G.R. No.

78780 July 23, 1987

DAVID G. NITAFAN, WENCESLAO M. POLO, and MAXIMO A. SAVELLANO, JR., petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE and THE FINANCIAL OFFICER, SUPREME COURT
OF THE PHILIPPINES, respondents.

RESOLUTION

MELENCIO-HERRERA, J.:

Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19 and 53,
respectively, of the Regional Trial Court, National Capital Judicial Region, all with stations in Manila,
seek to prohibit and/or perpetually enjoin respondents, the Commissioner of Internal Revenue and
the Financial Officer of the Supreme Court, from making any deduction of withholding taxes from
their salaries.

In a nutshell, they submit that "any tax withheld from their emoluments or compensation as judicial
officers constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10,
Article VIII of the 1987 Constitution mandating that "(d)uring their continuance in office, their salary
shall not be decreased," even as it is anathema to the Ideal of an independent judiciary envisioned in
and by said Constitution."

It may be pointed out that, early on, the Court had dealt with the matter administratively in response
to representations that the Court direct its Finance Officer to discontinue the withholding of taxes
from salaries of members of the Bench. Thus, on June 4, 1987, the Court en banc had reaffirmed the
Chief Justice's directive as follows:

RE: Question of exemption from income taxation. — The Court REAFFIRMED the Chief
Justice's previous and standing directive to the Fiscal Management and Budget Office of this
Court to continue with the deduction of the withholding taxes from the salaries of the Justices
of the Supreme Court as well as from the salaries of all other members of the judiciary.

That should have resolved the question. However, with the filing of this petition, the Court has
deemed it best to settle the legal issue raised through this judicial pronouncement. As will be shown
hereinafter, the clear intent of the Constitutional Commission was to delete the proposed express
grant of exemption from payment of income tax to members of the Judiciary, so as to "give
substance to equality among the three branches of Government" in the words of Commissioner
Rigos. In the course of the deliberations, it was further expressly made clear, specially with regard to
Commissioner Joaquin F. Bernas' accepted amendment to the amendment of Commissioner Rigos,
that the salaries of members of the Judiciary would be subject to the general income tax applied to
all taxpayers.

This intent was somehow and inadvertently not clearly set forth in the final text of the Constitution as
approved and ratified in February, 1987 (infra, pp. 7-8). Although the intent may have been obscured
by the failure to include in the General Provisions a proscription against exemption of any public
officer or employee, including constitutional officers, from payment of income tax, the Court since
then has authorized the continuation of the deduction of the withholding tax from the salaries of the
members of the Supreme Court, as well as from the salaries of all other members of the Judiciary.
The Court hereby makes of record that it had then discarded the ruling in Perfecto vs. Meer and
Endencia vs. David, infra, that declared the salaries of members of the Judiciary exempt from
payment of the income tax and considered such payment as a diminution of their salaries during
their continuance in office. The Court hereby reiterates that the salaries of Justices and Judges are
properly subject to a general income tax law applicable to all income earners and that the payment
of such income tax by Justices and Judges does not fall within the constitutional protection against
decrease of their salaries during their continuance in office.

A comparison of the Constitutional provisions involved is called for. The 1935 Constitution provided:

... (The members of the Supreme Court and all judges of inferior courts) shall receive such
compensation as may be fixed by law, which shall not be diminished during their continuance
in office ... (Emphasis supplied).
1

Under the 1973 Constitution, the same provision read:

The salary of the Chief Justice and of the Associate Justices of the Supreme court, and of
judges of inferior courts shall be fixed by law, which shall not be decreased during their
continuance in office. ... (Emphasis ours).
2

And in respect of income tax exemption, another provision in the same 1973 Constitution specifically
stipulated:

No salary or any form of emolument of any public officer or employee, including

constitutional officers, shall be exempt from payment of income tax. 3

The provision in the 1987 Constitution, which petitioners rely on, reads:

The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of
judges of lower courts shall be fixed by law. During their continuance in office, their salary
shall not be decreased. (Emphasis supplied).
4

The 1987 Constitution does not contain a provision similar to Section 6, Article XV of the 1973
Constitution, for which reason, petitioners claim that the intent of the framers is to revert to the
original concept of "non-diminution "of salaries of judicial officers.

The deliberations of the 1986 Constitutional Commission relevant to Section 10, Article VIII, negate
such contention.

The draft proposal of Section 10, Article VIII, of the 1987 Constitution read:

Section 13. The salary of the Chief Justice and the Associate Justices of the Supreme Court
and of judges of the lower courts shall be fixed by law. During their continuance in office,
their salary shall not be diminished nor subjected to income tax. Until the National Assembly
shall provide otherwise, the Chief Justice shall receive an annual salary of _____________
and each Associate Justice ______________ pesos. (Emphasis ours)
5

During the debates on the draft Article (Committee Report No. 18), two Commissioners presented
their objections to the provision on tax exemption, thus:
 MS. AQUINO. Finally, on the matter of exemption from tax of the salary of justices, does this
not violate the principle of the uniformity of taxation and the principle of equal protection of
the law? After all, tax is levied not on the salary but on the combined income, such that when
the judge receives a salary and it is comingled with the other income, we tax the income, not
the salary. Why do we have to give special privileges to the salary of justices?

MR. CONCEPCION. It is the independence of the judiciary. We prohibit the increase or

decrease of their salary during their term. This is an indirect way of decreasing their salary
and affecting the independence of the judges.

MS. AQUINO. I appreciate that to be in the nature of a clause to respect tenure, but the
special privilege on taxation might, in effect, be a violation of the principle of uniformity in
taxation and the equal protection clause. 6

xxx xxx xxx

MR. OPLE. x x x

Of course, we share deeply the concern expressed by the sponsor, Commissioner Roberto
Concepcion, for whom we have the highest respect, to surround the Supreme Court and the
judicial system as a whole with the whole armor of defense against the executive and
legislative invasion of their independence. But in so doing, some of the citizens outside,
especially the humble government employees, might say that in trying to erect a bastion of
justice, we might end up with the fortress of privileges, an island of extra territoriality under
the Republic of the Philippines, because a good number of powers and rights accorded to
the Judiciary here may not be enjoyed in the remotest degree by other employees of the
government.

An example is the exception from income tax, which is a kind of economic immunity, which
is, of course, denied to the entire executive department and the legislative. 7

And during the period of amendments on the draft Article, on July 14, 1986, Commissioner Cirilo A.
Rigos proposed that the term "diminished" be changed to "decreased" and that the words "nor
subjected to income tax" be deleted so as to "give substance to equality among the three branches
in the government.

Commissioner Florenz D. Regalado, on behalf of the Committee on the Judiciary, defended the
original draft and referred to the ruling of this Court in Perfecto vs. Meer that "the independence of
8

the judges is of far greater importance than any revenue that could come from taxing their salaries."
Commissioner Rigos then moved that the matter be put to a vote. Commissioner Joaquin G. Bernas
stood up "in support of an amendment to the amendment with the request for a modification of the
amendment," as follows:

FR. BERNAS. Yes. I am going to propose an amendment to the amendment saying that it is
not enough to drop the phrase "shall not be subjected to income tax," because if that is all
that the Gentleman will do, then he will just fall back on the decision in Perfecto vs. Meer and
in Dencia vs. David [should be Endencia and Jugo vs. David, etc., 93 Phil. 696[ which
excludes them from income tax, but rather I would propose that the statement will read:
"During their continuance in office, their salary shall not be diminished BUT MAY BE
SUBJECT TO GENERAL INCOME TAX."IN support of this position, I would say that the
argument seems to be that the justice and judges should not be subjected to income tax
because they already gave up the income from their practice. That is true also of Cabinet
 members and all other employees. And I know right now, for instance, there are many people
who have accepted employment in the government involving a reduction of income and yet
are still subject to income tax. So, they are not the only citizens whose income is reduced by
accepting service in government.

Commissioner Rigos accepted the proposed amendment to the amendment. Commissioner Rustico
F. de los Reyes, Jr. then moved for a suspension of the session. Upon resumption, Commissioner
Bernas announced:

During the suspension, we came to an understanding with the original proponent,

Commissioner Rigos, that his amendment on page 6,. line 4 would read: "During their
continuance in office, their salary shall not be DECREASED."But this is on the understanding
that there will be a provision in the Constitution similar to Section 6 of Article XV, the General
Provisions of the 1973 Constitution, which says:

No salary or any form of emolument of any public officer or employee, including

constitutional officers, shall be exempt from payment of income tax.

So, we put a period (.) after "DECREASED" on the understanding that the salary of justices
is subject to tax.

When queried about the specific Article in the General Provisions on non-exemption from tax of
salaries of public officers, Commissioner Bernas replied:

FR BERNAS. Yes, I do not know if such an article will be found in the General Provisions.
But at any rate, when we put a period (.) after "DECREASED," it is on the understanding that
the doctrine in Perfecto vs. Meer and Dencia vs. David will not apply anymore.

The amendment to the original draft, as discussed and understood, was finally approved without
objection.

THE PRESIDING OFFICER (Mr. Bengzon). The understanding, therefore, is that there will
be a provision under the Article on General Provisions. Could Commissioner Rosario Braid
kindly take note that the salaries of officials of the government including constitutional
officers shall not be exempt from income tax? The amendment proposed herein and
accepted by the Committee now reads as follows: "During their continuance in office, their
salary shall not be DECREASED"; and the phrase "nor subjected to income tax" is deleted. 9

The debates, interpellations and opinions expressed regarding the constitutional provision in
question until it was finally approved by the Commission disclosed that the true intent of the framers
of the 1987 Constitution, in adopting it, was to make the salaries of members of the Judiciary
taxable. The ascertainment of that intent is but in keeping with the fundamental principle of
constitutional construction that the intent of the framers of the organic law and of the people adopting
it should be given effect. The primary task in constitutional construction is to ascertain and thereafter
10

assure the realization of the purpose of the framers and of the people in the adoption of the
Constitution. it may also be safely assumed that the people in ratifying the Constitution were guided
11

mainly by the explanation offered by the framers. 12

1avvphi1

Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for clarity, is again
reproduced hereunder:
 The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of
judges of lower courts shall be fixed by law. During their continuance in office, their salary
shall not be decreased. (Emphasis supplied).

it is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation
of Justices and Judges but such rate must be higher than that which they are receiving at the time of
enactment, or if lower, it would be applicable only to those appointed after its approval. It would be a
strained construction to read into the provision an exemption from taxation in the light of the
discussion in the Constitutional Commission.

With the foregoing interpretation, and as stated heretofore, the ruling that "the imposition of income
tax upon the salary of judges is a dimunition thereof, and so violates the Constitution" in Perfecto vs.
Meer, as affirmed in Endencia vs. David must be declared discarded. The framers of the
13 14

fundamental law, as the alter ego of the people, have expressed in clear and unmistakable terms the
meaning and import of Section 10, Article VIII, of the 1987 Constitution that they have adopted

Stated otherwise, we accord due respect to the intent of the people, through the discussions and
deliberations of their representatives, in the spirit that all citizens should bear their aliquot part of the
cost of maintaining the government and should share the burden of general income taxation
equitably.

WHEREFORE, the instant petition for Prohibition is hereby dismissed.

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial
Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R.
OSMEÑA, and EUSTAQUIO B. CESA, respondents.
DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of
22 March 1995 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the
1

petition for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu
International Airport Authority vs. City of Cebu", and its order of 4, May 1995 denying the
2

motion to reconsider the decision.

We resolved to give due course to this petition for its raises issues dwelling on the scope of
the taxing power of local government-owned and controlled corporations.

The uncontradicted factual antecedents are summarized in the instant petition as follows:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue
of Republic Act No. 6958, mandated to "principally undertake the economical,
efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, . . .
and such other Airports as may be established in the Province of Cebu . . . (Sec. 3,
RA 6958). It is also mandated to:

a) encourage, promote and develop international and

domestic air traffic in the Central Visayas and
Mindanao regions as a means of making the regions
centers of international trade and tourism, and
accelerating the development of the means of
transportation and communication in the country; and

b) upgrade the services and facilities of the airports

and to formulate internationally acceptable standards
of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter.

Sec. 14. Tax Exemptions. — The authority shall be exempt from

realty taxes imposed by the National Government or any of its
political subdivisions, agencies and instrumentalities . . .

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of

the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total
amount of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified,

claiming in its favor the aforecited Section 14 of RA 6958 which exempt it from
payment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing section 133 of the Local
Government Code of 1991 which puts limitations on the taxing powers of local
government units:

Sec. 133. Common Limitations on the Taxing Powers of Local

Government Units. — Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities, municipalities, and barangay
shall not extend to the levy of the following:

a) . . .

xxx xxx xxx

o) Taxes, fees or charges of any kind on the National

Government, its agencies and instrumentalities, and
local government units. (Emphasis supplied)

Respondent City refused to cancel and set aside petitioner's realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax exemption
privilege has been withdrawn by virtue of Sections 193 and 234 of the Local
Governmental Code that took effect on January 1, 1992:

Sec. 193. Withdrawal of Tax Exemption Privilege. — 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 RA No.
6938, non-stock, and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied)

xxx xxx xxx

Sec. 234. Exemptions from Real Property taxes. — . . .

(a) . . .

xxx xxx xxx

(c) . . .

Except as provided herein, any exemption from payment of real

property tax previously granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or
controlled corporations are hereby withdrawn upon the effectivity of
this Code.

As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account "under protest" and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu,
Branch 20, on December 29, 1994. MCIAA basically contended that the taxing
powers of local government units do not extend to the levy of taxes or fees of any
kind on an instrumentality of the national government. Petitioner insisted that while it
is indeed a government-owned corporation, it nonetheless stands on the same
 footing as an agency or instrumentality of the national government. Petitioner insisted
that while it is indeed a government-owned corporation, it nonetheless stands on the
same footing as an agency or instrumentality of the national government by the very
nature of its powers and functions.

Respondent City, however, asserted that MACIAA is not an instrumentality of the

government but merely a government-owned corporation performing proprietary
functions As such, all exemptions previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992. 3

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

In its decision of 22 March 1995, the trial court dismissed the petition in light of its findings,
4

to wit:

A close reading of the New Local Government Code of 1991 or RA 7160 provides the
express cancellation and withdrawal of exemption of taxes by government owned
and controlled corporation per Sections after the effectivity of said Code on January
1, 1992, to wit: [proceeds to quote Sections 193 and 234]

Petitioners claimed that its real properties assessed by respondent City Government
of Cebu are exempted from paying realty taxes in view of the exemption granted
under RA 6958 to pay the same (citing Section 14 of RA 6958).

However, RA 7160 expressly provides that "All general and special laws, acts, city
charters, decress [sic], executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the provisions
of this Code are hereby repealed or modified accordingly." ([f], Section 534, RA
7160).

With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed
by the provisions of the New Local Government Code of 1991.

So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Towards this end, the State shall provide
for a more responsive and accountable local government structure instituted through
a system of decentralization whereby local government units shall be given more
powers, authority, responsibilities, and resources. The process of decentralization
shall proceed from the national government to the local government units. . . . 5

Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order,
the petitioner filed the instant petition based on the following assignment of errors:
 I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.

II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS

LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a government-owned
or controlled corporation it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to perform
governmental functions primarily to promote certain aspects of the economic life of the
people. Considering its task "not merely to efficiently operate and manage the Mactan-Cebu
6

International Airport, but more importantly, to carry out the Government policies of promoting
and developing the Central Visayas and Mindanao regions as centers of international trade
and tourism, and accelerating the development of the means of transportation and
communication in the country," and that it is an attached agency of the Department of
7

Transportation and Communication (DOTC), the petitioner "may stand in [sic] the same
8

footing as an agency or instrumentality of the national government." Hence, its tax exemption
privilege under Section 14 of its Charter "cannot be considered withdrawn with the passage
of the Local Government Code of 1991 (hereinafter LGC) because Section 133 thereof
specifically states that the taxing powers of local government units shall not extend to the
levy of taxes of fees or charges of any kind on the national government its agencies and
instrumentalities."

As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained
in Basco vs. Philippine Amusement and Gaming Corporation; 9

Local governments have no power to tax instrumentalities of the National

Government. PAGCOR is a government owned or controlled corporation with an
original character, PD 1869. All its shares of stock are owned by the National
Government. . . .

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke
is governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.

The states have no power by taxation or otherwise, to retard, impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (McCulloch v. Maryland,
4 Wheat 316, 4 L Ed. 579).

This doctrine emanates from the "supremacy" of the National Government over local
government.

Justice Holmes, speaking for the Supreme Court, make references to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
 can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them.
(Antieau Modern Constitutional Law, Vol. 2, p. 140)

Otherwise mere creature of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to
tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the
very entity which has the inherent power to wield it. (Emphasis supplied)

It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a governmental
function as against one performing merely proprietary ones such that the exemption privilege
withdrawn under the said Code would apply to all government corporations." For it is clear
from Section 133, in relation to Section 234, of the LGC that the legislature meant to
exclude instrumentalities of the national government from the taxing power of the local
government units.

In its comment respondent City of Cebu alleges that as local a government unit and a
political subdivision, it has the power to impose, levy, assess, and collect taxes within its
jurisdiction. Such power is guaranteed by the Constitution and enhanced further by the
10

LGC. While it may be true that under its Charter the petitioner was exempt from the payment
of realty taxes, this exemption was withdrawn by Section 234 of the LGC. In response to the
11

petitioner's claim that such exemption was not repealed because being an instrumentality of
the National Government, Section 133 of the LGC prohibits local government units from
imposing taxes, fees, or charges of any kind on it, respondent City of Cebu points out that
the petitioner is likewise a government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned or controlled corporations performing governmental
and purely proprietary functions. Respondent city of Cebu urges this the Manila International
Airport Authority is a governmental-owned corporation, and to reject the application of
12

Basco because it was "promulgated . . . before the enactment and the singing into law of
R.A. No. 7160," and was not, therefore, decided "in the light of the spirit and intention of the
framers of the said law.

As a general rule, 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 who are
to pay it. Nevertheless, effective limitations thereon may be imposed by the people through
their Constitutions. Our Constitution, for instance, provides that the rule of taxation shall be
13

uniform and equitable and Congress shall evolve a progressive system of taxation. So 14

potent indeed is the power that it was once opined that "the power to tax involves the power
to destroy." Verily, taxation is a destructive power which interferes with the personal and
15

property for the support of the government. Accordingly, tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer. But since taxes are
16

what we pay for civilized society, or are the lifeblood of the nation, the law frowns against
17

exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayers and liberally in favor of the taxing
authority. A claim of exemption from tax payment must be clearly shown and based on
18
language in the law too plain to be mistaken. Elsewise stated, taxation is the rule,
19

exemption therefrom is the exception. However, if the grantee of the exemption is a political
20

subdivision or instrumentality, the rigid rule of construction does not apply because the
practical effect of the exemption is merely to reduce the amount of money that has to be
handled by the government in the course of its operations. 21

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the
Constitution. Under the latter, the exercise of the power may be subject to such guidelines
22

and limitations as the Congress may provide which, however, must be consistent with the
basic policy of local autonomy.

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt
from the payment of realty taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of
the taxing authority. The only exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the Constitution. 23

The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the
exercise by local government units of their power to tax, the scope thereof or its limitations,
and the exemption from taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:

Sec. 133. Common Limitations on the Taxing Power of Local Government Units. —
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial
institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, "inheritance, gifts, legacies and other

acquisitions mortis causa, except as otherwise provided herein

(d) Customs duties, registration fees of vessels and wharfage on

wharves, tonnage dues, and all other kinds of customs fees charges
and dues except wharfage on wharves constructed and maintained
by the local government unit concerned:

(e) Taxes, fees and charges and other imposition upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise or charges for wharfages, tolls for
bridges or otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;
 (f) Taxes fees or charges on agricultural and aquatic products when
sold by marginal farmers or fishermen;

(g) Taxes on business enterprise certified to be the Board of

Investment as pioneer or non-pioneer for a period of six (6) and four
(4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the National Internal

Revenue Code, as amended, and taxes, fees or charges on
petroleum products;

(i) Percentage or value added tax (VAT) on sales, barters or

exchanges or similar transactions on goods or services except as
otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractor and person

engage in the transportation of passengers of freight by hire and
common carriers by air, land, or water, except as provided in this
code;

(k) Taxes on premiums paid by ways reinsurance or retrocession;

(l) Taxes, fees, or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the driving of
thereof, except, tricycles;

(m) Taxes, fees, or other charges on Philippine product actually

exported, except as otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business

Enterprise and Cooperatives duly registered under R.A. No. 6810
and Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No.
6938) otherwise known as the "Cooperative Code of the Philippines;
and

(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE

NATIONAL GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS.
(emphasis supplied)

Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges"
referred to are "of any kind", hence they include all of these, unless otherwise provided by
the LGC. The term "taxes" is well understood so as to need no further elaboration, especially
in the light of the above enumeration. The term "fees" means charges fixed by law or
Ordinance for the regulation or inspection of business activity, while "charges" are pecuniary
24

liabilities such as rents or fees against person or property.

25

Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section
232. It reads as follows:
 Sec. 232. Power to Levy Real Property Tax. — A province or city or a municipality
within the Metropolitan Manila Area may levy on an annual ad valorem tax on real
property such as land, building, machinery and other improvements not hereafter
specifically exempted.

Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons, including
government owned and controlled corporations, except as provided therein. It provides:

Sec. 234. Exemptions from Real Property Tax. — The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of

its political subdivisions except when the beneficial use thereof had
been granted, for reconsideration or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents

appurtenants thereto, mosques nonprofits or religious cemeteries and
all lands, building and improvements actually, directly, and exclusively
used for religious charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as

provided for under R.A. No. 6938; and;

(e) Machinery and equipment used for pollution control and

environmental protection.

Except as provided herein, any exemptions from payment of real

property tax previously granted to or presently enjoyed by, all persons
whether natural or juridical, including all government owned or
controlled corporations are hereby withdrawn upon the effectivity of
his Code.

These exemptions are based on the ownership, character, and use of the property. Thus;

(a) Ownership Exemptions. Exemptions from real property taxes on

the basis of ownership are real properties owned by: (i) the Republic,
(ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi)
registered cooperatives.

(b) Character Exemptions. Exempted from real property taxes on the

basis of their character are: (i) charitable institutions, (ii) houses and
temples of prayer like churches, parsonages or convents appurtenant
thereto, mosques, and (iii) non profit or religious cemeteries.
 (c) Usage exemptions. Exempted from real property taxes on the
basis of the actual, direct and exclusive use to which they are
devoted are: (i) all lands buildings and improvements which are
actually, directed and exclusively used for religious, charitable or
educational purpose; (ii) all machineries and equipment actually,
directly and exclusively used or by local water districts or by
government-owned or controlled corporations engaged in the supply
and distribution of water and/or generation and transmission of
electric power; and (iii) all machinery and equipment used for
pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the

country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.

2. Other Exemptions Withdrawn. All other exemptions previously

granted to natural or juridical persons including government-owned or
controlled corporations are withdrawn upon the effectivity of the
Code. 26

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It
provides:

Sec. 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.
6938, non stock and non profit hospitals and educational constitutions, are hereby
withdrawn upon the effectivity of this Code.

On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:

Sec. 192. Authority to Grant Tax Exemption Privileges. — Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.

The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions
and the exceptions thereto. The use of exceptions of provisos in these section, as shown by
the following clauses:

(1) "unless otherwise provided herein" in the opening paragraph of

Section 133;

(2) "Unless otherwise provided in this Code" in section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned
clause in section 133 seems to be inaccurately worded. Instead of the clause "unless
otherwise provided herein," with the "herein" to mean, of course, the section, it should have
used the clause "unless otherwise provided in this Code." The former results in absurdity
since the section itself enumerates what are beyond the taxing powers of local government
units and, where exceptions were intended, the exceptions were explicitly indicated in the
text. For instance, in item (a) which excepts the income taxes "when livied on banks and
other financial institutions", item (d) which excepts "wharfage on wharves constructed and
maintained by the local government until concerned"; and item (1) which excepts taxes, fees,
and charges for the registration and issuance of license or permits for the driving of
"tricycles". It may also be observed that within the body itself of the section, there are
exceptions which can be found only in other parts of the LGC, but the section
interchangeably uses therein the clause "except as otherwise provided herein" as in items (c)
and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or the
clause "excepts as provided in this Code" in item (j). These clauses would be obviously
unnecessary or mere surplus-ages if the opening clause of the section were" "Unless
otherwise provided in this Code" instead of "Unless otherwise provided herein". In any event,
even if the latter is used, since under Section 232 local government units have the power to
levy real property tax, except those exempted therefrom under Section 234, then Section
232 must be deemed to qualify Section 133.

Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general
rule, as laid down in Section 133 the taxing powers of local government units cannot extend
to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its
agencies and instrumentalties, and local government units"; however, pursuant to Section
232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, "real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial used thereof has been granted, for
consideration or otherwise, to a taxable person", as provided in item (a) of the first paragraph
of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical

persons, including government-owned and controlled corporations, Section 193 of the LGC
prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except
upon the effectivity of the LGC, except those granted to local water districts, cooperatives
duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational
institutions, and unless otherwise provided in the LGC. The latter proviso could refer to
Section 234, which enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption in so far as the real
property taxes are concerned by limiting the retention only to those enumerated there-in; all
others not included in the enumeration lost the privilege upon the effectivity of the LGC.
Moreover, even as the real property is owned by the Republic of the Philippines, or any of its
political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption
is withdrawn if the beneficial use of such property has been granted to taxable person for
consideration or otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the
LGC, exemptions from real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and
the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge
under any of the exceptions provided in Section 234, but not under Section 133, as it now
asserts, since, as shown above, the said section is qualified by Section 232 and 234.

In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing
powers of the local government units cannot extend to the levy of:

(o) taxes, fees, or charges of any kind on the National Government,

its agencies, or instrumentalities, and local government units.

I must show that the parcels of land in question, which are real property, are any one of
those enumerated in Section 234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under any explicit provision of the said
section, for one exists. In light of the petitioner's theory that it is an "instrumentality of the
Government", it could only be within be first item of the first paragraph of the section by
expanding the scope of the terms Republic of the Philippines" to
embrace . . . . . . "instrumentalities" and "agencies" or expediency we quote:

(a) real property owned by the Republic of the Philippines, or any of

the Philippines, or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.

This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions the
word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political
subdivision "in Section 234(a).

The terms "Republic of the Philippines" and "National Government" are not interchangeable.
The former is boarder and synonymous with "Government of the Republic of the Philippines"
which the Administrative Code of the 1987 defines as the "corporate governmental entity
though which the functions of the government are exercised through at the Philippines,
including, saves as the contrary appears from the context, the various arms through which
political authority is made effective in the Philippines, whether pertaining to the autonomous
reason, the provincial, city, municipal or barangay subdivision or other forms of local
government." These autonomous regions, provincial, city, municipal or barangay
27

subdivisions" are the political subdivision.28

On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments." The National
29

Government then is composed of the three great departments the executive, the legislative
and the judicial. 30

An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit therein;" while an "instrumentality" refers
31

to "any agency of the National Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy; usually through a
charter. This term includes regulatory agencies, chartered institutions and government-
owned and controlled corporations". 32
If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption
from payment of real property taxes under the last sentence of the said section to the
agencies and instrumentalities of the National Government mentioned in Section 133(o),
then it should have restated the wording of the latter. Yet, it did not Moreover, that Congress
did not wish to expand the scope of the exemption in Section 234(a) to include real property
owned by other instrumentalities or agencies of the government including government-
owned and controlled corporations is further borne out by the fact that the source of this
exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax Code,
which reads:

Sec 40. Exemption from Real Property Tax. — The exemption shall be as follows:

(a) Real property owned by the Republic of the

Philippines or any of its political subdivisions and any
government-owned or controlled corporations so
exempt by is charter: Provided, however, that this
exemption shall not apply to real property of the
above mentioned entities the beneficial use of which
has been granted, for consideration or otherwise, to a
taxable person.

Note that as a reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last paragraph
of Section 234. These policy considerations are consistent with the State policy to ensure
autonomy to local governments and the objective of the LGC that they enjoy genuine and
33

meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national goals. The34

power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of local government units for the delivery of basic services essential
to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and controlled
corporations and all other units of government were that such privilege resulted in serious
tax base erosion and distortions in the tax treatment of similarly situated enterprises, and
there was a need for this entities to share in the requirements of the development, fiscal or
otherwise, by paying the taxes and other charges due from them. 35

The crucial issues then to be addressed are: (a) whether the parcels of land in question
belong to the Republic of the Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person".

Section 15 of the petitioner's Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. — All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works, or air operations,
including all equipment which are necessary for the operations of air navigation,
acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to
 the Authority: Provided however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication,
the approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the authority. The
authority may assist in the maintenance of the Air Transportation Office equipment.

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International
AirPort in the Province of Cebu", which belonged to the Republic of the Philippines, then
36

under the Air Transportation Office (ATO). 37

It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands"
among other things, to the petitioner and not just the transfer of the beneficial use thereof,
with the ownership being retained by the Republic of the Philippines.

This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate
owned and/or administered by the airports." Hence, the petitioner is now the owner of the
38

land in question and the exception in Section 234(c) of the LGC is inapplicable.

Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It
was only exempted from the payment of real property taxes. The grant of the privilege only in
respect of this tax is conclusive proof of the legislative intent to make it a taxable person
subject to all taxes, except real property tax.

Finally, even if the petitioner was originally not a taxable person for purposes of real property
tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be
an "agency" or "instrumentality" of the Government, a taxable person for such purpose in
view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment
of real property taxes, which, as earlier adverted to, applies to the petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco

vs. Philippine Amusement and Gaming Corporation is unavailing since it was decided
39

before the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing that
even instrumentalities or agencies of the government performing governmental functions
may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and
national policy, no one can doubt its wisdom.

WHEREFORE, the instant petition is DENIED. The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.
G.R. No. L-29987 October 22, 1975

MANILA ELECTRIC COMPANY, petitioner,

vs.
MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, respondent.

G.R. No. L-23847 October 22, 1975

MANILA ELECTRIC COMPANY, petitioner,

vs.
BENJAMIN. TABIOS, as Commissioner of Internal Revenue, respondent.

Salcedo, Del Rosario, Bito, Misa and Lozada for petitioner.

Office of the Solicitor General for respondents.

MUÑOZ PALMA, J.:

Manila Electric Company, petitioner in these two cases, poses a single before Us: is Manila
Electric Company (MERALCO for short) exempt from payment of a compensating tax on
poles, wires, transformers, and insulators imported by it for use in the operation of its
electric light, heat, and power system? MERALCO answers the query in the affirmative while
the Commissioner of Internal Revenue asserts the contrary.

MERALCO is the holder of a franchise to construct, maintain, and operate an electric light,
heat, and power system in the City of Manila and its suburbs. 1

In 1962, MERALCO imported and received from abroad on various dates copper wires,
transformers, and insulators for use in the operation of its business on which, the Collector of
Customs, as Deputy of Commissioner of Internal Revenue, levied and collected a compensating tax
amounting to a total of P62,335.00. A claim for refund of said amount was presented by MERALCO
and because no action was taken by the Commissioner of Internal Revenue on its claim, it appealed
to the Court of Tax Appeals by filing a petition for review on February 25, 1964 (CTA Case No. 1495).
On November 28, 1968, the Court of Tax Appeals denied MERALCO claim, forthwith, the case was
elevated to the Court on appeal (L-29987).
Again in 1963, MERALCO imported certain quantities of copper wires, transformers and insulators
also to be used in its business and again a compensating tax of P6,587.00 on said purchases was
collected. Its claim for refund of the amount having been denied by the Commissioner of Internal
Revenue on January 23, 1964, MERALCO riled with the Court of Tax Appeals CTA Case No. 1493.
On September 23, 1964 the Court of Tax Appeals decided against petitioner, and the latter filed with
this Court the corresponding Petition for Review of said decision docketed herein as G.R. No. L-
23847.

Inasmuch as the two appeals raise the same issue, they are consolidated in this Decision.

The law under which the Commissioner of Internal Revenue, respondent in these two cases,
assessed and collected the corresponding compensating taxes in 1962 and 1963 was found in
Section 190 of the National Internal Revenue Code(Commonwealth Act No. 466, as amended) the
pertinent provision of which read at the time as follows:

Sec. 190. Compensating Tax. — All persons residing or doing business in the
Philippines, who purchase or receive from without the Philippines any commodities,
goods, wares, or merchandise, excepting those subject to specific taxes under Title
IV of this Code, shall pay on the total value thereof at the time they are received by
such persons, including freight, postage, insurance, commission and all similar
charges, a compensating tax equivalent to the percentage taxes imposed under this
Title on original transactions effected by merchants, importers, or manufacturers,
such tax to be paid before the withdrawal or removal of said commodities, goods,
wares, or merchandise from the customhouse or the post office: ... 2

In deciding against petitioner, the Court of Tax Appeals held that following the ruling of the Supreme
Court in the case of Panay Electric Co. vs. Collector of Internal Revenue, G.R. No. L-6753, July 30,
1955, Manila Gas Corp. vs. Collector of Internal Revenue, G.R. No. L-11784, October 24, 1958,
and Borja vs. Collector of Internal Revenue, G.R. No. L-12134, November 30,1961, MERALCO
is not exempt from paying the compensating tax provided for in Section 190 of the National Internal
Revenue Code, the purpose of which is to "place casual importers, who are not merchants on equal
putting with established merchants who pay sales tax on articles imported by them." The court
further stated that MERALCO's claim for exemption from the payment of the compensating tax is not
clear or expressed, contrary to the cardinal rule in taxation that "exemptions from taxation are highly
disfavored in law, and he who claims exemption must be able to justify his claim by the clearest
grant of organic or statute law. (pp. 10-11, L-23847, rollo)

Petitioner, on the other hand, bases its claim for exemption from the compensating tax on poles,
wires, transformers and insulators purchased by it from abroad on paragraph 9 of its franchise which
We quote from its brief:

PARAGRAPH 9. The grantee shall be liable to pay the same taxes upon its real
estate, buildings, plant (not including poles, wires, transformers, and insulators),
machinery, and personal property as other persons are or may be hereafter by law to
pay. Inconsideration of Part Two of the franchise herein granted, to wit, the right to
build and maintain in the City of Manila and its suburbs a plant for the conveying and
furnishing of electric current for light, heat, and power, and to charge for the same,
the grantee shall pay to the City of Manila a five per centum of the gross earnings
received form its business under this franchise in the City and its suburbs:
PROVIDED, That two and one-half per centum of the gross earnings received from
the business of the line to Malabon shall be paid to the Province of Rizal. Said
percentage shall be due and payable at the times stated in paragraph nineteen of
 Part One hereof, and after an audit, like that provided in paragraph twenty of Part
One hereof, and shall be in lieu of all taxes and assessments of whatsoever nature,
and by whatsoever authority upon the privileges, earnings, income, franchise, and
poles, wires, transformers, and insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted. (Petitioner's brief, p. 4, G.R.
No. L-29987; see also pp. 3-4, petitioner's brief, L-23847)

Petitioner argues that the abovequoted provision in plain and unambiguous terms makes two
references to the exemption of the articles in question from all taxes except the franchise tax. Thus,
after prescribing in the opening sentence that "the grantee shall be liable to pay the said taxes upon
its real estate buildings, plant (not including poles, wires, transformers and insulators), machinery
and personal property as other persons are or may be hereinafter required by law to pay," par. 9,
specifically provides that the percentage tax payable by petitioner as fixed therein "shall be in lieu of
all taxes and assessments of whatsoever nature, and by whatsoever authority upon the privileges,
earnings, income, franchise, and poles, wires, transformers and insulators of the grantee from which
taxes and assessments the grantee is hereby expressly exempted." Petitioner further states that
while par. 9 does not specifically mention the compensating tax for the obvious reason that
petitioner's original franchise was an earlier enactment, the words "in lieu of all taxes and
assessments of whatsoever nature and by whatsoever authority" are broad and sweeping enough to
include the compensating tax. (p. 5, petitioner's brief, L-29987; pp, 4-5, ibid, L-23847)

Petitioner also contends that the ruling of this Court in the cases of Panay Electric Co., Manila Gas
Corporation, and Borja (supra) are not applicable to its situation.

We find no merit in petitioner's cause.

1. One who claims to be exempt from the payment of a particular tax must do so under clear and
unmistakable terms found in the statute. Tax exemptions are strictly construed against the taxpayer,
they being highly disfavored and may almost be said "to be odious to the law." He who claims an
exemption must be able to print to some positive provision of law creating the right; it cannot be
allowed to exist upon a mere vague implication or inference. The right of taxation will not beheld to
3

have been surrendered unless the intention to surrender is manifested by words too plain to be
mistaken (Ohio Life Insurance & Trust Co. vs. Debolt, 60 Howard, 416), for the state cannot strip
itself of the most essential power of taxation by doubtful words; it cannot, by ambiguous language,
be deprived of this highest attribute of sovereignty (Erie Railway Co. vs. Commonwealth of
Pennsylvania, 21 Wallace 492, 499). So, when exemption is claimed, it must be shown indubitably to
exist, for every presumption is against it, and a well-founded doubt is fatal to the claim (Farrington
vs. Tennessee & County of Shelby, 95 U.S. 679, 686). 4

2. Petitioner's submission that its right to exemption is supported by the "plain and unambiguous"
term of paragraph 9 of its franchise is positively without basis.

First, the Court cannot overlook the tax court's finding that, and We quote:

At the outset it should be noted that the franchise by the Municipal Board of the City
of Manila to Mr. Charles M. Swift and later assumed and taken over by petitioner
(see Rep. Act No. 150, CTA rec. p. 84), is a municipal franchise and not a legal
franchise. While it is true that Section 1 of Act No. 484 of the Philippine Commission
of 1902 authorizes the Municipal Board of the City of Manila to grant a franchise to
the person making the most favorable bid for the construction and maintenance of an
electric street railway and the construction, maintenance, and operation of an electric
light, heat, and power system in Manila and its suburbs, Section 2 of the same Act
 authorize the said Municipal Board to make necessary amendments to be fixed by
the terms of the successful bid; otherwise, the form of the franchise to be granted
shall be in the words and figures appearing in Act No. 484 of the Philippine
Commission, which includes Par. 9. Part Two, thereof, supra.

This Court is not aware whether or not the tax exemption provisions contained in Par.
9, Part Two of Act No. 484 of the Philippine Commission of 1902 was incorporated in
the municipal franchise granted to Mr. Charles M. Swift by the Municipal Board of the
City of Manila and later assumed and taken over by petitioner because no admissible
copy of Ordinance No. 44 of the said Board was ever presented in evidence by the
herein petitioner. Neither is this Court aware of any amendment to the terms of this
franchise granted by the aforesaid Municipal Board to the successful bidder in the
absence of Ordinance No. 44 and the amendment thereto, if any. In the
circumstances, we are at a Las to interpret and apply the tax exemption provisions
relied upon by petitioner. (pp. 11-13, rollo, L-29987)

Second, and this is the controlling reason for the denial of petitioner's claim in these cases, We do
not see in paragraph 9 of its petitioner's franchise, on the assumption that it does exist as worded,
what may be considered as "plain and unambiguous terms" declaring petitioner MERALCO exempt
from paying a compensating tax on its imports of poles, wires, transformers, and insulators. What
MERALCO really wants Us to do, but which We cannot under the principles enumerated earlier, is
to infer and imply that there is such an exemption from the following phrase: "... the grantee shall pay
to the City of Manila five per centum of the gross earnings received from its business ... and shall be
in lieu of all taxes and assessments of whatsoever nature, and by whatsoever authority upon the
privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee,
from which taxes and assessments the grantee is hereby expressly exempted."

Note that what the above provision exempts petitioner from, is the payment of property, tax on its
poles, wires, transformers, and insulators; it does not exempt it from payment of taxes like the one in
question which, by mere necessity or consequence alone, fall upon property. The first sentence of
paragraph 9 of petitioner's franchise expressly states that the grantee like any other taxpayer shall
pay taxes upon its real estate, buildings, plant (not including poles, wires, transformers, and
insulators),machinery, and personal property. These are direct taxes imposed upon the thing or
property itself. Thus, while the grantee is to pay tax on its plant, its poles, wires, transformers, and
insulators as forming part of the plant or installation(significantly the enumeration is in parenthesis
and follows the word "plant") are exempt and as such are not to be included in the assessment of
the property tax to be paid.

The ending clause of paragraph 9 providing in effect that the percentage tax imposed upon petitioner
shall be in lieu of "all taxes and assessments of what and by whatsoever authority" cannot be said to
have granted it exemption from payment of compensating tax. The phrase "all taxes and
assessments of whatsoever nature and by whatsoever authority" is not so broad and sweeping, as
petitioner would have Us think, as to include the tax in question because there is an immediately
succeeding phrase which limits the scope of exemption to taxes and assessments "upon the
privileges earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee."
The last clause of paragraph 9 merely reaffirms, with regards to poles, wires, transformers, and
insulators, what has been expressed in the that first sentence of the same paragraph
namely, exemption of petitioner from payment of property tax. It is a principle of statutory
construction that general terms may be restricted by specific words, with the result that the general
language will be limited by the specific language which indicates the statute's object and purpose.
(Statutory Construction by Crawford, 1940 ed. p. 324-325)
3. It is a well-settled rule or principle in taxation that a compensating tax is not a property tax but is
an excise tax. Generally stated, an excise tax is one that is imposed on the performance of an act,
5

the engaging in an occupation, or the enjoyment of a privilege. 6 A tax upon property because of its
ownership its a direct tax, whereas one levied upon property because of its use is an excise duty.
(Manufacturer's Trust Co. vs. United States, Ct. Cl., 32 F. Supp. 289, 296) Thus, where a tax which
is not on the property as such, is upon certain kinds of property, having reference to their origin and
their intended use, that is an excise tax. (State v. Wynne, 133 S.W. 2d 951, 956,957, 133 Tex. 622)

The compensating tax being imposed upon petitioner herein, MERALCO, is an impost on its use of
imported articles and is not in the nature of a direct tax on the articles themselves, the latter tax
falling within the exemption. Thus, in International Business Machine Corp. vs. Collector of Internal
Revenue, 1956, 98 Phil. Reports 595, 593, which involved the collection of a compensating tax from
the plaintiff-petitioner on business machines imported by it, this Court stated in unequivocal terms
that "it is not the act of importation that is taxed under section 190, but the use of imported goods not
subjected to sales tax" because "the compensating tax was expressly designed as a substitute to
make up or compensate for the revenue lost to the government through the avoidance of sales taxes
by means of direct purchases abroad. ..."

It is true that upon the collection of a compensating tax on petitioner's poles, wires, transformers,
and insulators purchased from abroad, the tax falls on the goods themselves; this fact leads
petitioner to claim that what is being imposed upon it is a property tax. But petitioner loses sight of
the principle that "every excise necessarily must finally fall upon and be paid by property, and so
may be indirectly a tax upon property; but if it is really imposed upon the performance of an act,
the enjoyment of a privilege, or the engaging in an occupation, it will be considered an excise." (51
Am. Jur. 1d, Taxation, Sec. 34, emphasis supplied) And so, to reiterate, what is being taxed here is
the use of goods purchased from out of the country, and the imposition is in the nature of an excise
tax.

4. There is no valid reason for Us not to apply to petitioner the ruling of the Court in Panay Electric
Co. and Borja, supra, for MERALCO is similarly situated.

Panay Electric Co. sought exemption from payment of a compensating tax on equipments
purchased abroad for use in its electric plant. A provision in its franchise reads:

Sec 8. ... Said percentage shall be due and payable quarterly and shall be lieu of all
taxes of any kind levied, established, or collected by any authority whatsoever, now
or in the future, on its poles, wires, insulators, switches, transformers and other
structures, installations, conductors, and accessories, placed in and over the public
streets, avenues, roads, thoroughfares, squares, bridges, and other places on its
franchise, from which taxes the grantee is hereby expressly exempted. (113 Phil.
570)

This Court rejected the exemption sought by Panay Electric and held that the cited provision in its
franchise exempts from taxation those rights and privileges which are not enjoyed by the public in
general but only by the grantee of a franchise, but do not include the common right or privileges of
every citizen to make purchases anywhere; and that we must bear in mind the purpose for the
imposition of compensating tax which as explained in the report of the Tax Commission is as follows:

The purpose of this proposal is to place persons purchasing goods from dealers
doing business in the Philippines on an equal footing, for tax purposes, with those
who purchase goods directly from without the Philippines. Under the present tax law,
the former bear the burden of the local sales tax because it is shifted to them as part
 of the selling price demanded by the local merchants, while the latter do not. The
proposed tax will do away with this inequality and render justice to merchants and
firms of all nationalities who are in legitimate business here, paying taxes and giving
employment to a large number of people. (113 Phil. 571)

In Borja, petitioner Consuelo P. Borja, a grantee of a legislative franchise, also claimed to be free
from paying the compensating tax imposed on the materials and equipment such as wires,
insulators, transformers, conductors, etc. imported from Japan, on the basis of Sec. 10 of Act No.
3636 (Model Electric Light and Power Franchise Act) which has been incorporated by reference in
franchise under Act No. 3810. Section 10 provides:

The grantee shall pay the same taxes as are now or may "hereafter be required by
law from other individuals, co-partnerships, private, public or quasi-public
associations, corporations, or joint-stock companies, on his (its) real estate,
buildings, plants, machinery; and other personal property, except property section. In
consideration of the franchise and rights hereby granted, the grantee shall pay into
the municipal treasury of the (of each) municipality in which it is supplying electric
current to the public under this franchise, a tax equal to two per centum of the gross
earnings from electric current sold or supplied under this franchise in said (each)
municipality. Said tax shall be due and payable quarterly and shall be in lieu of any
and all taxes of any kind, nature or description levied, established, or collected by
any authority whatsoever, municipal, provincial or insular, now or in the future, on its
poles, wires, insulators, switches; transformers and structures, installations,
conductors, and accessories, placed in and over and under all public property,
including public streets and highways, provincial roads, bridges and public squares,
and on its franchise, rights, privileges, receipts, revenues and profits, from which
taxes the grantee is hereby expressly exempted. (113 Phil. 569-570)

The Court applying the ruling in Panay Electric denied the exemption with the added statement that

Considering, therefore, the fact that section 190 of the Tax Code is a sort of an
equalizer, to place casual importers, who are not merchants on equal footing with
established merchants who pay sales tax on articles imported by them ... We may
conclude that it was not the intention of the law to exempt the payment of
compensating tax on the personal properties in question. The principle and legal
philosophy underlying the imposition of compensating tax, as enunciated in the
above case (referring to Borja), are fundamentally correct, and no plausible reason is
advanced for their non-application to the case at bar. (p. 572, ibid.)

Petitioner claims that there exists a difference between paragraph 9 of its franchise and the
corresponding provisions of the franchise of Panay Electric and Borja in that in the latter, unlike in
the former, there is no statement that the grantee is exempt from "all taxes of whatsoever nature and
whatsoever authority." In addition, petitioner points out, the franchise of Panay
Electric and Borja contains a qualifying phrase, to wit: "placed in and over the public streets,
avenues, roads, thoroughfares, etc."

A comparison of the pertinent provisions mentioned by petitioner and which are quoted in the
preceding pages reveals no substantial or fundamental distinction as to remove petitioner
MERALCO from the ambit of the Panay Electric and Borja ruling. There may be differences in the
phraseology used, but the intent to exempt the grantee from the payment only of property tax on its
poles, wires, transformers, and insulators is evidently common to the three; withal, in all the
franchises in question there is no specific mention of exemption of the grantee from the payment of
compensating tax.

Petitioner disputes, however, the applicability of the stare decisis principle to its case claiming that
this Court should not blindly follow the doctrine of Panay Electric and Borja, and that in Philippine
Trust Co. et al. vs. Mitchell, 59 Phil. 30, 36, the Court had occasion to state: ,the rule of stare
decisis is entitled to respect. Stability in the law, particularly in the business field, is desirable. But
idolatrous reverence for precedent, simply as precedent, no longer rules. More important than
anything else is that the court should be right." (pp. 18-19, petitioner's brief, L-29987)

But what possible ground can there be for deviating from the decisions of this Court in these two
cases? A doctrine buttressed by the law, reason, and logic is not to be simply brushed aside to suit
the convenience of a particular party or interest or to avoid hardship to one. As We view this legal
problem, no justification can be found for giving petitioner herein preferential treatment by reading
into its franchise an exemption from a particular kind of tax which is not there. If it had been the
legislative intent to exempt MERALCO from paying a tax on the use of imported equipments, the
legislative body could have easily done so by expanding the provision of paragraph 9 and adding to
the exemption such words as "compensating tax" or "purchases from abroad for use in its business,"
and the like. We cannot ignore the principle that express mention in a statute of one exemption
precludes reading others into it. (Hoard vs. Sears, Roebuck & Co., 122 Conn. 185, 193, 188 A. 269)

On this point, the Government correctly argues that the provision in petitioner's franchise that the
payment of the percentage tax on the gross earnings shall be "in lieu of all taxes and assessments
of whatsoever nature, and whatsoever authority" is not to be given a literal meaning as to preclude
the imposition of the compensating tax in this particular case, and cites for its authority the Opinion
of the Supreme Court of Connecticut rendered in Connecticut Light & Power Co., et al. vs. Walsh,
1948, which involved the construction of a statute imposing a sales and use tax, and which inter
alia held:

The broad statement that the tax upon the gross earning of telephone companies
shall be "in lieu of all other taxation" upon them is not necessarily to be given a literal
meaning. "In construing the act it is our duty to seek the real intent of the legislature,
even though by so doing we may limit the literal meaning of the broad language
used." Greenwich Trust Co. v. Tyson, 129 Conn. 211, 222, 27 A. 2d 166, 172. It is not
reasonable to assume that the General Assembly intended by the provisions we
have quoted that the tax on gross earnings should take the place of taxes of a kind
not then anywhere imposed and entire outside its knowledge. ... ." (57 A.R., 2d S, pp.
129, 133-134, emphasis supplied)

In 1902 when Act 484 of the Philippine Commission was enacted, "compensating tax' was certainly
not generally known or in use, hence, to paraphrase the above-mentioned Connecticut decision, the
Court cannot assume that the Philippine Commission in providing that the gross earnings taxes
imposed on the grantee of the electric light franchise shall be in lieu of all taxes and assessments,
meant to include impositions in the nature of a compensating tax which came into use in this country
only upon the enactment of Commonwealth Act 466 in 1939.

5. One last argument of petitioner to support its cause is that just as a new and necessary industry
was held to be exempt from paying a compensating tax on its imports under the tax exemption
provision of Republic Act 901, so should MERALCO be exempt from such a tax under the general
clause in its franchise, to wit: "... in lieu of all taxes and assessments of whatsoever nature and
whatsoever authority upon poles, wires, etc."
We agree with the court below that there can be no analogy between MERALCO and what is
considered as a new and necessary industry under Republic Act 35 now superseded by Republic
Act 901.

The rationale of Republic Act 901 is "to encourage the establishment or exploitation of new and
necessary industries to promote the economic growth of the country," and because "an entrepreneur
engaging in a new and necessary industry faces uncertainty and assumes a risk bigger than one
engaging in a venture already known and developed ... the law grants him tax exemption — to
lighten onerous financial burdens and reduce losses." (Marcelo Steel Corporation vs. Collector of
Internal Revenue, 109 Phil. 921, 926) This intendment of the legislature in enacting Republic Act 901
is not the motivation behind the tax exemption clause found in petitioner MERALCO's franchise;
consequently, there can be no analogy between the two.

IN VIEW OF THE FOREGOING, We find no merit in these Petitions for Review and We hereby
AFFIRM the decision of the Court of Tax Appeals in these two cases, with costs against petitioner in
both instances.

So Ordered

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. A. D. GUERRERO, Special Administrator, in

substitution of NATHANIEL I. GUNN, as Administrator of the Estate of the late PAUL I.
GUNN, Respondent.

Solicitor General for Petitioner.

A. E. Dacanay for Respondent.

SYLLABUS

1. CONSTITUTIONAL LAW; ORDINANCE, BACKGROUND OF. — Upon liberation in 1945 when the ravages of
war left thePhilippines economically prostrate and helpless, the American Congress enacted, by way of aid,
the Philippine Trade Act of1946, providing, in its Sec. 341, parity rights with respect to "the disposition,
exploitation, development and utilization" of all the natural resources of the Philippines as well as the
operation of public utilities. This was embodied in an Executive Agreement of July 4, 1946, signed by the
President of the Philippines and the plenipotentiary of the President of the United States, and later appended
to the Philippine Constitution as Ordinance.

2. ID.; ORDINANCE CONSTRUED. — What it promises must be fulfilled. There must be recognition of the
right of the "citizens of the United States in the same manner as to, and under the same conditions imposed
upon, citizens of the Philippines, or corporations or associations owned or controlledby citizens of the
Philippines," in the disposition, exploitation,development and utilization of all the natural resources of
thePhilippines, and the operation of public utilities. To that grant,the Philippines is committed. Its terms are
to be respected. Anything further than its categorical wording would not bewarranted. Nothing less would
suffice, but anything more would not be justified. What was not included, whether by purpose
orinadvertence, cannot be judicially supplied.

3. ID.; SCOPE OF ORDINANCE. — The Ordinance, which is transitory in character providing merely for the
exigencies of a few years, is designed for a limited period to allow what the Constitution prohibits. During its
effectivity there should be no thought of whittling down the grant thus freely made. Nonetheless, it should
not be given an interpretation at war with the plain and explicit command of what is to continue far into the
future that would trench further on the plain constitutional mandate to limit the operation of public utilities
to Filipino hands, for the Constitution is intended to endure through a long lapse of ages and state principles
for an expanding future.

4. ID.; TAX EXEMPTION RULE. — Exemption, being obnoxious to taxation, is not favored and never
presumed; if at all, it must be categorically and unmistakably expressed in terms that admit of no doubt, yet
such exempting provision must be interpreted in strictissimi juris against the taxpayer and liberally in favor
of the taxing authority. The silence on tax exemption in the Ordinance being patently evident, without any
franchise to supply that omission, affords no warrant for the claim here made.

5. ID.; TAXATION; INTERNAL REVENUE CODE; TAX REFUND;COMITY OF NATIONS; CASE AT BAR. — Sec.
142 of the National Internal Revenue Code allowing Filipinos a refund of 50% of the specific tax paid on
aviation oil, cannot be availed of by aliens in the absence of showing that their country grants similar
exemption to Filipino citizens; and where no such evidence was presented, the case should be remanded to
the court a quo for further proceedings.

DECISION

FERNANDO, J.:

A novel question, one of importance and significance, is before this Court in this petition for the review of a
decision of the Court of Tax Appeals. For the first time, the Ordinance appended to the Constitution calls for
interpretation, having been invoked to justify a claim for refund of taxes by the estate of an American
national, who in his life-time was engaged in the air transportation business. More specifically, the issue is
whether or not Section 142 of the National Internal Revenue Code allowing Filipinos a refund of 50
percentum of the specific tax paid on aviation oil, could be availed of by citizens of the United States and all
forms of business enterprises owned or controlled directly or indirectly by them in view of their privilege
under the Ordinance to operate public utilities "in the same manner as to, and under the same conditions
imposed upon, citizens of the Philippines or corporations or associations owned or controlled by citizens of
the Philippines." 1

The Commissioner of Internal Revenue, now petitioner before this Court, denied the claim for refund in the
sum of P2,441.93 filed by the administrator of the estate of Paul I. Gunn, thereafter substituted by the
present respondent A. D. Guerrero as special administrator under the above section of the National Internal
Revenue Code. 2 The deceased operated an air transportation business under the business name and style
of Philippine Aviation Development; his estate, it was claimed, "was entitled to the same rights and
privileges as Filipino citizens operating public utilities including privileges in the matter of taxation." The
Commissioner of Internal Revenue disagreed, ruling that such partial exemption from the gasoline tax was
not included under the terms of the Ordinance and that in accordance with the statute, to be entitled to its
benefits, there must be a showing that the United States of which the deceased was a citizen granted a
similar exemption to Filipinos. The refund as already noted was denied. The matter was brought to the Court
of Tax Appeals on a stipulation of facts, no additional evidence being introduced. Viewing the Ordinance
differently, it "ordered the petitioner to refund to the respondent the sum of P2,441.93 representing 50% of
the specific taxes paid on 61,048.19 liters of gasoline actually used in aviation during the period from
October 3, 1956 up to May 31, 1957." Not satisfied with the above decision, petitioner appealed.
We sustain the Commissioner of Internal Revenue; accordingly, the Court of Tax Appeals is reversed. To the
extent that a refund is allowable, there is in reality a tax exemption. The rule applied with undeviating
rigidity in the Philippines is that for a tax exemption to exist, it must be so categorically declared in words
that admit of no doubt. No such language may be found in the Ordinance. It furnishes no support, whether
express or implied, to the claim of respondent Administrator for a refund.

From 1906, in Catholic Church v. Hastings 3 to 1966, in Esso Standard Eastern, Inc. v. Acting Commissioner
of Customs, 4 it has been the constant and uniform holding that exemption from taxation is not favored and
is never presumed, so that if granted it must be strictly construed against the taxpayer. Affirmatively put,
the law frowns on exemption from taxation, hence, an exempting provision should be construed strictissimi
juris. 5 The state of the law on the subject was aptly summarized in the Esso Standard Eastern, Inc. by
Justice Sanchez thus: "The drive of petitioner’s argument is that marketing of its gasoline product ‘is
corollary to or incidental to its industrial operations.’ But this contention runs smack against the familiar
rules that exemption from taxation is not favored, and that exemptions in tax statutes are never presumed.
Which are but statements in adherence to the ancient rule that exemptions from taxation are construed in
strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Tested by this precept,
we cannot indulge in expansive construction and write into the law an exemption not therein set forth.
Rather, we go by the reasonable assumption that where the State has granted in express terms certain
exemptions, those are the exemptions to be considered, and no more . . . ." cralaw virtua1aw library

In addition to Justice Tracey, who first spoke for this Court in the Hastings case in announcing "the cardinal
rule of American jurisprudence that exemption from taxation not being favored," and therefore "must be
strictly construed" against the taxpayer, two other noted American jurists, Moreland and Street, who
likewise served this Court with distinction, reiterated the doctrine in terms even more emphatic. According
to Justice Moreland: "Even though the complaint in this regard were well founded, it would have little
bearing on the result of the litigation when we take into consideration the universal rule that he who claims
an exemption from his share of the common burden of taxation must justify his claim by showing that the
Legislature intended to exempt him by words too plain to be mistaken." 6 From Justice Street: "Exemptions
from taxation are highly disfavored, so much so that they may almost be said to be odious to the law. He
who claims an exemption must be able to point to some positive provision of law creating the right. It
cannot be allowed to exist upon a vague implication such as is supposed to arise in this case from the
omission from Act No. 1654 of any reference to liability for tax. The books are full of very strong expressions
on this point." 7

At the time then when the Ordinance took effect in April, 1947, the strict rule against tax exemption was
undisputed and indisputable. Such being the case, it would be a plain departure from the terms of the
Ordinance to predicate a tax exemption where none was intended. Wellsettled is the principle." . . that a
constitutional provision must be presumed to have been framed and adopted in the light and understanding
of prior and existing laws and with reference to them.’Courts are bound to presume that the people adopting
a constitution are familiar with the previous and existing laws upon the subjects to which its provisions
relate, and upon which they express their judgment and opinion in its adoption’." 8

Respect for and deference to doctrines of such undeniable force and cogency preclude an affirmance of the
decision of the Court of Tax Appeals. This is not to say that the scope of the Ordinance is to be restricted or
confined. What it promises must be fulfilled. There must be recognition of the right of the "citizens of the
United States and to all forms of business enterprise owned or controlled, directly or indirectly, by citizens of
the United States" to operate public utilities "in the same manner as to, and under the same conditions
imposed upon, citizens of the Philippines or corporations or associations owned or controlled by citizens of
the Philippines."
cralaw virtua1aw library

If the language of the Ordinance applies to tax refund or exemption, then the Court of Tax Appeals should
be sustained. It does not, however. Its terms are clear. Standing alone, without any franchise to supply that
omission, it affords no warrant for the claim here made. While good faith, no less than adherence to the
categorical wording of the Ordinance, requires that all the rights and privileges thus granted to Americans
and business enterprises owned and controlled by them be respected, anything further would not be
warranted. Nothing less will suffice, but anything more is not justified.

This conclusion has reinforcement that comes to it from another avenue of approach, the historical
background of the Ordinance. In public law questions, history many a time holds the key that unlocks the
door to understanding. Justice Tuason would thus have courts "look to the history of the times, examine the
state of things existing when the Constitution was framed and adopted, . . . and interpret it in the light of
the law then in operation." 9 Justice Laurel earlier noted that while historical discussion is not decisive, it is
valuable. 10 A brief resume then of the events that led to its being appended to the Constitution will not be
inappropriate.

Early in 1945, liberation primarily through the efforts of the American forces under General MacArthur,
assisted by Filipino guerrillas, heralded the dawn, awaited so long and so anxiously, ending the dark night of
the Japanese Occupation, which was only partly mitigated by a show of cooperation on the part of some
Filipino leaders of stature and eminence. All throughout those years, the Japanese Army in the Philippines
enforced repressive measures, severe in character. What was even more regrettable, in the last few weeks,
the few remaining Japanese troops in Manila and suburbs made a suicidal stand. The scorched earth policy
was followed. Guerrilla suspects paid dearly for their imaginary sins. There were recorded cases, not few in
number, or the old and infirm, even those of tender years, not being spared. The Americans shelled
Japanese positions, unfortunately not always with precision, as would have been unavoidable perhaps in any
case. The lot of the helpless civilians, already suffering from acts born out of desperation of a cornered prey,
became even more unenviable. They were caught in the cross-fire.

The toll in the destruction of the property and the loss of lives was heavy; the price the Filipinos paid was
high. The feeling then, and even now for that matter, was that it was worth it. For life during the period of
the Japanese Occupation had become unbearable. There was an intolerable burden on the spirit and the
kind of man with all civil liberties wantonly disregarded. There was likewise a well-nigh insupportable
affliction on his health and physical well-being, with food, what there was of it, difficult to locate and beyond
the means of even the middle-income groups. Medicine was equally scarce, what was available commanding
prices unusually high. A considerable portion of the population were dressed in rags and lived under the
most pitiable conditions in houses that had seen much better days. Moreover in a garrison state with the
Japanese kempetai, 11 and the contemptible spies and informers, there was ever present that fear of the
morrow, the sense of living at the edge of an impending doom.

It was fortunate that the Japanese Occupation ended when it did. Liberation was hailed by all, but the
problems faced by the legitimate government were awesome in their immensity. The Philippine treasury was
bankrupt and her economy prostrate. There were no dollar-earning export crops to speak of; commercial
operations were paralyzed; and her industries were unable to produce with mills, factories and plants either
destroyed or their machineries obsolete or dismantled. It was a desolate and tragic sight that greeted the
victorious American and Filipino troops. Manila, particularly that portion south of the Pasig, lay in ruins, its
public edifices and business buildings lying in a heap of rubble and numberless houses razed to the ground.
It was in fact, next to Warsaw, the most devastated city in the expert opinion of the then General
Eisenhower. There was thus a clear need of help from the United States. American aid was forthcoming but
on terms proposed by her government and later on accepted by the Philippines.

One such condition expressly set forth in the Philippine Trade Act of 1946 passed by the Congress of the
United States was that: "The disposition, exploitation, development, and utilization of all agricultural,
timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all
forces and sources of potential energy, and other natural resources of the Philippines, and the operation of
public utilities, shall, if open to any person, be open to citizens of the United States and to all forms of
business enterprises owned or controlled directly or indirectly, by United States citizens.’’ 12

The above was embodied in an Executive Agreement concluded on July 4, 1946, the agreement being signed
by the President of the Republic of the Philippines and the plenipotentiary of the President of the United
States. The Constitution being in the way, both the exploitation of natural resources and the operation of
public utilities having been reserved for Filipinos, there was a need for an amendment. Such an amendment
was only forthcoming. It took the form of the Ordinance now under consideration, which took effect on April
9, 1947.

The Ordinance thus came into being at a time when the liberation of the Philippines had elicited a vast
reservoir of goodwill for the United States, one that has lasted to this day notwithstanding irritants that mar
ever so often the relationship even among the most friendly of nations. Her prestige was never so high. The
Philippines after hearing opposing views on the matter conceded parity rights. She adopted the Ordinance.
To that grant, she is committed. Its terms are to be respected. In view of the equally fundamental postulate
that legal concepts imperatively calling for application cannot be ignored, however, it follows that tax
exemption to Americans or to business owned or controlled directly or indirectly by American citizens, based
solely on the language of the Ordinance, cannot be allowed. There is nothing in its history that calls for a
different view. Had the parties been of a different mind, they would have employed words indicative of such
intention. What was not there included, whether by purpose or inadvertence, cannot be judicially supplied.
One final consideration. The Ordinance is designed for a limited period to allow what the Constitution
prohibits; Americans may operate public utilities. During its effectivity, there should be no thought of
whittling down the grant thus freely made. Nonetheless, being of a limited duration, it should not be given
an interpretation that would trench further on the plain constitutional mandate to limit the operation of
public utilities to Filipino hands. That is to show fealty to the fundamental law, which, in the language of
Story "was not intended to provide merely for the exigencies of a few years" unlike the Ordinance "but was
to endure through a long lapse of ages, the events of which were locked up in the inscrutable purposes of
Providence." 13 This is merely to emphasize that the Constitution unlike an ordinance appended to it, to
borrow from Cardozo "states or ought to state not rules for the passing hour, but principles for an expanding
future.’’ 14 That is transitory in character then should not be given an interpretation at war with the plain
and explicit command of what is to continue far into the future, unless there be some other principle of
acknowledged primacy that compels the contrary. 15

It would seem to follow from all the foregoing that the decision of the Court of Tax Appeals enlarged the
scope and operation of the Ordinance. It failed unfortunately to abide by what the controlling precedents
require, namely, that tax exemption is not to be presumed and that if granted, it is to be most strictly
construed. No such grant was apparent on the face of the Ordinance. No such grant could be implied from
its history, much less from its transitory character. The Court of Tax Appeals went too far. That cannot be
done.

WHEREFORE, the decision of the Court of Tax Appeals is reversed and the case is remanded to it, to grant
respondent Administrator the opportunity of proving whether the estate could claim the benefits of Section
142 of the National Internal Revenue Code, allowing refund to citizens of foreign countries on a showing of
reciprocity. With costs.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
SOLIDBANK CORPORATION, respondent.

DECISION

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,
1

2000 Decision and the May 8, 2001 Resolution of the Court of Appeals (CA) in CA-GR SP No.
2 3 4

54599. The 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
11

the 20% FWT forms 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 this
14

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
15

to 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
16

within twenty (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
18 19

on 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
20

conditions as provided 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
24

constructive. Both parties herein 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
26

constructive receipt of the interest on deposits and yield on deposit substitutes. Respondent,
27

however, claims that even if there is, it is Section 4(e) of RR 12-80 that nevertheless governs the
28

situation.
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
29 30

Code, as amended.

‘(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
34

argues 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
35

tax burden 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,
36

objectives, remedies and 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, the regulation must (1) be germane to the object and purpose of the
38

law; (2) not contradict, but conform to, the standards the law prescribes; and (3) be issued for the
39 40

sole purpose of carrying into effect the general 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
42

intended repeal on a substantial 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
45

implied repeal of an earlier RR by the mere 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
47

earlier regulation remain in force, while its omitted portions are deemed repealed. An exception
48

therein that is amended by its 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
50

exerted to make all regulations stand -- and a later rule will 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
55

pay a tax may 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"
57

shall not 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
59

regard, 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
64 65

therefore the total receipts before any deduction for the expenses of management. Webster’s New
66 67

International 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
68

constitutional, 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
70 71

interpretation has been 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
73

be 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
74

had been 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 76

is ownership that determines whether interest income forms part of taxable gross receipts. Being 77

originally owned by these 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
80

the lawmaking body the intent to obey the constitutional mandate, as long as its enactments fairly
admit of such construction. In fact, "x x x no tax can be levied without express authority of law, but
81

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
83

equivalent to the payment of 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
84

on the objects to which it is applicable to the utmost extent as the government may choose. Being 85

an incident of sovereignty, such power is coextensive with that to which it is an incident. The interest
86

on deposits and yield 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
88

place 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
89

business, the imposition must 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
93

favor doubts will be resolved. No such doubts exist with respect to the Tax Code, because the
94

income and 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.
96

Development Bank of the 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 99

that the literal 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 103

Manila 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
104

fact will ordinarily not be reviewed, absent any showing of gross error or abuse on its part. Such 105

findings are binding on the Court 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
108

to be 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 creating that right.
109 110

The right of taxation will not be surrendered, except in words too plain to be mistaken. The reason is 1âwphi1

that 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 112

certainly 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 113

a well-founded doubt is fatal to the claim. In the instant case, respondent has not been able to
114

satisfactorily show that its FWT on interest 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
117

the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate
118

taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the
119

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 property tax. It is not an income tax, unlike the FWT. In fact, we have already
121 122

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
123 124

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%
125

GRT is 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. 155491 : July 21, 2009]

SMART COMMUNICATIONS, INC., Petitioner, v. THE CITY OF

DAVAO, represented herein by its Mayor Hon. RODRIGO
DUTERTE, and the SANGGUNIANG PANLUNSOD OF DAVAO
CITY, Respondents.

RESOLUTION

NACHURA, J.:

Before the Court is a Motion for Reconsideration1 filed by Smart

Communications, Inc. (Smart) of the Decision2 of the Court dated
September 16, 2008, denying its appeal of the Decision and Order
of the Regional Trial Court (RTC) of Davao City, dated July 19, 2002
and September 26, 2002, respectively.

Briefly, the factual antecedents are as follows:

On February 18, 2002, Smart filed a special civil action for

declaratory relief3 for the ascertainment of its rights and obligations
under the Tax Code of the City of Davao, which imposes a franchise
tax on businesses enjoying a franchise within the territorial
jurisdiction of Davao. Smart avers that its telecenter in Davao City
is exempt from payment of franchise tax to the City.

On July 19, 2002, the RTC rendered a Decision denying the petition.
Smart filed a motion for reconsideration, which was denied by the
trial court in an Order dated September 26, 2002. Smart filed an
appeal before this Court, but the same was denied in a decision
dated September 16, 2008. Hence, the instant motion for
reconsideration raising the following grounds: (1) the "in lieu of all
taxes" clause in Smart's franchise, Republic Act No. 7294 (RA
7294), covers local taxes; the rule of strict construction against tax
exemptions is not applicable; (2) the "in lieu of all taxes" clause is
not rendered ineffective by the Expanded VAT Law; (3) Section 23
of Republic Act No. 79254 (RA 7925) includes a tax exemption; and
(4) the imposition of a local franchise tax on Smart would violate
the constitutional prohibition against impairment of the obligation of
contracts.

Section 9 of RA 7294 and Section 23 of RA 7925 are once again put

in issue. Section 9 of Smart's legislative franchise contains the
contentious "in lieu of all taxes" clause. The Section reads:

Section 9. Tax provisions. - The grantee, its successors or assigns

shall be liable to pay the same taxes on their real estate buildings
and personal property, exclusive of this franchise, as other persons
or corporations which are now or hereafter may be required by law
to pay. In addition thereto, the grantee, its successors or assigns
shall pay a franchise tax equivalent to three percent (3%) of all
gross receipts of the business transacted under this franchise by the
grantee, its successors or assigns and the said percentage shall
be in lieu of all taxes on this franchise or earnings thereof: Provided,
That the grantee, its successors or assigns shall continue to be
liable for income taxes payable under Title II of the National
Internal Revenue Code pursuant to Section 2 of Executive Order No.
72 unless the latter enactment is amended or repealed, in which
case the amendment or repeal shall be applicable thereto.

xxx5

Section 23 of RA 7925, otherwise known as the most favored

treatment clause or equality clause, contains the word "exemption,"
viz.:

SEC. 23. Equality of Treatment in the Telecommunications Industry

- Any advantage, favor, privilege, exemption, or immunity granted
under existing franchises, or may hereafter be granted, shall ipso
facto become part of previously granted telecommunications
franchises and shall be accorded immediately and unconditionally to
the grantees of such franchises: Provided, however, That the
foregoing shall neither apply to nor affect provisions of
telecommunications franchises concerning territory covered by the
franchise, the life span of the franchise, or the type of the service
authorized by the franchise.6

A review of the recent decisions of the Court on the matter of

exemptions from local franchise tax and the interpretation of the
word "exemption" found in Section 23 of RA 7925 is imperative in
order to resolve this issue once and for all.

In Digital Telecommunications Philippines, Inc. (Digitel) v. Province

of Pangasinan,7 Digitel used as an argument the "in lieu of all taxes"
clauses/provisos found in the legislative franchises of Globe,8 Smart
and Bell,9 vis - à-vis Section 23 of RA 7925, in order to claim
exemption from the payment of local franchise tax. Digitel claimed,
just like the petitioner in this case, that it was exempt from the
payment of any other taxes except the national franchise and
income taxes. Digitel alleged that Smart was exempted from the
payment of local franchise tax.

However, it failed to substantiate its allegation, and, thus, the Court

denied Digitel's claim for exemption from provincial franchise tax.
Cited was the ruling of the Court in PLDT v. City of Davao,10 wherein
the Court, speaking through Mr. Justice Vicente V. Mendoza, held
that in approving Section 23 of RA No. 7925, Congress did not
intend it to operate as a blanket tax exemption to all
telecommunications entities. Section 23 cannot be considered as
having amended PLDT's franchise so as to entitle it to exemption
from the imposition of local franchise taxes. The Court further held
that tax exemptions are highly disfavored and that a tax exemption
must be expressed in the statute in clear language that leaves no
doubt of the intention of the legislature to grant such exemption.
And, even in the instances when it is granted, the exemption must
be interpreted in strictissimi juris against the taxpayer and liberally
in favor of the taxing authority.

The Court also clarified the meaning of the word "exemption" in

Section 23 of RA 7925: that the word "exemption" as used in the
statute refers or pertains merely to an exemption from regulatory or
reporting requirements of the Department of Transportation and
Communication or the National Transmission Corporation and not to
an exemption from the grantee's tax liability.
In Philippine Long Distance Telephone Company (PLDT) v. Province
of Laguna,11 PLDT was a holder of a legislative franchise under Act
No. 3436, as amended. On August 24, 1991, the terms and
conditions of its franchise were consolidated under Republic Act No.
7082, Section 12 of which embodies the so-called "in-lieu-of-all
taxes" clause. Under the said Section, PLDT shall pay a franchise
tax equivalent to three percent (3%) of all its gross receipts, which
franchise tax shall be "in lieu of all taxes." The issue that the Court
had to resolve was whether PLDT was liable to pay franchise tax to
the Province of Laguna in view of the "in lieu of all taxes" clause in
its franchise and Section 23 of RA 7925. ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Applying the rule of strict construction of laws granting tax

exemptions and the rule that doubts are resolved in favor of
municipal corporations in interpreting statutory provisions on
municipal taxing powers, the Court held that Section 23 of RA 7925
could not be considered as having amended petitioner's franchise so
as to entitle it to exemption from the imposition of local franchise
taxes.

In ruling against the claim of PLDT, the Court cited the previous
decisions in PLDT v. City of Davao12 and PLDT v. City of Bacolod,13 in
denying the claim for exemption from the payment of local franchise
tax.

In sum, the aforecited jurisprudence suggests that aside from the

national franchise tax, the franchisee is still liable to pay the local
franchise tax, unless it is expressly and unequivocally exempted
from the payment thereof under its legislative franchise. The "in lieu
of all taxes" clause in a legislative franchise should categorically
state that the exemption applies to both local and national taxes;
otherwise, the exemption claimed should be strictly construed
against the taxpayer and liberally in favor of the taxing authority.

Republic Act No. 7716, otherwise known as the "Expanded VAT

Law," did not remove or abolish the payment of local franchise tax.
It merely replaced the national franchise tax that was previously
paid by telecommunications franchise holders and in its stead
imposed a ten percent (10%) VAT in accordance with Section 108 of
the Tax Code. VAT replaced the national franchise tax, but it did not
prohibit nor abolish the imposition of local franchise tax by cities or
municipaties.

The power to tax by local government units emanates from Section

5, Article X of the Constitution which empowers them to create their
own sources of revenue s and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may
provide. The imposition of local franchise tax is not inconsistent with
the advent of the VAT, which renders functus officio the franchise
tax paid to the national government. VAT inures to the benefit of
the national government, while a local franchise tax is a revenue of
the local government unit.

WHEREFORE, the motion for reconsideration is DENIED, and this

denial is final.

SO ORDERED.

G.R. No. 203514

COMMISSIONER OF INTERNAL REVENUE, Petitioner

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

DECISION

DEL CASTILLO, J.:

The doctrine of stare decisis dictates that "absent any powerful countervailing considerations, like
cases ought to be decided alike." 1
This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the May 9, 2012
2

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

Case No. 716.

Factual Antecedents

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

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

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

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

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

amended, it is exempt from paying income tax.

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

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

For Taxable Year 2005:

ASSESSMENT NO. QA-07-000096

PARTICULARS
AMOUNT

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

For Taxable Year 2006:

ASSESSMENT NO. QA-07-000097

PARTICULARS [AMOUNT]

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

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

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

No. 7789.

Ruling of the Court of Tax Appeals Division

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

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

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly,
Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097, assessing petitioner for
alleged deficiency income taxes for the taxable years 2005 and 2006, respectively, are hereby
CANCELLED and SET ASIDE.
SO ORDERED. 14

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

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

Ruling of the Court of Tax Appeals En Banc

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

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

Issue

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

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

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

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center,
Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income
tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals
are AFFIRMED.

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

SO ORDERED. 19

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

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

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

CIR opposed the motion claiming that the payment confirmation submitted by SLMC is not a
competent proof of payment as it is a mere photocopy and does not even indicate the
quarter/sand/or year/s said payment covers. 22
In reply, SLMC submitted a copy of the Certification issued by the Large Taxpayers Service of the
23 24

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

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

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

Thereafter, the parties submitted their respective memorandum.

CIR 's Arguments

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

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

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

SLMC's Arguments

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

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

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

with the ruling of the Court in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
St. Luke's Medical Center, Inc.), it is not liable for compromise penalties.
36 37

In any case, SLMC insists that the instant case should be dismissed in view of its payment of the
basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to the BIR on April 30, 2013. 38

Our Ruling

SLMC is liable for income tax under

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

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

ruled that:

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

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

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

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

To be a charitable institution, however, an organization must meet the substantive test of charity
in Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities already assume a
part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of
taxes by the government is compensated by its relief from doing public works which would have
been funded by appropriations from the Treasury.

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

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution
for the purpose of exemption from real property taxes. This ruling uses the same premise
as Hospital de San Juan and Jesus Sacred Heart College which says that receiving income from
paying patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether outpatient, or confined in
the hospital, or receives subsidies from the government, so long as the money received is devoted
or used altogether to the charitable object which it is intended to achieve; and no money inures to
the private benefit of the persons managing or operating the institution.

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

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

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

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

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

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

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
'no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person.' The use of lands, buildings and improvements of the institution is but
a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is
not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property 'actually, directly and exclusively'
for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be 'organized and operated exclusively' for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be 'operated
exclusively' for social welfare.

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

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

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

Thus, even if the charitable institution must be 'organized and operated exclusively' for charitable
purposes, it is nevertheless allowed to engage in 'activities conducted for profit' without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the 'income of whatever
kind and character' of a charitable institution 'from any of its activities conducted for profit, regardless
of the disposition made of such income, shall be subject to tax.' Prior to the introduction of Section
27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate under
Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

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

x x xx

In Lung Center, this Court declared:

'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as enjoying a
privilege exclusively.' . . . The words 'dominant use' or 'principal use' cannot be substituted for the
words 'used exclusively' without doing violence to the Constitution and thelaw. Solely is synonymous
with exclusively.
The Court cannot expand the meaning of the words 'operated exclusively' without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any
other way. There is a 'purpose to make profit over and above the cost' of services. The ₱l.73 billion
total revenues from paying patients is not even incidental to St. Luke's charity expenditure of
₱2l8,187,498 for non-paying patients.

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

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

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

de dicha universidad?

x x x x x x xxx

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

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posicion social economica, lo que se paga por estos enfermos debe estar sujeto a 'income
tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any
activity conducted for profit.'

The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has
1awp++i1

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

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

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

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

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

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

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

insofar as its revenues from paying patients are concerned.

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

SLMC is not liable for Compromise

Penalty.

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

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

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

The Petition is rendered moot by the

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

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

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

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

WHEREFORE, the Petition is hereby DISMISSED.

SO ORDERED.

G.R. No. 216161, August 09, 2017

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PHILIPPINE ALUMINUM WHEELS,

INC., Respondent.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review on certiorari1 assailing the 19 May 2014 Decision2 and the 5 January
2015 Resolution3 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 994.

The CTA En Banc affirmed the Decision of the CTA First Division ordering the cancellation and withdrawal of
 the deficiency tax assessments issued by the Commissioner of Internal Revenue (CIR) against Philippine
Aluminum Wheels, Inc. (respondent).

The Facts

Respondent is a corporation organized and existing under Philippine laws which engages in the manufacture,
production, sale, and distribution of automotive parts and accessories. On 16 December 2003, the Bureau of
Internal Revenue (BIR) issued a Preliminary Assessment Notice (PAN) against respondent covering
deficiency taxes for the taxable year 2001.4 On 28 March 2004, the BIR issued a Final Assessment Notice
(FAN) against respondent in the amount of P32,100,613.42.5 On 23 June 2004, respondent requested for
reconsideration of the FAN issued by the BIR. On 8 November 2006, the BIR issued a Final Decision on
Disputed Assessment (FDDA) and demanded full payment of the deficiency tax assessment from
respondent.6 On 12 April 2007, the FDDA was served through registered mail.

On 19 July 2007, respondent filed with the BIR an application for the abatement of its tax liabilities under
Revenue Regulations No. 13-2001 for the taxable year 2001. 7 In a letter dated 12 September 2007,8 the BIR
denied respondent's application for tax abatement on the ground that the FDDA was already issued by the
BIR and that the FDDA had become final and executory due to the failure of the respondent to appeal the
FDDA with the CTA. The BIR contended that the FDDA had been sent through registered mail on 12 April
2007 and that the FDDA had become final, executory, and demandable because of the failure of the
respondent to appeal the FDDA with the CTA within thirty (30) days from receipt of the FDDA.

In a letter dated 19 September 2007,9 respondent informed the BIR that it already paid its tax deficiency on
withholding tax amounting to P736,726.89 through the Electronic Filing and Payment System of the BIR and
that it was also in the process of availing of the Tax Amnesty Program under Republic Act No. 9480 (RA
9480) as implemented by Revenue Memorandum Circular No. 55-2007 to settle its deficiency tax
assessment for the taxable year 2001. On 21 September 2007, respondent complied with the requirements
of RA 9480 which include: the filing of a Notice of Availment, Tax Amnesty Return and Payment Form, and
remitting the tax payment. In a letter dated 29 January 2008, the BIR denied respondent's request and
ordered respondent to pay the deficiency tax assessment amounting to P29,108,767.63. 10

In a second letter dated 16 July 2008, the BIR reiterated that the FDDA had become final and executory for
the failure of the respondent to appeal the FDDA with the CTA within the prescribed period of thirty (30)
days. The BIR demanded the full payment of the tax assessment and contended that the respondent's
availment of the tax amnesty under RA 9480 had no effect on the assessment due to the finality of the
FDDA prior to respondent's tax amnesty availment. On 1 August 2008, respondent filed a Petition for Review
with the CTA assailing the letter of the BIR dated 16 July 2008.

The Decision of the CTA First Division

On 12 November 2012, the CTA granted respondent's Petition for Review and set aside the assessment in
view of respondent's availment of a tax amnesty under RA 9480. The CTA First Division held that RA 9480
covers all national internal revenue taxes for the taxable year 2005 and prior years, with or without
assessments duly issued, that have remained unpaid as of 31 December 2005. 11 The CTA First Division ruled
that respondent complied with all the requirements of RA 9480 including the payment of the amnesty tax
and submission of all relevant documents. Having complied with all the requirements of RA 9480,
respondent is fully entitled to the immunities and privileges granted under RA 9480. 12

The dispositive portion of the Decision states:

chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the instant Petition for Review is GRANTED. The subject assessment in
the present case against petitioner is hereby SET ASIDE solely in view of petitioner's availment of the Tax
Amnesty Program under R.A. No. 9480; and accordingly, petitioner is hereby DECLARED ENTITLED to the
immunities and privileges provided by the Tax Amnesty Law being a qualified tax amnesty applicant and for
having complied with all the documentary requirements set by law.

SO ORDERED.13
The CIR filed a Motion for Reconsideration14 on 3 December 2012 which the CTA First Division denied on 1
March 2013.15

The Decision of the CTA En Banc

On 19 May 2014, the CTA En Banc held that a qualified tax amnesty applicant who has completed the
requirements of RA 9480 shall be deemed to have fully complied with the Tax Amnesty Program. Upon
compliance with the requirements of the law, the taxpayer shall, as mandated by law, be immune from the
payment of taxes as well as appurtenant civil, criminal, or administrative penalties under the National
Internal Revenue Code. The CTA En Banc ruled that the finality of a tax assessment did not disqualify
respondent from availing of a tax amnesty under RA 9480.

The dispositive portion of the Decision states: chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the Petition for Review filed by the Commissioner of Internal Revenue is
DENIED, for lack of merit. The Decision of the First Division of this Court promulgated on November 12,
2012 in CTA Case No. 781[7], captioned Philippine Aluminum Wheels, Inc. v. Commissioner of Internal
Revenue, and the Resolution of the said Division dated March 1, 2013, are AFFIRMED in toto.

SO ORDERED.16
The CIR filed a Motion for Reconsideration on 11 June 2014 which was denied on 5 January 2015. 17

The Issue

Whether respondent is entitled to the benefits of the Tax Amnesty Program under RA 9480. ( THE
CORPORATION IS EXEMPTED VIA TAX AMNESTY)

The Decision of this Court

This Court denies the petition in view of the respondent's availment of the Tax Amnesty Program under RA
9480.

A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an
absolute forgiveness or 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. A tax amnesty, much like a tax exemption,
is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing authority. 18

On 24 May 2007, RA 9480, or "An Act Enhancing Revenue Administration and Collection by Granting an.
Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National Government for Taxable Year 2005
and Prior Years," became law.

The pertinent provisions of RA 9480 are:chanRoblesvirt ualLawlibrary

Section 1. Coverage. There is hereby authorized and granted a tax amnesty which shall cover all national
internal 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: Provided, however, that the
amnesty hereby authorized and granted shall not cover persons or cases enumerated under Section 8
hereof.

xxxx

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:
chanRoblesvirtualLawlibrary

(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.

x x x x (Emphasis supplied)
The Department of Finance issued DOF Department Order No. 29-07 (DO 29-07). 19 Section 6 of DO 29-07
provides for the method for availing a tax amnesty under RA 9480, to wit: chanRoblesvirtualLawlibrary

Section 6. Method of Availment of Tax Amnesty.

1. Forms/Documents to be filed. To avail of the general tax amnesty, concerned taxpayers shall file the
following documents/requirements:
a. Notice of Availment in such forms as may be prescribed by the BIR;

b. Statement of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in such forms, as may be
prescribed by the BIR;

c. Tax Amnesty Return in such forms as may be prescribed by the BIR.

2. x x x.

3. x x x.

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 RA 9480.

x x x x (Emphasis supplied)
In Philippine Banking Corporation v. Commissioner of Internal Revenue,20 this Court held that the taxpayer's
completion of the requirements under RA 9480, as implemented by DO 29-07, will extinguish the taxpayer's
tax liability, additions and all appurtenant civil, criminal, or administrative penalties under the National
Internal Revenue Code, to wit: chanRoblesvirt ualLawlibrary

Considering that the completion of these requirements shall be deemed full compliance with the tax amnesty
program, the law mandates that the taxpayer shall thereafter be immune from the payment of taxes, and
additions thereto, as well as 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.21
Similarly, in Metropolitan Bank and Trust Company (Metrobank) v. Commissioner of Internal Revenue,22 this
Court sustained the validity of Metrobank's tax amnesty upon full compliance with the requirements of RA
9480. This Court ruled: "Therefore, by virtue of the availment by Metrobank of the Tax Amnesty Program
under Republic Act No. 9480, it is already immune from the payment of taxes, including DST on the UNISA
for 1999, as well as the addition thereto."
23

On 19 September 2007, respondent availed of the Tax Amnesty Program under RA 9480, as implemented
by DO 29-07. Respondent submitted its Notice of Availment, Tax Amnesty Return, Statement of Assets,
Liabilities and Net Worth, and comparative financial statements for 2005 and 2006. Respondent paid the
amnesty tax to the Development Bank of the Philippines, evidenced by its Tax Payment Deposit Slip dated
21 September 2007. Respondent's completion of the requirements of the Tax Amnesty Program under RA
9480 is sufficient to extinguish its tax liability under the FDDA of the BIR.

In Asia International Auctioneers, Inc. v. Commissioner of Internal Revenue,24 this Court ruled that the tax
liability of Asia International Auctioneers, Inc. was fully settled when it was able to avail of the Tax Amnesty
Program under RA 9480 in February 2008 while its Petition for Review was pending before this Court. This
Court declared the pending case involving the tax liability of Asia International Auctioneers, Inc. moot since
the company's compliance with the Tax Amnesty Program under RA 9480 extinguished the company's
outstanding deficiency taxes.

The CIR contends that respondent is disqualified to avail of the tax amnesty under RA 9480. The CIR asserts
that the finality of its assessment, particularly its FDDA is equivalent to a final and executory judgment by
the courts, falling within the exceptions to the Tax Amnesty Program under Section 8 of RA 9480, which
states:chanRoblesvirtualLawlibrary

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:

(a) Withholding agents with respect to their withholding tax liabilities;

(b) Those with pending cases falling under the jurisdiction of the Presidential Commission on Good
Government;

(c) Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft
and Corrupt Practices Act;
(d) Those with pending cases filed in court involving violation of the Anti-Money Laundering Law;

(e) Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X
of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and
transactions, and malversation of public funds and property under Chapters III and IV of Title VII of the
Revised Penal Code; and

(f) Tax cases subject of final and executory judgment by the courts. (Emphasis supplied)
The CIR is wrong. Section 8(f) is clear: only persons with "tax cases subject of final and executory judgment
by the courts" are disqualified to avail of the Tax Amnesty Program under RA 9480. There must be a
judgment promulgated by a court and the judgment must have become final and executory. Obviously,
there is none in this case. The FDDA issued by the BIR is not a tax case "subject to a final and
executory judgment by the courts" as contemplated by Section 8(f) of RA 9480. The determination
of the tax liability of respondent has not reached finality and is still not subject to an executory judgment by
the courts as it is the issue pending before this Court. In fact, in Metrobank, this Court held that the FDDA
issued by the BIR was not a final and executory judgment and did not prevent Metrobank from availing of
the immunities and privileges granted under RA 9480, to wit: chanRoblesvirt ualLawlibrary

x x x. As argued by Metrobank, the very fact that the instant case is still subject of the present proceedings
is proof enough that it has not reached a final and executory stage as to be barred from the tax amnesty
under Republic Act No. 9480.

The assertion of the CIR that deficiency DST is not covered by the Tax Amnesty Program under Republic Act
No. 9480 is downright specious.25
The CIR alleges that respondent is disqualified to avail of the Tax Amnesty Program under Revenue
Memorandum Circular No. 19-2008 (RMC No. 19-2008) dated 22 February 2008 issued by the BIR which
includes "delinquent accounts or accounts receivable considered as assets by the BIR or the Government,
including self-assessed tax" as disqualifications to avail of the Tax Amnesty Program under RA 9480. The
exception of delinquent accounts or accounts receivable by the BIR under RMC No. 19-2008 cannot amend
RA 9480. As a rule, executive issuances including implementing rules and regulations cannot amend a
statute passed by Congress.

In National Tobacco Administration v. Commission on Audit,26 this Court held that in case there is a
discrepancy between the law and a regulation issued to implement the law, the law prevails because the
rule or regulation cannot go beyond the terms and provisions of the law, to wit: "[t]he Circular cannot
extend the law or expand its coverage as the power to amend or repeal a statute is vested with the
legislature." To give effect to the exception under RMC No. 19-2008 of delinquent accounts or accounts
receivable by the BIR, as interpreted by the BIR, would unlawfully create a new exception for availing of the
Tax Amnesty Program under RA 9480.

WHEREFORE, we DENY the petition. We AFFIRM the 19 May 2014 Decision and the 5 January 2015
Resolution of the Court of Tax Appeals En Banc in CTA EB No. 994.

SO ORDERED.
 PILMICO-MAURI FOODS CORP., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

REYES, J.:

Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court pursuant to
Republic Act (R.A.) No. 1125,2 Section 19,3 as amended by R.A. No. 9282,4 Section 12.5 The petition filed by
Pilmico-Mauri Foods Corp. (PMFC) against the Commissioner of Internal Revenue (CIR) assails the
Decision6 and Resolution7 of the Court of Appeals (CTA) en banc, dated August 29, 2006 and December 4,
2006, respectively, in C.T.A. EB No. 97.

Antecedents

The CTA aptly summed up the facts of the case as follows: ChanRoblesVirtualawlibrary

[PMFC] is a corporation, organized and existing under the laws of the Philippines, with principal place of
business at Aboitiz Corporate Center, Banilad, Cebu City.

The books of accounts of [PMFC] pertaining to 1996 were examined by the [CIR] thru Revenue Officer
Eugenio D. Maestrado of Revenue District No. 81 (Cebu City North District) for deficiency income, value-
added [tax] (VAT) and withholding tax liabilities.

As a result of the investigation, the following assessment notices were issued against [PMFC]:
chanRoblesvirtualLawlibrary

(a) Assessment Notice No. 81-WT-13-96-98-11-126, dated November 26,

1998, demanding payment for deficiency withholding taxes for the
year 1996 in the sum of P384,925.05 (inclusive of interest and other
penalties);
(b) Assessment Notice No. 81-VAT-13-96-98-11-127, dated November 26,
1998, demanding payment of deficiency value-added tax in the sum of
P5,017,778.01 (inclusive of interest and other penalties); [and]
(c) Assessment Notice No. 81-IT-13-96[-]98-11-128, dated November 26,
1998, demanding payment of. deficiency income tax for the year 1996
in the sum of P4,359,046.96 (inclusive of interest and other penalties).

The foregoing Assessment Notices were all received by [PMFC] on December 1, 1998. On December 29,
1998, [PMFC] filed a protest letter against the aforementioned deficiency tax assessments through the
Regional Director, Revenue Region No. 13, Cebu City.

In a final decision of the [CIR] on the disputed assessments dated July 3, 2000, the deficiency tax liabilities
of [PMFC] were reduced from P9,761,750.02 to P3,020,259.30, broken down as follows:

a) Deficiency withholding tax from P384,925.05 to P197,780.67;

chanRoblesvirtualLawlibrary

b) Deficiency value-added tax from P5,017,778.01 to P1,642,145.79; and

c) Deficiency Income Tax from P4,359,046.96 to P1,180,332.84.

xxxx
On the basis of the foregoing facts[, PMFC] filed its Petition for Review on August 9, 2000. In the "Joint
Stipulation of Facts" filed on March 7, 2001, the parties have agreed that the following are the issues to be
resolved:ChanRoblesVirtualawlibrary

I. Whether or not [PMFC] is liable for the payment of deficiency income, value-added,
expanded withholding, final withholding and withholding tax (on compensation).

II. On the P1,180,382.84 deficiency income tax

A. Whether or not the P5,895,694.66 purchases of raw materials are

unsupported[;]

B. Whether or not the cancelled invoices and expenses for taxes, repairs and
freight are unsupported[;]

C. Whether or not commission, storage and trucking charges claimed are

deductible[; and]

D. Whether or not the alleged deficiency income tax for the year 1996 was
correctly computed.

xxxx

V. Whether or not [CIR's] decision on the 1996 internal revenue tax

liabilities of [PMFC] is contrary to law and the facts.
After trial on the merits, the [CTA] in Division rendered the assailed Decision affirming the assessments but
in the reduced amount of P2,804,920.36 (inclusive of surcharge and deficiency interest) representing
[PMFC's] Income, VAT and Withholding Tax deficiencies for the taxable year 1996 plus 20% delinquency
interest per annum until fully paid. The [CTA] in Division ruled as follows: ChanRoblesVirtualawlibrary

"However, [PMFC's] contention that the NIRC of 1977 did not impose substantiation requirements on
deductions from gross income is bereft of merit. Section 238 of the 1977 Tax Code [now Section 237 of the
National Internal Revenue Code of 1997] provides: ChanRoblesVirtualawlibrary

SEC. 238. Issuance of receipts or sales or commercial invoices. - All persons, subject to an internal
revenue tax shall for each sale or transfer of merchandise or for services rendered valued at P25.00 or
more, issue receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of
transaction, quantity, unit cost and description of merchandise or nature of service: Provided, That in the
case of sales, receipts or transfers in the amount of P100.00 or more, or, regardless of amount, where the
sale or transfer is made by persons subject to value-added tax to other persons, also subject to value-added
tax; or, where the receipt is issued to cover payment made as rentals, commissions, compensations or fees,
receipts or invoices shall be issued which shall show the name, business style, if any, and address of the
purchaser, customer, or client. The original of each receipt or invoice shall be issued to the
purchaser, customer or client at the time the transaction is effected, who, if engaged in business
or in the exercise of profession, shall keep and preserve the same in his place of business for a
period of three (3) years from the close of the taxable year in which such invoice or receipt was
issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business for a like
period. x x x
From the foregoing provision of law, a person who is subject to an internal revenue tax shall issue receipts,
sales or commercial invoices, prepared at least in duplicate. The provision likewise imposed a responsibility
upon the purchaser to keep and preserve the original copy of the invoice or receipt for a period of three
years from the close of the taxable year in which such invoice or receipt was issued. The rationale behind
the latter requirement is the duty of the taxpayer to keep adequate records of each and every transaction
entered into in the conduct of its business. So that when their books of accounts are subjected to a tax audit
examination, all entries therein, could be shown as adequately supported and proven as legitimate business
transactions. Hence, [PMFC's] claim that the NIRC of 1977 did not require substantiation requirements is
erroneous.
In fact, in its effort to prove the above-mentioned purchases of raw materials, [PMFC] presented the
following sales invoices:
chanRoblesvirtualLawlibrary

Exhibit Invoice
Date Gross Amount 10% VAT Net Amount
Number No.
B-3 2072 04/18/96 P2,312,670.00 P210,242.73 P2,102,427.27
B-7,
B-11 2026 Undated 2,762,099.10 251,099.92 2,510,999.18
P5,074,769.10 P461,342.65 P4,613,426.45
The mere fact that [PMFC] submitted the foregoing sales invoices belies [its] claim that the NIRC of 1977
did not require that deductions must be substantiated by adequate records.

From the total purchases of P5,893,694.64 which have been disallowed, it seems that a portion thereof
amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no supporting sales invoices because of
[PMFC's] failure to present said invoices.

A scrutiny of the invoices supporting the remaining balance of P4,613,426.45 (P5,893,694.64 less
P1,280,268.19) revealed the following:
chanRoblesvirtualLawlibrary

a) In Sales Invoice No. 2072 marked as Exhibit B-3, the name Pilmico
Foods Corporation was erased and on top of it the name [PMFC] was
inserted but with a counter signature therein;
b) For undated Sales Invoice No. 2026, [PMFC] presented two exhibits
marked as Exhibits B-7 and B-11. Exhibit B-11 is the original sales
invoice whereas Exhibit B-7 is a photocopy thereof. Both exhibits
contained the word Mauri which was inserted on top and between the
words Pilmico and Foods. The only difference is that in the original
copy (Exhibit B-11), there was a counter signature although the ink
used was different from that used in the rest of the writings in the said
invoice; while in the photocopied invoice (Exhibit B-7), no such counter
signature appeared. [PMFC] did not explain why the said
countersignature did not appear in the photocopied invoice considering
it was just a mere reproduction of the original copy.

The sales invoices contain alterations particularly in the name of the purchaser giving rise to serious doubts
regarding their authenticity and if they were really issued to [PMFC]. Exhibit B-11 does not even have any
date indicated therein, which is a clear violation of Section 238 of the NIRC of 1977 which required that the
official receipts must show the date of the transaction.

Furthermore, [PMFC] should have presented documentary evidence establishing that Pilmico Foods
Corporation did not claim the subject purchases as deduction from its gross income. After all, the records
revealed that both [PMFC] and its parent company, Pilmico Foods Corporation, have the same AVP
Comptroller in the person of Mr. Eugenio Gozon, who is in-charge of the financial records of both entities x x
x.

Similarly, the official receipts presented by [PMFC] x x x, cannot be considered as valid proof of [PMFC's]
claimed deduction for raw materials purchases. The said receipts did not conform to the requirements
provided for under Section 238 of the NIRC of 1977, as amended. First the official receipts were not in the
name of [PMFC] but in the name of Golden Restaurant. And second, these receipts were issued by PFC and
not the alleged seller, JTE.

Likewise, [PMFC's] allegations regarding the offsetting of accounts between [PMFC], PFC and JTE is
untenable. The following circumstances contradict [PMFC's] proposition: 1) the Credit Agreement itself does
not provide for the offsetting arrangement; 2) [PMFC] was not even a party to the credit agreement; and
3) the official receipts in question pertained to the year 1996 whereas the Credit Agreement (Exhibit M) and
the Real Estate Mortgage Agreement (Exhibit N) submitted by [PMFC] to prove the fact of the offsetting of
accounts, were both executed only in 1997.

Besides, in order to support its claim, [PMFC] should have presented the following vital documents, namely,
1) Written Offsetting Agreement; 2) proof of payment by [PMFC] to Pilmico Foods Corporation; and 3)
Financial Statements for the year 1996 of Pilmico Foods Corporation to establish the fact that Pilmico Foods
Corporation did not deduct the amount of raw materials being claimed by [PMFC].

Considering that the official receipts and sales invoices presented by [PMFC] failed to comply with the
requirements of Section 238 of the NIRC of 1977, the disallowance by the [CIR] of the claimed deduction for
raw materials is proper.
[PMFC] filed a Motion for Partial Consideration on January 21, 2005 x x x but x x x [PMFC's] Motion for
Reconsideration was denied in a Resolution dated May 19, 2005 for lack of merit, x x x. 8 (Citation omitted,
italics ours and emphasis in the original)
Unperturbed, PMFC then filed a petition for review before the CTA en banc, which adopted the CTA First
Division's ruling and ratiocinations. Additionally, the CTA en banc declared that:ChanRoblesVirtualawlibrary

The language of [Section 238] of the 1977 NIRC, as amended, is clear. It requires that for each sale valued
at P100.00 or more, the name, business style and address of the purchaser, customer or client shall be
indicated and that the purchaser is required to keep and preserve the same in his place of business. The
purpose of the law in requiring the preservation by the purchaser of the official receipts or sales invoices for
a period of three years is two-fold: 1) to enable said purchaser to substantiate his claimed
deductions from the gross income, and 2) to enable the Bureau of Internal Revenue to verify the
accuracy of the gross income of the seller from external sources such as the customers of said seller. Hence,
[PMFC's] argument that there was no substantiation requirement under the 1977 NIRC is without basis.

Moreover, the Supreme Court had ruled that in claiming deductions for business expenses [,] it is not
enough to prove the business test but a claimant must substantially prove by evidence or records the
deductions claimed under the law, thus: ChanRoblesVirtualawlibrary

The principle is recognized that when a taxpayer claims a deduction, he must point to some specific
provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to
the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from
gross income for purposes of the income tax is Section 30 (a) (l) of the National Internal Revenue which
allows a deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business.["] An item of expenditure, in order to be deductible under this section of
the statute must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business
expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary; (2) it
must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade
or business. In addition, not only must the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does
not justify its deduction. x x x
And in proving claimed deductions from gross income, the Supreme Court held that invoices and official
receipts are the best evidence to substantiate deductible business expenses. x x x

xxxx

The irregularities found on the official receipts and sales invoices submitted in evidence by [PMFC], i.e. not
having been issued in the name of [PMFC] as the purchaser and the fact that the same were not issued by
the alleged seller himself directly to the purchaser, rendered the same of no probative value.

Parenthetically, the "Cohan Rule" which according to [PMFC] was adopted by the Supreme Court in the case
of Visayan Cebu Terminal v. Collector, x x x, is not applicable because in both of these cases[,] there were
natural calamities that prevented the taxpayers therein to fully substantiate their claimed deductions. In the
Visayan Cebu Terminal case, there was a fire that destroyed some of the supporting documents for the
claimed expenses. There is no such circumstance in [PMFC's] case, hence, the ruling therein is not
applicable. It is noteworthy that notwithstanding the destruction of some of the supporting documents in the
aforementioned Visayan Cebu Terminal case, the Supreme Court[,] in denying the appeal[,] issued the
following caveat noting the violation of the provision of the Tax Code committed by [PMFC] therein: ChanRoblesVirtualawlibrary

"It may not be amiss to note that the explanation to the effect that the supporting paper of some of those
expenses had been destroyed when the house of the treasurer was burned, can hardly be regarded as
satisfactory, for appellant's records are supposed to be kept in its offices, not in the residence of
one of its officers." x x x
From the above-quoted portion of the Supreme Court's Decision, it is clear that compliance with the
mandatory record-keeping requirements of the National Internal Revenue Code should not be taken lightly.
Raw materials are indeed deductible provided they are duly supported by official receipts or sales invoices
prepared and issued in accordance with the invoicing requirements of the National Internal Revenue Code. x
x x [PMFC] failed to show compliance with the requirements of Section 238 of the 1977 NIRC as shown by
the fact that the sales invoices presented by [it] were not in its name but in the name of Pilmico Foods
Corporation.

xxxx

In the Joint Stipulation of Facts filed on March 7, 2001, the parties have agreed that with respect to the
deficiency income tax assessment, the following are the issues to be resolved:
Whether or not the P5,895,694.66 purch ases of raw materials are unsupported;
xxxx

Clearly, the issue of proper substantiation of the deduction from gross income pertaining to the purchases of
raw materials was properly raised even before [PMFC] began presenting its evidence. [PMFC] was aware
that the [CIR] issued the assessment from the standpoint of lack of supporting documents for the claimed
deduction and the fact that the assessments were not based on the deductibility of the cost of raw
materials. There is no difference in the basis of the assessment and the issue presented to the [CTA] in
Division for resolution since both pertain to the issue of proper supporting documents for ordinary and
necessary business expenses.9 (Citation omitted, italics ours and emphasis in the original)
PMFC moved for reconsideration. Pending its resolution, the CIR issued Revenue Regulation (RR) No. 15-
2006,10 the abatement program of which was availed by PMFC on October 27, 2006. Out of the total amount
of P2,804,920.36 assessed as income, value-added tax (VAT) and withholding tax deficiencies, plus
surcharges and deficiency interests, PMFC paid the CIR P1,101,539.63 as basic deficiency tax. The PMFC,
thus, awaits the CIR's approval of the abatement, which can render moot the resolution of the instant
petition.11
chanrobleslaw

Meanwhile, the CTA en banc denied the motion for reconsideration12 of PMFC, in its Resolution13 dated
December 4, 2006.

Issues

In the instant petition, what is essentially being assailed is the CTA en banc's concurrence with the CTA First
Division's ruling, which affirmed but reduced the CIR's income deficiency tax assessment against PMFC.
More specifically, the following errors are ascribed to the CTA:
ChanRoblesVirtualawlibrary

The Honorable CTA First Division deprived PMFC of due process of law and the CTA assumed an executive
function when it substituted a legal basis other than that stated in the assessment and pleading of the CIR,
contrary to law.

II

The decision of the Honorable CTA First Division must conform to the pleadings and the theory of the action
under which the case was tried. A judgment going outside the issues and purporting to adjudicate
something on which the parties were not heard is invalid. Since the legal basis cited by the CTA supporting
the validity of the assessment was never raised by the CIR, PMFC was deprived of its constitutional right to
be apprised of the legal basis of the assessment.
 III

The nature of evidence required to prove an ordinary expense like raw materials is governed by Section
2914 of the 1977 National Internal Revenue Code (NIRC) and not by Section 238 as found by the CTA. 15 chanroblesvirtuallawlibrary

In support of the instant petition, PMFC claims that the deficiency income tax assessment issued against it
was anchored on Sect on 34(A)(l)(b)16 of the 1997 NIRC. In disallowing the deduction of the purchase of raw
materials from PMFC's gross income, the CIR never m any reference to Section 238 of the 1977 NIRC
relative to the mandatory requirement of keeping records of official receipts, upon which the CTA had
misplaced reliance. Had substantiation requirements under Section 23 the 1977 NIRC been made an issue
during the trial, PMFC could have presented official receipts or invoices, or could have compelled its
suppliers to issue the same.17chanrobleslaw

PMFC further argues that in determining the deductibility of the purchase of raw materials from gross
income, Section 29 of the 1977 NIRC is the applicable provision. According to the said section, for the
deduction to be allowed, the expenses must be (a) both ordinary and necessary; (b) incurred in carrying on
a trade or business; and (c) paid or incurred within the taxable year. PMFC, thus, claims that prior to the
promulgation of the 1997 NIRC, the law does not require the production of official receipts to prove an
expense.18chanrobleslaw

In its Comment,19 the Office of the Solicitor General (OSG) counters that the arguments advanced by PMFC
are mere reiterations of those raised in the proceedings below. Further, PMFC was fully apprised of the
assailed tax assessments and had all the opportunities to prove its claims. 20 chanrobleslaw

The OSG also avers that in the Joint Stipulation of Facts filed before the CTA First Division on March 7, 2001,
it was stated that one of the issues for resolution was "whether or not the Php5,895,694.66 purchases of
raw materials are unsupported." Hence, PMFC was aware that the CIR issued the assessments due to lack of
supporting documents for the deductions claimed. Essentially then, even in the proceedings before the CIR,
the primary issue has always been the lack or inadequacy of supporting documents for ordinary and
necessary business expenses.21 chanrobleslaw

The OSG likewise points out that PMFC failed to satisfactorily discharge the burden of proving the propriety
of the tax deductions claimed. Further, there were discrepancies in the names of the sellers and purchasers i
indicated in the receipts casting doubts on their authenticity. 22 chanrobleslaw

Ruling of the Court

The Court affirms but modifies the herein assailed decision and resolution.

Preliminary matters

On December 19, 2006, PMFC filed before the Court a motion for extension of time to file a petition for
review.23 In the said motion, PMFC informed the Court that it had availed of the CIR's tax abatement
program, the details of which were provided for in RR No. 15-2006. PMFC paid the CIR the amount of
P1,101,539.63 as basic deficiency tax. PMFC manifested that if the abatement application would be
approved by the CIR, the instant petition filed before the Court may be rendered superfluous.

According to Section 4 of RR No. 15-2006, after the taxpayer's payment of the assessed basic deficiency
tax, the docket of the case shall forwarded to the CIR, thru the Deputy Commissioner for Operations Group,
for issuance of a termination letter. However, as of this Resolution's writing, none of the parties have
presented the said termination letter. Hence, the Court cannot outrightly dismiss the instant petition on the
ground of mootness.

On the procedural issues raised by PMFC

The first and second issues presented by PMFC are procedural in nature. They both pertain to the alleged
omission of due process of law by the CTA since in its rulings, it invoked Section 238 of the 1977 NIRC,
while in the proceedings below, the CIR's tax deficiency assessments issued against PMFC were instead
anchored on Section 34 of the 1997 NIRC.

Due process was not violated.

In CIR v. Puregold Duty Free, Inc.,24 the Court is emphatic that: ChanRoblesVirtualawlibrary

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
would constitute a violation of the other party's right to due process, and is contrary to the principle of fair
play. x x x
x x x 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.25 (Citations omitted)
cralawred

In the case at bar, the CIR issued assessment notices against PMFC for deficiency income, VAT and
withholding tax for the year 1996. PMFC assailed the assessments before the Bureau of Internal Revenue
and late before the CTA.

In the Joint Stipulation of Facts, dated March 7, 2001, filed before CTA First Division, the CIR and PMFC both
agreed that among the issues for resolution was "whether or not the P5,895,694.66 purchases of raw
materials are unsupported."26 Estoppel, thus, operates against PMFC anent its argument that the issue of
lack or inadequacy of documents to justify the costs of purchase of raw materials as deductions from the
gross income had not been presented in the proceedings below, hence, barred for being belatedly raised
only on appeal.

Further, in issuing the assessments, the CIR had stated the material facts and the law upon which they were
based. In the petition for review filed by PMFC before the CTA, it was the former's burden to properly invoke
the applicable legal provisions in pursuit of its goal to reduce its tax liabilities. The CTA, on the other hand,
is not bound to rule solely on the basis of the laws cited by the CIR. Were it otherwise, the tax court's
appellate power of review shall be rendered useless. An absurd situation would arise leaving the CTA with
only two options, to wit: (a) affirming the CIR's legal findings; or (b) altogether absolving the taxpayer from
liability if the CIR relied on misplaced legal provisions. The foregoing is not what the law intends.

To reiterate, PMFC was at the outset aware that the lack or inadequacy of supporting documents to justify
the deductions claimed from the gross income was among the issues raised for resolution before the CTA.
With PMFC's acquiescence to the Joint Stipulation of Facts filed before the CTA and thenceforth, the former's
participation in the proceedings with all opportunities it was afforded to ventilate its claims, the alleged
deprivation of due process is bereft of basis.

On the applicability of Section 29 of the 1977 NIRC

The third issue raised by PMFC is substantive in nature. At its core is the alleged application of Section 29 of
the 1977 NIRC as regards the deductibility from the gross income of the cost of raw materials purchased by
PMFC.

It bears noting that while the CIR issued the assessments on the basis of Section 34 of the 1997 NIRC, the
CTA and PMFC are in agreement that the 1977 NIRC finds application.

However, while the CTA ruled on the basis of Section 238 of the 1977 NIRC, PMFC now insists that Section
29 of the same code should be applied instead. Citing Atlas Consolidated Mining and Development
Corporation v. CIR,27 PMFC argues that Section 29 imposes less stringent requirements and the presentation
of official receipts as evidence of the claimed deductions dispensable. PMFC further posits that the
mandatory nature of the submission of official receipts as proof is a mere innovation in the 19 NIRC, which
cannot be applied retroactively.28 chanrobleslaw

PMFC's argument fails.

The Court finds that the alleged differences between the requirements of Section 29 of the 1977 NIRC
invoked by PMFC, on one hand, and Section 238 relied upon by the CTA, on the other, are more imagined
than real.

In CIR v. Pilipinas Shell Petroleum Corporation,29 the Count enunciated that: ChanRoblesVirtualawlibrary

It is a rule in statutory construction that every part of the statute must be interpreted with reference to the
context, i.e., that every part of the statute must be considered together with the other parts, and kept
subservient to the general intent of the whole enactment. The law must not be read in truncated parts, its
provisions must be read in relation to the whole law. The particular words, clauses and phrases should not
be studied as detached and isolated expression, but the whole and every part of the statute must be
considered in fixing the meaning of any of its parts and in order to produce a harmonious whole. 30 (Citations
omitted)
The law, thus, intends for Sections 29 and 238 of the 1977 NIRC to be read together, and not for one
provision to be accorded preference over the other.

It is undisputed that among the evidence adduced by PMFC on it behalf are the official receipts of alleged
purchases of raw materials. Thus, the CTA cannot be faulted for making references to the same, and for
applying Section 238 of the 1977 NIRC in rendering its judgment. Required or not, the official receipts were
submitted by PMFC as evidence. Inevitably, the said receipts were subjected to scrutiny, and the CTA
exhaustively explained why it had found them wanting.

PMFC cites Atlas31 to contend that the statutory test, as provided in Section 29 of the 1977 NIRC, is
sufficient to allow the deductibility of a business expense from the gross income. As long as the expense is:
(a) both ordinary and necessary; (b) incurred in carrying a business or trade; and (c) paid or incurred within
the taxable year, then, it shall be allowed as a deduction from the gross income. 32 chanrobleslaw

Let it, however, be noted that in Atlas, the Court likewise declared that: ChanRoblesVirtualawlibrary

In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or
records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation
of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction. 33 (Citation
omitted and italics ours)
It is, thus, clear that Section 29 of the 1977 NIRC does not exempt the taxpayer from substantiating claims
for deductions. While official receipts are not the only pieces of evidence which can prove deductible
expenses, if presented, they shall be subjected to examination. PMFC submitted official receipts as among
its evidence, and the CTA doubted their veracity. PMFC was, however, unable to persuasively explain and
prove through other documents the discrepancies in the said receipts. Consequently, the CTA disallowed the
deductions claimed, and in its ruling, invoked Section 238 of the 1977 NIRC considering that official receipts
are matters provided for in the said section.

Conclusion

The Court recognizes that the CTA, 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, the Court must presume that the CTA rendered a decision which is valid in every respect. 34 chanrobleslaw

Further, revenue laws are not intended to be liberally construed. Taxes are the lifeblood of the government
and in Holmes' memorable metaphor, the price we pay for civilization; hence, laws relative thereto must be
faithfully and strictly implemented.35 While the 1977 NIRC required substantiation requirements for claimed
deductions to be allowed, PMFC insists on leniency, which is not warranted under the circumstances.

Lastly, the Court notes too that PMFC's tax liabilities have been me than substantially reduced to
P2,804,920.36 from the CIR's initial assessment of P9,761,750.02. 36 chanrobleslaw

In precis, the affirmation of the herein assailed decision and resolution is in order.

However, the Court finds it proper to modify the herein assail decision and resolution to conform to the
interest rates prescribed in Nacar v. Gallery Frames, et al.37 The total amount of P2,804,920.36 to be paid
PMFC to the CIR shall be subject to an interest of six percent (6%) per annum to be computed from the
finality of this Resolution until full payment.

WHEREFORE, the instant petition is DENIED. The Decision dated August 29, 2006 and Resolution dated
December 4, 2006 of the Court of Tax Appeals en banc in C.T.A. EB No. 97 are AFFIRMED.
However, MODIFICATION thereof, the legal interest of six percent (6%) per annum reckoned from the
finality of this Resolution until full satisfaction, is here imposed upon the amount of P2,804,920.36 to be
paid by Pilmico-Mauri Foods Corporation to the Commissioner of Internal Revenue.

SO ORDERED
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
FIREMAN'S FUND INSURANCE COMPANY and the COURT OF TAX APPEALS, respondents.

B.V. Abela, M.C. Gutierrez & F.J. Malate, Jr., for respondents.

PARAS, J.:

This is an appeal from the decision of the respondent Court of Tax Appeals dated May 24, 1969, in
C.T.A. Case No. 1629, entitled "FIREMAN'S FUND INSURANCE COMPANY v. COMMISSIONER
OF INTERNAL REVENUE," which reversed the decision of petitioner Commissioner of Internal
Revenue holding private respondent Fireman's Fund Insurance Company liable for the payment of
the amount of P81,406.87 as documentary stamp taxes and compromise penalties for the years
1952 to 1958.

Private respondent is a resident foreign insurance corporation organized under the laws of the
United States, authorized and duly licensed to do business in the Philippines. It is a member of the
American Foreign Insurance Association, through which its business is cleared (Brief for
Respondents, pp. 1-2)

The antecedent facts of this case are as follows:

From January, 1952 to December, 1958, herein private respondent Fireman's Fund Insurance
Company entered into various insurance contracts involving casualty, fire and marine risks, for which
the corresponding insurance policies were issued. From January, 1952 to 1956, documentary
stamps were bought and affixed to the monthly statements of policies issues; and from 1957 to 1958
documentary stamps were bought and affixed to the corresponding pages of the policy register,
instead of on the insurance policies issued. On July 3, 1959, respondent company discovered that
its monthly statements of business and policy register were lost. The loss was reported to the
Building Administration of Ayala Building and the National Bureau of Investigation on July 6, 1959.
Herein petitioner was also informed of such loss by respondent company, through the latter's
auditors, Sycip, Gorres and Velayo, in a letter dated July 14, 1959. After conducting an investigation
of said loss, petitioner's examiner ascertained that respondent company failed to affix the required
documentary stamps to the insurance policies issued by it and failed to preserve its accounting
records within the time prescribed by Section 337 of the Revenue Code by using loose leaf forms as
registers of documentary stamps without written authority from the Commissioner of Internal
Revenue as required by Section 4 of Revenue Regulations No. V-1. As a consequence of these
findings, petitioner, in a letter dated December 7, 1962, assessed and demanded from petitioner the
payment of documentary stamp taxes for the years 1952 to 1958 in the total amount of P 79,806.87
and plus compromise penalties, a total of P 81,406.87.

A breakdown of the amount of taxes due and collectible are as follows:

YEAR AMOUNT

1952 P 6,500.00

1953 9,977.72

1954 10,908.89

1955 14,204.52

1956 12,108.26

1957 7,880.68

1958 16,257.60

Total stamp taxes due on policies issued from 1952 to 1958 77,837.67

Add: Stamp taxes on monthly statements during:

1957..........................................................................................1,218.3
5

1958..........................................................................................3,264.3
9
 Total...................................................................................P 82,320.41

Less: Stamp taxes paid per voucher shown:

1957............................................................... p 416.82

1958................................................................2,096.72 2,513.54

AMOUNT DUE & COLLECTIBLE.............................................P 79,906.87

(CTA Decision, Rollo, pp. 16-17).

The compromise penalties consisted of the sum of P1,000.00 as penalty for the alleged failure to
affix documentary stamps and the further sum of P 600.00 as penalty for an alleged violation of
Revenue Regulations No. V-1 otherwise known as the Bookkeeping Regulations (Brief for
Respondents, p. 4)

In a letter dated January 14, 1963, respondent company contested the assessment. After petitioner
denied the protest in a decision dated March 17, 1965, respondent company appealed to the
respondent Court of Tax Appeals on May 8, 1965. After hearing respondent court rendered its
decision dated May 24, 1969 (Rollo, pp. 16-21) reversing the decision of the Commissioner of
Internal Revenue. The assailed decision reads in part:

The affixture of documentary stamps to papers other than those authorized by law is
not tantamount to failure to pay the same. It is true that the mode of affixing the
stamps as prescribed by law was not followed, but the fact remains that the
documentary stamps corresponding to the various insurance policies were
purchased and paid by petitioner. There is no legal justification for respondent to
require petitioner to pay again the documentary stamp tax which it had already paid.
To sustain respondent's stand would require petitioner to pay the same tax twice. If at
all, the petitioner should be proceeded against for failure to comply with the
requirement of affixing the documentary stamps to the taxable insurance policies and
not for failure to pay the tax. (See Sec. 239 and 332, Rev. Code).

It should be observed that the law allows the affixture of documentary stamps' to
such other paper as may be indicated by law or regulations as the proper recipient of
the stamp.' It appears from this provision that respondent has authority to allow
documentary stamps to be affixed to papers other than the documents or instruments
taxed. Although the practice adopted by petitioner in affixing the documentary stamps
to the business statements and policy register was without specific permission from
respondent but only on the strength of his ruling given to Wise & Company (see
Petitioner's Memorandum, p. 176, CTA rec.; p. 24, t.s.n.), one of the general agents
of petitioner, however, considering that petitioner actually purchased the
documentary stamps, affixed them to the business statements and policy register
and cancelled the stamps by perforating them, we hold that petitioner cannot be held
liable to pay again the same tax.

With respect to the 'compromise penalties' in the total sum of P 1,600.00, suffice it to
say that penalties cannot be imposed in the absence of a showing that petitioner
consented thereto. A compromise implies agreement. If the offer is rejected by the
taxpayer, as in this case, respondent cannot enforce it except through a criminal
 action. (See Comm. of Int. Rev. vs. Abad, L-19627, June 27, 1968.) (CTA Decision,
Rollo, pp. 20-21).

Hence, this petition filed on June 26, 1969 (Rollo, pp. 1-8).

The petition is devoid of merit.

The principal issue in this case is whether or not respondent company may be required to pay again
the documentary stamps it has actually purchased, affixed and cancelled.

The relevant provisions of the National Internal Revenue Code provide:

SEC. 210. Stamp taxes upon documents, instruments, and papers. — Upon
documents, instruments, and papers, and upon acceptances, assignments, sales,
and transfers of the obligation, right, or property incident thereto, there shall be
levied, collected and paid for and in respect of the transaction so had or
accomplished, the corresponding documentary stamp taxes prescribed in the
following sections of this Title, by the person making, signing, issuing, accepting, or
transferring the same, and at the same time such act is done or transaction had.
(Now. Sec. 222).

SEC. 232. Stamp tax on life insurance policies. — On all policies of insurance or
other instruments by whatever name the same may be called, whereby any
insurance shall be made or renewed upon any life or lives, there shall be collected a
documentary stamp tax of thirty-five centavos on each two hundred pesos or
fractional part thereof, of the amount issued by any such policy. (220) (As amended
by PD 1457)

Insurance policies issued by a Philippine company to persons in other countries are

not subject to documentary stamp tax. (Rev. Regs. No. 26)

Medical certificate attached to an insurance policy is not a part of the said policy.
Insurance policy is subject to Section 232 of the Tax Code while medical certificate is
taxable under Section 237 of the same Code.

Insurance policies are issued in the place where delivered to the person insured. (As
amended.)

SEC. 221. Stamp tax on policies of insurance upon property. — On all policies of
insurance or other instruments by whatever name the same may be called, by which
insurance shall be made or renewed upon property of any description, including rents
or profits, against peril by sea or on inland waters, or by fire or lightning, there shall
be collected a documentary stamp tax of six centavos on each four persons, or
fractional part thereof, of the amount of premium charged," (Now Sec. 233.)

SEC. 237. Payment of documentary stamp tax. — Documentary stamp taxes shall
be paid by the purchase and affixture of documentary stamps to the document or
instrument taxed or to such other paper as may be indicated by law or regulations as
the proper recipient of the stamp, and by the subsequent cancellation of same, such
cancellation to be accomplished by writing, stamping, or perforating the date of the
cancellation across the face of each stamp in such manner that part of the writing,
 impression, or perforation shall be on the stamp itself and part on the paper to which
it is attached; Provided, That if the cancellation is accomplished by writing or
stamping the date of cancellation, a hole sufficiently large to be visible to the naked
eye shall be punched, cut or perforated on both the stamp and the document either
by the use of a hand punch, knife, perforating machine, scissors, or any other cutting
instrument; but if the cancellation is accomplished by perforating the date of
cancellation, no other hole need be made on the stamp. (Now Sec. 249.)

SEC. 239. Failure to affix or cancel documentary stamps. — Any person who fails to
affix the correct amount of documentary stamps to any taxable document,
instrument, or paper, or to cancel in the manner prescribed by section 237 any
documentary stamp affixed to any document, instrument, or paper, shall be subject to
a fine of not less than twenty pesos or more than three hundred pesos. (Emphasis
supplied.) (Now Sec. 250.)

As correctly pointed out by respondent Court of Tax Appeals, under the above-quoted provisions of
law, documentary tax is deemed paid by: (a) the purchase of documentary stamps; (b) affixture of
documentary stamps to the document or instrument taxed or to such other paper as may be
indicated by law or regulations; and (c) cancellation of the stamps as required by law (Rollo, p. 18).

It will be observed however, that the over-riding purpose of these provisions of law is the collection of
taxes. The three steps above-mentioned are but the means to that end. Thus, the purchase of the
stamps is the form of payment made; the affixture thereof on the document or instrument taxed is to
insure that the corresponding tax has been paid for such document while the cancellation of the
stamps is to obviate the possibility that said stamps will be reused for similar documents for similar
purposes.

In the case at bar, there appears to be no dispute on the fact that the documentary stamps
corresponding to the various policies were purchased and paid for by the respondent Company.
Neither is there any argument that the same were cancelled as required by law. In fact such were
the findings of petitioner's examiner Amando B. Melgar who stated as follows:

Investigation disclosed that the subject insurance company is a duly organized

corporation doing business in the Philippines. It keeps the necessary books of
accounts and other accounting records needed by the business. Further verification
revealed that it has, since July, 1959, been using a "HASLER" franking machine,
Model F88, which stamps the documentary stamps on the duplicates of the policies
issued. Prior to the acquisition of the said machine, the company buys its stamps by
allowing the Manager to issue a Manager's check drawn against the National City
Bank of New York and payable to the City Treasurer of Manila. It was also found out
that during this period (1952 to 1958), the total purchases of documentary stamps
amounted to P77,837.67, while the value of the used stamps lost amounted to
P65,901.11. Verification with the files revealed that most of the monthly statements of
business and registers of documentary stamps corresponding to insurance policies
issued were missing while some where the punched documentary stamps affixed
were small in amount are still intact.

The taxpayer was found to be negligent in the preservation and keeping of its
records. Although the loss was found by the company's private investigator (see
attached true copies of his reports) was not an "Inside Job," still the company should
be held liable for its negligence, it appearing that the said records were placed in a
bodega, where almost all patrons of the coffee shop nearby could see them. The
 company also violated the provision of Section 221 of the National Internal Revenue
Code which provides that the documentary stamps should be affixed and cancelled
on the duplicates of bonds and policies issued. In this case, the said stamps were
affixed on the register of documentary stamps. (pp. 35-36, BIR rec.; Emphasis
supplied.) (CTA Decision, Rollo, pp, 18-19.)

Such findings were confirmed by the Memorandum of Acting Commissioner of Internal Revenue
Jose B. Lingad, dated November 7, 1962 to the Chief, Business Tax Division, which states:

The records show that the FIREMAN'S FUND INSURANCE COMPANY allegedly
paid P 77,837.67 in documentary stamp taxes for the policies of insurance issued by
it for the years 1952 to 1958 but could only present as proof of payment Pll,936.56 of
said taxes as the rest of the amount of P 65,901.11 were lost due to robbery. Upon
verification of this payment however it was found that the FIREMAN'S FUND
INSURANCE COMPANY affixed the documentary stamps not on the individual
insurance policies issued by it but on a monthly statement of business and a register
of documentary stamps, the use of which was not authorized by this Office. It was
claimed that the same procedure was used in the case of the lost documentary
stamps aforementioned. As this practice is irregular and the remaining records are
not conclusive proofs of the payment of the corresponding documentary stamp tax
on the policies, the FIREMAN'S FUND AND INSURANCE COMPANY is still liable for
the payment of the documentary stamp taxes on the policies found not affixed with
stamps. (Original B I R Record, p. 87).

Later, respondent Court of Tax Appeals correctly observed that the purchase of documentary stamps
and their being affixed to the monthly statements of business and policy registers were also admitted
by counsel for the Government as could clearly be gleaned from his Memorandum submitted to the
respondent Court. (Decision, CTA Rollo, pp. 4-5).

Thus, all investigations made by the petitioner show the same factual findings that respondent
company purchased documentary stamps for the various policies it has issued for the period in
question although it has attached the same on documents not authorized by law.

There is no argument to petitioner's contention that the insurance policies with the corresponding
documentary stamps affixed are the best evidence to prove payment of said documentary stamp tax.
This rule however does not preclude the admissibility of other proofs which are uncontradicted and
of considerable weight, such as: copies of the applications for manager's checks, copies of the
manager's check vouchers of the bank showing the purchases of documentary stamps
corresponding to the various insurance policies issued during the years 1952-1958 duly and properly
Identified by the witnesses for respondent company during the hearing and admitted by the
respondent Court of Tax Appeals (Brief for Respondent, p. 15).

It is a general rule in the interpretation of statutes levying taxes or duties, that in case of doubt, such
statutes are to be construed most strongly against the government and in favor of the subjects or
citizens, because burdens are not to be imposed, nor presumed to be imposed beyond what statutes
expressly and clearly import (Manila Railroad Co. v. Collector of Customs, 52 Phil. 950 [1929]).

There appears to be no question that the purpose of imposing documentary stamp taxes is to raise
revenue and the corresponding amount has already been paid by respondent and has actually
become part of the revenue of the government. In the same manner, it is evident that the affixture of
the stamps on documents not authorized by law is not attended by bad faith as the practice was
adopted from the authority granted to Wise & Company, one of respondent's general agents (CTA
Decision, Rollo, p. 20). Indeed, petitioner argued that such authority was not given to respondent
company specifically, but under the general principle of agency, where the acts of the agents bind
the principal, the conclusion is inescapable that the justification for the acts of the agents may also
be claimed for the acts of the principal itself (Brief for the Respondents, pp. 12-13).

Be that as it may, there is no justification for the government which has already realized the revenue
which is the object of the imposition of subject stamp tax, to require the payment of the same tax for
the same documents. Enshrined in our basic legal principles is the time honored doctrine that no
person shall unjustly enrich himself at the expense of another. It goes without saying that the
government is not exempted from the application of this doctrine (Ramie Textiles, Inc. v. Mathay Sr.,
89 SCRA 587 [1979]).

Under the circumstances, this court RESOLVED to DISMISS this petition and to AFFIRM the
assailed decision of the Court of Tax Appeals

[G.R. No. L-9408. October 31, 1956.]

EMILIO Y. HILADO, Petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, Respondents.

DECISION
BAUTISTA ANGELO, J.:
On March 31, 1952, Petitioner filed his income tax return for 1951 with the treasurer of Bacolod City
wherein he claimed, among other things, the amount of P12,837.65 as a deductible item from his gross
income pursuant to General Circular No. V-123 issued by the Collector of Internal Revenue. This circular
was issued pursuant to certain rules laid down by the Secretary of Finance On the basis of said return, an
assessment notice demanding the payment of P9,419 was sent to Petitioner, who paid the tax in
monthly installments, the last payment having been made on January 2, 1953.
Meanwhile, on August 30, 1952, the Secretary of Finance, through the Collector of Internal Revenue,
issued General Circular No. V-139 which not only revoked and declared void his general Circular No. V-
123 but laid down the rule that losses of property which occurred during the period of World War II from
fires, storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible in the
year of actual loss or destruction of said property. As a consequence, the amount of P12,837.65 was
disallowed as a deduction from the gross income of Petitioner for 1951 and the Collector of Internal
Revenue demanded from him the payment of the sum of P3,546 as deficiency income tax for said year.
When the petition for reconsideration filed by Petitioner was denied, he filed a petition for review with
the Court of Tax Appeals. In due time, this court rendered decision affirming the assessment made
by Respondent Collector of Internal Revenue. This is an appeal from said decision.
It appears that Petitioner claimed in his 1951 income tax return the deduction of the sum of P12,837.65
as a loss consisting in a portion of his war damage claim which had been duly approved by the Philippine
War Damage Commission under the Philippine Rehabilitation Act of 1946 but which was not paid and
never has been paid pursuant to a notice served upon him by said Commission that said part of his claim
will not be paid until the United States Congress should make further appropriation. He claims that said
amount of P12,837.65 represents a “business asset” within the meaning of said Act which he is entitled
to deduct as a loss in his return for 1951. This claim is untenable.
To begin with, assuming that said a mount represents a portion of the 75% of his war damage claim
which was not paid, the same would not be deductible as a loss in 1951 because, according to Petitioner,
the last installment he received from the War Damage Commission, together with the notice that no
further payment would be made on his claim, was in 1950. In the circumstance, said amount would at
most be a proper deduction from his 1950 gross income. In the second place, said amount cannot be
considered as a “business asset” which can be deducted as a loss in contemplation of law because its
collection is not enforceable as a matter of right, but is dependent merely upon the generosity and
magnanimity of the U. S. government. Note that, as of the end of 1945, there was absolutely no law
under which Petitioner could claim compensation for the destruction of his properties during the battle
for the liberation of the Philippines. And under the Philippine Rehabilitation Act of 1946, the payments
of claims by the War Damage Commission merely depended upon its discretion to be exercised in the
manner it may see fit, but the non-payment of which cannot give rise to any enforceable right, for, under
said Act, “All findings of the Commission concerning the amount of loss or damage sustained, the cause
of such loss or damage, the persons to whom compensation pursuant to this title is payable, and the
value of the property lost or damaged, shall be conclusive and shall not be reviewable by any court”.
(section 113).
It is true that under the authority of section 338 of the National Internal Revenue Code the Secretary of
Finance, in the exercise of his administrative powers, caused the issuance of General Circular No. V-123
as an implementation or interpretative regulation of section 30 of the same Code, under which the
amount of P12,837.65 was allowed to be deducted “in the year the last installment was received with
notice that no further payment would be made until the United States Congress makes further
appropriation therefor”, but such circular was found later to be wrong and was revoked. Thus, when
doubts arose as to the soundness or validity of such circular, the Secretary of Finance sought the advice
of the Secretary of Justice who, accordingly, gave his opinion the pertinent portion of which reads as
follows:
chanroblesv irtuallawlibrary

“Yet it might be argued that war losses were not included as deductions for the year when they were
sustained because the taxpayers had prospects that losses would be compensated for by the United
States Government; that since only uncompensated losses are deductible, they had to wait until after
chan roblesvirtualawlibra ry

the determination by the Philippine War Damage Commission as to the compensability in part or in
whole of their war losses so that they could exclude from the deductions those compensated for by the
said Commission; and that, of necessity, such determination could be complete only much later than
chan roble svirtualawlibrary

in the year when the loss was sustained. This contention falls to the ground when it is considered that
the Philippine Rehabilitation Act which authorized the payment by the United States Government of war
losses suffered by property owners in the Philippines was passed only on August 30, 1946, long after the
losses were sustained. It cannot be said therefore, that the property owners had any conclusive
assurance during the years said losses were sustained, that the compensation was to be paid therefor.
Whatever assurance they could have had, could have been based only on some information less reliable
and less conclusive than the passage of the Act itself. Hence, as diligent property owners, they should
adopt the safest alternative by considering such losses deductible during the year when they were
sustained.”
In line with this opinion, the Secretary of Finance, through the Collector of Internal Revenue, issued
General Circular No. V-139 which not only revoked and declared void his previous Circular No. V — 123
but laid down the rule that losses of property which occurred during the period of World War II from
fires, storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible for
income tax purposes in the year of actual destruction of said property. We can hardly argue against this
opinion. Since we have already stated that the amount claimed does not represent a “business asset”
that may be deducted as a loss in 1951, it is clear that the loss of the corresponding asset or property
could only be deducted in the year it was actually sustained. This is in line with section 30 (d) of the
National Internal Revenue Code which prescribes that losses sustained are allowable as deduction only
within the corresponding taxable year.
Petitioner’s contention that during the last war and as a consequence of enemy occupation in the
Philippines “there was no taxable year” within the meaning of our internal revenue laws because during
that period they were unenforceable, is without merit. It is well known that our internal revenue laws
are not political in nature and as such were continued in force during the period of enemy occupation
and in effect were actually enforced by the occupation government. As a matter of fact, income tax
returns were filed during that period and income tax payment were effected and considered valid and
legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy.
“Furthermore, it is a legal maxim, that excepting that of a political nature, ‘Law once established
continues until changed by some competent legislative power. It is not changed merely by change of
sovereignty.’ (Joseph H. Beale, Cases on Conflict of Laws, III, Summary section 9, citing Commonwealth
vs. Chapman, 13 Met., 68.) As the same author says, in his Treatise on the Conflict of Laws (Cambridge,
1916, section 131): ‘There can be no break or interregnun in law. From the time the law comes into
chanroblesv irtuallawlibrary

existence with the first-felt corporateness of a primitive people it must last until the final disappearance
of human society. Once created, it persists until a change takes place, and when changed it continues in
such changed condition until the next change and so forever. Conquest or colonization is impotent to
bring law to an end; inspite of change of constitution, the law continues unchanged until the new
chan roblesvirtualawlibra ry

sovereign by legislative act creates a change.’“ (Co Kim Chan vs. Valdes Tan Keh and Dizon, 75 Phil., 113,
142-143.)
It is likewise contended that the power to pass upon the validity of General Circular No. V-123 is vested
exclusively in our courts in view of the principle of separation of powers and, therefore, the Secretary of
Finance acted without valid authority in revoking it and approving in lieu thereof General Circular No. V-
139. It cannot be denied, however, that the Secretary of Finance is vested with authority to revoke,
repeal or abrogate the acts or previous rulings of his predecessor in office because the construction of a
statute by those administering it is not binding on their successors if thereafter the latter become
satisfied that a different construction should be given. [Association of Clerical Employees vs.
Brotherhood of Railways & Steamship Clerks, 85 F. (2d) 152, 109 A.L.R., 345.]
“When the Commissioner determined in 1937 that the Petitioner was not exempt and never had been, it
was his duty to determine, assess and collect the tax due for all years not barred by the statutes of
limitation. The conclusion reached and announced by his predecessor in 1924 was not binding upon him.
It did not exempt the Petitioner from tax, This same point was decided in this way in Stanford University
Bookstore, 29 B. T. A., 1280; affd., 83 Fed. (2d) 710.” (Southern Maryland Agricultural Fair Association
chan roble svirtualawlibrary

vs. Commissioner of Internal Revenue, 40 B. T. A., 549, 554).

With regard to the contention that General Circular No. V-139 cannot be given retroactive effect because
that would affect and obliterate the vested right acquired by Petitioner under the previous circular,
suffice it to say that General Circular No. V-123, having been issued on a wrong construction of the law,
cannot give rise to a vested right that can be invoked by a taxpayer. The reason is obvious: a vested
chanroble svirtuallawlibra ry

right cannot spring from a wrong interpretation. This is too clear to require elaboration.
“It seems too clear for serious argument that an administrative officer cannot change a law enacted by
Congress. A regulation that is merely an interpretation of the statute when once determined to have
been erroneous becomes nullity. An erroneous construction of the law by the Treasury Department or
the collector of internal revenue does not preclude or estop the government from collecting a tax which
is legally due.” (Ben Stocker, et al., 12 B. T. A., 1351.)
“Art. 2254. — No vested or acquired right can arise from acts or omissions which are against the law or
which infringe upon the rights of others.” (Article 2254, New Civil Code.)
Wherefore, the decision appealed from is affirmed Without pronouncement as to costs.

[G.R. NO. 190102 - July 11, 2012]

ACCENTURE, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION
 SERENO, J.:

This is a Petition filed under Rule 45 of the 1997 Rules of Civil Procedure, praying for the reversal of the
Decision of the Court of Tax Appeals En Banc (CTA En Banc ) dated 22 September 2009 and its subsequent
Resolution dated 23 October 2009.1 ςrνll

Accenture, Inc. (Accenture) is a corporation engaged in the business of providing management consulting,
business strategies development, and selling and/or licensing of software. 2 It is duly registered with the
Bureau of Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer or enterprise in accordance with
Section 236 of the National Internal Revenue Code (Tax Code). 3 ςrνll

On 9 August 2002, Accenture filed its Monthly VAT Return for the period 1 July 2002 to 31 August 2002 (1st
period). Its Quarterly VAT Return for the fourth quarter of 2002, which covers the 1st period, was filed on
17 September 2002; and an Amended Quarterly VAT Return, on 21 June 2004. 4 The following are reflected
in Accenture s VAT Return for the fourth quarter of 2002: 5 ςηαñrοblεš νιr†υαl lαω lιbrαrà ¿

Purchases Amount Input VAT

Domestic Purchases- Capital Goods P12,312,722.00 P1,231,272.20
Domestic Purchases- Goods other than
P64,789,507.90 P6,478,950.79
capital Goods
Domestic Purchases- Services P16,455,868.10 P1,645,586.81
Total Input Tax P9,355,809.80
Zero-rated Sales P316,113,513.34
Total Sales P335,640,544.74

Accenture filed its Monthly VAT Return for the month of September 2002 on 24 October 2002; and that for
October 2002, on 12 November 2002. These returns were amended on 9 January 2003. Accenture s
Quarterly VAT Return for the first quarter of 2003, which included the period 1 September 2002 to 30
November 2002 (2nd period), was filed on 17 December 2002; and the Amended Quarterly VAT Return, on
18 June 2004. The latter contains the following information: 6 ςηαñrοblεš νιr†υαl lαω lιbrαrà ¿

Purchases Amount Input VAT

Domestic Purchases- Capital Goods P80,765,294.10 P8,076,529.41
Domestic Purchases- Goods other
P132,820,541.70 P13,282,054.17
than capital Goods
Domestic Purchases-Services P63,238,758.00 P6,323,875.80
Total Input Tax P27,682,459.38
Zero-rated Sales P545,686,639.18
Total Sales P P572,880,982.68

The monthly and quarterly VAT returns of Accenture show that, notwithstanding its application of the input
VAT credits earned from its zero-rated transactions against its output VAT liabilities, it still had excess or
unutilized input VAT credits. These VAT credits are in the amounts of P9,355,809.80 for the 1st period and
P27,682,459.38 for the 2nd period, or a total of P37,038,269.18. 7 ςrνll

Out of the P37,038,269.18, only P35,178,844.21 pertained to the allocated input VAT on Accenture s
"domestic purchases of taxable goods which cannot be directly attributed to its zero-rated sale of
services."8 This allocated input VAT was broken down to P8,811,301.66 for the 1st period and
P26,367,542.55 for the 2nd period.9 ςrνll

The excess input VAT was not applied to any output VAT that Accenture was liable for in the same quarter
when the amount was earned or to any of the succeeding quarters. Instead, it was carried forward to
petitioner s 2nd Quarterly VAT Return for 2003.10 ςrνll

Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an administrative claim for the
refund or the issuance of a Tax Credit Certificate (TCC). The DoF did not act on the claim of Accenture.
Hence, on 31 August 2004, the latter filed a Petition for Review with the First Division of the Court of Tax
Appeals (Division), praying for the issuance of a TCC in its favor in the amount of P35,178,844.21.

The Commissioner of Internal Revenue (CIR), in its Answer, 11 argued thus: ςηαñrοblεš νιr†υαl lαω lιbrαrà ¿

1. The sale by Accenture of goods and services to its clients are not zero-rated transactions.

2. Claims for refund are construed strictly against the claimant, and Accenture has failed to prove that it is
entitled to a refund, because its claim has not been fully substantiated or documented.
chanrobles virtual law library

In a 13 November 2008 Decision,12 the Division denied the Petition of Accenture for failing to prove that the
latter s sale of services to the alleged foreign clients qualified for zero percent VAT. 13 ςrνll

In resolving the sole issue of whether or not Accenture was entitled to a refund or an issuance of a TCC in
the amount of P35,178,844.21,14 the Division ruled that Accenture had failed to present evidence to prove
that the foreign clients to which the former rendered services did business outside the Philippines. 15 Ruling
that Accenture s services would qualify for zero-rating under the 1997 National Internal Revenue Code of
the Philippines (Tax Code) only if the recipient of the services was doing business outside of the
Philippines,16 the Division cited Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian
Contractor Mindanao, Inc. (Burmeister)17 as basis.

Accenture appealed the Division s Decision through a Motion for Reconsideration (MR). 18 In its MR, it argued
that the reliance of the Division on Burmeister was misplaced 19 for the following reasons: ςηαñrοblεš νιr†υαl lαω lιbrαrà ¿

1. The issue involved in Burmeister was the entitlement of the applicant to a refund, given that the recipient
of its service was doing business in the Philippines; it was not an issue of failure of the applicant to present
evidence to prove the fact that the recipient of its services was a foreign corporation doing business outside
the Philippines.20 ςrνll

2. Burmeister emphasized that, to qualify for zero-rating, the recipient of the services should be doing
business outside the Philippines, and Accenture had successfully established that. 21 ςrνll

3. Having been promulgated on 22 January 2007 or after Accenture filed its Petition with the Division,
Burmeister cannot be made to apply to this case.22 ςrνll

chanrobles virtual law library

Accenture also cited Commissioner of Internal Revenue v. American Express (Amex) 23 in support of its
position. The MR was denied by the Division in its 12 March 2009 Resolution. 24 ςrνll

Accenture appealed to the CTA En Banc. There it argued that prior to the amendment introduced by
Republic Act No. (R.A.) 9337, 25 there was no requirement that the services must be rendered to a person
engaged in business conducted outside the Philippines to qualify for zero-rating. The CTA En Banc agreed
that because the case pertained to the third and the fourth quarters of taxable year 2002, the applicable law
was the 1997 Tax Code, and not R.A. 9337.26 Still, it ruled that even though the provision used in
Burmeister was Section 102(b)(2) of the earlier 1977 Tax Code, the pronouncement therein requiring
recipients of services to be engaged in business outside the Philippines to qualify for zero-rating was
applicable to the case at bar, because Section 108(B)(2) of the 1997 Tax Code was a mere reenactment of
Section 102(b)(2) of the 1977 Tax Code.

The CTA En Banc concluded that Accenture failed to discharge the burden of proving the latter s allegation
that its clients were foreign-based.27 ςrνll

Resolute, Accenture filed a Petition for Review with the CTA En Banc, but the latter affirmed the Division s
Decision and Resolution.28 A subsequent MR was also denied in a Resolution dated 23 October 2009.

Hence, the present Petition for Review29 under Rule 45.

In a Joint Stipulation of Facts and Issues, the parties and the Division have agreed to submit the following
issues for resolution: ςηαñrοblεš νιr†υαl lαω lιbrαrà ¿

1. Whether or not Petitioner s sales of goods and services are zero-rated for VAT purposes under Section
108(B)(2)(3) of the 1997 Tax Code.

2. Whether or not petitioner s claim for refund/tax credit in the amount of P35,178,884.21 represents
unutilized input VAT paid on its domestic purchases of goods and services for the period commencing from 1
July 2002 until 30 November 2002.

3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s) or year(s) the alleged
unutilized input VAT paid on its domestic purchases of goods and services for the period commencing from 1
July 2002 until 30 November 2002, and applied the same fully to its output VAT liability for the said period.

4. Whether or not Petitioner is entitled to the refund of the amount of P35,178,884.21, representing the
unutilized input VAT on domestic purchases of goods and services for the period commencing from 1 July
2002 until 30 November 2002, from its sales of services to various foreign clients.

5. Whether or not Petitioner s claim for refund/tax credit in the amount of P35,178,884.21, as alleged
unutilized input VAT on domestic purchases of goods and services for the period covering 1 July 2002 until
30 November 2002 are duly substantiated by proper documents. 30 ςrνll

chanrobles virtual law library

For consideration in the present Petition are the following issues: ςηαñrοblεš νιr†υαl lαω lιbrαrà ¿

1. Should the recipient of the services be "doing business outside the Philippines" for the transaction to be
zero-rated under Section 108(B)(2) of the 1997 Tax Code? chanroblesvirtualawlibrary

2. Has Accenture successfully proven that its clients are entities doing business outside the Philippines?
chanrobles virtual law library

Recipient of services must be doing business outside the Philippines for the transactions to qualify as zero-
rated.

Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which allows the refund of
unutilized input VAT earned from zero-rated or effectively zero-rated sales. The provision reads: ςrαlαω

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)
(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated
sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable
input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of sales. Section 108(B) referred to in the foregoing
provision was first seen when Presidential Decree No. (P.D.) 1994 31 amended Title IV of P.D. 1158,32 which
is also known as the National Internal Revenue Code of 1977. Several Decisions have referred to this as the
1986 Tax Code, even though it merely amended Title IV of the 1977 Tax Code.

Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 273 33 further amended provisions of
Title IV. E.O. 273 by transferring the old Title IV provisions to Title VI and filling in the former title with new
provisions that imposed a VAT.

The VAT system introduced in E.O. 273 was restructured through Republic Act No. (R.A.) 7716. 34 This law,
which was approved on 5 May 1994, widened the tax base. Section 3 thereof reads: ςrαlαω

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

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

xxx xxx xxx

"(b) Transactions subject to zero-rate. The following services performed in the Philippines by VAT-registered
persons shall be subject to 0%: ςηαñrοblεš νιr†υαl lαω lιbrαrà ¿

"(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

"(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP)."
chanrobles virtual law library

Essentially, Section 102(b) of the 1977 Tax Code as amended by P.D. 1994, E.O. 273, and R.A. 7716
provides that if the consideration for the services provided by a VAT-registered person is in a foreign
currency, then this transaction shall be subjected to zero percent rate.

The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section 108(B), to wit: ςrαlαω

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

(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for
in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP); x x x.
chanrobles virtual law library

On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision, became effective. It
reads:

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:

"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of

Properties. -

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by
VAT-registered persons shall be subject to zero percent (0%) rate: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

"(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not engaged in business who is
outside the Philippines when the services are performed, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP); x x x." (Emphasis supplied) cralawlibrary

chanrobles virtual law library

The meat of Accenture s argument is that nowhere does Section 108(B) of the 1997 Tax Code state that
services, to be zero-rated, should be rendered to clients doing business outside the Philippines, the
requirement introduced by R.A. 9337.35 Required by Section 108(B), prior to the amendment, is that the
consideration for the services rendered be in foreign currency and in accordance with the rules of the
Bangko Sentral ng Pilipinas (BSP). Since Accenture has complied with all the conditions imposed in Section
108(B), it is entitled to the refund prayed for.

In support of its claim, Accenture cites Amex, in which this Court supposedly ruled that Section 108(B)
reveals a clear intent on the part of the legislators not to impose the condition of being "consumed abroad"
in order for the services performed in the Philippines to be zero-rated. 36 ςrνll

The Division ruled that this Court, in Amex and Burmeister, did not declare that the requirement that the
client must be doing business outside the Philippines can be disregarded, because this requirement is
expressly provided in Article 108(2) of the Tax Code.37 ςrνll

Accenture questions the Division s application to this case of the pronouncements made in Burmeister.
According to petitioner, the provision applied to the present case was Section 102(b) of the 1977 Tax Code,
and not Section 108(B) of the 1997 Tax Code, which was the law effective when the subject transactions
were entered into and a refund was applied for.

In refuting Accenture s theory, the CTA En Banc ruled that since Section 108(B) of the 1997 Tax Code was a
mere reproduction of Section 102(b) of the 1977 Tax Code, this Court s interpretation of the latter may be
used in interpreting the former, viz:
ςrαlαω

In the Burmeister case, the Supreme Court harmonized both Sections 102(b)(1) and 102(b)(2) of the 1977
Tax Code, as amended, pertaining to zero-rated transactions. A parallel approach should be accorded to the
renumbered provisions of Sections 108(B)(2) and 108(B)(1) of the 1997 NIRC. This means that Section
108(B)(2) must be read in conjunction with Section 108(B)(1). Section 108(B)(2) requires as follows: a)
services other than processing, manufacturing or repacking rendered by VAT registered persons in the
Philippines; and b) the transaction paid for in acceptable foreign currency duly accounted for in accordance
with BSP rules and regulations. The same provision made reference to Section 108(B)(1) further imposing
the requisite c) that the recipient of services must be performing business outside of Philippines. Otherwise,
if both the provider and recipient of service are doing business in the Philippines, the sale transaction is
subject to regular VAT as explained in the Burmeister case x x x.

xxx xxx xxx

Clearly, the Supreme Court s pronouncements in the Burmeister case requiring that the recipient of the
services must be doing business outside the Philippines as mandated by law govern the instant case. 38 ςrνll

Assuming that the foregoing is true, Accenture still argues that the tax appeals courts cannot be allowed to
apply to Burmeister this Court s interpretation of Section 102(b) of the 1977 Tax Code, because the Petition
of Accenture had already been filed before the case was even promulgated on 22 January 2007, 39 to wit: ςrαlαω

x x x. While the Burmeister case forms part of the legal system and assumes the same authority as the
statute itself, however, the same cannot be applied retroactively against the Petitioner because to do so will
be prejudicial to the latter.40
ςrνll

The CTA en banc is of the opinion that Accenture cannot invoke the non-retroactivity of the rulings of the
Supreme Court, whose interpretation of the law is part of that law as of the date of its enactment. 41 ςrνll

We rule that the recipient of the service must be doing business outside the Philippines for the transaction to
qualify for zero-rating under Section 108(B) of the Tax Code.

This Court upholds the position of the CTA en banc that, because Section 108(B) of the 1997 Tax Code is a
verbatim copy of Section 102(b) of the 1977 Tax Code, any interpretation of the latter holds true for the
former.

Moreover, even though Accenture s Petition was filed before Burmeister was promulgated, the
pronouncements made in that case may be applied to the present one without violating the rule against
retroactive application. When this Court decides a case, it does not pass a new law, but merely interprets a
preexisting one.42 When this Court interpreted Section 102(b) of the 1977 Tax Code in Burmeister, this
interpretation became part of the law from the moment it became effective. It is elementary that the
interpretation of a law by this Court constitutes part of that law from the date it was originally passed, since
this Court's construction merely establishes the contemporaneous legislative intent that the interpreted law
carried into effect.43
ςrνll

Accenture questions the CTA s application of Burmeister, because the provision interpreted therein was
Section 102(b) of the 1977 Tax Code. In support of its position that Section 108 of the 1997 Tax Code does
not require that the services be rendered to an entity doing business outside the Philippines, Accenture
invokes this Court s pronouncements in Amex. However, a reading of that case will readily reveal that the
provision applied was Section 102(b) of the 1977 Tax Code, and not Section 108 of the 1997 Tax Code. As
previously mentioned, an interpretation of Section 102(b) of the 1977 Tax Code is an interpretation of
Section 108 of the 1997 Tax Code, the latter being a mere reproduction of the former.

This Court further finds that Accenture s reliance on Amex is misplaced.

We ruled in Amex that Section 102 of the 1977 Tax Code does not require that the services be consumed
abroad to be zero-rated. However, nowhere in that case did this Court discuss the necessary qualification of
the recipient of the service, as this matter was never put in question. In fact, the recipient of the service in
Amex is a nonresident foreign client.

The aforementioned case explains how the credit card system works. The issuance of a credit card allows
the holder thereof to obtain, on credit, goods and services from certain establishments. As proof that this
credit is extended by the establishment, a credit card draft is issued. Thereafter, the company issuing the
credit card will pay for the purchases of the credit card holders by redeeming the drafts. The obligation to
collect from the card holders and to bear the loss in case they do not pay rests on the issuer of the credit
card.
The service provided by respondent in Amex consisted of gathering the bills and credit card drafts from
establishments located in the Philippines and forwarding them to its parent company's regional operating
centers outside the country. It facilitated in the Philippines the collection and payment of receivables
belonging to its Hong Kong-based foreign client.

The Court explained how the services rendered in Amex were considered to have been performed and
consumed in the Philippines, to wit: ςrαlαω

Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means
the performance or "successful completion of a contractual duty, usually resulting in the performer s release
from any past or future liability x x x." The services rendered by respondent are performed or successfully
completed upon its sending to its foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the Philippines, are therefore also consumed in
the Philippines.44
ςrνll

The effect of the place of consumption on the zero-rating of the transaction was not the issue in Burmeister.
Instead, this Court addressed the squarely raised issue of whether the recipient of services should be doing
business outside the Philippines for the transaction to qualify for zero-rating. We ruled that it should. Thus,
another essential condition for qualification for zero-rating under Section 102(b)(2) of the 1977 Tax Code is
that the recipient of the business be doing that business outside the Philippines. In clarifying that there is no
conflict between this pronouncement and that laid down in Amex, we ruled thus: ςrαlαω

x x x. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch), the place of payment is immaterial, much less is the place where the output of the
service is ultimately used. An essential condition for entitlement to 0% VAT under Section 102 (b) (1) and
(2) is that the recipient of the services is a person doing business outside the Philippines. In this case, the
recipient of the services is the Consortium, which is doing business not outside, but within the Philippines
because it has a 15-year contract to operate and maintain NAPOCOR s two 100-megawatt power barges in
Mindanao. (Emphasis in the original)45 ςrνll

In Amex we ruled that the place of performance and/or consumption of the service is immaterial. In
Burmeister, the Court found that, although the place of the consumption of the service does not affect the
entitlement of a transaction to zero-rating, the place where the recipient conducts its business does.

Amex does not conflict with Burmeister. In fact, to fully understand how Section 102(b)(2) of the 1977 Tax
Code and consequently Section 108(B)(2) of the 1997 Tax Code was intended to operate, the two
aforementioned cases should be taken together. The zero-rating of the services performed by respondent in
Amex was affirmed by the Court, because although the services rendered were both performed and
consumed in the Philippines, the recipient of the service was still an entity doing business outside the
Philippines as required in Burmeister.

That the recipient of the service should be doing business outside the Philippines to qualify for zero-rating is
the only logical interpretation of Section 102(b)(2) of the 1977 Tax Code, as we explained in Burmeister: ςrαlαω

This can only be the logical interpretation of Section 102 (b) (2). If the provider and recipient of the "other
services" are both doing business in the Philippines, the payment of foreign currency is irrelevant.
Otherwise, those subject to the regular VAT under Section 102 (a) can avoid paying the VAT by simply
stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret Section
102 (b) (2) to apply to a payer-recipient of services doing business in the Philippines is to make the
payment of the regular VAT under Section 102 (a) dependent on the generosity of the taxpayer. The
provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign currency
inwardly remitted by the payer-recipient. Such interpretation removes Section 102 (a) as a tax measure in
the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary
contribution.

xxx xxx xxx

Further, when the provider and recipient of services are both doing business in the Philippines, their
transaction falls squarely under Section 102 (a) governing domestic sale or exchange of services. Indeed,
this is a purely local sale or exchange of services subject to the regular VAT, unless of course the transaction
falls under the other provisions of Section 102 (b).

Thus, when Section 102 (b) (2) speaks of "services other than those mentioned in the preceding
subparagraph," the legislative intent is that only the services are different between subparagraphs 1 and 2.
The requirements for zero-rating, including the essential condition that the recipient of services is doing
business outside the Philippines, remain the same under both subparagraphs. (Emphasis in the original)46 ςrνll

Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had already clarified
the intent behind Sections 102(b)(2) of the 1977 Tax Code and 108(B)(2) of the 1997 Tax Code amending
the earlier provision. R.A. 9337 added the following phrase: "rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not engaged in business who is outside the
Philippines when the services are performed."

Accenture has failed to establish that the recipients of its services do business outside the Philippines.

Accenture argues that based on the documentary evidence it presented, 47 it was able to establish the
following circumstances: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

1. The records of the Securities and Exchange Commission (SEC) show that Accenture s clients have not
established any branch office in which to do business in the Philippines.

2. For these services, Accenture bills another corporation, Accenture Participations B.V. (APB), which is
likewise a foreign corporation with no "presence in the Philippines."

3. Only those not doing business in the Philippines can be required under BSP rules to pay in acceptable
currency for their purchase of goods and services from the Philippines. Thus, in a domestic transaction,
where the provider and recipient of services are both doing business in the Philippines, the BSP cannot
require any party to make payment in foreign currency. 48 ςrνll

chanrobles virtual law library

Accenture claims that these documentary pieces of evidence are supported by the Report of Emmanuel
Mendoza, the Court-commissioned Independent Certified Public Accountant. He ascertained that Accenture s
gross billings pertaining to zero-rated sales were all supported by zero-rated Official Receipts and Billing
Statements. These documents show that these zero-rated sales were paid in foreign exchange currency and
duly accounted for in the rules and regulations of the BSP. 49 ςrνll

In the CTA s opinion, however, the documents presented by Accenture merely substantiate the existence of
the sales, receipt of foreign currency payments, and inward remittance of the proceeds of these sales duly
accounted for in accordance with BSP rules. Petitioner presented no evidence whatsoever that these clients
were doing business outside the Philippines.50 ςrνll

Accenture insists, however, that it was able to establish that it had rendered services to foreign corporations
doing business outside the Philippines, unlike in Burmeister, which allegedly involved a foreign corporation
doing business in the Philippines.51 ςrνll

We deny Accenture s Petition for a tax refund.

The evidence presented by Accenture may have established that its clients are foreign. This fact does not
automatically mean, however, that these clients were doing business outside the Philippines. After all, the
Tax Code itself has provisions for a foreign corporation engaged in business within the Philippines and vice
versa, to wit:

SEC. 22. Definitions - When used in this Title: ςηαñrοblεš νιr†υαl lαω lιbrαrà ¿

xxx xxx xxx

(H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business
within the Philippines.

(I) The term nonresident foreign corporation applies to a foreign corporation not engaged in trade or
business within the Philippines. (Emphasis in the original)
chanrobles virtual law library

Consequently, to come within the purview of Section 108(B)(2), it is not enough that the recipient of the
service be proven to be a foreign corporation; rather, it must be specifically proven to be a nonresident
foreign corporation.

There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. We
ruled thus in Commissioner of Internal Revenue v. British Overseas Airways Corporation: 52 ςrνll

x x x. 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."53 ςrνll

A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual basis of that
claim. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. 54
ςrνll

Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its clients
were foreign entities. However, as found by both the CTA Division and the CTA En Banc, no evidence was
presented by Accenture to prove the fact that the foreign clients to whom petitioner rendered its services
were clients doing business outside the Philippines.

As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests, Billing Statements,
Memo Invoices-Receivable, Memo Invoices-Payable, and Bank Statements presented by Accenture merely
substantiated the existence of sales, receipt of foreign currency payments, and inward remittance of the
proceeds of such sales duly accounted for in accordance with BSP rules, all of these were devoid of any
evidence that the clients were doing business outside of the Philippines. 55
ςrνll

WHEREFORE, the instant Petition is DENIED. The 22 September 2009 Decision and the 23 October 2009
Resolution of the Court of Tax Appeals En Banc in C.T.A. EB No. 477, dismissing the Petition for the refund
of the excess or unutilized input VAT credits of Accenture, Inc., are AFFIRMED.

SO ORDERED.
 G.R. No. 125704 August 28, 1998

PHILEX MINING CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,

COURT OF APPEALS, and THE COURT OF TAX APPEALS, Respondents.

ROMERO, J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8,
1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA Case No. 4872
dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise tax liability for the
period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August
6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.

The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax
liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the
total amount of P123,821.982.52 computed as follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE

TAX DUE

2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91

3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60

4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

----- ----- ------ ------

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39

----- ----- ------ ------

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25

2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

----- ----- ------ ------

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13

----- ----- ------ ------

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3

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

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax liabilities
stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989
to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund
should be applied against the tax liabilities, citing our ruling in Commissioner of Internal Revenue v.
Itogon-Suyoc Mines, Inc. 5

In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position. Since
these pending claims have not yet been established or determined with certainty, it follows that no
legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount
plus interest within 30 days from the receipt of the letter.

In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its
excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. 7 In
the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the amount of
P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively
lowered the latter's tax obligation to P110,677,688.52.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of
P110,677,688.52 plus interest, elucidating its reason, to wit:

Thus, for legal compensation to take place, both obligations must be liquidated and demandable.
"Liquidated" debts are those where the exact amount has already been determined (PARAS, Civil Code
of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the
Petitioner for VAT refund is still pending litigation, and still has to be determined by this Court (C.T.A.
Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the government cannot, therefore,
be set-off against the unliquidated claim which Petitioner conceived to exist in its favor (see Compañia
General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34). 8

Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on compensation
since claim for taxes is not a debt or contract." 9 The dispositive portion of the CTA
decision 10 provides:

In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby
ORDERED to PAY the Respondent the amount of P110,677,668.52 representing excise tax liability for
the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from
August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-GR.
CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax
Appeals observation. The pertinent portion of which reads: 12

WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated
March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July
11, 1996. 13

However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its
VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994,
computed as follows: 14

Period Covered Tax Credit Date

By Claims For Certificate of

VAT refund/credit Number Issue Amount

1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01

1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61

1989 007732 11 July 1996 P37,322,799.19

1990-1991 007751 16 July 1996 P84,662,787.46

1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso
jure, off-set its excise tax liabilities 15 since both had already become "due and demandable, as well as
fully liquidated;" 16 hence, legal compensation can properly take place.

We see no merit in this contention.

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. 17 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. 18 We find no cogent reason to deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19

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, 20 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.

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines
Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even
though the refund has not yet been approved by the Commissioner, 21 is no longer without any
support in statutory law.

It is important to note, that the premise of our ruling in the aforementioned case was anchored on
Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal Revenue
Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was
based was omitted. 22 Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by
Philex.

Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of
surcharge and interest for the non-payment of the excise taxes within the time prescribed was
unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities within the
prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. 23

We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law
that taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. 24 Evidently, to countenance Philex's whimsical reason would render ineffective our tax
collection system. Too simplistic, it finds no support in law or in jurisprudence.

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. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any taxpayer 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. 27 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.

Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is
immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the
Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any
authority to waive the collection thereof. 28 The same cannot be condoned for flimsy reasons, 29 similar
to the one advanced by Philex in justifying its non-payment of its tax liabilities.

Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue Code of
1977, which requires the refund of input taxes within 60 days, 31 when it took five years for the latter
to grant its tax claim for VAT input credit/refund. 32

In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof
to establish the factual basis of his or her claim for tax credit or refund, 33 however, once the claimant
has submitted all the required documents it is the function of the BIR to assess these documents with
purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that
government render fair service to the taxpayers. 34

In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these
erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and
judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that
simple justice requires the speedy refund of wrongly-held taxes. 35 Fair dealing and nothing less, is
expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas
v. Court of Tax Appeals: 36

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised
with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill the "hen that lays the golden egg" And, in order to
maintain the general public's trust and confidence in the Government this power must be used justly
and not treacherously.

Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a
settled rule that in the performance of governmental function, the State is not bound by the neglect of
its agents and officers. Nowhere is this more true than in the field of taxation. 37 Again, while we
understand Philex's predicament, it must be stressed that the same is not a valid reason for the non-
payment of its tax liabilities.

To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or
employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet
needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter can
seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. 38 Second, if
the inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the
Tax Code can also be availed of.
Art. 27 of the Civil Code provides:

Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or
neglects, without just cause, to perform his official duty may file an action for damages and other
relief against the latter, without prejudice to any disciplinary action that may be taken.

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:

xxx xxx xxx

(c) Wilfully neglecting to give receipts, as by law required for any sum collected in the performance of
duty or wilfully neglecting to perform, any other duties enjoyed by law.

Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the
performance of official duties. 39 In no uncertain terms must we stress that every public employee or
servant must strive to render service to the people with utmost diligence and efficiency. Insolence and
delay have no place in government service. The BIR, being the government collecting arm, must and
should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it
wishes to remain true to its mission of hastening the country's development. We take judicial notice of
the taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its
detractors wrong.

In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the
same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law
into his own hands" should have guided Philex's action.

WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision
of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.

SO ORDERED

G.R. No. L-66653 June 19, 1986

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BURROUGHS LIMITED AND THE COURT OF TAX APPEALS, respondents.
Sycip, Salazar, Feliciano & Hernandez Law Office for private respondent.

PARAS, J.:

Petition for certiorari to review and set aside the Decision dated June 27, 1983 of respondent Court
of Tax Appeals in its C.T.A. Case No. 3204, entitled "Burroughs Limited vs. Commissioner of Internal
Revenue" which ordered petitioner Commissioner of Internal Revenue to grant in favor of private
respondent Burroughs Limited, tax credit in the sum of P172,058.90, representing erroneously
overpaid branch profit remittance tax.

Burroughs Limited is a foreign corporation authorized to engage in trade or business in the

Philippines through a branch office located at De la Rosa corner Esteban Streets, Legaspi Village,
Makati, Metro Manila.

Sometime in March 1979, said branch office applied with the Central Bank for authority to remit to its
parent company abroad, branch profit amounting to P7,647,058.00. Thus, on March 14, 1979, it paid
the 15% branch profit remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office
the amount of P6,499,999.30 computed as follows:

Amount applied for remittance................................ P7,647,058.00

Deduct: 15% branch profit

remittance tax ..............................................1,147,058.70

Net amount actually remitted.................................. P6,499,999.30

Claiming that the 15% profit remittance tax should have been computed on the basis of the amount
actually remitted (P6,499,999.30) and not on the amount before profit remittance tax
(P7,647,058.00), private respondent filed on December 24, 1980, a written claim for the refund or tax
credit of the amount of P172,058.90 representing alleged overpaid branch profit remittance tax,
computed as follows:

Profits actually remitted .........................................P6,499,999.30

Remittance tax rate .......................................................15%

Branch profit remittance tax-

due thereon ......................................................P 974,999.89

Branch profit remittance

tax paid .............................................................Pl,147,058.70

Less: Branch profit remittance

tax as above computed................................................. 974,999.89

 Total amount refundable........................................... P172,058.81

On February 24, 1981, private respondent filed with respondent court, a petition for review, docketed
as C.T.A. Case No. 3204 for the recovery of the above-mentioned amount of P172,058.81.

On June 27, 1983, respondent court rendered its Decision, the dispositive portion of which reads—

ACCORDINGLY, respondent Commission of Internal Revenue is hereby ordered to grant a tax credit
in favor of petitioner Burroughs Limited the amount of P 172,058.90. Without pronouncement as to
costs.

SO ORDERED.

Unable to obtain a reconsideration from the aforesaid decision, petitioner filed the instant petition
before this Court with the prayers as herein earlier stated upon the sole issue of whether the tax
base upon which the 15% branch profit remittance tax shall be imposed under the provisions of
section 24(b) of the Tax Code, as amended, is the amount applied for remittance on the profit
actually remitted after deducting the 15% profit remittance tax. Stated differently is private
respondent Burroughs Limited legally entitled to a refund of the aforementioned amount of
P172,058.90.

We rule in the affirmative. The pertinent provision of the National Revenue Code is Sec. 24 (b) (2) (ii)
which states:

Sec. 24. Rates of tax on corporations....

(b) Tax on foreign corporations. ...

(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a branch to its
head office shall be subject to a tax of fifteen per cent (15 %) ...

In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting Commissioner of
Internal Revenue Hon. Efren I. Plana the aforequoted provision had been interpreted to mean that
"the tax base upon which the 15% branch profit remittance tax ... shall be imposed...(is) the
profit actually remitted abroad and not on the total branch profits out of which the remittance is to be
made. " The said ruling is hereinbelow quoted as follows:

In reply to your letter of November 3, 1978, relative to your query as to the tax base
upon which the 15% branch profits remittance tax provided for under Section 24 (b)
(2) of the 1977 Tax Code shall be imposed, please be advised that the 15% branch
profit tax shall be imposed on the branch profits actually remitted abroad and not on
the total branch profits out of which the remittance is to be made.

Please be guided accordingly.

Applying, therefore, the aforequoted ruling, the claim of private respondent that it made an
overpayment in the amount of P172,058.90 which is the difference between the remittance tax
actually paid of Pl,147,058.70 and the remittance tax that should have been paid of P974,999,89,
computed as follows

Profits actually remitted......................................... P6,499,999.30

 Remittance tax rate.............................................................. 15%

Remittance tax due................................................... P974,999.89

is well-taken. As correctly held by respondent Court in its assailed decision-

Respondent concedes at least that in his ruling dated January 21, 1980 he held that
under Section 24 (b) (2) of the Tax Code the 15% branch profit remittance tax shall
be imposed on the profit actually remitted abroad and not on the total branch profit
out of which the remittance is to be made. Based on such ruling petitioner should
have paid only the amount of P974,999.89 in remittance tax computed by taking the
15% of the profits of P6,499,999.89 in remittance tax actually remitted to its head
office in the United States, instead of Pl,147,058.70, on its net profits of
P7,647,058.00. Undoubtedly, petitioner has overpaid its branch profit remittance tax
in the amount of P172,058.90.

Petitioner contends that respondent is no longer entitled to a refund because Memorandum Circular
No. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980.
The said memorandum circular states—

Considering that the 15% branch profit remittance tax is imposed and collected at
source, necessarily the tax base should be the amount actually applied for by the
branch with the Central Bank of the Philippines as profit to be remitted abroad.

Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still the
Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited paid the branch
profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82 dated March
17, 1982 cannot be given retroactive effect in the light of Section 327 of the National Internal
Revenue Code which provides-

Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of any

of the rules and regulations promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the Commissioner shag not be given
retroactive application if the revocation, modification, or reversal will be prejudicial to
the taxpayer except in the following cases (a) where the taxpayer deliberately
misstates or omits material facts from his return or in 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. (ABS-CBN Broadcasting Corp.
v. CTA, 108 SCRA 151-152)

The prejudice that would result to private respondent Burroughs Limited by a retroactive application
of Memorandum Circular No. 8-82 is beyond question for it would be deprived of the substantial
amount of P172,058.90. And, insofar as the enumerated exceptions are concerned, admittedly,
Burroughs Limited does not fall under any of them.

WHEREFORE, the assailed decision of respondent Court of Tax Appeals is hereby AFFIRMED. No
pronouncement as to costs.

SO ORDERED
 SECRETARY OF FINANCE CESAR B. PURISIMA AND COMMISSIONER OF INTERNAL REVENUE KIM
S. JACINTO-HENARES, Petitioners, v. REPRESENTATIVE CARMELO F. LAZATIN AND ECOZONE
PLASTIC ENTERPRISES CORPORATION, Respondents.

DECISION

BRION, J.:

This is a direct recourse to this Court from the Regional Trial Court (RTC), Branch 58, Angeles City, through
a petition for review on certiorari1 under Rule 45 of the Rules of Court on a pure question of law. The
petition seeks the reversal of the November 8, 2013 decision 2 of the RTC in SCA Case No. 12-410. In the
assailed decision, the RTC declared Revenue Regulation (RR) No. 2-2012 unconstitutional and without force
and effect.

The Facts

In response to reports of smuggling of petroleum and petroleum products and to ensure the correct taxes
are paid and collected, petitioner Secretary of Finance Cesar V. Purisima - pursuant to his authority to
interpret tax laws3 and upon the recommendation of petitioner Commissioner of Internal Revenue (CIR) Kim
S. Jacinto-Henares signed RR 2-2012 on February 17, 2012.

The RR requires the payment of value-added tax (VAT) and excise tax on the importation of all petroleum
and petroleum products coming directly from abroad and brought into the Philippines, including Freeport and
economic zones (FEZs).4 It then allows the credit or refund of any VAT or excise tax paid if the taxpayer
proves that the petroleum previously brought in has been sold to a duly registered FEZ locator and used
pursuant to the registered activity of such locator.5

In other words, an FEZ locator must first pay the required taxes upon entry into the FEZ of a petroleum
product, and must thereafter prove the use of the petroleum product for the locator's registered activity in
order to secure a credit for the taxes paid.

On March 7, 2012, Carmelo F. Lazatin, in his capacity as Pampanga First District Representative, filed a
petition for prohibition and injunction6 against the petitioners to annul and set aside RR 2-2012.

Lazatin posits that Republic Act No. (RA) 94007 treats the Clark Special Economic Zone and Clark Freeport
Zone (together hereinafter referred to as Clark FEZ) as a separate customs territory and allows tax and
duty-free importations of raw materials, capital and equipment into the zone. Thus, the imposition of VAT
and excise tax, even on the importation of petroleum products into FEZs (like Clark FEZ), directly
contravenes the law.

The respondent Ecozone Plastic Enterprises Corporation (EPEC) sought to intervene in the proceedings as a
co-petitioner and accordingly entered its appearance and moved for leave of court to file its petition-in-
intervention.8

EPEC claims that, as a Clark FEZ locator, it stands to suffer when RR 2-2012 is implemented. EPEC insists
that RR 2-2012's mechanism of requiring even locators to pay the tax first and to subsequently claim a
credit or to refund the taxes paid effectively removes the locators' tax-exempt status.

The RTC initially issued a temporary restraining order to stay the implementation of RR 2-2012. It
eventually issued a writ of preliminary injunction in its order dated April 4, 2012.

The petitioners questioned the issuance of the writ. On May 17, 2012, they filed a petition
for certiorari9 before the Court of Appeals (CA) assailing the RTC's order. The CA granted the petition 10 and
denied the respondents' subsequent motion for reconsideration. 11

The respondents stood their ground by filing a petition for review on certiorari before this Court (G.R. No.
208387) to reinstate the RTC's injunction against the implementation of RR 2-2012, and by moving for the
issuance of a temporary restraining order and/or writ of preliminary injunction. We denied the motion but
nevertheless required the petitioners to comment on the petition.

The proceedings before the RTC in the meanwhile continued. On April 18, 2012, petitioner Lazatin amended
his original petition, converting it to a petition for declaratory relief. 12 The RTC admitted the amended
petition and allowed EPEC to intervene.

In its decision dated November 8, 2013, the RTC ruled in favor of Lazatin and EPEC.

First, on the procedural aspect, the RTC held that the original petition's amendment is allowed by the rules
and that amendments are largely preferred; it allowed the amendment in the exercise of its sound judicial
discretion to avoid multiplicity of suits and to give the parties an opportunity to thresh out the issues and
finally reach a conclusion.13

Second, the RTC held that Lazatin and EPEC had legal standing to question the validity of RR 2-2012.
Lazatin's allegation that RR 2-2012 effectively amends and modifies RA 9400 gave him standing as a
legislator: the amendment of a tax law is a power that belongs exclusively to Congress. Lazatin's allegation,
according to the RTC, sufficiently shows how his rights, privileges, and prerogatives as a member of
Congress were impaired by the issuance of RR 2-2012.

The RTC also ruled that the case warrants a relaxation on the rules on legal standing because the issues
touched upon are of transcendental importance. The trial court considered the encompassing effect that RR
2-2012 may have in the numerous freeport and economic zones in the Philippines, as well as its potential
impact on hundreds of investors operating within the zones.

The RTC then held that even if Lazatin does not have legal standing, EPEC's intervention cured this defect:
EPEC, as a locator within the Clark FEZ, would be adversely affected by the implementation of RR 2-2012.

Finally, the RTC declared RR 2-2012 unconstitutional. RR 2-2012 violates RA 9400 because it imposes taxes
that, by law, are not due in the first place.14 Since RA 9400 clearly grants tax and duty-free incentives to
Clark FEZ locators, a revocation of these incentives by an RR directly contravenes the express intent of the
Legislature.15 In effect, the petitioners encroached upon the prerogative to enact, amend, or repeal laws,
which the Constitution exclusively granted to Congress.

The Petition
The petitioners anchor their present petition on two arguments: 1) respondents have no legal standing, and
2) RR 2-2012 is valid and constitutional.

The petitioners submit that the Lazatin and EPEC do not have legal standing to assail the validity of RR 2-
2012.

First, the petitioners claim that Lazatin does not have the requisite legal standing as he failed to exactly
show how the implementation of RR 2- 2012 would impair the exercise his official functions. Respondent
Lazatin merely generally alleged that his constitutional prerogatives to pass or amend laws were gravely
impaired or were about to be impaired by the issuance of RR 2-2012. He did not specify the power that he,
as a legislator, would be encroached upon.

While the Clark FEZ is within the district that respondent Lazatin represents, the petitioners emphasize that
Lazatin failed to show that he is authorized to file a case on behalf of the locators in the FEZ, the local
government unit, or his constituents in general.16 To the petitioners, if RR 2- 2012 ever caused injury to the
locators or to any of Lazatin's constituents, only these injured parties possess the personality to question the
petitioners' actions; respondent Lazatin cannot claim this right on their behalf. 17

The petitioners claim, too, that the RTC should not have brushed aside the rules on standing on account of
transcendental importance. To them, this case does not involve public funds, only a speculative loss of
profits upon the implementation of RR 2-2012; nor is Lazatin a party with more direct and specific interest
to raise the issues in his petition.18 Citing Senate v. Ermita,19 the petitioners argue that the rules on standing
cannot be relaxed.

Second, petitioners also argue that EPEC does not have legal standing to intervene. That EPEC will
ultimately bear the VAT and excise tax as an end-user, is misguided. 20 The burden of payment of VAT and
excise tax may be shifted to the buyer21 and this burden, from the point of view of the transferee is no
longer a tax but merely a component of the cost of goods purchased. The statutory liability for the tax
remains with the seller. Thus, EPEC cannot say that when the burden is passed on to it, RR 2-2012
effectively imposes tax on it as a Clark FEZ locator.

The petitioners point out that RR 2-2012 imposes an "advance tax" only upon importers of petroleum
products. If EPEC is indeed a locator, then it enjoys tax and duty exemptions granted by RA 9400 so long as
it does not bring the petroleum or petroleum products to the Philippine customs territory. 22

The petitioners legally argue that RR 2-2012 is valid and constitutional.

First, petitioner submit that RR 2-2012's issuance and implementation are within their powers to
undertake.23 RR 2-2012 is an administrative issuance that enjoys the presumption of validity in the manner
that statutes enjoy this presumption; thus, it cannot be nullified without clear and convincing evidence to
the contrary.24

Second, petitioners contend that while RA 9400 does grant tax and customs duty incentives to Clark FEZ
locators, there are conditions before these benefits may be availed of. The locators cannot invoke outright
exemption from VAT and excise tax on its importations without first satisfying the conditions set by RA
9400, that is, the importation must not be removed from the FEZ and introduced into the Philippine customs
territory.25

These locators enjoy what petitioners call a qualified tax exemption. They must first pay the corresponding
taxes on its imported petroleum. Then, they must submit the documents required under RR 2-2012. If they
have sufficiently shown that the imported products have not been removed from the FEZ, their earlier
payment shall be subject to a refund.

The petitioners lastly argue that RR 2-2012 does not withdraw the locators' tax exemption privilege. The
regulation simply requires proof that a locator has complied with the conditions for tax exemption. If the
locator cannot show that the goods were retained and/or consumed within the FEZ, such failure creates the
presumption that the goods have been introduced into the customs territory without the appropriate
permits.26 On the other hand, if they have duly proven the disposition of the goods within the FEZ, their
"advance payment" is subject to a refund. Thus, to the petitioners, to the extent that a refund is allowable,
there is in reality a tax exemption.27

Counter-arguments

Respondents Lazatin and EPEC, maintaining that they have standing to question its validity, insist that RR 2-
2012 is unconstitutional.

Respondents have standing as

lawmaker and FEZ locator.

The respondents argue that a member of Congress has standing to protect the prerogatives, powers, and
privileges vested by the Constitution in his office.28 As a member of Congress, his standing to question
executive issuances that infringe on the right of Congress to enact, amend, or repeal laws has already been
recognized.29 He suffers substantial injury whenever the executive oversteps and intrudes into his power as
a lawmaker.30

On the other hand, the respondents point out that RR 2-2012 explicitly covers FEZs. Thus, being a Clark FEZ
locator, EPEC is among the many businesses that would have been directly affected by its implementation. 31

RR 2-2012 illegally imposes taxes

on Clark FEZs.

The respondents underscore that RA 9400 provides FEZ locators certain incentives, such as tax- and duty-
free importations of raw materials and capital equipment. These provisions of the law must be interpreted in
a way that will give full effect to law's policy and objective, which is to maximize the benefits derived from
the FEZs in promoting economic and social development.32

They admit that the law subjects to taxes and duties the goods that were brought into the FEZ and
subsequently introduced to the Philippine customs territory. However, contrary to petitioners' position that
locators' tax and duty exemptions are qualified, their incentives apply automatically.

According to the respondents, petitioners' interpretation of the law contravenes the policy laid down by RA
9400, because it makes the incentives subject to a suspensive condition. They claim that the condition —
the removal of the goods from the FEZ and their subsequent introduction to the customs territory — is
resolutory; locators enjoy the granted incentives upon bringing the goods into the FEZ. It is only when the
goods are shown to have been brought into the customs territory will the proper taxes and duties have to be
paid.33 RR 2-2012 reverses this process by requiring the locators to pay "advance" taxes and duties first and
to subsequently prove that they are entitled to a refund, thereafter. 34 RR 2-2012 indeed allows a refund, but
a refund of taxes that were not due in the first place. 35

The respondents add that even the refund mechanism under RR 2-2012 is problematic. They claim that RR
2-2012 only allows a refund when the petroleum products brought into the FEZ are subsequently sold to FEZ
locators or to entities that similarly enjoy exemption from direct and indirect taxes. The issuance does not
envision a situation where the petroleum products are directly brought into the FEZ and are consumed by
the same entity/locator.36 Further, the refund process takes a considerable length of time to secure, thus
requiring cash outlay on the part of locators;37 even when the claim for refund is granted, the refund will not
be in cash, but in the form of a Tax Credit Certificate (TCC). 38

As the challenged regulation directly contravenes incentives legitimately granted by a legislative act, the
respondents argue that in issuing RR 2-2012, the petitioners not only encroached upon congressional
prerogatives and arrogated powers unto themselves; they also effectively violated, brushed aside, and
rendered nugatory the rigorous process required in enacting or amending laws. 39

Issues

We shall decide the following issues:

 I. Whether respondents Lazatin and EPEC have legal standing to bring the action of declaratory relief;
and

II. Whether RR 2-2012 is valid and constitutional.

The Court's Ruling

We do not find the petition meritorious.

I. Respondents have
legal standing to
file petition for
declaratory relief.

The party seeking declaratory relief must have a legal interest in the controversy for the action to
prosper.40 This interest must be material not merely incidental. It must be an interest that which will be
affected by the challenged decree, law or regulation. It must be a present substantial interest, as opposed to
a mere expectancy or a future, contingent, subordinate, or consequential interest. 41

Moreover, in case the petition for declaratory relief specifically involves a question of constitutionality, the
courts will not assume jurisdiction over the case unless the person challenging the validity of the act
possesses the requisite legal standing to pose the challenge.42

Locus standi is a personal and substantial interest in a case such that the party has sustained or will sustain
direct injury as a result of the challenged governmental act. The question is whether the challenging party
alleges such personal stake in the outcome of the controversy so as to assure the existence of concrete
adverseness that would sharpen the presentation of issues and illuminate the court in ruling on the
constitutional question posed.43

We rule that the respondents satisfy these standards.

Lazatin has legal standing as

a legislator.

Lazatin filed the petition for declaratory relief before the RTC in his capacity as a member of Congress. 44 He
alleged that RR 2-2012 was issued directly contravening RA 9400, a legislative enactment. Thus, the
regulation encroached upon the Congress' exclusive power to enact, amend, or repeal laws. 45 According to
Lazatin, a member of Congress has standing to challenge the validity of an executive issuance if it tends to
impair his prerogatives as a legislator.46

We agree with Lazatin.

In Biraogo v. The Philippine Truth Commission,47 we ruled that legislators have the legal standing to ensure
that the prerogatives, powers, and privileges vested by the Constitution in their office remain inviolate. To
this end, members of Congress are allowed to question the validity of any official action that infringes on
their prerogatives as legislators.48

Thus, members of Congress possess the legal standing to question acts that amount to a usurpation of the
legislative power of Congress.49 Legislative power is exclusively vested in the Legislature. When the
implementing rules and regulations issued by the Executive contradict or add to what Congress has provided
by legislation, the issuance of these rules amounts to an undue exercise of legislative power and an
encroachment of Congress' prerogatives.

To the same extent that the Legislature cannot surrender or abdicate its legislative power without violating
the Constitution,50 so also is a constitutional violation committed when rules and regulations implementing
legislative enactments are contrary to existing statutes. No law can be amended by a mere administrative
rule issued for its implementation; administrative or executive acts are invalid if they contravene the laws or
to the Constitution.51

Thus, the allegation that RR. 2-2012 — an executive issuance purporting to implement the provisions of the
Tax Code — directly contravenes RA 9400 clothes a member of Congress with legal standing to question the
issuance to prevent undue encroachment of legislative power by the executive.

EPEC has legal standing as a

Clark FEZ locator.

EPEC intervened in the proceedings before the RTC based on the allegation that, as a Clark FEZ locator, it
will be directly affected by the implementation of RR 2-2012. 52

We agree with EPEC.

It is not disputed that RR 2-2012 relates to the imposition of VAT and excise tax and applies to all petroleum
and petroleum products that are imported directly from abroad to the Philippines, including FEZs.53

As an enterprise located in the Clark FEZ, its importations of petroleum and petroleum products will be
directly affected by RR 2-2012. Thus, its interest in the subject matter — a personal and substantial one —
gives it legal standing to question the issuance's validity.

In sum, the respondents' respective interests in this case are sufficiently substantial to be directly affected
by the implementation of RR 2-2012. The RTC therefore did not err when it gave due course to Lazatin's
petition for declaratory relief as well as PEC's petition-in-intervention.

In light of this ruling, we see no need to rule on the claimed transcendental importance of the issues raised.

II. RR 2-2012 is
invalid and
unconstitutional.

On the merits of the case, we rule that RR 2-2012 is invalid and unconstitutional because: a) it illegally
imposes taxes upon FEZ enterprises, which, by law, enjoy tax-exempt status, and b) it effectively amends
the law (i.e., RA 7227, as amended by RA 9400) and thereby encroaches upon the legislative authority
reserved exclusively by the Constitution for Congress.

FEZ enterprises enjoy tax- and

duty-free incentives on its
importations.

In 1992, Congress enacted RA 7227 otherwise known as the "Bases Conversion and Development Act of
1992" to enhance the benefits to be derived from the Subic and Clark military reservations. 54 RA 7227
established the Subic Special economic zone and granted such special territory various tax and duty
incentives.

To effectively extend the same benefits enjoyed in Subic to the Clark FEZ, the legislature enacted RA 9400
to amend RA 7227.55 Subsequently, the Department of Finance issued Department Order No. 3-2008 56 to
implement RA 9400 (Implementing Rules).

Under RA 9400 and its Implementing Rules, Clark FEZ is considered a customs territory separate and
distinct from the Philippines customs territory. Thus, as opposed to importations into and establishments in
the Philippines customs territory,57 which are fully subject to Philippine customs and tax
laws, importations into and establishments located within the Clark FEZ (FEZ Enterprises)58 enjoy special
incentives, including tax and duty-free importation.59 More specifically, Clark FEZ enterprises shall be
entitled to the freeport status of the zone and a 5% preferential income tax rate on its gross income, in lieu
of national and local taxes.60

RA 9400 and its Implementing Rules grant the following:

First, the law provides that importations of raw materials and capital equipment into the FEZs shall be tax-
and duty-free. It is the specific transaction (i.e., importation) that is exempt from taxes and duties.

Second, the law also grants FEZ enterprises tax- and duty-free importation and a preferential rate in the
payment of income tax, in lieu of all national and local taxes. These incentives exempt
the establishment itself from taxation.

Thus, the Legislature intended FEZs to enjoy tax incentives in general — whether with respect to
the transactions that take place within its special jurisdiction, or the persons/establishments within the
jurisdiction. From this perspective, the tax incentives enjoyed by FEZ enterprises must be understood
to necessarily include the tax exemption of importations of selected articles into the FEZ.

We have ruled in the past that FEZ enterprises' tax exemptions must be interpreted within the context and
in a manner that promotes the legislative intent of RA 7227 61 and, by extension, RA 9400. Thus, we
recognized that FEZ enterprises are exempt from both direct and indirect internal revenue taxes.62 In
particular, they are considered VAT-exempt entities.63

In line with this comprehensive interpretation, we rule that the tax exemption enjoyed by FEZ enterprises
covers internal revenue taxes imposed on goods brought into the FEZ, including the Clark FEZ, such as VAT
and excise tax.

RR 2-2012 illegally imposes VAT and excise

tax on goods brought into the FEZs.

Section 3 of RR 2-2012 provides the following:

First, whenever petroleum and petroleum products are imported and/or brought directly to the Philippines,
the importer of these goods is required to pay the corresponding VAT and excise tax due on the
importation.

Second, the importer, as the payor of the taxes, may subsequently seek a refund of the amount previously
paid by filing a corresponding claim with the Bureau of Customs (BOC).

Third, the claim shall only be granted upon showing that the necessary condition has been fulfilled.

At first glance, this imposition — a mere tax administration measure according to the petitioners — appears
to be consistent with the taxation of similar imported articles under the Tax Code, specifically under its
Sections 10764 and 14865 (in relation with Sections 12966 and 13167) .

However, RR 2-2012 explicitly covers even petroleum and petroleum products imported and/or brought into
the various FEZs in the Philippines. Hence, when an FEZ enterprise brings petroleum and petroleum
products into the FEZ, under RR 2-2012, it shall be considered an importer liable for the taxes due on these
products.

The crux of the controversy can be found in this feature of the challenged regulation.

The petitioners assert that RR 2-2012 simply implements the provisions of the Tax Code on collection of
internal revenue taxes, more specifically VAT and excise tax, on the importation of petroleum and petroleum
products. To them, FEZ enterprises enjoy a qualified tax exemption such that they have to pay the tax due
on the importation first, and thereafter claim a refund, which shall be allowed only upon showing that the
goods were not introduced to the Philippine customs territory.
On the other hand, the respondents contend that RR 2-2012 imposes taxes on FEZ enterprises, which in the
first place are not liable for taxes. They emphasize that the tax incentives under RA 9400
apply automatically upon the importation of the goods. The proper taxes on the importation shall only be
due if the enterprises can later show that the goods were subsequently introduced to the Philippine customs
territory.

Since the tax exemptions enjoyed by FEZ enterprises under the law extend even to VAT and excise tax, as
we discussed above, it follows and we accordingly rule that the taxes imposed by Section 3 of RR 2-2012
directly contravene these exemptions. First, the regulation erroneously considers petroleum and petroleum
products brought into a FEZ as taxable importations. Second, it unreasonably burdens FEZ enterprises by
making them pay the corresponding taxes — an obligation from which the law specifically exempts them —
even if there is a subsequent opportunity to refund the payments made.

Petroleum and petroleum products brought

into the FEZ and which remain therein are

not taxable importations.

RR 2-2012 clearly imposes VAT and excise tax on the importation of petroleum and petroleum products into
FEZs. Strictly speaking, however, articles brought into these FEZs are not taxable importations under the
law based on the following considerations:

First, importation refers to bringing goods from abroad into the Philippine customs jurisdiction. It begins
from the time the goods enter the Philippine jurisdiction and is deemed terminated when the applicable
taxes and duties have been paid or the goods have left the jurisdiction of the BOC.68

Second, under the Tax Code, imported goods are subject to VAT and excise tax. These taxes shall be paid
prior to the release of the goods from customs custody.69 Also, for VAT purposes,70 an importer refers to any
person who brings goods into the Philippines.

Third, the Philippine VAT system adheres to the cross border doctrine.71 Under this rule, no VAT shall be
imposed to form part of the cost of the goods destined for consumption outside the Philippine customs
territory.72 Thus, we have already ruled before that an FEZ enterprise cannot be directly charged for the
VAT on its sales, nor can VAT be passed on to them indirectly as added cost to their purchases.73

Fourth, laws such as RA 7227, RA 7916, and RA 9400 have established certain special areas as separate
customs territories.74 In this regard, we have already held that such jurisdictions, such as the Clark FEZ, are,
by legal fiction, foreign territories.75

Fifth, the Implementing Rules provides that goods initially introduced into the FEZs and subsequently
brought out therefrom and introduced into the Philippine customs territory shall be considered
as importations and thereby subject to the VAT. 76 One such instance is the sale by any FEZ enterprise to a
customer located in the customs territory, which the VAT regulations refer to as a technical importation.77

We find it clear from all these that when goods (e.g., petroleum and petroleum products) are brought into
an FEZ, the goods remain to be in foreign territory and are not therefore goods introduced into Philippine
customs territory subject to Philippine customs and tax laws.78

Stated differently, goods brought into and traded within an FEZ are generally beyond the reach of national
internal revenue taxes and customs duties enforced in the Philippine customs territory. This is consistent
with the incentive granted to FEZs exempting the importation itself from taxes and duties.

Therefore, the act of bringing the goods into an FEZ is not a taxable importation. As long as the goods
remain (e.g., sale and/or consumption of the article within the FEZ) in the FEZ or re-exported to another
foreign jurisdiction, they shall continue to be tax-free.79 However, once the goods are introduced into the
Philippine customs territory, it ceases to enjoy the tax privileges accorded to FEZs. It shall then be
considered as an importation subject to all applicable national internal revenue taxes and customs duties.
The tax exemption granted to FEZ
enterprises is an immunity from tax liability
and from the payment of the tax.

The respondents claim that when RR 2-2012 was issued, petroleum and petroleum products brought into the
FEZ by FEZ enterprises suddenly became subject to VAT and excise tax, in direct contravention of RA 9400
(with respect to Clark FEZ enterprises). Such imposition is not authorized under any law, including the Tax
Code.80

On the other hand, the petitioners argue that RR 2-2012 does not withdraw the tax exemption privileges of
FEZ enterprises. As their tax exemption is merely qualified, they cannot invoke outright exemption. Thus,
FEZ enterprises are required to pay internal revenue taxes first on their imported petroleum under RR 2-
2012. They may then refund their previous payment upon showing that the condition under RA 9400 has
been satisfied — that is, the goods have not been introduced to the Philippines customs territory. 81 To the
petitioners, to the extent that a refund is allowable, there is still in reality a tax exemption. 82

We disagree with this contention.

First, FEZ enterprises bringing goods into the FEZ should not be considered as importers subject to tax in
the same manner that the very act of bringing goods into these special territories does not make
them taxable importations. We emphasize that the exemption from taxes and duties under RA 9400 are
granted not only to importations into the FEZ, but also specifically to each FEZ enterprise. As discussed, the
tax exemption enjoyed by FEZ enterprises necessarily includes the tax exemption of the importations of
selected articles into the FEZ.

Second, the essence of a tax exemption is the immunity or freedom from a charge or burden to which
others are subjected.83 It is a waiver of the government's right to collect84 the amounts that would have
been collectible under our tax laws. Thus, when the law speaks of a tax exemption, it should be understood
as freedom from the imposition and payment of a particular tax.

Based on this premise, we rule that the refund mechanism provided by RR 2-2012 does not amount to a tax
exemption. Even if the possibility of a subsequent refund exists, the fact remains that FEZ enterprises must
still spend money and other resources to pay for something they should be immune to in the first place. This
completely contradicts the essence of their tax exemption.

In the same vein, we cannot agree with the view that FEZ enterprises have the duty to prove their
entitlement to tax exemption first before fully enjoying the same; we find it illogical to determine whether a
person is exempted from tax without first determining if he is subject to the tax being imposed. We have
reminded the tax authorities to determine first if a person is liable for a particular tax, applying the rule of
strict interpretation of tax laws, before asking him to prove his exemption therefrom. 85 Indeed, as entities
exempted on taxes on importations, FEZ enterprises are clearly beyond the coverage of any law imposing
those very charges. There is no justifiable reason to require them to prove that they are exempted from it.

More importantly, we have also recognized that the exemption from local and national taxes granted under
RA 7227, as amended by RA 9400, are ipso facto accorded to FEZs. In case of doubt, conflicts with respect
to such tax exemption privilege shall be resolved in favor of these special territories. 86

RR 2-2012 is unconstitutional.

According to the respondents, the power to enact, amend, or repeal laws belong exclusively to
Congress.87 In passing RR 2-2012, petitioners illegally amended the law — a power solely vested on the
Legislature.

We agree with the respondents.

The power of the petitioners to interpret tax laws is not absolute. The rule is that regulations may not
enlarge, alter, restrict, or otherwise go beyond the provisions of the law they administer; administrators and
implementors cannot engraft additional requirements not contemplated by the legislature. 88
It is worthy to note that RR 2-2012 does not even refer to a specific Tax Code provision it wishes to
implement. While it purportedly establishes mere administration measures for the collection of VAT and
excise tax on the importation of petroleum and petroleum products, not once did it mention the pertinent
chapters of the Tax Code on VAT and excise tax.

While we recognize petitioners' essential rationale in issuing RR 2-2012, the procedures proposed by the
issuance cannot be implemented at the expense of entities that have been clearly granted statutory tax
immunity.

Tax exemptions are granted for specific public interests that the Legislature considers sufficient to offset the
monetary loss in the grant of exemptions.89 To limit the tax-free importation privilege of FEZ enterprises by
requiring them to pay subject to a refund clearly runs counter to the Legislature's intent to create a free port
where the "free flow of goods or capital within, into, and out of the zones" is ensured. 90

Finally, the State's inherent power to tax is vested exclusively in the Legislature. 91 We have since ruled that
the power to tax includes the power to grant tax exemptions. 92 Thus, the imposition of taxes, as well as the
grant and withdrawal of tax exemptions, shall only be valid pursuant to a legislative enactment.

As RR 2-2012, an executive issuance, attempts to withdraw the tax incentives clearly accorded by the
legislative to FEZ enterprises, the *petitioners have arrogated upon themselves a power reserved exclusively
to Congress, in violation of the doctrine of separation of powers.

In these lights, we hereby rule and declare that RR 2-2012 is null and void.

WHEREFORE, we hereby DISMISS the petition for lack of merit, and accordingly AFFIRM decision of the
Regional Trial Court dated November 8, 2013 2001 in SCA Case No. 12-410.

SO ORDERED

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PHILIPPINE ALUMINUM WHEELS,

INC., Respondent.

DECISION

CARPIO, J.:
 The Case

Before the Court is a petition for review on certiorari1 assailing the 19 May 2014 Decision2 and the 5 January
2015 Resolution3 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 994.

The CTA En Banc affirmed the Decision of the CTA First Division ordering the cancellation and withdrawal of
the deficiency tax assessments issued by the Commissioner of Internal Revenue (CIR) against Philippine
Aluminum Wheels, Inc. (respondent).

The Facts

Respondent is a corporation organized and existing under Philippine laws which engages in the manufacture,
production, sale, and distribution of automotive parts and accessories. On 16 December 2003, the Bureau of
Internal Revenue (BIR) issued a Preliminary Assessment Notice (PAN) against respondent covering
deficiency taxes for the taxable year 2001.4 On 28 March 2004, the BIR issued a Final Assessment Notice
(FAN) against respondent in the amount of P32,100,613.42.5 On 23 June 2004, respondent requested for
reconsideration of the FAN issued by the BIR. On 8 November 2006, the BIR issued a Final Decision on
Disputed Assessment (FDDA) and demanded full payment of the deficiency tax assessment from
respondent.6 On 12 April 2007, the FDDA was served through registered mail.

On 19 July 2007, respondent filed with the BIR an application for the abatement of its tax liabilities under
Revenue Regulations No. 13-2001 for the taxable year 2001. 7 In a letter dated 12 September 2007,8 the BIR
denied respondent's application for tax abatement on the ground that the FDDA was already issued by the
BIR and that the FDDA had become final and executory due to the failure of the respondent to appeal the
FDDA with the CTA. The BIR contended that the FDDA had been sent through registered mail on 12 April
2007 and that the FDDA had become final, executory, and demandable because of the failure of the
respondent to appeal the FDDA with the CTA within thirty (30) days from receipt of the FDDA.

In a letter dated 19 September 2007,9 respondent informed the BIR that it already paid its tax deficiency on
withholding tax amounting to P736,726.89 through the Electronic Filing and Payment System of the BIR and
that it was also in the process of availing of the Tax Amnesty Program under Republic Act No. 9480 (RA
9480) as implemented by Revenue Memorandum Circular No. 55-2007 to settle its deficiency tax
assessment for the taxable year 2001. On 21 September 2007, respondent complied with the requirements
of RA 9480 which include: the filing of a Notice of Availment, Tax Amnesty Return and Payment Form, and
remitting the tax payment. In a letter dated 29 January 2008, the BIR denied respondent's request and
ordered respondent to pay the deficiency tax assessment amounting to P29,108,767.63. 10

In a second letter dated 16 July 2008, the BIR reiterated that the FDDA had become final and executory for
the failure of the respondent to appeal the FDDA with the CTA within the prescribed period of thirty (30)
days. The BIR demanded the full payment of the tax assessment and contended that the respondent's
availment of the tax amnesty under RA 9480 had no effect on the assessment due to the finality of the
FDDA prior to respondent's tax amnesty availment. On 1 August 2008, respondent filed a Petition for Review
with the CTA assailing the letter of the BIR dated 16 July 2008.

The Decision of the CTA First Division

On 12 November 2012, the CTA granted respondent's Petition for Review and set aside the assessment in
view of respondent's availment of a tax amnesty under RA 9480. The CTA First Division held that RA 9480
covers all national internal revenue taxes for the taxable year 2005 and prior years, with or without
assessments duly issued, that have remained unpaid as of 31 December 2005. 11 The CTA First Division ruled
that respondent complied with all the requirements of RA 9480 including the payment of the amnesty tax
and submission of all relevant documents. Having complied with all the requirements of RA 9480,
respondent is fully entitled to the immunities and privileges granted under RA 9480. 12

The dispositive portion of the Decision states:

chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the instant Petition for Review is GRANTED. The subject assessment in
the present case against petitioner is hereby SET ASIDE solely in view of petitioner's availment of the Tax
Amnesty Program under R.A. No. 9480; and accordingly, petitioner is hereby DECLARED ENTITLED to the
immunities and privileges provided by the Tax Amnesty Law being a qualified tax amnesty applicant and for
having complied with all the documentary requirements set by law.

SO ORDERED.13
The CIR filed a Motion for Reconsideration14 on 3 December 2012 which the CTA First Division denied on 1
March 2013.15

The Decision of the CTA En Banc

On 19 May 2014, the CTA En Banc held that a qualified tax amnesty applicant who has completed the
requirements of RA 9480 shall be deemed to have fully complied with the Tax Amnesty Program. Upon
compliance with the requirements of the law, the taxpayer shall, as mandated by law, be immune from the
payment of taxes as well as appurtenant civil, criminal, or administrative penalties under the National
Internal Revenue Code. The CTA En Banc ruled that the finality of a tax assessment did not disqualify
respondent from availing of a tax amnesty under RA 9480.

The dispositive portion of the Decision states: chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the Petition for Review filed by the Commissioner of Internal Revenue is
DENIED, for lack of merit. The Decision of the First Division of this Court promulgated on November 12,
2012 in CTA Case No. 781[7], captioned Philippine Aluminum Wheels, Inc. v. Commissioner of Internal
Revenue, and the Resolution of the said Division dated March 1, 2013, are AFFIRMED in toto.

SO ORDERED.16
The CIR filed a Motion for Reconsideration on 11 June 2014 which was denied on 5 January 2015. 17

The Issue

Whether respondent is entitled to the benefits of the Tax Amnesty Program under RA 9480.

The Decision of this Court

This Court denies the petition in view of the respondent's availment of the Tax Amnesty Program under RA
9480.

A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an
absolute forgiveness or 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. A tax amnesty, much like a tax exemption,
is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing authority. 18

On 24 May 2007, RA 9480, or "An Act Enhancing Revenue Administration and Collection by Granting an.
Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National Government for Taxable Year 2005
and Prior Years," became law.

The pertinent provisions of RA 9480 are:chanRoblesvirt ualLawlibrary

Section 1. Coverage. There is hereby authorized and granted a tax amnesty which shall cover all national
internal 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: Provided, however, that the
amnesty hereby authorized and granted shall not cover persons or cases enumerated under Section 8
hereof.

xxxx

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:
chanRoblesvirtualLawlibrary

(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.

x x x x (Emphasis supplied)
The Department of Finance issued DOF Department Order No. 29-07 (DO 29-07). 19 Section 6 of DO 29-07
provides for the method for availing a tax amnesty under RA 9480, to wit: chanRoblesvirtualLawlibrary
Section 6. Method of Availment of Tax Amnesty.

1. Forms/Documents to be filed. To avail of the general tax amnesty, concerned taxpayers shall file the
following documents/requirements:

a. Notice of Availment in such forms as may be prescribed by the BIR;

b. Statement of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in such forms, as may be
prescribed by the BIR;

c. Tax Amnesty Return in such forms as may be prescribed by the BIR.

2. x x x.

3. x x x.

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 RA 9480.

x x x x (Emphasis supplied)
In Philippine Banking Corporation v. Commissioner of Internal Revenue,20 this Court held that the taxpayer's
completion of the requirements under RA 9480, as implemented by DO 29-07, will extinguish the taxpayer's
tax liability, additions and all appurtenant civil, criminal, or administrative penalties under the National
Internal Revenue Code, to wit: chanRoblesvirt ualLawlibrary

Considering that the completion of these requirements shall be deemed full compliance with the tax amnesty
program, the law mandates that the taxpayer shall thereafter be immune from the payment of taxes, and
additions thereto, as well as 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.21
Similarly, in Metropolitan Bank and Trust Company (Metrobank) v. Commissioner of Internal Revenue,22 this
Court sustained the validity of Metrobank's tax amnesty upon full compliance with the requirements of RA
9480. This Court ruled: "Therefore, by virtue of the availment by Metrobank of the Tax Amnesty Program
under Republic Act No. 9480, it is already immune from the payment of taxes, including DST on the UNISA
for 1999, as well as the addition thereto."23

On 19 September 2007, respondent availed of the Tax Amnesty Program under RA 9480, as implemented
by DO 29-07. Respondent submitted its Notice of Availment, Tax Amnesty Return, Statement of Assets,
Liabilities and Net Worth, and comparative financial statements for 2005 and 2006. Respondent paid the
amnesty tax to the Development Bank of the Philippines, evidenced by its Tax Payment Deposit Slip dated
21 September 2007. Respondent's completion of the requirements of the Tax Amnesty Program under RA
9480 is sufficient to extinguish its tax liability under the FDDA of the BIR.

In Asia International Auctioneers, Inc. v. Commissioner of Internal Revenue,24 this Court ruled that the tax
liability of Asia International Auctioneers, Inc. was fully settled when it was able to avail of the Tax Amnesty
Program under RA 9480 in February 2008 while its Petition for Review was pending before this Court. This
Court declared the pending case involving the tax liability of Asia International Auctioneers, Inc. moot since
the company's compliance with the Tax Amnesty Program under RA 9480 extinguished the company's
outstanding deficiency taxes.

The CIR contends that respondent is disqualified to avail of the tax amnesty under RA 9480. The CIR asserts
that the finality of its assessment, particularly its FDDA is equivalent to a final and executory judgment by
the courts, falling within the exceptions to the Tax Amnesty Program under Section 8 of RA 9480, which
states:chanRoblesvirtualLawlibrary

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:

(a) Withholding agents with respect to their withholding tax liabilities;

(b) Those with pending cases falling under the jurisdiction of the Presidential Commission on Good
Government;
(c) Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft
and Corrupt Practices Act;

(d) Those with pending cases filed in court involving violation of the Anti-Money Laundering Law;

(e) Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X
of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and
transactions, and malversation of public funds and property under Chapters III and IV of Title VII of the
Revised Penal Code; and

(f) Tax cases subject of final and executory judgment by the courts. (Emphasis supplied)
The CIR is wrong. Section 8(f) is clear: only persons with "tax cases subject of final and executory judgment
by the courts" are disqualified to avail of the Tax Amnesty Program under RA 9480. There must be a
judgment promulgated by a court and the judgment must have become final and executory. Obviously,
there is none in this case. The FDDA issued by the BIR is not a tax case "subject to a final and
executory judgment by the courts" as contemplated by Section 8(f) of RA 9480. The determination
of the tax liability of respondent has not reached finality and is still not subject to an executory judgment by
the courts as it is the issue pending before this Court. In fact, in Metrobank, this Court held that the FDDA
issued by the BIR was not a final and executory judgment and did not prevent Metrobank from availing of
the immunities and privileges granted under RA 9480, to wit: chanRoblesvirt ualLawlibrary

x x x. As argued by Metrobank, the very fact that the instant case is still subject of the present proceedings
is proof enough that it has not reached a final and executory stage as to be barred from the tax amnesty
under Republic Act No. 9480.

The assertion of the CIR that deficiency DST is not covered by the Tax Amnesty Program under Republic Act
No. 9480 is downright specious.25
The CIR alleges that respondent is disqualified to avail of the Tax Amnesty Program under Revenue
Memorandum Circular No. 19-2008 (RMC No. 19-2008) dated 22 February 2008 issued by the BIR which
includes "delinquent accounts or accounts receivable considered as assets by the BIR or the Government,
including self-assessed tax" as disqualifications to avail of the Tax Amnesty Program under RA 9480. The
exception of delinquent accounts or accounts receivable by the BIR under RMC No. 19-2008 cannot amend
RA 9480. As a rule, executive issuances including implementing rules and regulations cannot amend a
statute passed by Congress.

In National Tobacco Administration v. Commission on Audit,26 this Court held that in case there is a
discrepancy between the law and a regulation issued to implement the law, the law prevails because the
rule or regulation cannot go beyond the terms and provisions of the law, to wit: "[t]he Circular cannot
extend the law or expand its coverage as the power to amend or repeal a statute is vested with the
legislature." To give effect to the exception under RMC No. 19-2008 of delinquent accounts or accounts
receivable by the BIR, as interpreted by the BIR, would unlawfully create a new exception for availing of the
Tax Amnesty Program under RA 9480.

WHEREFORE, we DENY the petition. We AFFIRM the 19 May 2014 Decision and the 5 January 2015
Resolution of the Court of Tax Appeals En Banc in CTA EB No. 994.

SO ORDERED.
G.R. No. 163653 July 19, 2011

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FILINVEST DEVELOPMENT CORPORATION, Respondent.

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

G.R. No. 167689

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FILINVEST DEVELOPMENT CORPORATION, Respondent.

DECISION

PEREZ, J.:

Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of the 1997 Rules of
Civil Procedure are the decisions rendered by the Court of Appeals (CA) in the following cases: (a)
Decision dated 16 December 2003 of the then Special Fifth Division in CA-G.R. SP No. 72992; 1 and,
(b) Decision dated 26 January 2005 of the then Fourteenth Division in CA-G.R. SP No. 74510. 2

The Facts

The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent
Filinvest Development Corporation (FDC) is a holding company which also owned 67.42% of the
outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a
Deed of Exchange with FLI whereby the former both transferred in favor of the latter parcels of land
appraised at ₱4,306,777,000.00. In exchange for said parcels which were intended to facilitate
development of medium-rise residential and commercial buildings, 463,094,301 shares of stock of
FLI were issued to FDC and FAI.3 As a result of the exchange, FLI’s ownership structure was
changed to the extent reflected in the following tabular précis, viz.:

Number and Percentage of Number of Number and Percentage of

Stockholder Shares Held Prior to the Additional Shares Held After the
Exchange Shares Issued Exchange
FDC 2,537,358,000 67.42% 42,217,000 2,579,575,000 61.03%
FAI 0 0 420,877,000 420,877,000 9.96%
OTHERS 1,226,177,000 32.58% 0 1,226,177,000 29.01%
 3,763,535,000 100% 463,094,301 4,226,629,000 (100%)

On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect
that no gain or loss should be recognized in the aforesaid transfer of real properties. Acting on the
request, the BIR issued Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is
among those contemplated under Section 34 (c) (2) of the old National Internal Revenue Code
(NIRC)4 which provides that "(n)o gain or loss shall be recognized if property is transferred to a
corporation by a person in exchange for a stock in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four (4) persons, gains control of
said corporation."5 With the BIR’s reiteration of the foregoing ruling upon the 10 February 1997
request for clarification filed by FLI,6 the latter, together with FDC and FAI, complied with all the
requirements imposed in the ruling.7

On various dates during the years 1996 and 1997, in the meantime, FDC also extended advances in
favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest
Capital, Inc. (FCI).8 Duly evidenced by instructional letters as well as cash and journal vouchers, said
cash advances amounted to ₱2,557,213,942.60 in 1996 9 and ₱3,360,889,677.48 in 1997.10 On 15
November 1996, FDC also entered into a Shareholders’ Agreement with Reco Herrera PTE Ltd.
(RHPL) for the formation of a Singapore-based joint venture company called Filinvest Asia
Corporation (FAC), tasked to develop and manage FDC’s 50% ownership of its PBCom Office Tower
Project (the Project). With their equity participation in FAC respectively pegged at 60% and 40% in
the Shareholders’ Agreement, FDC subscribed to ₱500.7 million worth of shares in said joint venture
company to RHPL’s subscription worth ₱433.8 million. Having paid its subscription by executing a
Deed of Assignment transferring to FAC a portion of its rights and interest in the Project worth
₱500.7 million, FDC eventually reported a net loss of ₱190,695,061.00 in its Annual Income Tax
Return for the taxable year 1996.11

On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency
income and documentary stamp taxes, plus interests and compromise penalties, 12 covered by the
following Assessment Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-2000 for
deficiency income taxes in the sum of ₱150,074,066.27 for 1996; (b) Assessment Notice No. SP-
DST-96-00020-2000 for deficiency documentary stamp taxes in the sum of ₱10,425,487.06 for 1996;
(c) Assessment Notice No. SP-INC-97-00019-2000 for deficiency income taxes in the sum of
₱5,716,927.03 for 1997; and (d) Assessment Notice No. SP-DST-97-00021-2000 for deficiency
documentary stamp taxes in the sum of ₱5,796,699.40 for 1997.13 The foregoing deficiency taxes
were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange it
executed with FAI and FLI, on the dilution resulting from the Shareholders’ Agreement FDC executed
with RHPL as well as the "arm’s-length" interest rate and documentary stamp taxes imposable on
the advances FDC extended to its affiliates.14

On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for deficiency
income taxes in the sum of ₱1,477,494,638.23 for the year 1997. 15 Covered by Assessment Notice
No. SP-INC-97-0027-2000,16 said deficiency tax was also assessed on the taxable gain purportedly
realized by FAI from the Deed of Exchange it executed with FDC and FLI.17 On 26 January 2000 or
within the reglementary period of thirty (30) days from notice of the assessment, both FDC and FAI
filed their respective requests for reconsideration/protest, on the ground that the deficiency income
and documentary stamp taxes assessed by the BIR were bereft of factual and legal basis. 18 Having
submitted the relevant supporting documents pursuant to the 31 January 2000 directive from the BIR
Appellate Division, FDC and FAI filed on 11 September 2000 a letter requesting an early resolution
of their request for reconsideration/protest on the ground that the 180 days prescribed for the
resolution thereof under Section 228 of the NIRC was going to expire on 20 September 2000. 19

In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their request
for reconsideration/protest within the aforesaid period, FDC and FAI filed on 17 October 2000 a
petition for review with the Court of Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC.
Docketed before said court as CTA Case No. 6182, the petition alleged, among other matters, that
as previously opined in BIR Ruling No. S-34-046-97, no taxable gain should have been assessed
from the subject Deed of Exchange since FDC and FAI collectively gained further control of FLI as a
consequence of the exchange; that correlative to the CIR's lack of authority to impute theoretical
interests on the cash advances FDC extended in favor of its affiliates, the rule is settled that interests
cannot be demanded in the absence of a stipulation to the effect; that not being promissory notes or
certificates of obligations, the instructional letters as well as the cash and journal vouchers
evidencing said cash advances were not subject to documentary stamp taxes; and, that no income
tax may be imposed on the prospective gain from the supposed appreciation of FDC's shareholdings
in FAC. As a consequence, FDC and FAC both prayed that the subject assessments for deficiency
income and documentary stamp taxes for the years 1996 and 1997 be cancelled and annulled. 20

On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in question
should not be considered tax free since, with the resultant diminution of its shares in FLI, FDC did
not gain further control of said corporation. Likewise calling attention to the fact that the cash
advances FDC extended to its affiliates were interest free despite the interest bearing loans it
obtained from banking institutions, the CIR invoked Section 43 of the old NIRC which, as
implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the power to
allocate, distribute or apportion income or deductions between or among such organizations, trades
or business in order to prevent evasion of taxes." The CIR justified the imposition of documentary
stamp taxes on the instructional letters as well as cash and journal vouchers for said cash advances
on the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94 which provide that
loan transactions are subject to said tax irrespective of whether or not they are evidenced by a
formal agreement or by mere office memo. The CIR also argued that FDC realized taxable gain
arising from the dilution of its shares in FAC as a result of its Shareholders' Agreement with RHPL. 21

At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and Issues 22 which
was admitted in the 16 February 2001 resolution issued by the CTA. With the further admission of
the Formal Offer of Documentary Evidence subsequently filed by FDC and FAI 23 and the conclusion
of the testimony of Susana Macabelda anent the cash advances FDC extended in favor of its
affiliates,24 the CTA went on to render the Decision dated 10 September 2002 which, with the
exception of the deficiency income tax on the interest income FDC supposedly realized from the
advances it extended in favor of its affiliates, cancelled the rest of deficiency income and
documentary stamp taxes assessed against FDC and FAI for the years 1996 and 1997, 25 thus:

WHEREFORE, in view of all the foregoing, the court finds the instant petition partly meritorious.
Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency income tax on
FDC for taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and SP-DST-97-00021-
2000 imposing deficiency documentary stamp tax on FDC for taxable years 1996 and 1997,
respectively and Assessment Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on
FAI for the taxable year 1997 are hereby CANCELLED and SET ASIDE. However, [FDC] is hereby
ORDERED to PAY the amount of ₱5,691,972.03 as deficiency income tax for taxable year 1997. In
addition, petitioner is also ORDERED to PAY 20% delinquency interest computed from February 16,
2000 until full payment thereof pursuant to Section 249 (c) (3) of the Tax Code. 26
Finding that the collective increase of the equity participation of FDC and FAI in FLI rendered the
gain derived from the exchange tax-free, the CTA also ruled that the increase in the value of FDC's
shares in FAC did not result in economic advantage in the absence of actual sale or conversion
thereof. While likewise finding that the documents evidencing the cash advances FDC extended to
its affiliates cannot be considered as loan agreements that are subject to documentary stamp tax,
the CTA enunciated, however, that the CIR was justified in assessing undeclared interests on the
same cash advances pursuant to his authority under Section 43 of the NIRC in order to forestall tax
evasion. For persuasive effect, the CTA referred to the equivalent provision in the Internal Revenue
Code of the United States (IRC-US), i.e., Sec. 482, as implemented by Section 1.482-2 of 1965-
1969 Regulations of the Law of Federal Income Taxation. 27

Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for review
docketed before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997 Rules of Civil
Procedure. Calling attention to the fact that the cash advances it extended to its affiliates were
interest-free in the absence of the express stipulation on interest required under Article 1956 of the
Civil Code, FDC questioned the imposition of an arm's-length interest rate thereon on the ground,
among others, that the CIR's authority under Section 43 of the NIRC: (a) does not include the power
to impute imaginary interest on said transactions; (b) is directed only against controlled taxpayers
and not against mother or holding corporations; and, (c) can only be invoked in cases of
understatement of taxable net income or evident tax evasion. 28 Upholding FDC's position, the CA's
then Special Fifth Division rendered the herein assailed decision dated 16 December 2003, 29 the
decretal portion of which states:

WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed
Decision dated September 10, 2002 rendered by the Court of Tax Appeals in CTA Case No. 6182
directing petitioner Filinvest Development Corporation to pay the amount of ₱5,691,972.03
representing deficiency income tax on allegedly undeclared interest income for the taxable year
1997, plus 20% delinquency interest computed from February 16, 2000 until full payment thereof is
REVERSED and SET ASIDE and, a new one entered annulling Assessment Notice No. SP-INC-97-
00019-2000 imposing deficiency income tax on petitioner for taxable year 1997. No pronouncement
as to costs.30

With the denial of its partial motion for reconsideration of the same 11 December 2002 resolution
issued by the CTA,31 the CIR also filed the petition for review docketed before the CA as CA-G.R. No.
74510. In essence, the CIR argued that the CTA reversibly erred in cancelling the assessment
notices: (a) for deficiency income taxes on the exchange of property between FDC, FAI and FLI; (b)
for deficiency documentary stamp taxes on the documents evidencing FDC's cash advances to its
affiliates; and (c) for deficiency income tax on the gain FDC purportedly realized from the increase of
the value of its shareholdings in FAC.32 The foregoing petition was, however, denied due course and
dismissed for lack of merit in the herein assailed decision dated 26 January 2005 33 rendered by the
CA's then Fourteenth Division, upon the following findings and conclusions, to wit:

1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29 November 1996
Deed of Exchange resulted in the combined control by FDC and FAI of more than 51% of the
outstanding shares of FLI, hence, no taxable gain can be recognized from the transaction
under Section 34 (c) (2) of the old NIRC;

2. The instructional letters as well as the cash and journal vouchers evidencing the advances
FDC extended to its affiliates are not subject to documentary stamp taxes pursuant to BIR
Ruling No. 116-98, dated 30 July 1998, since they do not partake the nature of loan
agreements;
 3. Although BIR Ruling No. 116-98 had been subsequently modified by BIR Ruling No. 108-
99, dated 15 July 1999, to the effect that documentary stamp taxes are imposable on inter-
office memos evidencing cash advances similar to those extended by FDC, said latter ruling
cannot be given retroactive application if to do so would be prejudicial to the taxpayer;

4. FDC's alleged gain from the increase of its shareholdings in FAC as a consequence of the
Shareholders' Agreement it executed with RHPL cannot be considered taxable income since,
until actually converted thru sale or disposition of said shares, they merely represent
unrealized increase in capital.34

Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's petitions for
review on certiorari assailing the 16 December 2003 decision in CA-G.R. No. 72992 and the 26
January 2005 decision in CA-G.R. SP No. 74510 were consolidated pursuant to the 1 March 2006
resolution issued by this Court’s Third Division.

The Issues

In G.R. No. 163653, the CIR urges the grant of its petition on the following ground:

THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE COURT OF TAX
APPEALS AND IN HOLDING THAT THE ADVANCES EXTENDED BY RESPONDENT TO ITS
AFFILIATES ARE NOT SUBJECT TO INCOME TAX.35

In G.R. No. 167689, on the other hand, petitioner proffers the following issues for resolution:

THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION

IN HOLDING THAT THE EXCHANGE OF SHARES OF STOCK FOR PROPERTY AMONG
FILINVEST DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG,
INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED (FLI) MET ALL THE
REQUIREMENTS FOR THE NON-RECOGNITION OF TAXABLE GAIN UNDER SECTION
34 (c) (2) OF THE OLD NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW SECTION
40 (C) (2) (c) OF THE NIRC.

II

THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN

HOLDING THAT THE LETTERS OF INSTRUCTION OR CASH VOUCHERS EXTENDED
BY FDC TO ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS SUBJECT TO
DOCUMENTARY STAMP TAXES UNDER SECTION 180 OF THE NIRC.

III

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT GAIN ON

DILUTION AS A RESULT OF THE INCREASE IN THE VALUE OF FDC’S
SHAREHOLDINGS IN FAC IS NOT TAXABLE.36

The Court’s Ruling

While the petition in G.R. No. 163653 is bereft of merit, we find the CIR’s petition in G.R. No. 167689
impressed with partial merit.

In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTA’s finding that theoretical
interests can be imputed on the advances FDC extended to its affiliates in 1996 and 1997
considering that, for said purpose, FDC resorted to interest-bearing fund borrowings from
commercial banks. Since considerable interest expenses were deducted by FDC when said funds
were borrowed, the CIR theorizes that interest income should likewise be declared when the same
funds were sourced for the advances FDC extended to its affiliates. Invoking Section 43 of the 1993
NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the CIR maintains that it is vested
with the power to allocate, distribute or apportion income or deductions between or among controlled
organizations, trades or businesses even in the absence of fraud, since said power is intended "to
prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or
businesses." In addition, the CIR asseverates that the CA should have accorded weight and respect
to the findings of the CTA which, as the specialized court dedicated to the study and consideration of
tax matters, can take judicial notice of US income tax laws and regulations. 37

Admittedly, Section 43 of the 1993 NIRC38 provides that, "(i)n any case of two or more organizations,
trades or businesses (whether or not incorporated and whether or not organized in the Philippines)
owned or controlled directly or indirectly by the same interests, the Commissioner of Internal
Revenue is authorized to distribute, apportion or allocate gross income or deductions between or
among such organization, trade or business, if he determines that such distribution, apportionment
or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any
such organization, trade or business." In amplification of the equivalent provision 39 under
Commonwealth Act No. 466,40 Sec. 179(b) of Revenue Regulation No. 2 states as follows:

Determination of the taxable net income of controlled taxpayer. – (A) DEFINITIONS. – When used in
this section –

(1) The term "organization" includes any kind, whether it be a sole proprietorship, a
partnership, a trust, an estate, or a corporation or association, irrespective of the
place where organized, where operated, or where its trade or business is conducted,
and regardless of whether domestic or foreign, whether exempt or taxable, or
whether affiliated or not.

(2) The terms "trade" or "business" include any trade or business activity of any kind,
regardless of whether or where organized, whether owned individually or otherwise,
and regardless of the place where carried on.

(3) The term "controlled" includes any kind of control, direct or indirect, whether
legally enforceable, and however exercisable or exercised. It is the reality of the
control which is decisive, not its form or mode of exercise. A presumption of control
arises if income or deductions have been arbitrarily shifted.

(4) The term "controlled taxpayer" means any one of two or more organizations,
trades, or businesses owned or controlled directly or indirectly by the same interests.

(5) The term "group" and "group of controlled taxpayers" means the organizations,
trades or businesses owned or controlled by the same interests.

(6) The term "true net income" means, in the case of a controlled taxpayer, the net
income (or as the case may be, any item or element affecting net income) which
 would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or,
as the case may be, any item or element affecting net income) which would have
resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case
may be, in the particular contract, transaction, arrangement or other act) dealt with
the other members or members of the group at arm’s length. It does not mean the
income, the deductions, or the item or element of either, resulting to the controlled
taxpayer by reason of the particular contract, transaction, or arrangement, the
controlled taxpayer, or the interest controlling it, chose to make (even though such
contract, transaction, or arrangement be legally binding upon the parties thereto).

(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a
controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according
to the standard of an uncontrolled taxpayer, the true net income from the property and
business of a controlled taxpayer. The interests controlling a group of controlled taxpayer are
assumed to have complete power to cause each controlled taxpayer so to conduct its affairs
that its transactions and accounting records truly reflect the net income from the property and
business of each of the controlled taxpayers. If, however, this has not been done and the
taxable net income are thereby understated, the statute contemplates that the Commissioner
of Internal Revenue shall intervene, and, by making such distributions, apportionments, or
allocations as he may deem necessary of gross income or deductions, or of any item or
element affecting net income, between or among the controlled taxpayers constituting the
group, shall determine the true net income of each controlled taxpayer. The standard to be
applied in every case is that of an uncontrolled taxpayer. Section 44 grants no right to a
controlled taxpayer to apply its provisions at will, nor does it grant any right to compel the
Commissioner of Internal Revenue to apply its provisions.

(C) APPLICATION – Transactions between controlled taxpayer and another will be subjected
to special scrutiny to ascertain whether the common control is being used to reduce, avoid or
escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner
of Internal Revenue is not restricted to the case of improper accounting, to the case of a
fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or
avoid tax by shifting or distorting income or deductions. The authority to determine true net
income extends to any case in which either by inadvertence or design the taxable net
income in whole or in part, of a controlled taxpayer, is other than it would have been had the
taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arm’s length
with another uncontrolled taxpayer.41

As may be gleaned from the definitions of the terms "controlled" and "controlled taxpayer" under
paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDC and its affiliates come
within the purview of Section 43 of the 1993 NIRC. Aside from owning significant portions of the
shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of money
as cash advances to its said affiliates for the purpose of providing them financial assistance for their
operational and capital expenditures seemingly indicate that the situation sought to be addressed by
the subject provision exists. From the tenor of paragraph (c) of Section 179 of Revenue Regulation
No. 2, it may also be seen that the CIR's power to distribute, apportion or allocate gross income or
deductions between or among controlled taxpayers may be likewise exercised whether or not fraud
inheres in the transaction/s under scrutiny. For as long as the controlled taxpayer's taxable income is
not reflective of that which it would have realized had it been dealing at arm's length with an
uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of
taxes.
Despite the broad parameters provided, however, we find that the CIR's powers of distribution,
apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and
Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical
interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC, 42 after
all, the term "gross income" is understood to mean all income from whatever source derived,
including, but not limited to the following items: compensation for services, including fees,
commissions, and similar items; gross income derived from business; gains derived from dealings in
property;" interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and
partner’s distributive share of the gross income of general professional partnership. 43 While it has
been held that the phrase "from whatever source derived" indicates a legislative policy to include all
income not expressly exempted within the class of taxable income under our laws, the term "income"
has been variously interpreted to mean "cash received or its equivalent", "the amount of money
coming to a person within a specific time" or "something distinct from principal or
capital."44 Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or
realization by the controlled taxpayer of the item of gross income sought to be distributed,
apportioned or allocated by the CIR.

Our circumspect perusal of the record yielded no evidence of actual or possible showing that the
advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the
CIR. For all its harping upon the supposed fact that FDC had resorted to borrowings from
commercial banks, the CIR had adduced no concrete proof that said funds were, indeed, the source
of the advances the former provided its affiliates. While admitting that FDC obtained interest-bearing
loans from commercial banks,45 Susan Macabelda - FDC's Funds Management Department
Manager who was the sole witness presented before the CTA - clarified that the subject advances
were sourced from the corporation's rights offering in 1995 as well as the sale of its investment in
Bonifacio Land in 1997.46 More significantly, said witness testified that said advances: (a) were
extended to give FLI, FAI, DSCC and FCI financial assistance for their operational and capital
expenditures; and, (b) were all temporarily in nature since they were repaid within the duration of
one week to three months and were evidenced by mere journal entries, cash vouchers and
instructional letters."47

Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC had
deducted substantial interest expense from its gross income, there would still be no factual basis for
the imputation of theoretical interests on the subject advances and assess deficiency income taxes
thereon. More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the
Philippines, no interest shall be due unless it has been expressly stipulated in writing. Considering
that taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and
clearly declares,48 the rule is likewise settled that tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer.49 Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication. 50 While it is true that taxes are the
lifeblood of the government, it has been held that their assessment and collection should be in
accordance with law as any arbitrariness will negate the very reason for government itself. 51

In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the imposition of
deficiency income taxes on the transfer FDC and FAI effected in exchange for the shares of stock of
FLI. With respect to the Deed of Exchange executed between FDC, FAI and FLI, Section 34 (c) (2)
of the 1993 NIRC pertinently provides as follows:

Sec. 34. Determination of amount of and recognition of gain or loss.-

xxxx
(c) Exception – x x x x

No gain or loss shall also be recognized if property is transferred to a corporation by a person in

exchange for shares of stock in such corporation of which as a result of such exchange said person,
alone or together with others, not exceeding four persons, gains control of said corporation;
Provided, That stocks issued for services shall not be considered as issued in return of property.

As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties, 52 the
requisites for the non-recognition of gain or loss under the foregoing provision are as follows: (a) the
transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of the
transferor; (c) the transfer is made by a person, acting alone or together with others, not exceeding
four persons; and, (d) as a result of the exchange the transferor, alone or together with others, not
exceeding four, gains control of the transferee.53 Acting on the 13 January 1997 request filed by FLI,
the BIR had, in fact, acknowledged the concurrence of the foregoing requisites in the Deed of
Exchange the former executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97. 54 With the
BIR's reiteration of said ruling upon the request for clarification filed by FLI, 55 there is also no dispute
that said transferee and transferors subsequently complied with the requirements provided for the
non-recognition of gain or loss from the exchange of property for tax, as provided under Section 34
(c) (2) of the 1993 NIRC.56

Then as now, the CIR argues that taxable gain should be recognized for the exchange considering
that FDC's controlling interest in FLI was actually decreased as a result thereof. For said purpose,
the CIR calls attention to the fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42%
of FLI's 3,763,535,000 outstanding capital stock. Upon the issuance of 443,094,000 additional FLI
shares as a consequence of the exchange and with only 42,217,000 thereof accruing in favor of
FDC for a total of 2,579,575,000 shares, said corporation’s controlling interest was supposedly
reduced to 61%.03 when reckoned from the transferee's aggregate 4,226,629,000 outstanding
shares. Without owning a share from FLI's initial 3,763,535,000 outstanding shares, on the other
hand, FAI's acquisition of 420,877,000 FLI shares as a result of the exchange purportedly resulted in
its control of only 9.96% of said transferee corporation's 4,226,629,000 outstanding shares. On the
principle that the transaction did not qualify as a tax-free exchange under Section 34 (c) (2) of the
1993 NIRC, the CIR asseverates that taxable gain in the sum of ₱263,386,921.00 should be
recognized on the part of FDC and in the sum of ₱3,088,711,367.00 on the part of FAI. 57

The paucity of merit in the CIR's position is, however, evident from the categorical language of
Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not be recognized in case
the exchange of property for stocks results in the control of the transferee by the transferor, alone or
with other transferors not exceeding four persons. Rather than isolating the same as proposed by
the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding shares
should, therefore, be appreciated in combination with the 420,877,000 new shares issued to FAI
which represents 9.96% control of said transferee corporation. Together FDC's 2,579,575,000
shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or
70.99% of FLI's 4,226,629,000 shares. Since the term "control" is clearly defined as "ownership of
stocks in a corporation possessing at least fifty-one percent of the total voting power of classes of
stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of property
for stocks between FDC FAI and FLI clearly qualify as a tax-free transaction under paragraph 34 (c)
(2) of the same provision.

Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme Court
Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and
Jurisprudence, opined that said provision could be inapplicable if control is already vested in the
exchangor prior to exchange.58 Aside from the fact that that the 10 September 2002 Decision in CTA
Case No. 6182 upholding the tax-exempt status of the exchange between FDC, FAI and FLI was
penned by no less than Justice Acosta himself,59 FDC and FAI significantly point out that said
authors have acknowledged that the position taken by the BIR is to the effect that "the law would
apply even when the exchangor already has control of the corporation at the time of the
exchange."60 This was confirmed when, apprised in FLI's request for clarification about the change of
percentage of ownership of its outstanding capital stock, the BIR opined as follows:

Please be informed that regardless of the foregoing, the transferors, Filinvest Development Corp.
and Filinvest Alabang, Inc. still gained control of Filinvest Land, Inc. The term 'control' shall mean
ownership of stocks in a corporation by possessing at least 51% of the total voting power of all
classes of stocks entitled to vote. Control is determined by the amount of stocks received, i.e., total
subscribed, whether for property or for services by the transferor or transferors. In determining the
51% stock ownership, only those persons who transferred property for stocks in the same
transaction may be counted up to the maximum of five (BIR Ruling No. 547-93 dated December 29,
1993.61

At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is
more apparent than real. As the uncontested owner of 80% of the outstanding shares of FAI, it
cannot be gainsaid that FDC ideally controls the same percentage of the 420,877,000 shares issued
to its said co-transferor which, by itself, represents 7.968% of the outstanding shares of FLI.
Considered alongside FDC's 61.03% control of FLI as a consequence of the 29 November 1996
Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee corporation's
outstanding shares of stock which is evidently still greater than the 67.42% FDC initially held prior to
the exchange. This much was admitted by the parties in the 14 February 2001 Stipulation of Facts,
Documents and Issues they submitted to the CTA.62 Inasmuch as the combined ownership of FDC
and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that
neither of said transferors can be held liable for deficiency income taxes the CIR assessed on the
supposed gain which resulted from the subject transfer.

On the other hand, insofar as documentary stamp taxes on loan agreements and promissory notes
are concerned, Section 180 of the NIRC provides follows:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments
and securities issued by the government or any of its instrumentalities, certificates of deposit bearing
interest and others not payable on sight or demand. – On all loan agreements signed abroad
wherein the object of the contract is located or used in the Philippines; bill of exchange (between
points within the Philippines), drafts, instruments and securities issued by the Government or any of
its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum
of money otherwise than at sight or on demand, or on all promissory notes, whether negotiable or
non-negotiable, except bank notes issued for circulation, and on each renewal of any such note,
there shall be collected a documentary stamp tax of Thirty centavos (₱0.30) on each two hundred
pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft,
certificate of deposit or note: Provided, That only one documentary stamp tax shall be imposed on
either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher
tax: Provided however, That loan agreements or promissory notes the aggregate of which does not
exceed Two hundred fifty thousand pesos (₱250,000.00) executed by an individual for his purchase
on installment for his personal use or that of his family and not for business, resale, barter or hire of
a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of documentary
stamp tax provided under this Section.

When read in conjunction with Section 173 of the 1993 NIRC,63 the foregoing provision concededly
applies to "(a)ll loan agreements, whether made or signed in the Philippines, or abroad when the
obligation or right arises from Philippine sources or the property or object of the contract is located or
used in the Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations No. 9-94
provide as follows:

Section 3. Definition of Terms. – For purposes of these Regulations, the following term shall mean:

(b) 'Loan agreement' – refers to a contract in writing where one of the parties delivers to another
money or other consumable thing, upon the condition that the same amount of the same kind and
quality shall be paid. The term shall include credit facilities, which may be evidenced by credit memo,
advice or drawings.

The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section 195, both of the Tax
Code, as amended, generally refer to distinct and separate instruments. A loan agreement shall be
taxed under Section 180, while a deed of mortgage shall be taxed under Section 195."

"Section 6. Stamp on all Loan Agreements. – All loan agreements whether made or signed in the
Philippines, or abroad when the obligation or right arises from Philippine sources or the property or
object of the contract is located in the Philippines shall be subject to the documentary stamp tax of
thirty centavos (₱0.30) on each two hundred pesos, or fractional part thereof, of the face value of
any such agreements, pursuant to Section 180 in relation to Section 173 of the Tax Code.

In cases where no formal agreements or promissory notes have been executed to cover credit
facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the
facilities, which may be evidenced by credit/debit memo, advice or drawings by any form of check or
withdrawal slip, under Section 180 of the Tax Code.

Applying the aforesaid provisions to the case at bench, we find that the instructional letters as well
as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and
1997 qualified as loan agreements upon which documentary stamp taxes may be imposed. In
keeping with the caveat attendant to every BIR Ruling to the effect that it is valid only if the facts
claimed by the taxpayer are correct, we find that the CA reversibly erred in utilizing BIR Ruling No.
116-98, dated 30 July 1998 which, strictly speaking, could be invoked only by ASB Development
Corporation, the taxpayer who sought the same. In said ruling, the CIR opined that documents like
those evidencing the advances FDC extended to its affiliates are not subject to documentary stamp
tax, to wit:

On the matter of whether or not the inter-office memo covering the advances granted by an affiliate
company is subject to documentary stamp tax, it is informed that nothing in Regulations No. 26
(Documentary Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that the same is
subject to documentary stamp tax. Such being the case, said inter-office memo evidencing the
lendings or borrowings which is neither a form of promissory note nor a certificate of indebtedness
issued by the corporation-affiliate or a certificate of obligation, which are, more or less, categorized
as 'securities', is not subject to documentary stamp tax imposed under Section 180, 174 and 175 of
the Tax Code of 1997, respectively. Rather, the inter-office memo is being prepared for accounting
purposes only in order to avoid the co-mingling of funds of the corporate affiliates. 1avvphi1

In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling
No. 108-99 dated 15 July 1999, which opined that inter-office memos evidencing lendings or
borrowings extended by a corporation to its affiliates are akin to promissory notes, hence, subject to
documentary stamp taxes.64 In brushing aside the foregoing argument, however, the CA applied
Section 246 of the 1993 NIRC65 from which proceeds the settled principle that rulings, circulars, rules
and regulations promulgated by the BIR have no retroactive application if to so apply them would be
prejudicial to the taxpayers.66 Admittedly, this rule does not apply: (a) where the taxpayer deliberately
misstates or omits material facts from his return or in 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.67 Not being the taxpayer who, in the first instance, sought a ruling from the CIR, however, FDC
cannot invoke the foregoing principle on non-retroactivity of BIR rulings.

Viewed in the light of the foregoing considerations, we find that both the CTA and the CA erred in
invalidating the assessments issued by the CIR for the deficiency documentary stamp taxes due on
the instructional letters as well as the journal and cash vouchers evidencing the advances FDC
extended to its affiliates in 1996 and 1997. In Assessment Notice No. SP-DST-96-00020-2000, the
CIR correctly assessed the sum of ₱6,400,693.62 for documentary stamp tax, ₱3,999,793.44 in
interests and ₱25,000.00 as compromise penalty, for a total of ₱10,425,487.06. Alongside the sum
of ₱4,050,599.62 for documentary stamp tax, the CIR similarly assessed ₱1,721,099.78 in interests
and ₱25,000.00 as compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a total
of ₱5,796,699.40. The imposition of deficiency interest is justified under Sec. 249 (a) and (b) of the
NIRC which authorizes the assessment of the same "at the rate of twenty percent (20%), or such
higher rate as may be prescribed by regulations", from the date prescribed for the payment of the
unpaid amount of tax until full payment.68 The imposition of the compromise penalty is, in turn,
warranted under Sec. 25069 of the NIRC which prescribes the imposition thereof "in case of each
failure to file an information or return, statement or list, or keep any record or supply any information
required" on the date prescribed therefor.

To our mind, no reversible error can, finally, be imputed against both the CTA and the CA for
invalidating the Assessment Notice issued by the CIR for the deficiency income taxes FDC is
supposed to have incurred as a consequence of the dilution of its shares in FAC. Anent FDC’s
Shareholders’ Agreement with RHPL, the record shows that the parties were in agreement about the
following factual antecedents narrated in the 14 February 2001 Stipulation of Facts, Documents and
Issues they submitted before the CTA,70 viz.:

"1.11. On November 15, 1996, FDC entered into a Shareholders’ Agreement (‘SA’) with Reco
Herrera Pte. Ltd. (‘RHPL’) for the formation of a joint venture company named Filinvest Asia
Corporation (‘FAC’) which is based in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7,
Answer).

1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked to develop and
manage the 50% ownership interest of FDC in its PBCom Office Tower Project (‘Project’)
with the Philippine Bank of Communications (par. 6.12, Petition; par. 7, Answer).

1.13. Pursuant to the SA between FDC and RHPL, the equity participation of FDC and RHPL
in FAC was 60% and 40% respectively.

1.14. In accordance with the terms of the SA, FDC subscribed to ₱500.7 million worth of
shares of stock representing a 60% equity participation in FAC. In turn, RHPL subscribed to
₱433.8 million worth of shares of stock of FAC representing a 40% equity participation in
FAC.

1.15. In payment of its subscription in FAC, FDC executed a Deed of Assignment transferring
to FAC a portion of FDC’s right and interests in the Project to the extent of ₱500.7 million.

1.16. FDC reported a net loss of ₱190,695,061.00 in its Annual Income Tax Return for the
taxable year 1996."71
Alongside the principle that tax revenues are not intended to be liberally construed, 72 the rule is
settled that the findings and conclusions of the CTA are accorded great respect and are generally
upheld by this Court, unless there is a clear showing of a reversible error or an improvident exercise
of authority.73 Absent showing of such error here, we find no strong and cogent reasons to depart
from said rule with respect to the CTA's finding that no deficiency income tax can be assessed on
the gain on the supposed dilution and/or increase in the value of FDC's shareholdings in FAC which
the CIR, at any rate, failed to establish. Bearing in mind the meaning of "gross income" as above
discussed, it cannot be gainsaid, even then, that a mere increase or appreciation in the value of said
shares cannot be considered income for taxation purposes. Since "a mere advance in the value of
the property of a person or corporation in no sense constitute the ‘income’ specified in the revenue
law," it has been held in the early case of Fisher vs. Trinidad,74 that it "constitutes and can be treated
merely as an increase of capital." Hence, the CIR has no factual and legal basis in assessing income
tax on the increase in the value of FDC's shareholdings in FAC until the same is actually sold at a
profit.

WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No. 163653 is
DENIED for lack of merit and the CA’s 16 December 2003 Decision in G.R. No. 72992 is AFFIRMED
in toto. The CIR’s petition in G.R. No. 167689 is PARTIALLY GRANTED and the CA’s 26 January
2005 Decision in CA-G.R. SP No. 74510 is MODIFIED.

Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 issued

for deficiency documentary stamp taxes due on the instructional letters as well as journal and cash
vouchers evidencing the advances FDC extended to its affiliates are declared valid.

The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-00019-2000 and

SP-INC-97-0027-2000 issued for deficiency income assessed on (a) the "arms-length" interest from
said advances; (b) the gain from FDC’s Deed of Exchange with FAI and FLI; and (c) income from the
dilution resulting from FDC’s Shareholders’ Agreement with RHPL is, however, upheld.

SO ORDERED
G.R. No. L-17509 January 30, 1970

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
CARLOS LEDESMA, JULIETA LEDESMA, VICENTE GUSTILO. JR. and AMPARO LEDESMA DE
GUSTILO, respondents.

Assistant Solicitor General Jose P. Alejandro and Special Attorneys Priscilla R. Gonzales and
Librada del Rosario-Natividad for petitioner.

Angel S. Gamboa for respondent.

ZALDIVAR, J.:

Appeal by petitioner Commissioner of Internal Revenue — hereinafter referred to as Commissioner

— from the decision of the Court of Tax Appeals, in its CTA Case No. 226, declaring as not in
accordance with law the assessment of corporate income tax made by said Commissioner in the
sum of P15,777.26 on the income of the co-partnership named "Hacienda Fortuna" during the period
from January 1 to July 13, 1949, of which co-partnership herein respondents Carlos Ledesma,
Julieta Ledesma, Amparo Ledesma de Gustilo and Vicente Gustilo, Jr. are its members. 1 The
undisputed facts, as shown in the record, are as follows:

On July 9, 1949 herein respondents, Carlos Ledesma, Julieta Ledesma and the spouses Amparo
Ledesma and Vicente Gustilo, Jr., purchased from their parents, Julio Ledesma and Florentina de
Ledesma, the sugar plantation known as "Hacienda Fortuna," consisting of 36 parcels of land,
situated in the municipality of San Carlos, province of Negros Occidental, with an area of
approximately 1,202 hectares and with a sugar quota of 79,211.17 piculs, which sugar quota was
included in the sale. By virtue of the purchase, Carlos Ledesma acquired the one-third undivided
portion of the plantation for the price of P144,043.00; Julieta Ledesma acquired another one-third
undivided portion of the plantation for the same price; and respondents Amparo Ledesma de Gustilo
and Vicente Gustilo, Jr. acquired the remaining one-third undivided portion also for the same price.
Prior to the purchase, the sugar quota of 79,211.17 piculs was registered in the names of the
vendors, Julio Ledesma and Florentina de Ledesma, under Plantation Audit No. 38-101 of the milling
district of San Carlos Milling Co., Ltd. By virtue of the purchase Plantation Audit No. 58-101 was
cancelled, and during the sugar crop year 1948-1949 the said sugar quota of 79,211.17 piculs was
transferred to, apportioned among, and separately registered in the names of, the respondents, as
follows: one-third to Vicente Gustilo, Jr. and Amparo Ledesma de Gustilo, under Plantation Audit No.
38-246; one-third to Carlos Ledesma, under Plantation Audit No. 38-247; and one-third to Julieta
Ledesma under Plantation Audit No. 38248.

After their purchase of the plantation, herein respondents took over the sugar cane farming on the
plantation beginning with the crop year 1948-1949. For the crop year 1948- 1949 the San Carlos
Milling Co., Ltd. credited the respondents with their shares in the gross sugar production, as follows:

Gross Production:

Amparo Ledesma and

Vicente Gustilo, Jr. 21,308.30 piculs
 Carlos Ledesma 21,308.30 "
Julieta Ledesma 21,308.30 "

TOTAL 63,924.90 piculs

Planters' Share:

Amparo Ledesma and

Vicente Gustilo, Jr. 13,317.70 piculs
Carlos Ledesma 13,317.70 "
Julieta Ledesma 13,317.70 "

TOTAL 39,953.10 piculs

The respondents shared equally the expenses of production, on the basis of their respective one-
third undivided portions of the plantation. The San Carlos Milling Co., Ltd. issued to respondents
separate quedans for the sugar produced, based on the quota under the plantation audits
respectively issued to them. In their individual income tax returns for the year 1949 the respondents
included as part of their income their respective net profits derived from their individual sugar
production from the "Hacienda Fortuna," as herein-above stated.

On July 11, 1949, the respondents organized themselves into a general co-partnership under the
firm name "Hacienda Fortuna", for the "production of sugar cane for conversion into sugar, palay and
corn and such other products as may profitably be produced on said hacienda, which products shall
be sold or otherwise disposed of for the purpose of realizing profit for the partnership." 2 The articles of
general co-partnership were registered in the commercial register of the office of the Register of Deeds in
Bacolod City, Negros Occidental, on July 14, 1949. Paragraph 14 of the articles of general partnership
provides that the agreement shall have retroactive effect as of January 1, 1949.

On March 22, 1959 the Commissioner assessed against the partnership "Hacienda Fortuna"
corporate income tax for the calendar year 1949, under Section 24 of the National Internal Revenue
Code, in the sum of P23,704.22. The respondents contested the assessment upon the ground that
the "Hacienda Fortuna" was a registered general co-partnership and requested for the cancellation
of the assessment. In a letter, dated March 12, 1955, the Commissioner advised respondents that
inasmuch as the articles of general co-partnership of the "Hacienda Fortuna" were registered on July
14, 1949, the income realized by the partnership prior to the registration cannot be, exempt from the
payment of corporate income tax. In a letter, also dated March 12, 1955, the Commissioner
instructed the provincial revenue agent of Negros Occidental to investigate the income of "Hacienda
Fortuna" for the period from January 1, 1959 to July 13, 1949, being the portion of the year 1949
which was prior to July 14, 1949, the date of the registration of the articles of general co-partnership
of "Hacienda Fortuna." The provincial revenue agent reported that during the period from January 1,
1959 to July 13, 1949 the "Hacienda Fortuna" had a net profit amounting to P131,477.20, and that
the income tax due on said net profit, at the rate of 12%, was P15,777.26. It thus resulted that the
original assessment of P23,704.22, as corporate income tax on the income for the entire calendar
year 1949, was reduced to P15,777.26 after deducting the corporate income tax due on the net
profits derived by the "Hacienda Fortuna" for the period from July 14 to December 31, 1949, based
on the theory that the co-partnership "Hacienda Fortuna" was exempt from the payment of corporate
income tax on its income from the day its articles of general co-partnership were registered in the
mercantile registry. Herein respondents accepted the correctness of the figures contained in the
report of the provincial revenue agent, but denied their liability to pay the corporate income tax of
P15,777.26 assessed against the "Hacienda Fortuna" as a general co-partnership.
On April 2, 1955 the respondents, through counsel, wrote a letter to the Commissioner asking for the
reconsideration of his ruling of March 12, 1955, upon the ground that during the period from January
1 to July 13, 1949 the respondents were operating merely as co-owners of the plantation known as
"Hacienda Fortuna", so that the case of the "Hacienda Fortuna" was really one of co-ownership and
not that of an unregistered co-partnership which was subject to corporate tax. That request for
reconsideration was denied by the Commissioner on October 25, 1955. The respondents filed a
second request for reconsideration, dated November 4, 1955, but the Commissioner in a letter dated
December 6, 1955, which was received by respondents on December 20, 1955, denied said second
request for reconsideration. Thereupon, respondents, on January 3, 1956, filed a petition for review
with the Court of Tax Appeals, by way of an appeal from the ruling of the Commissioner of March 12,
1955 and from the denial of the requests for reconsideration of said ruling. The case was docketed
in the Court of Tax Appeals as CTA Case No. 226.

In the meantime, on March 22, 1955, exactly 5 years from and after the date of the assessment on
March 22, 1950, and before the expiration of the thirty-day period within which the respondents
could ask for a reconsideration of the ruling of the Commissioner of March 12, 1955, or appeal to the
Court of Tax Appeals, the Provincial Fiscal of Negros Occidental, upon the request of the
Commissioner, filed a complaint against herein respondents for the collection of the alleged income
tax assessed against the "Hacienda Fortuna." The said action, entitled "The Collector of Internal
Revenue vs. Carlos Ledesma, Julieta Ledesma, Vicente Gustilo, Jr. and Amparo Ledesma de
Gustilo" was docketed in the Court of First Instance of Negros Occidental as Civil Case No. 3373.

It happened, therefore, that before respondents could bring the case on appeal to the Court of Tax
Appeals a complaint for the Collection of the alleged income tax due on the "Hacienda Fortuna" was
filed against them in the Court of First Instance of Negros Occidental. Upon motion of the
Commissioner, in CTA Case No. 226, the Court of Tax Appeals, on July 31, 1956, dismissed the
petition for review upon the ground that the Court of First Instance of Negros Occidental had already
acquired jurisdiction over the controverted assessment prior to the institution of the appeal, and the
judgment in Civil Case No. 3373 of the Court of First Instance of Negros Occidental would
constitute res adjudicata between the same parties. Herein respondents filed in the Supreme Court a
petition for mandamus to compel the Court of Tax Appeals to annul the resolution of July 31, 1956
dismissing the petition in CTA Case No. 226 and to proceed with the case. The Supreme Court set
aside the resolution of the Court of Tax Appeals of July 31, 1956 and directed said court to proceed
with the determination of the appeal of herein respondents in CTA Case No. 226. 3 This Court held that
the Court of Tax Appeals had exclusive jurisdiction over the disputed assessment, to the exclusion of the
Court of First Instance of Negros Occidental. Subsequently, the Court of First Instance of Negros
Occidental dismissed Civil Case No. 3373.

After the dismissal of Civil Case No. 3373 of the Court of First Instance of Negros Occidental, and
before the hearing of CTA Case No. 226 in the Court of Tax Appeals, herein respondents filed a
supplement petition for review alleging, as an additional ground for appeal, that the action of the
Government to collect the tax assessed against the "Hacienda Fortuna" had prescribed. During the
hearing before the Court of Tax Appeals, the parties submitted a stipulation of facts and their
respective documentary evidence.

Two issues were raised before the Court of Tax Appeals, to wit: (1) whether or not the right of the
Government to collect the income tax against the "Hacienda Fortune" as an unregistered general co-
partnership for the year 1949, had prescribed; and (2) whether or not the income tax in question was
validly assessed against the "Hacienda Fortuna."

The Court of Tax Appeals, on August 15, 1960, rendered a decision, declaring that the right of the
Government to collect the income tax in question had not prescribed, but holding that the
assessment of the corporate income tax against the "Hacienda Fortuna" is not in accordance with
law. The Court of Tax Appeals, therefore, reversed the rulings of the Commissioner of Internal
Revenue, appealed from.

Herein respondents did not appeal from the decision of the Court of Tax Appeals, but in the brief that
they filed before this Court, as appellees, they claim that the Court of Tax Appeals erred in holding
that prior to the execution of the articles of general co-partnership on July 11, 1949 the respondents
had operated the "Hacienda Fortuna" as a general partnership; and that the Court of Tax Appeals
erred in not holding that the right of the Government to collect the income tax in question had
prescribed. In this connection, suffice it to say that the conclusion of the Court of Tax Appeals that
the respondents operated the "Hacienda Fortuna" as a partnership prior to the execution of the
articles of general co-partnership is based on findings of fact, and We find no reason in the record to
disturb the findings of the tax court on this matter. On the contrary, the intention of the respondents
to operate the "Hacienda Fortuna" as a partnership, before July 11, 1949, is clearly shown in
paragraph 14 of the articles of general co-partnership which provides that the partnership agreement
"shall be retroactive as of January 1, 1949." We also find no merit in the contention of the
respondents that the Court of Tax Appeals erred in not holding that the right of the Government to
collect the income tax in question had prescribed.

We shall now occupy ourselves with the errors assigned by the Commissioner, as follows:

(1) The Court of Tax Appeals erred in holding that herein respondents, as partners of
the general co-partnership "Hacienda Fortuna", are not subject to corporate income
tax prior to its registration or for the period from January 1 to July 13, 1949.

(2) The Court of Tax Appeals erred in holding that the registration of the articles or
general co-partnership of the "Hacienda Fortuna" on July 14, 1949 operated to
exempt said partnership from the corporate income tax for the year 1949 and not
only for the period from July 14, 1949 to December 31, 1949.

The Solicitor General, as counsel for the Commissioner, considers these two assigned errors as
interrelated and discusses them together.

The sole question to be decided in this appeal is whether or not the partnership known as "Hacienda
Fortuna" which was organized by respondents on July 11, 1949, whose articles of general
partnership provided that the partnership agreement should retroact as of January 1, 1949, and
which articles of general co-partnership were registered on July 14, 1949, should pay corporate
income tax as an unregistered partnership on its net income received during the period from January
1, 1949 to July 13, 1949, the period in the year 1949 prior to the date of said registration.

The provision of law that is relevant to this question is, that portion of Section 24 of the National
Internal Revenue Code which reads as follows:

Sec. 24. Rate of tax on corporation. — (a) Tax on domestic corporations. — In

general, there shall be levied, collected, and paid annually upon the total net income
received in the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of, the Philippines, no matter how created or
organized, but not including duly registered general co-partnerships (compañias
colectivas), domestic life insurance companies and foreign life insurance companies
doing business in the Philippines, a tax upon such income equal to the sum of the
following: (Italics supplied.).
 xxx xxx xxx

It is the contention of the Commissioner that it is only from the date of the registration of the articles
of general co- partnership in the mercantile register when a co-partnership is exempt from the
payment of corporate income tax under Section 24 of the Tax Code. It is the position of the
Commissioner, in the present case, that the partnership known as "Hacienda Fortuna" is exempt
from the payment of corporate income tax due only on income received from July 14, 1949, the date
of the registration of its articles of general co-partnership. In other words, from January 1 to July 13,
1949 the partnership "Hacienda Fortune" should be considered still an unregistered co-partnership
for the purposes of the assessment of the corporate income tax, notwithstanding the fact that
paragraph 14 of its articles of co-partnership provides that the partnership agreement should retroact
to January 1, 1949. Thus, as stated at the earlier part of this decision, the Commissioner instructed
the provincial revenue agent in Negros Occidental to determine the net income of the "Hacienda
Fortuna" for the period from January 1 to July 13, 1949, said agent having reported that the net
income of the partnership during that period amounted to P131,477.20, and that the corporate
income tax due on that net income was P15,777.26. It is this amount of P15,777.26 which the
Commissioner insists in collecting from the respondents.

On the other hand, the respondents contend that prior to July 14, 1949 they were operating the
sugar plantation that they bought from their parents under a system of co-ownership, and not as a
partnership, so that they were not under obligation to pay the corporate income tax assessed by the
Commissioner on the alleged income of the partnership "Hacienda Fortuna" from January 1 to July
13, 1949. The respondents further contend that even assuming that they were operating the sugar
plantation as a partnership the registration of the articles of general co-partnership on July 14, 1949
had operated to exempt said partnership from corporate income tax on its net income during the
entire taxable year, from January 1 to December 31, 1949.

The Court of Tax Appeals made a finding that the respondents had actually operated the "Hacienda
Fortuna" as a general partnership from January 1, 1949, and that when its articles of general
partnership were registered on July 14, 1949 that registration had the effect of giving the partnership
the status of a registered co-partnership which places it under the purview of Section 24 of the Tax
Code as exempt from the payment of corporate income tax during the entire taxable year of 1949.
The pertinent portion of the decision of the Court of Tax Appeals reads as follows:

Although petitioners acquired undivided shares in the Hacienda Fortuna, from the
evidence of record it appears to us that the intention of the parties was to form, and
that they did operate the hacienda as, a general partnership. That this was their
intention is confirmed by the fact that they actually organized a general co-
partnership on July 11, 1949. And the Articles of General Co-partnership which was
registered on July 14, 1949 provides that the agreement shall be retroactive as of
January 1, 1949. The sole question to be decided is, therefore, whether the
partnership is entitled to exemption for the entire year of 1949, or whether it is
taxable as an unregistered partnership before its articles of partnership was actually
registered.

Section 24 of the Revenue Code imposes an income tax on corporations. The term
"corporation" includes unregistered general co-partnerships. (See. 84 [b]). Section 26
provides that persons carrying on business in general co-partnership duly registered
in the mercantile registry shall be liable for income tax only in their individual
capacity. There is no specific provision of law or regulations as to the date of
commencement of the exemption of a registered general co-partnership. We find,
however, that the Bureau of Internal Revenue as far back as 1924, issued a ruling
which was published in the Official Gazette to the effect that 'the status or form of
organization of a partnership at the end of the taxable year will determine its income
tax liability for that year.' We quote:

A & S Co. had been paying income tax for years as non-registered
partnership. On July, 1922, it registered its partnership agreement.
Should it file a return for the period from January to July of the year of
its registration ?

HELD: That it need not do so. For purposes of the Income Tax Law,
the status or form of organization of a partnership at the end of the
taxable year will determine its income tax liability for that year.
(September 4, 1924.)' (Ruling No. 30, 22 O.G. 3451.) 4

Ruling No. 30 of the Bureau of Internal Revenue, dated September 4, 1924, does not
appear to have been revoked or even revised or amended. In fact, the same opinion was
reiterated in a ruling dated November 4, 1948. Again, we quote:

In answer to your letter dated October 15, 1948, requesting opinion

whether or not a commercial partnership, intended to be registered
as evidenced by the partnership agreement formally executed by the
parties at the time it commenced to do business, but which was not
registered until after the lapse of several months, should be required
to file two (2) separate returns — one corresponding to the
unregistered period and another for the period after its registration,
you are informed that, if a general partnership registers its articles of
partnership within the same taxable year, which may either be
calendar or fiscal year, in which it commenced business, it is required
to file only one income tax return covering its income for the period
from the date of its business operation to the end of the taxable year.
However, where the registration takes place after the end of the
taxable year in which the partnership commenced business, separate
returns should be filed, one corresponding to the taxable year in
which the partnership did business as an unregistered partnership,
and another covering the taxable year in which it operated as a
registered partnership. (B. I. R. ruling, dated November 5, 1948,
contained in a letter addressed to Provincial Examiner Amante
Astudillo, Surigao, Surigao.)

The rule enunciated above that the status of a general partnership as a registered or
unregistered general co-partnership at the end of the taxable year determines its
liability or exemption from income tax for the entire taxable year is a sound rule. It
does not run counter to any specific provision of law or regulation. On the other hand,
it appears to us to be in harmony with the intent and purpose of the law to grant
exemption to registered general co-partnership and to tax the partners only in their
individual capacity. We note that when the attention of respondent was called to the
existence of the Bureau's ruling of November 5, 1948, he merely stated that he was
not inclined to reconsider his decision and would prefer 'to have a judicial
pronouncement on the matter.' (See p. 222, B.I.R. records.)

Moreover, the old Income Tax Law (Act No. 2833, as amended) contained the same
provisions regarding the exemption from income tax of registered general co-
 partnerships as the present law. The practice of the Bureau of Internal Revenue
exempting general co-partnerships from income tax for the entire year so long as it
was registered within that year continued to be the prevailing rule in 1939, when the
National Internal Revenue Code, Commonwealth Act No. 466, was enacted. The law
governing general co-partnership contained in the old law was merely reenacted in
the new Code. It is reasonable to suppose that a long standing administrative
practice, if contrary to the intention of the legislature, would be specifically corrected
by it. (1 USTC, Par. 259; see also 1 USTC, Par. 293). That Congress merely
reenacted the old law in the face of the long continued practice of the Bureau of
Internal Revenue which it published in the Official Gazette is a strong indication that
such practice has received congressional approval. We find no justification to deviate
from the rule.

We are in accord with the views expressed by the Court of Tax Appeals in the afore-quoted portion of
its decision. The Bureau of Internal Revenue, in the exercise of its powers relative to the collection of
internal revenue taxes, fees and charges, may make, and has in fact issued, administrative rules
and rulings in connection with the enforcement of the provisions of the National Internal Revenue
Code. There are rulings of the Bureau of Internal Revenue where the "status-at-the-end-of-the-
taxable-year" rule has been applied in determining the taxpayer's income tax liability during the
taxable year. In the book, "Rules and Rulings on the Philippine Income Tax", a compilation by
Francisco Tantuico, Sr. and Francisco Tantuico Jr. of the rulings of the Bureau of Internal Revenue,
We read:5

A child born or adopted during the first fifteen days of October, if wholly dependent
upon the head of the family for support on December 31 of the year, entitles the latter
to an additional exemption of P600.00 (amount amended) in accordance with
subsections (c) and (d) of section 23 of the National Internal Revenue Code (Ruling
of February 8, 1952). [p. 65]

A child who becomes 21 years of age during the last 15 days of June, unless
incapable of support for being mentally or physically defective, does not entitle his
parents to any additional exemption (Rule of February 8, 1952). [pages 65-66]

A father is entitled to P600.00 (amount amended) additional exemption for his child
born on December 31 of the taxable year, but not for a child who became of age on
September 15, unless the latter is incapable of self-support because he is physically
or mentally defective. (Ruling of July 29, 1948). [page 66]

A person who married during the first fifteen days of July, if not legally separated from
his spouse on December 31 of that year is granted the full exemption of P3,000 for
said year. (Ruling of February 8, 1952). [page 58]

Under Section 23 of the National Internal Revenue Code, as amended by Republic

Act 590, a person who marries on December 31 is entitled to the full exemption of
P3,000.00 for said calendar year; and a child born or Legally adopted on December
31, wholly dependent upon the taxpayer can be claimed as an additional exemption
of P600 (amount amended) for the said year. (BIR Ruling of June 19, 1952, p. 58).
[page 58]

The Court of Tax Appeals, in its decision, has pointed out that as early as 1924 the Bureau of
Internal Revenue had applied the "status-at-the-end-of-the-taxable-year" rule in determining the
income tax liability of a partnership, such that a partnership is considered a registered partnership for
the entire taxable year even if its articles of co-partnership are registered only at the middle of the
taxable year, or in the last month of the taxable year. We agree with the Court of Tax Appeals that
the ruling is a sound one, and it is in consonance with the purpose of the law in requiring the
registration of partnerships. The policy of the law is to encourage persons doing business under a
partnership agreement to have the partnership agreement, or the articles of partnership, registered
in the mercantile registry, so that the public may know who the real partners of the partnership are,
the capital stock of the partnership, the interest or contribution of each partner in the capital stock,
the proportionate share of each partner in the profits, and the earnings or salaries of the partner or
partners who render service for the partnership. 6 It is precisely in the share of the profits and the
salaries or wages that the partners would receive that the government is interested in, because it is on
these incomes that the assessment of the income tax is based. It can happen that the profits realized by
an unregistered partnership may be distributed to other persons in addition to those who appear to the
public as the partners. The government may not be able to trace exactly to whom the profits of an
unregistered partnership go, nor can the government determine the precise participation of the apparent
partners in the profits of the partnership. It is for this reason that the government imposes a corporate
income tax against an unregistered partnership as an entity, and an individual income tax against the
apparent members thereof. But once the partnership is duly registered, the names of all the partners are
known, the proportional interest of the partners in the business of the partnership is known, and the
government can very well assess the income tax on the respective income of the partners whose names
appear in the articles of co-partnership. Once the partnership is registered its operation during the taxable
year may be ascertained in all matters regarding its management, its expenditures, its earnings, and the
participation of the partners in the net profits. If it can be ascertained that the profits of the partnership
have actually been given, or credited, to the partners, then there is no reason why the partnership should
be made to pay a corporate income tax on the profits realized by the partnership, and at the same time
assess an income tax on the income that the partners had received from the partnership. And so, We
believe that it is a fair and sound application of Section 24 of the tax code that once a partnership is
registered during a taxable year that partnership should be considered as registered "partnership exempt
from the payment of corporate income tax during that taxable year, and only the partners thereof should
be made to pay income tax on the profits of the partnership that were divided among them. Section 26 of
the tax code provides as follows:

SEC. 26 — Tax liability of members of duly registered co-partnership.—Persons

carrying on business in general co-partnership (compañia colectiva) duly registered
in the mercantile registry, or those exercising a common profession in general
partnership, shall be liable for income tax only in their individual capacity, and the
share in the profits of the registered general co-partnership (compañia colectiva) or in
the general professional partnership to which any taxable partner should be entitled,
whether distributed or otherwise shall be returned for taxation and the tax paid in
accordance with the provisions of this title.

It may thus be said that a premium is given to a partnership that is registered by exempting it from
the payment of corporate income tax, and making only the individual partners pay income tax on the
basis of their respective shares in the partnership profits. On the other hand, the partnership that is
not registered is being penalized by making it pay corporate income tax on the profits it realizes
during a taxable year and at the same time making the partners thereof pay their individual income
tax based on their respective shares in the profits of the partnership. In other words, there is double
assessment of income tax against the partners of the unregistered partnership, but only one
assessment against the partners of registered partnership.

The exclusion of a registered partnership from the entities subject to the payment of corporate
income tax under Section 24 of the tax code should be made to cover the entire taxable year,
regardless of whether the registration takes place at the middle, or towards the last days, of the
taxable year. This is so because, after all, the taxable status of the taxpayer, for the purposes of the
payment of income tax, is determined as of the end of the taxable year, and the income tax is
collected after the end of the taxable year. Since it is the policy of the government to encourage a
partnership to register its articles of co-partnership in order that the government can better ascertain
the profits of the partnership and the distribution of said profits among the partner, this benefit of
exclusion from paying corporate income tax arising from registration should be liberally extended to
registered, or registering, partnerships in order that the purpose of the government may be attained.
The provision of Section 24 of the tax code excluding "registered general co-partnership" from the
payment of corporate income tax is not an exemption clause but a classification clause which must
be construed liberally in favor of the taxpayer.

A classification statute, or one which specifies the persons or property subject and
not subject to a tax, is not an exemption statute and the general rule ... that a tax
statute will be construed in favor of the taxpayer applies. (84 C.J.S., Section 277,
page 443)

Any doubt as to the person or property intended to be included in a tax statute will be
resolved in favor of the taxpayer. (51 Am. Jur., Section 409, page 433).

Once the articles of partnership are registered, the collecting agents of the government can very well
trace the operations of the partnership during the period of the taxable year prior to the date of
registration — that is, if the partnership had operated as an unregistered partnership prior to the date
of its registration, and require the partners to declare the true income that they derived from the
operations of the partnership during the period prior to the date of registration and after the date of
registration.

We hold that the administrative construction of Section 24 of the tax code made by the Bureau of
Internal Revenue as early as 1924, reiterated in 1948, as pointed out by the Court of Tax Appeals,
being of long standing, not shown to be contrary to law, and not having been modified up to the time
when the case at bar came up, should be upheld. Considering that most of our tax laws are
patterned after the tax laws of the United States of America, the following authority is pertinent:

Considerable weight is given to the Treasury Department's administrative

construction of a tax provision and to its regulations. The Supreme Court at one time
said: 'Treasury regulations and interpretations long continued without substantial
change, applied to unamended or substantially re-enacted statutes are deemed to
have received congressional approval and have the effect of law ...

Treasury Department rules and regulations will not be disturbed except for cogent
reasons or unless contrary to the statute or exceeding departmental authority, and
they are binding on the Commissioner and taxpayer alike. When a particular
construction has been operative over a long period and has acquired the sanction of
usage it is entitled to "respectful consideration" specially if rights have been adjusted
and determined by it for many years, as a change may result in inequitable treatment
of similarly situated taxpayers and may occur after many persons have acted upon
the faith of the regulation. The rule is also, perhaps, particularly applicable where a
change in the administrative construction would produce great administrative
inconvenience or irregularity. Particular weight will be given to an administrative
construction where much latitude for discretion has been given to the Treasury.
Where the basic provision of the Code is couched in general language an
interpretative regulation is appropriate. Where the statutory provision is ambiguous
the Supreme Court has sustained the administrative construction particularly where
the Congress did not interfere with the interpretation claimed by the administrative
 agency. ("The Law of Federal Income Taxation" by Jacob Mertens, Jr., Volume 1,
1962 Revision, Section 320, pages 32-35).

WHEREFORE, the decision of the Court of Tax Appeals appealed from is affirmed. No
pronouncement as to costs. It is so ordered

G.R. No. 147188 September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna
Kapunan and Mario Luza Bautista, respondents.

DECISION

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 Decision1 of the Court of Appeals of 31 January 2001 in CA-
G.R. SP No. 57799 affirming the 3 January 2000 Decision2 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 denied 20 the motion for
reconsideration, prompting the Commissioner to file a petition for review 21 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 balance26 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 amount is fully paid.

Costs against respondent.

SO ORDERED

G.R. No. 153866 February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

DECISION

PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu --
like herein respondent -- are entities exempt from all internal revenue taxes and the implementing
rules relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction
between exempt entities and exempt transactions has little significance, because the net result is
that the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied
with all requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it
purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is
entitled to such refund or credit.

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to set aside the May
1

27, 2002 Decision of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the
2

Decision reads as follows:

"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit." 3

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

"As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange
Commission to do business in the Philippines, with principal office address at the new Cebu
Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform
the duties of his office, including, among others, the duty to act and approve claims for refund or tax
credit;

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued
PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers for export. Such registration was
made on 6 June 1997;

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration

Certification No. 97-083-000600-V issued on 2 April 1997;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on [respondent’s] claim for VAT
refund.

"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by
the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way
of Petition for Review in order to toll the running of the two-year prescriptive period.

"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary

investigation/examination by [petitioner’s] Bureau;

2. Since ‘taxes are presumed to have been collected in accordance with laws and regulations,’ the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or
illegally collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:

"A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund."

4. Claims for tax refund/tax credit are construed in ‘strictissimi juris’ against the taxpayer. This is due
to the fact that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is
incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit sought. Failure
on the part of the [respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or statutory law. An
exemption from the common burden cannot be permitted to exist upon vague implications;

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA)
registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of
Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As
[respondent’s] business is not subject to VAT, the capital goods and services it alleged to have
purchased are considered not used in VAT taxable business. As such, [respondent] is not entitled to
refund of input taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations No.
([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said regulations.

6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997
Tax Code on filing of a written claim for refund within two (2) years from the date of payment of tax.’

"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund." 4

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input VAT paid on capital goods purchased for the
period covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of
those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916.
Respondent was, therefore, considered exempt only from the payment of income tax when it opted
for the income tax holiday in lieu of the 5 percent preferential tax on gross income earned. As a VAT-
registered entity, though, it was still subject to the payment of other national internal revenue taxes,
like the VAT.

Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of
RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent
correctly filed the administrative and judicial claims for its refund within the two-year prescriptive
period. Such payments were -- to the extent of the refundable value -- duly supported by VAT
invoices or official receipts, and were not yet offset against any output VAT liability.

Hence this Petition. 5

Sole Issue

Petitioner submits this sole issue for our consideration:

"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the
amount of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods
purchased for the period April 1, 1998 to June 30, 1999." 6

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone, respondent is entitled to

7

the fiscal incentives and benefits provided for in either PD 66 or EO 226. It shall, moreover, enjoy all
8 9 10

privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844.
11 12

Preferential Tax Treatment Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent
shall not be subject to internal revenue laws and regulations for raw materials, supplies, articles,
equipment, machineries, spare parts and wares, except those prohibited by law, brought into the
zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise
processed, manipulated, manufactured, mixed or used directly or indirectly in such activities. Even
13

so, respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign
exchange and financial assistance; and exemption from export taxes, local taxes and licenses. 14

Comparatively, the same exemption from internal revenue laws and regulations applies if EO 226 is 15

chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional
deduction for labor expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw
materials; and exemption from contractors’ taxes, wharfage dues, taxes and duties on imported
capital equipment and spare parts, export taxes, duties, imposts and fees, local taxes and licenses,
16

and real property taxes. 17

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation
of raw materials, capital and equipment -- is, ipso facto, also accorded to the zone under RA 7916.
18 19

Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the
contrary -- extends to that zone the provision stating that no local or national taxes shall be imposed
20

therein. No exchange control policy shall be applied; and free markets for foreign exchange, gold,
21

securities and future shall be allowed and maintained. Banking and finance shall also be liberalized
22

under minimum Bangko Sentral regulation with the establishment of foreign currency depository
units of local commercial banks and offshore banking units of foreign banks. 23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits for locally- 24

produced materials used as inputs. Aside from the other incentives possibly already granted to it by
the Board of Investments, it also enjoys preferential credit facilities and exemption from PD 1853.
25 26

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment. It 27

is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on
capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VAT-registered person, however, 28

is entitled to their credits.

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on
every importation of goods, whether or not in the course of trade or business, or imposed on each
sale, barter, exchange or lease of goods or properties or on each rendition of services in the course
of trade or business as they pass along the production and distribution chain, the tax being limited
29

only to the value added to such goods, properties or services by the seller, transferor or lessor. It is
30 31

an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. As such, it should be understood not in the context of the person or entity
32

that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption. In either case, though, the same conclusion is arrived at.
33

The law that originally imposed the VAT in the country, as well as the subsequent amendments of
34

that law, has been drawn from the tax credit method. Such method adopted the mechanics and self-
35

enforcement features of the VAT as first implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada. Under the present method that relies on invoices, an entity
36

can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports. 37

If at the end of a taxable quarter the output taxes charged by a seller are equal to the input
38 39

taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the
40

input taxes that the excess has to be paid. If, however, the input taxes exceed the output taxes, the
41

excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result
42

from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any 43

excess over the output taxes shall instead be refunded to the taxpayer or credited against other
44 45

internal revenue taxes. 46

Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-
rated transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax
47

rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable
48

against the purchaser. The seller of such transactions charges no output tax, but can claim a refund
49

of or a tax credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to
50 51

persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects such transactions to a zero rate. Again, as applied to
52

the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who
charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for
the VAT previously charged by suppliers.

Zero Rating and Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that
results from either one of them is not.

Applying the destination principle to the exportation of goods, automatic zero rating is primarily
53 54

intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to
export sales. Effective zero rating, on the contrary, is intended to benefit the purchaser who, not
55

being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax
shifted by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from the burden of the tax. But
56

in an exemption there is only partial relief, because the purchaser is not allowed any tax refund of or
57

credit for input taxes paid.

58

Exempt Transaction >and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.59

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the
tax status -- VAT-exempt or not -- of the party to the transaction. Indeed, such transaction is not
60

subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by
virtue of which its taxable transactions become exempt from the VAT. Such party is also not subject
61

to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its
registration as a VAT or non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods, properties or services. While the liability is
62

imposed on one person, the burden may be passed on to another. Therefore, if a special law merely
exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the
same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered
suppliers, the purchase transaction is not exempt. Applying this principle to the case at bar, the
purchase transactions entered into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT. However, the Tax Code provides that
63

those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which
respondent was registered. The purchase transactions it entered into are, therefore, not VAT-
exempt. These are subject to the VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
percent, depending again on the application of the destination principle.
64 65

If respondent enters into such sales transactions with a purchaser -- usually in a foreign country --
for use or consumption outside the Philippines, these shall be subject to 0 percent. If entered into
66

with a purchaser for use or consumption in the Philippines, then these shall be subject to 10
percent, unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall
67

also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero
rate, because the ecozone within which it is registered is managed and operated by the PEZA as
68

a separate customs territory. This means that in such zone is created the legal fiction of foreign
69

territory. Under the cross-border principle of the VAT system being enforced by the Bureau of
70 71

Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods destined for
72

consumption outside of the territorial border of the taxing authority. If exports of goods and services
from the Philippines to a foreign country are free of the VAT, then the same rule holds for such
73

exports from the national territory -- except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country. An ecozone --
74

indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign
soil. This legal fiction is necessary to give meaningful effect to the policies of the special law
75

creating the zone. If respondent is located in an export processing zone within that ecozone, sales
76 77

to the export processing zone, even without being actually exported, shall in fact be viewed
as constructively exported under EO 226. Considered as export sales, such purchase transactions
78 79

by respondent would indeed be subject to a zero rate. 80

Tax Exemptions Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal
revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a
tax on consumption, for which the direct liability is imposed on one person but the indirect burden is
passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT
on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its
purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish,
we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that "no taxes, local and national, shall be imposed on business
establishments operating within the ecozone." Since this law does not exclude the VAT from the
81

prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception
confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as
coming within the purview of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law.
That no VAT shall be imposed directly upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid
prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also
prohibited indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for
real property taxes that presently are imposed on land owned by developers. This similar and
82

repeated prohibition is an unambiguous ratification of the law’s intent in not imposing local or
national taxes on business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject
to x x x internal revenue laws and regulations" under PD 66 -- the original charter of PEZA (then
83

EPZA) that was later amended by RA 7916. No provisions in the latter law modify such exemption.
84

Although this exemption puts the government at an initial disadvantage, the reduced tax collection
ultimately redounds to the benefit of the national economy by enticing more business investments
and creating more employment opportunities. 85

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those
prohibited by law -- "shall not be subject to x x x internal revenue laws and regulations x x x" if
86

brought to the ecozone’s restricted area for manufacturing by registered export enterprises, of
87 88

which respondent is one. These rules also apply to all enterprises registered with the EPZA prior to
the effectivity of such rules.
89

Fifth, export processing zone enterprises registered with the Board of Investments (BOI) under EO
90

226 patently enjoy exemption from national internal revenue taxes on imported capital equipment
reasonably needed and exclusively used for the manufacture of their products; on required supplies
91

and spare part for consigned equipment; and on foreign and domestic merchandise, raw materials,
92

equipment and the like -- except those prohibited by law -- brought into the zone for
manufacturing. In addition, they are given credits for the value of the national internal revenue taxes
93

imposed on domestic capital equipment also reasonably needed and exclusively used for the
manufacture of their products, as well as for the value of such taxes imposed on domestic raw
94

materials and supplies that are used in the manufacture of their export products and that form part
thereof.
95

Sixth, the exemption from local and national taxes granted under RA 7227 are ipso facto accorded
96

to ecozones. In case of doubt, conflicts with respect to such tax exemption privilege shall be
97

resolved in favor of the ecozone. 98

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the
production of export goods, and for locally produced raw materials, capital equipment and spare
99

parts used by exporters of non-traditional products -- shall also be continuously enjoyed by similar
100

exporters within the ecozone.101 Indeed, the latter exporters are likewise entitled to such tax
exemptions and credits.
Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris against the 102

taxpayer and liberally in favor of the taxing authority.

103 104

Tax refunds are in the nature of such exemptions. Accordingly, the claimants of those refunds bear
105

the burden of proving the factual basis of their claims; and of showing, by words too plain to be
106

mistaken, that the legislature intended to exempt them. In the present case, all the cited legal
107

provisions are teeming with life with respect to the grant of tax exemptions too vivid to pass
unnoticed. In addition, respondent easily meets the challenge.

Respondent, which as an entity is exempt, is different from its transactions which are not exempt.
The end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves. Nonetheless, its exemption as an entity and the non-
108

exemption of its transactions lead to the same result for the following considerations:

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to
execute or administer such laws will have to be adopted. Their prior tax issuances have held
109

inconsistent positions brought about by their probable failure to comprehend and fully appreciate the
nature of the VAT as a tax on consumption and the application of the destination principle. Revenue 110

Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-
registered supplier’s sale of goods, property or services from the customs territory to any registered
enterprise operating in the ecozone -- regardless of the class or type of the latter’s PEZA registration
-- is legally entitled to a zero rate.111

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its
very soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of
export processing zones, seeks "to encourage and promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange position, of hastening industrialization, of
reducing domestic unemployment, and of accelerating the development of the country." 112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special
economic zones, "the government shall actively encourage, promote, induce and accelerate a sound
and balanced industrial, economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall effectively attract legitimate
and productive foreign investments." 113

Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x
x meet the tests of international competitiveness[,] accelerate development of less developed
regions of the country[,] and result in increased volume and value of exports for the
economy." Fiscal incentives that are cost-efficient and simple to administer shall be devised and
114

extended to significant projects "to compensate for market imperfections, to reward performance
contributing to economic development," and "to stimulate the establishment and assist initial
115

operations of the enterprise."116

Wisely accorded to ecozones created under RA 7916 was the government’s policy -- spelled out
117

earlier in RA 7227 -- of converting into alternative productive uses the former military reservations
118

and their extensions, as well as of providing them incentives to enhance the benefits that would be
119 120

derived from them121 in promoting economic and social development. 122

Finally, under RA 7844, the State declares the need "to evolve export development into a national
effort" in order to win international markets. By providing many export and tax incentives, the State
123 124

is able to drive home the point that exporting is indeed "the key to national survival and the means
through which the economic goals of increased employment and enhanced incomes can most
expeditiously be achieved." 125

The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic
activity; and x x x create a robust environment for business to enable firms to compete better in the
regional as well as the global market." After all, international competitiveness requires economic
126

and tax incentives to lower the cost of goods produced for export. State actions that affect global
competition need to be specific and selective in the pricing of particular goods or services.127

All these statutory policies are congruent to the constitutional mandates of providing incentives to
needed investments, as well as of promoting the preferential use of domestic materials and locally
128

produced goods and adopting measures to help make these competitive. Tax credits for domestic
129

inputs strengthen backward linkages. Rightly so, "the rule of law and the existence of credible and
efficient public institutions are essential prerequisites for sustainable economic development." 130

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law. Petitioner alleges that respondent
131

did register for VAT purposes with the appropriate Revenue District Office. However, it is now too late
in the day for petitioner to challenge the VAT-registered status of respondent, given the latter’s prior
representation before the lower courts and the mode of appeal taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal
revenue laws and regulations the equipment -- including capital goods -- that registered enterprises
will use, directly or indirectly, in manufacturing. EO 226 even reiterates this privilege among the
132

incentives it gives to such enterprises. Petitioner merely asserts that by virtue of the PEZA
133

registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital goods
and services respondent has purchased are not considered used in the VAT business, and no VAT
refund or credit is due. This is a non sequitur. By the VAT’s very nature as a tax on consumption,
134

the capital goods and services respondent has purchased are subject to the VAT, although at zero
rate. Registration does not determine taxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of
respondent, petitioner is deemed to have conceded. It is a cardinal rule that "issues and arguments
135

not adequately and seriously brought below cannot be raised for the first time on appeal." This is a
136

"matter of procedure" and a "question of fairness." Failure to assert "within a reasonable time
137 138

warrants a presumption that the party entitled to assert it either has abandoned or declined to assert
it."
139

The BIR regulations additionally requiring an approved prior application for effective zero
rating cannot prevail over the clear VAT nature of respondent’s transactions. The scope of such
140

regulations is not "within the statutory authority x x x granted by the legislature.

141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot
purport to do any more than interpret the latter. The courts will not countenance one that overrides
142

the statute it seeks to apply and implement. 143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayer’s
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not
and cannot become exempt simply because an application therefor was not made or, if made, was
denied. To allow the additional requirement is to give unfettered discretion to those officials or agents
who, without fluid consideration, are bent on denying a valid application. Moreover, the State can
never be estopped by the omissions, mistakes or errors of its officials or agents. 144

Second, grantia argumenti that such an application is required by law, there is still the presumption
of regularity in the performance of official duty. Respondent’s registration carries with it the
145

presumption that, in the absence of contradictory evidence, an application for effective zero rating
was also filed and approval thereof given. Besides, it is also presumed that the law has been
obeyed by both the administrative officials and the applicant.
146

Third, even though such an application was not made, all the special laws we have tackled exempt
respondent not only from internal revenue laws but also from the regulations issued pursuant
thereto. Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur
economic growth in the country and attain global competitiveness as envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements, is sufficient for the
147

effective zero rating of the transactions of a taxpayer. The nature of its business and transactions
can easily be perused from, as already clearly indicated in, its VAT registration papers and
photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere
failure to apply for their effective zero rating. Otherwise, their VAT exemption would be determined,
not by their nature, but by the taxpayer’s negligence -- a result not at all contemplated.
Administrative convenience cannot thwart legislative mandate.

Tax Refund or Credit in Order

Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax
refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in
EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5
percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law, for
148

EO 226 also has provisions to contend with. These two regimes are in fact incompatible and cannot
149

be availed of simultaneously by the same entity. While EO 226 merely exempts it from income taxes,
the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of
income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer
enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then
be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision
merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt, the transactions it enters
into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable
may certainly be refunded or credited.

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a
VAT refund or credit.150

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from
Contex, in which this Court held that the petitioner therein was registered as a non-VAT
taxpayer. Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any VAT
151

refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices
and have not been offset against any output taxes. Although enterprises registered with the BOI after
December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital equipment --
as provided for under Article 39(d), Title III, Book I of EO 226 -- starting January 1, 1996,
152

respondent would still have the same benefit under a general and express exemption contained in
both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the
ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:

"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and
local taxes; x x x tax credit for locally-sourced inputs x x x."

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national
taxes, x x x tax credits for locally sourced inputs x x x."
153

And third, no question as to either the filing of such claims within the prescriptive period or the
validity of the VAT returns has been raised. Even if such a question were raised, the tax exemption
under all the special laws cited above is broad enough to cover even the enforcement of internal
revenue laws, including prescription. 154

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs
territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and
regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to
such tax holiday can no longer be questioned. Its sales transactions intended for export may not be
exempt, but like its purchase transactions, they are zero-rated. No prior application for the effective
zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied
with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods
purchased, respondent is entitled to such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to

costs.

SO ORDERED

COMMISSIONER OF INTERNAL G.R. No. 140230

REVENUE,

Petitioner, Present :

' PANGANIBAN, J., Chairman,

- versus' - ' SANDOVAL-GUTIERREZ,

' CORONA,

' CARPIO MORALES and

GARCIA, JJ.

PHILIPPINE LONG DISTANCE

TELEPHONE COMPANY,

Respondent. ' Promulgated:

December 15, 2005

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

DECISION

GARCIA, J.:

In this petition for review on certiorari, the Commissioner of Internal Revenue (Commissioner)
seeks the review and reversal of the September 17, 1999 Decision [1] of the Court of Appeals
(CA) in CA-G.R. No. SP 47895, affirming, in effect, the February 18, 1998 decision [2] of the
Court of Tax Appeals (CTA) in C.T.A. Case No. 5178, a claim for tax refund/credit instituted by
respondent Philippine Long Distance Company (PLDT) against petitioner for taxes it paid to the
Bureau of Internal Revenue (BIR) in connection with its importation in 1992 to 1994 of
equipment, machineries and spare parts.

The facts:

PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and
maintain a telecommunications system throughout the Philippines.

For equipment, machineries and spare parts it imported for its business' on different dates from
October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken
down as follows: (a) compensating tax of P126,713,037.00; advance sales tax
of P12,460,219.00 and other internal revenue taxes of P25,337,697.00. For similar importations
made between March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax
(VAT).
On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax
exemption privilege under Section 12 of R.A. 7082, which reads:

Sec. 12. The grantee ' shall be liable to pay the same
taxes on their real estate, buildings, and personal
property, exclusive of this franchise, as other persons or
corporations are now or hereafter may be required by law
to pay. In addition thereto, the grantee, ' shall pay a
franchise tax equivalent to three percent (3%) of all
gross receipts of the telephone or other
telecommunications businesses transacted under this
franchise by the grantee, its successors or assigns, and
the said percentage shall be in lieu of all taxes on
this franchise or earnings thereof: Provided, That the
grantee ' shall continue to be liable for income taxes
payable under Title II of the National Internal Revenue
Code pursuant to Sec. 2 of Executive Order No. 72 unless
the latter enactment is amended or repealed, in which
case the amendment or repeal shall be applicable
thereto. (Emphasis supplied).

Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-94, [3] pertinently reading, as
follows:

PLDT shall be subject only to the following taxes, to wit:

xxx xxx xxx

7. The 3% franchise tax on gross receipts which shall be in lieu of
all taxes on its franchise or earnings thereof.

xxx xxx xxx

The 'in lieu of all taxes' provision under Section 12 of RA 7082

clearly exempts PLDT from all taxes including the 10% value-added
tax (VAT) prescribed by Section 101 (a) of the same Code on its
importations of equipment, machineries and spare parts necessary
in the conduct of its business covered by the franchise, except the
aforementioned enumerated taxes for which PLDT is expressly made
liable.

xxx xxx xxx

In view thereof, this Office ' hereby holds that PLDT, is
exempt from VAT on its importation of equipment,
machineries and spare parts ' needed in its franchise
operations.

Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a claim [4] for tax
credit/refund of the VAT, compensating taxes, advance sales taxes and other taxes it had been
paying 'in connection with its importation of various equipment, machineries and spare parts
needed for its operations' . With its claim not having been acted upon by the BIR, and obviously
to forestall the running of the prescriptive period therefor, PLDT filed with the CTA a petition for
review, [5] therein seeking a refund of, or the issuance of a tax credit certificate in, the amount
of P280,552,286.00, representing compensating taxes, advance sales taxes, VAT and other
internal revenue taxes alleged to have been erroneously paid on its importations from October
1992 to May 1994. The petition was docketed in said court as CTA Case No. 5178.

On February 18, 1998, the CTA rendered a decision [6] granting PLDT's petition, pertinently
saying:
This Court has noted that petitioner has included in its
claim receipts covering the period prior to December 16,
1992, thus, prescribed and barred from recovery. In
conclusion, We find that the petitioner is' entitled to the
reduced amount of P223,265,276.00 after excluding from
the final computation those taxes' that were paid prior to
December 16, 1992 as they fall outside the two-year
prescriptive period for claiming for a refund as provided
by law. The computation of the refundable amount is
summarized as follows:

COMPENSATING TAX

Total amount claimed ' P126,713.037.00

Less:

a) Amount already prescribed: xxx

Total P 38,015,132.00

b) Waived by petitioner

(Exh. B-216) P 1,440,874.00 P 39,456,006.00

Amount refundable P 87,257,031.00

ADVANCE SALES TAX

Total amount claimed P12,460.219.00

Less amount already prescribed: P 5,043,828.00

Amount refundable P 7,416,391.00

 OTHER BIR TAXES

Total amount claimed P 25,337,697.00

Less amount already prescribed: 11,187,740.00

Amount refundable P 14,149,957.00

VALUE ADDED TAX

Total amount claimed P 116.041,333.00

Less amount waived by petitioner
(unaccounted receipts) 1,599,436.00

Amount refundable ' P 114,441,897.00

TOTAL AMOUNT REFUNDABLE P223,265,276.00,

'============
(Breakdown omitted)

and accordingly disposed, as follows:

WHEREFORE, in view of all the foregoing, this Court finds the instant
petition meritorious and in accordance with law. Accordingly,
respondent is hereby ordered to REFUND or to ISSUE in favor of
petitioner a Tax Credit Certificate in the reduced amount
of P223,265,276.00 representing erroneously paid value-added taxes,
compensating taxes, advance sales taxes and other BIR taxes on its
importation of equipments (sic), machineries and spare parts for the
period covering the taxable years 1992 to 1994.

Noticeably, the CTA decision, penned by then Associate Justice Ramon O. de Veyra, with then
CTA Presiding Judge Ernesto D. Acosta, concurring, is punctuated by a dissenting opinion [7] of
Associate Judge Amancio Q. Saga who maintained that the phrase ' in lieu of all taxes found in
Section 12 of R.A. No. 7082, supra, refers to exemption from 'direct taxes only and does not
cover 'indirect taxes', such as VAT, compensating tax and advance sales tax.

In time, the BIR Commissioner moved for a reconsideration but the CTA, in its Resolution [8] of
May 7, 1998, denied the motion, with Judge Amancio Q. Saga reiterating his dissent. [9]

Unable to accept the CTA decision, the BIR Commissioner elevated the matter to the Court of
Appeals (CA) by way of petition for review, thereat docketed as CA-G.R. No. 47895 .

As stated at the outset hereof, the appellate court, in the herein challenged Decision [10] dated
September 17, 1999, dismissed the BIR's petition, thereby effectively affirming the CTA's
judgment.

Relying on its ruling in an earlier case between the same parties and involving the same issue
' CA-G.R. SP No. 40811, decided 16 February 1998 ' the appellate court partly wrote in its
assailed decision:

This Court has already spoken on the issue of what taxes are referred
to in the phrase 'in lieu of all taxes' found in Section 12 of R.A. 7082.
There are no reasons to deviate from the ruling and the same must be
followed pursuant to the doctrine of stare decisis. xxx. 'Stare decisis et
non quieta movere. Stand by the decision and disturb not what is
settled.

Hence, this recourse by the BIR Commissioner on the lone assigned error that:

THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT IS

EXEMPT FROM THE PAYMENT OF VALUE-ADDED TAXES,
COMPENSATING TAXES, ADVANCE SALES TAXES AND OTHER BIR
TAXES ON ITS IMPORTATIONS, BY VIRTUE OF THE PROVISION IN ITS
FRANCHISE THAT THE 3% FRANCHISE TAX ON ITS GROSS' RECEIPTS'
SHALL BE IN LIEU OF ALL TAXES ON ITS FRANCHISE OR EARNINGS
THEREOF.
There is no doubt that, insofar as the Court of Appeals is concerned, the issue petitioner
presently raises had been resolved by that court in CA-G.R. SP No. 40811,
entitled Commissioner of Internal Revenue vs. Philippine Long Distance Company. ' There, the
Sixteenth Division of the appellate court declared that under the express provision of Section 12
of R.A. 7082, supra, 'the payment [by PLDT] of the 3% franchise tax of [its] gross receipts shall
be in lieu of all taxes' exempts PLDT from payment of compensating tax, advance sales tax,
VAT and other internal revenue taxes on its importation of various equipment, machinery and
spare parts for the use of its telecommunications system.

Dissatisfied with the CA decision in that case, the BIR Commissioner initially filed with this Court
a motion for time to file a petition for review, docketed in this Court as G.R. No. 134386.
However, on the last day for the filing of the intended petition, the then BIR Commissioner had
a change of heart and instead manifested [11] that he will no longer pursue G.R. No. 134386,
there being no compelling grounds to disagree with the Court of Appeals' decision in CA-G.R.
40811. Consequently, on September 28, 1998, the Court issued a Resolution [12] in G.R. No.
134386 notifying the parties that 'no petition was filed in said case and that the CA judgment
sought to be reviewed therein ' has now become final and executory . Pursuant to said
Resolution, an Entry of Judgment [13] was issued by the Court of Appeals in CA-G.R. SP No.
40811. Hence, the CA's dismissal of CA-G.R. No. 47895 on the additional ground of stare
decisis.

Under the doctrine of stare decisis et non quieta movere, a point of law already established will,
generally, be followed by the same determining court and by all courts of lower rank in
subsequent cases where the same legal issue is raised. [14] For reasons needing no belaboring,
however, the Court is not at all concluded by the ruling of the Court of Appeals in its earlier CA-
G.R. SP No. 47895.

The Court has time and again stated that the rule on stare decisis promotes stability in the law
and should, therefore, be accorded respect. However, blind adherence to precedents, simply as
precedent, no longer rules. More important than anything else is that the court is
right, [15] thus its duty to abandon any doctrine found to be in violation of the law in force. [16]
As it were, the former BIR Commissioner's decision not to pursue his petition in G.R. No.
134386 denied the BIR, at least as early as in that case, the opportunity to obtain from the
Court an authoritative interpretation of Section 12 of R.A. 7082. All is, however, not lost. For,
the government is not estopped by acts or errors of its agents, particularly on matters involving
taxes. Corollarily, the erroneous application of tax laws by public officers does not preclude the
subsequent correct application thereof. [17] Withal, the errors of certain administrative officers,
if that be the case, should never be allowed to jeopardize the government's financial
position. [18]

Hence, the need to address the main issue tendered herein.

According to the Court of Appeals, the ' in lieu of all taxes clause found in Section 12 of PLDT's
franchise (R.A. 7082) covers all taxes, whether direct or indirect; and that said section states, in
no uncertain terms, that PLDT's payment of the 3% franchise tax on all its gross receipts from
businesses transacted by it under its franchise is in lieu of all taxes on the franchise or earnings
thereof. In fine, the appellate court, agreeing with PLDT, posits the view that the word
'all encompasses any and all taxes collectible under the National Internal Revenue Code (NIRC),
save those specifically mentioned in PLDT's franchise, such as income and real property taxes.

The BIR Commissioner excepts. He submits that the exempting ' in lieu of all taxes' clause
covers direct taxes only, adding that for indirect taxes to be included in the exemption, the
intention to include must be specific and unmistakable. He thus faults the Court of Appeals for
erroneously declaring PLDT exempt from payment of VAT and other indirect taxes on its
importations. To the Commissioner, PLDT's claimed entitlement to tax refund/credit is without
basis inasmuch as the 3% franchise tax being imposed on PLDT is not a substitute for or in lieu
of indirect taxes.

The sole issue at hand is whether or not PLDT, given the tax component of its franchise, is
exempt from paying VAT, compensating taxes, advance sales taxes and internal revenue taxes
on its importations.

Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden
of taxation, taxes may be classified into either direct tax or indirect tax.
In context, direct taxes are those that are exacted from the very person who, it is intended or
desired, should pay them; [19] they are impositions for which a taxpayer is directly liable on the
transaction or business he is engaged in. [20]

On the other hand, indirect taxes are those that are demanded, in the first instance, from, or
are paid by, one person in the expectation and intention that he can shift the burden to
someone else. [21] Stated elsewise, indirect taxes are taxes wherein the liability for the
payment of the tax falls on one person but the burden thereof can be shifted or passed on to
another person, such as when the tax is imposed upon goods before reaching the consumer
who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts
the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or
services rendered.

To put the situation in graphic terms, by tacking the VAT due to the selling price, the seller
remains the person primarily and legally liable for the payment of the tax. What is shifted only
to the intermediate buyer and ultimately to the final purchaser is the burden of the
tax. [22] Stated differently, a seller who is directly and legally liable for payment of an indirect
tax, such as the VAT on goods or services, is not necessarily the person who ultimately bears
the burden of the same tax. It is the final purchaser or end-user of such goods or services who,
although not directly and legally liable for the payment thereof, ultimately bears the burden of
the tax. [23]

There can be no serious argument that PLDT, vis--vis its payment of internal revenue taxes on
its importations in question, is effectively claiming exemption from taxes not falling under the
category of direct taxes. The claim covers VAT, advance sales tax and compensating tax.

The NIRC classifies VAT as 'an indirect tax ' the amount of [which] may be shifted or passed on
to the buyer, transferee or lessee of the goods' . [24] As aptly pointed out by Judge Amancio Q.
Saga in his dissent in C.T.A. Case No. 5178, the 10% VAT on importation of goods partakes of
an excise tax levied on the privilege of importing articles. It is not a tax on the franchise of a
business enterprise or on its earnings. It is imposed on all taxpayers who import goods (unless
such importation falls under the category of an exempt transaction under Sec. 109 of the
Revenue Code) whether or not the goods will eventually be sold, bartered, exchanged or
utilized for personal consumption. The VAT on importation replaces the advance sales tax
payable by regular importers who import articles for sale or as raw materials in the manufacture
of finished articles for sale. [25]

Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods
for sale or of raw materials to be processed into merchandise can shift the tax or, to borrow
from Philippine Acetylene Co, Inc. vs. Commissioner of Internal Revenue, [26] lay the 'economic
burden of the tax', on the purchaser, by subsequently adding the tax to the selling price of the
imported article or finished product.

Compensating tax also partakes of the nature of an excise tax payable by all persons who
import articles, whether in the course of business or not. [27] The rationale for compensating
tax is to place, for tax purposes, persons purchasing from merchants in the Philippines on a
more or less equal basis with those who buy directly from foreign countries. [28]

It bears to stress that the liability for the payment of the indirect taxes lies only with the seller
of the goods or services, not in the buyer thereof. Thus, one cannot invoke one's exemption
privilege to avoid the passing on or the shifting of the VAT to him by the
manufacturers/suppliers of the goods he purchased. [29] Hence, it is important to determine if
the tax exemption granted to a taxpayer specifically includes the indirect tax which is shifted to
him as part of the purchase price, otherwise it is presumed that the tax exemption embraces
only those taxes for which the buyer is directly liable. [30]

Time and again, the Court has stated that taxation is the rule, exemption is the exception.
Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority. [31] To him, therefore, who claims a
refund or exemption from tax payments rests the burden of justifying the exemption by words
too plain to be mistaken and too categorical to be misinterpreted. [32]
As may be noted, the clause ' in lieu of all taxes' in Section 12 of RA 7082 is immediately
followed by the limiting or qualifying clause ' on this franchise or earnings thereof, suggesting
that the exemption is limited to taxes imposed directly on PLDT since taxes' pertaining to
PLDT's franchise or earnings are its direct liability. Accordingly, indirect taxes, not being taxes
on PLDT's franchise or earnings, are outside the purview of the ' in lieu provision.

If we were to adhere to the appellate court's interpretation of the law that the ' in lieu of all
taxes' clause encompasses the totality of all taxes collectible under the Revenue Code, then, the
immediately following limiting clause ' on this franchise and its earnings' would be nothing more
than a pure jargon bereft of effect and meaning whatsoever. Needless to stress, this kind of
interpretation cannot be accorded a governing sway following the familiar legal maxim redendo
singula singulis meaning, take the words distributively and apply the reference. Under this
principle, each word or phrase must be given its proper connection in order to give it proper
force and effect, rendering none of them useless or superfluous. [33]

Significantly, in Electric Company [Meralco] vs. Vera, [34] the Court declared the relatively
broader exempting clause 'shall be in lieu of all taxes and assessments of whatsoever nature '
upon the privileges earnings, income franchise ... of the grantee written in par. # 9 of Meralco's
franchise as not so all encompassing as to embrace indirect tax, like compensating tax. There,
the Court said:

It is a well-settled rule or principle in taxation that a compensating tax ' is an

excise tax ' one that is imposed on the performance of an act, the engaging in
an occupation, or the enjoyment of a privilege. A tax levied upon property
because of its ownership is a direct tax, whereas one levied upon property
because of its use is an excise duty. '.

The compensating tax being imposed upon ' MERALCO, is an impost on

its use of imported articles and is not in the nature of a direct tax on
the articles themselves, the latter tax falling within the exemption.
Thus, in International Business Machine Corporation vs. Collector of
Internal Revenue, ' which involved the collection of a compensating tax
from the plaintiff-petitioner on business machines imported by it, this
Court stated in unequivocal terms that 'it is not the act of importation
that is taxed under section 190 but the uses of imported goods not
subjected to a sales tax because the 'compensating tax was expressly
designated as a substitute to make up or compensate for the revenue
lost to the government through the avoidance of sales taxes by means
of direct purchases abroad.
 xxx xxx xxx
xxx If it had been the legislative intent to exempt MERALCO from
paying a tax on the use of imported equipments, the legislative body
could have easily done so by expanding the provision of paragraph 9
and adding to the exemption such words as 'compensating tax or
'purchases from abroad for use in its business, and the like.

It may be so that in Maceda vs. Macaraig, Jr. [35] the Court held that an exemption from ' all
taxes granted to the National Power Corporation (NPC) under its charter [36] includes both
direct and indirect taxes. But far from providing PLDT comfort, Maceda in fact supports the case
of herein petitioner, the correct lesson of Maceda being that an exemption from 'all
taxes excludes indirect taxes, unless the exempting statute, like NPC's charter, is so couched as
to include indirect tax from the exemption. Wrote the Court:

xxx However, the amendment under Republic Act No. 6395 enumerated the
details covered by the exemption. Subsequently, P.D. 380, made even more
specific the details of the exemption of NPC to cover, among others, both direct
and indirect taxes on all petroleum products used in its operation. Presidential
Decree No. 938 [NPC's amended charter) amended the tax exemption by
simplifying the same law in general terms. It succinctly exempts NPC from 'all
forms of taxes, duties fees '.

The use of the phrase 'all forms' of taxes demonstrate the intention of
the law to give NPC all the tax exemptions it has been enjoying before.
'.

xxx xxx xxx

'It is evident from the provisions of P.D. No. 938 that its purpose is to
maintain the tax exemption of NPC from all forms of taxes including
indirect taxes as provided under R.A. No. 6395 and P.D. 380 if it is to
attain its goals. (Italics in the original; words in bracket added)

Of similar import is what we said in Borja vs. Collector of Internal Revenue . [37] There, the
Court upheld the decision of the CTA denying a claim for refund of the compensating taxes paid
on the importation of materials and equipment by a grantee of a heat and power legislative
franchise containing an 'in lieu provision, rationalizing as follows:
 xxx Moreover, the petitioner's alleged exemption from the payment of
compensating tax in the present case is not clear or expressed; unlike
the exemption from the payment of income tax which was clear and
expressed in the Carcar case. Unless it appears clearly and manifestly
that an exemption is intended, the provision is to be construed strictly
against the party claiming exemption. xxx.

Jurisprudence thus teaches that imparting the ' in lieu of all taxes' clause a literal meaning, as
did the Court of Appeals and the CTA before it, is fallacious. It is basic that in construing a
statute, it is the duty of courts to seek the real intent of the legislature, even if, by so doing,
they may limit the literal meaning of the broad language. [38]

It cannot be over-emphasized that tax exemption represents a loss of revenue to the

government and must, therefore, not rest on vague inference. When claimed, it must be strictly
construed against the taxpayer who must prove that he falls under the exception. And, if an
exemption is found to exist, it must not be enlarged by construction, since the reasonable
presumption is that the state has granted in express terms all it intended to grant at all, and
that, unless the privilege is limited to the very terms of the statute the favor would be extended
beyond dispute in ordinary cases. [39]

All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket exemption
from payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or
earnings. 'PLDT has not shown its eligibility for the desired exemption. None should be granted.

'As a final consideration, the Court takes particular stock, as the CTA earlier did, of PLDT's
allegation that the Bureau of Customs assessed the company for advance sales tax and
compensating tax for importations entered between October 1, 1992 and May 31, 1994 when
the value-added tax system already replaced, if not totally eliminated, advance sales and
compensating taxes. [40] Indeed, pursuant to Executive Order No. 273 [41] which took effect
on January 1, 1988, a multi-stage value-added tax was put into place to replace the tax on
original and subsequent sales tax. [42] It stands to reason then, as urged by PLDT, that
compensating tax and advance sales tax were no longer collectible internal revenue taxes under
the NILRC when the Bureau of Customs made the assessments in question and collected the
corresponding tax. Stated a bit differently, PLDT was no longer under legal obligation to pay
compensating tax and advance sales tax on its importation from 1992 to 1994.

Parenthetically, petitioner has not made an issue about PLDT's allegations concerning the
abolition of the provisions of the Tax Code imposing the payment of compensating and advance
sales tax on importations and the non-existence of these taxes during the period under review.
On the contrary, petitioner admits that the VAT on importation of goods has ' replace[d] the
compensating tax and advance sales tax under the old Tax Code . [43]

Given the above perspective, the amount PLDT paid in the concept of advance sales tax and
compensating tax on the 1992 to 1994 importations were, in context, erroneous tax payments
and would theoretically be refundable. It should be emphasized, however, that, such
importations were, when made, already subject to VAT.

' Factoring in the fact that a portion of the claim was barred by prescription, the CTA had
determined that PLDT is entitled to a total refundable amount of P94,673,422.00
(P87,257,031.00 of compensating tax + P7,416,391.00 = P94,673,422.00). Accordingly, it
behooves the BIR to grant a refund of the advance sales tax and compensating tax in the total
amount of P94,673,422.00, subject to the condition that PLDT present proof of payment of the
corresponding VAT on said transactions.

WHEREFORE , the petition is partially GRANTED. The Decision of the Court of Appeals in CA-
G.R. No. 47895 dated September 17, 1999 is MODIFIED. The Commissioner of Internal
Revenue is ORDERED to issue a Tax Credit Certificate or to refund to PLDT only the
of P94,673,422.00 advance sales tax and compensating tax erroneously collected by the Bureau
of Customs from October 1, 1992 to May 31, 1994, less the VAT which may have been due on
the importations in question, but have otherwise remained uncollected.

SO ORDERED
 [G.R. NO. 151135 : July 2, 2004]

CONTEX CORPORATION, Petitioner, v. HON. COMMISSIONER

OF INTERNAL REVENUE, Respondent.

DECISION

QUISUMBING, J.:

For review is the Decision1 dated September 3, 2001, of the Court of

Appeals, in CA-G.R. SP No. 62823, which reversed and set aside the
decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA)
.The CTA had ordered the Commissioner of Internal Revenue (CIR)
to refund the sum of P683,061.90 to petitioner as erroneously paid
input value-added tax (VAT) or in the alternative, to issue a tax
credit certificate for said amount.Petitioner also assails the appellate
courts Resolution,3 dated December 19, 2001, denying the motion
for reconsideration.

Petitioner is a domestic corporation engaged in the business of

manufacturing hospital textiles and garments and other hospital
supplies for export.Petitioners place of business is at the Subic Bay
Freeport Zone (SBFZ) .It is duly registered with the Subic Bay
Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise,
pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-
registered firm, petitioner is exempt from all local and national
internal revenue taxes except for the preferential tax provided for in
Section 12 (c)5 of Rep. Act No. 7227.Petitioner also registered with
the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under
Certificate of Registration RDO Control No. 95-180-000133.

From January 1, 1997 to December 31, 1998, petitioner purchased

various supplies and materials necessary in the conduct of its
manufacturing business.The suppliers of these goods shifted unto
petitioner the 10% VAT on the purchased items, which led the
petitioner to pay input taxes in the amounts of P539,411.88
and P504,057.49 for 1997 and 1998, respectively.6 ςrνll

Acting on the belief that it was exempt from all national and local
taxes, including VAT, pursuant to Rep. Act No. 7227, petitioner filed
two applications for tax refund or tax credit of the VAT it paid.Mr.
Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied
the first application letter, dated December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another

application for tax refund/credit, this time directly with Atty. Alberto
Pagabao, the regional director of BIR Revenue Region No. 4.The
second letter sought a refund or issuance of a tax credit certificate
in the amount of P1,108,307.72, representing erroneously paid
input VAT for the period January 1, 1997 to November 30, 1998.

When no response was forthcoming from the BIR Regional Director,

petitioner then elevated the matter to the Court of Tax Appeals, in a
Petition for Review docketed as CTA Case No. 5895.Petitioner
stressed that Section 112(A)7 if read in relation to Section 106(A)
(2) (a)8 of the National Internal Revenue Code, as amended and
Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was
not liable in any way for any value-added tax.

In opposing the claim for tax refund or tax credit, the BIR asked the
CTA to apply the rule that claims for refund are strictly construed
against the taxpayer. Since petitioner failed to establish both its
right to a tax refund or tax credit and its compliance with the rules
on tax refund as provided for in Sections 20410 and 22911 of the Tax
Code, its claim should be denied, according to the BIR.

On October 13, 2000, the CTA decided CTA Case No. 5895 as
follows:
ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

WHEREFORE, in view of the foregoing, the Petition for Review is

hereby PARTIALLY GRANTED.Respondent is hereby ORDERED to
REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE
in favor of Petitioner the sum of P683,061.90, representing
erroneously paid input VAT.

SO ORDERED.12 ςrνll

In granting a partial refund, the CTA ruled that petitioner misread

Sections 106(A) (2) (a) and 112(A) of the Tax Code.The tax court
stressed that these provisions apply only to those entities registered
as VAT taxpayers whose sales are zero-rated.Petitioner does not fall
under this category, since it is a non-VAT taxpayer as evidenced by
the Certificate of Registration RDO Control No. 95-180-000133
issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic
Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep.
Act No. 7227, said the CTA.

Nonetheless, the CTA held that the petitioner is exempt from the
imposition of input VAT on its purchases of supplies and materials.
It pointed out that under Section 12(c) of Rep. Act No. 7227 and
the Implementing Rules and Regulations of the Bases Conversion
and Development Act of 1992, all that petitioner is required to pay
as a SBFZ-registered enterprise is a 5% preferential tax.

The CTA also disallowed all refunds of input VAT paid by the
petitioner prior to June 29, 1997 for being barred by the two-year
prescriptive period under Section 229 of the Tax Code.The tax court
also limited the refund only to the input VAT paid by the petitioner
on the supplies and materials directly used by the petitioner in the
manufacture of its goods.It struck down all claims for input VAT paid
on maintenance, office supplies, freight charges, and all materials
and supplies shipped or delivered to the petitioners Makati and
Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No.
62823, for review of the CTA decision by the Court of
Appeals.Respondent maintained that the exemption of Contex Corp.
under Rep. Act No. 7227 was limited only to direct taxes and not to
indirect taxes such as the input component of the VAT.The
Commissioner pointed out that from its very nature, the value-
added tax is a burden passed on by a VAT registered person to the
end users; hence, the direct liability for the tax lies with the
suppliers and not Contex.

Finding merit in the CIRs arguments, the appellate court decided

CA-G.R. SP No. 62823 in his favor, thus: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

WHEREFORE, premises considered, the appealed decision is hereby

REVERSED AND SET ASIDE.Contexs claim for refund of erroneously
paid taxes is DENIED accordingly.

SO ORDERED.13 ςrνll

In reversing the CTA, the Court of Appeals held that the exemption
from duties and taxes on the importation of raw materials, capital,
and equipment of SBFZ-registered enterprises under Rep. Act No.
7227 and its implementing rules covers only the VAT imposable
under Section 107 of the [Tax Code], which is a direct liability of the
importer, and in no way includes the value-added tax of the seller-
exporter the burden of which was passed on to the importer as an
additional costs of the goods.14 This was because the exemption
granted by Rep. Act No. 7227 relates to the act of importation and
Section 10715 of the Tax Code specifically imposes the VAT on
importations.The appellate court applied the principle that tax
exemptions are strictly construed against the taxpayer. The Court of
Appeals pointed out that under the implementing rules of Rep. Act
No. 7227, the exemption of SBFZ-registered enterprises from
internal revenue taxes is qualified as pertaining only to those for
which they may be directly liable.It then stated that apparently, the
legislative intent behind Rep. Act No. 7227 was to grant exemptions
only to direct taxes, which SBFZ-registered enterprise may be liable
for and only in connection with their importation of raw materials,
capital, and equipment as well as the sale of their goods and
services.
Petitioner timely moved for reconsideration of the Court of Appeals
decision, but the motion was denied.

Hence, the instant petition raising as issues for our resolution the
following:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

A.WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND

NATIONAL INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC ACT
NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A
SUBIC BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF
SUPPLIES AND MATERIALS.

B.WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY

HELD THAT PETITIONER IS ENTITLED TO A TAX CREDIT OR
REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND
RAW MATERIALS FOR THE YEARS 1997 AND 1998.16 ςrνll

Simply stated, we shall resolve now the issues concerning:(1) the

correctness of the finding of the Court of Appeals that the VAT
exemption embodied in Rep. Act No. 7227 does not apply to
petitioner as a purchaser; and (2) the entitlement of the petitioner
to a tax refund on its purchases of supplies and raw materials for
1997 and 1998.

On the first issue, petitioner argues that the appellate courts

restrictive interpretation of petitioners VAT exemption as limited to
those covered by Section 107 of the Tax Code is erroneous and
devoid of legal basis.It contends that the provisions of Rep. Act No.
7227 clearly and unambiguously mandate that no local and national
taxes shall be imposed upon SBFZ-registered firms and hence, said
law should govern the case.Petitioner calls our attention to
regulations issued by both the SBMA and BIR clearly and
categorically providing that the tax exemption provided for by Rep.
Act No. 7227 includes exemption from the imposition of VAT on
purchases of supplies and materials.

The respondent takes the diametrically opposite view that while

Rep. Act No. 7227 does grant tax exemptions, such grant is not all-
encompassing but is limited only to those taxes for which a SBFZ-
registered business may be directly liable.Hence, SBFZ locators are
not relieved from the indirect taxes that may be shifted to them by
a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect

tax.As such, the amount of tax paid on the goods, properties or
services bought, transferred, or leased may be shifted or passed on
by the seller, transferor, or lessor to the buyer, transferee or
lessee.17 Unlike a direct tax, such as the income tax, which primarily
taxes an individuals ability to pay based on his income or net
wealth, an indirect tax, such as the VAT, is a tax on consumption of
goods, services, or certain transactions involving the same.The VAT,
thus, forms a substantial portion of consumer expenditures.

Further, in indirect taxation, there is a need to distinguish between

the liability for the tax and the burden of the tax.As earlier pointed
out, the amount of tax paid may be shifted or passed on by the
seller to the buyer. What is transferred in such instances is not the
liability for the tax, but the tax burden.In adding or including the
VAT due to the selling price, the seller remains the person primarily
and legally liable for the payment of the tax.What is shifted only to
the intermediate buyer and ultimately to the final purchaser is the
burden of the tax.18 Stated differently, a seller who is directly and
legally liable for payment of an indirect tax, such as the VAT on
goods or services is not necessarily the person who ultimately bears
the burden of the same tax.It is the final purchaser or consumer of
such goods or services who, although not directly and legally liable
for the payment thereof, ultimately bears the burden of the tax.19 ςrνll

Exemptions from VAT are granted by express provision of the Tax

Code or special laws.Under VAT, the transaction can have
preferential treatment in the following ways:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

(a) VAT Exemption.An exemption means that the sale of goods or

properties and/or services and the use or lease of properties is not
subject to VAT (output tax) and the seller is not allowed any tax
credit on VAT (input tax) previously paid.20 This is a case wherein
the VAT is removed at the exempt stage (i.e., at the point of the
sale, barter or exchange of the goods or properties).
The person making the exempt sale of goods, properties or services
shall not bill any output tax to his customers because the said
transaction is not subject to VAT.On the other hand, a VAT-
registered purchaser of VAT-exempt goods/properties or services
which are exempt from VAT is not entitled to any input tax on such
purchase despite the issuance of a VAT invoice or receipt.21 ςrνll

(b) Zero-rated Sales.These are sales by VAT-registered persons

which are subject to 0% rate, meaning the tax burden is not passed
on to the purchaser. A zero-rated sale by a VAT-registered person,
which is a taxable transaction for VAT purposes, shall not result in
any output tax.However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be
available as tax credit or refund in accordance with these
regulations.22 ςrνll

Under Zero-rating, all VAT is removed from the zero-rated goods,

activity or firm.In contrast, exemption only removes the VAT at the
exempt stage, and it will actually increase, rather than reduce the
total taxes paid by the exempt firms business or non-retail
customers.It is for this reason that a sharp distinction must be
made between zero-rating and exemption in designating a value-
added tax.23 ςrνll

Apropos, the petitioners claim to VAT exemption in the instant case

for its purchases of supplies and raw materials is founded mainly on
Section 12 (b) and (c) of Rep. Act No. 7227, which basically
exempts them from all national and local internal revenue taxes,
including VAT and Section 4 (A) (a) of BIR Revenue Regulations No.
1-95.24ςrνll

On this point, petitioner rightly claims that it is indeed VAT-Exempt

and this fact is not controverted by the respondent.In fact,
petitioner is registered as a NON-VAT taxpayer per Certificate of
Registration25 issued by the BIR.As such, it is exempt from VAT on
all its sales and importations of goods and services.

Petitioners claim, however, for exemption from VAT for its

purchases of supplies and raw materials is incongruous with its
claim that it is VAT-Exempt, for only VAT-Registered entities can
claim Input VAT Credit/Refund.

The point of contention here is whether or not the petitioner may

claim a refund on the Input VAT erroneously passed on to it by its
suppliers.

While it is true that the petitioner should not have been liable for
the VAT inadvertently passed on to it by its supplier since such is a
zero-rated sale on the part of the supplier, the petitioner is not the
proper party to claim such VAT refund.

Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or

the Consolidated Value-Added Tax Regulations provide: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Sec. 4.100-2.Zero-rated Sales.A zero-rated sale by a VAT-

registered person, which is a taxable transaction for VAT purposes,
shall not result in any output tax.However, the input tax on his
purchases of goods, properties or services related to such zero-
rated sale shall be available as tax credit or refund in accordance
with these regulations.

The following sales by VAT-registered persons shall be subject to

0%: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

(a) Export Sales

Export Sales shall mean

.. .

(5) Those considered export sales under Articles 23 and 77 of

Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987, and other special laws, e.g. Republic Act
No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992.

.. .

(c) Sales to persons or entities whose exemption under special laws,

e.g. R.A. No. 7227 duly registered and accredited enterprises with
Subic Bay Metropolitan Authority (SBMA) and Clark Development
Authority (CDA), R. A. No. 7916, Philippine Economic Zone
Authority (PEZA), or international agreements, e.g. Asian
Development Bank (ADB), International Rice Research Institute
(IRRI), etc. to which the Philippines is a signatory effectively subject
such sales to zero-rate.

Since the transaction is deemed a zero-rated sale, petitioners

supplier may claim an Input VAT credit with no corresponding
Output VAT liability. Congruently, no Output VAT may be passed on
to the petitioner.

On the second issue, it may not be amiss to re-emphasize that the

petitioner is registered as a NON-VAT taxpayer and thus, is exempt
from VAT.As an exempt VAT taxpayer, it is not allowed any tax
credit on VAT (input tax) previously paid.In fine, even if we are to
assume that exemption from the burden of VAT on petitioners
purchases did exist, petitioner is still not entitled to any tax credit or
refund on the input tax previously paid as petitioner is an exempt
VAT taxpayer.

Rather, it is the petitioners suppliers who are the proper parties to

claim the tax credit and accordingly refund the petitioner of the VAT
erroneously passed on to the latter.

Accordingly, we find that the Court of Appeals did not commit any
reversible error of law in holding that petitioners VAT exemption
under Rep. Act No. 7227 is limited to the VAT on which it is directly
liable as a seller and hence, it cannot claim any refund or exemption
for any input VAT it paid, if any, on its purchases of raw materials
and supplies.

WHEREFORE, the petition is DENIEDfor lack of merit.The Decision

dated September 3, 2001, of the Court of Appeals in CA-G.R. SP No.
62823, as well as its Resolution of December 19, 2001 are
AFFIRMED.No pronouncement as to costs.

SO ORDERED
G.R. No. L-17725 February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.

Arthur Tordesillas for 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-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate Court, to set aside the
auction sale of his property which took place on December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at
public auction to Ho Fernandez and ordered titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an
area of about 328 square meters, is described and covered by Transfer Certificate of Title No. 4739
(37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the
Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent
to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5,
1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section
73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his
uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for
Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739
(37795) and the issuance in his name of a new certificate of title. Upon verification through his
lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the
City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated
at the back of TCT No. 4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the

amended complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer

Certificate of Title in favor of the defendant Ho Fernandez over the
parcel of land including the improvements thereon, subject to
whatever encumbrances appearing at the back of TCT No. 4739
(37795) and ordering the same TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00

as attorney's fees. (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN

NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX
DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS
INDEBTED TO THE FORMER.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS

ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED
THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO
SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS

ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF
P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO
SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE
THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that
his property was sold at public auction without notice to him and that the price paid for the property
was shockingly inadequate, amounting to fraud and deprivation without due process of law.

A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his
petition upon himself. While we commiserate with him at the loss of his property, the law and the
facts militate against the grant of his petition. We are constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as
of October 15, 1977.

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.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that:

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., 7374). "The general rule based on grounds of
 public policy is well-settled that no set-off 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 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. ..."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he
has a claim against the governmental body not included in the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "...
internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer
are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a
"claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."

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.

Petitioner had one year within which to redeem his property although, as well be shown later, he
claimed that he pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was
followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof
therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition for Review,
Rollo p. 18; emphasis supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the
burden of proof to show that there was compliance with all the prescribed requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by

proof and the general rule is that the purchaser of a tax title is bound to take upon
himself the burden of showing the regularity of all proceedings leading up to the
sale. (emphasis supplied)

There is no presumption of the regularity of any administrative action which results in depriving a
taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular
Government, 19 Phil. 261). This is actually an exception to the rule that administrative proceedings
are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been
complied with, the petitioner can not, however, deny that he did receive the notice for the auction
sale. The records sustain the lower court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not
properly notified of the auction sale. Surprisingly, however, he admitted in his
testimony that he received the letter dated November 21, 1977 (Exhibit "I") as shown
by his signature (Exhibit "I-A") thereof. He claimed further that he was not present on
December 5, 1977 the date of the auction sale because he went to Iligan City. As
long as there was substantial compliance with the requirements of the notice, the
validity of the auction sale can not be assailed ... .

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho

Fernandez notified you that the property in question shall be sold at
public auction to the highest bidder on December 5, 1977 pursuant to
Sec. 74 of PD 464. Will you tell the Court whether you received the
original of this letter?

A. I just signed it because I was not able to read the same. It was just
sent by mail carrier.

Q. So you admit that you received the original of Exhibit I and you
signed upon receipt thereof but you did not read the contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he
ignored such notice. By his very own admission that he received the notice, his now coming to court
assailing the validity of the auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy
of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance
Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de
Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not
material when the law gives the owner the right to redeem as when a sale is made at public auction,
upon the theory that the lesser the price, the easier it is for the owner to effect redemption."
In Velasquez v. Coronel (5 SCRA 985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands were sold
are unconscionable considering the wide divergence between their assessed values
and the amounts for which they had been actually sold. However, while in ordinary
sales for reasons of equity a transaction may be invalidated on the ground of
inadequacy of price, or when such inadequacy shocks one's conscience as to justify
the courts to interfere, such does not follow when the law gives to the owner the right
to redeem, as when a sale is made at public auction, upon the theory that the lesser
 the price the easier it is for the owner to effect the redemption. And so it was aptly
said: "When there is the right to redeem, inadequacy of price should not be material,
because the judgment debtor may reacquire the property or also sell his right to
redeem and thus recover the loss he claims to have suffered by reason of the price
obtained at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et
al. (188 Wash. 162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not rendered
altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is
stated as follows: "where land is sold for taxes, the inadequacy of the price given is
not a valid objection to the sale." This rule arises from necessity, for, if a fair price for
the land were essential to the sale, it would be useless to offer the property. Indeed,
it is notorious that the prices habitually paid by purchasers at tax sales are grossly
out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307,
73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P.
555):

Like most cases of this character there is here a certain element of hardship from
which we would be glad to relieve, but do so would unsettle long-established rules
and lead to uncertainty and difficulty in the collection of taxes which are the life blood
of the state. We are convinced that the present rules are just, and that they bring
hardship only to those who have invited it by their own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in
value. Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the
expropriation of adjoining areas, real estate values have gone up in the area. However, the price
quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the
foregoing reasons which answer the petitioner's claims lead us to deny the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no
strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14
years from 1963 up to the date of the auction sale. He claims to have pocketed the notice of sale
without reading it which, if true, is still an act of inexplicable negligence. He did not withdraw from the
expropriation payment deposited with the Philippine National Bank an amount sufficient to pay for
the back taxes. The petitioner did not pay attention to another notice sent by the City Treasurer on
November 3, 1978, during the period of redemption, regarding his tax delinquency. There is
furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez.
The petitioner has no standing to invoke equity in his attempt to regain the property by belatedly
asking for the annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision
of the respondent court is affirmed.

SO ORDERED
G.R. No. L-19495 November 24, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
LILIA YUSAY GONZALES and THE COURT OF TAX APPEALS, respondents.

Office of the Solicitor General for the petitioner.

Ramon A. Gonzales for respondent Lilia Yusay Gonzales.

BENGZON, J.P., J.:

Matias Yusay, a resident of Pototan, Iloilo, died intestate on May 13, 1948, leaving two heirs, namely,
Jose S. Yusay, a legitimate child, and Lilia Yusay Gonzales, an acknowledged natural child. Intestate
proceedings for the settlement of his estate were instituted in the Court of First Instance of Iloilo
(Special Proceedings No. 459). Jose S. Yusay was therein appointed administrator.

On May 11, 1949 Jose S. Yusay filed with the Bureau of Internal Revenue an estate and inheritance
tax return declaring therein the following properties:

Personal properties

Palay P6,444.00
Carabaos 1,000.00 P7,444.00
 Real properties:
Capital, 74 parcels )

Conjugal 19 parcels) assessed at P179,760.00

Total gross estate P187,204.00

The return mentioned no heir.

Upon investigation however the Bureau of Internal Revenue found the following properties:

Personal properties:

Palay P6,444.00
Carabaos 1,500.00
Packard Automobile 2,000.00
2 Aparadors 500.00 P10,444.00

Real properties:
Capital, 25 parcels assessed at P87,715.32

1/2 of Conjugal, 130 parcels

assessed at P121,425.00 P209,140.32

Total P219,584.32

The fair market value of the real properties was computed by increasing the assessed value by forty
percent.

Based on the above findings, the Bureau of Internal Revenue assessed on October 29, 1953 estate
and inheritance taxes in the sums of P6,849.78 and P16,970.63, respectively.

On January 25, 1955 the Bureau of Internal Revenue increased the assessment to P8,225.89 as
estate tax and P22,117.10 as inheritance tax plus delinquency interest and demanded payment
thereof on or before February 28, 1955. Meanwhile, on February 16, 1955, the Court of First
Instance of Iloilo required Jose S. Yusay to show proof of payment of said estate and inheritance
taxes.

On March 3, 1955 Jose S. Yusay requested an extension of time within which to pay the tax. He
posted a surety bond to guarantee payment of the taxes in question within one year. The
Commissioner of Internal Revenue however denied the request. Then he issued a warrant of
distraint and levy which he transmitted to the Municipal Treasurer of Pototan for execution. This
warrant was not enforced because all the personal properties subject to distraint were located in
Iloilo City.

On May 20, 1955 the Provincial Treasurer of Iloilo requested the BIR Provincial Revenue Officer to
furnish him copies of the assessment notices to support a motion for payment of taxes which the
Provincial Fiscal would file in Special Proceedings No. 459 before the Court of First Instance of Iloilo.
The papers requested were sent by the Commissioner of Internal Revenue to the Provincial
Revenue Officer of Iloilo to be transmitted to the Provincial Treasurer. The records do not however
show whether the Provincial Fiscal filed a claim with the Court of First Instance for the taxes due.

On May 30, 1956 the commissioner appointed by the Court of First Instance for the purpose,
submitted a reamended project of partition which listed the following properties:

Personal properties:

Buick Sedan P8,100.00

Packard car 2,000.00
Aparadors 500.00
Cash in Bank (PNB) 8,858.46
Palay 6,444.00
Carabaos 1,500.00 P27,402.46

Real properties:

Land, 174 parcels

assessed at P324,797.21
Buildings 4,500.00 P329,297.21

Total P356,699.67

More than a year later, particularly on July 12, 1957, an agent of the Bureau of Internal Revenue
apprised the Commissioner of Internal Revenue of the existence of said reamended project of
partition. Whereupon, the Internal Revenue Commissioner caused the estate of Matias Yusay to be
reinvestigated for estate and inheritance tax liability. Accordingly, on February 13, 1958 he issued the
following assessment:

Estate tax P16,246.04

5% surcharge 411.29

Delinquency interest 11,868.90

Compromise
No notice of death P15.00
Late payment 40.00 55.00

Total P28,581.23

Inheritance Tax P38,178.12

5% surcharge 1,105.86

Delinquency interest 28,808.75

Compromise for late payment 50.00

Total P69,142.73

Total estate and inheritance taxes P97,723.96

Like in previous assessments, the fair market value of the real properties was arrived at by adding
40% to the assessed value.
In view of the demise of Jose S. Yusay, said assessment was sent to his widow, Mrs. Florencia
Piccio Vda. de Yusay, who succeeded him in the administration of the estate of Matias Yusay.

No payment having been made despite repeated demands, the Commissioner of Internal Revenue
filed a proof of claim for the estate and inheritance taxes due and a motion for its allowance with the
settlement court in voting priority of lien pursuant to Section 315 of the Tax Code.

On June 1, 1959, Lilia Yusay, through her counsel, Ramon Gonzales, filed an answer to the proof of
claim alleging non-receipt of the assessment of February 13, 1958, the existence of two
administrators, namely Florencia Piccio Vda. de Yusay who administered two-thirds of the estate,
and Lilia Yusay, who administered the remaining one-third, and her willingness to pay the taxes
corresponding to her share, and praying for deferment of the resolution on the motion for the
payment of taxes until after a new assessment corresponding to her share was issued.

On November 17, 1959 Lilia Yusay disputed the legality of the assessment dated February 13, 1958.
She claimed that the right to make the same had prescribed inasmuch as more than five years had
elapsed since the filing of the estate and inheritance tax return on May 11, 1949. She therefore
requested that the assessment be declared invalid and without force and effect. This request was
rejected by the Commissioner in his letter dates January 20, 1960, received by Lilia Yusay on March
14, 1960, for the reasons, namely, (1) that the right to assess the taxes in question has not been lost
by prescription since the return which did not name the heirs cannot be considered a true and
complete return sufficient to start the running of the period of limitations of five years under Section
331 of the Tax Code and pursuant to Section 332 of the same Code he has ten years within which to
make the assessment counted from the discovery on September 24, 1953 of the identity of the heirs;
and (2) that the estate's administrator waived the defense of prescription when he filed a surety bond
on March 3, 1955 to guarantee payment of the taxes in question and when he requested
postponement of the payment of the taxes pending determination of who the heirs are by the
settlement court.

On April 13, 1960 Lilia Yusay filed a petition for review in the Court of Tax Appeals assailing the
legality of the assessment dated February 13, 1958. After hearing the parties, said Court declared
the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes in
question to have prescribed and rendered the following judgment:

WHEREFORE, the decision of respondent assessing against the estate of the late Matias
Yusay estate and inheritance taxes is hereby reversed. No costs.

The Commissioner of Internal Revenue appealed to this Court and raises the following issues:

1. Was the petition for review in the Court of Tax Appeals within the 30-day period provided for in
Section 11 of Republic Act 1125?

2. Could the Court of Tax Appeals take cognizance of Lilia Yusay's appeal despite the pendency of
the "Proof of Claim" and "Motion for Allowance of Claim and for an Order of Payment of Taxes" filed
by the Commissioner of Internal Revenue in Special Proceedings No. 459 before the Court of First
Instance of Iloilo?

3. Has the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes
in question prescribed?
On November 17, 1959 Lilia Yusay disputed the legality of the assessment of February 13, 1958. On
March 14, 1960 she received the decision of the Commissioner of Internal Revenue on the disputed
assessment. On April 13, 1960 she filed her petition for review in the Court of Tax Appeals. Said
Court correctly held that the appeal was seasonably interposed pursuant to Section 11 of Republic
Act 1125. We already ruled in St. Stephen's Association v. Collector of Internal Revenue,1 that the
counting of the thirty days within which to institute an appeal in the Court of Tax Appeals should
commence from the date of receipt of the decision of the Commissioner on the disputed
assessment, not from the date the assessment was issued.

Accordingly, the thirty-day period should begin running from March 14, 1960, the date Lilia Yusay
received the appealable decision. From said date to April 13, 1960, when she filed her appeal in the
Court of Tax Appeals, is exactly thirty days. Hence, the appeal was timely.

Next, the Commissioner attacks the jurisdiction of the Court of Tax Appeals to take cognizance of
Lilia Yusay's appeal on the ground of lis pendens. He maintains that the pendency of his motion for
allowance of claim and for order of payment of taxes in the Court of First Instance of Iloilo would
preclude the Court of Tax Appeals from acquiring jurisdiction over Lilia Yusay's appeal. This
contention lacks merit.

Lilia Yusay's cause seeks to resist the legality of the assessment in question. Should she maintain it
in the settlement court or should she elevate her cause to the Court of Tax Appeals? We say, she
acted correctly by appealing to the latter court. An action involving a disputed assessment for
internal revenue taxes falls within the exclusive jurisdiction of the Court of Tax Appeals. 2 It is in that
forum, to the exclusion of the Court of First Instance,3 where she could ventilate her defenses
against the assessment.

Moreover, the settlement court, where the Commissioner would wish Lilia Yusay to contest the
assessment, is of limited jurisdiction. And under the Rules,4 its authority relates only to matters
having to do with the settlement of estates and probate of wills of deceased persons. 5 Said court has
no jurisdiction to adjudicate the contentions in question, which — assuming they do not come
exclusively under the Tax Court's cognizance — must be submitted to the Court of First Instance in
the exercise of its general jurisdiction.6

We now come to the issue of prescription. Lilia Yusay claims that since the latest assessment was
issued only on February 13, 1958 or eight years, nine months and two days from the filing of the
estate and inheritance tax return, the Commissioner's right to make it has expired. She would rest
her stand on Section 331 of the Tax Code which limits the right of the Commissioner to assess the
tax within five years from the filing of the return.

The Commissioner claims that fraud attended the filing of the return; that this being so, Section
332(a) of the Tax Code would apply.7 It may be well to note that the assessment letter itself (Exhibit
22) did not impute fraud in the return with intent to evade payment of tax. Precisely, no surcharge for
fraud was imposed. In his answer to the petition for review filed by Lilia Yusay in the Court of Tax
Appeals, the Commissioner alleged no fraud. Instead, he broached the insufficiency of the return as
barring the commencement of the running of the statute of limitations. He raised the point of fraud for
the first time in the proceedings, only in his memorandum filed with the Tax Court subsequent to
resting his case. Said Court rejected the plea of fraud for lack of allegation and proof, and ruled that
the return, although not accurate, was sufficient to start the period of prescription.

Fraud is a question of fact.8 The circumstances constituting it must be alleged and proved in the
court below.9 And the finding of said court as to its existence and non-existence is final unless clearly
shown to be erroneous.10 As the court a quo found that no fraud was alleged and proved therein, We
see no reason to entertain the Commissioner's assertion that the return was fraudulent.

The conclusion, however, that the return filed by Jose S. Yusay was sufficient to commence the
running of the prescriptive period under Section 331 of the Tax Code rests on no solid ground.

Paragraph (a) of Section 93 of the Tax Code lists the requirements of a valid return. It states:

(a) Requirements.—In all cases of inheritance or transfers subject to either the estate tax or
the inheritance tax, or both, or where, though exempt from both taxes, the gross value of the
estate exceeds three thousand pesos, the executor, administrator, or anyone of the heirs, as
the case may be, shall file a return under oath in duplicate, setting forth (1) the value of the
gross estate of the decedent at the time of his death, or, in case of a nonresident not a
citizen of the Philippines ; (2) the deductions allowed from gross estate in determining net
estate as defined in section eighty-nine; (3) such part of such information as may at the time
be ascertainable and such supplemental data as may be necessary to establish the correct
taxes.

A return need not be complete in all particulars. It is sufficient if it complies substantially with the law.
There is substantial compliance (1) when the return is made in good faith and is not false or
fraudulent; (2) when it covers the entire period involved; and (3) when it contains information as to
the various items of income, deduction and credit with such definiteness as to permit the
computation and assessment of the tax.11

There is no question that the state and inheritance tax return filed by Jose S. Yusay was
substantially defective.

First, it was incomplete. It declared only ninety-three parcels of land representing about 400 hectares
and left out ninety-two parcels covering 503 hectares. Said huge under declaration could not have
been the result of an over-sight or mistake. As found in L-11378, supra note 7, Jose S. Yusay very
well knew of the existence of the ommited properties. Perhaps his motive in under declaring the
inventory of properties attached to the return was to deprive Lilia Yusay from inheriting her legal
share in the hereditary estate, but certainly not because he honestly believed that they did not form
part of the gross estate.

Second, the return mentioned no heir. Thus, no inheritance tax could be assessed. As a matter of
law, on the basis of the return, there would be no occasion for the imposition of estate and
inheritance taxes. When there is no heir - the return showed none - the intestate estate is escheated
to the State.12 The State taxes not itself.

In a case where the return was made on the wrong form, the Supreme Court of the United States
held that the filing thereof did not start the running of the period of limitations. 13 The reason is that the
return submitted did not contain the necessary information required in the correct form. In this
jurisdiction, however, the Supreme Court refrained from applying the said ruling of the United States
Supreme Court in Collector of Internal Revenue v. Central Azucarera de Tarlac, L-11760-61, July 31,
1958, on the ground that the return was complete in itself although inaccurate. To our mind, it would
not make much difference where a return is made on the correct form prescribed by the Bureau of
Internal Revenue if the data therein required are not supplied by the taxpayer. Just the same, the
necessary information for the assessment of the tax would be missing.

The return filed in this case was so deficient that it prevented the Commissioner from computing the
taxes due on the estate. It was as though no return was made. The Commissioner had to determine
and assess the taxes on data obtained, not from the return, but from other sources. We therefore
hold the view that the return in question was no return at all as required in Section 93 of the Tax
Code.

The law imposes upon the taxpayer the burden of supplying by the return the information upon
which an assessment would be based.14 His duty complied with, the taxpayer is not bound to do
anything more than to wait for the Commissioner to assess the tax. However, he is not required to
wait forever. Section 331 of the Tax Code gives the Commissioner five years within which to make
his assessment.15 Except, of course, if the taxpayer failed to observe the law, in which case Section
332 of the same Code grants the Commissioner a longer period. Non-observance consists in filing a
false or fraudulent return with intent to evade the tax or in filing no return at all.

Accordingly, for purposes of determining whether or not the Commissioner's assessment of February
13, 1958 is barred by prescription, Section 332(a) which is an exception to Section 331 of the Tax
Code finds application.16 We quote Section 332(a):

SEC. 332. 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 a failure to file a
return, the tax may be assessed, or a proceeding in court for 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.

As stated, the Commissioner came to know of the identity of the heirs on September 24, 1953 and
the huge underdeclaration in the gross estate on July 12, 1957. From the latter date, Section 94 of
the Tax Code obligated him to make a return or amend one already filed based on his own
knowledge and information obtained through testimony or otherwise, and subsequently to assess
thereon the taxes due. The running of the period of limitations under Section 332(a) of the Tax Code
should therefore be reckoned from said date for, as aforesaid, it is from that time that the
Commissioner was expected by law to make his return and assess the tax due thereon. From July
12, 1957 to February 13, 1958, the date of the assessment now in dispute, less than ten years have
elapsed. Hence, prescription did not abate the Commissioner's right to issue said assessment.

Anent the Commissioner's contention that Lilia Yusay is estopped from raising the defense of
prescription because she failed to raise the same in her answer to the motion for allowance of claim
and for the payment of taxes filed in the settlement court (Court of First Instance of Iloilo), suffice it to
state that it would be unjust to the taxpayer if We were to sustain such a view. The Court of First
Instance acting as a settlement court is not the proper tribunal to pass upon such defense, therefore
it would be but futile to raise it therein. Moreover, the Tax Code does not bar the right to contest the
legality of the tax after a taxpayer pays it. Under Section 306 thereof, he can pay the tax and claim a
refund therefor. A fortiori his willingness to pay the tax is no waiver to raise defenses against the
tax's legality.

WHEREFORE, the judgment appealed from is set aside and another entered affirming the
assessment of the Commissioner of Internal Revenue dated February 13, 1958. Lilia Yusay
Gonzales, as administratrix of the intestate estate of Matias Yusay, is hereby ordered to pay the
sums of P16,246.04 and P39,178.12 as estate and inheritance taxes, respectively, plus interest and
surcharge for delinquency in accordance with Section 101 of the National Internal Revenue Code,
without prejudice to reimbursement from her co-administratrix, Florencia Piccio Vda. de Yusay for
the latter's corresponding tax liability. No costs. So ordered.