile the financial affairs of the government
will be thrown into great confusion. (47 Am. Jur. 766-767.)
WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with costs
against the defendant-appellant. So ordered.

G.R. No. L-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott
Price, respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte, Ron.
Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this Court
directing the respondent court below to execute the judgment in favor of the Government against the estate
of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960,
this Court declared as final and executory the order for the payment by the estate of the estate and
inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First Instance of
Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter Scott
Price." In order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961,
to the court below for the execution of the judgment. The petition was, however, denied by the court which
held that the execution is not justifiable as the Government is indebted to the estate under administration in
the amount of P262,200. The orders of the court below dated August 20, 1960 and September 28, 1960,
respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix of
the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of Lands
dated September 19, 1956 and acknowledged before Notary Public Salvador V. Esguerra, legal
adviser in Malacañang to Executive Secretary De Leon dated December 14, 1956, the note of His
Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the latter to
pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No. 2700
appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc.,
represented by the administratrix Simeona K. Price, as directed in the above note of the President.
Considering these facts, the Court orders that the payment of inheritance taxes in the sum of
P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in
accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be
deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K. Price,
in this estate, the balance to be paid by the Government to her without further delay. (Order of
August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and it orders that the
payment of the claim of the Collector of Internal Revenue be deferred until the Government shall
have paid its accounts to the administratrix herein amounting to P262,200.00. It may not be amiss to
repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-creditors
before it can insist in the prompt payment of the latter's account to it, specially taking into
consideration that the amount due to the Government draws interests while the credit due to the
present state does not accrue any interest. (Order of September 28, 1960)
The petition to set aside the above orders of the court below and for the execution of the claim of the
Government against the estate must be denied for lack of merit. The ordinary procedure by which to settle
claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for the claimant to

present a claim before the probate court so that said court may order the administrator to pay the amount
thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First Instance of
Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of
debts and expenses of administration. The proper procedure is for the court to order the sale of
personal estate or the sale or mortgage of real property of the deceased and all debts or expenses
of administrator and with the written notice to all the heirs legatees and devisees residing in the
Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of
real estate is to be made, the regulations contained in Rule 90, section 7, should be complied with. 1äwphï1.ñët
Execution may issue only where the devisees, legatees or heirs have entered into possession of
their respective portions in the estate prior to settlement and payment of the debts and expenses of
administration and it is later ascertained that there are such debts and expenses to be paid, in which
case "the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle
the amount of their several liabilities, and order how much and in what manner each person shall
contribute, and may issue execution if circumstances require" (Rule 89, section 6; see also Rule 74,
Section 4; Emphasis supplied.) And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the
estate of a deceased person, the properties belonging to the estate are under the jurisdiction of the court
and such jurisdiction continues until said properties have been distributed among the heirs entitled thereto.
During the pendency of the proceedings all the estate is in custodia legis and the proper procedure is not to
allow the sheriff, in case of the court judgment, to seize the properties but to ask the court for an order to
require the administrator to pay the amount due from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction of
the estate had found that the claim of the estate against the Government has been recognized and an
amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No.
2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the
claim of the intestate for services rendered have already become overdue and demandable is well as fully
liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of
Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect
by operation of law, and extinguished both debts to the concurrent amount, eventhough the creditors
and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate
of the deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not the proper
remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.

G.R. No. 92585 May 8, 1992
CALTEX PHILIPPINES, INC., petitioner,

vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C.
FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.
DAVIDE, JR., J.:
This is a petition erroneously brought under Rule 44 of the Rules of Court questioning the authority of the
1
Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil Price
Stabilization Fund (OPSF) and seeking the reversal of said Commission's decision denying its claims for
recovery of financing charges from the Fund and reimbursement of underrecovery arising from sales to the
National Power Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and
Marcopper Mining Corporation (MAR-COPPER), preventing it from exercising the right to offset its
remittances against its reimbursement vis-a-vis the OPSF and disallowing its claims which are still pending
resolution before the Office of Energy Affairs (OEA) and the Department of Finance (DOF).
Pursuant to the 1987 Constitution, any decision, order or ruling of the Constitutional Commissions may be
2 3
brought to this Court on certiorari by the aggrieved party within thirty (30) days from receipt of a copy
thereof. The certiorari referred to is the special civil action for certiorari under Rule 65 of the Rules of Court. 4
Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings and
rulings of the administrator of the fund itself and in disallowing a claim which is still pending resolution at the
OEA level, and (b) "grave abuse of discretion and completely without jurisdiction" in declaring that petitioner
5
cannot avail of the right to offset any amount that it may be required under the law to remit to the OPSF
against any amount that it may receive by way of reimbursement therefrom are sufficient to bring this
petition within Rule 65 of the Rules of Court, and, considering further the importance of the issues raised,
the error in the designation of the remedy pursued will, in this instance, be excused.
The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.) No. 1956,
as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as follows:
Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of
Energy to be designated as Oil Price Stabilization Fund (OPSF) for the purpose of
minimizing frequent price changes brought about by exchange rate adjustments and/or
changes in world market prices of crude oil and imported petroleum products. The Oil Price
Stabilization Fund may be sourced from any of the following:
a) Any increase in the tax collection from ad valorem tax or customs duty
imposed on petroleum products subject to tax under this Decree arising from
exchange rate adjustment, as may be determined by the Minister of Finance
in consultation with the Board of Energy;
b) Any increase in the tax collection as a result of the lifting of tax exemptions
of government corporations, as may be determined by the Minister of
Finance in consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment
the resources of the Fund through an appropriate Order that may be issued
by the Board of Energy requiring payment by persons or companies engaged
in the business of importing, manufacturing and/or marketing petroleum
products;
d) Any resulting peso cost differentials in case the actual peso costs paid by
oil companies in the importation of crude oil and petroleum products is less
than the peso costs computed using the reference foreign exchange rate as
fixed by the Board of Energy.
The Fund herein created shall be used for the following:
1) To reimburse the oil companies for cost increases in crude oil and
imported petroleum products resulting from exchange rate adjustment and/or
increase in world market prices of crude oil;
2) To reimburse the oil companies for possible cost under-recovery incurred

as a result of the reduction of domestic prices of petroleum products. The
magnitude of the underrecovery, if any, shall be determined by the Ministry of
Finance. "Cost underrecovery" shall include the following:
i. Reduction in oil company take as directed by the Board of

Energy without the corresponding reduction in the landed cost
of oil inventories in the possession of the oil companies at the
time of the price change;
ii. Reduction in internal ad valorem taxes as a result of

foregoing government mandated price reductions;
iii. Other factors as may be determined by the Ministry of

Finance to result in cost underrecovery.
The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.
The material operative facts of this case, as gathered from the pleadings of the parties, are not disputed.
On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as
Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for the years 1986
and 1988, of the additional tax on petroleum products authorized under the aforesaid Section 8 of P.D. No.
1956 which, as of 31 December 1987, amounted to P335,037,649.00 and informing it that, pending such
remittance, all of its claims for reimbursement from the OPSF shall be held in abeyance. 6
On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with the OEA
showed that the grand total of its unremitted collections of the above tax is P1,287,668,820.00, broken down
as follows:
1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from receipt of the
letter; advising it that the COA will hold in abeyance the audit of all its claims for reimbursement from the
OPSF; and directing it to desist from further offsetting the taxes collected against outstanding claims in 1989
and subsequent periods. 7
In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement certificates
from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to March 1989, invoking
in support thereof COA Circular No. 89-299 on the lifting of pre-audit of government transactions of national
government agencies and government-owned or controlled corporations. 8
In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from the OPSF and
repeated its earlier directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action on the
reimbursement claims. 9
By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the payment
of the collections and the recovery of claims, since the outright payment of the sum of P1.287 billion to the
OEA as a prerequisite for the processing of said claims against the OPSF will cause a very serious
impairment of its cash position. The proposal reads:
10
We, therefore, very respectfully propose the following:
(1) Any procedural arrangement acceptable to COA to facilitate monitoring of

payments and reimbursements will be administered by the ERB/Finance
Dept./OEA, as agencies designated by law to administer/regulate OPSF.
(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as
payment to OPSF, similarly OEA will deliver to Caltex the same amount in
cash reimbursement from OPSF.
(3) The COA audit will commence immediately and will be conducted
expeditiously.
(4) The review of current claims (1989) will be conducted expeditiously to

preclude further accumulation of reimbursement from OPSF.
On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921 accepting the
above-stated proposal but prohibiting petitioner from further offsetting remittances and reimbursements for
the current and ensuing years. Decision No. 921 reads:
11
This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron
Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex (Philippines)
Inc., for reconsideration of this Commission's adverse action embodied in its letters dated
February 2, 1989 and March 9, 1989, the former directing immediate remittance to the Oil
Price Stabilization Fund of collections made by the firms pursuant to P.D. 1956, as amended
by E.O. No. 137, S. 1987, and the latter reiterating the same directive but further advising the
firms to desist from offsetting collections against their claims with the notice that "this
Commission will hold in abeyance the audit of all . . . claims for reimbursement from the
OPSF."
It appears that under letters of authority issued by the Chairman, Energy Regulatory Board,
the aforenamed oil companies were allowed to offset the amounts due to the Oil Price
Stabilization Fund against their outstanding claims from the said Fund for the calendar years

1987 and 1988, pending with the then Ministry of Energy, the government entity charged with
administering the OPSF. This Commission, however, expressing serious doubts as to the
propriety of the offsetting of all types of reimbursements from the OPSF against all
categories of remittances, advised these oil companies that such offsetting was bereft of
legal basis. Aggrieved thereby, these companies now seek reconsideration and in support
thereof clearly manifest their intent to make arrangements for the remittance to the Office of
Energy Affairs of the amount of collections equivalent to what has been previously
offset, provided that this Commission authorizes the Office of Energy Affairs to prepare the
corresponding checks representing reimbursement from the OPSF. It is alleged that the
implementation of such an arrangement, whereby the remittance of collections due to the
OPSF and the reimbursement of claims from the Fund shall be made within a period of not
more than one week from each other, will benefit the Fund and not unduly jeopardize the
continuing daily cash requirements of these firms.
Upon a circumspect evaluation of the circumstances herein obtaining, this Commission

perceives no further objectionable feature in the proposed arrangement, provided that 15%
of whatever amount is due from the Fund is retained by the Office of Energy Affairs, the
same to be answerable for suspensions or disallowances, errors or discrepancies which may
be noted in the course of audit and surcharges for late remittances without prejudice to
similar future retentions to answer for any deficiency in such surcharges, and provided
further that no offsetting of remittances and reimbursements for the current and ensuing
years shall be allowed.
Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director
Wenceslao R. De la Paz of the Office of Energy Affairs:12
Dear Atty. dela Paz:
Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on
our initial verification of documents submitted to us by your Office in support of Caltex
(Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as its outstanding
claims against the Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased
to inform your Office that Caltex (Philippines), Inc. shall be required to remit to OPSF an
amount of P1,505,668,906, representing remittances to the OPSF which were offset against
its claims reimbursements (net of unsubmitted claims). In addition, the Commission hereby
authorize (sic) the Office of Energy Affairs (OEA) to cause payment of P1,959,182,612 to
Caltex, representing claims initially allowed in audit, the details of which are presented
hereunder: . . .
As presented in the foregoing computation the disallowances totalled P387,683,535, which

included P130,420,235 representing those claims disallowed by OEA, details of which is (sic)
shown in Schedule 1 as summarized as follows:
Disallowance of COA
Particulars Amount
Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558

——————
P257,263,300
Disallowances of OEA 130,420,235

————————— ——————
Total P387,683,535
The reasons for the disallowances are discussed hereunder:
a. Recovery of Financing Charges
Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that
recovery of financing charges by oil companies is not among the items for which the OPSF
may be utilized. Therefore, it is our view that recovery of financing charges has no legal
basis. The mechanism for such claims is provided in DOF Circular 1-87.
b. Product Sales –– Sales to International Vessels/Airlines
BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-
03-095 indicating that (sic) February 7, 1987 as the effectivity date that (sic) oil companies
should pay OPSF impost on export sales of petroleum products. Effective February 7, 1987
sales to international vessels/airlines should not be included as part of its domestic sales.
Changing the effectivity date of the resolution from February 7, 1987 to October 20, 1987 as
covered by subsequent ERB Resolution No. 88-12 dated November 18, 1988 has allowed
Caltex to include in their domestic sales volumes to international vessels/airlines and claim
the corresponding reimbursements from OPSF during the period. It is our opinion that the
effectivity of the said resolution should be February 7, 1987.
c. Inventory losses –– Settlement of Ad Valorem
We reviewed the system of handling Borrow and Loan (BLA) transactions including the
related BLA agreement, as they affect the claims for reimbursements of ad valorem taxes.
We observed that oil companies immediately settle ad valorem taxes for BLA transaction
(sic). Loan balances therefore are not tax paid inventories of Caltex subject to
reimbursements but those of the borrower. Hence, we recommend reduction of the claim for
July, August, and November, 1987 amounting to P14,034,786.
d. Sales to Atlas/Marcopper
LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of
payment of all taxes, duties, fees, imposts and other charges whether direct or indirect due
and payable by the copper mining companies in distress to the national and local
governments." It is our opinion that LOI 1416 which implements the exemption from payment
of OPSF imposts as effected by OEA has no legal basis.
Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as
herein authorized shall be subject to availability of funds of OPSF as of May 31, 1989 and
applicable auditing rules and regulations. With regard to the disallowances, it is further
informed that the aggrieved party has 30 days within which to appeal the decision of the
Commission in accordance with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision based
on the following grounds:
13
A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS,

RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE AND THE
ENERGY REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.
xxx xxx xxx
B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF

EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY
BOARD ARE LEGAL AND SHOULD BE RESPECTED AND APPLIED UNLESS DECLARED
NULL AND VOID BY COURTS OR REPEALED BY LEGISLATION.
xxx xxx xxx
C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY

THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.
xxx xxx xxx
On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for Reconsideration. 14
On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner Fernandez
dissenting in part, handed down Decision No. 1171 affirming the disallowance for recovery of financing
charges, inventory losses, and sales to MARCOPPER and ATLAS, while allowing the recovery of product
sales or those arising from export sales. Decision No. 1171 reads as follows:
15
Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority
to recover financing charges from the OPSF on the basis of Department of Finance (DOF)
Circular 1-87, dated February 18, 1987, which allowed oil companies to "recover cost of
financing working capital associated with crude oil shipments," and provided a schedule of
reimbursement in terms of peso per barrel. It appears that on November 6, 1989, the DOF
issued a memorandum to the President of the Philippines explaining the nature of these
financing charges and justifying their reimbursement as follows:
As part of your program to promote economic recovery, . . . oil companies

(were authorized) to refinance their imports of crude oil and petroleum
products from the normal trade credit of 30 days up to 360 days from date of
loading . . . Conformably . . ., the oil companies deferred their foreign
exchange remittances for purchases by refinancing their import bills from the
normal 30-day payment term up to the desired 360 days. This refinancing of
importations carried additional costs (financing charges) which then became,
due to government mandate, an inherent part of the cost of the purchases of
our country's oil requirement.
We beg to disagree with such contention. The justification that financing charges increased
oil costs and the schedule of reimbursement rate in peso per barrel (Exhibit 1) used to
support alleged increase (sic) were not validated in our independent inquiry. As manifested in
Exhibit 2, using the same formula which the DOF used in arriving at the reimbursement rate
but using comparable percentages instead of pesos, the ineluctable conclusion is that the oil

companies are actually gaining rather than losing from the extension of credit because such
extension enables them to invest the collections in marketable securities which have much
higher rates than those they incur due to the extension. The Data we used were obtained
from CPI (CALTEX) Management and can easily be verified from our records.
With respect to product sales or those arising from sales to international vessels or
airlines, . . ., it is believed that export sales (product sales) are entitled to claim refund from
the OPSF.
As regard your claim for underrecovery arising from inventory losses, . . . It is the considered
view of this Commission that the OPSF is not liable to refund such surtax on inventory losses
because these are paid to BIR and not OPSF, in view of which CPI (CALTEX) should seek
refund from BIR. . . .
Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to
claim recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984, since these
copper mining companies did not pay CPI (CALTEX) and OPSF imposts which were added
to the selling price.
Upon a circumspect evaluation, this Commission believes and so holds that the CPI
(CALTEX) has no authority to claim reimbursement for this uncollected OPSF impost
because LOI 1416 dated July 17, 1984, which exempts distressed mining companies from
"all taxes, duties, import fees and other charges" was issued when OPSF was not yet in
existence and could not have contemplated OPSF imposts at the time of its formulation.
Moreover, it is evident that OPSF was not created to aid distressed mining companies but
rather to help the domestic oil industry by stabilizing oil prices.
Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it imputes to the
COA the commission of the following errors: 16
RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING

CHARGES FROM THE OPSF.
II
RESPONDENT COMMISSION ERRED IN DISALLOWING

CPI's CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES
17
TO NPC.
III
RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR

REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.
IV
RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS

LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-
VIS THE OPSF.

V
RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE

STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.
In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition within ten
(10) days from notice. 18
On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the Office
of the Solicitor General, filed their Comment. 19
This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file their
respective Memoranda within twenty (20) days from notice. 20
In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment filed on 6
September 1990 be considered as the Memorandum for respondents. 21
Upon the other hand, petitioner filed its Memorandum on 14 August 1991.
I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:
(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a second
purpose, to wit:
2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if
any, shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the
following:
i. Reduction in oil company take as directed by the Board of Energy without

the corresponding reduction in the landed cost of oil inventories in the
possession of the oil companies at the time of the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in

cost underrecovery.
the "other factors" mentioned therein that may be determined by the Ministry (now Department) of Finance
may include financing charges for "in essence, financing charges constitute unrecovered cost of acquisition
of crude oil incurred by the oil companies," as explained in the 6 November 1989 Memorandum to the
President of the Department of Finance; they "directly translate to cost underrecovery in cases where the
money market placement rates decline and at the same time the tax on interest income increases. The
relationship is such that the presence of underrecovery or overrecovery is directly dependent on the amount
and extent of financing charges."
(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the basis of
Department of Finance Circular No. 1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated with
crude oil shipments, the following guidelines on the utilization of the Oil Price Stabilization
Fund pertaining to the payment of the foregoing (sic) exchange risk premium and recovery of
financing charges will be implemented:
1. The OPSF foreign exchange premium shall be reduced to a flat rate of one
(1) percent for the first (6) months and 1/32 of one percent per month
thereafter up to a maximum period of one year, to be applied on crude oil'
shipments from January 1, 1987. Shipments with outstanding financing as of
January 1, 1987 shall be charged on the basis of the fee applicable to the
remaining period of financing.
2. In addition, for shipments loaded after January 1987, oil companies shall
be allowed to recover financing charges directly from the OPSF per barrel of
crude oil based on the following schedule:
Financi
ng
Period
Reimb
urseme
nt Rate
Pesos
per
Barrel
Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28
The above rates shall be subject to review every sixty

days. 22
Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the Office of
Energy Affairs as follows:
HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila
Dear Sir:
This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987
and subsequent discussions held by the Price Review committee on February 6, 1987.
On the basis of the representations made, the Department of Finance recognizes the
necessity to reduce the foreign exchange risk premium accruing to the Oil Price Stabilization

Fund (OPSF). Such a reduction would allow the industry to recover partly associated
financing charges on crude oil imports. Accordingly, the OPSF foreign exchange risk fee
shall be reduced to a flat charge of 1% for the first six (6) months plus 1/32% of 1% per
month thereafter up to a maximum period of one year, effective January 1, 1987. In addition,
since the prevailing company take would still leave unrecovered financing charges,
reimbursement may be secured from the OPSF in accordance with the provisions of the
attached Department of Finance circular. 23
Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the guidelines for
the computation of the foreign exchange risk fee and the recovery of financing charges from the OPSF, to
wit:
B. FINANCE CHARGES
1. Oil companies shall be allowed to recover financing charges directly from

the OPSF for both crude and product shipments loaded after January 1, 1987
based on the following rates:
Financi
ng
Period
Reimb
urseme
nt Rate
(PBbl.)
Less than 180 days None

240 days to 229 (sic) days 4.02
360 days to more 8.28
2. The above rates shall be subject to review every sixty days. 24
Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further
guidelines on the recoverability of financing charges, to wit:
Following are the supplemental rules to Department of Finance Circular No. 1-87 dated
February 18, 1987 which allowed the recovery of financing charges directly from the Oil Price
Stabilization Fund. (OPSF):
1. The Claim for reimbursement shall be on a per shipment basis.
2. The claim shall be filed with the Office of Energy Affairs together with the
claim on peso cost differential for a particular shipment and duly certified
supporting documents provided for under Ministry of Finance No. 11-85.
3. The reimbursement shall be on the form of reimbursement certificate

(Annex A) to be issued by the Office of Energy Affairs. The said certificate
may be used to offset against amounts payable to the OPSF. The oil

companies may also redeem said certificates in cash if not utilized, subject to
availability of funds.
25
The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-017. 26
The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the light of
the determination of executive agencies. The determination by the Department of Finance and the OEA that
financing charges are recoverable from the OPSF is entitled to great weight and consideration. The 27
function of the COA, particularly in the matter of allowing or disallowing certain expenditures, is limited to the
promulgation of accounting and auditing rules for, among others, the disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties. 28
(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that
petitioner is gaining, instead of losing, from the extension of credit, is belatedly raised and not supported by
expert analysis.
In impeaching the validity of petitioner's assertions, the respondents argue that:
1. The Constitution gives the COA discretionary power to disapprove irregular or

unnecessary government expenditures and as the monetary claims of petitioner are not
allowed by law, the COA acted within its jurisdiction in denying them;
2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the
OPSF;
3. Under the principle of ejusdem generis, the "other factors" mentioned in the second
purpose of the OPSF pursuant to E.O. No. 137 can only include "factors which are of the
same nature or analogous to those enumerated;"
4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the
Department of Finance violates P.D. No. 1956 and E.O. No. 137; and
5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise
allow reimbursement of financing
charges. 29
We find no merit in the first assigned error.
As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of
petitioner –– that such does not extend to the disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or use of government funds and properties, but only to the
promulgation of accounting and auditing rules for, among others, such disallowance –– to be untenable in
the light of the provisions of the 1987 Constitution and related laws.
Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:
Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or
uses of funds and property, owned or held in trust by, or pertaining to, the Government, or
any of its subdivisions, agencies, or instrumentalities, including government-owned and
controlled corporations with original charters, and on a post-audit basis: (a) constitutional

bodies, commissions and offices that have been granted fiscal autonomy under this
Constitution; (b) autonomous state colleges and universities; (c) other government-owned or
controlled corporations and their subsidiaries; and (d) such non-governmental entities
receiving subsidy or equity, directly or indirectly, from or through the government, which are
required by law or the granting institution to submit to such audit as a condition of subsidy or
equity. However, where the internal control system of the audited agencies is inadequate, the
Commission may adopt such measures, including temporary or special pre-audit, as are
necessary and appropriate to correct the deficiencies. It shall keep the general accounts, of
the Government and, for such period as may be provided by law, preserve the vouchers and
other supporting papers pertaining thereto.
(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to
define the scope of its audit and examination, establish the techniques and methods required
therefor, and promulgate accounting and auditing rules and regulations, including those for
the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or,
unconscionable expenditures, or uses of government funds and properties.
These present powers, consistent with the declared independence of the Commission, are broader and 30
more extensive than that conferred by the 1973 Constitution. Under the latter, the Commission was
empowered to:
Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to
the revenues, and receipts of, and expenditures or uses of funds and property, owned or
held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities including government-owned or controlled corporations, keep the general
accounts of the Government and, for such period as may be provided by law, preserve the
vouchers pertaining thereto; and promulgate accounting and auditing rules and regulations
including those for the prevention of irregular, unnecessary, excessive, or extravagant
expenditures or uses of funds and property. 31
Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor, the
General Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section 2 of Article
XI thereof provided:
Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the
revenues and receipts from whatever source, including trust funds derived from bond issues;
and audit, in accordance with law and administrative regulations, all expenditures of funds or
property pertaining to or held in trust by the Government or the provinces or municipalities
thereof. He shall keep the general accounts of the Government and the preserve the
vouchers pertaining thereto. It shall be the duty of the Auditor General to bring to the
attention of the proper administrative officer expenditures of funds or property which, in his
opinion, are irregular, unnecessary, excessive, or extravagant. He shall also perform such
other functions as may be prescribed by law.
As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures or uses
of funds, the 1935 Constitution did not grant the Auditor General the power to issue rules and regulations to
prevent the same. His was merely to bring that matter to the attention of the proper administrative officer.
The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez and Ramos vs. Aquino, are no longer controlling as the two (2) were decided in the light of
32 33
the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the 1935 Constitution
and the Commission on Audit under the 1973 Constitution authorized them to disallow illegal expenditures of
funds or uses of funds and property. Our present Constitution retains that same power and authority, further
strengthened by the definition of the COA's general jurisdiction in Section 26 of the Government Auditing
Code of the Philippines and Administrative Code of 1987. Pursuant to its power to promulgate accounting
34 35
and auditing rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the
36
COA is responsible for the enforcement of the rules and regulations, it goes without saying that failure to
comply with them is a ground for disapproving the payment of the proposed expenditure. As observed by
one of the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37
It should be noted, however, that whereas under Article XI, Section 2, of the 1935
Constitution the Auditor General could not correct "irregular, unnecessary, excessive or
extravagant" expenditures of public funds but could only "bring [the matter] to the attention of
the proper administrative officer," under the 1987 Constitution, as also under the 1973
Constitution, the Commission on Audit can "promulgate accounting and auditing rules and
regulations including those for the prevention and disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures or uses of government funds and
properties." Hence, since the Commission on Audit must ultimately be responsible for the
enforcement of these rules and regulations, the failure to comply with these regulations can
be a ground for disapproving the payment of a proposed expenditure.
Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active role and
invested it with broader and more extensive powers, they did not intend merely to make the COA a toothless
tiger, but rather envisioned a dynamic, effective, efficient and independent watchdog of the Government.
The issue of the financing charges boils down to the validity of Department of Finance Circular No. 1-87,
Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued pursuant to
Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine "other factors" which may
result in cost underrecovery and a consequent reimbursement from the OPSF.
The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges are not
included in "cost underrecovery" and, therefore, cannot be considered as one of the "other factors." Section
8 of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what "cost underrecovery" is. It
merely states what it includes. Thus:
. . . "Cost underrecovery" shall include the following:
i. Reduction in oil company takes as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of the oil
companies at the time of the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated

price reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.
These "other factors" can include only those which are of the same class or nature as the two specifically
enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they are in the nature of
government mandated price reductions. Hence, any other factor which seeks to be a part of the

enumeration, or which could qualify as a cost underrecovery, must be of the same class or nature as those
specifically enumerated.
Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad and
unrestricted authority to determine or define "other factors."
Both views are unacceptable to this Court.
The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or things,
by words of a particular and specific meaning, such general words are not to be construed in their widest
extent, but are held to be as applying only to persons or things of the same kind or class as those
specifically mentioned. A reading of subparagraphs (i) and (ii) easily discloses that they do not have a
38
common characteristic. The first relates to price reduction as directed by the Board of Energy while the
second refers to reduction in internal ad valorem taxes. Therefore, subparagraph (iii) cannot be limited by
the enumeration in these subparagraphs. What should be considered for purposes of determining the "other
factors" in subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly allows cost
underrecovery only if such were incurred as a result of the reduction of domestic prices of petroleum
products.
Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the sense
that such were incurred as a result of the inability to fully offset financing expenses from yields in money
market placements, they do not, however, fall under the foregoing provision of P.D. No. 1956, as amended,
because the same did not result from the reduction of the domestic price of petroleum products. Until
paragraph (2), Section 8 of the decree, as amended, is further amended by Congress, this Court can do
nothing. The duty of this Court is not to legislate, but to apply or interpret the law. Be that as it may, this
Court wishes to emphasize that as the facts in this case have shown, it was at the behest of the Government
that petitioner refinanced its oil import payments from the normal 30-day trade credit to a maximum of 360
days. Petitioner could be correct in its assertion that owing to the extended period for payment, the financial
institution which refinanced said payments charged a higher interest, thereby resulting in higher financing
expenses for the petitioner. It would appear then that equity considerations dictate that petitioner should
somehow be allowed to recover its financing losses, if any, which may have been sustained because it
accommodated the request of the Government. Although under Section 29 of the National Internal Revenue
Code such losses may be deducted from gross income, the effect of that loss would be merely to reduce its
taxable income, but not to actually wipe out such losses. The Government then may consider some positive
measures to help petitioner and others similarly situated to obtain substantial relief. An amendment, as
aforestated, may then be in order.
Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the Department of
Finance to determine or define "other factors" is to uphold an undue delegation of legislative power, it clearly
appearing that the subject provision does not provide any standard for the exercise of the authority. It is a
fundamental rule that delegation of legislative power may be sustained only upon the ground that some
standard for its exercise is provided and that the legislature, in making the delegation, has prescribed the
manner of the exercise of the delegated authority. 39
Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by reason of
the foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove COA's claim that it
had in fact gained in the process. Otherwise stated, petitioner failed to sufficiently show that it incurred a
loss. Such being the case, how can petitioner claim for reimbursement? It cannot have its cake and eat it
too.
II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner. The
respondents themselves admit in their Comment that underrecovery arising from sales to NPC are

reimbursable because NPC was granted full exemption from the payment of taxes; to prove this,
respondents trace the laws providing for such exemption. The last law cited is the Fiscal Incentives
40
Regulatory Board's Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the tax and duty
exemption privileges of the National Power Corporation, including those pertaining to its domestic purchases
of petroleum and petroleum products . . . are restored effective March 10, 1987." In a Memorandum issued
on 5 October 1987 by the Office of the President, NPC's tax exemption was confirmed and approved.
Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to the NPC
is evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price Standby Fund to
support the OPSF. The pertinent part of Section 2, Republic Act No. 6952 provides:
41
Sec. 2. Application of the Fund shall be subject to the following conditions:
(1) That the Fund shall be used to reimburse the oil companies for (a) cost
increases of imported crude oil and finished petroleum products resulting
from foreign exchange rate adjustments and/or increases in world market
prices of crude oil; (b) cost underrecovery incurred as a result of fuel oil sales
to the National Power Corporation (NPC); and (c) other cost underrecoveries
incurred as may be finally decided by the Supreme
Court; . . .
Hence, petitioner can recover its claim arising from sales of petroleum products to the National Power
Corporation.
III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner relies on
Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of payments of all taxes,
duties, fees and other charges, whether direct or indirect, due and payable by the copper mining companies
in distress to the national government. Pursuant to this LOI, then Minister of Energy, Hon. Geronimo
Velasco, issued Memorandum Circular No. 84-11-22 advising the oil companies that Atlas Consolidated
Mining Corporation and Marcopper Mining Corporation are among those declared to be in distress.
In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August 1989 letter
to Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416 which implements
the exemption from payment of OPSF imposts as effected by OEA has no legal basis;" in its Decision No.
42
1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim reimbursement for this uncollected
impost because LOI 1416 dated July 17, 1984, . . . was issued when OPSF was not yet in existence and
could not have contemplated OPSF imposts at the time of its formulation." It is further stated that:
43
"Moreover, it is evident that OPSF was not created to aid distressed mining companies but rather to help the
domestic oil industry by stabilizing oil prices."
In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended to
exempt said distressed mining companies from the payment of OPSF dues for the following reasons:
a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating
the OPSF was promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was
issued on February 25, 1987.
b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the
government's effort to prevent the collapse of the copper industry. P.D No. 1956, as
amended, was issued for the purpose of minimizing frequent price changes brought about by
exchange rate adjustments and/or changes in world market prices of crude oil and imported
petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges,
whether direct or indirect, due and payable by the copper mining companies in distress to
the Notional and Local Governments . . ." On the other hand, OPSF dues are not payable by
(sic) distressed copper companies but by oil companies. It is to be noted that the copper
mining companies do not pay OPSF dues. Rather, such imposts are built in or already
incorporated in the prices of oil products. 44
Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining
companies, it does not accord petitioner the same privilege with respect to its obligation to pay OPSF dues.
We concur with the disquisitions of the respondents. Aside from such reasons, however, it is apparent that
LOI 1416 was never published in the Official Gazette as required by Article 2 of the Civil Code, which
45
reads:
Laws shall take effect after fifteen days following the completion of their publication in the
Official Gazette, unless it is otherwise provided. . . .
In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46
WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all
unpublished presidential issuances which are of general application, and unless so
published they shall have no binding force and effect.
Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated on 29
December 1986, ruled:
47
We hold therefore that all statutes, including those of local application and private laws, shall
be published as a condition for their effectivity, which shall begin fifteen days after publication
unless a different effectivity date is fixed by the legislature.
Covered by this rule are presidential decrees and executive orders promulgated by the
President in the exercise of legislative powers whenever the same are validly delegated by
the legislature or, at present, directly conferred by the Constitution. Administrative rules and
regulations must also be published if their purpose is to enforce or implement existing laws
pursuant also to a valid delegation.
xxx xxx xxx
WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon
their approval, or as soon thereafter as possible, be published in full in the Official Gazette,
to become effective only after fifteen days from their publication, or on another date specified
by the legislature, in accordance with Article 2 of the Civil Code.
LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette after its
issuance or at any time after the decision in the abovementioned cases.
Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18 June
1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their publication either in
the Official Gazette or in a newspaper of general circulation in the Philippines, unless it is
otherwise provided.
We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to
Executive Order No. 200.
Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still fail. Tax
exemptions as a general rule are construed strictly against the grantee and liberally in favor of the taxing
authority. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by
48
the exemption so claimed. The party claiming exemption must therefore be expressly mentioned in the
exempting law or at least be within its purview by clear legislative intent.
In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS and
MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may suspend the
payment of taxes by copper mining companies, it does not give petitioner the same privilege with respect to
the payment of OPSF dues.
IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the Department of
Finance has still to issue a final and definitive ruling thereon; accordingly, it was premature for COA to
disallow it. By doing so, the latter acted beyond its jurisdiction. Respondents, on the other hand, contend
49
that said amount was already disallowed by the OEA for failure to substantiate it. In fact, when OEA
50
submitted the claims of petitioner for pre-audit, the abovementioned amount was already excluded.
An examination of the records of this case shows that petitioner failed to prove or substantiate its contention
that the amount of P130,420,235.00 is still pending before the OEA and the DOF. Additionally, We find no
reason to doubt the submission of respondents that said amount has already been passed upon by the
OEA. Hence, the ruling of respondent COA disapproving said claim must be upheld.
V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from petitioner
may be offset against petitioner's outstanding claims from said fund. Petitioner contends that it should be
allowed to offset its claims from the OPSF against its contributions to the fund as this has been allowed in
the past, particularly in the years 1987 and 1988.51
Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on compensation
and Section 21, Book V, Title I-B of the Revised Administrative Code which provides for "Retention of Money
for Satisfaction of Indebtedness to Government." Petitioner also mentions communications from the Board
52
of Energy and the Department of Finance that supposedly authorize compensation.
Respondents, on the other hand, citing Francia vs. IAC and Fernandez, contend that there can be no
53
offsetting of taxes against the claims that a taxpayer may have against the government, as taxes do not
arise from contracts or depend upon the will of the taxpayer, but are imposed by law. Respondents also
allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised Administrative Code, is
misplaced because "while this provision empowers the COA to withhold payment of a government
indebtedness to a person who is also indebted to the government and apply the government indebtedness
to the satisfaction of the obligation of the person to the government, like authority or right to make
compensation is not given to the private person." The reason for this, as stated in Commissioner of
54
Internal Revenue vs. Algue, Inc., is that money due the government, either in the form of taxes or other
55
dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving petitioner a reason
for compensation or set-off, the Revised Administrative Code makes it the respondents' duty to collect
petitioner's indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of
taxation because "P.D. 1956, amended, did not create a source of taxation; it instead established a special
fund . . .," and that the OPSF contributions do not go to the general fund of the state and are not used for
56
public purpose, i.e., not for the support of the government, the administration of law, or the payment of public
expenses. This alleged lack of a public purpose behind OPSF exactions distinguishes such from a tax.
Hence, the ruling in the Francia case is inapplicable.
Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the OPSF; the
said law provides in part that:
Sec. 2. Application of the fund shall be subject to the following conditions:
xxx xxx xxx
(3) That no amount of the Petroleum Price Standby Fund shall be used to
pay any oil company which has an outstanding obligation to the Government
without said obligation being offset first, subject to the requirements of
compensation or offset under the Civil Code.
We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose because
they go to a special fund of the government. Taxation is no longer envisioned as a measure merely to raise
revenue to support the existence of the government; taxes may be levied with a regulatory purpose to
provide means for the rehabilitation and stabilization of a threatened industry which is affected with public
interest as to be within the police power of the state. There can be no doubt that the oil industry is greatly
57
imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil prices
could hurt the lives of a majority of the people and cause economic crisis of untold proportions. It would have
a chain reaction in terms of, among others, demands for wage increases and upward spiralling of the cost of
basic commodities. The stabilization then of oil prices is of prime concern which the state, via its police
power, may properly address.
Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is taxation.
No amount of semantical juggleries could dim this fact.
It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and taxpayer are not
58
mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off. 59
We may even further state that technically, in respect to the taxes for the OPSF, the oil companies merely
act as agents for the Government in the latter's collection since the taxes are, in reality, passed unto the
end-users –– the consuming public. In that capacity, the petitioner, as one of such companies, has the
primary obligation to account for and remit the taxes collected to the administrator of the OPSF. This duty
stems from the fiduciary relationship between the two; petitioner certainly cannot be considered merely as a
debtor. In respect, therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no
compensation is likewise legally feasible. Firstly, the Government and the petitioner cannot be said to be
mutually debtors and creditors of each other. Secondly, there is no proof that petitioner's claim is already due
and liquidated. Under Article 1279 of the Civil Code, in order that compensation may be proper, it is
necessary that:
(1) each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;

(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3) the two (2) debts be due;
(4) they be liquidated and demandable;
(5) over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.
That compensation had been the practice in the past can set no valid precedent. Such a practice has no
legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims against their OPSF
contributions. Instead, it prohibits the government from paying any amount from the Petroleum Price
Standby Fund to oil companies which have outstanding obligations with the government, without said
obligation being offset first subject to the rules on compensation in the Civil Code.
WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged decision
of the Commission on Audit, except that portion thereof disallowing petitioner's claim for reimbursement of
underrecovery arising from sales to the National Power Corporation, which is hereby allowed.
With costs against petitioner. SO ORDERED.
G.R. No. 180356 February 16, 2010
SOUTH AFRICAN AIRWAYS, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007 Decision 1 and
October 30, 2007 Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA E.B. Case No. 210, entitled
South African Airways v. Commissioner of Internal Revenue. The assailed decision affirmed the Decision
dated May 10, 20063 and Resolution dated August 11, 20064 rendered by the CTA First Division.
The Facts
Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of the
laws of the Republic of South Africa. Its principal office is located at Airways Park, Jones Road,
Johannesburg International Airport, South Africa. In the Philippines, it is an internal air carrier having no
landing rights in the country. Petitioner has a general sales agent in the Philippines, Aerotel Limited
Corporation (Aerotel). Aerotel sells passage documents for compensation or commission for petitioner’s off-
line flights for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction
of the Philippines. Petitioner is not registered with the Securities and Exchange Commission as a
corporation, branch office, or partnership. It is not licensed to do business in the Philippines.

For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line
flights, summarized as follows:
2.5% Gross
Period Date Filed
Phil. Billings
1st Quarter May 30, 2000 222,531.25
2nd Quarter August 29, 2000 424,046.95
For Passenger PhP
3rd Quarter November 29, 2000 422,466.00
4th Quarter April 16, 2000 453,182.91
Sub-total PhP 1,522,227.11
1st Quarter May 30, 2000 81,531.00
2nd Quarter August 29, 2000 50,169.65
For Cargo PhP
3rd Quarter November 29, 2000 36,383.74
4th Quarter April 16, 2000 37,454.88
Sub-total PhP 205,539.27
TOTAL 1,727,766.38
Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue, Revenue District Office
No. 47, a claim for the refund of the amount of PhP 1,727,766.38 as erroneously paid tax on Gross
Philippine Billings (GPB) for the taxable year 2000. Such claim was unheeded. Thus, on April 14, 2003,
petitioner filed a Petition for Review with the CTA for the refund of the abovementioned amount. The case
was docketed as CTA Case No. 6656.
On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of merit. The CTA
ruled that petitioner is a resident foreign corporation engaged in trade or business in the Philippines. It
further ruled that petitioner was not liable to pay tax on its GPB under Section 28(A)(3)(a) of the National
Internal Revenue Code (NIRC) of 1997. The CTA, however, stated that petitioner is liable to pay a tax of
32% on its income derived from the sales of passage documents in the Philippines. On this ground, the CTA
denied petitioner’s claim for a refund.
Petitioner’s Motion for Reconsideration of the above decision was denied by the CTA First Division in a
Resolution dated August 11, 2006.
Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for a refund of its tax
payment on its GPB. This was denied by the CTA in its assailed decision. A subsequent Motion for
Reconsideration by petitioner was also denied in the assailed resolution of the CTA En Banc.
Hence, petitioner went to us.
The Issues
Whether or not petitioner, as an off-line international carrier selling passage documents through an
independent sales agent in the Philippines, is engaged in trade or business in the Philippines subject to the
32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC.
Whether or not the income derived by petitioner from the sale of passage documents covering petitioner’s
off-line flights is Philippine-source income subject to Philippine income tax.

Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on Gross Philippine
Billings for the taxable year 2000 in the amount of P1,727,766.38. 5
This petition must be denied.
Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable Income
Preliminarily, we emphasize that petitioner is claiming that it is exempted from being taxed for its sale of
passage documents in the Philippines. Petitioner, however, failed to sufficiently prove such contention.
In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, 6 we held, "Since an action
for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in the most
explicit and categorical language, it is strictly construed against the claimant who must discharge such
burden convincingly."
Petitioner has failed to overcome such burden.
In essence, petitioner calls upon this Court to determine the legal implication of the amendment to Sec.
28(A)(3)(a) of the 1997 NIRC defining GPB. It is petitioner’s contention that, with the new definition of GPB,
it is no longer liable under Sec. 28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax on GPB
is inapplicable to it, it is thereby excluded from the imposition of any income tax.
Sec. 28(b)(2) of the 1939 NIRC provided:
(2) Resident Corporations. – A corporation organized, authorized, or existing under the laws of a foreign
country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of
this section upon the total net income received in the preceding taxable year from all sources within the
Philippines: Provided, however, that international carriers shall pay a tax of two and one-half percent on their
gross Philippine billings.
This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows:
"Gross Philippine billings" include gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold therein, whether for
passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines.
In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:
"Gross Philippine Billings" means gross revenue realized from uplifts of passengers anywhere in the world
and excess baggage, cargo and mail originating from the Philippines, covered by passage documents sold
in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world, provided
that the passage documents were sold in the Philippines. Legislature departed from such concept in the
1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):
"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or passage document.

Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or from
the Philippines, income is included in GPB.
As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from the Philippines, it is
not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. This much was also found by the CTA. But petitioner
further posits the view that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying
any other income tax for its sale of passage documents in the Philippines.
Such position is untenable.
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas

Airways),7 which was decided under similar factual circumstances, this Court ruled that off-line air carriers
having general sales agents in the Philippines are engaged in or doing business in the Philippines and that
their income from sales of passage documents here is income from within the Philippines. Thus, in that
case, we held the off-line air carrier liable for the 32% tax on its taxable income.
Petitioner argues, however, that because British Overseas Airways was decided under the 1939 NIRC, it
does not apply to the instant case, which must be decided under the 1997 NIRC. Petitioner alleges that the
1939 NIRC taxes resident foreign corporations, such as itself, on all income from sources within the
Philippines. Petitioner’s interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international
carrier that does not maintain flights to or from the Philippines, thereby having no GPB as defined, it is
exempt from paying any income tax at all. In other words, the existence of Sec. 28(A)(3)(a) according to
petitioner precludes the application of Sec. 28(A)(1) to it.
Its argument has no merit.
First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to the taxation of off-
line air carriers is more apparent than real.
We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all
international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, had legislature’s
intentions been to completely exclude all international air carriers from the application of the general rule
under Sec. 28(A)(1), it would have used the appropriate language to do so; but the legislature did not. Thus,
the logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the
general rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident
foreign corporation, whether an international air carrier or not, would be liable for the tax under Sec. 28(A)
(1).
Clearly, no difference exists between British Overseas Airways and the instant case, wherein petitioner
claims that the former case does not apply. Thus, British Overseas Airways applies to the instant case. The
findings therein that an off-line air carrier is doing business in the Philippines and that income from the sale
of passage documents here is Philippine-source income must be upheld.
Petitioner further reiterates its argument that the intention of Congress in amending the definition of GPB is
to exempt off-line air carriers from income tax by citing the pronouncements made by Senator Juan Ponce
Enrile during the deliberations on the provisions of the 1997 NIRC. Such pronouncements, however, are not
controlling on this Court. We said in Espino v. Cleofe:8
A cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making body must
be sought, first of all, in the words of the statute itself, read and considered in their natural, ordinary,
commonly-accepted and most obvious significations, according to good and approved usage and without

resorting to forced or subtle construction. Courts, therefore, as a rule, cannot presume that the law-making
body does not know the meaning of words and rules of grammar. Consequently, the grammatical reading of
a statute must be presumed to yield its correct sense. x x x It is also a well-settled doctrine in this jurisdiction
that statements made by individual members of Congress in the consideration of a bill do not necessarily
reflect the sense of that body and are, consequently, not controlling in the interpretation of law. (Emphasis
supplied.)
Moreover, an examination of the subject provisions of the law would show that petitioner’s interpretation of
those provisions is erroneous.
Sec. 28(A)(1) and (A)(3)(a) provides:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or business within the Philippines,
shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within the Philippines: provided, That effective
January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999,
the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).
xxxx
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of
two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:
(a) International Air Carrier. – ‘Gross Philippine Billings’ refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in
a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings if the passenger
boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates
from the Philippines, but transshipment of passenger takes place at any port outside the Philippines
on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from
the Philippines to the point of transshipment shall form part of Gross Philippine Billings.
Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax on
all income from sources within the Philippines. Sec. 28(A)(3) is an exception to this general rule.
An exception is defined as "that which would otherwise be included in the provision from which it is
excepted. It is a clause which exempts something from the operation of a statue by express words." 9 Further,
"an exception need not be introduced by the words ‘except’ or ‘unless.’ An exception will be construed as
such if it removes something from the operation of a provision of law." 10
In the instant case, the general rule is that resident foreign corporations shall be liable for a 32% income tax
on their income from within the Philippines, except for resident foreign corporations that are international
carriers that derive income "from carriage of persons, excess baggage, cargo and mail originating from the
Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an

international carrier with no flights originating from the Philippines, does not fall under the exception. As
such, petitioner must fall under the general rule. This principle is embodied in the Latin maxim, exception
firmat regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as
coming within the purview of the general rule.11
To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains
flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while
international air carriers that do not have flights to and from the Philippines but nonetheless earn income
from other activities in the country will be taxed at the rate of 32% of such income.
As to the denial of petitioner’s claim for refund, the CTA denied the claim on the basis that petitioner is liable
for income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus, petitioner raises the issue of whether the
existence of such liability would preclude their claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a).
In answer to petitioner’s motion for reconsideration, the CTA First Division ruled in its Resolution dated
August 11, 2006, thus:
On the fourth argument, petitioner avers that a deficiency tax assessment does not, in any way, disqualify a
taxpayer from claiming a tax refund since a refund claim can proceed independently of a tax assessment
and that the assessment cannot be offset by its claim for refund.
Petitioner’s argument is erroneous. Petitioner premises its argument on the existence of an assessment. In
the assailed Decision, this Court did not, in any way, assess petitioner of any deficiency corporate income
tax. The power to make assessments against taxpayers is lodged with the respondent. For an assessment
to be made, respondent must observe the formalities provided in Revenue Regulations No. 12-99. This
Court merely pointed out that petitioner is liable for the regular corporate income tax by virtue of Section
28(A)(3) of the Tax Code. Thus, there is no assessment to speak of. 12
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability
under Sec. 28(A)(1), considering that there has not yet been any assessment of their obligation under the
latter provision. Petitioner argues that such offsetting is in the nature of legal compensation, which cannot be
applied under the circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, 13 thus:

In several instances prior to the instant case, we have already made the pronouncement that taxes cannot
be subject to compensation for the simple reason that the government and the taxpayer are not creditors
and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. We
find no cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes
cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may
have against the government. A person cannot refuse to pay a tax on the ground that the government owes
him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the
results of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on
Audit, which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes
cannot be the subject of compensation because the government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed
to be set-off.
Verily, petitioner’s argument is correct that the offsetting of its tax refund with its alleged tax deficiency is
unavailing under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals, 14 however, granted the offsetting of a tax refund
with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s supplemental
motion for reconsideration alleging bringing to said court’s attention the existence of the deficiency income
and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately related
to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year.
To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in
conceptual effects. Herein private respondent cannot be entitled to refund and at the same time be liable for
a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated
therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and
constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and
without unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when
the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list, statement,
or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained
any understatement or undervaluation, no tax collected under such assessment shall be recovered by any
suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not
contain any understatement or undervaluation; but this provision shall not apply to statements or returns
made or to be made in good faith regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would
inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be

upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously
refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the
falsity, fraud or omission in the false or fraudulent return involved.This would necessarily require and entail
additional efforts and expenses on the part of the Government, impose a burden on and a drain of
government funds, and impede or delay the collection of much-needed revenue for governmental
operations.1avvphi1
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and
legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with
its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of
tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded,it would be only just and fair that the
taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to defeat
each other’s claim and to determine all matters of dispute between them in one single case. It is important to
note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would [be]
necessary to determine how much the Government is entitled to collect as taxes. This would necessarily
include the determination of the correct liability of the taxpayer and, certainly, a determination of this case
would constitute res judicata on both parties as to all the matters subject thereof or necessarily involved
therein. (Emphasis supplied.)
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.
Here, petitioner’s similar tax refund claim assumes that the tax return that it filed was correct. Given,
however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC,
is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we
cannot grant the prayer for a refund.
Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En Banc on
the outright denial of petitioner’s claim for a refund. Even though petitioner is not entitled to a refund due to
the question on the propriety of petitioner’s tax return subject of the instant controversy, it would not be
proper to deny such claim without making a determination of petitioner’s liability under Sec. 28(A)(1).
It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based
on taxable income, that is, gross income less deductions and exemptions, if any. It cannot be assumed that
petitioner’s liabilities under the two provisions would be the same. There is a need to make a determination
of petitioner’s liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax
deficiency exists. The assailed decision fails to mention having computed for the tax due under Sec. 28(A)
(1) and the records are bereft of any evidence sufficient to establish petitioner’s taxable income. There is a
necessity to receive evidence to establish such amount vis-à-vis the claim for refund. It is only after such
amount is established that a tax refund or deficiency may be correctly pronounced.
WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the CTA En Banc in
CTA E.B. Case No. 210 are SET ASIDE. The instant case is REMANDED to the CTA En Banc for further
proceedings and appropriate action, more particularly, the reception of evidence for both parties and the
corresponding disposition of CTA E.B. Case No. 210 not otherwise inconsistent with our judgment in this
Decision.
SO ORDERED.

G.R. No. 169507, January 11, 2016
AIR CANADA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is
a resident foreign corporation doing business in the Philippines. As such, it is taxable under Section 28(A)
(1), and not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to any applicable tax
treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-Canada
Tax Treaty, Air Canada may only be imposed a maximum tax of 1 1/2% of its gross revenues earned from
the sale of its tickets in the Philippines.
This is a Petition for Review 1 appealing the August 26, 2005 Decision 2 of the Court of Tax Appeals En Banc,
which in turn affirmed the December 22, 2004 Decision 3 and April 8, 2005 Resolution 4 of the Court of Tax
Appeals First Division denying Air Canada's claim for refund.
Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]" 5 On April 24, 2000,
it was granted an authority to operate as an offline carrier by the Civil Aeronautics Board, subject to certain
conditions, which authority would expire on April 24, 2005. 6 "As an off-line carrier, [Air Canada] does not
have flights originating from or coming to the Philippines [and does not] operate any airplane [in] the
Philippines[.]"7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent
in the Philippines.8 Aerotel "sells [Air Canada's] passage documents in the Philippines."9
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through
Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings in
the total amount of P5,185,676.77,10 detailed as follows:
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29,2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30,2001 522,465.39
2nd Qtr 2001 August 29,2001 1,033,423.34
3rd Qtr 2001 November 29,2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30,2002 594,850.13
2nd Qtr 2002 August 29,2002 1,164,664.11
TOTAL P 5,185,676.77"cralawlawlibrary

On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income taxes
amounting to P5,185,676.77 before the Bureau of Internal Revenue, 12 Revenue District Office No. 47-East
Makati.13 It found basis from the revised definition14 of Gross Philippine Billings under Section 28(A)(3)(a) of
the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. –

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and
one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the Philippines on another
airline, only-the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to
the point of transshipment shall form part of Gross Philippine Billings. (Emphasis supplied)
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the Court of
Tax Appeals on November 29, 2002. 15 The case was docketed as C.T.A. Case No. 6572. 16
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the Petition
for Review and, hence, the claim for refund.17 It found that Air Canada was engaged in business in the
Philippines through a local agent that sells airline tickets on its behalf. As such, it should be taxed as a
resident foreign corporation at the regular rate of 32%. 18 Further, according to the Court of Tax Appeals First
Division, Air Canada was deemed to have established a "permanent establishment" 19 in the Philippines
under Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty 20 by the appointment of the local
sales agent, "in which [the] petitioner uses its premises as an outlet where sales of [airline] tickets are
made[.]"21
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of Tax
Appeals First Division's Resolution dated April 8, 2005 for lack of merit. 22 The First Division held that while
Air Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it was nevertheless
liable to pay the 32% corporate income tax on income derived from the sale of airline tickets within the
Philippines pursuant to Section 28(A)(1).
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Bane. 24 The appeal was docketed as
CTAEB No. 86.
In the Decision dated August 26, 2005, the Court of Tax Appeals En Bane affirmed the findings of the First
Division.26 The En Banc ruled that Air Canada is subject to tax as a resident foreign corporation doing
business in the Philippines since it sold airline tickets in the Philippines. 27 The Court of Tax Appeals En Bane
disposed thus:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and
accordingly, DISMISSED for lack of merit.28cralawlawlibrary

Hence, this Petition for Review29 was filed. The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international carrier selling passage documents through a
general sales agent in the Philippines, is-a resident foreign corporation within the meaning of Section 28(A)
(1) of the 1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the 21/2% tax on Gross Philippine Billings pursuant to
Section 28(A)(3). If not, whether an offline international carrier selling passage documents through a general
sales agent can be subject to the regular corporate income tax of 32% on taxable income pursuant to
Section 28(A)(1);
Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines falls under the definition of
"permanent establishment" under Article V(2)(i) of the Republic of the Philippines-Canada Tax
Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of P5,185,676.77 pertaining allegedly to
erroneously paid tax on Gross Philippine Billings from the third quarter of 2000 to the second quarter of
2002.
Petitioner claims that the general provision imposing the regular corporate income tax on resident foreign
corporations provided under Section 28(A)(1) of the 1997 National Internal Revenue Code does not apply to
"international carriers,"31 which are especially classified and taxed under Section 28(A)(3). 32 It adds that the
fact that it is no longer subject to Gross Philippine Billings tax as ruled in the assailed Court of Tax Appeals
Decision "does not render it ipso facto subject to 32% income tax on taxable income as a resident foreign
corporation."33 Petitioner argues that to impose the 32% regular corporate income tax on its income would
violate the Philippine government's covenant under Article VIII of the Republic of the Philippines-Canada Tax
Treaty not to impose a tax higher than 1 Vi% of the carrier's gross revenue derived from sources within the
Philippines.34 It would also allegedly result in "inequitable tax treatment of on-line and off-line international air
carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was income
from services and not income from sales of personal property. 36 Petitioner cites the deliberations of the
Bicameral Conference Committee on House Bill No. 9077 (which eventually became the 1997 National
Internal Revenue Code), particularly Senator Juan Ponce Enrile's statement, 37 to reveal the "legislative
intent to treat the revenue derived from air carriage as income from services, and that the carriage of
passenger or cargo as the activity that generates the income." 38 Accordingly, applying the principle on the
situs of taxation in taxation of services, petitioner claims that its income derived "from services rendered
outside the Philippines [was] not subject to Philippine income taxation."
Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner cannot be
considered to have a "permanent establishment" 40 in the Philippines pursuant to Article V(6) of the Republic
of the Philippines-Canada Tax Treaty. 41 It points out that Aerotel is an "independent general sales agent that
acts as such for ... other international airline companies in the ordinary course of its business." 42 Aerotel sells
passage tickets on behalf of petitioner and receives a commission for its services. 43 Petitioner states that
even the Bureau of Internal Revenue— through VAT Ruling No. 003-04 dated February 14, 2004—has

conceded that an offline international air carrier, having no flight operations to and from the Philippines, is
not deemed engaged in business in the Philippines by merely appointing a general sales agent. 44 Finally,
petitioner maintains that its "claim for refund of erroneously paid Gross Philippine Billings cannot be denied
on the ground that [it] is subject to income tax under Section 28 (A) (I)" 45 since it has not been assessed at
all by the Bureau of Internal Revenue for any income tax liability.
On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax as a
resident foreign corporation doing business in the Philippines. Petitioner's total payment of P5,185,676.77
allegedly shows that petitioner was earning a sizable income from the sale of its plane tickets within the
Philippines during the relevant period. 47 Respondent further points out that this court in Commissioner of
Internal Revenue v. American Airlines, Inc., 48 which in turn cited the cases involving the British Overseas
Airways Corporation and Air India, had already settled that "foreign airline companies which sold tickets in
the Philippines through their local agents . . . [are] considered resident foreign corporations engaged in trade
or business in the country."49 It also cites Revenue Regulations No. 6-78 dated April 25, 1978, which defined
the phrase "doing business in the Philippines" as including "regular sale of tickets in the Philippines by offline
international airlines either by themselves or through their agents."
Respondent further contends that petitioner is not entitled to its claim for refund because the amount of
P5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of 2001 was still short of
the 32% income tax due for the period. 51 Petitioner cannot allegedly claim good faith in its failure to pay the
right amount of tax since the National Internal Revenue Code became operative on January 1, 1998 and by
2000, petitioner should have already been aware of the implications of Section 28(A)(3) and the decided
cases of this court's ruling on the taxability of offline international carriers selling passage tickets in the
Philippines.52
At the outset, we affirm the Court of Tax Appeals' ruling that petitioner, as an offline international carrier with
no landing rights in the Philippines, is not liable to tax on Gross Philippine Billings under Section 28(A)(3) of
the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and
one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international
airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the
cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form
part of Gross Philippine Billings. (Emphasis supplied)
Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage, cargo,

and mail originated from the Philippines in a continuous and uninterrupted flight, regardless of where the
passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings
tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls within
the definition of resident • foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue
Code, thus, it may be subject to 32%53 tax on its taxable income:
SEC. 28. Rates of Income Tax on Foreign Corporations. –

(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or business within the Philippines,
shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within the Philippines: Provided, That effective
January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate
shall be thirty- three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two
percent (32%54). (Emphasis supplied)
The definition of "resident foreign corporation" has not substantially changed throughout the amendments of
the National Internal Revenue Code. All versions refer to "a foreign corporation engaged in trade or business
within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June 15,
1939, defined "resident foreign corporation" as applying to "a foreign corporation engaged in trade or
business within the Philippines or having an office or place of business therein."
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110, approved
on August 4, 1969, reads:
Sec. 24. Rates of tax on corporations. — . . .

(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any foreign
country, except a foreign life insurance company, engaged in trade or business within the Philippines, shall
be taxable as provided in subsection (a) of this section upon the total net income received in the preceding
taxable year from all sources within the Philippines.56 (Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939 National
Internal Revenue Code. Section 24(b)(2) on foreign resident corporations was amended, but it still provides
that "[a] corporation organized, authorized, or existing under the laws of any foreign country, engaged in
trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon
the total net income received in the preceding taxable year from all sources within the Philippines[.]" 57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation58 declared British Overseas Airways Corporation, an international air carrier with no landing

rights in the Philippines, as a resident foreign corporation engaged in business in the Philippines through its
local sales agent that sold and issued tickets for the airline company. 59 This court discussed that:
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each
case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity
of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts
or works or the exercise of some of the functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose and object of the business organization. "In order
that a foreign corporation may be regarded as doing business within a State, there must be continuity of
conduct and intention to establish a continuous business, such as the appointment of a local agent, and not
one of a temporary character. ["]
BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in the
Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips — each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities
were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeWood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a
local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation
subject to tax upon its total net income received in the preceding taxable year from all sources within the
Philippines.60 (Emphasis supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its definition of
"doing business" with regard to foreign corporations. Section 3(d) of the law enumerates the activities that
constitute doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether
called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days
or more; participating in the management, supervision or control of any domestic business, firm, entity or
corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings
or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive prosecution of, commercial gain or of
the purpose and object of the business organization: Provided, however, That' the phrase "doing
business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name and for its own
account[.]61 (Emphasis supplied)
While Section 3(d) above states that "appointing a representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own account" is not considered as "doing business,"
the Implementing Rules and Regulations of Republic Act No. 7042 clarifies that "doing business"
includes "appointing representatives or distributors, operating under full control of the foreign
corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period or
periods totaling one hundred eighty (180) days or more[.]"

An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who maintains
office or who has designated or appointed agents or employees in the Philippines, who sells or offers for
sale any air transportation in behalf of said foreign air carrier and/or others, or negotiate for, or holds itself
out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such
transportation."
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil Aeronautics] Board
for such authority."64 Each offline carrier must file with the Civil Aeronautics Board a monthly report
containing information on the tickets sold, such as the origin and destination of the passengers, carriers
involved, and commissions received.
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose of
petitioner's business. The activities of Aerotel bring direct receipts or profits to petitioner. 66 There is nothing
on record to show that Aerotel solicited orders alone and for its own account and without interference from,
let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into any contract on behalf of
[petitioner Air Canada] without the express written consent of [the latter,]" 67 and it must perform its functions
according to the standards required by petitioner. 68 Through Aerotel, petitioner is able to engage in an
economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in
the Philippines for a period of five years, or from April 24, 2000 until April 24, 2005.
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources
within the Philippines. Petitioner's income from sale of airline tickets, through Aerotel, is income realized
from the pursuit of its business activities in the Philippines.
Ill
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National Internal
Revenue Code must consider the existence of an effective tax treaty between the Philippines and the home
country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court held that
Section 28(A)(3)(a) does not categorically exempt all international air carriers from the coverage of Section
28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Section 28(A)
(1) does not apply. If, however, Section 28(A)(3)(a) does not apply, an international air carrier would be liable
for the tax under Section 28(A)(1).
This court in South African Airways declared that the correct interpretation of these provisions is that:
"international air carrier[s] maintaining] flights to and from the Philippines . . . shall be taxed at the rate of
21/2% of its Gross Philippine Billings[;] while international air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other activities in the country [like sale of airline tickets] will be
taxed at the rate of 32% of such [taxable] income."
In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating double
taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and

according fair and equitable tax treatment to foreign residents or nationals." 73Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc.74 explained the purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions.
More precisely, the tax conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of goods and
services and the movement of capital, technology and persons between countries, conditions deemed vital
in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against double taxation is crucial in creating
such a climate.75 (Emphasis in the original, citations omitted)
Observance of any treaty obligation binding upon the government of the Philippines is anchored on the
constitutional provision that the Philippines "adopts the generally accepted principles of international law as
part of the law of the land[.]" 76Pacta sunt servanda is a fundamental international law principle that requires
agreeing parties to comply with their treaty obligations in good faith.
Hence, the application of the provisions of the National Internal Revenue Code must be subject to the
provisions of tax treaties entered into by the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, 78 this court stressed the binding
effects of tax treaties. It dealt with the issue of "whether the failure to strictly comply with [Revenue
Memorandum Order] RMO No. 1-200079 will deprive persons or corporations of the benefit of a tax
treaty."80 Upholding the tax treaty over the administrative issuance, this court reasoned thus:
Our Constitution provides for adherence to the general principles of international law as part of the law of
the land. The time-honored international principle of pacta sunt servanda demands the performance in
good faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is
binding upon the parties, and obligations under the treaty must be performed by them in good faith. More
importantly, treaties have the force and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in
turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v. S.C. Johnson and
Son, Inc. further clarifies that "tax conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for
doing away with double taxation is to encourage the free flow of goods and services and the movement of
capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such a climate." Simply
put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical double
taxation, which is why they are also known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations undertaken. " Thus, laws and
issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto .
The BIR must not impose additional requirements that would negate the availment of the reliefs provided for

under international agreements. More so, when the RP-Germany Tax Treaty does not provide for any pre-
requisite for the availment of the benefits under said agreement.
required by RMO No. 1 -2000 should not operate to divest entitlement to the relief as it would constitute a
violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax
relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance
would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should
merely operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000.
Logically, noncompliance with tax treaties has negative implications on international relations, and unduly
discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve
an administrative procedure, these may be remedied through other system management processes, e.g.,
the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a
treaty for failure to strictly comply with an administrative issuance requiring prior application for tax treaty
relief.81 (Emphasis supplied, citations omitted)
On March 11, 1976, the representatives82 for the government of the Republic of the Philippines and for the
government of Canada signed the Convention between the Philippines and Canada for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Republic of the
Philippines-Canada Tax Treaty). This treaty entered into force on December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent establishment" as a
"fixed place of business in which the business of the enterprise is wholly or partly carried on."
Even though there is no fixed place of business, an enterprise of a Contracting State is deemed to have a
permanent establishment in the other Contracting State if under certain conditions there is a person acting
for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a] person acting in
a Contracting State on behalf of an enterprise of the other Contracting State (other than an agent of
independent status to whom paragraph 6 applies) shall be deemed to be a permanent establishment in the
first-mentioned State if . . . he has and habitually exercises in that State an authority to conclude contracts
on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for that
enterprise[.]" The provision seems to refer to one who would be considered an agent under Article 186883 of
the Civil Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be deemed to
have a permanent establishment in the other Contracting State merely because it carries on business in that
other State through a broker, general commission agent or any other agent of an independent status,
where such persons are acting in the ordinary course of their business."
Considering Article XV86 of the same Treaty, which covers dependent personal services, the term
"dependent" would imply a relationship between the principal and the agent that is akin to an employer-
employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter exercises
comprehensive control and detailed instructions over the means and results of the activities of the agent.

Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the Philippines,
defines a general sales agent as "a person, not a bonafide employee of an air carrier, who pursuant to an
authority from an airline, by itself or through an agent, sells or offers for sale any air transportation, or
negotiates for, or holds himself out by solicitation, advertisement or otherwise as one who sells, provides,
furnishes, contracts or arranges for, such air transportation." 88 General sales agents and their property,
property rights, equipment, facilities, and franchise are subject to the regulation and control of the Civil
Aeronautics Board.89 A permit or authorization issued by the Civil Aeronautics Board is required before a
general sales agent may engage in such an activity.
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a
"permanent"establishment" in the Philippines as defined under the Republic of the Philippines-Canada Tax
Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of transportation on
petitioner and handle reservations, appointment, and supervision of International Air Transport Association-
approved and petitioner-approved sales agents, including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every matter
relating to this Agreement;
....
c) Promotion of passenger transportation on AC;

....
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA
[Philippines], of traffic documents issued by AC outside the said territory of the GSA [Philippines], as
required by the passenger(s);
....
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and publicity
material provided by AC in accordance with the reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media and reference of any press or public
relations inquiries to AC;
....
o) Submission for AC's approval, of an annual written sales plan on or before a date to be determined by AC
and in a form acceptable to AC;
....
q) Submission of proposals for AC's approval of passenger sales agent incentive plans at a reasonable time
in advance of proposed implementation.
....
r) Provision of assistance on request, in its relations with Governmental and other authorities, offices and
agencies in the Territory [Philippines].

....
u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless otherwise
stated in the guidelines, refer all such claims and complaints to AC. 91cralawlawlibrary
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its own
expense and acceptable to [petitioner Air Canada], adequate and suitable premises, qualified staff,
equipment, documentation, facilities and supervision and in consideration of the remuneration and expenses
payable[,] [will] defray all costs and expenses of and incidental to the Agency." 92 "[I]t is the sole employer of
its employees and . . . is responsible for [their] actions ... or those of any subcontractor." 93 In remuneration
for its services, Aerotel would be paid by petitioner a commission on sales of transportation plus override
commission on flown revenues.94 Aerotel would also be reimbursed "for all authorized expenses supported
by original supplier invoices."95
Aerotel is required to keep "separate books and records of account, including supporting documents,
regarding all transactions at, through or in any way connected with [petitioner Air Canada] business." 96
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased way." 97 Aerotel
cannot "accept additional appointments as General Sales Agent of any other carrier without the prior written
consent of [petitioner Air Canada]."
The Passenger General Sales Agency Agreement "may be terminated by either party without cause upon
[no] less than 60 days' prior notice in writing[.]" 99 In case of breach of any provisions of the Agreement,
petitioner may require Aerotel "to cure the breach in 30 days failing which [petitioner Air Canada] may
terminate [the] Agreement[.]"100
The following terms are indicative of Aerotel's dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes control of
another entity or merges with or is acquired or controlled by another person or entity[,]" 101 Except with the
written consent of petitioner, Aerotel must not acquire a substantial interest in the ownership, management,
or profits of a passenger sales agent affiliated with the International Air Transport Association or a non-
affiliated passenger sales agent nor shall an affiliated passenger sales agent acquire a substantial interest in
Aerotel as to influence its commercial policy and/or management decisions. 102 Aerotel must also provide
petitioner "with a report on any interests held by [it], its owners, directors, officers, employees and their
immediate families in companies and other entities in the aviation industry or ... industries related to
it[.]"103 Petitioner may require that any interest be divested within a set period of time. 104
Second, in carrying out the services, Aerotei cannot enter into any contract on behalf of petitioner without the
express written consent of the latter;105 it must act according to the standards required by
petitioner;106 "follow the terms and provisions of the [petitioner Air Canada] GS A Manual [and all] written
instructions of [petitioner Air Canada;]" 107 and "[i]n the absence of an applicable provision in the Manual or
instructions, [Aerotei must] carry out its functions in accordance with [its own] standard practices and
procedures[.]"108
Third, Aerotei must only "issue traffic documents approved by [petitioner Air Canada] for all transportation
over [its] services[.]"109 All use of petitioner's name, logo, and marks must be with the written consent of
petitioner and according to petitioner's corporate standards and guidelines set out in the Manual. 110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation sold by
Aerotei are for the account of petitioner, except in the case of negligence of Aerotei. 111

Aerotei is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales Agency
Agreement executed between the parties. It has the authority or power to conclude contracts or bind
petitioner to contracts entered into in the Philippines. A third-party liability on contracts of Aerotei is to
petitioner as the principal, and not to Aerotei, and liability to such third party is enforceable against petitioner.
While Aerotei maintains a certain independence and its activities may not be devoted wholly to petitioner,
nonetheless, when representing petitioner pursuant to the Agreement, it must carry out its functions solely
for the benefit of petitioner and according to the latter's Manual and written instructions. Aerotei is required to
submit its annual sales plan for petitioner's approval.
In essence, Aerotei extends to the Philippines the transportation business of petitioner. It is a conduit or
outlet through which petitioner's airline tickets are sold.
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the "business
profits" of an enterprise of a Contracting State is "taxable only in that State[,] unless the enterprise carries on
business in the other Contracting State through a permanent establishment);.]" 113 Thus, income attributable
to Aerotel or from business activities effected by petitioner through Aerotel may be taxed in the Philippines.
However, pursuant to the last paragraph 114 of Article VII in relation to Article VIII 115 (Shipping and Air
Transport) of the same Treaty, the tax imposed on income derived from the operation of ships or aircraft in
international traffic should not exceed 1 1/2% of gross revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997 National
Internal Revenue Code on its taxable income 116 from sale of airline tickets in the Philippines, it could only be
taxed at a maximum of 1 1/2% of gross revenues, pursuant to Article VIII of the Republic of the Philippines-
Canada Tax Treaty that applies to petitioner as a "foreign corporation organized and existing under the laws
of Canada[.]"
Tax treaties form part of the law of the land, 118 and jurisprudence has applied the statutory construction
principle that specific laws prevail over general ones.
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became valid
and effective on that date. On the other hand, the applicable provisions 120 relating to the taxability of resident
foreign corporations and the rate of such tax found in the National Internal Revenue Code became effective
on January 1, 1998.121 Ordinarily, the later provision governs over the earlier one. 122 In this case, however,
the provisions of the Republic of the Philippines-Canada Tax Treaty are more specific than the provisions
found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:

SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in by at
least two-thirds of all the Members of the Senate.
This provision states the second of two ways through which international obligations become binding. Article
II, Section 2 of the Constitution deals with international obligations that are incorporated, while Article VII,
Section 21 deals with international obligations that become binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as well as definite prestations
have effects equivalent to a statute. Thus, these specific treaty provisions may amend statutory provisions.
Statutory provisions may also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international obligations erga omnes. We

are also not required to rule in this case on the effect of international customary norms especially those
with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a Contracting State derived by
an enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may
be taxed in the first-mentioned State but the tax so charged shall not exceed the lesser of a) one and one-
half per cent of the gross revenues derived from sources in that State; and b) the lowest rate of Philippine
tax imposed on such profits derived by an enterprise of a third State."
The Agreement between the government of the Republic of the Philippines and the government of Canada
on Air Transport, entered into on January 14, 1997, reiterates the effectivity of Article VIII of the Republic of
the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention between
the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income, signed at Manila on March 31, 1976 and entered into force on December 21,
1977, and any amendments thereto, in respect of the operation of aircraft in international
traffic.123cralawlawlibrary
Petitioner's income from sale of ticket for international carriage of passenger is income derived from
international operation of aircraft. The sale of tickets is closely related to the international operation of
aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited to a
certain extent[.]"124 Thus, we are bound to extend to a Canadian air carrier doing business in the Philippines
through a local sales agent the benefit of a lower tax equivalent to 1 1/2% on business profits derived from
sale of international air transportation.
V
Finally, we reject petitioner's contention that the Court of Tax Appeals erred in denying its claim for refund of
erroneously paid Gross Philippine Billings tax on the ground that it is subject to income tax under Section
28(A)(1) of the National Internal Revenue Code because (a) it has not been assessed at all by the Bureau of
Internal Revenue for any income tax liability;125 and (b) internal revenue taxes cannot be the subject of set-
off or compensation,126 citing Republic v. Mambulao Lumber Co., et al. 127 and Francia v. Intermediate
Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue, 129 we have ruled that "[i]n an
action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may determine whether
there are taxes that should have been paid in lieu of the taxes paid." 130 The determination of the proper
category of tax that should have been paid is incidental and necessary to resolve the issue of whether a
refund should be granted.131 Thus:chanRoblesvirtualLawlibrary
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or
other taxes at the first instance. The Court of Tax Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioner's
transactions are subject to capital gains tax, however, the Court of Tax Appeals was not making an
assessment. It was merely determining the proper category of tax that petitioner should have paid, in view of

its claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-registered
enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund.
The issue of petitioner's claim for tax refund is intertwined with the issue of the proper taxes that are due
from petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct. If the tax
return filed was not proper, the correctness of the amount paid and, therefore, the claim for refund become
questionable. In that case, the court must determine if a taxpayer claiming refund of erroneously paid taxes
is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for refund of
its erroneously paid 2 1/2% taxes on its gross Philippine billings. This court did not immediately grant South
African's claim for refund. This is because although this court found that South African Airways was not
subject to the 2 1/2% tax on its gross Philippine billings, this court also found that it was subject to 32% tax
on its taxable income.
In this case, petitioner's claim that it erroneously paid the 5% final tax is an admission that the quarterly tax
return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the refund being
claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed not liable for the 5%
final tax and, instead, liable for taxes other than the 5% final tax. As in South African Airways, petitioner's
request for refund can neither be granted nor denied outright without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the
taxpayer's liability should be computed and deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a case involving solely the
issue of the taxpayer's entitlement to refund. The question of tax deficiency is distinct and unrelated to the
question of petitioner's entitlement to refund. Tax deficiencies should be subject to assessment procedures
and the rules of prescription. The court cannot be expected to perform the BIR's duties whenever it fails to
do so either through neglect or oversight. Neither can court processes be used as a tool to circumvent laws
protecting the rights of taxpayers.
Hence, the Court of Tax Appeals properly denied petitioner's claim for refund of allegedly erroneously paid
tax on its Gross Philippine Billings, on the ground that it was liable instead for the regular 32% tax on its
taxable income received from sources within the Philippines. Its determination of petitioner's liability for the
32% regular income tax was made merely for the purpose of ascertaining petitioner's entitlement to a tax
refund and not for imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are based on
different circumstances. In both cited cases, 133 the taxpayer claimed that his (its) tax liability was off-set by
his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al, Mambulao Lumber contended that the amounts it
paid to the government as reforestation charges from 1947 to 1956, not having been used in the
reforestation of the area covered by its license, may be set off or applied to the payment of forest charges
still due and owing from it.134 Rejecting Mambulao's claim of legal compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on
compensation is inapplicable. On this point, the trial court correctly observed:

Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors
and debtors of each other. With respect to the forest charges which the defendant Mambulao Lumber
Company has paid to the government, they are in the coffers of the government as taxes collected, and the
government does not owe anything to defendant Mambulao Lumber Company. So, it is crystal clear that the
Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of each
other, because compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can not be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an
action or any indebtedness of the state or municipality to one who is liable to the state or municipality for
taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. * * *. (80 C.J.S. 73-74.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general rule
is based, is that taxes are not in the nature of contracts between the party and party but grow out of a duty
to, and are the positive acts of the government, to the making and enforcing of which, the personal consent
of individual taxpayers is not required. * * * If the taxpayer can properly refuse to pay his tax when called
upon by the Collector, because he has a claim against the governmental body which is not included in the
tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer's claim
is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial
affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-767.) 135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal compensation
provided under Article 1279 were present. 136 In that case, a portion of Francia's property in Pasay was
expropriated by the national government, 137 which did not immediately pay Francia. In the meantime, he
failed to pay the real property tax due on his remaining property to the local government of Pasay, which
later on would auction the property on account of such delinquency. He then moved to set aside the auction
sale and argued, among others, that his real property tax delinquency was extinguished by legal
compensation on account of his unpaid claim against the national government. 139 This court ruled against
Francia:
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own
right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The
circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of
the other;
xxx xxx xxx
(3) that the two debts be due.

xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-
setting of taxes against the claims that the taxpayer may have against the government. A person cannot
refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a lawsuit against the government.

There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount of
P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with the
Philippine National Bank long before the sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner
admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw
it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax
obligation thus aborting the sale at public auction. 140cralawlawlibrary
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission on
Audit141 and Philex Mining Corporation v. Commissioner of Internal Revenue. 142 In Caltex, this court
reiterated:
[A] taxpayer may not offset taxes due from the claims that he may have against the government. Taxes
cannot be the subject of compensation because the government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed
to beset-off.143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its sovereign
capacity."144 Rejecting Philex Mining's assertion that the imposition of surcharge and interest was unjustified
because it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still
had pending claims for VAT input credit/refund with the Bureau of Internal Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a
pending tax claim for refund or credit against the government which has not yet been granted. It must be
noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a
tax does not depend upon the consent of the taxpayer. If any tax payer can defer the payment of taxes by
raising the defense that it still has a pending claim for refund or credit, this would adversely affect the
government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because
he has a claim against the government or that the collection of the tax is contingent on the result of the
lawsuit it filed against the government. Moreover, Philex's theory that would automatically apply its VAT input
credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government
of authority over the manner by which taxpayers credit and offset their tax liabilities. 145 (Citations omitted)
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax on the
ground that the tax liabilities were off-set against any alleged claim the taxpayer may have against the
government. Such would merely be in keeping with the basic policy on prompt collection of taxes as the
lifeblood of the government.
Here, what is involved is a denial of a taxpayer's refund claim on account of the Court of Tax Appeals' finding
of its liability for another tax in lieu of the Gross Philippine Billings tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on the denial of
claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund
with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner's supplemental
motion for reconsideration alleging bringing to said court's attention the existence of the deficiency income
and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately related
to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year.
To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in
conceptual effects. Herein private respondent cannot be entitled to refund and at the same time be liable for
a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated
therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and
constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and
without unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when
the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list, statement,
or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained
any understatement or undervaluation, no tax collected under such assessment shall be recovered by any
suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not
contain any understatement or undervaluation; but this provision shall not apply to statements or returns
made or to be made in good faith regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would
inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be
upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously
refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the
falsity, fraud or omission in the false or fraudulent return involved. This would necessarily require and entail
additional efforts and expenses on the part of the Government, impose a burden on and a drain of
government funds, and impede or delay the collection of much-needed revenue for governmental
operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and
legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with
its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of
tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the
taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to defeat
each other's claim and to determine all matters of dispute between them in one single case. It is important to
note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would [be]
necessary to determine how much the Government is entitled to collect as taxes. This would necessarily
include the determination of the correct liability of the taxpayer and, certainly, a determination of this case
would constitute res judicata on both parties as to all the matters subject thereof or necessarily involved
therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct. Given,
however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC,
is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we
cannot grant the prayer for a refund.146 (Emphasis supplied, citation omitted)

In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, 147 this court upheld the
denial of the claim for refund based on the Court of Tax Appeals' finding that the taxpayer had, through
erroneous deductions on its gross income, underpaid its Gross Philippine Billing tax on cargo revenues for
1999, and the amount of underpayment was even greater than the refund sought for erroneously paid Gross
Philippine Billings tax on passenger revenues for the same taxable period. 148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of 1
1/2% of its gross revenues amounting to P345,711,806.08 149 from the third quarter of 2000 to the second
quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(1) of the 1997 National
Internal Revenue Code [32% of taxable income, that is, gross income less deductions] will exceed the
maximum ceiling of 1 1/2% of gross revenues as decreed in Article VIII of the Republic of the Philippines-
Canada Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated April 8,
2005 of the Court of Tax Appeals En Banc are AFFIRMED. SO ORDERED.
G.R. No. 196415, December 02, 2015
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. TOLEDO POWER COMPANY, Respondent.
G.R. No. 196451
TOLEDO POWER COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
DEL CASTILLO, J.:
The burden of proving entitlement to a tax refund rests on the taxpayer.
Before this Court are Consolidated Petitions for Review on Certiorari1 assailing the November 22, 2010
Decision2 and the April 6, 2011 Resolution 3 of the Court of Tax Appeals (CTA) in CTA EB Nos. 623 and 629.
Factual Antecedents
Toledo Power Corporation (TPC) is a general partnership principally engaged in the business of power
generation and sale of electricity to the National Power Corporation (NPC), Cebu Electric Cooperative III
(CEBECO), Atlas Consolidated Mining and Development Corporation (ACMDC), and Atlas Fertilizer
Corporation (AFC).
On December 22, 2003, TPC filed with the Bureau of Internal Revenue (BIR) Regional District Office (RDO)
No. 83 an administrative claim for refund or credit of its unutilized input Value Added Tax (VAT) for the
taxable year 2002 in the total amount of P14,254,013.27 under Republic Act No. 9136 or the Electric Power
Industry Reform Act of 2001 (EPIRA) and the National Internal Revenue Code of 1997 (NIRC).
On April 22, 2004, due to the inaction of the Commissioner of Internal Revenue (OR), TPC filed with the CTA
a Petition for Review, docketed as CTA Case No. 6961 and raffled to the CTA First Division (CTA Division).

In response to the Petition for Review, the CIR argued that TPC failed to prove its entitlement to a tax refund
or credit.
Ruling of the CTA Division
On November 11, 2009, the CTA Division rendered a Decision 8 partially granting TPC's claim in the reduced
amount of P7,598,279.29.9 Since NPC is exempt from the payment of all taxes, including VAT, the CTA
Division allowed TPC to claim a refund or credit of its unutilized input VAT attributable to its zero-rated sales
of electricity to NPC for the taxable year 2002. 10 The CTA Division, however, denied the claim attributable to
TPC's sales of electricity to CEBECO, ACMDC and AFC due to the failure of TPC to prove that it is a
generation company under the EPIRA.11 The CTA Division did not consider the said sales as valid zero-rated
sales because TPC did not submit a Certificate of Compliance (COC) from the Energy Regulatory
Commission (ERC).12 Although TPC filed an application for a COC on June 20, 2002 with the ERC, the CTA
Division found this insufficient to prove that TPC is a generation company under the EPIRA. 13 The pertinent
portions of the Decision read:
Therefore, out of the P439,660,958.77 zero-rated sales declared by [TPC] in its Quarterly VAT Returns for
the four quarters of 2002, only the amount of P280,337,939.83 pertaining to [TPC's] sales of electricity to
NPC shall be considered as valid zero-rated sales. x x x
xxxx
[TPC's] sales of electricity to companies other than NPC worth P159,323,018.94 shall be denied VAT zero-
rating for [TPC's] failure to present Certificate of Compliance from the ERC, as stated earlier. x x x
xxxx
After finding that [TPC] had VAT zero-rated sales for the four quarters of 2002 in the amount of
P280,337,939.83, the Court now determines the amount of input VAT attributable thereto.
[TPC] submitted its summary lists of purchases and corresponding suppliers' invoices/official receipts,
Bureau of Customs (BOC) Import Entries and Internal Revenue Declarations (IEIRDs), BOC official receipts,
and other documentary evidence in support of the following input taxes reported in its Quarterly VAT Returns
for the four quarters of 2002:chanRoblesvirtualLawlibrary
xxxx
Upon examination of the supporting documents of [TPC], the Court[-]Commissioned Independent CPA
recommended that out of the total reported input VAT of P14,558,043.30, only the amount of P11,347,363.55
represents [TPC's] valid claim, while the remaining amount of P3,210,679.75 should be disallowed. x x x
xxxx
The Court finds the disallowance of the above input taxes proper except for input taxes classified under Nos.
3 and 10 in the respective amounts of P6,568.00 and P3,121,787.60.
The input VAT of P6,568.00 represents [TPC's] valid claim because the same is duly supported by BOC
official receipt. As to the input taxes of P3,121,787.60, [TPC] submitted documents marked as Exhibits "SS-
3" top "SS-28" but only with respect to the claimed amount of P1,106,820.84 as summarized in Exhibit "SS."
Out of the P1,106,820.84 input VAT claim, only the amount of P969,369.59 is valid, while the remaining input
VAT of P137,451.25 shall be denied. x x x

xxxx
Therefore, the P3,121,787.60 input VAT disallowed by the Independent CPA for not having supporting
documents shall now be reduced to P2,152,418.01 (P3,121,787.60 less P969,369.59).
In addition to the disallowances found by the Independent CPA, the amount of P102,700.85, representing
out-of-period claim, shall be denied.
In sum, only the input VAT claim of P12,220,600.29 is duly substantiated in accordance with Sections 110(A)
and 113(A) of the NIRC of 1997, as implemented by Sections 4.104-1, 4.104-5, and 4.108-1 of Revenue
Regulations No. 7-95. The amount of P12,220,600.29 is computed below:
Input VAT per 2002 Quarterly VAT Returns P14,558,043.30

Less: Disallowances
Per Independent CPA P3,210,679.75
Less: Valid Claim
Input VAT on Importation of Goods 6,568.00
Input VAT per add'l documents submitted 969,369.59 2,234,742.16
Per this Court's further verification 102,700.85
Substantiated Input VAT P12,220,600.29
A portion of the substantiated input VAT of P12,220,600.29, however, shall be applied against [TPC's]
reported output VAT liability of P304,030.03. x x x
xxxx
Hence, only the remaining input VAT of P11,916,570.26 can be attributed to the entire zero-rated sales
declared by [TPC] in the amount of P439,660,958.77, and only the input VAT of P7,598,279.29 is attributable
to the substantiated zero-rated sales of P280,337,939.83, as computed below:chanRoblesvirtualLawlibrary
Substantiated Input VAT P 12,220,600.29

Less: Output VAT 304,030.03
Excess Input VAT P 11,916,570.26
Substantiated Zero-Rated Sales P 280,337,939.83
Divided by Total Reported Zero-Rated Sales /439,660.958.77
Multiplied by Substantiated Excess Input VAT x 11,916,570.26
Excess Input VAT attributable to Substantiated Zero-
P 7,598,279.29
Rated Sales
As evidenced by its Quarterly VAT Returns from the first quarter of 2003 to the second quarter of 2004,
[TPC] was able to prove that the input VAT of P7,598,279.29 was not applied against any output VAT in the
succeeding quarters.
xxxx

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in
favor of [TPC] the amount of SEVEN MILLION FIVE HUNDRED NINETY EIGHT THOUSAND TWO
HUNDRED SEVENTY NINE PESOS AND 29/100 (P7,598,279.29), representing its unutilized input taxes
attributable to zero-rated sales for taxable year 2002.
SO ORDERED.
ChanRoblesVirtualawlibrary
TPC moved for partial reconsideration contending that as an existing generation company, it was not
required to obtain a COC from the ERC as a prerequisite for its operations, and that the issue of whether it is
a generation company was never raised during the trial. 15 In any case, it attached photocopies of its
application for a COC dated June 20, 2002 and its COC dated June 23, 2004.
The CIR, likewise, sought partial reconsideration arguing that the administrative claim was merely pro
forma since TPC failed to submit the complete documents required under Revenue Memorandum Order
(RMO) No. 53-98,17 which were necessary to ascertain the correct amount to be refunded in the
administrative claim.18
On April 13, 2010, the CTA Division issued a Resolution 19 denying both motions for lack of merit. It
maintained that TPC timely filed its administrative claim for refund and that its failure to comply with RMO
No. 53-98 was not fatal.20 The CTA Division also said that in claiming a refund under the EPIRA, the
taxpayer must prove that it was duly authorized by the ERC to operate a generation facility and that it
derived its sales from power generation. 21 In this case, TPC failed to present a COC to prove that it was duly
authorized by the ERC to operate as a generation facility in 2002. 22 As to the attached photocopy of the
COC, the CTA Division gave no credence to it as it was not formally offered in evidence and no valid reason
was offered by TPC to justify its late submission.
Unfazed, both parties elevated the case before the CTA En Banc.
Ruling of the CTA En Banc

On November 22, 2010, the CTA En Banc rendered a Decision dismissing both Petitions. It sustained the
findings of the CTA Division that both the administrative and the judicial claims were timely filed and that
TPC's non-compliance with RMO No. 53-98 was not fatal to its claim. 24 Also, since TPC was not yet issued a
COC in 2002, the CTA En Banc agreed with the CTA Division that TPC's sales of electricity to CEBECO,
ACMDC, and AFC for the taxable year 2002 could not qualify for a VAT zero-rating under the EPIRA. 25 The
CTA En Banc likewise noted that contrary to the claim of TPC, there is no stipulation in the Joint Stipulation
of Facts and Issues (JSFI) that TPC is a generation company under the EPIRA. 26 Thus:
WHEREFORE, premises considered, the above-captioned petitions are hereby DISMISSED. Hie assailed
Decision dated November 11/2009 and Resolution dated April 13, 2010 rendered by the Former First
Division in CTA Case No. 6961 are hereby AFFIRMED.
SO ORDERED.27ChanRoblesVirtualawlibrary
Both parties moved for partial reconsideration but the CTA En Banc denied both motions for lack of merit in
its April 6, 2011 Resolution.28
Issues
Hence, the instant Petitions with the following issues:

G.R. No. 196415
Whether x x x the [CTA] En Banc committed reversible error in holding that TPC is entitled to a refund or tax

credit certificate in the reduced amount of P7,598,279.29, representing alleged unutilized input tax,
considering that -
A. TPC did not comply with the rule on exhaustion of administrative remedies.
B. TPC is liable for deficiency VAT for those sales of electricity to companies other than NPC
that failed to qualify as VAT zero-rated sales under the EPIRA x x x, hence, considered
subject to VAT under Section 108 of the [NIRC], as amended.
C. x x x TPC did not comply with the pertinent provisions of Section 112 (A) of the MRC x x x,
as amended.29
G.R. No. 196451
A. Whether TPC established that it is a generation company during the period of its claim for
refund.
B. Whether the fact of TPC being a generation company was raised as an issue by the parties
for the CTA to resolve.
C. Whether TPC is entitled to the rights of a generation company under the EPIRA prior to the
issuance of its COC.30
Simply put, the issues raised in the Petitions can be grouped into two:
A. Whether the administrative and the judicial claims for tax refund or credit were timely and validly filed.
B. Whether the TPC is entitled to the full amount of its claim for tax refund or credit.
The CIR 's Arguments
The CIR contends that TPC is not entitled to a refund or credit in the reduced amount of P7,598,279.29,
representing its alleged unutilized input VAT for taxable year 2002 because it failed to comply with the rules
on exhaustion of administrative remedies.31 She insists that the BIR was deprived of the opportunity to
determine the truthfulness of the claim as TPC failed to submit the complete documents set out in RMO No.
53-98.32 And since TPC failed to present all relevant documents, it failed to prove that it did not apply its
unutilized input VAT against output VAT as provided in Section 112 (A) of the NIRC. 33 Thus, the pro
forma administrative claim filed by TPC has no effect. 34 Moreover, since TPC's sales of electricity to
companies other than NPC were denied VAT zero-rating, TPC should be held liable for deficiency VAT in the
amount of P4,015,731.63.
TPC's Arguments
TPC, on the other hand, argues that its administrative claim was not pro forma as it submitted relevant
supporting documents, to wit: (a) its Articles of Partnership; (b) ERC Registration and Compliance
Certificate; (c) VAT Registration Certificate; (d) Quarterly VAT Returns for the 1 st to 4th quarters of 2002; (e)
Summary of Input Tax Payments for the 1st to 4th quarters of 2002 showing the details of TPC's purchases of
goods and services as well as the corresponding input taxes paid, and the pertinent supporting VAT invoices
and official receipts; and (f) application for zero rating for 2002. 36 It also complied with the rule on exhaustion
of administrative remedies as it waited for the CIR to rule on its administrative claim before filing the judicial
claim.37
Citing VAT Ruling No. 011-5,38 TPC further claims that it is entitled to the full amount of tax refund or credit

because it became entitled to the rights of a generation company under the EPIRA when it filed its
application with the ERC on June 20, 2002. 39 Thus, the belated issuance of the COC has no effect on its
claim for tax refund or credit. Besides, in the JSFI, the parties already agreed that TPC is a generation
company under the EPIRA.40 In addition, it is not liable for deficiency VAT, even if, for the sake of argument,
its sales of electricity to CEBECO, ACMDC, and AFC are not zero-rated, as an assessment cannot be
issued in a refund case, not to mention that the BIR's period to assess had already prescribed. 41
Our Ruling
The Petitions are bereft of merit.
Both the administrative and the judicial claims were timely and validly filed.
Pursuant to Section 112 (A)42 and (D)43 of the NIRC, a taxpayer has two (2) years from the close of the
taxable quarter when the zero-rated sales were made within which to file with the CIR an administrative
claim for refund or credit of unutilized input VAT attributable to such sales. The CIR, on the other hand, has
120 days from receipt of the complete documents within which to act on the administrative claim. Upon
receipt of the decision, a taxpayer has 30 days within which to appeal the decision to the CTA. However, if
the 120-day period expires without any decision from the CIR, the taxpayer may appeal the, inaction to the
CTA within 30 days from the expiration of the 120-day period.
In Commissioner of Internal Revenue v. San Roque Power Corporation,44 we said that the 120+30-day
period must be strictly observed except from the date of issuance of BIR Ruling No. DA-489-03 on
December 10, 2003, which allowed taxpayers to file a judicial claim without waiting for the end of the 120-
day period, up to the date of promulgation of Commissioner of Internal Revenue v. Aichi Forging Company
of Asia, Inc.45 on October 6, 2010, where we declared that compliance with the 120+30-day period is
mandatory and jurisdictional.
In this case, TPC applied for a claim for refund or credit of its unutilized input VAT for the taxable year 2002
on December 22, 2003. Since the CIR did not act on its application within the 120-day period, TPC appealed
the inaction on April 22, 2004. Clearly, both the administrative and the judicial claims were filed within the
prescribed period provided in Section 112 of the NIRC.
Also, the administrative claim was not pro forma as TPC submitted documents to support its claim for refund
and even manifested its willingness to submit additional documents if necessary. 46 The CIR, however, never
requested TPC to submit additional documents. Thus, she cannot now raise the issue that TPC failed to
submit the complete documents.
Neither do we find the alleged failure of TPC to submit all relevant documents set out in RMO No. 53-98
fatal to its claim. In Commissioner of Internal Revenue v. Team Sual Corporation (formerly Mirant Sual
Corporation),47 we said that:
The CIR's reliance on RMO 53-98 is misplaced. There is nothing in Section 112 of the NIRC, RR 3-88 or
RMO 53-98 itself that requires submission of the complete documents enumerated in RMO 53-98 for a grant
of a refund or credit of input VAT. The subject of RMO 53-98 states that it is a "Checklist of Documents to be
Submitted by a Taxpayer upon Audit of his Tax Liabilities ...." In this case, TSC was applying for a grant of
refund or credit of its input tax. There was no allegation of an audit being conducted by the CIR. Even
assuming that RMO 53-98 applies, it specifically states that some documents are required to be submitted
by the taxpayer "if applicable."
Moreover, if TSC indeed failed to submit the complete documents in support of its application, the CIR could
have informed TSC of its failure, consistent with Revenue Memorandum Circular No. (RMC) 42-03.
However, the CIR did not inform TSC of the document it failed to submit, even up to the present petition. The
CIR likewise raised the issue of TSC's alleged failure to submit the complete documents only in its motion

for reconsideration of the CTA Special First Division's 4 March 2010 Decision. Accordingly, we affirm the CTA
EB's finding that TSC filed its administrative claim on 21 December 2005, and submitted the complete
documents in support of its application for refund or credit of its input tax at the same
time.ChanRoblesVirtualawlibrary
In view of the foregoing, we find that both the administrative and the judicial claims were timely and validly
filed.
Now, as to the validity of TPC's claim, there is no question that TPC is entitled to a refund or credit of its
unutilized input VAT attributable to its zero-rated sales of electricity to NPC for the taxable year 2002
pursuant to Section 108 (B) (3)49 of the NIRC, as amended, in relation to Section 13 50 of the Revised Charter
of the NPC, as amended. Hence, the only issue to be resolved is whether TPC is entitled to a refund of its
unutilized input VAT attributable to its sales of electricity to CEBECO, ACMDC, and AFC.
TPC is not entitled to a refund or credit of unutilized input VAT attributable to its sales of electricity
to CEBECO, ACMDC, and AFC.
Section 651 of the EPIRA provides that the sale of generated power by generation companies shall be zero-
rated. Section 4(x) of the same law states that a generation company "refers to any person or entity
authorized by the ERC to operate facilities used in the generation of electricity." Corollarily, to be entitled to a
refund or credit of unutilized input VAT attributable to the sale of electricity under the EPIRA, a taxpayer must
establish: (1) that it is a generation company, and (2) that it derived sales from power generation.
In this case, TPC failed to present a COC from the ERC during the trial. On partial reconsideration, TPC
argued that there was no need for it to present a COC because the parties already stipulated in the JSFI that
TPC is a generation company and that it became entitled to the rights under the EPIRA when it filed its
application with the ERC on June 20, 2002.
We find the arguments raised by TPC unavailing.
There is nothing in the JSFI to show that the parties agreed that TPC is a generation company under the
EPIRA. The pertinent portions of the JSFI read:
JOINTLY STIPULATED FACTS
1. [TPC] is principally engaged in the business of power generation and subsequent sale thereof to the
[NPC, CEBECO, ACMDC, and AFC].
2. On 20 June 2002, petitioner filed an application with the Energy Regulatory Commission (ERC) for the
issuance of a Certificate of Compliance pursuant to the Implementing Rules and Regulations of the EPIRA.
xxxx
ADMITTED FACTS
xxxx
3. Effective 26 June 2001, sales of generated power by generation companies became VAT zero-rated by
virtue of Section 4(x) in relation to Section 6 of the EPIRA and Rule 5, Section 6 of the Rules and
Regulations to Implement the EPIRA.
anRoblesVirtualawlibrary
Obviously, the parties did not stipulate that TPC is a generation company. They only stipulated that TPC is
engaged in the business of power generation and that it filed an application with the ERC on June 20, 2002.
However, being engaged in the business of power generation does not make TPC a generation company

under the EPIRA. Neither did TPC's filing of an application for COC with the ERC automatically entitle TPC
to the rights of a generation company under the EPIRA.
At this point, a distinction must be made between a generation facility and a generation company. A
generation facility is defined under the EPIRA Rules and Regulations as "a facility for the production of
electricity."54 While a generation company, as previously mentioned, "refers to any person or entity
authorized by the ERC to operate facilities used in the generation of electricity." Based on the foregoing
definitions, what differentiates a generation facility from a generation company is that the latter is authorized
by the ERC to operate, as evidenced by a COC.
Under the EPIRA, all new generation companies and existing generation facilities are required to obtain a
COC from the ERC. New generation companies must show that they have complied with the requirements,
standards, and guidelines of the ERC before they can operate. 55 As for existing generation facilities, they
must submit to the ERC an application for a COC together with the required documents within ninety (90)
days from the effectivity of the EPIRA Rules and Regulations. 56 Based on the documents submitted, the
ERC will determine whether the applicant has complied with the standards and requirements for operating a
generation company. If the applicant is found compliant, only then will the ERC issue a COC.
In this case, when the EPIRA took effect in 2001, TPC was an existing generation facility. And at the time the
sales of electricity to CEBECO, ACMDC, and AFC were made in 2002, TPC was not yet a generation
company under EPIRA. Although it filed an application for a COC on June 20, 2002, it did not automatically
become a generation company. It was only on June 23,2005, when the ERC issued a COC in favor of TPC,
that it became a generation company under EPIRA. Consequently, TPC's sales of electricity to CEBECO,
ACMDC, and AFC cannot qualify for VAT zero-rating under the EPIRA.
Neither can TPC rely on VAT Ruling No. 011-5, which considered the sales of electricity of Hedcor effectively
zero-rated from the effectivity of the EPIRA despite the fact that it was issued a COC only on November 5,
2003, as this is a specific ruling, issued in response to the query made by Hedcor to the CIR. As such, it is
applicable only to a particular taxpayer, which is Hedcor. Thus, it is not a general interpretative rule that can
be applied to all taxpayers similarly situated.
All told, we find no error on the part of the CTA En Banc, in considering TPC's sales of electricity to
CEBECO, ACMDC, and AFC for taxable year 2002 as invalid zero-rated sales, and in consequently denying
TPC's claim for refund or credit of unutilized input VAT attributable to the said sales of electricity.
TPC is not liable for deficiency VAT.
But while TPC's sales of electricity to CEBECO, ACMDC, and AFC are not zero-rated, we cannot hold it
liable for deficiency VAT by imposing 10% VAT on said sales of electricity as what the CIR wants us to do.
As a rule, taxes cannot be subject to compensation because the government and the taxpayer are not
creditors and debtors of each other. 58 However, we are aware that in several cases, we have allowed the
determination of a taxpayer's liability in a refund case, thereby allowing the offsetting of taxes.
In Commissioner of Internal Revenue v. Court of Tax Appeals,59 we allowed offsetting of taxes in a tax refund
case because there was an existing deficiency income and business tax assessment against the taxpayer.
We said that "[t]o award such refund despite the existence of that deficiency assessment is an absurdity and
a polarity in conceptual effects" and that "to grant the refund without determination of the proper assessment
and the tax due would inevitably result in multiplicity of proceedings or suits."
Similarly, in South African Airways v. Commissioner of Internal Revenue,61 we permitted offsetting of taxes
because the correctness of the return filed by the taxpayer was put in issue.

In the recent case of SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,62 we also
allowed offsetting because there was a need for the court to determine if a taxpayer claiming refund of
erroneously paid taxes is more properly liable for taxes other than that paid. We explained that the
determination of the proper category of tax that should have been paid is not an assessment but is an
incidental issue that must be resolved in order to determine whether there should be a refund. 63 However,
we clarified that while offsetting may be allowed, the BIR can no longer assess the taxpayer for deficiency
taxes in excess of the amount claimed for refund if prescription has already set in.
But in all these cases, we allowed offsetting of taxes only because the determination of the taxpayer's
liability is intertwined with the resolution of the claim for tax refund of erroneously or illegally collected taxes
under Section 22965 of the NIRC. A situation that is not present in the instant case.
In this case, TPC filed a claim for tax refund or credit under Section 112 of the NIRC, where the issue to be
resolved is whether TPC is entitled to a refund or credit of its unutilized input VAT for the taxable year 2002.
And since it is not a claim for refund under Section 229 of the NIRC, the correctness of TPC s VAT returns is
not an issue. Thus, there is no need for the court to determine whether TPC is liable for deficiency VAT.
Besides, it would be unfair to allow the CIR to use a claim for refund under Section 112 of the NIRC as a
means to assess a taxpayer for any deficiency VAT, especially if the period to assess had already
prescribed. As we have said, the courts have no assessment powers, and therefore, cannot issue
assessments against taxpayers.66 The courts can only review the assessments issued by the CIR, who
under the law is vested with the powers to assess and collect taxes and the duty to issue tax assessments
within the prescribed period.
WHEREFORE, the Petitions are hereby DENIED. The November 22, 2010 Decision and the April 6, 2011
Resolution of the Court of Tax Appeals in CTA EB Nos. 623 and 629 are hereby AFFIRMED.
SO ORDERED.

G.R. No. 147188 September 14, 2004

vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan
and Mario Luza Bautista, respondents.
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision 1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP
No. 57799 affirming the 3 January 2000 Decision 2 of the Court of Tax Appeals (CTA) in C.T.A. Case No.
5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income
tax of Cibeles Insurance Corporation (CIC) in the amount of ₱79,099,999.22 for the year 1989, and ordered
the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway
Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal
Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building
known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building
stands for an amount of not less than ₱90 million.4
On 30 August 1989, Toda purportedly sold the property for ₱100 million to Rafael A. Altonaga, who, in turn,
sold the same property on the same day to Royal Match Inc. (RMI) for ₱200 million. These two transactions
were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public. 5
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of ₱10 million. 6
On 16 April 1990, CIC filed its corporate annual income tax return 7 for the year 1989, declaring, among other
things, its gain from the sale of real property in the amount of ₱75,728.021. After crediting withholding taxes
of ₱254,497.00, it paid ₱26,341,2078 for its net taxable income of ₱75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for ₱12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks. 9 Three and a half years later, or on 16 January 1994,
Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice 10 and demand letter to
the CIC for deficiency income tax for the year 1989 in the amount of ₱79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old
CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover,
Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the
fiscal years 1987-1989.11

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna
Kapunan and Mario Luza Bautista, received a Notice of Assessment 12 dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of
₱79,099,999.22, computed as follows:
Income Tax – 1989

Net Income per return ₱75,987,725.00
Add: Additional gain on sale of real property taxable

under ordinary corporate income but were
substituted with individual capital gains(₱200M –
100M) 100,000,000.00
Total Net Taxable Income per investigation ₱175,987,725.00

Tax Due thereof at 35% ₱ 61,595,703.75
Less: Payment already made
1. Per return ₱26,595,704.00
2. Thru Capital Gains Tax made
by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of tax due
₱ 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total ₱ 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE ₱ 79,099,999.22

==============
The Estate thereafter filed a letter of protest.13
In the letter dated 19 October 1995, 14 the Commissioner dismissed the protest, stating that a fraudulent
scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the
additional gain of ₱100 million, which resulted in the change in the income structure of the proceeds of the
sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher
corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review 15 with the CTA alleging that the Commissioner
erred in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the
properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had
already prescribed.

In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the
property from CIC nor the seller of the same property to RMI. The additional gain of ₱100 million (the
difference between the second simulated sale for ₱200 million and the first simulated sale for ₱100 million)
realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at
the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to
evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR
only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period
prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may
be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud,
the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the
99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the
name of the individual directors of CIC, should be held liable for the deficiency income tax, especially
because the gains realized from the sale were withdrawn by him as cash advances or paid to him as cash
dividends. Since he is already dead, his estate shall answer for his liability.
In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed
fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived
scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There being
no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that prescribed in
Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the
return. Thus, the government’s right to assess CIC prescribed on 15 April 1993. The assessment issued on
9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of
99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate
personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax of
₱79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9
January 1995.
In its motion for reconsideration, 19 the Commissioner insisted that the sale of the property owned by CIC was
the result of the connivance between Toda and Altonaga. She further alleged that the latter was a
representative, dummy, and a close business associate of the former, having held his office in a property
owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for
representation services rendered. The CTA denied20 the motion for reconsideration, prompting the
Commissioner to file a petition for review21 with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA,
reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters
of taxation, is "better situated to determine the correctness, propriety, and legality of the income tax
assessments assailed by the Toda Estate."22
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking
the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO

FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES
INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO
ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD
PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the
Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of
purchasing it. She further points out that the documents themselves prove the fact of fraud in that (1) the two
sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between
Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former
registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of
1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early
as 4 May 1989, CIC received ₱40 million from RMI, and not from Altonaga. The said amount was debited by
RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of ₱40
million was withdrawn by Toda through the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of
Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if
any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be
used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used
outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional
civil or criminal liabilities.23
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less
than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is
due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or
"deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful. 24
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to
the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received ₱40 million
from RMI,25 and not from Altonaga. That ₱40 million was debited by RMI and reflected in its trial balance 26 as
"other inv. – Cibeles Bldg." Also, as of 31 July 1989, another ₱40 million was debited and reflected in RMI’s
trial balance as "other inv. – Cibeles Bldg." This would show that the real buyer of the properties was RMI,
and not the intermediary Altonaga. lavvphi1.net
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of
the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the

assistant accountant of CIC and an old timer in the company. 27 But Mr. Prieto did not testify on this matter,
hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either,
since the letter-request for investigation of Altonaga was unserved, 28 Altonaga having left for the United
States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the
admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That
admission is borne by the records. In its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one
hundred percent. But isn’t this precisely the definition of tax planning? Change the structure of the
funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of
property for stock, changing the structure of the property and the tax to be paid. As long as it is done
legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is
absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [ sic] cannot
be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e.,
from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such
scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue and unconscionable advantage is taken of
another."30
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual capital
gains tax, and not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and transferring title
of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property
and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a
sham, and without business purpose and economic substance. Doubtless, the execution of the two sales
was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability. lavvphi1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion. 31
Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by the
means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step
from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person
cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which
to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist
solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of
Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct
entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws.
Hence, the sale to Altonaga should be disregarded for income tax purposes. 34 The two sale transactions
should be treated as a single direct sale by CIC to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now
27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, and partnerships, no matter how created
or organized but not including general professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not exceed one
hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred
thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual
capital gains tax provided for in Section 34 (h) of the NIRC of 1986 35 (now 6% under Section 24 (D) (1) of the
Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the
BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case
of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court after the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal action for collection thereof… .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to
file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or
omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR
on the tax consequence of the two sale transactions. 36 Thus, the BIR was amply informed of the transactions
even prior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales
were openly made with the execution of public documents and the declaration of taxes for 1989. However,
these circumstances do not negate the existence of fraud. As earlier discussed those two transactions were
tainted with fraud. And even assuming arguendo that there was no fraud, we find that the income tax return
filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of
the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from
the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to
have been discovered only on 8 March 1991. 37 The assessment for the 1989 deficiency income tax of CIC
was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax
was well within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it.
Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of
a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It
has been held in a number of cases that personal liability of a corporate director, trustee, or officer along,
albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders,
or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action. 38
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and
voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987,
1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those
reported in its audited financial statement as of December 31, 1989, attached hereto as "Annex B"
and made a part hereof. The business of Cibeles has at all times been conducted in full compliance
with all applicable laws, rules and regulations. SELLER undertakes and agrees to hold the
BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years
1987, 1988 and 1989.39 [Underscoring Supplied].
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax
liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally
liable therefor. Respondent estate cannot, therefore, deny liability for CIC’s deficiency income tax for the
year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Toda’s
contractual undertaking, as contained in the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of
Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is
hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay ₱79,099,999.22 as deficiency
income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the
Costs against respondent.
SO ORDERED.

G.R. No. 182399 March 12, 2014
CS GARMENT, INC.,* Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
SERENO, CJ:
Before the Court is a Rule 45 petition for review on certiorari, assailing the respective Decision and 1
Resolution of the Court of Tax. Appeals (CTA) en bane in EB Case No. 287. These judgments in turn
2
affirmed the Decision and the Resolution of the CTA Second Division, which ordered the cancellation of
3 4
certain items in the 1998 tax assessments against petitioner CS Garment, Inc. (CS Garment or petitioner).
Accordingly, petitioner was directed to pay the Bureau of Internal Revenue (BIR) the remaining portion of the
tax assessments. This portion was comprised of the outstanding deficiency value-added tax (VAT) on CS
Garment’s undeclared local sales and on the incidental sale of a motor vehicle; deficiency documentary
stamp tax (DST) on a lease agreement; and deficiency income tax as a result of the disallowed expenses
and undeclared local sales. However, while the present case was pending before this Court, CS Garment
filed a Manifestation and Motion stating that the latter had availed itself of the government’s tax amnesty
program under Republic Act No. (R.A.) 9480, or the 2007 Tax Amnesty Law.
FACTS
We reproduce the narration of facts culled by the CTA en banc as follows:

5
Petitioner [CS Garment] is a domestic corporation duly organized and existing under and by virtue of the
laws of the Philippines with principal office at Road A, Cavite Ecozone, Rosario, Cavite. On the other hand,
respondent is the duly appointed Commissioner of Internal Revenue of the Philippines authorized under law
to perform the duties of said office, including, inter alia, the power to assess taxpayers for [alleged]
deficiency internal revenue tax liabilities and to act upon administrative protests or requests for
reconsideration/reinvestigation of such assessments.
Petitioner is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration
No. 89-064, duly approved on December 18, 1989. As such, it is engaged in the business of manufacturing
garments for sale abroad.
On November 24, 1999, petitioner [CS Garment] received from respondent [CIR] Letter of Authority No.
00012641 dated November 10, 1999, authorizing the examination of petitioner’s books of accounts and
other accounting records for all internal revenue taxes covering the period January 1, 1998 to December 31,
1998.
On October 23, 2001, petitioner received five (5) formal demand letters with accompanying Assessment
Notices from respondent, through the Office of the Revenue Director of Revenue Region No. 9, San Pablo
City, requiring it to pay the alleged deficiency VAT, Income, DST and withholding tax assessments for
taxable year 1998 in the aggregate amount of ₱2,046,580.10 broken down as follows:
Deficiency VAT
Basic tax due P 314,194.00

Add: Surcharge 157,097.00

Interest 188,516.00
Total Amount Payable ₱ 659,807.00
Deficiency Income Tax (at Normal Rate of 34%)
Basic tax due ₱ 78,639.00

Interest 43,251.00
Deficiency Income Tax (at Normal Rate of 34%)

Interest 43,251.00
Deficiency DST
Basic tax due P 806.00

Add: Surcharge 403.00
Interest 484.00
Deficiency EWT

Interest 13,680.00
GRAND TOTAL ₱ 2,046,580.10

On November 20, 2001, or within the 30-day period prescribed under Section 228 of the Tax Code, as
amended, petitioner filed a formal written protest with the respondent assailing the above assessments.
On January 11, 2002, or within the sixty-day period after the filing of the protest, petitioner submitted to the
Assessment Division of Revenue Region No. 9, San Pablo City, additional documents in support of its
protest.
Respondent failed to act with finality on the protest filed by petitioner within the period of one hundred eighty
(180) days from January 11, 2002 or until July 10, 2002. Hence, petitioner appealed before [the CTA] via a
Petition for Review filed on August 6, 2002 or within thirty (30) days from the last day of the aforesaid 180-
day period.
The case was raffled to the Second Division of [the CTA] for decision. After trial on the merits, the Second
Division rendered the Assailed Decision on January 4, 2007 upon which the Second Division cancelled
respondent’s assessment against CS Garments for deficiency expanded withholding taxes for CY 1998
amounting to ₱47,880.00, and partially cancelled the deficiency DST assessment amounting to ₱1,963.00.
However, the Second Division upheld the validity of the deficiency income tax assessments by subjecting
the disallowed expenses in the amount of ₱14,851,478.83 and a portion of the undeclared local sales
₱1,541,936.60 (amounting to ₱1,500,000.00) to income tax at the special rate of 5%. The remainder of
undeclared local sales of ₱1,541,936.06 (amounting to ₱41,936.60) was subjected to income tax at the rate
of 34%. The Second Division found that total tax liability of CS Garments amounted to ₱2,029,570.12, plus
20% delinquency interest pursuant to Section 249(C)(3), and computed the same as follows:
Income Tax
Deficiency
Tax VAT DST at 5% at 34% TOTAL
Basic Tax
P 314,194.00 P 145.00 P 817,573.94 P 1,789.44
Due
25%
78,548.50 36.25 204,393.49 447.36
Surcharge
20% Interest 188,516.00 102.02 422,898.52 925.6
P 581,258.50 P 283.27 P 1,444,865.95 P 3,162.40 P 2,029,570.12

============= ============= ============= ============= =============
On January 29, 2007, CS Garments filed its "Motion for Partial Reconsideration" of the said decision. On
May 25, 2007, in a resolution, the Second Division denied CS Garments’ motion for lack of merit. (Citations
omitted)
Petitioner appealed the case to the CTA en banc and alleged the following: (1) the Formal Assessment
Notices (FAN) issued by the Commissioner of Internal Revenue (CIR) did not comply with the requirements
of the law; (2) the income generated by CS Garment from its participation in the Cavite Export Processing
Zone’s trade fairs and from its sales to employees were not subject to 10% VAT; (3) the sale of the company
vehicle to its general manager was not subject to 10% VAT; (4) it had no undeclared local sales in the
amount of ₱1,541,936.60; and (5) Rule XX, Section 2 of the PEZA Rules and Regulations allowed
deductions from the expenses it had incurred in connection with advertising and representation; clinic and
office supplies; commissions and professional fees; transportation, freight and handling, and export fees;
and licenses and other taxes.

The CTA en banc affirmed the Decision and Resolution of the CTA Second Division. As regards the first
issue, the banc ruled that the CIR had duly apprised CS Garment of the factual and legal bases for
assessing the latter’s liability for deficiency income tax, as shown in the attached Schedule of Discrepancies
provided to petitioner; and in the subsequent reference of the CIR to Rule XX, Section 2 of the Rules and
Regulations of R.A. 7916. With respect to the second issue, the CTA pronounced that the income generated
by CS Garment from the trade fairs was subject to internal revenue taxes, as those transactions were
considered "domestic sales" under R.A. 7916, otherwise known as the Special Economic Zone Act. With
respect to the third issue, the CTA en banc declared that the sale of the motor vehicle by CS Garment to the
latter’s general manager in the amount of ₱1.6 million was subject to VAT, since the sale was considered an
incidental transaction within the meaning of Section 105 of the NIRC. On the fourth issue, the CTA found
that CS Garment had failed to declare the latter’s total local sales in the amount of ₱1,541,936.60 in its 1998
income tax return. The tax court then calculated the income tax liability of petitioner by subjecting ₱1.5
million of that liability to the preferential income tax rate of 5%. This amount represented the extent of the
authority of CS Garment, as a PEZA-registered enterprise, to sell in the local market. The normal income tax
rate of 34% was then charged for the excess amount of ₱41,936.60. Finally, as regards the fifth issue, the
CTA ruled that Section 2, Rule XX of the PEZA Rules – which enumerates the specific deductions for
ECOZONE Export Enterprises – does not mention certain claims of petitioner as allowable deductions.
Aggrieved, CS Garment filed the present Petition for Review assailing the Decision of the CTA en banc.
However, on 26 September 2008, while the instant case was pending before this Court, petitioner filed a
Manifestation and Motion stating that it had availed itself of the government’s tax amnesty program under
the 2007 Tax Amnesty Law. It thus prays that we take note of its availment of the tax amnesty and confirm
that it is entitled to all the immunities and privileges under the law. It has submitted to this Court the following
documents, which have allegedly been filed with Equitable PCI Bank–Cavite EPZA Branch, a supposed
authorized agent-bank of the BIR: 6
1. Notice of Availment of Tax Amnesty under R.A. 9480
2. Statement of Assets, Liabilities, and Net worth (SALN)
3. Tax Amnesty Return (BIR Form No. 2116)
4. Tax Amnesty Payment Form (Acceptance of Payment Form or BIR Form No. 0617)
5. Equitable PCI Bank’s BIR Payment Form indicating that CS Garment deposited the amount of
₱250,000 to the account of the Bureau of Treasury–BIR
On 26 January 2009, the Office of the Solicitor General (OSG) filed its Comment objecting to the
Manifestation and Motion of CS Garment. 7
The OSG asserts that the filing of an application for tax amnesty does not by itself entitle petitioner to the
benefits of the law, as the BIR must still assess whether petitioner was eligible for these benefits and
whether all the conditions for the availment of tax amnesty had been satisfied. Next, the OSG claims that the
BIR is given a one-year period to contest the correctness of the SALN filed by CS Garment, thus making
petitioner’s motion premature. Finally, the OSG contends that pursuant to BIR Revenue Memorandum
Circular No. (RMC) 19-2008, petitioner is disqualified from enjoying the benefits of the Tax Amnesty Law,
since a judgment was already rendered in favor of the BIR prior to the tax amnesty availment. The OSG
points out that CS Garment submitted its application for tax amnesty only on 6 March 2008, which was
almost two months after the CTA en banc issued its 14 January 2008 Decision and more than one year after
the CTA Second Division issued its 4 January 2007 Decision.

On 8 February 2010, the Court required both parties to prepare and file their respective memoranda within
30 days from notice. After this Court granted the motions for extension filed by the parties, the OSG
8
eventually filed its Memorandum on 18 May 2010, and CS Garment on 7 June 2010. It is worthy to note that
in its Memorandum, the OSG did not raise any argument with respect to petitioner’s availment of the tax
amnesty program. Neither did the OSG deny the authenticity of the documents submitted by CS Garments
or mention that a case had been filed against the latter for availing itself of the tax amnesty program, taking
into account the considerable lapse of time from the moment petitioner filed its Tax Amnesty Return and
Statement of Assets, Liabilities, and Net Worth in 2008.
On 17 July 2013, the parties were ordered to "move in the premises" by informing the Court of the status of
9 10
the tax amnesty availment of petitioner CS Garment, including any supervening event that may be of help to
the Court in its immediate disposition of the present case. Furthermore, the parties were directed to indicate
inter alia (a) whether CS Garment had complied with the requirements of the 2007 Tax Amnesty Law, taking
note of the aforementioned documents submitted; (b) whether a case had been initiated against petitioner,
with respect to its availment of the tax amnesty program; and (c) whether respondent CIR was still interested
in pursuing the case. Petitioner eventually filed its Compliance on 27 August 2013, and the OSG on 29
11
November 2013. 12
According to the OSG, CS Garment had already complied with all documentary requirements of the 2007
13
Tax Amnesty Law. It also stated that the BIR Litigation Division had not initiated any case against petitioner
relative to the latter’s tax amnesty application. However, the OSG reiterated that the CIR was still interested
in pursuing the case.
ISSUE
The threshold question before this Court is whether or not CS Garment is already immune from paying the
deficiency taxes stated in the 1998 tax assessments of the CIR, as modified by the CTA.
DISCUSSION
Tax amnesty refers to the articulation of the absolute waiver by a sovereign of its right to collect taxes and
power to impose penalties on persons or entities guilty of violating a tax law. Tax amnesty aims to grant a
14
general reprieve to tax evaders who wish to come clean by giving them an opportunity to straighten out their
records. In 2007, Congress enacted R.A. 9480, which granted a tax amnesty covering "all national internal
15
revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor,
that have remained unpaid as of December 31, 2005." These national internal revenue taxes include (a)
16
income tax; (b) VAT; (c) estate tax; (d) excise tax; (e) donor’s tax; (f) documentary stamp tax; (g) capital
gains tax; and (h) other percentage taxes. Pursuant to Section 6 of the 2007 Tax Amnesty Law, those who
17
availed themselves of the benefits of the law became "immune from the payment of taxes, as well as
additions thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal
Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years."
Amnesty taxpayers may immediately enjoy the privileges and immunities under the 2007 Tax Amnesty Law,
as soon as they fulfill the suspensive conditions imposed therein
A careful scrutiny of the 2007 Tax Amnesty Law would tell us that the law contains two types of conditions –
one suspensive, the other resolutory. Borrowing from the concepts under our Civil Code, a condition may be
classified as suspensive when the fulfillment of the condition results in the acquisition of rights. On the other
hand, a condition may be considered resolutory when the fulfillment of the condition results in the
extinguishment of rights. In the context of tax amnesty, the rights referred to are those arising out of the
privileges and immunities granted under the applicable tax amnesty law.

The imposition of a suspensive condition under the 2007 Tax Amnesty Law is evident from the following
provisions of the law:
2007 Tax Amnesty Law – Republic Act No. 9480
SECTION 2. Availment of the Amnesty. — Any person, natural or juridical, who wishes to avail himself of the
tax amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR) a
notice and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Networth (SALN) as
of December 31, 2005, in such form as may be prescribed in the implementing rules and regulations (IRR)
of this Act, and pay the applicable amnesty tax within six months from the effectivity of the IRR.
SECTION 4. Presumption of Correctness of the SALN. — The SALN as of December 31, 2005 shall be
considered as true and correct except where the amount of declared networth is understated to the extent of
thirty percent (30%) or more as may be established in proceedings initiated by, or at the instance of, parties
other than the BIR or its agents: Provided, That such proceedings must be initiated within one year following
the date of the filing of the tax amnesty return and the SALN. Findings of or admission in congressional
hearings, other administrative agencies of government, and/or courts shall be admissible to prove a thirty
percent (30%) under-declaration.
SECTION 6. Immunities and Privileges. — Those who availed themselves of the tax amnesty under Section
5 hereof, and have fully complied with all its conditions shall be entitled to the following immunities and
privileges:
(a) The taxpayer shall be immune from the payment of taxes, as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of
1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year
2005 and prior years.
(b) The taxpayer’s Tax Amnesty Return and the SALN as of December 31, 2005 shall not be
admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar
as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or administrative
bodies in which he is a defendant or respondent, and except for the purpose of ascertaining the
networth beginning January 1, 2006, the same shall not be examined, inquired or looked into by any
person or government office. However, the taxpayer may use this as a defense, whenever
appropriate, in cases brought against him.
(c) The books of accounts and other records of the taxpayer for the years covered by the tax
amnesty availed of shall not be examined: Provided, That the Commissioner of Internal Revenue
may authorize in writing the examination of the said books of accounts and other records to verify
the validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes
withheld on wages), tax incentives, and/or exemptions under existing laws.
All these immunities and privileges shall not apply where the person failed to file a SALN and the Tax
Amnesty Return, or where the amount of networth as of December 31, 2005 is proven to be understated to
the extent of thirty percent (30%) or more, in accordance with the provisions of Section 3 hereof.
SECTION 7. When and Where to File and Pay. — The filing of the Tax Amnesty Return and the payment of
the amnesty tax for those availing themselves of the tax amnesty shall be made within six months starting
from the effectivity of the IRR. It shall be filed at the office of the Revenue District Officer which has
jurisdiction over the legal residence or principal place of business of the filer. The Revenue District Officer
shall issue an acceptance of payment form authorizing an authorized agent bank, or in the absence thereof,
the collection agent or municipal treasurer concerned, to accept the amnesty tax payment.

Department of Finance Order No. 29-07: Rules and Regulations to Implement R.A. 9480
SECTION 6. Method of Availment of Tax Amnesty. —
xxxx
3. Payment of Amnesty Tax and Full Compliance. — Upon filing of the Tax Amnesty Return in accordance
with Sec. 6 (2) hereof, the taxpayer shall pay the amnesty tax to the authorized agent bank or in the
absence thereof, the Collection Agent or duly authorized Treasurer of the city or municipality in which such
person has his legal residence or principal place of business.
The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by the BIR for the use
of — or to be accomplished by — the bank, the collection agent or the Treasurer, showing the acceptance of
the amnesty tax payment. In case of the authorized agent bank, the branch manager or the assistant branch
manager shall sign the acceptance of payment form.
The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall be
submitted to the RDO, which shall be received only after complete payment. The completion of these
requirements shall be deemed full compliance with the provisions of R.A. 9480. (Emphases supplied)
In availing themselves of the benefits of the tax amnesty program, taxpayers must first accomplish the
following forms and prepare them for submission: (1) Notice of Availment of Tax Amnesty Form; (2) Tax
Amnesty Return Form (BIR Form No. 2116); (3) Statement of Assets, Liabilities and Net worth (SALN) as of
December 31, 2005; and (4) Tax Amnesty Payment Form (Acceptance of Payment Form or BIR Form No.
0617). 18
The taxpayers must then compute the amnesty tax due in accordance with the rates provided in Section 5 of
the law, using as tax base their net worth as of 31 December 2005 as declared in their SALNs. At their
19
option, the revenue district office (RDO) of the BIR may assist them in accomplishing the forms and
computing the taxable base and the amnesty tax due. The RDO, however, is disallowed from looking into,
20
questioning or examining the veracity of the entries contained in the Tax Amnesty Return, SALN, and other
documents they have submitted. Using the Tax Amnesty Payment Form, the taxpayers must make a
21
complete payment of the computed amount to an authorized agent bank, a collection agent, or a duly
authorized treasurer of the city or municipality.
22
Thereafter, the taxpayers must file with the RDO or an authorized agent bank the (1) Notice of Availment of
Tax Amnesty Form; (2) Tax Amnesty Return Form (BIR Form No. 2116); (3) SALN; and (4) Tax Amnesty
Payment Form. The RDO shall only receive these documents after complete payment is made, as shown in
23
the Tax Amnesty Payment Form. It must be noted that the completion of these requirements "shall be
24
deemed full compliance with the provisions of R.A. 9480." In our considered view, this rule means that
25
amnesty taxpayers may immediately enjoy the privileges and immunities under the 2007 Tax Amnesty Law
as soon as the aforementioned documents are duly received.
The OSG has already confirmed to this Court that CS Garment has complied with all of the documentary
26
requirements of the law. Consequently, and contrary to the assertion of the OSG, no further assessment by
the BIR is necessary. CS Garment is now entitled to invoke the immunities and privileges under Section 6 of
the law.
Similarly, we reject the contention of OSG that the BIR was given a one-year period to contest the
correctness of the SALN filed by CS Garment, thus making petitioner’s motion premature. Neither the 2007
Tax Amnesty Law nor Department of Finance (DOF) Order No. 29-07 (Tax Amnesty Law IRR) imposes a

waiting period of one year before the applicant can enjoy the benefits of the Tax Amnesty Law. It can be
surmised from the cited provisions that the law intended the immediate enjoyment of the immunities and
privileges of tax amnesty upon fulfilment of the requirements. Further, a reading of Sections 4 and 6 of the
2007 Tax Amnesty Law shows that Congress has adopted a "no questions asked" policy, so long as all the
requirements of the law and the rules are satisfied. The one-year period referred to in the law should thus be
considered only as a prescriptive period within which third parties, meaning "parties other than the BIR or its
agents," can question the SALN – not as a waiting period during which the BIR may contest the SALN and
the taxpayer prevented from enjoying the immunities and privileges under the law.
This clarification, however, does not mean that the amnesty taxpayers would go scot-free in case they
substantially understate the amounts of their net worth in their SALN. The 2007 Tax Amnesty Law imposes a
resolutory condition insofar as the enjoyment of immunities and privileges under the law is concerned.
Pursuant to Section 4 of the law, third parties may initiate proceedings contesting the declared amount of net
worth of the amnesty taxpayer within one year following the date of the filing of the tax amnesty return and
the SALN. Section 6 then states that "All these immunities and privileges shall not apply x x x where the
amount of networth as of December 31, 2005 is proven to be understated to the extent of thirty percent
(30%) or more, in accordance with the provisions of Section 3 hereof." Accordingly, Section 10 provides that
amnesty taxpayers who willfully understate their net worth shall be (a) liable for perjury under the Revised
Penal Code; and (b) subject to immediate tax fraud investigation in order to collect all taxes due and to
criminally prosecute those found to have willfully evaded lawful taxes due.
Nevertheless, in this case we note that the OSG has already Indicated that the CIR had not filed a case
27
relative to the tax amnesty application of CS Garment, from the time the documents were filed in March
2008. Neither did the OSG mention that a third party had initiated proceedings challenging the declared
amount of net worth of the amnesty taxpayer within the one-year period.
Taxpayers with pending tax cases are still qualified to avail themselves of the tax amnesty program.
With respect to its last assertion, the OSG quotes the following guidelines under BIR RMC 19-2008 to
establish that CS Garment is disqualified from availing itself of the tax amnesty program: 28
A BASIC GUIDE ON THE TAX AMNESTY ACT OF 2007
The following is a basic guide for taxpayers who wish to avail of tax amnesty pursuant of Republic Act No.
9480 (Tax Amnesty Act of 2007).
Who may avail of the amnesty?
xxxx
EXCEPT:
[x] Withholding agents with respect to their withholding tax liabilities
[x] Those with pending cases:
 Under the jurisdiction of the PCGG
 Involving violations of the Anti-Graft and Corrupt Practices Act
 Involving violations of the Anti-Money Laundering Law

 For tax evasion and other criminal offenses under the NIRC and/or the RPC
[x] Issues and cases which were ruled by any court (even without finality) in favor of
the BIR prior to amnesty availment of the taxpayer.(e.g. Taxpayers who have failed to
observe or follow BOI and/or PEZA rules on entitlement to Income Tax Holiday Incentives
and other incentives)
[x] Cases involving issues ruled with finality by the Supreme Court prior to the effectivity of
R.A. 9480 (e.g. DST on Special Savings Account)
[x] Taxes passed-on and collected from customers for remittance to the BIR
[x] Delinquent Accounts/Accounts Receivable considered as assets of the BIR/Government,

including self-assessed tax (Emphasis supplied)
To resolve the matter, we refer to the basic text of the Tax Amnesty Law and its implementing rules and
regulations, viz:
Republic Act No. 9480
SECTION 8. Exceptions. — The tax amnesty provided in Section 5 hereof shall not extend to the following
persons or cases existing as of the effectivity of this Act:
xxxx
(f) Tax cases subject of final and executory judgment by the courts.
DOF Order No. 29-07: Rules and Regulations to Implement R.A. 9480
SECTION 5. Exceptions. — The tax amnesty shall not extend to the following persons or cases existing as
of the effectivity of R.A. 9480:
xxxx
7. Tax cases subject of final and executory judgment by the courts. (Emphases supplied)
We cull from the aforementioned provisions that neither the law nor the implementing rules state that a court
ruling that has not attained finality would preclude the availment of the benefits of the Tax Amnesty Law.
Both R.A. 9480 and DOF Order No. 29-07 are quite precise in declaring that
"[t]ax cases subject of final and executory judgment by the courts" are the ones excepted from the benefits
of the law. In fact, we have already pointed out the erroneous interpretation of the law in Philippine Banking
Corporation (Now: Global Business Bank, Inc.) v. Commissioner of Internal Revenue, viz:
The BIR’s inclusion of "issues and cases which were ruled by any court (even without finality) in favor of the
BIR prior to amnesty availment of the taxpayer" as one of the exceptions in RMC 19-2008 is misplaced. RA
9480 is specifically clear that the exceptions to the tax amnesty program include "tax cases subject of final
and executory judgment by the courts." The present case has not become final and executory when
Metrobank availed of the tax amnesty program. (Emphasis supplied)
29

While tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in
favor of the taxing authority, it is also a well-settled doctrine that the rule-making power of administrative
30 31
agencies cannot be extended to amend or expand statutory requirements or to embrace matters not
originally encompassed by the law. Administrative regulations should always be in accord with the
1âwphi1
provisions of the statute they seek to carry into effect, and any resulting inconsistency shall be resolved in
favor of the basic law. We thus definitively declare that the exception "[i]ssues and cases which were ruled
by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer" under BIR
RMC 19-2008 is invalid, as the exception goes beyond the scope of the provisions of the 2007 Tax Amnesty
Law.32
Considering the completion of the aforementioned requirements, we find that petitioner has successfully
availed itself of the tax amnesty benefits granted under the Tax Amnesty Law. Therefore, we no longer see
any need to further discuss the issue of the deficiency tax assessments. CS Garment is now deemed to
have been absolved of its obligations and is already immune from the payment of taxes – including the
assessed deficiency in the payment of VAT, DST, and income tax as affirmed by the CTA en banc – as well
as of the additions thereto (e.g., interests and surcharges). Furthermore, the tax amnesty benefits include
immunity from "the appurtenant civil, criminal, or administrative penalties under the NIRC of 1997, as
amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior
years." 33
WHEREFORE, the instant Petition for Review is GRANTED. The 14 January 2008 Decision and 2 April
2008 Resolution of the Court of Tax Appeals en banc in CTA EB Case No. 287 is hereby SET ASIDE, and
the remaining assessments for deficiency taxes for taxable year 1998 are hereby CANCELLED solely in the
light of the availment by CS Garment, Inc. of the tax amnesty program under Republic Act No. 9480.
SO ORDERED.

G.R. No. 102967 February 10, 2000
BIBIANO V. BAÑAS, JR., petitioner,

vs.
COURT OF APPEALS, AQUILINO T. LARIN, RODOLFO TUAZON AND PROCOPIO
TALON, respondents.
QUISUMBING, J.:
For review is the Decision of the Court of Appeals in CA-C.R. CV No. 17251 promulgated on November 29,
1991. It affirmed in toto the judgment of the Regional Trial Court (RTC), Branch 39, Manila, in Civil Case No.
82-12107. Said judgment disposed as follows:
FOR ALL THE FOREGOING CONSIDERATIONS, this Court hereby renders judgment DISMISSING
the complaint against all the defendants and ordering plaintiff [herein petitioner] to pay defendant
Larin the amount of P200,000.00 (Two Hundred Thousand Pesos) as actual and compensatory
damages; P200,000.00 as moral damages; and P50,000.00 as exemplary damages and attorneys
fees of P100,000.00.1
The facts, which we find supported by the records, have been summarized by the Court of Appeals as
follows:
On February 20, 1976, petitioner, Bibiano V. Bañas Jr. sold to Ayala Investment Corporation (AYALA),
128,265 square meters of land located at Bayanan, Muntinlupa, for two million, three hundred eight
thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided that upon the signing
of the contract AYALA shall pay four hundred sixty-one thousand, seven hundred fifty-four (P461,754.00)
pesos. The balance of one million, eight hundred forty-seven thousand and sixteen (P1,847,016.00) pesos
was to be paid in four equal consecutive annual installments, with twelve (12%) percent interest per
annum on the outstanding balance. AYALA issued one promissory note covering four equal annual
installments. Each periodic payment of P461,754.00 pesos shall be payable starting on February 20, 1977,
and every year thereafter, or until February 20, 1980.
The same day, petitioner discounted the promissory note with AYALA, for its face value of P1,847,016.00,
evidenced by a Deed of Assignment signed by the petitioner and AYALA. AYALA issued nine (9) checks to
petitioner, all dated February 20, 1976, drawn against Bank of the Philippine Islands with the uniform amount
of two hundred five thousand, two hundred twenty-four (P205,224.00) pesos.
In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from disposition
of capital asset.2
Selling Price of Land P2,308,770.00

Less Initial Payment 461,754.00 3
Unrealized Gain P1,847,016.00
1976 Declaration of Income on Disposition of Capital Asset subject to Tax:

Initial Payment P461,754.00
Less: Cost of land and other incidental Expenses ( 76,547.90)

Income P385,206.10
Income subject to tax (P385,206. 10 x 50%) P192,603.65
In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty thousand,
eight hundred seventy-seven (P230,877.00) pesos 4 as gain from sale of capital asset. In his 1980 income
tax amnesty return, petitioner also reported the same amount of P230,877.00 as the realized gain on
disposition of capital asset for the year.
On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo Tuazon and
Procopio Talon to examine the books and records of petitioner for the year 1976. They discovered that
petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was
cash and the entire profit should have been taxable in 1976 since the income was wholly derived in 1976.
Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five thousand,
nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They recommended deficiency
tax assessment for two million, four hundred seventy-three thousand, six hundred seventy-three
(P2,473,673.00) pesos.
Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila Region IV-A. After reviewing
the examiners' report, Larin directed the revision of the audit report, with instruction to consider the land as
capital asset. The tax due was only fifty (50%) percent of the total gain from sale of the property held by the
taxpayer beyond twelve months pursuant to Section 34 5 of the 1977 National Internal Revenue Code
(NIRC). The deficiency tax assessment was reduced to nine hundred thirty six thousand, five hundred
ninety-eight pesos and fifty centavos (P936,598.50), inclusive of surcharges and penalties for the year 1976.
On June 27, 1980, respondent Larin sent a letter to petitioner informing of the income tax deficiency that
must be settled him immediately.
On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of his land to
AYALA was on installment.
On June 8, 1981, the matter was endorsed to the Acting Chief of the Legal Branch of the National Office of
the BIR. The Chief of the Tax Fraud Unit recommended the prosecution of a criminal case for conspiring to
file false and fraudulent returns, in violation of Section 51 of the Tax Code against petitioner and his
accountants, Andres P. Alejandre and Conrado Bañas.
On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner.
On July 1, 1981, news items appeared in the now defunct Evening Express with the headline: "BIR Charges
Realtor" and another in the defunct Evening Post with a news item: "BIR raps Realtor, 2 accountants."
Another news item also appeared in the July 2, 1981, issue of the Bulletin Today entitled: "3-face P1-M tax
evasion raps." All news items mentioned petitioner's false income tax return concerning the sale of land to
AYALA.
On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the amount of forty-one
thousand, seven hundred twenty-nine pesos and eighty-one centavos (P41,729.81). On November 2, 1981,
petitioner again filed an Amnesty Tax Return under P.D. 1840 and paid an additional amount of one

thousand, five hundred twenty-five pesos and sixty-two centavos (P1,525.62). In both, petitioner did not
recognize that his sale of land to AYALA was on cash basis.
Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC of Manila an
action6 for damages against respondents Larin, Tuazon and Talon for extortion and malicious publication of
the BIR's tax audit report. He claimed that the filing of criminal complaints against him for violation of tax
laws were improper because he had already availed of two tax amnesty decrees, Presidential Decree Nos.
1740 and 1840.
The trial court decided in favor of the respondents and awarded Larin damages, as already stated. Petitioner
seasonably appealed to the Court of Appeals. In its decision of November 29, 1991, the respondent court
affirmed the trial court's decision, thus:
The finding of the court a quo that plaintiff-appellant's actions against defendant-appellee Larin were
unwarranted and baseless and as a result thereof, defendant-appellee Larin was subjected to
unnecessary anxiety and humiliation is therefore supported by the evidence on record. 1âwphi1.nêt
Defendant-appellee Larin acted only in pursuance of the authority granted to him. In fact, the
criminal charges filed against him in the Tanodbayan and in the City Fiscal's Office were all
dismissed.
WHEREFORE, the appealed judgment is hereby AFFIRMED in toto.7
Hence this petition, wherein petitioner raises before us the following queries:
I. WHETHER THE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF PERTINENT TAX

LAWS, THUS IT FAILED TO APPRECIATE THE CORRECTNESS AND ACCURACY OF
PETITIONER'S RETURN OF THE INCOME DERIVED FROM THE SALE OF THE LAND TO
AYALA.
II. WHETHER THE RESPONDENT COURT ERRED IN NOT FINDING THAT THERE WAS AN
ALLEGED ATTEMPT TO EXTORT [MONEY FROM] PETITIONER BY PRIVATE RESPONDENTS.
III. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF

PRESIDENTIAL DECREE NOS. 1740 AND 1840, AMONG OTHERS, PETITIONER'S IMMUNITY
FROM CRIMINAL PROSECUTION.
IV. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF WELL-

ESTABLISHED DOCTRINES OF THIS HONORABLE COURT AS REGARDS THE AWARD OF
ACTUAL, MORAL AND EXEMPLARY DAMAGES IN FAVOR OF RESPONDENT LARIN.
In essence, petitioner asks the Court to resolve seriatim the following issues:
1. Whether respondent court erred in ruling that there was no extortion attempt by BIR officials;
2. Whether respondent court erred in holding that P.D. 1740 and 1840 granting tax amnesties did not
grant immunity from tax suits;
3. Whether respondent court erred in finding that petitioner's income from the sale of land in 1976
should be declared as a cash transaction in his tax return for the same year (because the buyer

discounted the promissory note issued to the seller on future installment payments of the sale, on
the same day of the sale);
4. Whether respondent court erred and committed grave abuse of discretion in awarding damages to
respondent Larin.
The first issue, on whether the Court of Appeals erred in finding that there was no extortion, involves a
determination of fact. The Court of Appeals observed,
The only evidence to establish the alleged extortion attempt by defendants-appellees is the plaintiff-
appellant's self serving declarations.
As found by the court a quo, "said attempt was known to plaintiff-appellant's son-in-law and counsel
on record, yet, said counsel did not take the witness stand to corroborate the testimony of plaintiff." 8
As repeatedly held, findings of fact by the Court of Appeals especially if they affirm factual findings of the trial
court will not be disturbed by this Court, unless these findings are not supported by evidence. 9 Similarly,
neither should we disturb a finding of the trial court and appellate court that an allegation is not supported by
evidence on record. Thus, we agree with the conclusion of respondent court that herein private respondents,
on the basis of evidence, could not be held liable for extortion.
On the second issue of whether P.D. Nos. 1740 and 1840 which granted tax amnesties also granted
immunity from criminal prosecution against tax offenses, the pertinent sections of these laws state:
P.D. No. 1740. CONDONING PENALTIES FOR CERTAIN VIOLATIONS OF THE INCOME
TAX LAW UPON VOLUNTARY DISCLOSURE OF UNDECLARED INCOME FOR INCOME
TAX PURPOSES AND REQUIRING PERIODIC SUBMISSION OF NET WORTH
STATEMENT.
xxx xxx xxx
Sec. 1. Voluntary Disclosure of Correct Taxable Income. — Any individual who, for any or all of the
taxable years 1974 to 1979, had failed to file a return is hereby, allowed to file a return for each of
the aforesaid taxable years and accurately declare therein the true and correct income, deductions
and exemptions and pay the income tax due per return. Likewise, any individual who filed a false or
fraudulent return for any taxable year in the period mentioned above may amend his return and pay
the correct amount of tax due after deducting the taxes already paid, if any, in the original
declaration. (emphasis ours)
xxx xxx xxx
Sec. 5. Immunity from Penalties. — Any individual who voluntarily files a return under this Decree
and pays the income tax due thereon shall be immune from the penalties, civil or criminal, under the
National Internal Revenue Code arising from failure to pay the correct income tax with respect to the
taxable years from which an amended return was filed or for which an original return was filed in
cases where no return has been filed for any of the taxable years 1974 to 1979: Provided, however,
That these immunities shall not apply in cases where the amount of net taxable income declared
under this Decree is understated to the extent of 25% or more of the correct net taxable income.
(emphasis ours)

P.D. NO. 1840 — GRANTING A TAX AMNESTY ON UNTAXED INCOME AND/OR WEALTH
EARNED OR ACQUIRED DURING THE TAXABLE YEARS 1974 TO 1980 AND
REQUIRING THE FILING OF THE STATEMENT OF ASSETS, LIABILITIES, AND NET
WORTH.
Sec. 1. Coverage. — In case of voluntary disclosure of previously untaxed income and/or wealth
such as earnings, receipts, gifts, bequests or any other acquisition from any source whatsoever,
realized here or abroad, by any individual taxpayer, which are taxable under the National Internal
Revenue Code, as amended, the assessment and collection of all internal revenue taxes, including
the increments or penalties on account of non-payment, as well as all civil, criminal or administrative
liabilities arising from or incident thereto under the National Internal Revenue Code, are hereby
condoned provided that the individual taxpayer shall pay. (emphasis ours) . . .
Sec. 2. Conditions for Immunity. — The immunity granted under Section one of this Decree shall
apply only under the following conditions:
a) Such previously untaxed income and/or wealth must have been earned or realized in any
of the years 1974 to 1980;
b) The taxpayer must file an amnesty return on or before November 30, 1981, and fully pay
the tax due thereon;
c) The amnesty tax paid by the taxpayer under this Decree shall not be less than P1,000.00
per taxable year; and
d) The taxpayer must file a statement of assets, liabilities and net worth as of December 31,
1980, as required under Section 6 hereof. (emphasis ours)
It will be recalled that petitioner entered into a deed of sale purportedly on installment. On the same day, he
discounted the promissory note covering the future installments. The discounting seems questionable
because ordinarily, when a bill is discounted, the lender (e.g. banks, financial institution) charges or deducts
a certain percentage from the principal value as its compensation. Here, the discounting was done by the
buyer. On July 2, 1981, two weeks after the filing of the tax evasion complaint against him by respondent
Larin on June 17, 1981, petitioner availed of the tax amnesty under P.D. No. 1740. His amended tax return
for the years 1974 - 1979 was filed with the BIR office of Valenzuela, Bulacan, instead of Manila where the
petitioner's principal office was located. He again availed of the tax amnesty under P.D. No. 1840. His
disclosure, however, did not include the income from his sale of land to AYALA on cash basis. Instead he
insisted that such sale was on installment. He did not amend his income tax return. He did not pay the tax
which was considerably increased by the income derived from the discounting. He did not meet the twin
requirements of P.D. 1740 and 1840, declaration of his untaxed income and full payment of tax due thereon.
Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere filing of tax
amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from immunity against prosecution.
Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the
government a chance to collect uncollected tax from tax evaders without having to go through the tedious
process of a tax case. To avail of a tax amnesty granted by the government, and to be immune from suit on
its delinquencies, the tax payer must have voluntarily disclosed his previously untaxed income and must
have paid the corresponding tax on such previously untaxed income. 10
It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and
if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against
the taxpayer and liberally in favor of the taxing authority. 11 Hence, on this matter, it is our view that
petitioner's claim of immunity from prosecution under the shield of availing tax amnesty is untenable.

On the third issue, petitioner asserts that his sale of the land to AYALA was not on cash basis but on
installment as clearly specified in the Deed of Sale which states:
That for and in consideration of the sum of TWO MILLION THREE HUNDRED EIGHT THOUSAND
SEVEN HUNDRED SEVENTY (P2,308,770.00) PESOS Philippine Currency, to be paid as follows:
1. P461,754.00, upon the signing of the Deed of Sale; and,
2. The balance of P1,847,016.00, to be paid in four (4) equal, consecutive, annual

installments with interest thereon at the rate of twelve percent (12%) per annum, beginning
on February 20, 1976, said installments to be evidenced by four (4) negotiable promissory
notes.12
Petitioner resorts to Section 43 of the NIRC and Sec. 175 of Revenue Regulation No. 2 to support his claim.
Sec. 43 of the 1977 NIRC states,
Installment basis. — (a) Dealers in personal property. — . . .
(b) Sales of realty and casual sales of personalty — In the case (1) of a casual sale or other casual
disposition of personal property (other than property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding one
thousand pesos, or (2) of a sale or other disposition of real property if in either case the initial
payments do not exceed twenty-five percentum of the selling price, the income may, under
regulations prescribed by the Minister of Finance, be returned on the basis and in the manner above
prescribed in this section. As used in this section the term "initial payment" means the payments
received in cash or property other than evidences of indebtedness of the purchaser during the
taxable period in which the sale or other disposition is made. . . . (emphasis ours)
Revenue Regulation No. 2, Section 175 provides,
Sale of real property involving deferred payments. — Under section 43 deferred-payment sales of
real property include (1) agreements of purchase and sale which contemplate that a conveyance is
not to be made at the outset, but only after all or a substantial portion of the selling price has been
paid, and (b) sales in which there is an immediate transfer of title, the vendor being protected by a
mortgage or other lien as to deferred payments. Such sales either under (a) or (b), fall into two
classes when considered with respect to the terms of sale, as follows:
(1) Sales of property on the installment plan, that is, sales in which the payments received in
cash or property other than evidences of indebtedness of the purchaser during the taxable
year in which the sale is made do not exceed 25 per cent of the selling price;
(2) Deferred-payment sales not on the installment plan, that is sales in which the payments
received in cash or property other than evidences of indebtedness of the purchaser during
the taxable year in which the sale is made exceed 25 per cent of the selling price;
In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken
subject to the mortgage or whether the mortgage is assumed by the purchaser, shall be included as
a part of the "selling price" but the amount of the mortgage, to the extent it does not exceed the
basis to the vendor of the property sold, shall not be considered as a part of the "initial payments" or
of the "total contract price," as those terms are used in section 43 of the Code, in sections 174 and

176 of these regulations, and in this section. The term "initial payments" does not include amounts
received by the vendor in the year of sale from the disposition to a third person of notes given by the
vendee as part of the purchase price which are due and payable in subsequent years. Commissions
and other selling expenses paid or incurred by the vendor are not to be deducted or taken into
account in determining the amount of the "initial payments," the "total contract price," or the "selling
price." The term "initial payments" contemplates at least one other payment in addition to the initial
payment. If the entire purchase price is to be paid in a lump sum in a later year, there being no
payment during the year, the income may not be returned on the installment basis. Income may not
be returned on the installment basis where no payment in cash or property, other than evidences of
indebtedness of the purchaser, is received during the first year, the purchaser having promised to
make two or more payments, in later years.
Petitioner asserts that Sec. 43 allows him to return as income in the taxable years involved, the respective
installments as provided by the deed of sale between him and AYALA. Consequently, he religiously reported
his yearly income from sale of capital asset, subject to tax, as follows:
Year 1977 (50% of P461,754) P230,877.00

1978 230,877.00
1979 230,877.00
1980 230,877.00
Petitioner says that his tax declarations are acceptable modes of payment under Section 175 of the
Revenue Regulations (RR) No. 2. The term "initial payment", he argues, does not include amounts received
by the vendor which are part of the complete purchase price, still due and payable in subsequent years.
Thus, the proceeds of the promissory notes, not yet due which he discounted to AYALA should not be
included as income realized in 1976. Petitioner states that the original agreement in the Deed of Sale should
not be affected by the subsequent discounting of the bill.
On the other hand, respondents assert that taxation is a matter of substance and not of form. Returns are
scrutinized to determine if transactions are what they are and not declared to evade taxes. Considering the
progressive nature of our income taxation, when income is spread over several installment payments
through the years, the taxable income goes down and the tax due correspondingly decreases. When
payment is in lump sum the tax for the year proportionately increases. Ultimately, a declaration that a sale is
on installment diminishes government taxes for the year of initial installment as against a declaration of cash
sale where taxes to the government is larger.
As a general rule, the whole profit accruing from a sale of property is taxable as income in the year the sale
is made. But, if not all of the sale price is received during such year, and a statute provides that income shall
be taxable in the year in which it is "received," the profit from an installment sale is to be apportioned
between or among the years in which such installments are paid and received. 13
Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned installment method is
a seller of real property who disposes his property on installment, provided that the initial payment does not
exceed 25% of the selling price. They also state what may be regarded as installment payment and what
constitutes initial payment. Initial payment means the payment received in cash or property excluding
evidences of indebtedness due and payable in subsequent years, like promissory notes or mortgages, given
of the purchaser during the taxable year of sale. Initial payment does not include amounts received by the
vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the
purchase price which are due and payable in subsequent years. 14 Such disposition or discounting of
receivable is material only as to the computation of the initial payment. If the initial payment is within 25% of

total contract price, exclusive of the proceeds of discounted notes, the sale qualifies as an installment sale,
otherwise it is a deferred sale.15
Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still
taxable income for the year it was converted into cash. The subsequent payments or liquidation of
certificates of indebtedness is reported using the installment method in computing the proportionate
income16 to be returned, during the respective year it was realized. Non-dealer sales of real or personal
property may be reported as income under the installment method provided that the obligation is still
outstanding at the close of that year. If the seller disposes the entire installment obligation by discounting the
bill or the promissory note, he necessarily must report the balance of the income from the discounting not
only income from the initial installment payment.
Where an installment obligation is discounted at a bank or finance company, a taxable disposition results,
even if the seller guarantees its payment, continues to collect on the installment obligation, or handles
repossession of merchandise in case of default. 17 This rule prevails in the United States. 18 Since our income
tax laws are of American origin,19 interpretations by American courts an our parallel tax laws have persuasive
effect on the interpretation of these laws. 20 Thus, by analogy, all the more would a taxable disposition result
when the discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of the
buyer is discharged, while the seller acquires money for the settlement of his receivables. Logically then, the
income should be reported at the time of the actual gain. For income tax purposes, income is an actual gain
or an actual increase of wealth. 21 Although the proceeds of a discounted promissory note is not considered
initial payment, still it must be included as taxable income on the year it was converted to cash. When
petitioner had the promissory notes covering the succeeding installment payments of the land issued by
AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a
sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his
returns the income derived from the discounting. What petitioner did is tantamount to an attempt to
circumvent the rule on payment of income taxes gained from the sale of the land to AYALA for the year 1976.
Lastly, petitioner questions the damages awarded to respondent Larin.
Any person who seeks to be awarded actual or compensatory damages due to acts of another has the
burden of proving said damages as well as the amount thereof. 22 Larin says the extortion cases filed against
him hampered his immediate promotion, caused him strong anxiety and social humiliation. The trial court
awarded him two hundred thousand (P200,000,00) pesos as actual damages. However, the appellate court
stated that, despite pendency of this case, Larin was given a promotion at the BIR. Said respondent court:
We find nothing on record, aside from defendant-appellee Larin's statements (TSN, pp. 6-7, 11
December 1985), to show that he suffered loss of seniority that allegedly barred his promotion. In
fact, he was promoted to his present position despite the pendency of the instant case (TSN, pp. 35-
39, 04 November 1985).23
Moreover, the records of the case contain no statement whatsoever of the amount of the actual damages
sustained by the respondents. Actual damages cannot be allowed unless supported by evidence on the
record.24 The court cannot rely on speculation, conjectures or guesswork as to the fact and amount of
damages.25 To justify a grant of actual or compensatory damages, it is necessary to prove with a reasonable
degree of certainty, the actual amount of loss. 26 Since we have no basis with which to assess, with certainty,
the actual or compensatory damages counter-claimed by respondent Larin, the award of such damages
should be deleted.
Moral damages may be recovered in cases involving acts referred to in Article 21 27 of the Civil Code.28 As a
rule, a public official may not recover damages for charges of falsehood related to his official conduct unless
he proves that the statement was made with actual malice. In Babst, et. al. vs. National Intelligence

Board, et. al., 132 SCRA 316, 330 (1984), we reiterated the test for actual malice as set forth in the
landmark American case of New York Times vs. Sullivan,29 which we have long adopted, in defamation and
libel cases, viz.:
. . . with knowledge that it was false or with reckless disregard of whether it was false or not.
We appreciate petitioner's claim that he filed his 1976 return in good faith and that he had honestly believed
that the law allowed him to declare the sale of the land, in installment. We can further grant that the pertinent
tax laws needed construction, as we have earlier done. That petitioner was offended by the headlines
alluding to him as tax evader is also fully understandable. All these, however, do not justify what amounted
to a baseless prosecution of respondent Larin. Petitioner presented no evidence to prove Larin extorted
money from him. He even admitted that he never met nor talked to respondent Larin. When the tax
investigation against the petitioner started, Larin was not yet the Regional Director of BIR Region IV-A,
Manila. On respondent Larin's instruction, petitioner's tax assessment was considered one involving a sale
of capital asset, the income from which was subjected to only fifty percent (50%) assessment, thus reducing
the original tax assessment by half. These circumstances may be taken to show that Larin's involvement in
extortion was not indubitable. Yet, petitioner went on to file the extortion cases against Larin in different fora.
This is where actual malice could attach on petitioner's part. Significantly, the trial court did not err in
dismissing petitioner's complaints, a ruling affirmed by the Court of Appeals.
Keeping all these in mind, we are constrained to agree that there is sufficient basis for the award of moral
and exemplary damages in favor of respondent Larin. The appellate court believed respondent Larin when
he said he suffered anxiety and humiliation because of the unfounded charges against him. Petitioner's
actions against Larin were found "unwarranted and baseless," and the criminal charges filed against him in
the Tanodbayan and City Fiscal's Office were all dismissed. 30 Hence, there is adequate support for
respondent court's conclusion that moral damages have been proved.
Now, however, what would be a fair amount to be paid as compensation for moral damages also requires
determination. Each case must be governed by its own peculiar circumstances. 31 On this score, Del Rosario
vs. Court of Appeals,32 cites several cases where no actual damages were adjudicated, and where moral
and exemplary damages were reduced for being "too excessive," thus:
In the case of PNB v. C.A., [256 SCRA 309 (1996)], this Court quoted with approval the following
observation from RCPI v. Rodriguez, viz:
** **. Nevertheless, we find the award of P100,000.00 as moral damages in favor of

respondent Rodriguez excessive and unconscionable. In the case of Prudenciado v. Alliance
Transport System, Inc. (148 SCRA 440 [1987]) we said: . . . [I]t is undisputed that the trial
courts are given discretion to determine the amount of moral damages (Alcantara v. Surro,
93 Phil. 472) and that the Court of Appeals can only modify or change the amount awarded
when they are palpably and scandalously excessive "so as to indicate that it was the result of
passion, prejudice or corruption on the part of the trial court" (Gellada v. Warner Barnes &
Co., Inc., 57 O.G. [4] 7347, 7358; Sadie v. Bacharach Motors Co., Inc., 57 O.G. [4] 636 and
Adone v. Bacharach Motor Co., Inc., 57 O.G. 656). But in more recent cases where the
awards of moral and exemplary damages are far too excessive compared to the actual loses
sustained by the aggrieved party, this Court ruled that they should be reduced to more
reasonable amounts. . . . . (Emphasis ours.)
In other words, the moral damages awarded must be commensurate with the loss or injury
suffered.

In the same case (PNB v. CA), this Court found the amount of exemplary damages required to be
paid (P1,000,000,00) "too excessive" and reduced it to an "equitable level" (P25,000.00).
It will be noted that in above cases, the parties who were awarded moral damages were not public officials.
Considering that here, the award is in favor of a government official in connection with his official function, it
is with caution that we affirm granting moral damages, for it might open the floodgates for government
officials counter-claiming damages in suits filed against them in connection with their functions. Moreover,
we must be careful lest the amounts awarded make citizens hesitate to expose corruption in the
government, for fear of lawsuits from vindictive government officials. Thus, conformably with our declaration
that moral damages are not intended to enrich anyone, 33 we hereby reduce the moral damages award in this
case from two hundred thousand (P200,000.00) pesos to seventy five thousand (P75,000.00) pesos, while
the exemplary damage is set at P25,000.00 only.
The law allows the award of attorney's fees when exemplary damages are awarded, and when the party to a
suit was compelled to incur expenses to protect his interest. 34 Though government officers are usually
represented by the Solicitor General in cases connected with the performance of official functions,
considering the nature of the charges, herein respondent Larin was compelled to hire a private lawyer for the
conduct of his defense as well as the successful pursuit of his counterclaims. In our view, given the
circumstances of this case, there is ample ground to award in his favor P50,000,00 as reasonable attorney's
fees.
WHEREFORE, the assailed decision of the Court of Appeals dated November 29, 1991, is hereby
AFFIRMED with MODIFICATION so that the award of actual damages are deleted; and that petitioner is
hereby ORDERED to pay to respondent Larin moral damages in the amount of P75,000.00, exemplary
damages in the amount of P25,000.00, and attorney's fees in the amount of P50,000.00 only. 1âwphi1.nêt
No pronouncement as to costs.
SO ORDERED.

TAXPAYER’S SUIT
G.R. No. 171633 September 18, 2013
JUANITO VICTOR C. REMULLA, Petitioner,

vs.
ERINEO S. MALIKSI, in his capacity as Governor of the Province of Cavite, RENATO A. IGNACIO, in
his capacity as Provincial Legal Officer of the Province of Cavite, MARIETTA O'HARA DE VILLA,
HEIRS OF HIGINO DE VILLA, GOLDENROD, INC., SONYA G. MATHAY, AND ELEUTERO M.
PASCUAL, Respondents.
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Resolutions dated May 18, 20052 and February 16,
20053 of the Court of Appeals (CA) in CA-G.R. SP No. 86465 which dismissed petitioner Juanito Victor C.
Remulla’s (Remulla) petition for annulment of judgment.
The Facts
On May 7, 1957, Marietta O’Hara de Villa (de Villa), in her personal capacity and as administratix of the
estate of her late husband Guillermo, ceded, through a deed of donation 4 (1957 deed of donation), 134,957
square meters (sq. m.) (donated portion) of their 396,622 sq. m. property (subject property) in favor of the
Province of Cavite, on which now stands various government offices and facilities. 5
On December 28, 1981 and February 1, 1982,6 the Province of Cavite respectively filed a Complaint and an
Amended Complaint, before the then Court of First Instance of Cavite, Trece Martires City, Branch 1 – now,
Regional Trial Court of Trece Martires City, Branch 23 (RTC), docketed as Civil Case No. TM-955
(expropriation case) – seeking to expropriate, for the amount of ₱215,050.00, the remaining 261,665 sq. m.
of the subject property which the former intends to develop as the Provincial Capitol Site. Accordingly, the
Province of Cavite made a preliminary deposit of the amount of ₱21,505.00 and, on January 4, 1982, the
RTC issued a Confirmatory Writ of Immediate Possession7 in its favor, by virtue of which the Province of
Cavite took possession of the entire property.8
For her part, de Villa, through her Answer,9 opposed the expropriation proceedings, claiming that there are
still areas within the donated portion which the Province of Cavite failed to develop. 10 She also alleged that
the fair market value of the subject property should be pegged at the amount of ₱11,272,500.00, or at
₱45.00 per sq. m.11 On June 9, 1989, while the expropriation case was still pending, de Villa sold, for the
amount of ₱2,000,000.00,12 the 261,665 sq. m. portion of the subject property to Goldenrod, Inc.
(Goldenrod), a joint venture company owned by Sonya G. Mathay (Mathay) and Eleuterio M. Pascual, Jr.
(Pascual).13 Subsequently, Mathay and Pascual intervened in the expropriation case. 14
On November 4, 2003, respondent then Cavite Governor Erineo S.Maliksi (Maliksi) issued Executive Order
No. 00415 authorizing the creation of a committee which recommended the terms and conditions for the
proper settlement of the expropriation case. The said committee thereafter submitted its Committee
Report16 dated November 24, 2003 recommending that: (a) the just compensation be pegged at the amount
of ₱495.00 per sq. m. plus 6% annual interest for 22 years,17 for a total net consideration of ₱50,000,000.00,
which amount shall be equally shouldered by the Province of Cavite and Trece Martires City; (b) the total
area to be expropriated be limited to only 116,287 sq. m. and the donated portion be reduced to 48,429sq.
m.; and (c) 193,662 sq. m. of the subject property be reverted to Goldenrod which include a fenced stadium,
one-half of the Trece Martires Cemetery, the forest park; a residential area, and some stalls; in turn,

Goldenrod will construct a commercial/business center, an art/historical museum, and an educational
institution within five years from the signing of the compromise agreement, among others.
The foregoing recommendations were then adopted/embodied in a Compromise Agreement 18 dated

December 8, 2003 (subject compromise)entered into by and between Maliksi and then Trece Martires City
Mayor Melencio De Sagun, Jr., both assisted by respondent Cavite Provincial Legal Officer Atty. Renato A.
Ignacio (Ignacio), and, on the other hand, Mathay and Pascual, in their capacity as owners of Goldenrod. On
February 28,2004, Goldenrod sold its landholdings to Mathay and Pascual for the amount of ₱400,000.00. 19
Thereafter, the subject compromise was approved by the RTC in a Decision20 dated March 18, 2004 and an
Amended Decision21 dated March25, 2004 (compromise judgment), both of which were ratified by the
Sangguniang Panlalawigan of the Province of Cavite and the Sangguniang Panlungsod of Trece Martires
City per Resolution Nos. 195-S-200422 and 2004-049,23 respectively.
The Proceedings Before The CA
On September 21, 2004, Remulla, in his personal capacity as taxpayer and as then Vice-Governor and,
hence, Presiding Officer of the Sangguniang Panlalawigan of the Province of Cavite, 24 filed a petition for
annulment of judgment25 under Rule 47 of the Rules of Court before the CA, arguing that the subject
compromise is grossly disadvantageous to the government because: (a) the agreed price for the subject
property was excessive as compared to its value at the time of taking in 1981; 26 (b) the government stands to
lose prime lots;27 and (c) it nullifies/amends the 1957 deed of donation. 28 Moreover, Maliksi entered into the
subject compromise without authority from the Sangguniang Panlalawigan of the Province of Cavite and
sans any certification on the availability of funds as required by law.29 Remulla claimed that extrinsic fraud
tainted the expropriation proceedings considering that there was collusion between the parties and that
respondent Ignacio deliberately withheld crucial information regarding the property valuation and certain
incidents prior to the expropriation case when he presented the subject compromise for ratification before
the Sangguniang Panlalawigan of the Province of Cavite. 30
On motion of respondents, however, the CA rendered a Resolution31 dated May 18, 2005, dismissing
Remulla’s petition for annulment of judgment based on the following grounds: ( a ) there was yet no
disbursement of public funds at the time of its filing; thus, it cannot be considered as a taxpayer's suit; and
(b) Remulla was not a real party in interest to question the propriety of the subject compromise as he was
not a signatory thereto.32
Aggrieved, Remulla filed a motion for reconsideration which was, however, denied by the CA in a
Resolution33 dated February 16, 2006.Hence, the instant petition.
The Issue Before The Court
The essential issue in this case is whether or not the CA properly denied Remulla’s petition for annulment of
judgment due to his lack of legal standing.
Records bear out that Remulla filed his petition for annulment of judgment in two capacities: first, in his
personal capacity as a taxpayer; and, second , in his official capacity as then presiding officer of the
Sangguniang Panlalawigan of the Province of Cavite.

With respect to the first, jurisprudence dictates that a taxpayer may be allowed to sue where there is a claim
that public funds are illegally disbursed or that public money is being deflected to any improper purpose, or
that public funds are wasted through the enforcement of an invalid or unconstitutional law or ordinance. 34 In
this case, public funds of the Province of Cavite stand to be expended to enforce the compromise judgment.
As such, Remulla – being a resident-taxpayer of the Province of Cavite – has the legal standing to file the
petition for annulment of judgment and, therefore, the same should not have been dismissed on said
ground. Notably, the fact that there lies no proof that public funds have already been disbursed should not
preclude Remulla from assailing the validity of the compromise judgment. Lest it be misunderstood, the
concept of legal standing is ultimately a procedural technicality which may be relaxed by the Court if the
circumstances so warrant. As observed in Mamba v. Lara,35 the Court did not hesitate to give standing to
taxpayers in cases36 where serious legal issues were raised or where public expenditures of millions of
pesos were involved. Likewise, it has also been ruled that a taxpayer need not be a party to the contract in
order to challenge its validity,37 or to seek the annulment of the same on the ground of extrinsic
fraud.38 Indeed, for as long as taxes are involved, the people have a right to question contracts entered into
by the government,39 as in this case. 1âwphi1
Anent the second, Remulla equally lodged the petition for annulment of judgment in his official capacity as
then Vice-Governor and Presiding Officer of the Sangguniang Panlalawigan of the Province of Cavite. As
such, he represents the interests of the province itself which is, undoubtedly, a real party in interest since it
stands to be either benefited or injured40 by the execution of the compromise judgment. 1âwphi1
For these reasons, the CA should not have dismissed the petition for annulment of judgment on account of
Remulla’s lack of legal standing. Consequently, the case should be remanded to the said court for further
proceedings.
WHEREFORE, the petition is GRANTED. Accordingly, the Resolutions dated May 18, 2005 and February
16, 2006 of the Court of Appeals in CA-G.R. SP No. 86465 are hereby, REVERSED and SET ASIDE. The
case is REINSTATED and REMANDED to the Court of Appeals for further proceedings.
SO ORDERED.

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TAX VS.

OTHER FORMS OF EXTRACTIONS

G.R. No. L-36081 April 24, 1989

PROGRESSIVE DEVELOPMENT CORPORATION, petitioner ,

xxx xxx xxx

a. name of stallholder or lessee;

xxx xxx xxx

xxx xxx xxx 2

Taxation 1 Full Text Cases A.g.-A.p. | 1

xxx xxx xxx

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xxx xxx xxx

(g) Taxes on income of any kind whatsoever;

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Fernan, C.J., Gutierrez, Jr., Bidin and Cortes, JJ., concur.

Taxation 1 Full Text Cases A.g.-A.p. | 4

COMPAÑIA GENERAL DE TABACOS DE FILIPINAS, plaintiff-appellee,

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ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and ENVIRONMENTALIST CONSUMERS

(b) Missionary electrification;6

(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour

Taxation 1 Full Text Cases A.g.-A.p. | 8

(b) July 2003 for Distribution Utilities (Dus).

Taxation 1 Full Text Cases A.g.-A.p. | 9

Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:

1. Projects for CY 2002 undertaken;

3. Actual amount utilized to complete the project;

5. Start of Operation; and

6. Explanation of the reallocation of UC-ME funds, if any.

Hence, this original action.

Taxation 1 Full Text Cases A.g.-A.p. | 10

The ultimate issues in the case at bar are:

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SECTION 5. The Supreme Court shall have the following powers:

The instant complaint is bereft of merit.

The First Issue

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SECTION 2. Declaration of Policy. — It is hereby declared the policy of the State:

(a) To ensure and accelerate the total electrification of the country;

Taxation 1 Full Text Cases A.g.-A.p. | 13

The OSG is in point when it asseverates:

The Second Issue

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WHEREFORE, the instant case is hereby DISMISSED for lack of merit.

Taxation 1 Full Text Cases A.g.-A.p. | 17

CHEVRON PHILIPPINES, INC. (Formerly CALTEX PHILIPPINES, INC.), Petitioner, v. BASES

VILLARAMA, JR., J.:

The facts follow.

2. Annual Inspection Fee

4. Gate Pass Fee

Taxation 1 Full Text Cases A.g.-A.p. | 18

Hence, this petition raising the following grounds:chanroblesvirtuallawlibrar

Taxation 1 Full Text Cases A.g.-A.p. | 19

The petition has no merit.

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Section 2 of Executive Order No. 8028cralaw provides:chanroblesvirtuallawlibrar

Taxation 1 Full Text Cases A.g.-A.p. | 21

With costs against the petitioner.