kaFIRST DIVISION [G.R. No. 147188.

September 14, 2004]

Total Net Taxable Income

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.

per investigation

DECISION

Less: Payment already made

DAVIDE, JR., C.J.:

1. Per return

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.

2. Thru Capital Gains

The petitioner seeks the reversal of the Decision [1] of the Court of Appeals of 31 January 2001 in CA-G.R.
SP No. 57799 affirming the 3 January 2000 Decision[2] of the Court of Tax Appeals (CTA) in C.T.A. Case
No. 5328,[3] which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency
income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 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.

Altonaga

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.

Total

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 P90 million.[4]

4/16/90-4/30/94 (.808)

On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in
turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 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 P10 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 P75,728.021. After crediting
withholding taxes of P254,497.00, it paid P26,341,207[8] for its net taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 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 P79,099,999.22.
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
P79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return

P75,987,725.00

Add: Additional gain on sale of real property taxable under ordinary corporate income but were
substituted with individual capital gains
(P200M 100M)

100,000,000.00

P175,987,725.00

Tax Due thereof at 35%

P 61,595,703.75

P26,595,704.00

Tax made by R.A.

10,000,000.00

Balance of tax due

Add: 50% Surcharge
25% Surcharge

36,595,704.00
P 24,999,999.75
12,499,999.88
6,249,999.94
P 43,749,999.57

Add: Interest 20% from

TOTAL AMT. DUE &COLLECTIBLE

35,349,999.65
P 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 P100 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 Answer[16] 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 P100 million (the
difference between the second simulated sale for P200 million and the first simulated sale for P100
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 decision[18] 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 preconceived 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 governments 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 P79,099,999.22 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 P40 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 P40 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 P40 million from RMI,[25] and not from Altonaga. That P40 million was debited by RMI and
reflected in its trial balance[26] as other inv. Cibeles Bldg. Also, as of 31 July 1989, another P40
million was debited and reflected in RMIs trial balance as other inv. Cibeles Bldg. This would show
that the real buyer of the properties was RMI, and not the intermediary Altonaga.
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 isnt 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. Altonagas 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.
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.

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 CICs deficiency income
tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from
Todas 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 P79,099,999.22 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.
Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

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

SECOND DIVISION [G.R. No. 120880. June 5, 1997]

FERDINAND R. MARCOS II, petitioner, vs. COURT OF APPEALS, THE COMMISSIONER OF
THE BUREAU OF INTERNAL REVENUE and HERMINIA D. DE GUZMAN, respondents.
DECISION
TORRES, JR., J.:
In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and
unfair, suffering the basic and oftly implored requisites of due process of law. Specifically, the petition
assails the Decision of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where
the said court held:
"In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax
assessment, are already final and (u)nappealable -and- the subsequent levy of real properties is a tax
remedy resorted to by the government, sanctioned by Section 213 and 218 of the National Internal
Revenue Code. This summary tax remedy is distinct and separate from the other tax remedies (such as
Judicial Civil actions and Criminal actions), and is not affected or precluded by the pendency of any other
tax remedies instituted by the government.
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition for certiorari
with prayer for Restraining Order and Injunction. No pronouncements as to costs. SO ORDERED."
More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the
Republic of the Philippines, the matter of the settlement of his estate, and its dues to the government in
estate taxes, are still unresolved, the latter issue being now before this Court for resolution. Specifically,
petitioner Ferdinand R. Marcos II, the eldest son of the decedent, questions the actuations of the
respondent Commissioner of Internal Revenue in assessing, and collecting through the summary remedy
of Levy on Real Properties, estate and income tax delinquencies upon the estate and properties of his
father, despite the pendency of the proceedings on probate of the will of the late president, which is
docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with an
application for writ of preliminary injunction and/or temporary restraining order on June 28, 1993, seeking
to I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May 20, 1993,
issued by respondent Commissioner of Internal Revenue;
II. Annul and set aside the Notices of Sale dated May 26, 1993;
III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding with
the Auction of the real properties covered by Notices of Sale.
After the parties had pleaded their case, the Court of Appeals rendered its Decision on November 29,
1994, ruling that the deficiency assessments for estate and income tax made upon the petitioner and the
estate of the deceased President Marcos have already become final and unappealable, and may thus be
enforced by the summary remedy of levying upon the properties of the late President, as was done by the
respondent Commissioner of Internal Revenue.
"WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition for
Certiorari with prayer for Restraining Order and Injunction. No pronouncements as to cost. SO
ORDERED."
Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision, assigning
the following as errors:
A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX
REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND PRECLUDED BY
THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE
PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING
PRECISELY PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S

ESTATE IN CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL OTHER
COURTS AND ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE
TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND
UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS CITED
IN THE PETITION. INDEPENDENT OF WHETHER THE TAX ASSESSMENTS HAD ALREADY
BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL
MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE ENFORCED BY
RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS, RESPONDENT COURT SHOULD
HAVE FAVORABLY CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE
PETITION:
(1) The Notices of Levy on Real Property were issued beyond the period provided in the Revenue
Memorandum Circular No. 38-68.
(2) [a] The numerous pending court cases questioning the late President's ownership or interests in several
properties (both personal and real) make the total value of his estate, and the consequent estate tax due,
incapable of exact pecuniary determination at this time. Thus, respondents assessment of the estate tax
and their issuance of the Notices of Levy and Sale are premature, confiscatory and oppressive.
[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less served with
copies of the Notices of Levy, contrary to the mandate of Section 213 of the NIRC. As such, petitioner
was never given an opportunity to contest the Notices in violation of his right to due process of law.
C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT
MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE RELIEF
TO PETITIONER. SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS POSSESS THE
POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS
COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE
ALLEGED DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.
The facts as found by the appellate court are undisputed, and are hereby adopted:
"On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.
On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and examinations of
the tax liabilities and obligations of the late president, as well as that of his family, associates and
"cronies". Said audit team concluded its investigation with a Memorandum dated July 26, 1991. The
investigation disclosed that the Marcoses failed to file a written notice of the death of the decedent, an
estate tax returns [sic], as well as several income tax returns covering the years 1982 to 1986, -all in
violation of the National Internal Revenue Code (NIRC).
Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional Trial of
Quezon City for violations of Sections 82, 83 and 84 (has penalized under Sections 253 and 254 in
relation to Section 252- a & b) of the National Internal Revenue Code (NIRC).
The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate Tax Return
for the estate of the late president, the Income Tax Returns of the Spouses Marcos for the years 1985 to
1986, and the Income Tax Returns of petitioner Ferdinand 'Bongbong' Marcos II for the years 1982 to
1985.
On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-2-89-91002464 (against the estate of the late president Ferdinand Marcos in the amount of P23,293,607,638.00
Pesos); (2) Deficiency income tax assessment no. FAC-1-85-91-002452 and Deficiency income tax
assessment no. FAC-1-86-91-002451 (against the Spouses Ferdinand and Imelda Marcos in the amounts
of P149,551.70 and P184,009,737.40 representing deficiency income tax for the years 1985 and 1986); (3)
Deficiency income tax assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463 (against petitioner
Ferdinand 'Bongbong' Marcos II in the amounts of P258.70 pesos; P9,386.40 Pesos; P4,388.30 Pesos; and
P6,376.60 Pesos representing his deficiency income taxes for the years 1982 to 1985).
The Commissioner of Internal Revenue avers that copies of the deficiency estate and income tax

assessments were all personally and constructively served on August 26, 1991 and September 12, 1991
upon Mrs. Imelda Marcos (through her caretaker Mr. Martinez) at her last known address at No. 204
Ortega St., San Juan, M.M. (Annexes 'D' and 'E' of the Petition). Likewise, copies of the deficiency tax
assessments issued against petitioner Ferdinand 'Bongbong' Marcos II were also personally and
constructively served upon him (through his caretaker) on September 12, 1991, at his last known address
at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes 'J' and 'J-1' of the Petition).
Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs. Marcos c/o petitioner,
at his office, House of Representatives, Batasan Pambansa, Quezon City. Moreover, a notice to Taxpayer
inviting Mrs. Marcos (or her duly authorized representative or counsel), to a conference, was furnished the
counsel of Mrs. Marcos, Dean Antonio Coronel - but to no avail.
The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the other heirs of
the late president, within 30 days from service of said assessments.
On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real property against
certain parcels of land owned by the Marcoses - to satisfy the alleged estate tax and deficiency income
taxes of Spouses Marcos.
On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of satisfying
the deficiency income taxes.
On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The foregoing
tax remedies were resorted to pursuant to Sections 205 and 213 of the National Internal Revenue Code
(NIRC).
In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein petitioner) calling
the attention of the BIR and requesting that they be duly notified of any action taken by the BIR affecting
the interest of their client Ferdinand 'Bongbong Marcos II, as well as the interest of the late president copies of the aforesaid notices were served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda
Marcos, the petitioner, and their counsel of record, 'De Borja, Medialdea, Ata, Bello, Guevarra and
Serapio Law Office'.
Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of Tacloban
City. The public auction for the sale of the eleven (11) parcels of land took place on July 5, 1993. There
being no bidder, the lots were declared forfeited in favor of the government.
On June 25, 1993, petitioner Ferdinand 'Bongbong' Marcos II filed the instant petition for certiorari and
prohibition under Rule 65 of the Rules of Court, with prayer for temporary restraining order and/or writ of
preliminary injunction."
It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the collection
of taxes, is of paramount importance for the sustenance of government. Taxes are the lifeblood of the
government and should be collected without unnecessary hindrance. However, such collection should be
made in accordance with law as any arbitrariness will negate the very reason for government itself. It is
therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so
that the real purpose of taxation, which is the promotion of the common good, may be achieved
Whether or not the proper avenues of assessment and collection of the said tax obligations were taken by
the respondent Bureau is now the subject of the Court's inquiry.
Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late President
Marcos effected by the BIR are null and void for disregarding the established procedure for the
enforcement of taxes due upon the estate of the deceased. The case of Domingo vs. Garlitos[ is
specifically cited to bolster the argument that "the ordinary procedure by which to settle claims of
indebtedness against the estate of a deceased, person, as in an inheritance (estate) tax, is for the claimant to
present a claim before the probate court so that said court may order the administrator to pay the amount
therefor." This remedy is allegedly, exclusive, and cannot be effected through any other means.
Petitioner goes further, submitting that the probate court is not precluded from denying a request by the
government for the immediate payment of taxes, and should order the payment of the same only within the
period fixed by the probate court for the payment of all the debts of the decedent. In this regard, petitioner
cites the case of Collector of Internal Revenue vs. The Administratrix of the Estate of Echarri (67 Phil

502), where it was held that:

"The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue (52 Phil
803), relied upon by the petitioner-appellant is good authority on the proposition that the court having
control over the administration proceedings has jurisdiction to entertain the claim presented by the
government for taxes due and to order the administrator to pay the tax should it find that the assessment
was proper, and that the tax was legal, due and collectible. And the rule laid down in that case must be
understood in relation to the case of Collector of Customs vs. Haygood, supra., as to the procedure to be
followed in a given case by the government to effectuate the collection of the tax. Categorically stated,
where during the pendency of judicial administration over the estate of a deceased person a claim for taxes
is presented by the government, the court has the authority to order payment by the administrator; but, in
the same way that it has authority to order payment or satisfaction, it also has the negative authority to
deny the same. While there are cases where courts are required to perform certain duties mandatory and
ministerial in character, the function of the court in a case of the present character is not one of them; and
here, the court cannot be an organism endowed with latitude of judgment in one direction, and converted
into a mere mechanical contrivance in another direction."
On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes is
paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not preclude
the assessment and collection, through summary remedies, of estate taxes over the same. According to the
respondent, claims for payment of estate and income taxes due and assessed after the death of the decedent
need not be presented in the form of a claim against the estate. These can and should be paid
immediately. The probate court is not the government agency to decide whether an estate is liable for
payment of estate of income taxes. Well-settled is the rule that the probate court is a court with special
and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a probate
court over estate of deceased individual, is not a trifling thing. The court's jurisdiction, once invoked, and
made effective, cannot be treated with indifference nor should it be ignored with impunity by the very
parties invoking its authority.
In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the
sale of properties of a deceased person by his prospective heirs before final adjudication to determine who
are the heirs of the decedent;[ the recognition of a natural child the status of a woman claiming to be the
legal wife of the decedent] the legality of disinheritance of an heir by the testator and to pass upon the
validity of a waiver of hereditary rights
The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal Revenue
to collect by the summary remedy of levying upon, and sale of real properties of the decedent, estate tax
deficiencies, without the cognition and authority of the court sitting in probate over the supposed will of
the deceased.
The nature of the process of estate tax collection has been described as follows:
"Strictly speaking, the assessment of an inheritance tax does not directly involve the administration of a
decedent's estate, although it may be viewed as an incident to the complete settlement of an estate, and,
under some statutes, it is made the duty of the probate court to make the amount of the inheritance tax a
part of the final decree of distribution of the estate. It is not against the property of decedent, nor is it a
claim against the estate as such, but it is against the interest or property right which the heir, legatee,
devisee, etc., has in the property formerly held by decedent. Further, under some statutes, it has been held
that it is not a suit or controversy between the parties, nor is it an adversary proceeding between the state
and the person who owes the tax on the inheritance. However, under other statutes it has been held that
the hearing and determination of the cash value of the assets and the determination of the tax are adversary
proceedings. The proceeding has been held to be necessarily a proceeding in rem]
In the Philippine experience, the enforcement and collection of estate tax, is executive in character, as the
legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of the National
Internal Revenue Code attests to this:
"Sec. 3. Powers and duties of the Bureau.-The powers and duties of the Bureau of Internal Revenue shall
comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the

enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said
Bureau shall also give effect to and administer the supervisory and police power conferred to it by this
Code or other laws."
Thus, it was in Vera vs. Fernandez] that the court recognized the liberal treatment of claims for taxes
charged against the estate of the decedent. Such taxes, we said, were exempted from the application of the
statute of non-claims, and this is justified by the necessity of government funding, immortalized in the
maxim that taxes are the lifeblood of the government. Vectigalianervisuntreipublicae - taxes are the
sinews of the state.
"Taxes assessed against the estate of a deceased person, after administration is opened, need not be
submitted to the committee on claims in the ordinary course of administration. In the exercise of its
control over the administrator, the court may direct the payment of such taxes upon motion showing that
the taxes have been assessed against the estate."
Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to allowing
the enforcement of tax obligations against the heirs of the decedent, even after distribution of the estate's
properties.
"Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the
heirs even after the distribution of the properties of the decedent. They are exempted from the application
of the statute of non-claims. The heirs shall be liable therefor, in proportion to their share in the
inheritance
"Thus, the Government has two ways of collecting the taxes in question. One, by going after all the heirs
and collecting from each one of them the amount of the tax proportionate to the inheritance received.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights
to property belong to the taxpayer for unpaid income tax, is by subjecting said property of the estate which
is in the hands of an heir or transferee to the payment of the tax due the estate. (Commissioner of Internal
Revenue vs. Pineda, 21 SCRA 105, September 15, 1967.)
From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement
tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot
therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of the properties
allegedly owned by the late President, on the ground that it was required to seek first the probate court's
sanction. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of
the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be
enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to
authorize the executor or judicial administrator of the decedent's estate to deliver any distributive share to
any party interested in the estate, unless it is shown a Certification by the Commissioner of Internal
Revenue that the estate taxes have been paid. This provision disproves the petitioner's contention that it is
the probate court which approves the assessment and collection of the estate tax.
If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have been
pursued through the proper administrative and judicial avenues provided for by law.
Section 229 of the NIRC tells us how:
"Sec. 229. Protesting of assessment.-When the Commissioner of Internal Revenue or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings.
Within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond to
said notice. If the taxpayer fails to respond, the Commissioner shall issue an assessment based on his
findings.
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation in such form and manner as may be prescribed by implementing regulations within (30)
days from receipt of the assessment; otherwise, the assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely affected by

the decision on the protest may appeal to the Court of Tax Appeals within thirty (30) days from receipt of
said decision; otherwise, the decision shall become final, executory and demandable. (As inserted by P.D.
1773)"
Apart from failing to file the required estate tax return within the time required for the filing of the same,
petitioner, and the other heirs never questioned the assessments served upon them, allowing the same to
lapse into finality, and prompting the BIR to collect the said taxes by levying upon the properties left by
President Marcos.
Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken by the
Government, collection thereof may have been done in violation of the law. Thus, the manner and method
in which the latter is enforced may be questioned separately, and irrespective of the finality of the former,
because the Government does not have the unbridled discretion to enforce collection without regard to the
clear provision of law
Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing Sections
318 and 324 of the old tax code (Republic Act 5203), the BIR's Notices of Levy on the Marcos properties,
were issued beyond the allowed period, and are therefore null and void:
"...the Notices of Levy on Real Property (Annexes 0 to NN of Annex C of this Petition) in satisfaction of
said assessments were still issued by respondents well beyond the period mandated in Revenue
Memorandum Circular No. 38-68. These Notices of Levy were issued only on 22 February 1993 and 20
May 1993 when at least seventeen (17) months had already lapsed from the last service of tax assessment
on 12 September 1991. As no notices of distraint of personal property were first issued by respondents,
the latter should have complied with Revenue Memorandum Circular No. 38-68 and issued these Notices
of Levy not earlier than three (3) months nor later than six (6) months from 12 September 1991. In
accordance with the Circular, respondents only had until 12 March 1992 (the last day of the sixth month)
within which to issue these Notices of Levy. The Notices of Levy, having been issued beyond the period
allowed by law, are thus void and of no effect.
We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period and
in accordance with the provisions of the present Tax Code. The deficiency tax assessment, having already
become final, executory, and demandable, the same can now be collected through the summary remedy of
distraint or levy pursuant to Section 205 of the NIRC.
The applicable provision in regard to the prescriptive period for the assessment and collection of tax
deficiency in this instance is Article 223 of the NIRC, which pertinently provides:
"Sec. 223. Exceptions as to a 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 (10) years after the discovery of the falsity, fraud, or omission: Provided, That, in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of
in the civil or criminal action for the collection thereof.
xxx
(c) Any internal revenue tax which has been assessed within the period of limitation above prescribed,
may be collected by distraint or levy or by a proceeding in court within three years following the
assessment of the tax.
xxx
The omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment
made by the BIR is fatal to the petitioner's cause, as under the above-cited provision, in case of failure to
file a return, the tax may be assessed at any time within ten years after the omission, and any tax so
assessed may be collected by levy upon real property within three years following the assessment of the
tax. Since the estate tax assessment had become final and unappealable by the petitioner's default as
regards protesting the validity of the said assessment, there is now no reason why the BIR cannot continue
with the collection of the said tax. Any objection against the assessment should have been pursued
following the avenue paved in Section 229 of the NIRC on protests on assessments of internal revenue
taxes.

Petitioner further argues that "the numerous pending court cases questioning the late president's ownership
or interests in several properties (both real and personal) make the total value of his estate, and the
consequent estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents'
assessment of the estate tax and their issuance of the Notices of Levy and sale are premature and
oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which
were filed by the government to question the ownership and interests of the late President in real and
personal properties located within and outside the Philippines. Petitioner, however, omits to allege
whether the properties levied upon by the BIR in the collection of estate taxes upon the decedent's estate
were among those involved in the said cases pending in the Sandiganbayan. Indeed, the court is at a loss
as to how these cases are relevant to the matter at issue. The mere fact that the decedent has pending cases
involving ill-gotten wealth does not affect the enforcement of tax assessments over the properties
indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of
P23,292,607,638.00, stating that this amount deviates from the findings of the Department of Justice's
Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear evidence of the
uncertainty on the part of the Government as to the total value of the estate of the late President.
This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had
already become final and unappealable.
It is not the Department of Justice which is the government agency tasked to determine the amount of
taxes due upon the subject estate, but the Bureau of Internal Revenue [whose determinations and
assessments are presumed correct and made in good faith The taxpayer has the duty of proving otherwise.
In the absence of proof of any irregularities in the performance of official duties, an assessment will not be
disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear
to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to
show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will
justify the judicial affirmance of said assessment. In this instance, petitioner has not pointed out one single
provision in the Memorandum of the Special Audit Team which gave rise to the questioned assessment,
which bears a trace of falsity. Indeed, the petitioner's attack on the assessment bears mainly on the alleged
improbable and unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis
for the charge of impropriety of the assessments made.
Moreover, these objections to the assessments should have been raised, considering the ample remedies
afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax
Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the pretext of
grave abuse of discretion. The course of action taken by the petitioner reflects his disregard or even
repugnance of the established institutions for governance in the scheme of a well-ordered society. The
subject tax assessments having become final, executory and enforceable, the same can no longer be
contested by means of a disguised protest. In the main, Certiorari may not be used as a substitute for a
lost appeal or remedy. This judicial policy becomes more pronounced in view of the absence of sufficient
attack against the actuations of government.

207-210, Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8, 1992

inviting Mrs. Marcos to a conference relative to her tax liabilities, was furnished the counsel of Mrs.
Marcos - Dean Antonio Coronel (Annex "B", p. 211, ibid). Thereafter, copies of Notices were also served
upon Mrs. Imelda Marcos, the petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and
Serapio Law Office", on April 7, 1993 and June 10, 1993. Despite all of these Notices, petitioner never
lifted a finger to protest the assessments, (upon which the Levy and sale of properties were based), nor
appealed the same to the Court of Tax Appeals.
There being sufficient service of Notices to herein petitioner (and his mother) and it appearing that
petitioner continuously ignored said Notices despite several opportunities given him to file a protest and to
thereafter appeal to the Court of Tax Appeals, - the tax assessments subject of this case, upon which the
levy and sale of properties were based, could no longer be contested (directly or indirectly) via this instant
petition for certiorari."[if !supportFootnotes][20][endif]
Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been
issued without validly serving copies thereof to the petitioner. As a mandatory heir of the decedent,
petitioner avers that he has an interest in the subject estate, and notices of levy upon its properties should
have been served upon him.
We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent
taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner as heir of the
deceased. In the same vein, in the matter of income tax delinquency of the late president and his spouse,
petitioner is not the taxpayer liable. Thus, it follows that service of notices of levy in satisfaction of these
tax delinquencies upon the petitioner is not required by law, as under Section 213 of the NIRC, which
pertinently states:
"xxx
...Levy shall be effected by writing upon said certificate a description of the property upon which levy is
made. At the same time, written notice of the levy shall be mailed to or served upon the Register of
Deeds of the province or city where the property is located and upon the delinquent taxpayer, or if he be
absent from the Philippines, to his agent or the manager of the business in respect to which the liability
arose, or if there be none, to the occupant of the property in question.
xxx"
The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale were
furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself on April
12, 1993 at his office at the Batasang Pambansa.[if !supportFootnotes][21][endif] We cannot therefore, countenance
petitioner's insistence that he was denied due process. Where there was an opportunity to raise objections
to government action, and such opportunity was disregarded, for no justifiable reason, the party claiming
oppression then becomes the oppressor of the orderly functions of government. He who comes to court
must come with clean hands. Otherwise, he not only taints his name, but ridicules the very structure of
established authority.

On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the respondent
appellate court's pronouncements sound and resilient to petitioner's attacks.

IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of
the Court of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

"Anent grounds 3(b) and (B) - both alleging/claiming lack of notice - We find, after considering the facts
and circumstances, as well as evidences, that there was sufficient, constructive and/or actual notice of
assessments, levy and sale, sent to herein petitioner Ferdinand "Bongbong" Marcos as well as to his
mother Mrs. Imelda Marcos.

SO ORDERED.

Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs. Marcos at
the latter's last known address, on August 26, 1991 and September 12, 1991, as well as the notices of
assessment personally given to the caretaker of petitioner also at his last known address on September 12,
1991 - the subsequent notices given thereafter could no longer be ignored as they were sent at a time when
petitioner was already here in the Philippines, and at a place where said notices would surely be called to
petitioner's attention, and received by responsible persons of sufficient age and discretion.
Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the petitioner, at
his office, House of Representatives, Batasan Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp.

THIRD DIVISION
G.R. Nos. 130371 &130855

August 4, 2009

REPUBLIC OF THE PHILIPPINES, Petitioner,

vs.
FERDINAND R. MARCOS II and IMELDA R. MARCOS, Respondents.
DECISION
DEL CASTILLO, J.:

Examining the arguments poised by the movants, the Court observed that these are but a mere rehash of
issues already raised and passed upon by the Court.
One has to review the previous orders issued by the Court in this case, e.g., the orders dated September 9,
1994, November 25, 1994, as well as October 3, 1995, to see that even as far back then, the Court has
considered the matter of competency of the oppositors and of Commissioner Liwayway Vinzons-Chato as
having been settled.
It cannot be overstressed that the assailed January 11, 1996 Orders of the Court was arrived at only after
extensive consideration of every legal facet available on the question of validity of the Will.

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, seeking to
set aside the March 13, 1997 Decision2 and August 27, 1997 Resolution3 of the Court of Appeals (CA) in
CA-G.R. SP No. 43450.

WHEREFORE, for lack of merit, the motion for reconsideration filed separately by petitioner Republic
and oppositor Imelda R. Marcos are both DENIED.

The facts of the case are as follows:

On June 6, 1996, petitioner filed with this Court a Petition for Review on Certiorari, under Ruled 45 of
the Rules of Court, questioning the aforementioned RTC Orders granting letters testamentary to
respondents.

On January 11, 1996, the Regional Trial Court (RTC) of Pasig City Branch 156, acting as a probate court,
in Special Proceeding No. 10279, issued an Order4 granting letters testamentary in solidum to respondents
Ferdinand R. Marcos II and Imelda Trinidad Romualdez-Marcos as executors of the last will and
testament of the late Ferdinand E. Marcos.

SO ORDERED.9

On February 5, 1997, the First Division of this Court issued a Resolution referring the petition to the CA,
to wit:

The dispositive portion of the January 11, 1996 Order reads:

xxxx

WHEREFORE, finding the Last Will and Testament of Ferdinand Edralin Marcos to have been duly
executed in accordance with law, the same is hereby ALLOWED AND ADMITTED TO PROBATE.

The special civil action for certiorari as well as all the other pleadings filed herein are REFERRED to
the Court of Appeals for consideration and adjudication on the merits or any other action as it may
deem appropriate, the latter having jurisdiction concurrent with this Court over the Case, and this Court
having been cited to no special and important reason for it to take cognizance of said case in the first
instance.10 (Emphasis and Underscoring Supplied)

Upon the filing of a bond in the amount of P50,000.00, let letters testamentary be issued
in solidum to Imelda Trinidad Romualdez-Marcos AND Ferdinand Romualdez Marcos II, named
executors therein.
Pending the filing of said bond and their oath, Commissioner Liwayway Vinzons-Chato of the Bureau of
Internal Revenue is hereby authorized to continue her functions as Special Administrator of the Estate of
Ferdinand Edralin Marcos.
Let NOTICE be given to all known heirs and creditors of the decedent, and to any other persons having an
interest in the estate for them to lay their claim against the Estate or forever hold their peace.
SO ORDERED.5
On January 15, 1996, the petitioner Republic of the Philippines filed a Motion for Partial
Reconsideration6 in so far as the January 11, 1996 RTC Order granted letters testamentary to respondents.
On the other hand, respondent Imelda Marcos filed her own motion for reconsideration on the ground that
the will is lost and that petitioner has not proven its existence and validity.
On February 5, 1996, respondent Ferdinand Marcos II filed a Compliance stating that he already filed a
bond in the amount of P50,000.00 as directed by the January 11, 1996 RTC Order and that he took his oath
as named executor of the will on January 30, 1996.
On March 13, 1996, the RTC issued Letters of Administration7 to BIR Commissioner Liwayway VinzonsChato in accordance with an earlier Order dated September 9, 1994, appointing her as Special
Administratrix of the Marcos Estate.

On March 13, 1997, the CA issued a Decision,11 dismissing the referred petition for having taken the
wrong mode of appeal, the pertinent portions of which reads:
Consequently, for having taken the wrong mode of appeal, the present petition should be dismissed in
accordance with the same Supreme Court Circular 2-90 which expressly provides that:
4. Erroneous Appeals An appeal taken to either the Supreme Court or the Court of Appeals by the
wrong or inappropriate mode shall be dismissed.
IN VIEW OF THE FOREGOING, the instant petition for review is hereby DISMISSED.
SO ORDERED.12
Petitioner filed a Motion for Reconsideration,13 which was, however denied by the CA in a
Resolution14 dated August 27, 1997.
Hence, herein petition, with petitioner raising the following assignment of errors, to wit:
I.
THE COURT OF APPEALS GRAVELY ERRED IN DISMISSING THE PETITION ON TECHNICAL
GROUNDS DESPITE THE SUPREME COURT RESOLUTION SPECIFICALLY REFERRING SAID
PETITION FOR A DECISION ON THE MERITS.

On April 1, 1996, respondent Ferdinand Marcos II filed a Motion to Revoke the Letters of Administration
issued by the RTC to BIR Commissioner Vinzons-Chato.

II.

On April 26, 1996, the RTC issued an Order8 denying the motion for partial reconsideration filed by
petitioner as well as the motion for reconsideration filed by respondent Imelda Marcos, the penultimate
portion of which reads:

THE PROBATE COURT GRAVELY ERRED IN FAILING TO CONSIDER THAT RESPONDENTS

IMELDA R. MARCOS AND FERDINAND R. MARCOS II SHOULD BE DISQUALIFIED TO ACT
AND SERVE AS EXECUTORS.

Under the Rules, a decedents testamentary privilege must be accorded utmost respect. Guided by this
legal precept, therefore, in resolving the two (2) motions at hand, the Court is constrained to DENY both.

III.
THE PROBATE COURT GRAVELY ERRED IN FAILING TO CONSIDER THAT SAID PRIVATE
RESPONDENTS HAVE DENIED AND DISCLAIMED THE VERY EXISTENCE AND VALIDITY OF
THE MARCOS WILL.

IV.
THE PROBATE COURT GRAVELY ERRED IN FAILING TO CONSIDER THAT ITS ORDER OF
JANUARY 11, 1996, WHICH ADMITTED THE MARCOS WILL TO PROBATE AND WHICH
DIRECTED THE ISSUANCE OF LETTERS TESTAMENTARY IN SOLIDUM TO PRIVATE
RESPONDENTS AS EXECUTORS OF SAID MARCOS WILL, WAS BASED ON THE EVIDENCE OF
THE REPUBLIC ALONE.
V.
THE PROBATE COURT GRAVELY ERRED IN FAILING TO CONSIDER THAT BOTH PRIVATE
RESPONDENTS HAVE OBSTRUCTED THE TRANSFER TO THE PHILIPPINES OF THE MARCOS
ASSETS DEPOSITED IN THE SWISS BANKS.15
In the meantime, on October 9, 2002, the RTC, acting on the pending unresolved motions before it, issued
an Order16 which reads:

A reading of Supreme Court Circular 2-90, in relation to Section 17 of the Judiciary Act of 1948, clearly
shows that the subject matter of therein petition, that is, the propriety of granting letters testamentary to
respondents, do not fall within any ground which can be the subject of a direct appeal to this Court. The
CA was thus correct in declaring that the "issues raised by petitioner do not fall within the purview of
Section 17 of the Judiciary Act of 1948 such that the Supreme Court should take cognizance of the instant
case."19
Moreover, the Courts pronouncement in Suarez v. Judge Villarama20 is instructive:
Section 4 of Circular No. 2-90, in effect at the time of the antecedents, provides that an appeal taken
to either the Supreme Court or the Court of Appeals by the wrong mode or inappropriate mode
shall be dismissed. This rule is now incorporated in Section 5, Rule 56 of the 1997 Rules of Civil
Procedure.

WHEREFORE, the Court hereby appoints as joint special administrators of the estate of the late
Ferdinand E. Marcos, the nominee of the Republic of the Philippines (the Undersecretary of the
Department of Justice whom the Secretary of Justice will designate for this purpose) and Mrs. Imelda
Romualdez Marcos and Mr. Ferdinand R. Marcos II, to serve as such until an executor is finally
appointed.

Moreover, the filing of the case directly with this Court runs afoul of the doctrine of hierarchy of
courts.Pursuant to this doctrine, direct resort from the lower courts to the Supreme Court will not
be entertained unless the appropriate remedy cannot be obtained in the lower tribunals. This Court
is a court of last resort, and must so remain if it is to satisfactorily perform the functions assigned to it by
the Constitution and immemorial tradition. Thus, a petition for review on certiorari assailing the
decision involving both questions of fact and law must first be brought before the Court of
Appeals.21

SO ORDERED.

Also, in Southern Negros Development Bank v. Court of Appeals,22 this Court ruled:

The petition is without merit.

It is incumbent upon private respondent qua appellants to utilize the correct mode of appeal of the
decisions of trial courts to the appellate courts. In the mistaken choice of their remedy, they can blame no
one but themselves (Jocson v. Baguio, 179 SCRA 550 [1989]; Yucuanseh Drug Co. v. National Labor
Union, 101 Phil. 409 [1957]).

When the assailed Orders granting letters testamentary in solidum to respondents were issued by the RTC,
petitioner sought to question them by filing a petition for review on certiorari under Rule 45 of the Rules
of Court.
Supreme Court Circular No. 2-90,17 which was then in effect, reads:
2. Appeals from Regional Trial Courts to the Supreme Court. Except in criminal cases where the penalty
imposed is life imprisonment to reclusion perpetua, judgments of regional trial courts may be appealed
to the Supreme Court only by petition for review on certiorari in accordance with Rule 45 of the
Rules of Courtin relation to Section 17 of the Judiciary Act of 1948, as amended, this being the clear
intendment of the provision of the Interim Rules that "(a)ppeals to the Supreme Court shall be taken by
petition for certiorari which shall be governed by Rule 45 of the Rules of Court. (Emphasis and
Underscoring Supplied)
The pertinent portions of Section 1718 of the Judiciary Act of 1948 read:
The Supreme Court shall further have exclusive jurisdiction to review, revise, reverse, modify or affirm
oncertiorari as the law or rules of court may provide, final judgments and decrees of inferior courts as
herein provided, in
(1) All cases in which the constitutionality or validity of any treaty, law, ordinance, or executive order or
regulation is in question;
(2) All cases involving the legality of any tax, impost, assessment or toll, or any penalty imposed in
relation thereto;
(3) All cases in which the jurisdiction of any inferior court is in issue;
(4) All other cases in which only errors or questions of law are involved: Provided, however, That if, in
addition to constitutional, tax or jurisdictional questions, the cases mentioned in the three next preceding
paragraphs also involve questions of fact or mixed questions of fact and law, the aggrieved party shall
appeal to the Court of Appeals; and the final judgment or decision of the latter may be reviewed, revised,
reversed, modified or affirmed by the Supreme Court on writ of certiorari; and
(5) Final awards, judgments, decision or orders of the Commission on Elections, Court of Tax Appeals,
Court of Industrial Relations, the Public Service Commission, and the Workmens Compensation
Commission.

xxxx
Pursuant to Section 4 of Circular No. 2-90, which provides that "[a]n appeal taken to either the
Supreme Court or the Court of Appeals by the wrong mode or inappropriate mode shall be
dismissed," the only course of action of the Court to which an erroneous appeal is made is to dismiss
the same. There is no longer any justification for allowing transfers of erroneous appeals from one
court to another (Quesada v. Court of Appeals, G.R. No. 93869, November 12, 1990, First Division,
Minute Resolution).23
Based on the foregoing, petitioner cannot deny that the determination of whether or not respondents
should be disqualified to act as executors is a question of fact. Hence, the proper remedy was to appeal to
the CA, not to this Court.
Petitioner is adamant, however, that notwithstanding the improper remedy, the CA should not have
dismissed therein petition. Petitioner argues in the wise:
However, as can be seen in the Resolution of February 5, 1997, (Annex "H") this Honorable Court deemed
it more proper to transmit the first Petition for Review to respondent appellate court for the reason that:
This Court having been cited to no special and important reason for it to take cognizance of said case in
the first instance. x x x
It would appear then that even though this Honorable Court apparently considers the Republics petition as
deserving to be given due course, it deemed it in the best interest of the parties concerned if the Court of
Appeals would first take cognizance of said case, thereby preserving its stance as a court of last resort.
Additionally, this Honorable Court itself plainly stated that the case under review is:
.REFERRED to the Court of Appeals for consideration and adjudication on the merits. The latter
having jurisdiction concurrent with this Court over the case24
Petitioners arguments are misplaced. To stress, the February 5, 1997 Resolution reads:
The special civil action for certiorari as well as all the other pleadings filed herein are REFERRED to the
Court of Appeals for consideration and adjudication on the merits or any other action as it may deem

appropriate, the latter having jurisdiction concurrent with this Court over the Case, and this Court having
been cited to no special and important reason for it to take cognizance of said case in the first instance. 25
Based thereon, this Court agrees with the ruling of the CA that said resolution gave the CA discretion and
latitude to decide the petition as it may deem proper. The resolution is clear that the petition was referred
to the CA for consideration and adjudication on the merits or any other action as it may deem appropriate.
Thus, no error can be attributed to the CA when the action it deemed appropriate was to dismiss the
petition for having availed of an improper remedy. More importantly, the action of the CA was sanctioned
under Section 4 of Supreme Court Circular 2-90 which provides that "an appeal taken to either the
Supreme Court or the Court of Appeals by the wrong mode or inappropriate mode shall be dismissed."
Moreover, petitioner mistakenly relies in Oriental Media, Inc. v. Court of Appeals,26 in which this Court
made the following pronouncements:
In the case at bar, there was no urgency or need for Oriental to resort to the extraordinary remedy
ofcertiorari for when it learned of the case and the judgment against it on July 25, 1986, due to its receipt
of a copy of the decision by default; no execution had as yet been ordered by the trial court. As
aforementioned, Oriental had still the time and the opportunity to file a motion for reconsideration, as was
actually done. Upon the denial of its motion for reconsideration in the first case, or at the latest upon
the denial of its petition for relief from judgment, Oriental should have appealed. Oriental should
have followed the procedure set forth in the Rules of Court for
Rules of procedure are intended to ensure the orderly administration of justice and the protection of
substantive rights in judicial and extrajudicial proceedings. It is a mistake to purpose that substantive law
and adjective law are contradictory to each other or, as has often been suggested, that enforcement of
procedural rules should never be permitted if it will result in prejudice to the substantive rights of the
litigants. This is not exactly true; the concept is much misunderstood. As a matter of fact, the policy of the
courts is to give effect to both kinds of law, as complementing each other, in the just and speedy resolution
of the dispute between the parties. Observance of both substantive rights is equally guaranteed by due
process whatever the source of such rights, be it the Constitution itself or only a statute or a rule of court. 27
In the case at bar, as found by this Court in its February 5, 1997 Resolution, therein petition offered no
important or special reason for the Court to take cognizance of it at the first instance. Petitioner offered no
plausible reason why it went straight to this Court when an adequate and proper remedy was still
available. The CA was thus correct that the remedy that petitioner should have availed of was to file an
appeal under Rule 109 of the Rules of Court which states:
Section 1. Orders of judgments from which appeals taken. An interested person may appeal in special
proceedings from an order or judgment rendered by a Court of First Instance or a Juvenile and Domestic
Relations Court, where such order or judgment:
(a) allows or disallows a will;
Because of the preceding discussion, herein petition must necessarily fail. However, even if this Court
were to set aside petitioners procedural lapses, a careful review of the records of the case reveal that
herein petition is without merit.
At the crux of the controversy is a determination of whether or not respondents are incompetent to serve as
executors of the will of Ferdinand Marcos.
Ozeata v. Pecson28 is instructive:
The choice of his executor is a precious prerogative of a testator, a necessary concomitant of his right to
dispose of his property in the manner he wishes. It is natural that the testator should desire to appoint one
of his confidence, one who can be trusted to carry out his wishes in the disposal of the estate. The
curtailment of this right may be considered as a curtailment of the right to dispose. And as the rights
granted by will take effect from the time of death (Article 777, Civil Code of the Philippines), the
management of his estate by the administrator of his choice should be made as soon as practicable, when
no reasonable objection to his assumption of the trust can be interposed any longer. It has been held that
when a will has been admitted to probate, it is the duty of the court to issue letters testamentary to
the person named as executor upon his application (23 C.J. 1023).

xxxx
The case of In re Erlanger's Estate, 242 N.Y.S. 249, also reiterates the same principle.
The courts have always respected the right to which a testator enjoys to determine who is most suitable to
settle his testamentary affairs, and his solemn selection should not lightly be disregarded. After the
admission of a will to probate, the courts will not name a better executor for the testator nor
disqualify, by a judicial veto, the widow or friend or other person selected in the will, except upon
strict proof of the statutory grounds of incompetency. Matter of Leland's Will, 219 N.Y. 387, 393, 114
N.E. 854. x x x29
Section 1(c), Rule 78 of the Rules of Court defines who are incompetent to serve as executors, to wit:
Section 1. Who are incompetent to serve as executors or administrators. No person is competent to serve
as executor or administrator who:
xxxx
(c) Is in the opinion of the court unfit to execute the duties of trust by reason of drunkenness,
improvidence, orwant of understanding or integrity, or by reason of conviction of an offense involving
moral turpitude. (Emphasis Supplied)
In the case at bar, petitioner anchored its opposition to the grant of letters testamentary to respondents,
specifically on the following grounds: (1) want of integrity, and (2) conviction of an offense involving
moral turpitude. Petitioner contends that respondents have been convicted of a number of cases30 and,
hence, should be characterized as one without integrity, or at the least, with questionable integrity.31
The RTC, however, in its January 11, 1996 Order, made the following findings:
However, except for petitioner Republics allegation of want of integrity on the part of Imelda Trinidad
Romualdez-Marcos and Ferdinand Romualdez Marco II, named executors in the last will and testament,
so as to render them "incompetent" to serve as executors, the Court sees at this time, no evidence on
record, oral or documentary, to substantiate and support the said allegation. (Emphasis Supplied)
Based on the foregoing, this Court stresses that an appellate court is disinclined to interfere with the action
taken by the probate court in the matter of removal of an executor or administrator unless positive error or
gross abuse of discretion is shown.32 The Rules of Court gives the lower court the duty and discretion to
determine whether in its opinion an individual is unfit to serve as an executor. The sufficiency of any
ground for removal should thus be determined by the said court, whose sensibilities are, in the first place,
affected by any act or omission on the part of the administrator not conformable to or in disregard of the
rules of orders of the court.33
Hence, in order to reverse the findings of the RTC, this Court must evaluate the evidence presented or
alleged by petitioner in support of its petition for disqualification. However, after a painstaking review of
the records and evidence on hand, this Court finds that the RTC committed no error or gross abuse of
discretion when it ruled that petitioner failed to substantiate its allegation.
Petitioner conveniently omits to state that the two cases against respondent Imelda Marcos have already
been reversed by this Court. Her conviction in Criminal Case No. 17453 was reversed by this Court
in Dans, Jr. v. People.34 Likewise, her conviction in Criminal Case No. 17450 was reversed by this Court
in Marcos v. Sandiganbayan.35 Hence, the so-called "convictions" against respondent Imelda Marcos
cannot serve as a ground for her disqualification to serve as an executor.
On the other hand, the eight cases filed against respondent Ferdinand Marcos II involve four charges for
violation of Section 45 (failure to file income tax returns) and four charges for violation of Section 50
(non-payment of deficiency taxes) of the National Internal Revenue Code of 1977 (NIRC).
It is a matter of record, that in CA-G.R. CR No. 18569,36 the CA acquitted respondent Ferdinand Marcos II
of all the four charges for violation of Section 50 and sustained his conviction for all the four charges for
violation of Section 45. It, however, bears to stress, that the CA only ordered respondent Marcos II to pay
a fine for his failure to file his income tax return. Moreover, and as admitted by petitioner,37 said decision
is still pending appeal.

10

Therefore, since respondent Ferdinand Marcos II has appealed his conviction relating to four violations of
Section 45 of the NIRC, the same should not serve as a basis to disqualify him to be appointed as an
executor of the will of his father. More importantly, even assuming arguendo that his conviction is later on
affirmed, the same is still insufficient to disqualify him as the "failure to file an income tax return" is not a
crime involving moral turpitude.
In Villaber v. Commision on Elections,38 this Court held:
As to the meaning of "moral turpitude," we have consistently adopted the definition in Black's Law
Dictionary as "an act of baseness, vileness, or depravity in the private duties which a man owes his
fellow men, or to society in general, contrary to the accepted and customary rule of right and duty
between man and woman, or conduct contrary to justice, honesty, modesty, or good morals."
In In re Vinzon, the term "moral turpitude" is considered as encompassing "everything which is done
contrary to justice, honesty, or good morals."
xxxx
We, however, clarified in Dela Torre vs. Commission on Elections that "not every criminal act involves
moral turpitude," and that ''as to what crime involves moral turpitude is for the Supreme Court to
determine."39
Moreover, In De Jesus-Paras v. Vailoces:40
Indeed, it is well-settled that "embezzlement, forgery, robbery, and swindling are crimes which denote
moral turpitude and, as a general rule, all crimes of which fraud is an element are looked on as
involving moral turpitude" (58 C.J.S., 1206).
The "failure to file an income tax return" is not a crime involving moral turpitude as the mere omission is
already a violation regardless of the fraudulent intent or willfulness of the individual. This conclusion is
supported by the provisions of the NIRC as well as previous Court decisions which show that with regard
to the filing of an income tax return, the NIRC considers three distinct violations: (1) a false return, (2) a
fraudulent return with intent to evade tax, and (3) failure to file a return.
The same is illustrated in Section 51(b) of the NIRC which reads:
(b) Assessment and payment of deficiency tax xxx
In case a person fails to make and file a return or list at the time prescribed by law, or makes willfully
or otherwise, false or fraudulent return or list x x x. (Emphasis Supplied)
Likewise, in Aznar v. Court of Tax Appeals,41 this Court observed:
To our minds we can dispense with these controversial arguments on facts, although we do not deny that
the findings of facts by the Court of Tax Appeals, supported as they are by very substantial evidence, carry
great weight, by resorting to a proper interpretation of Section 332 of the NIRC. We believe that the proper
and reasonable interpretation of said provision should be that in the three different cases of (1) false
return, (2) fraudulent return with intent to evade tax, (3) 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 (1) falsity, (2) fraud, and (3) omission. Our stand that
the law should be interpreted to mean a separation of the three different situations of false return,
fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably
by the last portion of the provision which segregates the situations into three different classes,
namely, "falsity," "fraud" and "omission."42 (Emphasis Supplied)
Applying the foregoing considerations to the case at bar, the filing of a "fraudulent return with intent to
evade tax" is a crime involving moral turpitude as it entails willfulness and fraudulent intent on the part of
the individual. The same, however, cannot be said for "failure to file a return" where the mere omission
already constitutes a violation. Thus, this Court holds that even if the conviction of respondent Marcos II
is affirmed, the same not being a crime involving moral turpitude cannot serve as a ground for his
disqualification.

Petitioner contends that respondents denied the existence of the will, and are, therefore, estopped from
claiming to be the rightful executors thereof. Petitioner further claims that said actions clearly show that
respondents lack the competence and integrity to serve as officers of the court.
This Court does not agree with the posture taken by petitioner, and instead, accepts the explanation given
by respondents, to wit:
Respondents opposed the petition for probate not because they are disclaiming the existence of the will,
but because of certain legal grounds, to wit: (a) petitioner does not have the requisite interest to institute it;
(b) the original copy of the will was not attached to the petition for probate as required by the rules; and
(c) the Commissioner of the Bureau of Internal Revenue is not qualified to be appointed as administrator
of the estate.43
Based on the foregoing, considering the nature of their opposition, respondents cannot be held guilty
of estoppelas they merely acted within their rights when they put in issue legal grounds in opposing the
probate proceedings. More importantly, even if said grounds were later on overruled by the RTC, said
court was still of opinion that respondents were fit to serve as executors notwithstanding their earlier
opposition. Again, in the absence of palpable error or gross abuse of discretion, this Court will not
interfere with the RTCs discretion.
As for the remaining errors assigned by petitioner, the same are bereft of merit.
Petitioner contends that respondents have strongly objected to the transfer to the Philippines of the Marcos
assets deposited in the Swiss Banks44 and thus the same should serve as a ground for their disqualification
to act as executors. This Court does not agree. In the first place, the same are mere allegations which,
without proof, deserve scant consideration. Time and again, this Court has stressed that this Court is a
court of law and not a court of public opinion. Moreover, petitioner had already raised the same argument
in its motion for partial reconsideration before the RTC.1avvphi1 Said court, however, still did not find the
same as a sufficient ground to disqualify respondents. Again, in the absence of palpable error or gross
abuse of discretion, this Court will not interfere with the RTCs discretion.
Lastly, petitioner argues that the assailed RTC Orders were based solely on their own evidence and that
respondents offered no evidence to show that they were qualified to serve as executors. 45 It is basic that
one who alleges a fact has the burden of proving it and a mere allegation is not evidence.46 Consequently,
it was the burden of petitioner (not respondents) to substantiate the grounds upon which it claims that
respondents should be disqualified to serve as executors, and having failed in doing so, its petition must
necessarily fail.
WHEREFORE, premises considered, the March 13, 1997 Decision and August 27, 1997 Resolution of
the Court of Appeals in CA-G.R. SP No. 43450 are hereby AFFIRMED.
The Regional Trial Court of Pasig City, Branch 156, acting as a probate court in Special Proceeding No.
10279, is hereby ORDERED to issue letters testamentary, in solidum, to Imelda Romualdez-Marcos and
Ferdinand Marcos II.
SO ORDERED.

THIRD DIVISION
G.R. No. 140944

April 30, 2008

Anent the third error raised by petitioner, the same has no merit.

11

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the
deceased JOSE P. FERNANDEZ, petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil Procedure
seeking the reversal of the Court of Appeals (CA) Decision 2 dated April 30, 1999 which affirmed the
Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997.4
The Facts

Dizon passed away. Thus, on October 22, 1990, the probate court appointed petitioner as the administrator
of the Estate.15
Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for
the purpose of paying its creditors, namely: Equitable Banking Corporation (P19,756,428.31), Banque de
L'Indochine et. de Suez (US$4,828,905.90 as of January 31, 1988), Manila Banking Corporation
(P84,199,160.46 as of February 28, 1989) and State Investment House, Inc. (P6,280,006.21). Petitioner
manifested that Manila Bank, a major creditor of the Estate was not included, as it did not file a claim with
the probate court since it had security over several real estate properties forming part of the Estate. 16
However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles
Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-003269,17 demanding the payment
of P66,973,985.40 as deficiency estate tax, itemized as follows:
Deficiency Estate Tax- 1987

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will 5 was
filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court).[6] The probate court then
appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael
Arsenio P. Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of
Jose (Estate). In a letter7dated October 13, 1988, Justice Dizon informed respondent Commissioner of the
Bureau of Internal Revenue (BIR) of the special proceedings for the Estate.

Estate tax

P31,868,414.48

25% surcharge- late filing

7,967,103.62

late payment

Petitioner alleged that several requests for extension of the period to file the required estate tax return were
granted by the BIR since the assets of the estate, as well as the claims against it, had yet to be collated,
determined and identified. Thus, in a letter8 dated March 14, 1990, Justice Dizon authorized Atty. Jesus M.
Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return and to
represent the same in securing a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty.
Gonzales wrote a letter9addressed to the BIR Regional Director for San Pablo City and filed the estate tax
return10 with the same BIR Regional Office, showing therein a NIL estate tax liability, computed as
follows:

Interest

19,121,048.68

Compromise-non filing

25,000.00

COMPUTATION OF TAX
Conjugal Real Property (Sch. 1)

P10,855,020.00

Conjugal Personal Property (Sch.2)

3,460,591.34

Taxable Transfer (Sch. 3)

Gross Conjugal Estate

14,315,611.34

Less: Deductions (Sch. 4)

187,822,576.06

Net Conjugal Estate

NIL

Less: Share of Surviving Spouse

NIL.

Net Share in Conjugal Estate

NIL

Estate Tax Due

non payment

25,000.00

no notice of death

15.00

no CPA Certificate

300.00

Total amount due & collectible

P66,973,985.4018

In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate tax
assessment. However, in her letter20 dated April 12, 1994, the BIR Commissioner denied the request and
reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency estate tax. On May 3,
1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed a petition for review 21 before
respondent CTA. Trial on the merits ensued.
As found by the CTA, the respective parties presented the following pieces of evidence, to wit:
In the hearings conducted, petitioner did not present testimonial evidence but merely documentary
evidence consisting of the following:
Nature of Document (sic)

Exhibits

1.

Letter dated October 13, 1988 from Arsenio P. Dizon addressed to the
Commissioner of Internal Revenue informing the latter of the special
proceedings for the settlement of the estate (p. 126, BIR records);

"A"

2.

Petition for the probate of the will and issuance of letter of

administration filed with the Regional Trial Court (RTC) of Manila,
docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR records);

"B" & "B-1"

3.

Pleading entitled "Compliance" filed with the probate Court submitting

the final inventory of all the properties of the deceased (p. 106, BIR

"C"

xxx
Net Taxable Estate

7,967,103.62

NIL.
11

NIL.

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification
Nos. 2052[12]and 2053[13] stating that the taxes due on the transfer of real and personal properties[14] of Jose
had been fully paid and said properties may be transferred to his heirs. Sometime in August 1990, Justice

12

records);

1.

Estate Tax Return prepared by the BIR;

p. 138

4.

Attachment to Exh. "C" which is the detailed and complete listing of the
properties of the deceased (pp. 89-105, BIR rec.);

"C-1" to "C-17"

2.

Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing

at the lower Portion of Exh. "1";

-do-

5.

Claims against the estate filed by Equitable Banking Corp. with the
probate Court in the amount ofP19,756,428.31 as of March 31, 1988,
together with the Annexes to the claim (pp. 64-88, BIR records);

"D" to "D-24"

3.

Memorandum for the Commissioner, dated July 19, 1991, prepared by

revenue examiners, Ma. Anabella A. Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed by Maximino V. Tagle

pp. 143-144

6.

Claim filed by Banque de L' Indochine et de Suez with the probate Court "E" to "E-3"
in the amount of US $4,828,905.90 as of January 31, 1988 (pp. 262-265,
BIR records);

4.

Signature of Alberto S. Enriquez appearing at the lower portion on p. 2

of Exh. "2";

-do-

5.
Claim of the Manila Banking Corporation (MBC) which as of November "F" to "F-3"
7, 1987 amounts to P65,158,023.54, but recomputed as of February 28,
1989 at a total amount ofP84,199,160.46; together with the demand letter
from MBC's lawyer (pp. 194-197, BIR records);

Signature of Ma. Anabella A. Abuloc appearing at the lower portion on

p. 2 of Exh. "2";

-do-

7.

6.

Signature of Raymund S. Gallardo appearing at the Lower portion on p.

2 of Exh. "2";

-do-

7.

Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2";

-do-

8.

Summary of revenue Enforcement Officers Audit Report, dated July 19,

1991;

p. 139

9.

Signature of Alberto Enriquez at the lower portion of Exh. "3";

-do-

10.

Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. "3";

-do-

11.

Signature of Raymond S. Gallardo at the lower portion of Exh. "3";

-do-

12.

Signature of Maximino V. Tagle at the lower portion of Exh. "3";

-do-

13.

Demand letter (FAS-E-87-91-00), signed by the Asst. Commissioner for

Collection for the Commissioner of Internal Revenue, demanding
payment of the amount ofP66,973,985.40; and

p. 169

14.

Assessment Notice FAS-E-87-91-00

pp. 169-17022

8.

9.

Demand letter of Manila Banking Corporation prepared by Asedillo,

Ramos and Associates Law Offices addressed to Fernandez Hermanos,
Inc., represented by Jose P. Fernandez, as mortgagors, in the total
amount of P240,479,693.17 as of February 28, 1989 (pp. 186-187, BIR
records);

"G" & "G-1"

Claim of State Investment House, Inc. filed with the RTC, Branch VII of "H" to "H-16"
Manila, docketed as Civil Case No. 86-38599 entitled "State Investment
House, Inc., Plaintiff, versus Maritime Company Overseas, Inc. and/or
Jose P. Fernandez, Defendants," (pp. 200-215, BIR records);

10.

Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus "I"
M. Gonzales, (p. 184, BIR records);

11.

Letter dated April 17, 1990 from J.M. Gonzales addressed to the
Regional Director of BIR in San Pablo City (p. 183, BIR records);

"J"

12.

Estate Tax Return filed by the estate of the late Jose P. Fernandez
through its authorized representative, Atty. Jesus M. Gonzales, for
Arsenio P. Dizon, with attachments (pp. 177-182, BIR records);

"K" to "K-5"

13.

14.

The CTA's Ruling

Certified true copy of the Letter of Administration issued by RTC

"L"
Manila, Branch 51, in Sp. Proc. No. 87-42980 appointing Atty. Rafael S.
Dizon as Judicial Administrator of the estate of Jose P. Fernandez; (p.
102, CTA records) and
Certification of Payment of estate taxes Nos. 2052 and 2053, both dated
April 27, 1990, issued by the Office of the Regional Director, Revenue
Region No. 4-C, San Pablo City, with attachments (pp. 103-104, CTA
records.).

"M" to "M-5"

Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of Alberto
Enriquez, who was one of the revenue examiners who conducted the investigation on the estate tax
case of the late Jose P. Fernandez. In the course of the direct examination of the witness, he
identified the following:
Documents/Signatures

BIR Record

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oate
v. Court of Appeals,23 the CTA opined that the aforementioned pieces of evidence introduced by the BIR
were admissible in evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered as evidence for respondent,
considering that respondent has been declared to have waived the presentation thereof during the hearing
on March 20, 1996, still they could be considered as evidence for respondent since they were properly
identified during the presentation of respondent's witness, whose testimony was duly recorded as part of
the records of this case. Besides, the documents marked as respondent's exhibits formed part of the BIR
records of the case.24
Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own
computation of the deficiency estate tax, to wit:
Conjugal Real Property

P 5,062,016.00

Conjugal Personal Prop.

33,021,999.93

13

Gross Conjugal Estate

38,084,015.93

Less: Deductions

26,250,000.00

Net Conjugal Estate

P 11,834,015.93

Less: Share of Surviving Spouse

5,917,007.96

Net Share in Conjugal Estate

P 5,917,007.96

Add: Capital/Paraphernal

1. Whether or not the admission of evidence which were not formally offered by the respondent BIR by
the Court of Tax Appeals which was subsequently upheld by the Court of Appeals is contrary to the Rules
of Court and rulings of this Honorable Court;
2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in recognizing/considering the
estate tax return prepared and filed by respondent BIR knowing that the probate court appointed
administrator of the estate of Jose P. Fernandez had previously filed one as in fact, BIR Certification
Clearance Nos. 2052 and 2053 had been issued in the estate's favor;
3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the valid and
enforceable claims of creditors against the estate, as lawful deductions despite clear and convincing
evidence thereof; and
4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating erroneous double
imputation of values on the very same estate properties in the estate tax return it prepared and filed which
effectively bloated the estate's assets.31

Properties P44,652,813.66
Less: Capital/Paraphernal Deductions
Net Taxable Estate

44,652,813.66
P 50,569,821.62
============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing

7,483,835.74

Add: Penalties for-No notice of death

15.00

No CPA certificate
Total deficiency estate tax

300.00
P 37,419,493.71
============

exclusive of 20% interest from due date of its payment until full payment thereof
[Sec. 283 (b), Tax Code of 1987].25
Thus, the CTA disposed of the case in this wise:
WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies the
same. Petitioner and/or the heirs of Jose P. Fernandez are hereby ordered to pay to respondent the amount
of P37,419,493.71 plus 20% interest from the due date of its payment until full payment thereof as estate
tax liability of the estate of Jose P. Fernandez who died on November 7, 1987.
SO ORDERED.26
Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.27
The CA's Ruling
On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled
that the petitioner's act of filing an estate tax return with the BIR and the issuance of BIR Certification
Nos. 2052 and 2053 did not deprive the BIR Commissioner of her authority to re-examine or re-assess the
said return filed on behalf of the Estate.28
On May 31, 1999, petitioner filed a Motion for Reconsideration29 which the CA denied in its
Resolution30 dated November 3, 1999.
Hence, the instant Petition raising the following issues:

The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the
gross estate, no estate tax was due; that the lack of a formal offer of evidence is fatal to BIR's cause; that
the doctrine laid down in Vda. de Oate has already been abandoned in a long line of cases in which the
Court held that evidence not formally offered is without any weight or value; that Section 34 of Rule 132
of the Rules on Evidence requiring a formal offer of evidence is mandatory in character; that, while BIR's
witness Alberto Enriquez (Alberto) in his testimony before the CTA identified the pieces of evidence
aforementioned such that the same were marked, BIR's failure to formally offer said pieces of evidence
and depriving petitioner the opportunity to cross-examine Alberto, render the same inadmissible in
evidence; that assuming arguendo that the ruling in Vda. de Oate is still applicable, BIR failed to comply
with the doctrine's requisites because the documents herein remained simply part of the BIR records and
were not duly incorporated in the court records; that the BIR failed to consider that although the actual
payments made to the Estate creditors were lower than their respective claims, such were compromise
agreements reached long after the Estate's liability had been settled by the filing of its estate tax return and
the issuance of BIR Certification Nos. 2052 and 2053; and that the reckoning date of the claims against
the Estate and the settlement of the estate tax due should be at the time the estate tax return was filed by
the judicial administrator and the issuance of said BIR Certifications and not at the time the
aforementioned Compromise Agreements were entered into with the Estate's creditors. 32
On the other hand, respondent counters that the documents, being part of the records of the case and duly
identified in a duly recorded testimony are considered evidence even if the same were not formally
offered; that the filing of the estate tax return by the Estate and the issuance of BIR Certification Nos.
2052 and 2053 did not deprive the BIR of its authority to examine the return and assess the estate tax; and
that the factual findings of the CTA as affirmed by the CA may no longer be reviewed by this Court via a
petition for review.33
The Issues
There are two ultimate issues which require resolution in this case:
First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of
evidence which were not formally offered by the BIR; and
Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the deficiency
estate tax imposed against the Estate.
The Courts Ruling
The Petition is impressed with merit.
Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before
it are litigated de novo, party-litigants shall prove every minute aspect of their cases. Indubitably, no
evidentiary value can be given the pieces of evidence submitted by the BIR, as the rules on documentary
evidence require that these documents must be formally offered before the CTA. 34 Pertinent is Section 34,
Rule 132 of the Revised Rules on Evidence which reads:

14

SEC. 34. Offer of evidence. The court shall consider no evidence which has not been formally offered.
The purpose for which the evidence is offered must be specified.
The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this Court's previous
rulings inPeople v. Napat-a35 and People v. Mate36 on the admission and consideration of exhibits which
were not formally offered during the trial. Although in a long line of cases many of which were decided
after Vda. de Oate, we held that courts cannot consider evidence which has not been formally
offered,37 nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda. de Oate has
already been abandoned. Recently, in Ramos v. Dizon,38 this Court, applying the said doctrine, ruled that
the trial court judge therein committed no error when he admitted and considered the respondents' exhibits
in the resolution of the case, notwithstanding the fact that the same were not formally offered. Likewise,
in Far East Bank & Trust Company v. Commissioner of Internal Revenue,39 the Court made reference to
said doctrine in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De Oate still
subsists in this jurisdiction. In Vda. de Oate, we held that:
From the foregoing provision, it is clear that for evidence to be considered, the same must be formally
offered. Corollarily, the mere fact that a particular document is identified and marked as an exhibit does
not mean that it has already been offered as part of the evidence of a party. In Interpacific Transit, Inc. v.
Aviles[186 SCRA 385], we had the occasion to make a distinction between identification of documentary
evidence and its formal offer as an exhibit. We said that the first is done in the course of the trial and is
accompanied by the marking of the evidence as an exhibit while the second is done only when the party
rests its case and not before. A party, therefore, may opt to formally offer his evidence if he believes that it
will advance his cause or not to do so at all. In the event he chooses to do the latter, the trial court is not
authorized by the Rules to consider the same.
However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we relaxed the
foregoing rule and allowed evidence not formally offered to be admitted and considered by the trial
court provided the following requirements are present, viz.: first, the same must have been duly
identified by testimony duly recorded and, second, the same must have been incorporated in the
records of the case.40
From the foregoing declaration, however, it is clear that Vda. de Oate is merely an exception to the
general rule. Being an exception, it may be applied only when there is strict compliance with the requisites
mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of the Rules of Court should
prevail.
In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence were
presented and marked during the trial particularly when Alberto took the witness stand. Alberto identified
these pieces of evidence in his direct testimony.41 He was also subjected to cross-examination and re-cross
examination by petitioner.42 But Albertos account and the exchanges between Alberto and petitioner did
not sufficiently describe the contents of the said pieces of evidence presented by the BIR. In fact,
petitioner sought that the lead examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch
as Alberto was incompetent to answer questions relative to the working papers.43 The lead examiner never
testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR
documents themselves were not incorporated in the records of the case.
A common fact threads through Vda. de Oate and Ramos that does not exist at all in the instant case. In
the aforementioned cases, the exhibits were marked at the pre-trial proceedings to warrant the
pronouncement that the same were duly incorporated in the records of the case. Thus, we held in Ramos:
In this case, we find and so rule that these requirements have been satisfied. The exhibits in question
were presented and marked during the pre-trial of the case thus, they have been incorporated into
the records. Further, Elpidio himself explained the contents of these exhibits when he was interrogated by
respondents' counsel...
xxxx
But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and
admitted during the pre-trial stage as shown by the Pre-Trial Order quoted earlier.44
While the CTA is not governed strictly by technical rules of evidence,45 as rules of procedure are not ends
in themselves and are primarily intended as tools in the administration of justice, the presentation of the

BIR's evidence is not a mere procedural technicality which may be disregarded considering that it is the
only means by which the CTA may ascertain and verify the truth of BIR's claims against the Estate. 46 The
BIR's failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its
cause.47 Such failure is aggravated by the fact that not even a single reason was advanced by the BIR to
justify such fatal omission. This, we take against the BIR.
Per the records of this case, the BIR was directed to present its evidence 48 in the hearing of February 21,
1996, but BIR's counsel failed to appear.49 The CTA denied petitioner's motion to consider BIR's
presentation of evidence as waived, with a warning to BIR that such presentation would be considered
waived if BIR's evidence would not be presented at the next hearing. Again, in the hearing of March 20,
1996, BIR's counsel failed to appear.50 Thus, in its Resolution51 dated March 21, 1996, the CTA considered
the BIR to have waived presentation of its evidence. In the same Resolution, the parties were directed to
file their respective memorandum. Petitioner complied but BIR failed to do so.52 In all of these
proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of
Pedro Pasag v. Parocha:53
A formal offer is necessary because judges are mandated to rest their findings of facts and their judgment
only and strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge
to know the purpose or purposes for which the proponent is presenting the evidence. On the other hand,
this allows opposing parties to examine the evidence and object to its admissibility. Moreover, it facilitates
review as the appellate court will not be required to review documents not previously scrutinized by the
trial court.
Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled
that the formal offer of one's evidence is deemed waived after failing to submit it within a
considerable period of time. It explained that the court cannot admit an offer of evidence made after
a lapse of three (3) months because to do so would "condone an inexcusable laxity if not noncompliance with a court order which, in effect, would encourage needless delays and derail the
speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to
consider that petitioners had waived their right to make a formal offer of documentary or object evidence.
Despite several extensions of time to make their formal offer, petitioners failed to comply with their
commitment and allowed almost five months to lapse before finally submitting it. Petitioners' failure to
comply with the rule on admissibility of evidence is anathema to the efficient, effective, and
expeditious dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not be
disturbed on appeal unless it is shown that the lower courts committed gross error in the appreciation of
facts.54 In this case, however, we find the decision of the CA affirming that of the CTA tainted with
palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of
extinguishing an obligation,55 condonation or remission of debt56 is defined as:
an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the
enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of the same to
which the remission refers. It is an essential characteristic of remission that it be gratuitous, that there is no
equivalent received for the benefit given; once such equivalent exists, the nature of the act changes. It may
become dation in payment when the creditor receives a thing different from that stipulated; or novation,
when the object or principal conditions of the obligation should be changed; or compromise, when the
matter renounced is in litigation or dispute and in exchange of some concession which the creditor
receives.57
Verily, the second issue in this case involves the construction of Section 7958 of the National Internal
Revenue Code59 (Tax Code) which provides for the allowable deductions from the gross estate of the
decedent. The specific question is whether the actual claims of the aforementioned creditors may be fully
allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or
condoned through compromise agreements entered into by the Estate with its creditors.

15

"Claims against the estate," as allowable deductions from the gross estate under Section 79 of the Tax
Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and (E) of
Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of 1939,
and which was the first codification of Philippine tax laws. Philippine tax laws were, in turn, based on the
federal tax laws of the United States. Thus, pursuant to established rules of statutory construction, the
decisions of American courts construing the federal tax code are entitled to great weight in the
interpretation of our own tax laws.60
It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount
for a claim against the estate is fixed as of the decedent's death which is the general rule, or the same
should be adjusted to reflect post-death developments, such as where a settlement between the parties
results in the reduction of the amount actually paid.61 On one hand, the U.S. court ruled that the
appropriate deduction is the "value" that the claim had at the date of the decedent's death. 62 Also, as held in
Propstra v. U.S., 63 where a lien claimed against the estate was certain and enforceable on the date of the
decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude the
estate from deducting the entire amount of the claim for estate tax purposes. These pronouncements
essentially confirm the general principle that post-death developments are not material in determining the
amount of the deduction.
On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should be
taken into consideration and the claim should be allowed as a deduction only to the extent of the amount
actually paid.64Recognizing the dispute, the Service released Proposed Regulations in 2007 mandating that
the deduction would be limited to the actual amount paid.65
In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:
We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust date-ofdeath valuation principle to enforceable claims against the estate. As we interpret Ithaca Trust, when the
Supreme Court announced the date-of-death valuation principle, it was making a judgment about the
nature of the federal estate tax specifically, that it is a tax imposed on the act of transferring property by
will or intestacy and, because the act on which the tax is levied occurs at a discrete time, i.e., the instance
of death, the net value of the property transferred should be ascertained, as nearly as possible, as of that
time. This analysis supports broad application of the date-of-death valuation rule. 67
We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S.
Supreme Court in Ithaca Trust Co. v. United States.68 First. There is no law, nor do we discern any
legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly
provides that post-death developments must be considered in determining the net value of the estate. It
bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the
statute expressly and clearly imports, tax statutes being construed strictissimi juris against the
government.69 Any doubt on whether a person, article or activity is taxable is generally resolved against
taxation.70 Second. Such construction finds relevance and consistency in our Rules on Special Proceedings
wherein the term "claims" required to be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his
lifetime, or liability contracted by the deceased before his death.71Therefore, the claims existing at the time
of death are significant to, and should be made the basis of, the determination of allowable deductions.
WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30,
1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947
are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax assessment
against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.
SO ORDERED.

16

SECOND DIVISION G.R. No. 144653

August 28, 2001

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the decision, dated April 14, 2000, of the Court of Appeals, 1
affirming the decision of the Court of Tax Appeals (which denied petitioner Bank of the Philippine Islands'
claim for tax refund for 1985), and the appeals court's resolution, dated August 21, 2000, denying
reconsideration.
The facts are as follows:
Prior to its merger with petitioner Bank of the Philippine Islands (BPI) on July 1985, The Family Bank
and Trust Co. (FBTC) earned income consisting of rentals from its leased properties and interest from its
treasury notes for the period January 1 to June 30, 1985. As required by the Expanded Withholding Tax
Regulation, the lessees of FBTC withheld 5 percent of the rental income, in the amount of P118,609.17,
while the Central Bank, from which the treasury notes were purchased by FBTC, withheld P55,456.60
from the interest earned thereon. Creditable withholding taxes in the total amount of P174,065.77 were
remitted to respondent Commissioner of Internal Revenue.
FBTC, however, suffered a new loss of about P64,000,000.00 during the period in question. It also had an
excess credit of P2,146,072.57 from the previous year. Thus, upon its dissolution in 1985, FBTC had a
refundable of P2,320,138.34, representing that year's tax credit of P174,065.77 and the previous year's
excess credit of P2,146,072.57.
As FBTC's successor-in-interest, petitioner BPI claimed this amount as tax refund, but respondent
Commissioner of Internal Revenue refunded only the amount of P2,146,072.57, leaving a balance of
P174,065.77. Accordingly, petitioner filed a petition for review in the Court of Tax Appeals on December
29, 1987, seeking the refund of the aforesaid amount.2 However, in its decision rendered on July 19, 1994,
the Court of Tax Appeals dismissed petitioner's petition for review and denied its claim for refund on the
ground that the claim had already prescribed.3 In its resolution, dated August 4, 1995, the Court of Tax
Appeals denied petitioner's motion for reconsideration.4
Petitioner appealed to the Court of Appeals, but, in its decision rendered on April 14, 2000, the appeals
court affirmed the decision of the CTA.5 The appeals court subsequently denied petitioner's motion for
reconsideration.6 Hence this petition.
The sole issue in this case is whether petitioner's claim is barred by prescription. The resolution of this
question requires determination of when the two-year period of prescription under 292 of the Tax Code
started to run. This provision states:
Recovery of tax erroneously or illegally collected. No suit or proceedings shall be maintained in any
court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of
any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether
or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided,
however, That the Commissioner may, even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment appears clearly to have been
erroneously paid.
There is no dispute that FBTC ceased operations on June 30, 1985 upon its merger with petitioner BPI.
The merger was approved by the Securities and Exchange Commission on July 1, 1985. Petitioner
contends, however that its claim for refund has yet prescribed because the two-year prescriptive period
commenced to run only after it had filed FBTC's Final Adjustment Return on April 15 1986, pursuant to

46(a) of the National Internal Revenue Code of 1977 (the law applicable at the time of this transaction)
which provided that
Corporation returns. (a) Requirement. Every corporation, subject to the tax herein imposed, except
foreign corporations not engaged in trade or business in the Philippines shall render, in duplicate, a true
and accurate quarterly income tax return and final or adjustment return in accordance with the provisions
of Chapter X of this Title. The return shall be filed by the president, vice-president, or other principal
officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.
On the other hand, the Court of Tax Appeals ruled that the prescriptive period should be counted from July
31, 1985, 30 days after the approval by the SEC of the plan of dissolution in view of 78 of the Code
which provided that
Every corporation shall, within thirty days after the adoption by the corporation of a resolution or plan for
the dissolution of the corporation or for the liquidation of the whole or any part of its capital stock,
including corporations which have been notified of the possible involuntary dissolution by the Securities
and Exchange Commission, render a correct return to the Commission of Internal Revenue, verified under
oath, setting forth the terms of such resolution or plan and such other information as the Minister of
Finance shall, by regulations, prescribe. The dissolving corporation prior to the issuance of the Certificate
of Dissolution by the Securities and Exchange Commission shall secure a certificate of tax clearance from
the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange
Commission.
Failure to render the return and secure the certificate of tax clearance as above-mentioned shall subject the
officer (s) of the corporation required by law to file the return under Section 46(a) of this Code, to a fine of
not less than Five Thousand Pesos or imprisonment of not less than two years and shall make them liable
for all outstanding or unpaid tax liabilities of the dissolving corporation.
Its ruling was sustained by the Court of Appeals.
After due consideration of the parties' arguments, we are of the opinion that, in case of the dissolution of a
corporation, the period of prescription should be reckoned from the date of filing of the return required by
78 of the Tax Code. Accordingly, we hold that petitioner's claim for refund is barred by prescription.
First. Generally speaking, it is the Final Adjustment Return, in which amounts of the gross receipts and
deductions have been audited and adjusted, which is reflective of the results of the operations of a business
enterprise. It is only when the return, covering the whole year, is filed that the taxpayer will be able to
ascertain whether a tax is still due or a refund can be claimed based on the adjusted and audited figures. 7
Hence, this Court has ruled that at the earliest, the two-year prescriptive period for claiming a refund
commences to run on the date of filing of the adjusted final tax return.8
In the case at bar, however, the Court of Tax Appeals, applying 78 of the Tax Code, held:
Before this Court can be rule on the issue of prescription, it is noteworthy to point out that based on the
financial statements of FBTC and the independent auditor's opinion (Exh. "A-7" to "A-17"), FBTC
operates on a calendar year basis. Its twelve (12) months accounting period was shortened at the time it
was merged with BPI. Thereby, losing its corporate existence on July 1, 1985 when the Articles of Merger
was approved by the Security and Exchange Commission. Thus, respondent('s) stand that FBTC operates
on a fiscal year basis, based on its income tax return, holds no ground. Third Court believes that FBTC is
operating on a calendar year period based on the audited financial statements and the opinion thereof. The
fiscal period ending June 30, 1985 on the upper left corner of the income tax return can be concluded as an
error on the part of FBTC. It should have been for the six month period ending June 30, 1985. It should
also be emphasized that "where one corporation succeeds another both are separate entities and the income
earned by the predecessor corporation before organization of its successor is not income to the successor"
(Mertens, Law of Federal Income Taxation, Vol. 7 S 38.36).
Ruling now on the issue of prescription, this Court finds that the petition for review is filed out of time.
FBTC, after the end of its corporate life on June 30, 1985, should have filed its income tax return within
thirty days after the cessation of its business or thirty days after the approval of the Articles of Merger.
This is bolstered by Sec. 78 of the tax Code and under Sec. 244 of Revenue Regulation No. 2 9
As the FBTC did not file its quarterly income tax returns for the year 1985, there was no need for it to file

17

a Final adjustment Return because there was nothing for it to adjust or to audit. After it ceased operations
on June 30, 1985, its taxable year was shortened to six months, from January 1, 1985 to June 30, 1985 The
situation of FBTC is precisely what was contemplated under 78 of the Tax Code. It thus became
necessary for FBTC to file its income tax return within 30 days after approval by the SEC of its plan or
resolution of dissolution. Indeed, it would be absurd for FBTC to wait until the fifteenth day of April, or
almost 10 months after it ceased its operations, before filing its income tax return.

partnership joint accounts and associations, contemplating dissolution or retiring from business without
formal dissolution shall, within 30 days after the approval of such resolution authorizing their dissolution,
and within the same period after their retirement from business, file their income tax returns covering the
profit earned or business done by them from the beginning of the year up to the date of such dissolution or
retirement and pay the corresponding income tax due thereon upon demand by the Commissioner of
Internal Revenue

Thus, 46(a) of the Tax Code applies only to instances in which the corporation remains subsisting and its
business operations are continuing. In instances in which the corporation is contemplating dissolution, 78
of the Tax Code applies. It is a rule of statutory construction that "[w]here there is in the same statute a
particular enactment and also a general one which in its most comprehensive sense would include what is
embraced in the former, the particular enactment must be operative, and the general enactment must be
taken to affect only such cases within its general language as are not within the provisions of the particular
enactment.10

This regulation prevails over the memorandum circular of the Acting Commissioner of Internal Revenue,
which petitioner invokes.

Petitioner argues that to hold, as the Court of Tax Appeals and the Court of Appeals do, that 78 applies in
case a corporation contemplates dissolution would lead to absurd results. It contends that it is not feasible
for the certified public accountants to complete their report and audited financial statements, which are
required to be submitted together with the plan of dissolution to the SEC, within the period contemplated
by 78. It maintains that, in turn, the SEC would not have sufficient time to process the papers considering
that 78 also requires the submission of a tax clearance certificate before the SEC can approve the plan of
dissolution.
As the Court of Tax Appeals observed, however, petitioner could have asked for an extension of time of
file its income tax return under 47 of the NIRC which provides:
Extension of time to file returns. The Commissioner of Internal Revenue may, in meritorious cases, grant
a reasonable extension of time for filing returns of income (or final and adjustment returns in the case of
corporations), subject to the provisions of section fifty-one of this Code.
Petitioner further argues that the filing of a Final Adjustment Return would fall due on July 30, 1985, even
before the due date for filing the quarterly return. This argument begs the question. It assumes that a
quarterly return was required when the fact is that, because its taxable year was shortened, the FBTC did
not have to file a quarterly return. In fact, petitioner presented no evidence that the FBTC ever filed such
quarterly return in 1985.

Thus, as required by 244 of Revenue Regulation No. 2, any corporation contemplating dissolution must
submit tax return on the income earned by it from the beginning of the year up to the date of its dissolution
or retirement and pay the corresponding tax due upon demand by the Commissioner of Internal Revenue.
Nothing in 78 of the Tax Code limited the return to be filed by the corporation concerned to a mere
information return.
It is noteworthy that 78 of the Tax Code was substantially reproduced first in 45 (c), of the amendments
to the same tax Code, and later in 52 (C) of the National Internal Revenue Code of 1997. Through all the
re-enactments of the law, there has been no change in the authority granted to the Secretary (formerly
Minister) of Finance to require corporations to submit such other information as he may prescribe. Indeed,
Revenue Regulation No. 2 had been in existence prior to these amendments. Had Congress intended only
information returns, it would have expressly provided so.
Third. Considering that 78 of the Tax Code, in relation to 244 of Revenue Regulation No. 2 applies to
FBTC, the two-year prescriptive period should be counted from July 30, 1985, i.e., 30 days after the
approval by the SEC of its plan for dissolution. In accordance with 292 of the Tax Code, July 30, 1985
should be considered the date of payment by FBTC of the taxes withheld on the earned income.
Consequently, the two-year period of prescription ended on July 30, 1987. As petitioner's claim for tax
refund before the Court of Tax Appeals was filed only on December 29, 1987, it is clear that the claim is
barred by prescription.
WHEREFORE, the petition is DENIED for lack of merit.1wphi1.nt
SO ORDERED.

Finally, petitioner cites a hypothetical situation wherein the directors of a corporation would convene on
June 30, 2000 to plan the dissolution of the corporation on December 31, 2000, but would submit the plan
for dissolution earlier with the SEC, which, in turn, would approve the same on October 1, 2000.
Following 78 of the Tax Code, the corporation would be required to submit its complete return on
October 31, 2000, although its actual dissolution would take place only on December 31, 2000.
Suffice it to say that such a situation may likewise be remedied by resort to 47 of the Tax Code. The
corporation can ask for an extension of time to file a complete income tax return until December 31, 2000,
when it would cease operations. This would obviate any difficulty which may arise out of the
discrepancies not covered by 78 of the Tax Code.
In any case, as held in Commissioner of Internal Revenue v. Santos,11 "Debatable questions are for the
legislature to decide. The courts do not sit to resolve the merits of conflicting issues."
Second. Petitioner contends that what 78 required was an information return, not an income tax return. It
cites Revenue Memorandum Circular No. 14-85, of then Acting Commissioner of Internal Revenue Ruben
B. Ancheta, referring to an "information return" in interpreting Executive Order No. 1026, which amended
78.12
The contention has no merit. The circular in question must be considered merely as an administrative
interpretation of the law which in no case is binding on the courts. 13 The opinion in question cannot be
given any effect inasmuch as it is contrary to 244 of Revenue Regulation No. 2, as amended, which was
issued by the Minister of Finance pursuant to the authority to him by 78 of the Tax Code. This provision
states:
SEC. 244. Return of corporations contemplating dissolution or retiring from business. All corporations,

18

THIRD DIVISION G.R. No. 178490

July 7, 2009

failed to indicate in its ITR its choice of whether to carry over its excess tax credits or to claim the refund
of or issuance of a tax credit certificate for the amounts thereof.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

On 3 April 2001, BPI filed with petitioner Commissioner of Internal Revenue (CIR) an administrative
claim for refund in the amount of P33,947,101.00, representing its excess creditable income tax for 1998.

DECISION

The CIR failed to act on the claim for tax refund of BPI. Hence, BPI filed a Petition for Review before the
CTA, docketed as CTA Case No. 6276.

CHICO-NAZARIO, J.:
This is a Petition for Review assailing the Decision1 dated 29 April 2005 and the Resolution dated 20 April
2007 of the Court of Appeals in CA-G.R. SP No. 77655, which annulled and set aside the Decision dated
12 March 2003 of the Court of Tax Appeals (CTA) in CTA Case No. 6276, wherein the CTA held that
respondent Bank of the Philippine Islands (BPI) already exercised the irrevocable option to carry over its
excess tax credits for the year 1998 to the succeeding years 1999 and 2000 and was, therefore, no longer
entitled to claim the refund or issuance of a tax credit certificate for the amount thereof.
On 15 April 1999, BPI filed with the Bureau of Internal Revenue (BIR) its final adjusted Corporate
Annual Income Tax Return (ITR) for the taxable year ending on 31 December 1998, showing a taxable
income ofP1,773,236,745.00 and a total tax due of P602,900,493.00.
For the same taxable year 1998, BPI already made income tax payments for the first three quarters, which
amounted to P563,547,470.46.2 The bank also received income in 1998 from various third persons, which,
were already subjected to expanded withholding taxes amounting to P7,685,887.90. BPI additionally
acquired foreign tax credit when it paid the United States government taxes in the amount of $151,467.00,
or the equivalent ofP6,190,014.46, on the operations of formers New York Branch. Finally, respondent
BPI had carried over excess tax credit from the prior year, 1997, amounting to P59,424,222.00.
Crediting the aforementioned amounts against the total tax due from it at the end of 1998, BPI computed
an overpayment to the BIR of income taxes in the amount of P33,947,101.00. The computation of BPI is
reproduced below:
Total Income Taxes Due

P602,900,493.00

Less: Tax Credits:

Prior years tax credits

P59,424,222.00

Quarterly payments

563,547,470.46

Creditable taxes withheld

7,685,887.90

Foreign tax credit

6,190,014.00

The CTA promulgated its Decision in CTA Case No. 6276 on 12 March 2003, ruling therein that since BPI
had opted to carry over its 1998 excess tax credit to 1999 and 2000, it was barred from filing a claim for
the refund of the same.
The CTA relied on the irrevocability rule laid down in Section 76 of the National Internal Revenue Code
(NIRC) of 1997, which states that once the taxpayer opts to carry over and apply its excess income tax to
succeeding taxable years, its option shall be irrevocable for that taxable period and no application for tax
refund or issuance of a tax credit shall be allowed for the same.
The CTA Decision adjudged:
A close scrutiny of the 1998 income tax return of [BPI] reveals that it opted to carry over its excess tax
credits, the amount subject of this claim, to the succeeding taxable year by placing an "x" mark on the
corresponding box of said return (Exhibits A-2 & 3-a). For the year 1999, [BPI] again manifested its
intention to carry over to the succeeding taxable period the subject claim together with the current excess
tax credits (Exhibit J). Still unable to apply its prior years excess credits in 1999 as it ended up in a net
loss position, petitioner again carried over the said excess credits in the year 2000 (Exhibit K).
The court already categorically ruled in a number of cases that once the option to carry-over and apply the
excess quarterly income tax against the income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable and no application for cash refund or
issuance of a tax credit certificate shall be allowed therefore (Pilipinas Transport Industries vs.
Commissioner of Internal Revenue, CTA Case No. 6073, dated March 1, 2002; Pilipinas Hino, Inc. vs.
Commissioner of Internal Revenue, CTA Case No. 6074, dated April 19, 2002; Philam Asset Management,
Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6210, dated May 2, 2002; The Philippine
Banking Corporation (now known as Global Business Bank, Inc.) vs. Commissioner of Internal Revenue,
CTA Resolution, CTA Case No. 6280, August 16, 2001. Since [BPI] already exercised the irrevocable
option to carry over its excess tax credits for the year 1998 to the succeeding years 1999 and 2000, it is,
therefore, no longer entitled to claim for a refund or issuance of a tax credit certificate. 4
In the end, the CTA decreed:
IN VIEW OF ALL THE FOREGOING, the instant petition for review is hereby DENIED for lack of
merit.5

636,847,594.00

BPI filed a Motion for Reconsideration of the foregoing Decision, but the CTA denied the same in a
Resolution dated 3 June 2003.
BPI filed an appeal with the Court of Appeals, docketed as CA-G.R. SP No. 77655. On 29 April 2005, the
Court of Appeals rendered its Decision, reversing that of the CTA and holding that BPI was entitled to a
refund of the excess income tax it paid for 1998.

Net Tax Payable/(Refundable)

P(33,947,101.00)

BPI opted to carry over its 1998 excess tax credit, in the amount of P33,947,101.00, to the succeeding
taxable year ending 31 December 1999.3 For 1999, however, respondent BPI ended up with (1) a net loss
in the amount of P615,742,102.00; (2) its still unapplied excess tax credit carried over from 1998, in the
amount ofP33,947,101.00; and (3) more excess tax credit, acquired in 1999, in the sum of P12,975,750.00.
So in 1999, the total excess tax credits of BPI increased to P46,922,851.00, which it once more opted to
carry over to the following taxable year.
For the taxable year ending 31 December 2000, respondent BPI declared in its Corporate Annual ITR: (1)
zero taxable income; (2) excess tax credit carried over from 1998 and 1999, amounting to P46,922,851.00;
and (3) even more excess tax credit, gained in 2000, in the amount of P25,207,939.00. This time, BPI

The Court of Appeals conceded that BPI indeed opted to carry over its excess tax credit in 1998 to 1999
by placing an "x" mark on the corresponding box of its 1998 ITR. Nonetheless, there was no actual
carrying over of the excess tax credit, given that BPI suffered a net loss in 1999, and was not liable for any
income tax for said taxable period, against which the 1998 excess tax credit could have been applied.
The Court of Appeals added that even if Section 76 was to be construed strictly and literally, the
irrevocability rule would still not bar BPI from seeking a tax refund of its 1998 excess tax credit despite
previously opting to carry over the same. The phrase "for that taxable period" qualified the irrevocability
of the option of BIR to carry over its 1998 excess tax credit to only the 1999 taxable period; such that,
when the 1999 taxable period expired, the irrevocability of the option of BPI to carry over its excess tax
credit from 1998 also expired.

19

The Court of Appeals further reasoned that the government would be unjustly enriched should the
appellate court hold that the irrevocability rule barred the claim for refund of a taxpayer, who previously
opted to carry-over its excess tax credit, but was not able to use the same because it suffered a net loss in
the succeeding year.
Finally, the appellate court cited BPI-Family Savings Bank, Inc. v. Court of Appeals6 wherein this Court
held that if a taxpayer suffered a net loss in a year, thus, incurring no tax liability to which the tax credit
from the previous year could be applied, there was no reason for the BIR to withhold the tax refund which
rightfully belonged to the taxpayer.7
In a Resolution dated 20 April 2007, the Court of Appeals denied the Motion for Reconsideration of the
CIR.8
Hence, the CIR filed the instant Petition for Review, alleging that:
I THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT THE
"IRREVOCABILITY RULE" UNDER SECTION 76 OF THE TAX CODE DOES NOT OPERATE TO
BAR PETITIONER FROM ASKING FOR A TAX REFUND.
II THE COURT OF APPEALS COMMITTED GRAVE ERROR WHEN IT REVERSED AND SET
ASIDE THE DECISION OF THE COURT OF TAX APPEALS AND HELD THAT RESPONDENT IS
ENTITLED TO THE CLAIMED TAX REFUND.
The Court finds merit in the instant Petition.
The Court of Appeals erred in relying on BPI-Family, missing significant details that rendered said case
inapplicable to the one at bar.
In BPI-Family, therein petitioner BPI-Family declared in its Corporate Annual ITR for 1989 excess tax
credits ofP185,001.00 from 1988 and P112,491.00 from 1989, totaling P297,492.00. BPI-Family clearly
indicated in the same ITR that it was carrying over said excess tax credits to the following year. But on 11
October 1990, BPI-Family filed a claim for refund of its P112,491.00 tax credit from 1989. When no
action from the BIR was forthcoming, BPI-Family filed its claim with the CTA. The CTA denied the claim
for refund of BPI-Family on the ground that, since the bank declared in its 1989 ITR that it would carry
over its tax credits to the following year, it should be presumed to have done so. In its Motion for
Reconsideration filed with the CTA, BPI-Family submitted its final adjusted ITR for 1989 showing that it
incurred P52,480,173.00 net loss in 1990. Still, the CTA denied the Motion for Reconsideration of BPIFamily. The Court of Appeals likewise denied the appeal of BPI-Family and merely affirmed the judgment
of the CTA. The Court, however, reversed the CTA and the Court of Appeals.
This Court decided to grant the claim for refund of BPI-Family after finding that the bank had presented
sufficient evidence to prove that it incurred a net loss in 1990 and, thus, had no tax liability to which its tax
credit from 1989 could be applied. The Court stressed in BPI Family that "the undisputed fact is that [BPIFamily] suffered a net loss in 1990; accordingly, it incurred no tax liability to which the tax credit could be
applied. Consequently, there is no reason for the BIR and this Court to withhold the tax refund which
rightfully belongs to the [BPI-Family]." It was on the basis of this fact that the Court granted the appeal of
BPI-Family, brushing aside all procedural and technical objections to the same through the following
pronouncements:
Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be construed
strictissimi juris against the claimant. Under the facts of this case, we hold that [BPI-Family] has
established its claim. [BPI-Family] may have failed to strictly comply with the rules of procedure; it may
have even been negligent. These circumstances, however, should not compel the Court to disregard this
cold, undisputed fact: that petitioner suffered a net loss in 1990, and that it could not have applied the
amount claimed as tax credits.
Substantial justice, equity and fair play are on the side of [BPI-Family]. Technicalities and legalisms,
however exalted, should not be misused by the government to keep money not belonging to it and thereby
enrich itself at the expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness
and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess
payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness. 9

It is necessary for this Court, however, to emphasize that BPI-Family involved tax credit acquired by the
bank in 1989, which it initially opted to carry over to 1990. The prevailing tax law then was the NIRC of
1985, Section 7910of which provided:
Sec. 79. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes-paid, the
refundable amount shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable year. (Emphases ours.)
By virtue of the afore-quoted provision, the taxpayer with excess income tax was given the option to either
(1) refund the amount; or (2) credit the same to its tax liability for succeeding taxable periods.
Section 79 of the NIRC of 1985 was reproduced as Section 76 of the NIRC of 1997,11 with the addition of
one important sentence, which laid down the irrevocability rule:
Section 76. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the
refundable amount shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carryover and apply the excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered irrevocable for that taxable
period and no application for tax refund or issuance of a tax credit certificate shall be allowed therefor.
(Emphases ours.)
When BPI-Family was decided by this Court, it did not yet have the irrevocability rule to consider. Hence,
BPI-Family cannot be cited as a precedent for this case.
The factual background of Philam Asset Management, Inc. v. Commissioner of Internal Revenue, 12 cited
by the CIR, is closer to the instant Petition. Both involve tax credits acquired and claims for refund filed
more than a decade after those in BPI-Family, to which Section 76 of the NIRC of 1997 already apply.
The Court, in Philam, recognized the two options offered by Section 76 of the NIRC of 1997 to a taxable
corporation whose total quarterly income tax payments in a given taxable year exceeds its total income tax
due. These options are: (1) filing for a tax refund or (2) availing of a tax credit. The Court further
explained:
The first option is relatively simple. Any tax on income that is paid in excess of the amount due the
government may be refunded, provided that a taxpayer properly applies for the refund.
The second option works by applying the refundable amount, as shown on the [Final Adjustment Return
(FAR)] of a given taxable year, against the estimated quarterly income tax liabilities of the succeeding
taxable year.
These two options under Section 76 are alternative in nature. The choice of one precludes the other.
Indeed, in Philippine Bank of Communications v. Commissioner of Internal Revenue, the Court ruled that
a corporation must signify its intention -- whether to request a tax refund or claim a tax credit -- by
marking the corresponding option box provided in the FAR. While a taxpayer is required to mark its
choice in the form provided by the BIR, this requirement is only for the purpose of facilitating tax

20

collection.
13

One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. x x
x
The Court categorically declared in Philam that: "Section 76 remains clear and unequivocal. Once the
carry-over option is taken, actually or constructively, it becomes irrevocable." It mentioned no exception
or qualification to the irrevocability rule.
Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an
option; and once it had already done so, it could no longer make another one. Consequently, after the
taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or
not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in
stating that once the option to carry over has been made, "no application for tax refund or issuance of a tax
credit certificate shall be allowed therefor."
The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and apply the
excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that taxable period and no
application for tax refund or issuance of a tax credit certificate shall be allowed therefor." The phrase "for
that taxable period" merely identifies the excess income tax, subject of the option, by referring to the
taxable period when it was acquired by the taxpayer. In the present case, the excess income tax credit,
which BPI opted to carry over, was acquired by the said bank during the taxable year 1998. The option of
BPI to carry over its 1998 excess income tax credit is irrevocable; it cannot later on opt to apply for a
refund of the very same 1998 excess income tax credit.
The Court of Appeals mistakenly understood the phrase "for that taxable period" as a prescriptive period
for the irrevocability rule. This would mean that since the tax credit in this case was acquired in 1998, and
BPI opted to carry it over to 1999, then the irrevocability of the option to carry over expired by the end of
1999, leaving BPI free to again take another option as regards its 1998 excess income tax credit. This
construal effectively renders nugatory the irrevocability rule. The evident intent of the legislature, in
adding the last sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping on
its options, and avoid confusion and complication as regards said taxpayers excess tax credit. The
interpretation of the Court of Appeals only delays the flip-flopping to the end of each succeeding taxable
period.
The Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim for refund
of BPI, because of the irrevocability rule, would be tantamount to unjust enrichment on the part of the
government. The Court addressed the very same argument in Philam, where it elucidated that there would
be no unjust enrichment in the event of denial of the claim for refund under such circumstances, because
there would be no forfeiture of any amount in favor of the government. The amount being claimed as a
refund would remain in the account of the taxpayer until utilized in succeeding taxable years, 14 as provided
in Section 76 of the NIRC of 1997. It is worthy to note that unlike the option for refund of excess income
tax, which prescribes after two years from the filing of the FAR, there is no prescriptive period for the
carrying over of the same. Therefore, the excess income tax credit of BPI, which it acquired in 1998 and
opted to carry over, may be repeatedly carried over to succeeding taxable years, i.e., to 1999, 2000, 2001,
and so on and so forth, until actually applied or credited to a tax liability of BPI.
Finally, while the Court, in Philam, was firm in its position that the choice of option as regards the excess
income tax shall be irrevocable, it was less rigid in the determination of which option the taxpayer actually
chose. It did not limit itself to the indication by the taxpayer of its option in the ITR.
Thus, failure of the taxpayer to make an appropriate marking of its option in the ITR does not
automatically mean that the taxpayer has opted for a tax credit. The Court ratiocinated in G.R. No.
15663715 of Philam:
One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid.
Failure to signify ones intention in the FAR does not mean outright barring of a valid request for a refund,
should one still choose this option later on. A tax credit should be construed merely as an alternative
remedy to a tax refund under Section 76, subject to prior verification and approval by respondent.

particularly the self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty
or preference and thus demonstrates clear diligence. Conversely, a taxpayer that makes no choice
expresses uncertainty or lack of preference and hence shows simple negligence or plain oversight.
xxxx
x x x Despite the failure of [Philam] to make the appropriate marking in the BIR form, the filing of its
written claim effectively serves as an expression of its choice to request a tax refund, instead of a tax
credit. To assert that any future claim for a tax refund will be instantly hindered by a failure to signify
ones intention in the FAR is to render nugatory the clear provision that allows for a two-year prescriptive
period.16 (Emphases ours.)
Philam reveals a meticulous consideration by the Court of the evidence submitted by the parties and the
circumstances surrounding the taxpayers option to carry over or claim for refund. When circumstances
show that a choice has been made by the taxpayer to carry over the excess income tax as credit, it should
be respected; but when indubitable circumstances clearly show that another choice a tax refund is in
order, it should be granted. "Technicalities and legalisms, however exalted, should not be misused by the
government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding
citizens."
Therefore, as to which option the taxpayer chose is generally a matter of evidence. It is axiomatic that a
claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund.
Tax refunds, like tax exemptions, are construed strictly against the taxpayer.17
In the Petition at bar, BPI was unable to discharge the burden of proof necessary for the grant of a refund.
BPI expressly indicated in its ITR for 1998 that it was carrying over, instead of refunding, the excess
income tax it paid during the said taxable year. BPI consistently reported the said amount in its ITRs for
1999 and 2000 as credit to be applied to any tax liability the bank may incur; only, no such opportunity
arose because it suffered a net loss in 1999 and incurred zero tax liability in 2000. In G.R. No. 162004 of
Philam, the Court found:
First, the fact that it filled out the portion "Prior Years Excess Credits" in its 1999 FAR means that it
categorically availed itself of the carry-over option. In fact, the line that precedes that phrase in the BIR
form clearly states "Less: Tax Credits/Payments." The contention that it merely filled out that portion
because it was a requirement and that to have done otherwise would have been tantamount to falsifying
the FAR is a long shot.
The FAR is the most reliable firsthand evidence of corporate acts pertaining to income taxes. In it are
found the itemization and summary of additions to and deductions from income taxes due. These entries
are not without rhyme or reason. They are required, because they facilitate the tax administration
process.18
BPI itself never denied that its original intention was to carry over the excess income tax credit it acquired
in 1998, and only chose to refund the said amount when it was unable to apply the same to any tax liability
in the succeeding taxable years. There can be no doubt that BPI opted to carry over its excess income tax
credit from 1998; it only subsequently changed its mind which it was barred from doing by the
irrevocability rule.
The choice by BPI of the option to carry over its 1998 excess income tax credit to succeeding taxable
years, which it explicitly indicated in its 1998 ITR, is irrevocable, regardless of whether it was able to
actually apply the said amount to a tax liability. The reiteration by BPI of the carry over option in its ITR
for 1999 was already a superfluity, as far as its 1998 excess income tax credit was concerned, given the
irrevocability of the initial choice made by the bank to carry over the said amount. For the same reason,
the failure of BPI to indicate any option in its ITR for 2000 was already immaterial to its 1998 excess
income tax credit.
WHEREFORE, the instant Petition for Review of the Commissioner for Internal Revenue is GRANTED.
The Decision dated 29 April 2005 and the Resolution dated 20 April 2007 of the Court of Appeals in CAG.R. SP No. 77655 are REVERSED and SET ASIDE. The Decision dated 12 March 2003 of the Court of
Tax Appeals in CTA Case No. 6276, denying the claim of respondent Bank of the Philippine Islands for
the refund of its 1998 excess income tax credits, is REINSTATED. No costs. SO ORDERED.

The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration,

21

FIRST DIVISION

DECISION

to administrative routinary investigation by the BIR; (2) respondent miserably failed to show that the
amount claimed as VAT input taxes were erroneously collected or that the same were properly
documented; (3) taxes due and collected are presumed to have been made in accordance with law, hence,
not refundable; (4) the burden of proof is on the taxpayer to establish his right to a refund in an action for
tax refund. Failure to discharge such duty is fatal to his action; (5) respondent should show that it
complied with the provisions of Section 204 in relation to Section 229 of the 1997 Tax Code; and (6)
claims for refund are strictly construed against the taxpayer as it partakes of the nature of a tax exemption.
Hence, petitioner prayed for the denial of respondents petition." 7

PANGANIBAN, C.J.:

Ruling of the Court of Tax Appeals

Business enterprises registered with the Philippine Export Zone Authority (PEZA) may choose between
two fiscal incentive schemes: (1) to pay a five percent preferential tax rate on its gross income and thus be
exempt from all other taxes; or (b) to enjoy an income tax holiday, in which case it is not exempt from
applicable national revenue taxes including the value-added tax (VAT). The present respondent, which
availed itself of the second tax incentive scheme, has proven that all its transactions were export sales.
Hence, they should be VAT zero-rated.

The CTA ruled that respondent was entitled to the refund. While the company was registered with the
PEZA as an ecozone and was, as such, exempt from income tax, it availed itself of the fiscal incentive
under Executive Order No. 226. It thereby subjected itself to other internal revenue taxes like the
VAT.8 The CTA then found that only input taxes amounting to P4,377,102.26 were duly substantiated by
invoices and Official Receipts,9 while those amounting to P254,313.43 had not been sufficiently proven
and were thus disallowed.10

The Case

Ruling of the Court of Appeals

G.R. No. 149671

July 21, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
SEKISUI JUSHI PHILIPPINES, INC., respondent.

Before us is a Petition for Review under Rule 45 of the Rules of Court, challenging the August 16, 2001
Decision2 of the Court of Appeals (CA) in CA-GR SP No. 64679. The assailed Decision upheld the April
26, 2001 Decision3 of the Court of Tax Appeals (CTA) in CTA Case No. 5751. The CA Decision disposed
as follows:
"WHEREFORE, premises considered, the present petition for review is hereby DENIED DUE COURSE
and accordingly DISMISSED for lack of merit. The Decision dated April 26, 2001 of the Court of Tax
Appeals in CTA Case No. 5751 is hereby AFFIRMED and UPHELD." 4
On the other hand, the dispositive portion of the CTA Decision reads:
"WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. [Petitioner] is hereby
ordered to refund or to issue a Tax Credit Certificate in favor of the [Respondent] in the amount
of P4,377,102.26 representing excess input taxes paid for the period covering January 1 to June 30,
1997."5

The Court of Appeals upheld the Decision of the CTA. According to the CA, respondent had complied
with the procedural and substantive requirements for a claim by 1) submitting receipts, invoices, and
supporting papers as evidence; 2) paying the subject input taxes on capital goods; 3) not applying the input
taxes against any output tax liability; and 4) filing the claim within the two-year prescriptive period under
Section 229 of the 1997 Tax Code.11
Hence, this Petition.12
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or issuance of tax credit certificate in the amount
ofP4,377,102.26 as alleged unutilized input taxes paid on domestic purchase of capital goods and services
for the period covering January 1 to June 30, 1997."13

The Facts

The Courts Ruling

The uncontested6 facts are narrated by the CA as follows:

The Petition has no merit.

"Respondent is a domestic corporation duly organized and existing under and by virtue of the laws of the
Philippines with principal office located at the Special Export Processing Zone, Laguna Technopark,
Bian, Laguna. It is principally engaged in the business of manufacturing, importing, exporting, buying,
selling, or otherwise dealing in, at wholesale such goods as strapping bands and other packaging materials
and goods of similar nature, and any and all equipment, materials, supplies used or employed in or related
to the manufacture of such finished products.

Sole Issue:
Entitlement to Refund

"Having registered with the Bureau of Internal Revenue (BIR) as a value-added tax (VAT) taxpayer,
respondent filed its quarterly returns with the BIR, for the period January 1 to June 30, 1997, reflecting
therein input taxes in the amount of P4,631,132.70 paid by it in connection with its domestic purchase of
capital goods and services. Said input taxes remained unutilized since respondent has not engaged in any
business activity or transaction for which it may be liable for output tax and for which said input taxes
may be credited.
"On November 11, 1998, respondent filed with the One-Stop-Shop Inter-Agency Tax Credit and Duty
Drawback Center of the Department of Finance (CENTER-DOF) two (2) separate applications for tax
credit/refund of VAT input taxes paid for the period January 1 to March 31, 1997 and April 1 to June 30,
1997, respectively. There being no action on its application for tax credit/refund under Section 112 (B) of
the 1997 National Internal Revenue Code (Tax Code), as amended, private respondent filed, within the
two (2)-year prescriptive period under Section 229 of said Code, a petition for review with the Court of
Tax Appeals on March 26, 1999.
"Petitioner filed its Answer to the petition asseverating that: (1) said claim for tax credit/refund is subject

To support the issue raised, petitioner advances the following arguments:

"I. The Court of Appeals erred in not holding that respondent being registered with the Philippine
Economic Zone Authority (PEZA) as an [e]cozone [e]xport [e]nterprise, its business is not subject to VAT
pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now Sec. 109) of the Tax
Code, as amended by R.A. 7716.
"II. The Court of Appeals erred in not holding that since respondent is EXEMPT from Value-Added Tax
(VAT), the capital goods and services it purchased are considered not used in VAT taxable business, hence,
is not allowed any tax credit/refund on VAT input tax previously paid on such capital goods pursuant to
Section 4.106-1 of Revenue Regulations No. 7-95, and of input taxes paid on services pursuant to Section
4.103-1 of the same regulations.
"III. The Court of Appeals erred in not holding that tax refunds being in the nature of tax exemptions are
construed strictissimi juris against claimants."14
These issues have previously been addressed by this Court in Commissioner of Internal Revenue v.
Toshiba Information Equipment (Phils.),15 Commissioner of Internal Revenue v. Cebu Toyo
Corporation,16 andCommissioner of Internal Revenue v. Seagate Technology (Philippines).17
An entity registered with the PEZA as an ecozone18 may be covered by the VAT system. Section 23 of

22

Republic Act 7916, as amended, gives a PEZA-registered enterprise the option to choose between two
fiscal incentives: a) a five percent preferential tax rate on its gross income under the said law; or b) an
income tax holiday provided under Executive Order No. 226 or the Omnibus Investment Code of 1987, as
amended. If the entity avails itself of the five percent preferential tax rate under the first scheme, it is
exempt from all taxes, including the VAT;19 under the second, it is exempt from income taxes for a number
of years,20 but not from other national internal revenue taxes like the VAT.21
The CA and CTA found that respondent had availed itself of the fiscal incentive of an income tax holiday
under Executive Order No. 226. This Court respects that factual finding. Absent a sufficient showing of
error, findings of the CTA as affirmed by the CA are deemed conclusive.22 Moreover, a perusal of the
pleadings and supporting documents before us indicates that when it registered as a VAT-entity -- a fact
admitted by the parties -- respondent intended to avail itself of the income tax holiday.23 Verily, being a
question of fact, the type of fiscal incentive chosen cannot be a subject of this Petition, which should raise
only questions of law.
By availing itself of the income tax holiday, respondent became subject to the VAT. It correctly registered
as a VAT taxpayer, because its transactions were not VAT-exempt.
Notably, while an ecozone is geographically within the Philippines, it is deemed a separate customs
territory24and is regarded in law as foreign soil.25 Sales by suppliers from outside the borders of the
ecozone to this separate customs territory are deemed as exports 26 and treated as export sales.27 These sales
are zero-rated or subject to a tax rate of zero percent.28
Notwithstanding the fact that its purchases should have been zero-rated, respondent was able to prove that
it had paid input taxes in the amount of P4,377,102.26. The CTA found, and the CA affirmed, that this
amount was substantially supported by invoices and Official Receipts;29 and petitioner has not challenged
the computation. Accordingly, this Court upholds the findings of the CTA and the CA.
On the other hand, since 100 percent of the products of respondent are exported,30 all its transactions are
deemed export sales and are thus VAT zero-rated. It has been shown that respondent has no output tax with
which it could offset its paid input tax.31 Since the subject input tax it paid for its domestic purchases of
capital goods and services remained unutilized, it can claim a refund for the input VAT previously charged
by its suppliers.32 The amount of P4,377,102.26 is excess input taxes that justify a refund.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. No costs, as petitioner
is a government agency.
SO ORDERED.
Panganiban, C.J., Ynares-Santiago, Austria-Martinez, Callejo, Sr., Chico-Nazario, J.J., concur.

23

SECOND DIVISION
G.R. No. 178697

Basic Tax Due

Add: Penalties
Surcharge

November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SONY PHILIPPINES, INC., Respondent.

MENDOZA, J.:
This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007
Resolution of the Court of Tax Appeals En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the October
26, 2004 Decision of the CTA-First Division2 which, in turn, partially granted the petition for review of
respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled the deficiency
assessment issued by petitioner Commissioner of Internal Revenue (CIR) against Sony for Value Added
Tax (VAT) but upheld the deficiency assessment for expanded withholding tax (EWT) in the amount
of P1,035,879.70 and the penalties for late remittance of internal revenue taxes in the amount of P1,269,
593.90.3
THE FACTS:

Compromise
Deficiency VAT Due

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due
Add: Penalties
Surcharge
Interest up to 3-31-2000
Compromise
Penalties Due
LATE REMITTANCE OF FINAL WITHHOLDING
TAX
(Assessment No. ST-LR2-97-0127-2000)

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due
Add: Penalties
25 % Surcharge
Interest up to 3-31-2000
Compromise
Penalties Due
GRAND TOTAL

1,729,690.7
1
508,783.07
50,000.00
P

2,288,473.78
2,288,473.78

P
P

8,865.34
58.29
2,000.00
P

10,923.60
10,923.60

15,895,632.65
5

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing
certain revenue officers to examine Sonys books of accounts and other accounting records regarding
revenue taxes for"the period 1997 and unverified prior years." On December 6, 1999, a preliminary
assessment for 1997 deficiency taxes and penalties was issued by the CIR which Sony protested.
Thereafter, acting on the protest, the CIR issued final assessment notices, the formal letter of demand and
the details of discrepancies.4 Said details of the deficiency taxes and penalties for late remittance of
internal revenue taxes are as follows:

DEFICIENCY EXPANDED WITHHOLDING TAX

(EWT)
(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due
Add: Penalties
Interest up to 3-31-2000
Compromise
Deficiency EWT Due

Interest up to 3-31-2000
Compromise
Penalties Due

DECISION

DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due
Add: Penalties
Interest up to 3-31-2000

7,958,700.00

3,182,314.41
11,141,014.41

1,416,976.90

575,485.82
1,992,462.72

3,157,314.4
1
25,000.00

550,485.82
25,000.00

P
P

359,177.80
87,580.34
16,000.00
P

462,758.14
462,758.14

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony
submitted relevant documents in support of its protest on the 16th of that same month.6
On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting
documents to the CIR, Sony filed a petition for review before the CTA.7
After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT
credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on Sonys
motor vehicles and on professional fees paid to general professional partnerships. It also assessed the
amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to Section 1(g) of
Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the EWT assessment on
rental expense since it found that the total rental deposit of P10,523,821.99 was incurred from January to
March 1998 which was again beyond the coverage of LOA 19734. Except for the compromise penalties,
the CTA-First Division also upheld the penalties for the late payment of VAT on royalties, for late
remittance of final withholding tax on royalty as of December 1997 and for the late remittance of EWT by
some of Sonys branches.8 In sum, the CTA-First Division partly granted Sonys petition by cancelling the
deficiency VAT assessment but upheld a modified deficiency EWT assessment as well as the penalties.
Thus, the dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to
CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of merit.
However, the deficiency assessments for expanded withholding tax and penalties for late remittance of
internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in
the amount of P1,035,879.70 and the following penalties for late remittance of internal revenue taxes in
the sum ofP1,269,593.90:
1. VAT on Royalty

P 429,242.07

2. Withholding Tax on Royalty

831,428.20

3. EWT of Petitioner's Branches

8,923.63

Total

P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3) of the
1997 Tax Code. SO ORDERED.9

24

The CIR sought a reconsideration of the above decision and submitted the following grounds in support
thereof:

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement.

A. The Honorable Court committed reversible error in holding that petitioner is not liable for the
deficiency VAT in the amount of P11,141,014.41;
B. The Honorable court committed reversible error in holding that the commission expense in the amount
of P2,894,797.00 should be subjected to 5% withholding tax instead of the 10% tax rate;
C. The Honorable Court committed a reversible error in holding that the withholding tax assessment with
respect to the 5% withholding tax on rental deposit in the amount of P10,523,821.99 should be cancelled;
and
D. The Honorable Court committed reversible error in holding that the remittance of final withholding tax
on royalties covering the period January to March 1998 was filed on time.10
On April 28, 2005, the CTA-First Division denied the motion for reconsideration.1avvphi1 Unfazed, the
CIR filed a petition for review with the CTA-EB raising identical issues:

(A)Examination of Returns and Determination of tax Due. After a return has been filed as required under
the provisions of this Code, the Commissioner or his duly authorized representative may authorize the
examination of any taxpayer and the assessment of the correct amount of tax: Provided, however, That
failure to file a return shall not prevent the Commissioner from authorizing the examination of any
taxpayer. x x x [Emphases supplied]

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of P11,141,014.41;
2. Whether or not the commission expense in the amount of P2,894,797.00 should be subjected to 10%
withholding tax instead of the 5% tax rate;
3. Whether or not the withholding assessment with respect to the 5% withholding tax on rental deposit in
the amount of P10,523,821.99 is proper; and
4. Whether or not the remittance of final withholding tax on royalties covering the period January to
March 1998 was filed outside of time.11
Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIRs
petition on May 17, 2007. CIRs motion for reconsideration was denied by the CTA-EB on July 5, 2007.
The CIR is now before this Court via this petition for review relying on the very same grounds it raised
before the CTA-First Division and the CTA-EB. The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
I THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.
II AS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT
OF PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE
AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX OF 5%
INSTEAD OF THE 10% TAX RATE.
B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT TO
THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF PHP10,523,821.99
IS NOT PROPER.
III THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON
ROYALTIES COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME. 12
Upon filing of Sonys comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently
filed a manifestation informing the Court that it would no longer file a reply. Thus, on December 3, 2008,
the Court resolved to give due course to the petition and to decide the case on the basis of the pleadings
filed.13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should be
understood to mean the fiscal year ending in March 31, 1998.14 The Court cannot agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment functions. It empowers or enables said
revenue officer to examine the books of account and other accounting records of a taxpayer for the
purpose of collecting the correct amount of tax.15 The very provision of the Tax Code that the CIR relies
on is unequivocal with regard to its power to grant authority to examine and assess a taxpayer.

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the authority
given. In the absence of such an authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the
CIR acting through its revenue officers went beyond the scope of their authority because the deficiency
VAT assessment they arrived at was based on records from January to March 1998 or using the fiscal year
which ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005
Resolution, the CIR knew which period should be covered by the investigation. Thus, if CIR wanted or
intended the investigation to include the year 1998, it should have done so by including it in the LOA or
issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and
unverified prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated September
20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of
issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a taxpayer shall
include more than one taxable period, the other periods or years shall be specifically indicated in the
L/A.16 [Emphasis supplied]
On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the
CIRs argument, that Sonys advertising expense could not be considered as an input VAT credit because
the same was eventually reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sonys advertising expense was reimbursed by SIS, the former never incurred
any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the
said advertising expense should be for the account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB,
Sonys deficiency VAT assessment stemmed from the CIRs disallowance of the input VAT credits that
should have been realized from the advertising expense of the latter.18 It is evident under Section 11019 of
the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate business
expense. This is confirmed by no less than CIRs own witness, Revenue Officer Antonio Aluquin. 20 There
is also no denying that Sony incurred advertising expense. Aluquin testified that advertising companies
issued invoices in the name of Sony and the latter paid for the same.21 Indubitably, Sony incurred and paid
for advertising expense/ services. Where the money came from is another matter all together but will
definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus,
taxable. In support of this, the CIR cited a portion of Sonys protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy
equivalent to the latters advertising expenses will not affect the validity of the input taxes from such
expenses. Thus, at the most, this is an additional income of our client subject to income tax. We submit
further that our client is not subject to VAT on the subsidy income as this was not derived from the sale of
goods or services.22
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income
tax, the Court agrees. However, the Court does not agree that the same subsidy should be subject to the
10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively
earmarked for Sonys advertising expense for it was but an assistance or aid in view of Sonys dire or
adverse economic conditions, and was only "equivalent to the latters (Sonys) advertising expenses."

25

Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange
of goods or properties, value-added tax equivalent to ten percent (10%) of the gross selling price or gross
value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied.
Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole
out by SIS and not in payment for goods or properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services rendered for
a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. The
case, however, is not applicable to the present case. In that case, COMASERCO rendered service to its
affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which means that it was paid
the cost or expense that it incurred although without profit. This is not true in the present case. Sony did
not render any service to SIS at all. The services rendered by the advertising companies, paid for by Sony
using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent
to the latters advertising expense but never received any goods, properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly Sonys commission expense, the CIR insists
that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five percent
(5%) citing Revenue Regulation No. 2-98 dated April 17, 1998.24 The said revenue regulation provides
that the 10% rate is applied when the recipient of the commission income is a natural person. According to
the CIR, Sonys schedule of Selling, General and Administrative expenses shows the commission expense
as "commission/dealer salesman incentive," emphasizing the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on
Section 1(g) of Revenue Regulations No. 6-85 which provides:
(g) Amounts paid to certain Brokers and Agents. On gross payments to customs, insurance, real estate
and commercial brokers and agents of professional entertainers five per centum (5%). 25

the CTA-First Division when it upheld the CIR with respect to the royalties for December 1997 but
cancelled that from January to March 1998.
The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)
(2)(a)29of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from
January to March of 1998. At the same time, it downplays the relevance of the Manufacturing License
Agreement (MLA) between Sony and Sony-Japan, particularly in the payment of royalties.
The above revenue regulations provide the manner of withholding remittance as well as the payment of
final tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty
payments when the royalty is paid or is payable. After which, the corresponding return and remittance
must be made within 10 days after the end of each month. The question now is when does the royalty
become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments
were agreed upon:
(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the
LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE,
showing quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during such
respective semi-annual period and amount of royalty due pursuant this ARTICLE X therefore, and the
LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with the furnishing of the
above statement.30
Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which
ends in June 30 and December 31. However, the CTA-First Division found that there was accrual of
royalty by the end of December 1997 as well as by the end of June 1998. Given this, the FWTs should
have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct
for the CTA-First Division and the CTA-EB in ruling that the FWT for the royalty from January to March
1998 was seasonably filed. Although the royalty from January to March 1998 was well within the semiannual period ending June 30, which meant that the royalty may be payable until August 1998 pursuant to
the MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or 10 days from its accrual at
the end of June 1998. Thus, when Sony remitted the same on July 8, 1998, it was not yet late.

In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division,
held:

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is
subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the
commission expense in the schedule of Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does not
justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is composed of
"Commission Expense" in the amount of P10,200.00 and Broker Dealer of P2,894,797.00.26

SO ORDERED.

WHEREFORE, the petition is DENIED.

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which
was the applicable rule during the subject period of examination and assessment as specified in the LOA.
Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot be
applied in the present case. Besides, the withholding tax on brokers and agents was only increased to 10%
much later or by the end of July 2001 under Revenue Regulations No. 6-2001.27 Until then, the rate was
only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency
EWT assessment on the rental deposit. According to their findings, Sony incurred the subject rental
deposit in the amount of P10,523,821.99 only from January to March 1998. As stated earlier, in the
absence of the appropriate LOA specifying the coverage, the CIRs deficiency EWT assessment from
January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i)
as of December 1997; and (ii) for the period from January to March 1998. Again, the Court agrees with

26

THIRD DIVISION G.R. No. 146984

July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the National Development Company (NDC) of five
(5) of its vessels to the private respondents is subject to value-added tax (VAT) under the National Internal
Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The Court of Tax Appeals (CTA)
and the Court of Appeals commonly ruled that the sale is not subject to VAT. We affirm, though on a more
unequivocal rationale than that utilized by the rulings under review. The fact that the sale was not in the
course of the trade or business of NDC is sufficient in itself to declare the sale as outside the coverage of
VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its
shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell
in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type
vessels.1 The vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon
Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and
leased, on a bareboat basis, to the NMC.2
The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on the
value of the vessels."3 On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines)
offered to buy the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines,
purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM
Limited of the Marden Group based in Hongkong (collectively, private respondents).4 The bid was
approved by the Committee on Privatization, and a Notice of Award dated 1 July 1988 was issued to
Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and
Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract
stipulated that "[v]alue-added tax, if any, shall be for the account of the PURCHASER." 5 Per arrangement,
an irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as
security for the payment of VAT, if any. By this time, a formal request for a ruling on whether or not the
sale of the vessels was subject to VAT had already been filed with the Bureau of Internal Revenue (BIR)
by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf of private respondents.
Thus, the parties agreed that should no favorable ruling be received from the BIR, NDC was authorized to
draw on the Letter of Credit upon written demand the amount needed for the payment of the VAT on the
stipulated due date, 20 December 1988.6
In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14
December 1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The ruling
cited the fact that NDC was a VAT-registered enterprise, and thus its "transactions incident to its normal
VAT registered activity of leasing out personal property including sale of its own assets that are movable,
tangible objects which are appropriable or transferable are subject to the 10% [VAT]." 7
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No.
395-88 (dated 18 August 1988), which made a similar ruling on the sale of the same vessels in response to
an inquiry from the Chairman of the Senate Blue Ribbon Committee. Their motion was denied when the
BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT rulings. At this
point, NDC drew on the Letter of Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes
was paid on 16 March 1989.

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by
a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No.
395-88, 568-88 and 007-89, as well as the refund of the VAT payment made amounting to
P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that
private respondents were not the real parties in interest as they were not the transferors or sellers as
contemplated in Sections 99 and 100 of the then Tax Code. The CIR also squarely defended the VAT
rulings holding the sale of the vessels liable for VAT, especially citing Section 3 of Revenue Regulation
No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is imposed on any sale or transactions deemed
sale of taxable goods (including capital goods, irrespective of the date of acquisition)." The CIR argued
that the sale of the vessels were among those transactions "deemed sale," as enumerated in Section 4 of
R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which
classified "change of ownership of business" as a circumstance that gave rise to a transaction "deemed
sale."
In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the petition. 9 The
CTA ruled that the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDCs
business, and was thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to
sales in the course of trade or business. The CTA further held that the sale of the vessels could not be
"deemed sale," and thus subject to VAT, as the transaction did not fall under the enumeration of
transactions deemed sale as listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87.
Finally, the CTA ruled that any case of doubt should be resolved in favor of private respondents since
Section 99 of the Tax Code which implemented VAT is not an exemption provision, but a classification
provision which warranted the resolution of doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997, rendered a
Decision reversing the CTA.11 While the appellate court agreed that the sale was an isolated transaction,
not made in the course of NDCs regular trade or business, it nonetheless found that the transaction fell
within the classification of those "deemed sale" under R.R. No. 5-87, since the sale of the vessels together
with the NMC shares brought about a change of ownership in NMC. The Court of Appeals also applied
the principle governing tax exemptions that such should be strictly construed against the taxpayer, and
liberally in favor of the government.12
However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5
February 2001.13 This time, the appellate court ruled that the "change of ownership of business" as
contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or cessation of business" by
the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also agreed
with the CTA that the classification of transactions "deemed sale" was a classification statute, and not an
exemption statute, thus warranting the resolution of any doubt in favor of the taxpayer.14
To the mind of the Court, the arguments raised in the present petition have already been adequately
discussed and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the
Court finds that Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT payments,
and the subsequent disquisitions by the lower courts on the applicability of Section 100 of the Tax Code
and Section 4 of R.R. No. 5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a fixed
percentage.15 It is the end user of consumer goods or services which ultimately shoulders the tax, as the
liability therefrom is passed on to the end users by the providers of these goods or services16 who in turn
may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final
consumer (or output VAT).17 The final purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and several acts of consumption. The VAT system
assures fiscal adequacy through the collection of taxes on every level of consumption, 18 yet assuages the
manufacturers or providers of goods and services by enabling them to pass on their respective VAT
liabilities to the next link of the chain until finally the end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to
the taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and
its subsequent incarnations,19 the tax is levied only on the sale, barter or exchange of goods or services by
persons who engage in such activities, in the course of trade or business. These transactions outside the

27

course of trade or business may invariably contribute to the production chain, but they do so only as a
matter of accident or incident. As the sales of goods or services do not occur within the course of trade or
business, the providers of such goods or services would hardly, if at all, have the opportunity to
appropriately credit any VAT liability as against their own accumulated VAT collections since the
accumulation of output VAT arises in the first place only through the ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by
both the CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually
reconsidered.20 We cite with approval the CTAs explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the
term "carrying on business" does not mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing progressively all the acts normally
incident thereof; while "doing business" conveys the idea of business being done, not from time to time,
but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH
ANNOTATIONS), p. 608-9 (1988)]. "Course of business" is what is usually done in the management of
trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases,
Vol. 10, (1984)].

Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions
deemed sale those involving "change of ownership of business." However, Section 4(E) of R.R. No. 5-87,
reflecting Section 100 of the Tax Code, clarifies that such "change of ownership" is only an attending
circumstance to "retirement from or cessation of business[, ] with respect to all goods on hand [as] of the
date of such retirement or cessation."25 Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the
"change of ownership of business" as only a "circumstance" that attends those transactions "deemed sale,"
which are otherwise stated in the same section.26
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.

What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing
business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale
which was involuntary and made pursuant to the declared policy of Government for privatization could no
longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered
activity of NDC is leasing personal property.21
This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC
was created for the primary purpose of selling real property.23
The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute
before this Court,24 should have definitively settled the matter. Any sale, barter or exchange of goods or
services not in the course of trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon
by the CIR, is captioned "Value-added tax on sale of goods," and it expressly states that "[t]here shall be
levied, assessed and collected on every sale, barter or exchange of goods, a value added tax x x x." Section
100 should be read in light of Section 99, which lays down the general rule on which persons are liable for
VAT in the first place and on what transaction if at all. It may even be noted that Section 99 is the very
first provision in Title IV of the Tax Code, the Title that covers VAT in the law. Before any portion of
Section 100, or the rest of the law for that matter, may be applied in order to subject a transaction to VAT,
it must first be satisfied that the taxpayer and transaction involved is liable for VAT in the first place under
Section 99.
It would have been a different matter if Section 100 purported to define the phrase "in the course of trade
or business" as expressed in Section 99. If that were so, reference to Section 100 would have been
necessary as a means of ascertaining whether the sale of the vessels was "in the course of trade or
business," and thus subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not
the meaning of "in the course of trade or business," but instead the identification of the transactions which
may be deemed as sale. It would become necessary to ascertain whether under those two provisions the
transaction may be deemed a sale, only if it is settled that the transaction occurred in the course of trade or
business in the first place. If the transaction transpired outside the course of trade or business, it would be
irrelevant for the purpose of determining VAT liability whether the transaction may be deemed sale, since
it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the transaction in question was not
made in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to
Section 99 of the Tax Code, no matter how the said sale may hew to those transactions deemed sale as
defined under Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the
Court finds the discussions offered on this point by the CTA and the Court of Appeals (in its subsequent

28

SECOND DIVISION
G.R. No. 180909

The CTA stated that Section 130(A)(2) makes the manufacturer or producer of the petroleum products
directly liable for the payment of excise taxes.22 Therefore, it follows that the manufacturer or producer is
the taxpayer.23

January 19, 2011

EXXONMOBIL PETROLEUM AND CHEMICAL HOLDINGS, INC. - PHILIPPINE

BRANCH, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 filed by petitioner Exxonmobil Petroleum and
Chemical Holdings, Inc. - Philippine Branch (Exxon) to set aside the September 7, 2007 Decision1 of the
Court of Tax Appeals En Banc (CTA-En Banc) in CTA E.B. No. 204, and its November 27, 2007
Resolution2 denying petitioners motion for reconsideration.
THE FACTS
Petitioner Exxon is a foreign corporation duly organized and existing under the laws of the State of
Delaware, United States of America.3 It is authorized to do business in the Philippines through its
Philippine Branch, with principal office address at the 17/F The Orient Square, Emerald Avenue, Ortigas
Center, Pasig City.4
Exxon is engaged in the business of selling petroleum products to domestic and international carriers. 5 In
pursuit of its business, Exxon purchased from Caltex Philippines, Inc. (Caltex) and Petron Corporation
(Petron) Jet A-1 fuel and other petroleum products, the excise taxes on which were paid for and remitted
by both Caltex and Petron.6 Said taxes, however, were passed on to Exxon which ultimately shouldered
the excise taxes on the fuel and petroleum products.7
From November 2001 to June 2002, Exxon sold a total of 28,635,841 liters of Jet A-1 fuel to international
carriers, free of excise taxes amounting to Php105,093,536.47.8 On various dates, it filed administrative
claims for refund with the Bureau of Internal Revenue (BIR) amounting to Php105,093,536.47.9
On October 30, 2003, Exxon filed a petition for review with the CTA10 claiming a refund or tax credit in
the amount of Php105,093,536.47, representing the amount of excise taxes paid on Jet A-1 fuel and other
petroleum products it sold to international carriers from November 2001 to June 2002.11
Exxon and the Commissioner of Internal Revenue (CIR) filed their Joint Stipulation of Facts and Issues on
June 24, 2004, presenting a total of fourteen (14) issues for resolution.12
During Exxons preparation of evidence, the CIR filed a motion dated January 28, 2005 to first resolve the
issue of whether or not Exxon was the proper party to ask for a refund.13 Exxon filed its opposition to the
motion on March 15, 2005.
14

On July 27, 2005, the CTA First Division issued a resolution sustaining the CIRs position and
dismissing Exxons claim for refund. Exxon filed a motion for reconsideration, but this was denied on July
27, 2006.15
16

Exxon filed a petition for review with the CTA En Banc assailing the July 27, 2005 Resolution of the
CTA First Division which dismissed the petition for review, and the July 27, 2006 Resolution 17 which
affirmed the said ruling.
RULING OF THE COURT OF TAX APPEALS EN BANC
In its Decision dated September 7, 2007, the CTA En Banc dismissed the petition for review and affirmed
the two resolutions of the First Division dated July 27, 2005 and July 27, 2006. Exxon filed a motion for
reconsideration, but it was denied on November 27, 2007.
Citing Sections 130 (A)(2)18 and 204 (C) in relation to Section 135 (a)19 of the National Internal Revenue
Code of 1997 (NIRC), the CTA ruled that in consonance with its ruling in several cases,20 only the
taxpayer or the manufacturer of the petroleum products sold has the legal personality to claim the refund
of excise taxes paid on petroleum products sold to international carriers.21

This determination of the identity of the taxpayer designated by law is pivotal as the NIRC provides that it
is only the taxpayer who "has the legal personality to ask for a refund in case of erroneous payment of
taxes."24
Further, the excise tax imposed on manufacturers upon the removal of petroleum products by oil
companies is an indirect tax, or a tax which is primarily paid by persons who can shift the burden upon
someone else.25 The CTA cited the cases of Philippine Acetylene Co., Inc. v. Commissioner of Internal
Revenue,26 Contex Corporation v. Commissioner of Internal Revenue,27 and Commissioner of Internal
Revenue v. Philippine Long Distance Telephone Company,28 and explained that with indirect taxes,
"although the burden of an indirect tax can be shifted or passed on to the purchaser of the goods, the
liability for the indirect tax remains with the manufacturer." 29 Moreover, "the manufacturer has the option
whether or not to shift the burden of the tax to the purchaser. When shifted, the amount added by the
manufacturer becomes a part of the price, therefore, the purchaser does not really pay the tax per se but
only the price of the commodity."30
Going by such logic, the CTA concluded that a refund of erroneously paid or illegally received tax can
only be made in favor of the taxpayer, pursuant to Section 204(C) of the NIRC.31 As categorically ruled in
the Cebu Portland Cement32 and Contex33 cases, in the case of indirect taxes, it is the manufacturer of the
goods who is entitled to claim any refund thereof.34 Therefore, it follows that the indirect taxes paid by the
manufacturers or producers of the goods cannot be refunded to the purchasers of the goods because the
purchasers are not the taxpayers.35
The CTA also emphasized that tax refunds are in the nature of tax exemptions and are, thus, regarded as in
derogation of sovereign authority and construed strictissimi juris against the person or entity claiming the
exemption.36
Finally, the CTA disregarded Exxons argument that "in effectively holding that only petroleum products
purchased directly from the manufacturers or producers are exempt from excise taxes, the First Division of
[the CTA] sanctioned a universal amendment of existing bilateral agreements which the Philippines have
with other countries, in violation of the basic principle of pacta sunt servanda."37 The CTA explained
that the findings of fact of the First Division (that when Exxon sold the Jet A-1 fuel to international
carriers, it did so free of tax) negated any violation of the exemption from excise tax of the petroleum
products sold to international carriers. Second, the right of international carriers to invoke the exemption
granted under Section 135(a) of the NIRC was neither affected nor restricted in any way by the ruling of
the First Division. At the point of sale, the international carriers were free to invoke the exemption from
excise taxes of the petroleum products sold to them. Lastly, the lawmaking body was presumed to have
enacted a later law with the knowledge of all other laws involving the same subject matter.38
THE ISSUES
Petitioner now raises the following issues in its petition for review:
I.
WHETHER THE ASSAILED DECISION AND RESOLUTION ERRONEOUSLY PROHIBITED
PETITIONER, AS THE DISTRIBUTOR AND VENDOR OF PETROLEUM PRODUCTS TO
INTERNATIONAL CARRIERS REGISTERED IN FOREIGN COUNTRIES WHICH HAVE
EXISTING BILATERAL AGREEMENTS WITH THE PHILIPPINES, FROM CLAIMING A
REFUND OF THE EXCISE TAXES PAID THEREON; AND
II.
WHETHER THE ASSAILED DECISIONS ERRED IN AFFIRMING THE DISMISSAL OF
PETITIONERS CLAIM FOR REFUND BASED ON RESPONDENTS "MOTION TO RESOLVE
FIRST THE ISSUE OF WHETHER OR NOT THE PETITIONER IS THE PROPER PARTY
THAT MAY ASK FOR A REFUND," SINCE SAID MOTION IS ESSENTIALLY A MOTION TO
DISMISS, WHICH SHOULD HAVE BEEN DENIED OUTRIGHT BY THE COURT OF TAX
APPEALS FOR HAVING BEEN FILED OUT OF TIME.

29

RULING OF THE COURT

I. On respondents "motion to resolve first the issue of whether or not the petitioner is the proper party
that may ask for a refund."
For a logical resolution of the issues, the court will tackle first the issue of whether or not the CTA erred in
granting respondents Motion to Resolve First the Issue of Whether or Not the Petitioner is the Proper
Party that may Ask for a Refund.39 In said motion, the CIR prayed that the CTA First Division resolve
ahead of the other stipulated issues the sole issue of whether petitioner was the proper party to ask for a
refund.40
Exxon opines that the CIRs motion is essentially a motion to dismiss filed out of time,41 as it was
filed afterpetitioner began presenting evidence42 more than a year after the filing of the Answer.43 By
praying that Exxon be declared as not the proper party to ask for a refund, the CIR asked for the dismissal
of the petition, as the grant of the Motion to Resolve would bring trial to a close.44
Moreover, Exxon states that the motion should have also complied with the three-day notice and ten-day
hearing rules provided in Rule 15 of the Rules of Court.45 Since the CIR failed to set its motion for any
hearing before the filing of the Answer, the motion should have been considered a mere scrap of paper.46
Finally, citing Maruhom v. Commission on Elections and Dimaporo,47 Exxon argues that a defendant who
desires a preliminary hearing on special and affirmative defenses must file a motion to that effect at the
time of filing of his answer.48
The CIR, on the other hand, counters that it did not file a motion to dismiss.49 Instead, the grounds for
dismissal of the case were pleaded as special and affirmative defenses in its Answer filed on December 15,
2003.50Therefore, the issue of "whether or not petitioner is the proper party to claim for a tax refund of the
excise taxes allegedly passed on by Caltex and Petron" was included as one of the issues in the Joint
Stipulation of Facts and Issues dated June 24, 2004 signed by petitioner and respondent.51
The CIR now argues that nothing in the Rules requires the preliminary hearing to be held before the filing
of an Answer.52 However, a preliminary hearing cannot be held before the filing of the Answer precisely
because any ground raised as an affirmative defense is pleaded in the Answer itself. 53
Further, the CIR contends that the case cited by petitioner, Maruhom v. Comelec,54 does not apply here. In
the said case, a motion to dismiss was filed after the filing of the answer.55 And, the said motion to dismiss
was found to be a frivolous motion designed to prevent the early termination of the proceedings in the
election case therein.56 Here, the Motion to Resolve was filed not to delay the disposition of the case, but
rather, to expedite proceedings.571avvphi1
Rule 16, Section 6 of the 1997 Rules of Civil Procedure provides:
SEC. 6. Pleading grounds as affirmative defenses. - If no motion to dismiss has been filed, any of the
grounds for dismissal provided for in this Rule may be pleaded as an affirmative defense in the answer,
and in the discretion of the court, a preliminary hearing may be had thereon as if a motion to dismiss had
been filed.
The dismissal of the complaint under this section shall be without prejudice to the prosecution in the same
or separate action of a counterclaim pleaded in the answer. (Underscoring supplied.)
This case is a clear cut application of the above provision. The CIR did not file a motion to dismiss. Thus,
he pleaded the grounds for dismissal as affirmative defenses in its Answer and thereafter prayed for the
conduct of a preliminary hearing to determine whether petitioner was the proper party to apply for the
refund of excise taxes paid.
The determination of this question was the keystone on which the entire case was leaning. If Exxon was
not the proper party to apply for the refund of excise taxes paid, then it would be useless to proceed with
the case. It would not make any sense to proceed to try a case when petitioner had no standing to pursue it.
In the case of California and Hawaiian Sugar Company v. Pioneer Insurance and Surety
Corporation,58 the Court held that:

Considering that there was only one question, which may even be deemed to be the very touchstone of the
whole case, the trial court had no cogent reason to deny the Motion for Preliminary Hearing. Indeed, it
committed grave abuse of discretion when it denied a preliminary hearing on a simple issue of fact that
could have possibly settled the entire case. Verily, where a preliminary hearing appears to suffice, there is
no reason to go on to trial. One reason why dockets of trial courts are clogged is the unreasonable refusal
to use a process or procedure, like a motion to dismiss, which is designed to abbreviate the resolution of a
case.59 (Underscoring supplied.)
II. On whether petitioner, as the distributor and vendor of petroleum products to international carriers
registered in foreign countries which have existing bilateral agreements with the Philippines, can claim
a refund of the excise taxes paid thereon
This brings us now to the substantive issue of whether Exxon, as the distributor and vendor of petroleum
products to international carriers registered in foreign countries which have existing bilateral agreements
with the Philippines, is the proper party to claim a tax refund for the excise taxes paid by the
manufacturers, Caltex and Petron, and passed on to it as part of the purchase price.
Exxon argues that having paid the excise taxes on the petroleum products sold to international carriers, it
is a real party in interest consistent with the rules and jurisprudence.60
It reasons out that the subject of the exemption is neither the seller nor the buyer of the petroleum
products, but the products themselves, so long as they are sold to international carriers for use in
international flight operations, or to exempt entities covered by tax treaties, conventions and other
international agreements for their use or consumption, among other conditions.61
Thus, as the exemption granted under Section 135 attaches to the petroleum products and not to the seller,
the exemption will apply regardless of whether the same were sold by its manufacturer or its distributor
for two reasons.62 First, Section 135 does not require that to be exempt from excise tax, the products
should be sold by the manufacturer or producer.63 Second, the legislative intent was precisely to make
Section 135 independent from Sections 129 and 130 of the NIRC,64 stemming from the fact that unlike
other products subject to excise tax, petroleum products of this nature have become subject to preferential
tax treatment by virtue of either specific international agreements or simply of international reciprocity.65
Respondent CIR, on the other hand, posits that Exxon is not the proper party to seek a refund of excise
taxes paid on the petroleum products.66 In so arguing, the CIR states that excise taxes are indirect taxes,
the liability for payment of which falls on one person, but the burden of payment may be shifted to
another.67 Here, the sellers of the petroleum products or Jet A-1 fuel subject to excise tax are Petron and
Caltex, while Exxon was the buyer to whom the burden of paying excise tax was shifted.68 While the
impact or burden of taxation falls on Exxon, as the tax is shifted to it as part of the purchase price, the
persons statutorily liable to pay the tax are Petron and Caltex.69 As Exxon is not the taxpayer primarily
liable to pay, and not exempted from paying, excise tax, it is not the proper party to claim for the refund of
excise taxes paid.70
The excise tax, when passed on to the purchaser, becomes part of the purchase price.
Excise taxes are imposed under Title VI of the NIRC. They apply to specific goods manufactured or
produced in the Philippines for domestic sale or consumption or for any other disposition, and to those that
are imported.71 In effect, these taxes are imposed when two conditions concur: first, that the articles
subject to tax belong to any of the categories of goods enumerated in Title VI of the NIRC; and second,
that said articles are for domestic sale or consumption, excluding those that are actually exported. 72
There are, however, certain exemptions to the coverage of excise taxes, such as petroleum products sold to
international carriers and exempt entities or agencies. Section 135 of the NIRC provides:
SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies.
- Petroleum products sold to the following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their use or consumption outside the
Philippines: Provided, That the petroleum products sold to these international carriers shall be stored in a
bonded storage tank and may be disposed of only in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner;

30

(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for
their use of consumption: Provided, however, That the country of said foreign international carrier or
exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers,
entities or agencies; and
(c) Entities which are by law exempt from direct and indirect taxes. (Underscoring supplied.)
Thus, under Section 135, petroleum products sold to international carriers of foreign registry on their use
or consumption outside the Philippines are exempt from excise tax, provided that the petroleum products
sold to such international carriers shall be stored in a bonded storage tank and may be disposed of only in
accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.73
The confusion here stems from the fact that excise taxes are of the nature of indirect taxes, the liability for
payment of which may fall on a person other than he who actually bears the burden of the tax.
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,74 the Court
discussed the nature of indirect taxes as follows:
[I]ndirect taxes are those that are demanded, in the first instance, from, or are paid by, one person to
someone else. 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 goods sold or services rendered.
Accordingly, the party liable for the tax can shift the burden to another, as part of the purchase price of the
goods or services. Although the manufacturer/seller is the one who is statutorily liable for the tax, it is the
buyer who actually shoulders or bears the burden of the tax, albeit not in the nature of a tax, but part of the
purchase price or the cost of the goods or services sold.
As petitioner is not the statutory taxpayer, it is not entitled to claim a refund of excise taxes paid.
The question we are faced with now is, if the party statutorily liable for the tax is different from the party
who bears the burden of such tax, who is entitled to claim a refund of the tax paid?

shall be paid within ten (10) days from the date of removal of such products for the period from January 1,
1998 to June 30, 1998; within five (5) days from the date of removal of such products for the period from
July 1, 1998 to December 31, 1998; and, before removal from the place of production of such products
from January 1, 1999 and thereafter: Provided, further, That the excise tax on nonmetallic mineral or
mineral products, or quarry resources shall be due and payable upon removal of such products from the
locality where mined or extracted, but with respect to the excise tax on locally produced or extracted
metallic mineral or mineral products, the person liable shall file a return and pay the tax within fifteen (15)
days after the end of the calendar quarter when such products were removed subject to such conditions as
may be prescribed by rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner. For this purpose, the taxpayer shall file a bond in an amount which
approximates the amount of excise tax due on the removals for the said quarter. The foregoing rules
notwithstanding, for imported mineral or mineral products, whether metallic or nonmetallic, the excise tax
due thereon shall be paid before their removal from customs custody.
xxx
(Italics and underscoring supplied.)
As early as the 1960s, this Court has ruled that the proper party to question, or to seek a refund of, an
indirect tax, is the statutory taxpayer, or the person on whom the tax is imposed by law and who paid the
same, even if he shifts the burden thereof to another.75
In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue,76 the Court held that the sales tax is
imposed on the manufacturer or producer and not on the purchaser, "except probably in a very remote and
inconsequential sense."77 Discussing the "passing on" of the sales tax to the purchaser, the Court therein
cited Justice Oliver Wendell Holmes opinion in Lashs Products v. United States78 wherein he said:
"The phrase passed the tax on is inaccurate, as obviously the tax is laid and remains on the manufacturer
and on him alone. The purchaser does not really pay the tax. He pays or may pay the seller more for the
goods because of the sellers obligation, but that is all. x x x The price is the sum total paid for the goods.
The amount added because of the tax is paid to get the goods and for nothing else. Therefore it is part of
the price x x x."79
Proceeding from this discussion, the Court went on to state:

SEC. 129. Goods subject to Excise Taxes. - Excise taxes apply to goods manufactured or produced in the
Philippines for domestic sales or consumption or for any other disposition and to things imported. The
excise tax imposed herein shall be in addition to the value-added tax imposed under Title IV.

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax
becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is
billed as tax to the purchaser. x x x The effect is still the same, namely, that the purchaser does not pay the
tax. He pays or may pay the seller more for the goods because of the sellers obligation, but that is all and
the amount added because of the tax is paid to get the goods and for nothing else.

For purposes of this Title, excise taxes herein imposed and based on weight or volume capacity or any
other physical unit of measurement shall be referred to as 'specific tax' and an excise tax herein imposed
and based on selling price or other specified value of the good shall be referred to as 'ad valorem tax.'

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the
tax is largely a matter of economics. Then it can no longer be contended that a sales tax is a tax on the
purchaser.80

SEC. 130. Filing of Return and Payment of Excise Tax on Domestic Products. -

The above case was cited in the later case of Cebu Portland Cement Company v. Collector (now
Commissioner) of Internal Revenue,81 where the Court ruled that as the sales tax is imposed upon the
manufacturer or producer and not on the purchaser, "it is petitioner and not its customers, who may ask for
a refund of whatever amount it is entitled for the percentage or sales taxes it paid before the amendment of
section 246 of the Tax Code."82

Sections 129 and 130 of the NIRC provide:

(A) Persons Liable to File a Return, Filing of Return on Removal and Payment of Tax. (1) Persons Liable to File a Return. - Every person liable to pay excise tax imposed under this Title shall
file a separate return for each place of production setting forth, among others the description and quantity
or volume of products to be removed, the applicable tax base and the amount of tax due thereon: Provided,
however, That in the case of indigenous petroleum, natural gas or liquefied natural gas, the excise tax shall
be paid by the first buyer, purchaser or transferee for local sale, barter or transfer, while the excise tax on
exported products shall be paid by the owner, lessee, concessionaire or operator of the mining claim.
Should domestic products be removed from the place of production without the payment of the tax, the
owner or person having possession thereof shall be liable for the tax due thereon.
(2) Time for Filing of Return and Payment of the Tax. - Unless otherwise specifically allowed, the
return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic
products from place of production: Provided, That the tax excise on locally manufactured petroleum
products and indigenous petroleum/levied under Sections 148 and 151(A)(4), respectively, of this Title

The Philippine Acetylene case was also cited in the first Silkair (Singapore) Pte, Ltd. v. Commissioner of
Internal Revenue83 case, where the Court held that the proper party to question, or to seek a refund of, an
indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the
same even if he shifts the burden thereof to another.84
In the Silkair cases,85 petitioner Silkair (Singapore) Pte, Ltd. (Silkair), filed with the BIR a written
application for the refund of excise taxes it claimed to have paid on its purchase of jet fuel from Petron. As
the BIR did not act on the application, Silkair filed a Petition for Review before the CTA.

31

In both cases, the CIR argued that the excise tax on petroleum products is the direct liability of the
manufacturer/producer, and when added to the cost of the goods sold to the buyer, it is no longer a tax but
part of the price which the buyer has to pay to obtain the article.
In the first Silkair case, the Court ruled:
The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and who paid the same even if he shifts the burden
thereof to another.Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise specifically
allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal
of domestic products from place of production." Thus, Petron Corporation, not Silkair, is the statutory
taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of
the Air Transport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed
to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a
purchaser.86 (Emphasis and underscoring supplied.)

One final point, petitioners argument "that in effectively holding that only petroleum products purchased
directly from the manufacturers or producers are exempt from excise taxes, the First Division of this Court
sanctioned a unilateral amendment of existing bilateral agreements which the Philippines have (sic) with
other countries, in violation of the basic international principle of "pacta sunt servanda" is misplaced.
First, the findings of fact of the First Division of this Court that "when petitioner sold the Jet A-1 fuel to
international carriers, it did so free of tax"negates any violation of the exemption from excise tax of the
petroleum products sold to international carriers insofar as this case is concerned. Secondly, the right of
international carriers to invoke the exemption granted under Section 135 (a) of the 1997 NIRC has neither
been affected nor restricted in any way by the ruling of the First Division of this Court. At the point of
sale, the international carriers are free to invoke the exemption from excise taxes of the petroleum
products sold to them. Lastly, the law-making body is presumed to have enacted a later law with the
knowledge of all other laws involving the same subject matter."90 (Underscoring supplied.)
WHEREFORE, the petition is DENIED.
SO ORDERED.

Citing the above case, the second Silkair case was promulgated a few months after the first, and stated:
The issue presented is not novel. In a similar case involving the same parties, this Court has categorically
ruled that "the proper party to question, or seek a refund of an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to
another." The Court added that "even if Petron Corporation passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay
as a purchaser."87
The CTA En Banc, thus, held that:
The determination of who is the taxpayer plays a pivotal role in claims for refund because the same law
provides that it is only the taxpayer who has the legal personality to ask for a refund in case of erroneous
payment of taxes. Section 204 (C) of the 1997 NIRC, [provides] in part, as follows:
SEC. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. The
Commissioner may
xxx

xxx

xxx

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

xxx

xxx

(Emphasis shown supplied by the CTA.)88

Therefore, as Exxon is not the party statutorily liable for payment of excise taxes under Section 130, in
relation to Section 129 of the NIRC, it is not the proper party to claim a refund of any taxes erroneously
paid.
There is no unilateral amendment of existing bilateral agreements of the Philippines with other countries.
Exxon also argues that in effectively holding that only petroleum products purchased directly from the
manufacturers or producers are exempt from excise taxes, the CTA En Banc sanctioned a unilateral
amendment of existing bilateral agreements which the Philippines has with other countries, in violation of
the basic international law principle of pacta sunt servanda.89 The Court does not agree.
As correctly held by the CTA En Banc:

32

FIRST DIVISION G.R. No. 125355

March 30, 2000

Revenue, the dispositive portion of which reads:

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents.
PARDO, J.:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency
value-added tax for the taxable year 1988 is AFFIRMED with slight modifications. Accordingly, petitioner
is ordered to pay respondent Commissioner of Internal Revenue the amount of P335,831.01 inclusive of
the 25% surcharge and interest plus 20% interest from January 24, 1992 until fully paid pursuant to
Section 248 and 249 of the Tax Code.

What is before the Court is a petition for review on certiorari of the decision of the Court of Appeals,1
reversing that of the Court of Tax Appeals,2 which affirmed with modification the decision of the
Commissioner of Internal Revenue ruling that Commonwealth Management and Services Corporation, is
liable for value added tax for services to clients during taxable year 1988.

The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be
included in the payment as there was no compromise agreement entered into between petitioner and
respondent with respect to the value-added tax deficiency.5

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation

duly organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life
Insurance Co. (Philamlife), organized by the letter to perform collection, consultative and other technical
services, including functioning as an internal auditor, of Philamlife and its other affiliates.1wphi1.nt
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent
COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988,
computed as follows:
Taxable sale/receipt

P1,679,155.00
============

On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the
Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the
Court of Tax Appeals, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING
ASIDE the questioned Decision promulgated on 22 June 1995. The assessment for deficiency value-added
tax for the taxable year 1988 inclusive of surcharge, interest and penalty charges are ordered
CANCELLED for lack of legal and factual basis. 6
The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same
parties,7 where it was held that COMASERCO was not liable to pay fixed and contractor's tax for services
rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned that COMASERCO
was not engaged in business of providing services to Philamlife and its affiliates. In the same manner, the
Court of Appeals held that COMASERCO was not liable to pay VAT for it was not engaged in the
business of selling services.

10% tax due thereon

167,915.50

25% surcharge

41,978.88

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review on
certiorari assailing the decision of the Court of Appeals.

20% interest per annum

125,936.63

On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on
September 26, 1996, COMASERCO complied with the resolution.8

Compromise penalty for late payment

16,000.00

We give due course to the petition.

At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to pay
VAT thereon.

TOTAL AMOUNT DUE AND COLLECTIBLE

P351,831.01
============

COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its
operations in the amount of P6,077.00.
On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding
of deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to
COMASERCO demanding payment of the deficiency VAT.
On September 29, 1992, COMASERCO filed with the Court of Tax Appeals 4 a petition for review
contesting the Commissioner's assessment. COMASERCO asserted that the services it rendered to
Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including
functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred that
it was not engaged in the business of providing services to Philamlife and its affiliates. COMASERCO
was established to ensure operational orderliness and administrative efficiency of Philamlife and its
affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not
engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988.
COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.

Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different
things. Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates,
for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the
service. It is immaterial whether profit is derived from rendering the service.
We agree with the Commissioner.
Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in
1988, provides that:
Sec. 99. Persons liable. Any person who, in the course of trade or business, sells, barters or exchanges
goods, renders services, or engages in similar transactions and any person who, imports goods shall be
subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. 9
COMASERCO contends that the term "in the course of trade or business" requires that the "business" is
carried on with a view to profit or livelihood. It avers that the activities of the entity must be profitoriented. COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in the
articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis, without any
profit." Private respondent argues that profit motive is material in ascertaining who to tax for purposes of
determining liability for VAT.
We disagree.

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal

33

On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending
among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National
Internal Revenue Code of 1997, took effect. The amended law provides that:
Sec. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges,
leases goods or properties, renders services, and any person who imports goods shall be subject to the
value-added tax (VAT) imposed in Sections 106 and 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or
lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person regardless of whether or not the
person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members of their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or
business.

of the law, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is
plainly wrong, is entitled to great weight. 14 Also, it has been the long standing policy and practice of this
Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the
nature of its functions, is dedicated exclusively to the study and consideration of tax cases and has
necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise
of its authority. 15
There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042,
declaring the COMASERCO as not engaged in business and not liable for the payment of fixed and
percentage taxes, binds petitioner. The issue in CA-G.R. No. 34042 is different from the present case,
which involves COMASERCO's liability for VAT. As heretofore stated, every person who sells, barters, or
exchanges goods and services, in the course of trade or business, as defined by law, is subject to VAT.
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in
CA-G.R. SP No. 37930. The Court hereby REINSTATES the decision of the Court of Tax Appeals in C. T.
A. Case No. 4853.
No costs.
SO ORDERED.

Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit,
organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on
transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or
property, and on the performance of services, even in the absence of profit attributable thereto. The term
"in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic
activity regardless of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or business" present law applies to all transactions even
to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of
trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The
present law merely stresses that even a nonstock, nonprofit organization or government entity is liable to
pay VAT for the sale of goods and services.
Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the
"performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the
supply of technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking or project." 11
On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 12
emphasizing that a domestic corporation that provided technical, research, management and technical
assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without
any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation
was organized without any intention realizing profit, any income or profit generated by the entity in the
conduct of its activities was subject to income tax.
Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments
for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for
purposes of determining liability for VAT on services rendered. As long as the entity provides service for a
fee, remuneration or consideration, then the service rendered is subject to VAT.1awp++i1
At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are
construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any
exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely
implied therefrom. 13 In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the
transactions exempted from VAT. The services rendered by COMASERCO do not fall within the
exemptions.
Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services
rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by the
Commissioner, the performance of all kinds of services for others for a fee, remuneration or consideration
is considered as sale of services subject to VAT. As the government agency charged with the enforcement

34

Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as CTA
Case No. 7085.17
CTA Case No. 7111
On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for taxable
year 2000 in the amount of P35,840,895.78. First Asia protested the PAN through a letter dated April 22,
2004.18

SECOND DIVISION
G.R. No. 183505

February 26, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT
CORPORATION, Respondents.

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.19 First Asia protested
the same in a letter dated July 9, 2004.20
On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in the
amount ofP35,840,895.78 for taxable year 2000.21

DECISION

This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The case
was docketed as CTA Case No. 7111.22

DEL CASTILLO, J.:

CTA Case No. 7272

When the intent of the law is not apparent as worded, or when the application of the law would lead to
absurdity or injustice, legislative history is all important. In such cases, courts may take judicial notice of
the origin and history of the law,1 the deliberations during the enactment,2 as well as prior laws on the
same subject matter3 to ascertain the true intent or spirit of the law.

Re: Assessment Notice No. 008-02

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act
(RA) No. 9282,4 seeks to set aside the April 30, 2008 Decision5 and the June 24, 2008 Resolution6 of the
Court of Tax Appeals (CTA).
Factual Antecedents
Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation (First
Asia) are domestic corporations duly organized and existing under the laws of the Republic of the
Philippines. Both are engaged in the business of operating cinema houses, among others.7
CTA Case No. 7079
On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary Assessment
Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount
of P119,276,047.40 for taxable year 2000.8 In response, SM Prime filed a letter-protest dated December
15, 2003.9

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount
of P32,802,912.21 was issued against First Asia by the BIR. In response, First Asia filed a protest-letter
dated November 11, 2004. The BIR then sent a Formal Letter of Demand, which was protested by First
Asia on December 14, 2004.23
Re: Assessment Notice No. 003-03
A PAN for VAT deficiency on cinema ticket sales in the total amount of P28,196,376.46 for the taxable
year 2003 was issued by the BIR against First Asia. In a letter dated September 23, 2004, First Asia
protested the PAN. A Formal Letter of Demand was thereafter issued by the BIR to First Asia, which the
latter protested through a letter dated November 11, 2004. 24
On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the
amounts ofP33,610,202.91 and P28,590,826.50 for VAT deficiency for taxable years 2002 and 2003,
respectively.25
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No.
7272.26
Consolidated Petitions

On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT
deficiency, which the latter protested in a letter dated January 14, 2004.10

The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime and
First Asia.27

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT
deficiency for taxable year 2000 in the amount of P124,035,874.12.11

On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272 with CTA
Case No. 7079 on the grounds that the issues raised therein are identical and that SM Prime is a majority
shareholder of First Asia. The motion was granted.28

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case No.
7079.12
CTA Case No. 7085
On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount of P35,823,680.93.13 First Asia protested the
PAN in a letter dated July 9, 2002.14
Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was
protested by First Asia in a letter dated December 12, 2002.15
On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to pay the
amount of P35,823,680.93 for VAT deficiency for taxable year 1999.16

Upon submission of the parties respective memoranda, the consolidated cases were submitted for decision
on the sole issue of whether gross receipts derived from admission tickets by cinema/theater operators or
proprietors are subject to VAT.29
Ruling of the CTA First Division
On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for
Review. Resorting to the language used and the legislative history of the law, it ruled that the activity of
showing cinematographic films is not a service covered by VAT under the National Internal Revenue Code
(NIRC) of 1997, as amended, but an activity subject to amusement tax under RA 7160, otherwise known
as the Local Government Code (LGC) of 1991. Citing House Joint Resolution No. 13, entitled "Joint
Resolution Expressing the True Intent of Congress with Respect to the Prevailing Tax Regime in the
Theater and Local Film Industry Consistent with the States Policy to Have a Viable, Sustainable and
Competitive Theater and Film Industry as One of its Partners in National Development," 30 the CTA First

35

Division held that the House of Representatives resolved that there should only be one business tax
applicable to theaters and movie houses, which is the 30% amusement tax imposed by cities and provinces
under the LGC of 1991. Further, it held that consistent with the States policy to have a viable, sustainable
and competitive theater and film industry, the national government should be precluded from imposing its
own business tax in addition to that already imposed and collected by local government units. The CTA
First Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes
VAT on gross receipts from admission to cinema houses, cannot be given force and effect because it failed
to comply with the procedural due process for tax issuances under RMC No. 20-86.31 Thus, it disposed of
the case as follows:
IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review.
Respondents Decisions denying petitioners protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00000122, 003-03 and 008-02 are ORDEREDcancelled and set aside.
SO ORDERED.32
Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its Resolution
dated December 14, 2006.33
Ruling of the CTA En Banc
Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB No. 244.35 The CTA En
Banchowever denied36 the Petition for Review and dismissed37 as well petitioners Motion for
Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of
what services are intended to be subject to VAT. And since the showing or exhibition of motion pictures,
films or movies by cinema operators or proprietors is not among the enumerated activities contemplated in
the phrase "sale or exchange of services," then gross receipts derived by cinema/ theater operators or
proprietors from admission tickets in showing motion pictures, film or movie are not subject to VAT. It
reiterated that the exhibition or showing of motion pictures, films, or movies is instead subject to
amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-2001, the CTA En Banc
agreed with its First Division that the same cannot be given force and effect for failure to comply with
RMC No. 20-86.
Issue
Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:
(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses from
admission tickets [are] subject to the 10% VAT because:

(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage;
(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely subject
to the amusement tax imposed by the Local Government Code; and
(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38
Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors of
cinema/theater houses from admission tickets are subject to VAT.
Petitioners Arguments
Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not
exhaustive because it covers all sales of services unless exempted by law. He claims that the CTA erred in
applying the rules on statutory construction and in using extrinsic aids in interpreting Section 108 because
the provision is clear and unambiguous. Thus, he maintains that the exhibition of movies by cinema
operators or proprietors to the paying public, being a sale of service, is subject to VAT.
Respondents Arguments
Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997 shows that
the gross receipts of proprietors or operators of cinemas/theaters derived from public admission are not
among the services subject to VAT. Respondents insist that gross receipts from cinema/theater admission
tickets were never intended to be subject to any tax imposed by the national government. According to
them, the absence of gross receipts from cinema/theater admission tickets from the list of services which
are subject to the national amusement tax under Section 125 of the NIRC of 1997 reinforces this
legislative intent. Respondents also highlight the fact that RMC No. 28-2001 on which the deficiency
assessments were based is an unpublished administrative ruling.
Our Ruling
The petition is bereft of merit.
The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive
Section 108 of the NIRC of the 1997 reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or
lease of properties.

(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING RESPONDENTS

SERVICES FROM THE VAT IMPOSED UNDER SECTION 108 OF THE NIRC OF 1997;

The phrase "sale or exchange of services" means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered by
construction and service contractors; stock, real estate, commercial, customs and immigration brokers;
lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs
and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods
or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers
by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of
telephone and telegraph, radio and television broadcasting and all other franchise grantees except those
under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance
companies; and non-life insurance companies (except their crop insurances), including surety, fidelity,
indemnity and bonding companies; and similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties. The phrase "sale or exchange of
services" shall likewise include:

(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE TRIED BY
THE HONORABLE COURT; and

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other like property or right;

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF THE NIRC.

xxxx

(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE PAYING

PUBLIC IS A SALE OF SERVICE;
(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY SUBJECT TO VAT
UNDER SECTION 108 OF THE NIRC OF 1997;
(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE
APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS
UNWARRANTED;
(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE APPLICABLE
HEREIN, STILL THE HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND
PROMULGATED DANGEROUS PRECEDENTS;

36

(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television
time.
x x x x (Emphasis supplied)
A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or exchange
of services" subject to VAT is not exhaustive. The words, "including," "similar services," and "shall
likewise include," indicate that the enumeration is by way of example only.39
Among those included in the enumeration is the "lease of motion picture films, films, tapes and discs."
This, however, is not the same as the showing or exhibition of motion pictures or films. As pointed out by
the CTA En Banc:
"Exhibition" in Blacks Law Dictionary is defined as "To show or display. x x x To produce anything in
public so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as "a
contract by which one owning such property grants to another the right to possess, use and enjoy it on
specified period of time in exchange for periodic payment of a stipulated price, referred to as rent (Blacks
Law Dictionary, 6th ed., p. 889). x x x40
Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors
is not included in the enumeration, it is incumbent upon the court to the determine whether such activity
falls under the phrase "similar services." The intent of the legislature must therefore be ascertained.
The legislature never intended operators
or proprietors of cinema/theater houses to be covered by VAT
Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors, lessees, or
operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other places of
amusement, including cockpits, race tracks, and cabaret.42 In the case of theaters or cinematographs, the
taxes were first deducted, withheld, and paid by the proprietors, lessees, or operators of such theaters or
cinematographs before the gross receipts were divided between the proprietors, lessees, or operators of the
theaters or cinematographs and the distributors of the cinematographic films. Section 1143 of the Local Tax
Code,44 however, amended this provision by transferring the power to impose amusement tax45 on
admission from theaters, cinematographs, concert halls, circuses and other places of amusements
exclusively to the local government. Thus, when the NIRC of 197746 was enacted, the national government
imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai
and race tracks.47

deposits or advance payments actually or constructively received during the taxable quarter for the service
performed or to be performed for another person, excluding value-added tax.
(b) Determination of the tax. (1) Tax billed as a separate item in the invoice. If the tax is billed as a
separate item in the invoice, the tax shall be based on the gross receipts, excluding the tax.
(2) Tax not billed separately or is billed erroneously in the invoice. If the tax is not billed separately or
is billed erroneously in the invoice, the tax shall be determined by multiplying the gross receipts
(including the amount intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis supplied)
Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted from
the coverage of VAT.49
On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified that
the power to impose amusement tax on gross receipts derived from admission tickets was exclusive with
the local government units and that only the gross receipts of amusement places derived from sources
other than from admission tickets were subject to amusement tax under the NIRC of 1977, as amended.
Pertinent portions of RMC 8-88 read:
Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross
receipts arising from admission to places of amusement has been transferred to the local governments to
the exclusion of the national government.
xxxx
Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the amendatory
laws which amended the National Internal Revenue Code, including the value added tax law under
Executive Order No. 273, has amended the provisions of Section 11 of the Local Tax Code. Accordingly,
the sole jurisdiction for collection of amusement tax on admission receipts in places of amusement rests
exclusively on the local government, to the exclusion of the national government. Since the Bureau of
Internal Revenue is an agency of the national government, then it follows that it has no legal mandate to
levy amusement tax on admission receipts in the said places of amusement.
Considering the foregoing legal background, the provisions under Section 123 of the National Internal
Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC) pertaining to amusement
taxes on places of amusement shall be implemented in accordance with BIR RULING, dated December 4,
1973 and BIR RULING NO. 231-86 dated November 5, 1986 to wit:

On January 1, 1988, the VAT Law48 was promulgated. It amended certain provisions of the NIRC of 1977
by imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and percentage tax
on certain services. It imposed VAT on sales of services under Section 102 thereof, which provides:

"x x x Accordingly, only the gross receipts of the amusement places derived from sources other than
from admission tickets shall be subject to x x x amusement tax prescribed under Section 228 of the
Tax Code, as amended (now Section 123, NIRC, as amended by E.O. 273). The tax on gross receipts
derived from admission tickets shall be levied and collected by the city government pursuant to
Section 23 of Presidential Decree No. 231, as amended x x x" or by the provincial government,
pursuant to Section 11 of P.D. 231, otherwise known as the Local Tax Code. (Emphasis supplied)

SECTION 102. Value-added tax on sale of services. (a) Rate and base of tax. There shall be levied,
assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any
person engaged in the sale of services. The phrase "sale of services" means the performance of all kinds of
services for others for a fee, remuneration or consideration, including those performed or rendered by
construction and service contractors; stock, real estate, commercial, customs and immigration brokers;
lessors of personal property; lessors or distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others; and similar services regardless of whether or not
the performance thereof calls for the exercise or use of the physical or mental faculties: Provided That the
following services performed in the Philippines by VAT-registered persons shall be subject to 0%:

On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the power to
impose amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses,
boxing stadia, and other places of amusement at a rate of not more than thirty percent (30%) of the gross
receipts from admission fees under Section 140 thereof.50 In the case of theaters or cinemas, the tax shall
first be deducted and withheld by their proprietors, lessees, or operators and paid to the local government
before the gross receipts are divided between said proprietors, lessees, or operators and the distributors of
the cinematographic films. However, the provision in the Local Tax Code expressly excluding the national
government from collecting tax from the proprietors, lessees, or operators of theaters, cinematographs,
concert halls, circuses and other places of amusements was no longer included.

(1) Processing manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, x x x

In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its administration.
Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC of 1997 51 was signed
into law. Several amendments52 were made to expand the coverage of VAT. However, none pertain to
cinema/theater operators or proprietors. At present, only lessors or distributors of cinematographic films
are subject to VAT. While persons subject to amusement tax53 under the NIRC of 1997 are exempt from
the coverage of VAT.54

xxxx
"Gross receipts" means the total amount of money or its equivalent representing the contract price,
compensation or service fee, including the amount charged for materials supplied with the services and

37

Based on the foregoing, the following facts can be established:

(1) Historically, the activity of showing motion pictures, films or movies by cinema/theater operators or
proprietors has always been considered as a form of entertainment subject to amusement tax.
(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national government.
(3) When the Local Tax Code was enacted, amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements were transferred to the local
government.
(4) Under the NIRC of 1977, the national government imposed amusement tax only on proprietors, lessees
or operators of cabarets, day and night clubs, Jai-Alai and race tracks.
(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and percentage tax on
certain services.
(6) When the VAT law was implemented, it exempted persons subject to amusement tax under the NIRC
from the coverage of VAT.1auuphil
(7) When the Local Tax Code was repealed by the LGC of 1991, the local government continued to
impose amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and
other places of amusements.
(8) Amendments to the VAT law have been consistent in exempting persons subject to amusement tax
under the NIRC from the coverage of VAT.
(9) Only lessors or distributors of cinematographic films are included in the coverage of VAT.
These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax.
This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely
because the VAT law was intended to replace the percentage tax on certain services. The mere fact that
they are taxed by the local government unit and not by the national government is immaterial. The Local
Tax Code, in transferring the power to tax gross receipts derived by cinema/theater operators or proprietor
from admission tickets to the local government, did not intend to treat cinema/theater houses as a separate
class. No distinction must, therefore, be made between the places of amusement taxed by the national
government and those taxed by the local government.
To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or
proprietors, who would be paying an additional 10%55 VAT on top of the 30% amusement tax imposed by
Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as
persons taxed under the NIRC of 1997 would be in a better position than those taxed under the LGC of
1991. We need not belabor that a literal application of a law must be rejected if it will operate unjustly or
lead to absurd results.56 Thus, we are convinced that the legislature never intended to include
cinema/theater operators or proprietors in the coverage of VAT.
On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,57 to wit:
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.

(Sections 11 & 13, Local Tax Code). However, the said provision containing the exclusive power of the
provincial government to impose amusement tax, had also been repealed and/or deleted by Republic Act
(RA) No. 7160, otherwise known as the Local Government Code of 1991, enacted into law on October 10,
1991. Accordingly, the enactment of RA No. 7160, thus, eliminating the statutory prohibition on the
national government to impose business tax on gross receipts from admission of persons to places of
amusement, led the way to the valid imposition of the VAT pursuant to Section 102 (now Section 108) of
the old Tax Code, as amended by the Expanded VAT Law (RA No. 7716) and which was implemented
beginning January 1, 1996.58 (Emphasis supplied)
We disagree.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the
gross receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of
the prohibition under the Local Tax Code did not grant nor restore to the national government the power to
impose amusement tax on cinema/theater operators or proprietors. Neither did it expand the coverage of
VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be
extended by implication. A law will not be construed as imposing a tax unless it does so clearly, expressly,
and unambiguously.59 As it is, the power to impose amusement tax on cinema/theater operators or
proprietors remains with the local government.
Revenue Memorandum Circular No. 28-2001 is invalid
Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater
operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the
gross receipts from admission to cinema houses must be struck down. We cannot overemphasize that
RMCs must not override, supplant, or modify the law, but must remain consistent and in harmony with,
the law they seek to apply and implement.60
In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the
procedural due process for tax issuances as prescribed under RMC No. 20-86.
Rule on tax exemption does not apply
Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption
from the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer
presupposes that the taxpayer is clearly subject to the tax being levied against him. 61 The reason is
obvious: it is both illogical and impractical to determine who are exempted without first determining who
are covered by the provision.62Thus, unless a statute imposes a tax clearly, expressly and unambiguously,
what applies is the equally well-settled rule that the imposition of a tax cannot be presumed. 63 In fact, in
case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.64
WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of Tax
AppealsEn Banc holding that gross receipts derived by respondents from admission tickets in showing
motion pictures, films or movies are not subject to value-added tax under Section 108 of the National
Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution denying the motion for
reconsideration are AFFIRMED.
SO ORDERED.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT
Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax under
Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code of
1939, computed on the amount paid for admission. With the enactment of the Local Tax Code under
Presidential Decree (PD) No. 231, dated June 28, 1973, the power of imposing taxes on gross receipts
from admission of persons to cinema/theater and other places of amusement had, thereafter, been
transferred to the provincial government, to the exclusion of the national or municipal government

38

On October 31, 1981, Citibank submitted its claim for refund of the aforesaid amounts of P270,160.56 and
P298,829, respectively, or a total of P568,989.85; and on October 12, 1981 filed a petition for review with
the Court of Tax Appeals concerning subject claim for tax refund, docketed as CTA Case No. 3378. 5
On August 30, 1981, the Court of Tax Appeals adjudged Citibank's entitlement to the tax refund sought
for, representing the 5% tax withheld and paid on Citibank's rental income for 1979 and 1980. . . .
THIRD DIVISION G.R. No. 107434 October 10, 1997
CITIBANK, N.A., petitioner,
vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
PANGANIBAN, J.:
The law requires a lessee to withhold and remit to the Bureau of Internal Revenue (BIR) five percent (5%)
of the rental due the lessor, by way of advance payment of the latter's income tax liability. Is the lessor
entitled to a refund of such withheld amount after it is determined that the lessor was not, in fact, liable for
any income tax at all because its annual operation resulted in a net loss as shown in its income tax return
filed at the end of the taxable year?

In its decision 6 granting a refund to petitioner, 7 the Court of Tax Appeals rejected Respondent
Commissioner's argument that the claim was not seasonably filed:

This is the question raised in this petition for review on certiorari of the Court of Appeals 1 Decision 2
promulgated on May 27, 1992 and Resolution 3 promulgated on October 27, 1992 in CA-G.R. No. SP26555, reversing the decision of the Court of Tax Appeals which allowed the tax refund.

WHEREFORE, the appealed judgment of August 30, 1991, adjudging Citibank, N.A., Philippine Branch,
entitled to a tax refund/credit in the amount of P569,989.85, representing the 5% withheld tax on
Citibank's rental income for the taxable years 1979 and 1980 is hereby REVERSED. No pronouncement
as to costs.

The Facts
The facts, as found by Respondent Court, are undisputed. 4
From the pleadings and supporting papers on hand, it can be gathered that Citibank N.A. Philippine
Branch (CITIBANK) is a foreign corporation doing business in the Philippines. In 1979 and 1980, its
tenants withheld and paid to the Bureau of Internal Revenue the following taxes on rents due to Citibank,
pursuant to Section 1(c) of the Expanded Withholding Tax Regulations (BIR Revenue Regulations No. 1378, as amended), to wit:
1979
First quarter P60,690.97
Second quarter 69,897.08
Third quarter 69,160.89
Fourth quarter 70,160.56

P270,160.56
1980
First quarter P78,370.22
Second quarter 69,049.37
Third quarter 79,139.60
Fourth quarter 72,270.10

P298,829.29
On April 15, 1980, Citibank filed its corporate income tax returns for the year ended December 31, 1979
(Exh. "E:), showing a net loss of P74,854,916.00 and its tax credits totalled P6,257,780.00, even without
including the amounts withheld on rental income under the Expanded Withholding Tax System, the same
not having been utilized or applied for the reason that the year's operation resulted in a loss. (Exh. & "E-1
& E-2"). The taxes thus withheld by the tenants from rentals paid to Citibank in 1979 were not included as
tax credits although a rental income amounting to P7,796,811.00 was included in its income declared for
the year ended December 31, 1979 (Exhs. "E-3" & "E-4").
For the year ended December 31, 1980, Citibank's corporate income tax returns (Exh. "EC"), filed on
April 15, 1981, showed a net loss of P77,071,790.00 for income tax purposes. Its available tax credit
(refundable) at the end of 1980 amounting to P11,532,855.00 (Exh. "BC-1" & "BC-2") was not utilized or
applied. The said available tax credits did not include the amounts withheld by Citibank's tenants from
rental payments in 1980 but the rental payments for that year were declared as part of its gross income
included in its annual income tax returns (Exh. "BC-3").

WHEREFORE, respondent is hereby ordered to grant the refund of the amount sought by the petitioner.
No costs.
Not satisfied, the Commissioner appealed to the Court of Appeals. In due course, Respondent Court issued
the assailed Decision and Resolution, ruling that the five percent tax withheld by tenants from the rental
income of Citibank for the years 1979 and 1980 was in accordance with Section 1(c) of the Expanded
Withholding Tax Regulations (BIR Revenue Regulation No. 13-78, as amended) and did not involve
illegally or erroneously collected taxes. The dispositive portion of the Decision reads: 8

Respondent Court denied the motion for reconsideration of the petitioner-bank in the assailed Resolution,
the dispositive portion of which reads: 9
WHEREFORE, for want of merit, the motion for reconsideration, dated June 19, 1992, of respondent
Citibank, N.A. is hereby DENIED. SO ORDERED.
Hence, this petition under Rule 45 of the Rules of Court.
The Issues
The appellate court ruled that it was not enough for petitioner to show its lack of income tax liability
against which the five percent withholding tax could be credited. Petitioner should have also shown that
the withholding tax was illegally or erroneously collected and remitted by the tenants. On the other hand,
petitioner counters that Respondent Court failed to grasp "two fundamental concepts in the present income
tax system, namely: (1) the yearly computation of the corporate income tax and (2) the nature of the
creditable withholding tax."
In the main, petitioner thus raises the following issues: (1) For creditable withholding tax to be refundable,
when should the illegality or error in its assessment or collection be reckoned: at the time of withholding
or at the end of the taxable year? (2) Where the income tax returns show that no income tax is payable to
the government, is a creditable withholding tax, as contradistinguished from a final tax, refundable (or
creditable) at the end of the taxable year?
The Court's Ruling
The petition is meritorious.
First Issue: Determination of the Illegality or Error in Assessment or Collection
Tax refunds are allowed under Section 230 of the National Internal Revenue Code:
Sec. 230. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained
in any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority or of any sum alleged to have been excessive or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided,

39

however, That the Commissioner may, even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment appears clearly to have been
erroneously paid.
Petitioner maintains that it is entitled to a refund of the five percent creditable withholding tax in 1979 and
1980, since its operations resulted in a net loss and thus did not have any income tax liability for such
years. Respondent Court refused to allow the claim for refund for the reason that the taxes were "not
illegally or erroneously collected:" 10
It is decisively clear that the instant claim for tax refund under scrutiny does not involve illegally or
erroneously collected taxes. It involves the 5% tax withheld by tenants from the rental income of Citibank
for the years 1979 and 1980, in accordance with Section 1(c) of the Expanded Withholding Tax
Regulations (BIR Revenue Regulation No. 13-78 as amended) . . .
It is thus evident that the tenants or lessee of Citibank were required by law to withhold and pay to BIR
5% of their rental and, therefore, such withholding taxes were not illegally or erroneously collected. It was
the burden of Citibank to prove that the taxes it asked to be refunded were illegally or erroneously
collected; an onus probandi Citibank utterly failed to discharge.
We disagree with the Court of Appeals. In several cases, we have already ruled that income taxes remitted
partially on a periodic or quarterly basis should be credited or refunded to the taxpayer on the basis of the
taxpayer's final adjusted returns, nor on such periodic or quarterly basis. 11 For instance, in the recent case
of Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 12the Court held:

delegating to the Secretary of Finance the power to require the withholding of a tax, as follows:
Sec. 1. Section 53 (f) of the National Internal Revenue Code of 1997 is hereby amended to read as
follows:
(f) The Secretary of Finance may, upon recommendation of the Commissioner of Internal Revenue,
require also the withholding of a tax on the same items of income payable to persons (natural or juridical)
residing in the Philippines by the same persons mentioned in paragraph (b) (1) of this Section at the rate of
not less than 2-1/2% but not more than 35% thereof which shall be credited against the income tax liability
of the taxpayer for the taxable year.
Pursuant to said P.D. No. 1351 and in accordance with Section 4 in relation to Section 326 14 of the
National Internal Revenue Code, the Commissioner promulgated on September 7, 1978, Revenue
Regulations No. 13-78 to implement the withholding of creditable income taxes from certain types of
income. Rev. Reg. No. 13-78 requires that a certain percentage of income be deducted and withheld by a
payor, who is constituted as the withholding agent, and paid to the revenue district officer or BIR
collection agent. Section 1 of this revenue regulation provides:
Sec. 1. Income payments subject to withholding tax and rates prescribed therein. Except as herein
otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each
class of payee from the following items of income payments to persons residing in the Philippines:
(a) xxx xxx xxx (b) xxx xxx xxx

. . . When applied to taxpayers filing income tax returns on a quarterly basis, the date of payment
mentioned in Section 292 (now Section 230) must be deemed to be qualified by Sections 68 and 69 of the
present Tax Code . . .

(c) Rentals. When the gross rental or other payment required to be made as a condition to the continued
use or possession of property, whether real or personal, to which the payor or obligor has not taken or is
not taking title or in which he has no equity, exceeds five hundred pesos (P500.00) five per centum
(5%).xxx xxx xxx

It may be observed that although quarterly taxes due are required to be paid within 60 days from the close
of each quarter, the fact that the amount shall be deducted from the tax due for the succeeding quarter
shows that until a final adjustment return shall have been filed, the taxes paid in the preceding quarters are
merely partial taxes due from a corporation. Neither amount can serve as the final figure to quantify what
is due the government nor what should be refunded to the corporation.

Under this system, income is viewed as a flow 15 and is measured over a period of time known as an
"accounting period." An accounting period covers twelve months, subdivided into four equal segments
known as "quarters." Income realized within the taxpayer's annual accounting period (fiscal or calendar
year) becomes the basis for the computation of the gross income and the tax liability. 16

This interpretation may be gleaned from the last paragraph of Section 69 of the Tax Code which provides
that the refundable amount, in case a refund is due a corporation, is that amount which is shown on its
final adjustment return and not on its quarterly returns.

The same basic principles apply under the prevailing tax laws. Under the present tax code, the types of
income subject to withholding tax in Section 53, now Section 50, is simplified into three categories: (a)
withholding of final tax on certain incomes; (b) withholding of creditable tax at source; and (c) tax free
covenant bonds.

xxx xxx xxx

Clearly the prescriptive period of two years should commence to run only from the time that the refund is
ascertained, which can only be determined after a final adjustment return is accomplished. Private
respondent being a corporation, Section 292 (now Section 230) cannot serve as the sole basis for
determining the two-year prescriptive period for refunds. . . .
In the present case, there is no question that the taxes were withheld in accordance with Section 1(c), Rev.
Reg. No. 13-78. In that sense, it can be said that they were withheld legally by the tenants. However, the
annual income tax returns of petitioner-bank for tax years 1979 and 1980 undisputedly reflected the net
losses it suffered. The question arises: whether the taxes withheld remained legal and correct at the end of
each taxable year. We hold in the negative.
The withholding tax system was devised for two main reasons: first, to provide the taxpayer a convenient
manner to meet his probable income tax liability; and second, to ensure the collection of the income tax
which could otherwise be lost or substantially reduced through failure to file the corresponding returns. 13
To these, a third reason may be added: to improve the government's cash flow. Under Section 53 a-f of the
tax code which was in effect at the time this case ripened, withholding of tax at source was mandated in
cases of: (a) tax free covenant bonds, (b) payments of interest, dividends, rents, royalties, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual,
periodical, or casual gains, profits and income, and capital gains of non-resident aliens and foreign
corporations; (c) dividends from a domestic corporation and royalties received by resident individuals and
corporation; (d) certain dividends; (e) interest on bank deposit; and (f) other items of income payable to
resident individuals or corporations. Section 53-f was amended by Presidential Decree No. 1351,

Accordingly, the withheld amounts equivalent to five percent of the gross rental are remitted to the BIR
and are considered creditable withholding taxes under Section 53-f, i.e., creditable against income tax
liability for that year. The taxes withheld, as ruled in Gibbs vs. Commissioner of Internal Revenue, 17 are in
the nature of payment by a taxpayer in order to extinguish his possible tax obligation. They are
installments on the annual tax which may be due at the end of the taxable year. 18
In this case, petitioner's lessees withheld and remitted to the BIR the amounts now claimed as tax refunds.
That they were withheld and remitted pursuant to Rev. Reg. No. 13-78 does not derogate from the fact that
they were merely partial payments of probable taxes. Like the corporate quarterly income tax, creditable
withholding taxes are subject to adjustment upon determination of the correct income tax liability after the
filing of the corporate income tax return, as at the end of the taxable year. This final determination of the
corporate income tax liability is provided in Section 69, NIRC:
Sec. 69. Final Adjustment Return. Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the
refundable amount shown on its final adjustment return may be credited against the estimated quarterly

40

income tax liabilities for the taxable quarters of the succeeding taxable year.
19

The taxes thus withheld and remitted are provisional in nature. We repeat: five per cent of the rental
income withheld and remitted to the BIR pursuant to Rev. Reg. No. 13-78 is, unlike the withholding of
final taxes on passive incomes, a creditable withholding tax; that is, creditable against income tax liability
if any, for that taxable year.
In Commissioner of Internal Revenue vs. TMX Sales, Inc., 20 this Court ruled that the payments of
quarterly income taxes (per Section 68, NIRC) should be considered mere installments of the annual tax
due. These quarterly tax payments, which are computed based on the cumulative figures of gross receipts
and deductions in order to arrive at a net taxable income, should be treated as advances or portions of the
annual income tax due, to be adjusted at the end of the calendar or fiscal year. The same holds true in the
case of the withholding of creditable tax at source. Withholding taxes are "deposits" which are subject to
adjustments at the proper time when the complete tax liability is determined.
In this case, the payments of the withholding taxes for 1979 and 1980 were creditable to the income tax
liability, if any, of petitioner-bank, determined after the filing of the corporate income tax returns on April
15, 1980 and April 15, 1981. As petitioner posted net losses in its 1979 and 1980 returns, it was not liable
for any income taxes. Consequently and clearly, the taxes withheld during the course of the taxable year,
while collected legally under the aforesaid revenue regulation, became untenable and took on the nature of
erroneously collected taxes at the end of the taxable year.
Second Issue: Onus of Disputing a Claim for Refund
In general, there is no disagreement that a claimant has the burden of proof to establish the factual basis of
his or her claim for tax credit or refund. 21 Tax refunds, like tax exemptions, are construed strictly against
the taxpayer. The mechanics of a tax refunds provided in Rev. Reg. No. 13-78:

Furthermore, Section 321 (now Section 232) of the National Internal Revenue Code requires that the
books of accounts of companies or persons with gross quarterly sales or earnings exceeding Twenty Five
Thousand Pesos (P25,000.00) be audited and examined yearly by an independent Certified Public
Accountant and their income tax returns be accompanied by certified balance sheets, profit and loss
statements, schedules listing income producing properties and the corresponding incomes therefrom and
other related statements.
It is generally recognized that before an accountant can make a certification on the financial statements or
render an auditor's opinion, an audit of the books of accounts has to be conducted in accordance with
generally accepted auditing standards.
Since the audit, as required by Section 321 (now Section 232) of the Tax Code is to be conducted yearly,
then it is the Final Adjustment Return, where the figures of the gross receipts and deductions have been
audited and adjusted, that is truly reflective of the results of the operations of a business enterprise. Thus,
it is only when the Adjustment Return covering the whole year is filed that the taxpayer would know
whether a tax is still due or a refund can be claimed based on the adjusted and audited figures.
Therefore, the alleged irregularity in the declared operational losses is a matter which must be proven by
competent evidence. In resisting the claims of petitioner, Respondent Commissioner set up the defense of
the legality of the collection of the creditable withholding tax as well as prescription, instead of presenting
an assessment of the proper tax liability of the petitioner. This fact leads us to the conclusion that the
income tax returns were accepted as accurate and regular by the BIR.
After this case was filed, the Commissioner clarified on June 27, 1994, the onus probandi of a taxpayer
claiming refund of overpaid withholding taxes, inter alia, in Revenue Regulation No. 12-94, Section 10:
Sec. 10. Claim for Tax Credit or Refund.

Sec. 8. Claims for tax credit or refund. Claims for tax credit or refund of income tax deducted and
withheld on income payments shall be given due course only when it is shown on the return that the
income payment received was declared as part of the gross income and the fact of withholding is
established by a copy of the statement, duly issued by the payor to the payee (BIR Form No. 1743-A)
showing the amount paid and the amount of tax withheld therefrom.

(a) Claims for Tax Credit or Refund of income tax deducted and withheld on income payments shall be
given due course only when it is shown on the return that the income payment received has been declared
as part of the gross income and the fact of withholding is established by a copy of the Withholding Tax
Statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld
therefrom.

A refund claimant is required to prove the inclusion of the income payments which were the basis of the
withholding taxes and the fact of withholding. However, detailed proof of the truthfulness of each and
every item in the income tax return is nor required. That function is lodged in the commissioner of internal
revenue by the NIRC which requires the commissioner to assess internal revenue taxes within three years
after the last day prescribed by law for the filing of the return. 22 In San Carlos Milling Co., Inc. vs.
Commissioner of Internal Revenue, 23 the Court held that the internal revenue branch of government must
investigate and confirm the claims for tax refund or credit before taxpayers may avail themselves of this
option. The grant of a refund is founded on the assumption that the tax return is valid; that is, the facts
stated therein are true and correct. 24 In fact, even without petitioner's tax claim, the commissioner can
proceed to examine the books, records of the petitioner-bank, or any data which may be relevant or
material in accordance with Section 16 of the present NIRC.

(b) Excess Credits. A taxpayer's excess expanded withholding tax credits for the taxable quarter/taxable
year shall automatically be allowed as a credit for purposes of filing his income tax return for the taxable
quarter/taxable year immediately succeeding the taxable quarter/taxable year in which the aforesaid excess
credit arose, provided, however, he submits with his income tax return a copy of his income tax return for
the aforesaid previous taxable period showing the amount of his aforementioned excess withholding tax
credits.

In the case in hand, Respondent Commissioner examined petitioner's income tax returns and presumably
found no false declaration in them, because he did not allege any such false declaration before Respondent
Court and the Court of Tax Appeals (CTA). In the CTA, Respondent Commissioner's refusal to refund was
based on the argument that the claim filed on October 31, 1981 was time-barred. It bears stressing that this
issue was not raised in the appeal before us. The issue of operational losses was not raised until the appeal
before Respondent Court was filed on February 5, 1992. By such time, at least a decade had already
passed since the pertinent books and accounting records of petitioner-bank were closed. Section 235 of the
Tax Code requires the preservation of the books of account and records only "for a period beginning from
the last entry in each book until the last day prescribed by Section 203." Section 203 provides that internal
revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the
return, and no proceeding in Court without an assessment for the collection of such taxes shall begin after
the expiration of such period. To expect petitioner to have its book and records on hand during the appeal
was obviously unreasonable and violative of Section 235 in relation to Section 203 of the Tax Code. In
addition, the Tax Code has placed several safety measures to prevent falsification of income tax returns
which the Court recognized in Commissioner vs. TMX Sales, Inc.: 25

If the taxpayer, in lieu of the aforesaid automatic application of his excess credit, wants a cash refund or a
tax credit certificate for use in payment of his other national internal tax liabilities, he shall make a written
request therefor. Upon filing of his request, the taxpayer's income tax return showing the excess expanded
withholding tax credits shall be examined. The excess expanded withholding tax, if any, shall determined
and refunded/credited to the taxpayer-applicant. The refunded/credit shall be made within a period of sixty
(60) days from date of the taxpayer's request provided, however, that the taxpayer-applicant submitted for
audit all his pertinent accounting records and that the aforesaid records established the veracity of his
claim for a refund/credit of his excess expanded withholding tax credits.
Prior to Rev. Reg. 12-94, the requisites for a refund were: (1) the income tax return for the previous year
must show that income payment (rental in this case) was reported as part of the gross income; and (2) the
withholding tax statement of the withholding tax agent must show that payment of the creditable
withholding tax was made. However, even without this regulation, the commissioner may inspect the
books of the taxpayer and reassess a taxpayer for deficiency tax payments under Sections 7, NICR. We
stress that what was required under Rev. Reg. 12-94 was only a submission of records but the verification
of the tax return remained the function of the commissioner.
Worth emphasizing are these uncontested facts: (1) the amounts withheld were actually remitted to the
BIR and (2) the final adjusted returns which the BIR did not question showed that, for 1979 and
1980, no income taxes from petitioner were due. Hence, under the principle of solutio indebiti provided in
Art. 2154, Civil Code, 26 the BIR received something when "there [was] no right to demand it," and thus

41

"the obligation to return arises." 27 Heavily militating against Respondent Commissioner is the ancient
principle that no one, not even the state, shall enrich oneself at the expense of another. Indeed, simple
justice requires the speedy refund of the wrongly held taxes. WHEREFORE, the assailed Decision is
hereby REVERSED and the decision of the Court of Tax Appeals is REINSTATED. No costs.SO
ORDERED.

Pursuant to Section 112(D) of the 1997 Tax Code, the Commissioner of Internal Revenue (CIR) had a
period of 120 days, or until 3 February 2006, to act on the claim. The administrative claim, however,
remained unresolved on 3 February 2006.

FIRST DIVISION

Apparently, Mindanao II believed that a judicial claim must be filed within the two-year prescriptive
period provided under Section 112(A) and that such time frame was to be reckoned from the filing of its
Quarterly VAT Returns for the second, third, and fourth quarters of taxable year 2004, that is, from 26 July
2004, 22 October 2004, and 25 January 2005, respectively. Thus, on 21 July 2006, Mindanao II, claiming
inaction on the part of the CIR and that the two-year prescriptive period was about to expire, filed a
Petition for Review with the CTA docketed as CTA Case No. 6133.12

G.R. No. 191498

January 15, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
MINDANAO II GEOTHERMAL PARTNERSHIP, Respondent.
DECISION
SERENO, CJ:
This Rule 45 Petition1 requires this Court to address the question of timeliness with respect to petitioner's
administrative and judicial claims for refund and credit of accumulated unutilized input Value Added Tax
(VAT) under Section 112(A) and Section 112(D) of the 1997 Tax Code. Petitioner Mindanao II
Geothermal Partnership (Mindanao II) assails the Decision 2 and Resolution3 of the Court of Tax Appeals
En Banc (CTA En Banc) in CTA En Banc Case No. 448, affirming the Decision in CTA Case No. 7507 of
the CTA Second Division.4 The latter ordered the refund or issuance of a tax credit certificate in the
amount of P6,791,845.24 representing unutilized input VAT incurred for the second, third, and fourth
quarters of taxable year 2004 in favor of herein respondent, Mindanao II.
FACTS
Mindanao II is a partnership registered with the Securities and Exchange Commission. 5 It is engaged in
the business of power generation and sale of electricity to the National Power Corporation
(NAPOCOR)6 and is accredited by the Department of Energy.7
Mindanao II filed its Quarterly VAT Returns for the second, third and fourth quarters of taxable year 2004
on the following dates:8
Date filed
Quarter

Taxable Year

Original

Amended

26 July 2004

12 July 2005

2nd

2004

22 October 2004

12 July 2005

3rd

2004

25 January 2005

12 July 2005

4th

2004

On 6 October 2005, Mindanao II filed with the Bureau of Internal Revenue (BIR) an application for the
refund or credit of accumulated unutilized creditable input taxes.9 In support of the administrative claim
for refund or credit, Mindanao II alleged, among others, that it is registered with the BIR as a value-added
taxpayer10 and all its sales are zero-rated under the EPIRA law.11 It further stated that for the second, third,
and fourth quarters of taxable year 2004, it paid input VAT in the aggregate amount of P7,167,005.84,
which were directly attributable to the zero-rated sales. The input taxes had not been applied against
output tax.

Under the same provision, Mindanao II could treat the inaction of the CIR as a denial of its claim, in
which case, the former would have 30 days to file an appeal to the CTA, that is, on 5 March 2006.
Mindanao II, however, did not file an appeal within the 30-day period.

On 8 June 2007, while the application for refund or credit of unutilized input VAT of Mindanao II was
pending before the CTA Second Division, this Court promulgated Atlas Consolidated Mining and
Development Corporation v. CIR13 (Atlas). Atlas held that the two-year prescriptive period for the filing of
a claim for an input VAT refund or credit is to be reckoned from the date of filing of the corresponding
quarterly VAT return and payment of the tax.
On 12 August 2008, the CTA Second Division rendered a Decision14 ordering the CIR to grant a refund or
a tax credit certificate, but only in the reduced amount of P6,791,845.24, representing unutilized input
VAT incurred for the second, third and fourth quarters of taxable year 2004.15
In support of its ruling, the CTA Second Division held that Mindanao II complied with the twin requisites
for VAT zero-rating under the EPIRA law: first, it is a generation company, and second, it derived sales
from power generation. It also ruled that Mindanao II satisfied the requirements for the grant of a
refund/credit under Section 112 of the Tax Code: (1) there must be zero-rated or effectively zero-rated
sales; (2) input taxes must have been incurred or paid; (3) the creditable input tax due or paid must be
attributable to zero-rated sales or effectively zero-rated sales; (4) the input VAT payments must not have
been applied against any output liability; and (5) the claim must be filed within the two-year prescriptive
period.16
As to the second requisite, however, the input tax claim to the extent of P375,160.60 corresponding to
purchases of services from Mitsubishi Corporation was disallowed, since it was not substantiated by
official receipts.17
As regards to the fifth requirement in section 112 of the Tax Code, the tax court, citing Atlas, counted from
26 July 2004, 22 October 2004, and 25 January 2005 the dates when Mindanao II filed its Quarterly VAT
Returns for the second, third, and fourth quarters of taxable year 2004, respectively and determined that
both the administrative claim filed on 6 October 2005 and the judicial claim filed on 21 July 2006 fell
within the two-year prescriptive period.18
On 1 September 2008, the CIR filed a Motion for Partial Reconsideration,19 pointing out that prescription
had already set in, since the appeal to the CTA was filed only on 21 July 2006, which was way beyond the
last day to appeal 5 March 2006.20 As legal basis for this argument, the CIR relied on Section 112(D) of
the 1997 Tax Code.21
Meanwhile, on 12 September 2008, this Court promulgated CIR v. Mirant Pagbilao Corporation
(Mirant).22 Mirant fixed the reckoning date of the two-year prescriptive period for the application for
refund or credit of unutilized input VAT at the close of the taxable quarter when the relevant sales were
made , as stated in Section 112(A).23
On 3 December 2008, the CTA Second Division denied the CIRs Motion for Partial
Reconsideration.24 The tax court stood by its reliance on Atlas25 and on its finding that both the
administrative and judicial claims of Mindanao II were timely filed.26
On 7 January 2009, the CIR elevated the matter to the CTA En Banc via a Petition for Review.27 Apart
from the contention that the judicial claim of Mindanao II was filed beyond the 30-day period fixed by
Section 112(D) of the 1997 Tax Code,28 the CIR argued that Mindanao II erroneously fixed 26 July 2004,
the date when the return for the second quarter was filed, as the date from which to reckon the two-year

42

prescriptive period for filing an application for refund or credit of unutilized input VAT under Section
112(A). As the two-year prescriptive period ended on 30 June 2006, the Petition for Review of Mindanao
II was filed out of time on 21 July 2006.29 The CIR invoked the recently promulgated Mirant to support
this theory.
On 11 November 2009, the CTA En Banc rendered its Decision denying the CIRs Petition for
Review.30 On the question whether the application for refund was timely filed, it held that the CTA Second
Division correctly applied the Atlas ruling.31 It reasoned that Atlas remained to be the controlling doctrine.
Mirant was a new doctrine and, as such, the latter should not apply retroactively to Mindanao II who had
relied on the old doctrine of Atlas and had acted on the faith thereof.32
As to the issue of compliance with the 30-day period for appeal to the CTA, the CTA En Banc held that
this was a requirement only when the CIR actually denies the taxpayers claim. But in cases of CIR
inaction, the 30-day period is not a mandatory requirement; the judicial claim is seasonably filed as long
as it is filed after the lapse of the 120-day waiting period but within two years from the date of filing of the
return.33
The CIR filed a Motion for Partial Reconsideration34 of the Decision, but it was denied for lack of merit.35
Dissatisfied, the CIR filed this Rule 45 Petition, raising the following arguments in support of its appeal:
I.
THE CTA 2ND DIVISION LACKED JURISDICTION TO TAKE COGNIZANCE OF THE CASE.
II.
THE COURT A QUOS RELIANCE ON THE RULING IN ATLAS IS MISPLACED.36
ISSUES
The resolution of this case hinges on the question of compliance with the following time requirements for
the grant of a claim for refund or credit of unutilized input VAT: (1) the two-year prescriptive period for
filing an application for refund or credit of unutilized input VAT; and (2) the 120+30 day period for filing
an appeal with the CTA.
THE COURTS RULING
We deny Mindanao IIs claim for refund or credit of unutilized input VAT on the ground that its judicial
claims were filed out of time, even as we hold that its application for refund was filed on time.
I. MINDANAO IIS APPLICATION FOR
REFUND WAS FILED ON TIME
We find no error in the conclusion of the tax courts that the application for refund or credit of unutilized
input VAT was timely filed. The problem lies with their bases for the conclusion as to: (1) what should be
filed within the prescriptive period; and (2) the date from which to reckon the prescriptive period.
We thus take a different route to reach the same conclusion, initially focusing our discussion on what
should be filed within the two-year prescriptive period.
A. The Judicial Claim Need Not Be Filed Within the Two-Year Prescriptive Period
Section 112(A) provides:
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 or 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.
Both the CTA Second Division and CTA En Banc decisions held that the phrase "apply for the issuance of
a tax credit certificate or refund" in Section 112(A) is construed to refer to both the administrative claim
filed with the CIR and the judicial claim filed with the CTA. This view, however, has no legal basis.
In Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi), we dispelled the
misconception that both the administrative and judicial claims must be filed within the two-year
prescriptive period:37
There is nothing in Section 112 of the NIRC to support respondents view. Subsection (A) of the said
provision states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated may,
within two 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." The phrase
"within two (2) years x x x apply for the issuance of a tax credit certificate or refund" refers to applications
for refund/credit filed with the CIR and not to appeals made to the CTA. This is apparent in the first
paragraph of subsection (D) of the same provision, which states that the CIR has "120 days from the
submission of complete documents in support of the application filed in accordance with Subsections (A)
and (B)" within which to decide on the claim.
In fact, applying the two-year period to judicial claims would render nugatory Section 112 (D) of the
NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or
inaction of the CIR. The second paragraph of Section 112 (D) of the NIRC envisions two scenarios: (1)
when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is
made after the 120-day period. In both instances, the taxpayer has 30 days within which to file an appeal
with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA. (Emphasis
supplied)
The message of Aichi is clear: it is only the administrative claim that must be filed within the two-year
prescriptive period; the judicial claim need not fall within the two-year prescriptive period.
Having disposed of this question, we proceed to the date for reckoning the prescriptive period under
Section 112(A).
B. Reckoning Date is the Close of the Taxable Quarter When the Relevant Sales Were Made.
The other flaw in the reasoning of the tax courts is their reliance on the Atlas ruling, which fixed the
reckoning point to the date of filing the return and payment of the tax.
The CIRs Stand
The CIRs stand is that Atlas is not applicable to the case at hand as it involves Section 230 of the 1977
Tax Code, which contemplates recovery of tax payments erroneously or illegally collected. On the other
hand, this case deals with claims for tax refund or credit of unutilized input VAT for the second, third, and
fourth quarters of 2004, which are covered by Section 112 of the 1977 Tax Code.38
The CIR further contends that Mindanao II cannot claim good faith reliance on the Atlas doctrine since the
case was decided only on 8 June 2007, two years after Mindanao II filed its claim for refund or credit with
the CIR and one year after it filed a Petition for Review with the CTA on 21 July 2006.39
In lieu of Atlas, the CIR proposes that it is the Court's ruling in Mirant that should apply to this case
despite the fact that the latter was promulgated on 12 September 2008, after Mindanao II had filed its
administrative claim in 2005.40 It argues that Mirant can be applied retroactively to this case, since the
decision merely interprets Section 112, a provision that was already effective when Mindanao II filed its
claims for tax refund or credit.
The Taxpayers Defense
On the other hand, Mindanao II counters that Atlas, decided by the Third Division of this Court, could not
have been superseded by Mirant, a Second Division Decision of this Court. A doctrine laid down by the

43

Supreme Court in a Division may be modified or reversed only through a decision of the Court sitting en
banc.41
Mindanao II further contends that when it filed its Petition for Review, the prevailing rule in the CTA
reckons the two-year prescriptive period from the date of the filing of the VAT return.42 Finally, after
building its case on Atlas, Mindanao II assails the CIRs reliance on the Mirant doctrine stating that it
cannot be applied retroactively to this case, lest it violate the rock-solid rule that a judicial ruling cannot be
given retroactive effect if it will impair vested rights.43
Section 112(A) is the Applicable Rule
The issue posed is not novel. In the recent case of Commissioner of Internal Revenue v. San Roque Power
Corporation44 (San Roque), this Court resolved the threshold question of when to reckon the two-year
prescriptive period for filing an administrative claim for refund or credit of unutilized input VAT under the
1997 Tax Code in view of our pronouncements in Atlas and Mirant. In that case, we delineated the scope
and effectivity of the Atlas and Mirant doctrines as follows:
The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the twoyear prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007
until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the reckoning of
the two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlas doctrine,
the two-year prescriptive period for claiming refund or credit of input VAT should be governed by Section
112(A) following the verba legis rule. The Mirant ruling, which abandoned the Atlas doctrine, adopted the
verba legis rule, thus applying Section 112(A) in computing the two-year prescriptive period in claiming
refund or credit of input VAT. (Emphases supplied)
Furthermore, San Roque distinguished between Section 112 and Section 229 of the 1997 Tax Code:
The input VAT is not "excessively" collected as understood under Section 229 because at the time the
input VAT is collected the amount paid is correct and proper. The input VAT is a tax liability of, and
legally paid by, a VAT-registered seller of goods, properties or services used as input by another VATregistered person in the sale of his own goods, properties, or services. This tax liability is true even if the
seller passes on the input VAT to the buyer as part of the purchase price. The second VAT-registered
person, who is not legally liable for the input VAT, is the one who applies the input VAT as credit for his
own output VAT. If the input VAT is in fact "excessively" collected as understood under Section 229, then
it is the first VAT-registered person the taxpayer who is legally liable and who is deemed to have
legally paid for the input VAT who can ask for a tax refund or credit under Section 229 as an ordinary
refund or credit outside of the VAT System. In such event, the second VAT-registered taxpayer will have
no input VAT to offset against his own output VAT.
In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A), the input
VAT is not "excessively" collected as understood under Section 229. At the time of payment of the input
VAT the amount paid is the correct and proper amount. Under the VAT System, there is no claim or issue
that the input VAT is "excessively" collected, that is, that the input VAT paid is more than what is legally
due. The person legally liable for the input VAT cannot claim that he overpaid the input VAT by the mere
existence of an "excess" input VAT. The term "excess" input VAT simply means that the input VAT
available as credit exceeds the output VAT, not that the input VAT is excessively collected because it is
more than what is legally due. Thus, the taxpayer who legally paid the input VAT cannot claim for refund
or credit of the input VAT as "excessively" collected under Section 229.
Under Section 229, the prescriptive period for filing a judicial claim for refund is two years from the date
of payment of the tax "erroneously, . . . illegally, . . . excessively or in any manner wrongfully collected."
The prescriptive period is reckoned from the date the person liable for the tax pays the tax. Thus, if the
input VAT is in fact "excessively" collected, that is, the person liable for the tax actually pays more than
what is legally due, the taxpayer must file a judicial claim for refund within two years from his date of
payment. Only the person legally liable to pay the tax can file the judicial claim for refund. The person to
whom the tax is passed on as part of the purchase price has no personality to file the judicial claim under
Section 229.

liable to pay the output VAT. This prescriptive period has no relation to the date of payment of the
"excess" input VAT. The "excess" input VAT may have been paid for more than two years but this does not
bar the filing of a judicial claim for "excess" VAT under Section 112(A), which has a different reckoning
period from Section 229. Moreover, the person claiming the refund or credit of the input VAT is not the
person who legally paid the input VAT. Such person seeking the VAT refund or credit does not claim that
the input VAT was "excessively" collected from him, or that he paid an input VAT that is more than what is
legally due. He is not the taxpayer who legally paid the input VAT.
As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in the chain
of transactions. For simplicity and efficiency in tax collection, the VAT is imposed not just on the value
added by the taxpayer, but on the entire selling price of his goods, properties or services. However, the
taxpayer is allowed a refund or credit on the VAT previously paid by those who sold him the inputs for his
goods, properties, or services. The net effect is that the taxpayer pays the VAT only on the value that he
adds to the goods, properties, or services that he actually sells.
Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The only
exception is when the taxpayer is expressly "zero-rated or effectively zero-rated" under the law, like
companies generating power through renewable sources of energy. Thus, a non zero-rated VAT-registered
taxpayer who has no output VAT because he has no sales cannot claim a tax refund or credit of his unused
input VAT under the VAT System. Even if the taxpayer has sales but his input VAT exceeds his output
VAT, he cannot seek a tax refund or credit of his "excess" input VAT under the VAT System. He can only
carry-over and apply his "excess" input VAT against his future output VAT. If such "excess" input VAT is
an "excessively" collected tax, the taxpayer should be able to seek a refund or credit for such "excess"
input VAT whether or not he has output VAT. The VAT System does not allow such refund or credit. Such
"excess" input VAT is not an "excessively" collected tax under Section 229. The "excess" input VAT is a
correctly and properly collected tax. However, such "excess" input VAT can be applied against the output
VAT because the VAT is a tax imposed only on the value added by the taxpayer. If the input VAT is in fact
"excessively" collected under Section 229, then it is the person legally liable to pay the input VAT, not the
person to whom the tax was passed on as part of the purchase price and claiming credit for the input VAT
under the VAT System, who can file the judicial claim under Section 229.
Any suggestion that the "excess" input VAT under the VAT System is an "excessively" collected tax under
Section 229 may lead taxpayers to file a claim for refund or credit for such "excess" input VAT under
Section 229 as an ordinary tax refund or credit outside of the VAT System. Under Section 229, mere
payment of a tax beyond what is legally due can be claimed as a refund or credit. There is no requirement
under Section 229 for an output VAT or subsequent sale of goods, properties, or services using materials
subject to input VAT.
From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that is
"erroneously . . . illegally, . . . excessively or in any manner wrongfully collected." In short, there must be
a wrongful payment because what is paid, or part of it, is not legally due. As the Court held in Mirant,
Section 229 should "apply only to instances of erroneous payment or illegal collection of internal revenue
taxes." Erroneous or wrongful payment includes excessive payment because they all refer to payment of
taxes not legally due. Under the VAT System, there is no claim or issue that the "excess" input VAT is
"excessively or in any manner wrongfully collected." In fact, if the "excess" input VAT is an "excessively"
collected tax under Section 229, then the taxpayer claiming to apply such "excessively" collected input
VAT to offset his output VAT may have no legal basis to make such offsetting. The person legally liable to
pay the input VAT can claim a refund or credit for such "excessively" collected tax, and thus there will no
longer be any "excess" input VAT. This will upend the present VAT System as we know it. 45
Two things are clear from the above quoted San Roque disquisitions. First, when it comes to recovery of
unutilized input VAT, Section 112, and not Section 229 of the 1997 Tax Code, is the governing law.
Second, prior to 8 June 2007, the applicable rule is neither Atlas nor Mirant, but Section 112(A).
We present the rules laid down by San Roque in determining the proper reckoning date of the two-year
prescriptive period through the following timeline:

Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim for "excess"
input VAT is two years from the close of the taxable quarter when the sale was made by the person legally

44

Thus, the task at hand is to determine the applicable period for this case.
In this case, Mindanao II filed its administrative claims for refund or credit for the second, third and fourth
quarters of 2004 on 6 October 2005. The case thus falls within the first period as indicated in the above
timeline. In other words, it is covered by the rule prior to the advent of either Atlas or Mirant.
Accordingly, the proper reckoning date in this case, as provided by Section 112(A) of the 1997 Tax Code,
is the close of the taxable quarter when the relevant sales were made.
C. The Administrative Claims Were Timely Filed
We sum up our conclusions so far: (1) it is only the administrative claim that must be filed within the twoyear prescriptive period; and (2) the two-year prescriptive period begins to run from the close of the
taxable quarter when the relevant sales were made.

Fourth Quarter
Here, the two-year prescriptive period is counted starting from the close of the fourth quarter which is on
31 December 2004. The last day of the prescriptive period for filing an application for tax refund/credit
with the CIR was on 31 December 2006. Mindanao II filed its administrative claim with the CIR on 6
October 2005. Hence, the claims were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
(See timeline below)

Bearing these in mind, we now proceed to determine whether Mindanao II's administrative claims for the
second, third, and fourth quarters of 2004 were timely filed.
Second Quarter
Since the zero-rated sales were made in the second quarter of 2004, the date of reckoning the two-year
prescriptive period is the close of the second quarter, which is on 30 June 2004. Applying Section 112(A),
Mindanao II had two years from 30 June 2004, or until 30 June 2006 to file an administrative claim with
the CIR. Mindanao II filed its administrative claim on 6 October 2005, which is within the two-year
prescriptive period. The administrative claim for the second quarter of 2004 was thus timely filed. For
clarity, we present the rules laid down by San Roque in determining the proper reckoning date of the twoyear prescriptive period through the following timeline:

II.
MINDANAO IIS JUDICIAL CLAIMS WERE FILED OUT OF TIME
Notwithstanding the timely filing of the administrative claims, we find that the CTA En Banc erred in
holding that Mindanao IIs judicial claims were timely filed.
A. 30-Day Period Also Applies to Appeals from Inaction
Section 112(D) of the 1997 Tax Code states the time requirements for filing a judicial claim for refund or
tax credit of input VAT:

Third Quarter
As regards the claim for the third quarter of 2004, the two-year prescriptive period started to run on 30
September 2004, the close of the taxable quarter. It ended on 30 September 2006, pursuant to Section
112(A) of the 1997 Tax Code. Mindanao II filed its administrative claim on 6 October 2005. Thus, since
the administrative claim was filed well within the two-year prescriptive period, the administrative claim
for the third quarter of 2004 was timely filed. (See timeline below)

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsection (A) and (B) hereof. In case of full or partial denial of the
claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application
within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of
the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals. (Emphases supplied)
Section 112(D) speaks of two periods: the period of 120 days, which serves as a waiting period to give
time for the CIR to act on the administrative claim for refund or credit, and the period of 30 days, which
refers to the period for interposing an appeal with the CTA. It is with the 30-day period that there is an
issue in this case.
The CTA En Bancs holding is that, since the word "or" a disjunctive term that signifies dissociation and
independence of one thing from another is used in Section 112(D), the taxpayer is given two options: 1)
file an appeal within 30 days from the CIRs denial of the administrative claim; or 2) file an appeal with
the CTA after expiration of the 120-day period, in which case the 30-day appeal period does not apply. The

45

judicial claim is seasonably filed so long as it is filed after the lapse of the 120-day waiting period but
before the lapse of the two-year prescriptive period under Section 112(A).46
We do not agree.
The 30-day period applies not only to instances of actual denial by the CIR of the claim for refund or tax
credit, but to cases of inaction by the CIR as well. This is the correct interpretation of the law, as held in
San Roque:47
Section 112(C)48 also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or
inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim
or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with
the Court of Tax Appeals.
This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should
be applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may,
if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the
Commissioner's decision, or if the Commissioner does not act on the taxpayer's claim within the 120-day
period, the taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day period.
(Emphasis supplied)
The San Roque pronouncement is clear. The taxpayer can file the appeal in one of two ways: (1) file the
judicial claim within thirty days after the Commissioner denies the claim within the 120-day period, or (2)
file the judicial claim within thirty days from the expiration of the 120-day period if the Commissioner
does not act within the 120-day period.
B. The Judicial Claim Was Belatedly Filed

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim
or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with
the Court of Tax Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should
be applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may,
if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the
Commissioner's decision, or if the Commissioner does not act on the taxpayer's claim within the 120-day
period, the taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day period.
xxxx
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The
taxpayer can file his administrative claim for refund or credit at anytime within the two-year prescriptive
period. If he files his claim on the last day of the two-year prescriptive period, his claim is still filed on
time. The Commissioner will have 120 days from such filing to decide the claim. If the Commissioner
decides the claim on the 120th day, or does not decide it on that day, the taxpayer still has 30 days to file
his judicial claim with the CTA. This is not only the plain meaning but also the only logical interpretation
of Section 112(A) and (C).
xxxx
When Section 112(C) states that "the taxpayer affected may, within thirty (30) days from receipt of the
decision denying the claim or after the expiration of the one hundred twenty-day period, appeal the
decision or the unacted claim with the Court of Tax Appeals," the law does not make the 120+30 day
periods optional just because the law uses the word " may." The word "may" simply means that the
taxpayer may or may not appeal the decision of the Commissioner within 30 days from receipt of the
decision, or within 30 days from the expiration of the 120-day period. x x x.50

In this case, the facts are not up for debate. Mindanao II filed its administrative claim for refund or credit
for the second, third, and fourth quarters of 2004 on 6 October 2005. The CIR, therefore, had a period of
120 days, or until 3 February 2006, to act on the claim. The CIR, however, failed to do so. Mindanao II
then could treat the inaction as a denial and appeal it to the CTA within 30 days from 3 February 2006, or
until 5 March 2006.

D. Exception to the mandatory and jurisdictional nature of the 120+30 day period not applicable

Mindanao II, however, filed a Petition for Review only on 21 July 2006, 138 days after the lapse of the 30day period on 5 March 2006. The judicial claim was therefore filed late. (See timeline below.)

Although Mindanao II has not invoked the BIR ruling, we deem it prudent as well as necessary to dwell
on this issue to determine whether this case falls under the exception.

Nevertheless, San Roque provides an exception to the mandatory and jurisdictional nature of the 120+30
day period BIR Ruling No. DA-489-03 dated 10 December 2003. The BIR ruling declares that the
"taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief
with the CTA by way of Petition for Review."

For this question, we come back to San Roque, which provides that BIR Ruling No. DA-489-03 is a
general interpretative rule; thus, taxpayers can rely on it from the time of its issuance on 10 December
2003 until its reversal by this Court in Aichi on 6 October 2010, when the 120+30 day periods were held
to be mandatory and jurisdictional. The Court reasoned as follows:

C. The 30-Day Period to Appeal is Mandatory and Jurisdictional

However, what is up for debate is the nature of the 30-day time requirement. The CIR posits that it is
mandatory. Mindanao II contends that the requirement of judicial recourse within 30 days is only directory
and permissive, as indicated by the use of the word "may" in Section 112(D).49

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a

difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the
reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The
abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being made
to return the tax refund or credit they received or could have received under Atlas prior to its
abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general interpretative rule issued by the Commissioner,
like the reversal of a specific BIR ruling under Section 246, should also apply prospectively. x x x.
xxxx

The answer is found in San Roque. There, we declared that the 30-day period to appeal is both mandatory
and jurisdictional:

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all
taxpayers or a specific ruling applicable only to a particular taxpayer.

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or
inaction of the Commissioner, thus:

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not
by a particular taxpayer, but by a government agency tasked with processing tax refunds and credits, that
is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance . This
government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus,
while this government agency mentions in its query to the Commissioner the administrative claim of Lazi

46

Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do in cases
like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse
of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR
Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court
in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional.51
Thus, in San Roque, the Court applied this exception to Taganito Mining Corporation (Taganito), one of
the taxpayers in San Roque. Taganito filed its judicial claim on 14 February 2007, after the BIR ruling
took effect on 10 December 2003 and before the promulgation of Mirant. The Court stated:
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its judicial claim
prematurely without waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-48903. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its
judicial claim from the vice of prematurity.52
San Roque was also careful to point out that the BIR ruling does not retroactively apply to premature
judicial claims filed before the issuance of the BIR ruling:
However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first, it is
admittedly an erroneous interpretation of the law; second, prior to its issuance, the BIR held that the 120day period was mandatory and jurisdictional, which is the correct interpretation of the law; third, prior to
its issuance, no taxpayer can claim that it was misled by the BIR into filing a judicial claim prematurely;
and fourth, a claim for tax refund or credit, like a claim for tax exemption, is strictly construed against the
taxpayer.53

Bearing in mind the foregoing rules for the timely filing of a judicial claim for refund or credit of
unutilized input VAT, we rule on the present case of Mindanao II as follows:
We find that Mindanao IIs situation is similar to that of Philex in San Roque.
As mentioned above, Mindanao II filed its judicial claim with the CTA on 21 July 2006. This was after the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003, but before its reversal on 5 October 2010.
However, while the BIR ruling was in effect when Mindanao II filed its judicial claim, the rule cannot be
properly invoked. The BIR ruling, as discussed earlier, contemplates premature filing. The situation of
Mindanao II is one of late filing. To repeat, its judicial claim was filed on 21 July 2006 long after 5
March 2006, the last day of the 30-day period for appeal. In fact, it filed its judicial claim 138 days after
the lapse of the 30-day period. (See timeline below)

Thus, San Roque held that taxpayer San Roque Power Corporation, could not seek refuge in the BIR
ruling as it jumped the gun when it filed its judicial claim on 10 April 2003, prior to the issuance of the
BIR ruling on 10 December 2003.1wphi1 The Court stated:
San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its judicial claim
prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003.
To repeat, San Roque cannot claim that it was misled by the BIR into filing its judicial claim prematurely
because BIR Ruling No. DA-489-03 was issued only after San Roque filed its judicial claim. At the time
San Roque filed its judicial claim, the law as applied and administered by the BIR was that the
Commissioner had 120 days to act on administrative claims. This was in fact the position of the BIR prior
to the issuance of BIR Ruling No. DA-489-03. Indeed, San Roque never claimed the benefit of BIR
Ruling No. DA-489-03 or RMC 49-03, whether in this Court, the CTA, or before the Commissioner.54
San Roque likewise ruled out the application of the BIR ruling to cases of late filing. The Court held that
the BIR ruling, as an exception to the mandatory and jurisdictional nature of the 120+30 day periods, is
limited to premature filing and does not extend to late filing of a judicial claim. Thus, the Court found that
since Philex Mining Corporation, the other party in the consolidated case San Roque, filed its claim 426
days after the lapse of the 30-day period, it could not avail itself of the benefit of the BIR ruling:
Philexs situation is not a case of premature filing of its judicial claim but of late filing, indeed
Very late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means
non-exhaustion of the 120-day period for the Commissioner to act on an administrative claim. Philex
cannot claim the benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim
prematurely but filed it long after the lapse of the 30-day period following the expiration of the 120-day
period. In fact, Philex filed its judicial claim 426 days after the lapse of the 30-day period. 55
We sum up the rules established by San Roque on the mandatory and jurisdictional nature of the 30-day
period to appeal through the following timeline:

E. Undersigned dissented in San Roque to the retroactive application of the mandatory and jurisdictional
nature of the 120+30 day period.
It is worthy to note that in San Roque, this ponente registered her dissent to the retroactive application of
the mandatory and jurisdictional nature of the 120+30 day period provided under Section 112(D) of the
Tax Code which, in her view, is unfair to taxpayers. It has been the view of this ponente that the
mandatory nature of 120+30 day period must be completely applied prospectively or, at the earliest, only
upon the finality of Aichi in order to create stability and consistency in our tax laws. Nevertheless, this
ponente is mindful of the fact that judicial precedents cannot be ignored. Hence, the majority view
expressed in San Roque must be applied.
SUMMARY OF RULES ON PRESCRIPTIVE PERIODS FOR CLAIMING REFUND OR CREDIT OF
INPUT VAT
The lessons of this case may be summed up as follows:
A. Two-Year Prescriptive Period
1. It is only the administrative claim that must be filed within the two-year prescriptive period. (Aichi) 2.
The proper reckoning date for the two-year prescriptive period is the close of the taxable quarter when the
relevant sales were made. (San Roque)
3. The only other rule is the Atlas ruling, which applied only from 8 June 2007 to 12 September 2008.
Atlas states that the two-year prescriptive period for filing a claim for tax refund or credit of unutilized
input VAT payments should be counted from the date of filing of the VAT return and payment of the tax.
(San Roque)

47

B. 120+30 Day Period

1. The taxpayer can file an appeal in one of two ways: (1) file the judicial claim within thirty days after the
Commissioner denies the claim within the 120-day period, or (2) file the judicial claim within thirty days
from the expiration of the 120-day period if the Commissioner does not act within the 120-day period.
2. The 30-day period always applies, whether there is a denial or inaction on the part of the CIR.
3. As a general rule, the 3 0-day period to appeal is both mandatory and jurisdictional. (Aichi and San
Roque)
4. As an exception to the general rule, premature filing is allowed only if filed between 10 December 2003
and 5 October 2010, when BIR Ruling No. DA-489-03 was still in force. (San Roque)
5. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was in
force. (San Roque)
SUMMARY AND CONCLUSION

On November 24, 1999, petitioner [CS Garment] received from respondent [CIR] Letter of Authority No.
00012641 dated November 10, 1999, authorizing the examination of petitioners books of accounts and
other accounting records for all internal revenue taxes covering the period January 1, 1998 to December
31, 1998.
On October 23, 2001, petitioner received five (5) formal demand letters with accompanying Assessment
Notices from respondent, through the Office of the Revenue Director of Revenue Region No. 9, San Pablo
City, requiring it to pay the alleged deficiency VAT, Income, DST and withholding tax assessments for
taxable year 1998 in the aggregate amount of P2,046,580.10 broken down as follows:
Deficiency VAT
Basic tax due

P 314,194.00

In sum, our finding is that the three administrative claims for the refund or credit of unutilized input VAT
were all timely filed, while the corresponding judicial claims were belatedly filed.

Add: Surcharge

157,097.00

The foregoing considered, the CT A lost jurisdiction over Mindanao Ils claims for refund or
credit.1wphi1 The CTA EB erred in granting these claims.

Interest

188,516.00

Total Amount Payable

P 659,807.00

WHEREFORE, we GRANT the Petition. The assailed Court of Tax Appeals En Banc Decision dated 11
November 2009 and Resolution dated 3 March 2010 of the in CTA EB Case No. 448 (CTA Case No.
7507) are hereby REVERSED and SET ASIDE. A new ruling is entered DENYING respondent s claim for
a tax refund or credit ofP6,791,845.24. SO ORDERED.
FIRST DIVISION
G.R. No. 182399

March 12, 2014

CS GARMENT, INC.,* Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Deficiency Income Tax (at Normal Rate of 34%)

Basic tax due

P 78,639.00

Add: Surcharge

39,320.00

Interest

43,251.00

Total Amount Payable

P 161,210.00

DECISION
SERENO, CJ:
Before the Court is a Rule 45 petition for review on certiorari, assailing the respective Decision 1 and
Resolution2 of the Court of Tax. Appeals (CTA) en bane in EB Case No. 287. These judgments in turn
affirmed the Decision3and the Resolution4 of the CTA Second Division, which ordered the cancellation of
certain items in the 1998 tax assessments against petitioner CS Garment, Inc. (CS Garment or petitioner).
Accordingly, petitioner was directed to pay the Bureau of Internal Revenue (BIR) the remaining portion of
the tax assessments. This portion was comprised of the outstanding deficiency value-added tax (VAT) on
CS Garments undeclared local sales and on the incidental sale of a motor vehicle; deficiency
documentary stamp tax (DST) on a lease agreement; and deficiency income tax as a result of the
disallowed expenses and undeclared local sales. However, while the present case was pending before this
Court, CS Garment filed a Manifestation and Motion stating that the latter had availed itself of the
governments tax amnesty program under Republic Act No. (R.A.) 9480, or the 2007 Tax Amnesty Law.
FACTS
We reproduce the narration of facts culled by the CTA en banc5 as follows:
Petitioner [CS Garment] is a domestic corporation duly organized and existing under and by virtue of the
laws of the Philippines with principal office at Road A, Cavite Ecozone, Rosario, Cavite. On the other
hand, respondent is the duly appointed Commissioner of Internal Revenue of the Philippines authorized
under law to perform the duties of said office, including, inter alia, the power to assess taxpayers for
[alleged] deficiency internal revenue tax liabilities and to act upon administrative protests or requests for
reconsideration/reinvestigation of such assessments.
Petitioner is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of
Registration No. 89-064, duly approved on December 18, 1989. As such, it is engaged in the business of
manufacturing garments for sale abroad.

Deficiency Income Tax (at Normal Rate of 34%)

Basic tax due

P 78,639.00

Add: Surcharge

39,320.00

Interest

43,251.00

Total Amount Payable

P 161,210.00

Deficiency DST
Basic tax due

P 806.00

48

Add: Surcharge

403.00

Interest

484.00

Total Amount Payable

P 1,693.00

Deficiency EWT
Basic tax due

P 22,800.00

Add: Surcharge

11,400.00

Interest

13,680.00

Total Amount Payable

P 2,046,580.10

On November 20, 2001, or within the 30-day period prescribed under Section 228 of the Tax Code, as
amended, petitioner filed a formal written protest with the respondent assailing the above assessments.
On January 11, 2002, or within the sixty-day period after the filing of the protest, petitioner submitted to
the Assessment Division of Revenue Region No. 9, San Pablo City, additional documents in support of its
protest.
Respondent failed to act with finality on the protest filed by petitioner within the period of one hundred
eighty (180) days from January 11, 2002 or until July 10, 2002. Hence, petitioner appealed before [the
CTA] via a Petition for Review filed on August 6, 2002 or within thirty (30) days from the last day of the
aforesaid 180-day period.
The case was raffled to the Second Division of [the CTA] for decision. After trial on the merits, the
Second Division rendered the Assailed Decision on January 4, 2007 upon which the Second Division
cancelled respondents assessment against CS Garments for deficiency expanded withholding taxes for
CY 1998 amounting toP47,880.00, and partially cancelled the deficiency DST assessment amounting
to P1,963.00. However, the Second Division upheld the validity of the deficiency income tax assessments
by subjecting the disallowed expenses in the amount of P14,851,478.83 and a portion of the undeclared
local sales P1,541,936.60 (amounting to P1,500,000.00) to income tax at the special rate of 5%. The
remainder of undeclared local sales ofP1,541,936.06 (amounting to P41,936.60) was subjected to income
tax at the rate of 34%. The Second Division found that total tax liability of CS Garments amounted
to P2,029,570.12, plus 20% delinquency interest pursuant to Section 249(C)(3), and computed the same as
follows:
Deficienc
y Tax

VAT

DST

Income Tax

at 34%

Basic Tax
Due

P 314,194.00

P 145.00

P 817,573.94

P 1,789.44

25%
Surcharge

78,548.50

36.25

204,393.49

447.36

20%
Interest

188,516.00

102.02

422,898.52

925.6

P 581,258.50
===========
==

P 283.27
===========
==

P 1,444,865.95
===========
==

P 3,162.40
===========
==

P 2,029,570.12
===========
==

On January 29, 2007, CS Garments filed its "Motion for Partial Reconsideration" of the said decision. On
May 25, 2007, in a resolution, the Second Division denied CS Garments motion for lack of merit.
(Citations omitted)

P 47,880.00

GRAND TOTAL

at 5%

TOTAL

Petitioner appealed the case to the CTA en banc and alleged the following: (1) the Formal Assessment
Notices (FAN) issued by the Commissioner of Internal Revenue (CIR) did not comply with the
requirements of the law; (2) the income generated by CS Garment from its participation in the Cavite
Export Processing Zones trade fairs and from its sales to employees were not subject to 10% VAT; (3) the
sale of the company vehicle to its general manager was not subject to 10% VAT; (4) it had no undeclared
local sales in the amount of P1,541,936.60; and (5) Rule XX, Section 2 of the PEZA Rules and
Regulations allowed deductions from the expenses it had incurred in connection with advertising and
representation; clinic and office supplies; commissions and professional fees; transportation, freight and
handling, and export fees; and licenses and other taxes.
The CTA en banc affirmed the Decision and Resolution of the CTA Second Division. As regards the first
issue, the banc ruled that the CIR had duly apprised CS Garment of the factual and legal bases for
assessing the latters liability for deficiency income tax, as shown in the attached Schedule of
Discrepancies provided to petitioner; and in the subsequent reference of the CIR to Rule XX, Section 2 of
the Rules and Regulations of R.A. 7916. With respect to the second issue, the CTA pronounced that the
income generated by CS Garment from the trade fairs was subject to internal revenue taxes, as those
transactions were considered "domestic sales" under R.A. 7916, otherwise known as the Special Economic
Zone Act. With respect to the third issue, the CTA en banc declared that the sale of the motor vehicle by
CS Garment to the latters general manager in the amount of P1.6 million was subject to VAT, since the
sale was considered an incidental transaction within the meaning of Section 105 of the NIRC. On the
fourth issue, the CTA found that CS Garment had failed to declare the latters total local sales in the
amount of P1,541,936.60 in its 1998 income tax return. The tax court then calculated the income tax
liability of petitioner by subjecting P1.5 million of that liability to the preferential income tax rate of 5%.
This amount represented the extent of the authority of CS Garment, as a PEZA-registered enterprise, to
sell in the local market. The normal income tax rate of 34% was then charged for the excess amount
of P41,936.60. Finally, as regards the fifth issue, the CTA ruled that Section 2, Rule XX of the PEZA
Rules which enumerates the specific deductions for ECOZONE Export Enterprises does not mention
certain claims of petitioner as allowable deductions.
Aggrieved, CS Garment filed the present Petition for Review assailing the Decision of the CTA en banc.
However, on 26 September 2008, while the instant case was pending before this Court, petitioner filed a
Manifestation and Motion stating that it had availed itself of the governments tax amnesty program under
the 2007 Tax Amnesty Law. It thus prays that we take note of its availment of the tax amnesty and confirm
that it is entitled to all the immunities and privileges under the law. It has submitted to this Court the
following documents, which have allegedly been filed with Equitable PCI BankCavite EPZA Branch, a
supposed authorized agent-bank of the BIR:6

49

1. Notice of Availment of Tax Amnesty under R.A. 9480

2. Statement of Assets, Liabilities, and Net worth (SALN)
3. Tax Amnesty Return (BIR Form No. 2116)
4. Tax Amnesty Payment Form (Acceptance of Payment Form or BIR Form No. 0617)
5. Equitable PCI Banks BIR Payment Form indicating that CS Garment deposited the amount
of P250,000 to the account of the Bureau of TreasuryBIR
On 26 January 2009, the Office of the Solicitor General (OSG) filed its Comment objecting to the
Manifestation and Motion of CS Garment.7
The OSG asserts that the filing of an application for tax amnesty does not by itself entitle petitioner to the
benefits of the law, as the BIR must still assess whether petitioner was eligible for these benefits and
whether all the conditions for the availment of tax amnesty had been satisfied. Next, the OSG claims that
the BIR is given a one-year period to contest the correctness of the SALN filed by CS Garment, thus
making petitioners motion premature. Finally, the OSG contends that pursuant to BIR Revenue
Memorandum Circular No. (RMC) 19-2008, petitioner is disqualified from enjoying the benefits of the
Tax Amnesty Law, since a judgment was already rendered in favor of the BIR prior to the tax amnesty
availment. The OSG points out that CS Garment submitted its application for tax amnesty only on 6
March 2008, which was almost two months after the CTA en banc issued its 14 January 2008 Decision and
more than one year after the CTA Second Division issued its 4 January 2007 Decision.
On 8 February 2010, the Court required both parties to prepare and file their respective memoranda within
30 days from notice.8 After this Court granted the motions for extension filed by the parties, the OSG
eventually filed its Memorandum on 18 May 2010, and CS Garment on 7 June 2010. It is worthy to note
that in its Memorandum, the OSG did not raise any argument with respect to petitioners availment of the
tax amnesty program. Neither did the OSG deny the authenticity of the documents submitted by CS
Garments or mention that a case had been filed against the latter for availing itself of the tax amnesty
program, taking into account the considerable lapse of time from the moment petitioner filed its Tax
Amnesty Return and Statement of Assets, Liabilities, and Net Worth in 2008.
On 17 July 2013, the parties were ordered9 to "move in the premises"10 by informing the Court of the
status of the tax amnesty availment of petitioner CS Garment, including any supervening event that may
be of help to the Court in its immediate disposition of the present case. Furthermore, the parties were
directed to indicate inter alia (a) whether CS Garment had complied with the requirements of the 2007 Tax
Amnesty Law, taking note of the aforementioned documents submitted; (b) whether a case had been
initiated against petitioner, with respect to its availment of the tax amnesty program; and (c) whether
respondent CIR was still interested in pursuing the case. Petitioner eventually filed its Compliance 11 on 27
August 2013, and the OSG on 29 November 2013.12
According to the OSG,13 CS Garment had already complied with all documentary requirements of the
2007 Tax Amnesty Law. It also stated that the BIR Litigation Division had not initiated any case against
petitioner relative to the latters tax amnesty application. However, the OSG reiterated that the CIR was
still interested in pursuing the case.
ISSUE
The threshold question before this Court is whether or not CS Garment is already immune from paying the
deficiency taxes stated in the 1998 tax assessments of the CIR, as modified by the CTA.
DISCUSSION
Tax amnesty refers to the articulation of the absolute waiver by a sovereign of its right to collect taxes and
power to impose penalties on persons or entities guilty of violating a tax law.14 Tax amnesty aims to grant
a general reprieve to tax evaders who wish to come clean by giving them an opportunity to straighten out
their records.15 In 2007, Congress enacted R.A. 9480, which granted a tax amnesty covering "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."16 These national internal revenue taxes
include (a) income tax; (b) VAT; (c) estate tax; (d) excise tax; (e) donors tax; (f) documentary stamp tax;
(g) capital gains tax; and (h) other percentage taxes.17 Pursuant to Section 6 of the 2007 Tax Amnesty Law,

those who availed themselves of the benefits of the law became "immune from the payment of taxes, as
well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the National
Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue
taxes for taxable year 2005 and prior years."
Amnesty taxpayers may immediately enjoy the privileges and immunities under the 2007 Tax Amnesty
Law, as soon as they fulfill the suspensive conditions imposed therein
A careful scrutiny of the 2007 Tax Amnesty Law would tell us that the law contains two types of
conditions one suspensive, the other resolutory. Borrowing from the concepts under our Civil Code, a
condition may be classified as suspensive when the fulfillment of the condition results in the acquisition of
rights. On the other hand, a condition may be considered resolutory when the fulfillment of the condition
results in the extinguishment of rights. In the context of tax amnesty, the rights referred to are those arising
out of the privileges and immunities granted under the applicable tax amnesty law.
The imposition of a suspensive condition under the 2007 Tax Amnesty Law is evident from the following
provisions of the law:
2007 Tax Amnesty Law Republic Act No. 9480
SECTION 2. Availment of the Amnesty. Any person, natural or juridical, who wishes to avail himself
of the tax amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue
(BIR) a notice and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Networth
(SALN) as of December 31, 2005, in such form as may be prescribed in the implementing rules and
regulations (IRR) of this Act, and pay the applicable amnesty tax within six months from the effectivity of
the IRR.
SECTION 4. Presumption of Correctness of the SALN. The SALN as of December 31, 2005 shall be
considered as true and correct except where the amount of declared networth is understated to the extent
of thirty percent (30%) or more as may be established in proceedings initiated by, or at the instance of,
parties other than the BIR or its agents: Provided, That such proceedings must be initiated within one year
following the date of the filing of the tax amnesty return and the SALN. Findings of or admission in
congressional hearings, other administrative agencies of government, and/or courts shall be admissible to
prove a thirty percent (30%) under-declaration.
SECTION 6. Immunities and Privileges. Those who availed themselves of the tax amnesty under
Section 5 hereof, and have fully complied with all its conditions shall be entitled to the following
immunities and privileges:
(a) The taxpayer shall be immune from the payment of taxes, as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997,
as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years.
(b) The taxpayers Tax Amnesty Return and the SALN as of December 31, 2005 shall not be admissible as
evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar as such proceedings
relate to internal revenue taxes, before judicial, quasi-judicial or administrative bodies in which he is a
defendant or respondent, and except for the purpose of ascertaining the networth beginning January 1,
2006, the same shall not be examined, inquired or looked into by any person or government office.
However, the taxpayer may use this as a defense, whenever appropriate, in cases brought against him.
(c) The books of accounts and other records of the taxpayer for the years covered by the tax amnesty
availed of shall not be examined: Provided, That the Commissioner of Internal Revenue may authorize in
writing the examination of the said books of accounts and other records to verify the validity or
correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes withheld on
wages), tax incentives, and/or exemptions under existing laws.
All these immunities and privileges shall not apply where the person failed to file a SALN and the Tax
Amnesty Return, or where the amount of networth as of December 31, 2005 is proven to be understated to
the extent of thirty percent (30%) or more, in accordance with the provisions of Section 3 hereof.

50

SECTION 7. When and Where to File and Pay. The filing of the Tax Amnesty Return and the payment
of the amnesty tax for those availing themselves of the tax amnesty shall be made within six months
starting from the effectivity of the IRR. It shall be filed at the office of the Revenue District Officer which
has jurisdiction over the legal residence or principal place of business of the filer. The Revenue District
Officer shall issue an acceptance of payment form authorizing an authorized agent bank, or in the absence
thereof, the collection agent or municipal treasurer concerned, to accept the amnesty tax payment.
Department of Finance Order No. 29-07: Rules and Regulations to Implement R.A. 9480
SECTION 6. Method of Availment of Tax Amnesty.
xxxx
3. Payment of Amnesty Tax and Full Compliance. Upon filing of the Tax Amnesty Return in
accordance with Sec. 6 (2) hereof, the taxpayer shall pay the amnesty tax to the authorized agent bank or
in the absence thereof, the Collection Agent or duly authorized Treasurer of the city or municipality in
which such person has his legal residence or principal place of business.
The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by the BIR for the
use of or to be accomplished by the bank, the collection agent or the Treasurer, showing the
acceptance of the amnesty tax payment. In case of the authorized agent bank, the branch manager or the
assistant branch manager shall sign the acceptance of payment form.
The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall
be submitted to the RDO, which shall be received only after complete payment. The completion of these
requirements shall be deemed full compliance with the provisions of R.A. 9480. (Emphases supplied)
In availing themselves of the benefits of the tax amnesty program, taxpayers must first accomplish the
following forms and prepare them for submission: (1) Notice of Availment of Tax Amnesty Form; (2) Tax
Amnesty Return Form (BIR Form No. 2116); (3) Statement of Assets, Liabilities and Net worth (SALN)
as of December 31, 2005; and (4) Tax Amnesty Payment Form (Acceptance of Payment Form or BIR
Form No. 0617).18
The taxpayers must then compute the amnesty tax due in accordance with the rates provided in Section 5
of the law,19 using as tax base their net worth as of 31 December 2005 as declared in their SALNs. At their
option, the revenue district office (RDO) of the BIR may assist them in accomplishing the forms and
computing the taxable base and the amnesty tax due.20 The RDO, however, is disallowed from looking
into, questioning or examining the veracity of the entries contained in the Tax Amnesty Return, SALN,
and other documents they have submitted.21Using the Tax Amnesty Payment Form, the taxpayers must
make a complete payment of the computed amount to an authorized agent bank, a collection agent, or a
duly authorized treasurer of the city or municipality.22
Thereafter, the taxpayers must file with the RDO or an authorized agent bank the (1) Notice of Availment
of Tax Amnesty Form; (2) Tax Amnesty Return Form (BIR Form No. 2116); (3) SALN; and (4) Tax
Amnesty Payment Form.23 The RDO shall only receive these documents after complete payment is made,
as shown in the Tax Amnesty Payment Form.24 It must be noted that the completion of these requirements
"shall be deemed full compliance with the provisions of R.A. 9480."25 In our considered view, this rule
means that amnesty taxpayers may immediately enjoy the privileges and immunities under the 2007 Tax
Amnesty Law as soon as the aforementioned documents are duly received.
The OSG has already confirmed26 to this Court that CS Garment has complied with all of the documentary
requirements of the law. Consequently, and contrary to the assertion of the OSG, no further assessment by
the BIR is necessary. CS Garment is now entitled to invoke the immunities and privileges under Section 6
of the law.
Similarly, we reject the contention of OSG that the BIR was given a one-year period to contest the
correctness of the SALN filed by CS Garment, thus making petitioners motion premature. Neither the
2007 Tax Amnesty Law nor Department of Finance (DOF) Order No. 29-07 (Tax Amnesty Law IRR)
imposes a waiting period of one year before the applicant can enjoy the benefits of the Tax Amnesty Law.
It can be surmised from the cited provisions that the law intended the immediate enjoyment of the
immunities and privileges of tax amnesty upon fulfilment of the requirements. Further, a reading of
Sections 4 and 6 of the 2007 Tax Amnesty Law shows that Congress has adopted a "no questions asked"

policy, so long as all the requirements of the law and the rules are satisfied. The one-year period referred
to in the law should thus be considered only as a prescriptive period within which third parties, meaning
"parties other than the BIR or its agents," can question the SALN not as a waiting period during which
the BIR may contest the SALN and the taxpayer prevented from enjoying the immunities and privileges
under the law.
This clarification, however, does not mean that the amnesty taxpayers would go scot-free in case they
substantially understate the amounts of their net worth in their SALN. The 2007 Tax Amnesty Law
imposes a resolutory condition insofar as the enjoyment of immunities and privileges under the law is
concerned. Pursuant to Section 4 of the law, third parties may initiate proceedings contesting the declared
amount of net worth of the amnesty taxpayer within one year following the date of the filing of the tax
amnesty return and the SALN. Section 6 then states that "All these immunities and privileges shall not
apply x x x where the amount of networth as of December 31, 2005 is proven to be understated to the
extent of thirty percent (30%) or more, in accordance with the provisions of Section 3 hereof."
Accordingly, Section 10 provides that amnesty taxpayers who willfully understate their net worth shall be
(a) liable for perjury under the Revised Penal Code; and (b) subject to immediate tax fraud investigation in
order to collect all taxes due and to criminally prosecute those found to have willfully evaded lawful taxes
due.
Nevertheless, in this case we note that the OSG has already Indicated27 that the CIR had not filed a case
relative to the tax amnesty application of CS Garment, from the time the documents were filed in March
2008. Neither did the OSG mention that a third party had initiated proceedings challenging the declared
amount of net worth of the amnesty taxpayer within the one-year period.
Taxpayers with pending tax cases are still qualified to avail themselves of the tax amnesty program.
With respect to its last assertion, the OSG quotes the following guidelines under BIR RMC 19-2008 to
establish that CS Garment is disqualified from availing itself of the tax amnesty program:28
A BASIC GUIDE ON THE TAX AMNESTY ACT OF 2007
The following is a basic guide for taxpayers who wish to avail of tax amnesty pursuant of Republic Act
No. 9480 (Tax Amnesty Act of 2007).
Who may avail of the amnesty?
xxxx
EXCEPT:
[x] Withholding agents with respect to their withholding tax liabilities
[x] Those with pending cases:

Under the jurisdiction of the PCGG

Involving violations of the Anti-Graft and Corrupt Practices Act

Involving violations of the Anti-Money Laundering Law

For tax evasion and other criminal offenses under the NIRC and/or the RPC

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

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To resolve the matter, we refer to the basic text of the Tax Amnesty Law and its implementing rules and
regulations, viz:
Republic Act No. 9480
SECTION 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the
following persons or cases existing as of the effectivity of this Act:
xxxx
(f) Tax cases subject of final and executory judgment by the courts.
DOF Order No. 29-07: Rules and Regulations to Implement R.A. 9480
SECTION 5. Exceptions. The tax amnesty shall not extend to the following persons or cases existing as
of the effectivity of R.A. 9480:
xxxx
7. Tax cases subject of final and executory judgment by the courts. (Emphases supplied)
We cull from the aforementioned provisions that neither the law nor the implementing rules state that a
court ruling that has not attained finality would preclude the availment of the benefits of the Tax Amnesty
Law. Both R.A. 9480 and DOF Order No. 29-07 are quite precise in declaring that
"[t]ax cases subject of final and executory judgment by the courts" are the ones excepted from the benefits
of the law. In fact, we have already pointed out the erroneous interpretation of the law in Philippine
Banking Corporation (Now: Global Business Bank, Inc.) v. Commissioner of Internal Revenue, viz:
The BIRs inclusion of "issues and cases which were ruled by any court (even without finality) in favor of
the BIR prior to amnesty availment of the taxpayer" as one of the exceptions in RMC 19-2008 is
misplaced. RA 9480 is specifically clear that the exceptions to the tax amnesty program include "tax cases
subject of final and executory judgment by the courts." The present case has not become final and
executory when Metrobank availed of the tax amnesty program.29 (Emphasis supplied)
While tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally
in favor of the taxing authority,30 it is also a well-settled doctrine31 that the rule-making power of
administrative agencies cannot be extended to amend or expand statutory requirements or to embrace
matters not originally encompassed by the law.1wphi1 Administrative regulations should always be in
accord with the provisions of the statute they seek to carry into effect, and any resulting inconsistency
shall be resolved in favor of the basic law. We thus definitively declare that the exception "[i]ssues and
cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment
of the taxpayer" under BIR RMC 19-2008 is invalid, as the exception goes beyond the scope of the
provisions of the 2007 Tax Amnesty Law.32
Considering the completion of the aforementioned requirements, we find that petitioner has successfully
availed itself of the tax amnesty benefits granted under the Tax Amnesty Law. Therefore, we no longer see
any need to further discuss the issue of the deficiency tax assessments. CS Garment is now deemed to
have been absolved of its obligations and is already immune from the payment of taxes including the
assessed deficiency in the payment of VAT, DST, and income tax as affirmed by the CTA en banc as well
as of the additions thereto (e.g., interests and surcharges). Furthermore, the tax amnesty benefits include
immunity from "the appurtenant civil, criminal, or administrative penalties under the NIRC of 1997, as
amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior
years."33
WHEREFORE, the instant Petition for Review is GRANTED. The 14 January 2008 Decision and 2 April
2008 Resolution of the Court of Tax Appeals en banc in CTA EB Case No. 287 is hereby SET ASIDE, and
the remaining assessments for deficiency taxes for taxable year 1998 are hereby CANCELLED solely in
the light of the availment by CS Garment, Inc. of the tax amnesty program under Republic Act No. 9480.
SO ORDERED.

52

The CTA Second Division found that only the amount of 7,699,366.37 was duly substantiated by the
required evidence. As to the timeliness of the filing of the judicial claim, the Court ruled that following the
case of Commissioner of Internal Revenue (CIR) v. Mirant Pagbilao Corporation (Mirant), 5 both the
administrative and judicial claims were filed within the two-year prescriptive period provided in Section
112(A) of the National Internal Revenue Code of 1997 (NIRC),the reckoning point of the period being the
close of the taxable quarter when the sales were made.
In its October 29, 2009 Resolution,6 the CTA Second Division denied the separate motions for partial
reconsideration filed by VGPC and the CIR. Thus, both VGPC and the CIR appealed to the CTA En Banc.
In the assailed February 7, 2011 Decision,7 the CTA En Banc reversed and set aside the decision and
resolution of the CTA Second Division, and dismissed the original petition for review for having been
filed prematurely, to wit:
WHEREFORE, premises considered:
i. As regards CTA EB Case No. 562, the Petition for Review is hereby DISMISSED; and
THIRD DIVISION G.R. No. 197525

June 4, 2014

ii. As regards CTA EB Case No. 561, the Petition for Review is hereby GRANTED.

VISAYAS GEOTHERMAL POWER COMPANY, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Accordingly, the Decision, dated April 17, 2009, and the Resolution, dated October 29, 2009, of the CTA
Former Second Division are hereby REVERSED and SET ASIDE, and another one is hereby entered
DISMISSING the Petition for Review filed in CTA Case No. 7559 for having been filed prematurely.

MENDOZA, J.:

SO ORDERED.8

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the
February 7, 2011 Decision1 and the June 27, 2011 Resolution2 of the Court of Tax Appeals En Banc (CTA
En Banc) in CTA EB Case Nos. 561 and 562, which reversed and set aside the April 17, 2009 Decision of
the CT A Second Division in CTA Case No. 7559.

The CTA En Banc explained that although VGPC seasonably filed its administrative claim within the twoyear prescriptive period, its judicial claim filed with the CTA Second Division was prematurely filed under
Section 112(D) of the National Internal Revenue Code (NIRC).Citing the case of CIR v. Aichi Forging
Company of Asia, Inc. (Aichi),9 the CTA En Banc held that the judicial claim filed 28 days after the
petitioner filed its administrative claim, without waiting for the expiration of the 120-day period, was
premature and, thus, the CTA acquired no jurisdiction over the case.

The Facts:
Petitioner Visayas Geothermal Power Company (VGPC) is a special limited partnership duly organized
and existing under Philippine Laws with its principal office at Milagro, Ormoc City, Province of Leyte. It
is principally engaged in the business of power generation through geothermal energy and the sale of
generated power to the Philippine National Oil Company (PNOC),pursuant to the Energy Conversion
Agreement.

The VGPC filed a motion for reconsideration, but the CTA En Banc denied it in the assailed June 27, 2011
Resolution for lack of merit. It stated that the case of Atlas Consolidated Mining v. CIR (Atlas) 10 relied
upon by the petitioner had long been abandoned.

VGPC filed with the Bureau of Internal Revenue (BIR)its Original Quarterly VAT Returns for the first to
fourth quarters of taxable year 2005 on April 25, 2005, July 25, 2005, October 25, 2006, and January 20,
2006, respectively.

ASSIGNMENT OF ERRORS

On December 6, 2006, it filed an administrative claim for refund for the amount of 14,160,807.95 with the
BIR District Office No. 89 of Ormoc City on the ground that it was entitled to recover excess and
unutilized input VAT payments for the four quarters of taxable year 2005, pursuant to Republic Act (R.A.)
No. 9136,3 which treated sales of generated power subject to VAT to a zero percent (0%) rate starting June
26, 2001.
Nearly one month later, on January3, 2007, while its administrative claim was pending, VGPC filed its
judicial claim via a petition for review with the CTA praying for a refund or the issuance of a tax credit
certificate in the amount of 14,160,807.95, covering the four quarters of taxable year 2005.
In its April 17, 2009 Decision, the CTA Second Division partially granted the petition as follows:
WHEREFORE, in view of the foregoing considerations, the Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, respondent is ORDERED TO REFUND or, in the alternative, TO ISSUE A
TAX CREDIT CERTIFICATE in favor of petitioner the reduced amount of SEVEN MILLION SIX
HUNDRED NINENTY NINE THOUSAND THREE HUNDRED SIXTY SIX PESOS AND 37/100
(P7,699,366.37) representing unutilized input VAT paid on domestic purchases of non-capital goods and
services, services rendered by non-residents, and importations of non-capital goods for the first to fourth
quarters of taxable year 2005.
SO ORDERED.4

Hence, this petition.

I The CTA En Banc erred in finding that the 120-day and 30-day periods prescribed under Section 112(D)
of the 1997 Tax Code are jurisdictional and mandatory in the filing of the judicial claim for refund. The
CTA-Division should take cognizance of the judicial appeal as long as it is filed with the two-year
prescriptive period under Section 229 of the 1997 Tax Code.
II The CTA En Banc erred in finding that Aichi prevails over and/or overturned the doctrine in Atlas,
which upheld the primacy of the two-year period under Section 229 of the Tax Code. The law and
jurisprudence have long established the doctrine that the taxpayer is duty-bound to observe the two-year
period under Section 229 of the Tax Code when filing its claim for refund of excess and unutilized VAT.
III The CTA En Banc erred in finding that Respondent CIR is not estopped from questioning the
jurisdiction of the CTA. Respondent CIR, by her actions and pronouncements, should have been precluded
from questioning the jurisdiction of the CTA-Division.
IV The CTA En Banc erred in applying Aichi to Petitioner VGPCs claim for refund. The novel
interpretation of the law in Aichi should not be made to apply to the present case for being contrary to
existing jurisprudence at the time Petitioner VGPC filed its administrative and judicial claims for refund. 11
Petitioner VGPC argues that (1) the law and jurisprudence have long established the rule regarding
compliance with the two-year prescriptive period under Section 112(D) in relation to Section 229 of the
1997 Tax Code; (2) Aichi did not overturn the doctrine in Atlas, which upheld the primacy of the two-year
period under Section 229; (3) respondent CIR is estopped from questioning the jurisdiction of the CTA
and Aichi cannot be indiscriminately applied to all VAT refund cases; (4) applying Aichi invariably to all

53

VAT refund cases would effectively grant respondent CIR unbridled discretion to deprive a taxpayer of the
right to effectively seek judicial recourse, which clearly violates the standards of fairness and equity; and
(5) the novel interpretation of the law in Aichi should not be made to apply to the present case for being
contrary to existing jurisprudence at the time VGPC filed its administrative and judicial claims for refund.
Aichi should be applied prospectively.
Ruling of the Court
Judicial claim not premature
The assignment of errors is rooted in the core issue of whether the petitioners judicial claim for refund
was prematurely filed.
Two sections of the NIRC are pertinent to the issue at hand, namely Section 112 (A) and (D) and Section
229, to wit:
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 zerorated 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.
xxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made.- In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day period, appeal the decision or the unacted claim with the Court of Tax Appeals.
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be maintained
in any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority, of any sum alleged to have been excessively or in any manner wrongfully collected without
authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided,
however, That the Commissioner may, even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment appears clearly to have been
erroneously paid. [Emphases supplied]
It has been definitively settled in the recent En Banc case of CIR v. San Roque Power Corporation (San
Roque),12that it is Section 112 of the NIRC which applies to claims for tax credit certificates and tax
refunds arising from sales of VAT-registered persons that are zero-rated or effectively zero-rated, which
are, simply put, claims for unutilized creditable input VAT.
Thus, under Section 112(A), the taxpayer may, within 2 years after the close of the taxable quarter when
the sales were made, via an administrative claim with the CIR, apply for the issuance of a tax credit

certificate or refund of creditable input tax due or paid attributable to such sales. Under Section 112(D),
the CIR must then act on the claim within 120 days from the submission of the taxpayers complete
documents. In case of (a) a full or partial denial by the CIR of the claim, or (b) the CIRs failure to act on
the claim within 120 days, the taxpayer may file a judicial claim via an appeal with the CTA of the CIR
decision or unacted claim, within 30 days (a) from receipt of the decision; or (b) after the expiration of the
120-day period.
The 2-year period under Section 229 does not apply to appeals before the CTA in relation to claims for a
refund or tax credit for unutilized creditable input VAT.Section 229 pertains to the recovery of taxes
erroneously, illegally, or excessively collected.13 San Roque stressed that "input VAT is not excessively
collected as understood under Section 229 because, at the time the input VAT is collected, the amount paid
is correct and proper."14 It is, therefore, Section 112 which applies specifically with regard to claiming a
refund or tax credit for unutilized creditable input VAT.15
Upholding the ruling in Aichi,16 San Roque held that the 120+30 day period prescribed under Section
112(D) mandatory and jurisdictional.17 The jurisdiction of the CTA over decisions or inaction of the CIR is
only appellate in nature and, thus, necessarily requires the prior filing of an administrative case before the
CIR under Section 112.18 The CTA can only acquire jurisdiction over a case after the CIR has rendered its
decision, or after the lapse of the period for the CIR to act, in which case such inaction is considered a
denial.19 A petition filed prior to the lapse of the 120-day period prescribed under said Section would be
premature for violating the doctrine on the exhaustion of administrative remedies.20
There is, however, an exception to the mandatory and jurisdictional nature of the 120+30 day period. The
Court in San Roque noted that BIR Ruling No. DA-489-03, dated December 10, 2003, expressly stated
that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial
relief with the CTA by way of Petition for Review."21 This BIR Ruling was recognized as a general
interpretative rule issued by the CIR under Section 422 of the NIRC and, thus, applicable to all taxpayers.
Since the CIR has exclusive and original jurisdiction to interpret tax laws, it was held that taxpayers acting
in good faith should not be made to suffer for adhering to such interpretations. Section 24623 of the Tax
Code, in consonance with equitable estoppel, expressly provides that a reversal of a BIR regulation or
ruling cannot adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior
to its reversal. Hence, taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on
December 10, 2003 up to its reversal by this Court in Aichion October 6, 2010, where it was held that the
120+30 day period was mandatory and jurisdictional.
Accordingly, the general rule is that the 120+30 day period is mandatory and jurisdictional from the
effectivity of the 1997 NIRC on January 1, 1998, up to the present. As an exception, judicial claims filed
from December 10, 2003 to October 6, 201024 need not wait for the exhaustion of the 120-day period.
A review of the facts of the present case reveals that petitioner VGPC timely filed its administrative claim
with the CIR on December 6, 2006, and later, its judicial claim with the CTA on January 3, 2007. The
judicial claim was clearly filed within the period of exception and was, therefore, not premature and
should not have been dismissed by the CTA En Banc.
In the present petition, VGPC prays that the Court grant its claim for refund or the issuance of a tax credit
certificate for its unutilized input VAT in the amount of P14,160,807.95. The CTA Second Division,
however, only awarded the amount of P7,699,366.37. The petitioner has failed to present any argument to
support its entitlement to the former amount.
In any case, the Court would have been precluded from considering the same as such would require a
review of the evidence, which would constitute a question of fact outside the Courts purview under Rule
45 of the Rules of Court. The Court, thus, finds that the petitioner is entitled to the refund awarded to it by
the CTA Second Division in the amount of P7,699,366.37.
Atlas doctrine has no relevance to the 120+30 day period for filing judicial claim
Although the core issue of prematurity of filing has already been resolved, the Court deems it proper to
discuss the petitioners argument that the doctrine in Atlas, which allegedly upheld the primacy of the 2year prescriptive period under Section 229,should prevail over the ruling in Aichi regarding the mandatory
and jurisdictional nature of the 120+30 day period in Section 112.

54

In this regard, it was thoroughly explained in San Roque that the Atlas doctrine only pertains to the
reckoning point of the 2-year prescriptive period from the date of payment of the output VAT under
Section 229, and has no relevance to the 120+30 day period under Section 112, to wit:
The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the twoyear prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007
until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the reckoning of
the two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlas doctrine,
the two-year prescriptive period for claiming refund or credit of input VAT should be governed by Section
112(A) following the verba legis rule. The Mirant ruling, which abandoned the Atlas doctrine, adopted the
verba legis rule, thus applying Section 112(A) in computing the two year prescriptive period in claiming
refund or credit of input VAT.
The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because the
application of the 120+30 day periods was not in issue in Atlas. The application of the 120+30 day periods
was first raised in Aichi, which adopted the verba legis rule in holding that the 120+30 day periods are
mandatory and jurisdictional. The language of Section 112(C) is plain, clear, and unambiguous. When
Section 112(C) states that "the Commissioner shall grant a refund or issue the tax credit within one
hundred twenty (120) days from the date of submission of complete documents," the law clearly gives the
Commissioner 120 days within which to decide the taxpayers claim. Resort to the courts prior to the
expiration of the 120-day period is a patent violation of the doctrine of exhaustion of administrative
remedies, a ground for dismissing the judicial suit due to prematurity. Philippine jurisprudence is awash
with cases affirming and reiterating the doctrine of exhaustion of administrative remedies. Such doctrine is
basic and elementary.25 [Underscoring supplied]
Thus, Atlas is only relevant in determining when to file an administrative claim with the CIR for refund or
credit of unutilized creditable input VAT, and not for determining when to file a judicial claim with the
CTA. From June 8, 2007 to September 12, 2008, the 2-year prescriptive period to file administrative
claims should be counted from the date of payment of the output VAT tax. Before and after said period, the
2-year prescriptive period is counted from the close of the taxable quarter when the sales were made, in
accordance with Section 112(A). In either case, the mandatory and jurisdictional 120+30 day period must
be complied with for the filing of the judicial claim with the CTA, except for the period provided under
BIR Ruling No. DA-489-03, as previously discussed.
The Court further noted that Atlas was decided in relation to the 1977 Tax Code which had not yet
provided for the 30-day period for the taxpayer to appeal to the CTA from the decision or inaction of the
CIR over claims for unutilized input VAT. Clearly then, the Atlas doctrine cannot be invoked to disregard
compliance with the 120+30 day mandatory and jurisdictional period.26 In San Roque, it was written:
The old rule that the taxpayer may file the judicial claim, without waiting for the Commissioners decision
if the two-year prescriptive period is about to expire, cannot apply because that rule was adopted before
the enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old rule,
so that under the VAT System the taxpayer will always have 30 days to file the judicial claim even if the
Commissioner acts only on the 120th day, or does not act at all during the 120-day period. With the 30-day
period always available to the taxpayer, the taxpayer can no longer file a judicial claim for refund or credit
of input VAT without waiting for the Commissioner to decide until the expiration of the 120-day period.27
At any rate, even assuming that the Atlas doctrine was relevant to the present case, it could not be applied
since it was held to be effective only from its promulgation on June 8, 2007 until its abandonment on
September 12, 2008 when Mirant was promulgated. The petitioner in this case filed both its administrative
and judicial claims outside the said period of effectivity.
Aichi not applied prospectively
Petitioner VGPC also argues that Aichi should be applied prospectively and, therefore, should not be
applied to the present case. This position cannot be given consideration.
Article 8 of the Civil Code provides that judicial decisions applying or interpreting the law shall form part
of the legal system of the Philippines and shall have the force of law. The interpretation placed upon a law
by a competent court establishes the contemporaneous legislative intent of the law. Thus, such
interpretation constitutes a part of the law as of the date the statute is enacted. It is only when a prior ruling

of the Court is overruled, and a different view adopted, that the new doctrine may have to be applied
prospectively in favor of parties who have relied on the old doctrine and have acted in good faith. 28
Considering that the nature of the 120+30 day period was first settled in Aichi, the interpretation by the
Court of its being mandatory and jurisdictional in nature retro acts to the date the NIRC was enacted. It
cannot be applied prospectively as no old doctrine was overturned.
The petitioner cannot rely either on the alleged jurisprudence prevailing at the time it filed its judicial
claim. The Court notes that the jurisprudence relied upon by the petitioner consists of CTA cases. It is
elementary that CTA decisions do not constitute precedent and do not bind this Court or the public. Only
decisions of this Court constitute binding precedents, forming part of the Philippine legal system.29
As regards the cases30 which were later decided allegedly in contravention of Aichi, it is of note that all of
them were decided by Divisions of this Court, and not by the Court En Banc.1wphi1 Any doctrine or
principle of law laid down by the Court, either rendered En Bancor in Division, may be overturned or
reversed only by the Court sitting En Banc.31 Thus, the cases cited by the petitioner could not have
overturned the doctrine laid down in Aichi.
CIR not estopped
The petitioners argument that the CIR should have been estopped from questioning the jurisdiction of the
CTA after actively participating in the proceedings before the CTA Second Division deserves scant
consideration.
It is a well-settled rule that the government cannot be estopped by the mistakes, errors or omissions of its
agents.32 It has been specifically held that estoppel does not apply to the government, especially on matters
of taxation. Taxes are the nations lifeblood through which government agencies continue to operate and
with which the State discharges its functions for the welfare of its constituents.33 Thus, the government
cannot be estopped from collecting taxes by the mistake, negligence, or omission of its agents. Upon
taxation depends the ability of the government to serve the people for whose benefit taxes are collected.
To safeguard such interest, neglect or omission of government officials entrusted with the collection of
taxes should not be allowed to bring harm or detriment to the people.34
Rules on claims for refund or tax credit of unutilized input VAT
For clarity and guidance, the Court deems it proper to outline the rules laid down in San Roque with
regard to claims for refund or tax credit of unutilized creditable input VAT. They are as follows:
1. When to file an administrative claim with the CIR:
a. General rule Section 112(A) and Mirant Within 2 years from the close of the taxable quarter when the
sales were made.
b. Exception Atlas
Within 2 years from the date of payment of the output VAT, if the administrative claim was filed from June
8, 2007 (promulgation of Atlas) to September 12, 2008 (promulgation of Mirant).
2. When to file a judicial claim with the CTA:
a. General rule Section 112(D); not Section 229
i. Within 30 days from the full or partial denial of the administrative claim by the CIR; or
ii. Within 30 days from the expiration of the 120-day period provided to the CIR to decide on the claim.
This is mandatory and jurisdictional beginning January L 1998 ( effectivity of 1997 NI RC).
b. Exception - BIR Ruling No. DA-489-03
The judicial claim need not await the expiration of the 120-day period, if such was filed from December
10, 2003 (issuance of BIR Ruling No. DA-489-03) to October 6, 2010 (promulgation of Aichi).
WHEREFORE, the petition is PARTIALLY GRANTED. The February 7, 2011 Decision and the June 27,
2011 Resolution of the Court of Tax Appeals En Banc, in CT A EB Case Nos. 561 and 562 are

55

REVERSED and SET ASIDE. The April 17, 2009 Decision and the October 29, 2009 Resolution of the
CTA Former Second Division in CTA Case No. 7559 are REINSTATED.
Public respondent is hereby ORDERED TO REFUND or, in the alternative, TO ISSUE A TAX CREDIT
CERTIFICATE, in favor or the petitioner the amount of SEVEN MILLION SIX HUNDRED NINETY
NINE THOUSAND THREE HUNDRED SIXTY SIX PESOS AND 37/100 (P7,699,366.37) representing
unutilized input VAT paid on domestic purchases of non-capital goods and services, services rendered by
nonresidents, and importations of non-capital goods for the first to fourth quarters of taxable year 2005.

failed to take action on its administrative claims, San Roque filed two separate Petitions for Review before
the CTA, particularly, C.T.A. Case No. 7744 (covering the first, third, and fourth quarters of 2006) and
C.T.A. Case No. 7802 (covering the second quarter of 2006). The two cases were consolidated before the
CTA First Division.
The details concerning the administrative and judicial claims of San Roque for refund or tax credit of its
creditable input taxes for the four quarters of 2006 are summarized in table form below:

SO ORDERED.

FIRST DIVISION G.R. No. 205543

June 30, 2014

SAN ROQUE POWER CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari under Rule 16, Section 1 of A.M. No. 05-11-07CTA, otherwise known as the Revised Rules of the Court of Tax Appeals, in relation to Rule 45 of the
Rules of Court, filed by San Roque Power Corporation (San Roque), seeking the reversal of the
Decision1 dated June 4, 2012 and Resolution2 dated January 21, 2013 of the Court of Tax Appeals (CTA)
en bane in C.T.A. EB No. 789. The CTA en bane, in its assailed Decision, affirmed the Decision3 dated
January 10, 2011 of the CTA First Division in C.T.A. Case Nos. 7744 & 7802, which dismissed the
judicial claims of San Roque for the refund or tax credit of its excess/unutilized creditable input taxes for
the four quarters of 2006; and in its assailed Resolution, denied the Motion for Reconsideration of San
Roque.
San Roque is a domestic corporation principally engaged in the power-generation business. It is registered
with the Board of Investments on a preferred pioneer status for the construction and operation of
hydroelectric power-generating plants, as well as with the Bureau of Internal Revenue (BIR) as a ValueAdded Tax (VAT) taxpayer.
On October 11, 1997, San Roque entered intoa Power Purchase Agreement (PPA) with the National Power
Corporation (NPC) to develop the San Roque hydroelectric facilities located at Lower Agno River in San
Miguel, Pangasinan (Project) on a build-operate-transfer basis. During the co-operation period of 25 years,
commencing from the completion date of the power station, all the electricity generated by the Project
would be sold to and purchased exclusively by NPC.San Roque commenced commercial operations in
May 2003.
San Roque alleged that in 2006, it incurred creditable input taxes from its purchase of capital goods,
importation of goods other than capital goods, and payment for the services of non-residents. San Roque
subsequently filed with the BIR separate claims for refund or tax credit of its creditable input taxes for all
four quarters of 2006. San Roque averred that it did not have any output taxes to which it could have
applied said creditable input taxes because: (a) the sale by San Roque of electricity, generated through
hydropower, a renewable source of energy, is subject to 0% VAT under Section 108(B)(7) of the National
Internal Revenue Code (NIRC) of 1997, as amended; and (b) NPC is exempted from all taxes, direct and
indirect, under Republic Act No. 6395, otherwise known as the NPC Charter, so the sale by San Roque of
electricity exclusively to NPC, under the PPA dated October 11, 1997, is effectively zero-rated under
Section 108(B)(3) of the NIRC of 1997, as amended.4 When the Commissioner of Internal Revenue (CIR)

Tax
Period
2006

VAT Return

Administrative Claim

Judicial Claim

First
Quarter

Filed: April 21, 2006

Amended: November 7,
2006

Filed: April 11, 2007

Amount: P2,857,174.95

Filed: March 28, 2008

CTA Case No. 7744
Amount: P12,114,877.34
(for 1st, 3rd, and 4th
Quarters
of 2006)

Amended: March 10, 2008

Amount: P3,128,290.74

Second
Quarter

Third
Quarter

Filed: July 15, 2006

Amended: November 8,
2006
Amended: February 5,
2007

Filed: July 10, 2007

Amount: P15,044,030.82

Filed: October 19, 2006

Amended: February 5,
2007

Filed: August 31, 2007

Amount: P4,122,741.54

Amended: March 10, 2008

Amount: P15,548,630.55

Amended: September 21,

2007
Amount: P3,675,574.21
Fourth
Quarter

Filed: January 22, 2007

Amended: May 12, 2007

Filed: June 27, 2008

CTA Case No. 7802
Amount: P15,548,630.55

Filed: August 31, 2007

Amount: P6,223,682.61
Amended: September 21,
2007
Amount: P5,311,012.39

Filed: March 28, 2008

CTA Case No. 7744
Amount: P12,114,877.34
(for 1st, 3rd, and 4th
Quarters
of 2006)
Filed: March 28, 2008
CTA Case No. 7744
Amount: P12,114,877.34
(for 1st, 3rd, and 4th
Quarters
of 2006)

On January 10, 2011, the CTA First Division rendered a Decision on the consolidated judicialclaims of
San Roque, with the following findings:
As to [San Roques] original applications for refund is concerned, the Commissioner of Internal
Revenuehas one hundred twenty days or until August 9, 2007, November 7, 2007 and December 29, 2007
within which to make decision. After the lapse of the one hundred twenty[-]day period, [San Roque]

56

should have elevated its claim with the Court within thirty (30) days starting from August 10, 2007 to
September 8, 2007 for its first quarter claim, November 8, 2007 to December 7, 2007 for its second
quarter claim, and December 30, 2007 toJanuary 28, 2008 for its third and fourth quarters claims pursuant
to Section 112(D) of the NIRC in relation to Section 11 of [Republic Act No.] 1125, as amended by
Section 9 of [Republic Act No.] 9282. Unfortunately, the Petitions for Review on March 28, 2008 for the
first, third and fourth quarters claims and on June 27, 2008 for the second quarter claim, were filed beyond
the 30-day period set by law and therefore, the Court has no jurisdiction to entertain the subject matter of
the case considering that the 30-day appeal period provided under Section 11 of [RepublicAct No.] 1125 is
a jurisdictional requirement as held in the case of Ker & Co., Ltd. vs. Court of Tax Appeals, x x x:
xxxx
Likewise, if we reckoned the one hundred twenty[-]day period from the date of the amended applications
for refund on March 10, 2008 for the first and second quarters claims and September 21, 2007 for the third
and fourth quarters claims, both Petitions for Reviewwould still be denied.
With respect to the amended application for refund of input tax for the first and second quarters of 2006 on
March 10, 2008, the Commissioner of Internal Revenue has one hundred twenty days or until July 8, 2008
within which to make a decision. After the lapse of the said 120-day period, [San Roque] had thirty days
or until August 7, 2008 within which to appeal to this Court.[San Roque], however, appealed via Petitions
for Review on March 28, 2008 for its first quarter claim and on June 27, 2008 for its second quarter claim,
which are clearly before the lapse of the 120-day period. This violates the rule on exhaustion of
administrative remedies.
xxxx
The premature invocation ofthe courts intervention, like the instant Petitions for Review, is fatal to ones
cause of action; and the case is susceptible of dismissal for failure to state a cause of action. Moreover,
such premature appeal will also warrant the dismissal of the Petitions for Review inasmuch as no
jurisdiction was acquired by the Court in line with the recent pronouncement made by the Supreme Court
in the case of Commissioner of Internal Revenue vs. Aichi Forging Company of Asia, Inc.
As far as the amended application for refund covering the third and fourth quarter[s] filed on September
21, 2007 is concerned, the Commissioner of Internal Revenue has one hundred twenty days or until
January 19, 2008 within which to make a decision. After the lapse of the said one hundred twenty
day[-]period, [San Roque] should have elevated its claim with the Court within thirty (30) daysstarting
from January 20, 2008 to February 18, 2008. Unfortunately, the Petition for Review covering said third
and fourth quarter[s] was filed March 28, 2008 beyond the 30-day period set by law and therefore, the
Court has no jurisdiction to entertain the subject matter of the case.
Other issues raised now become moot and academic.

four quarters of 2006, it filed its judicial claimsbeyond the 30-day prescriptive period, reckoned from the
lapse of the 120-day period for the CIR to act on the original administrative claims. The CTA en
bancstressed that the 30-day period within which to appeal with the CTA is jurisdictional and failure to
comply therewith would bar the appeal and deprive the CTA of its jurisdiction.9
The CTA en bancfurther stated in its Decision that even if it counted the 120-day period from the filing of
the amended administrative claims for refund on March 10, 2008 for the first and second quarter claims,
and on September 21, 2007 for the third and fourth quarter claims, the CTA still did not acquire
jurisdiction over C.T.A.Case Nos. 7744 and 7802. Following the 120+30 day periods, the judicial claims
of San Roque for the first and second quarters were prematurely filed,while the judicial claims for the
third and fourth quarters were filed late.
Lastly, the CTA en bancadjudged that San Roque cannot rely on San Roque Power Corporation v.
Commissioner of Internal Revenue, promulgated on November 25, 2009 [San Roque (2009)],10 which
granted the claims for refund or tax credit of the creditable input taxes of San Roque for the four quarters
of 2002, on the following grounds: (a) The main issue in San Roque (2009)was whether or not San Roque
had zero-rated or effectively zero-rated sales in 2002, to which the creditable input taxes could be
attributed, while the pivotal issue inthe instant case is whether or not San Roque complied with the
prescriptive periods under Section 112 of the NIRC of 1997, as amended, when it filed its administrative
and judicial claims for refund or tax credit of itscreditable input taxes for the four quarters of 2006; (b)
The claims for refund or tax credit in San Roque (2009) involved the four quarters of 2002,when sales of
electric power by generation companies to the NPC were explicitly VAT zero-rated under Section 6 of
Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act (EPIRA) of 2001.
Eventually, Republic Act No. 9337, otherwise known as the Extended VAT Law (EVAT Law), took effect
on November 1, 2005, and Section 24 of said law already expressly repealed Section 6 of the EPIRA; and
(3) In San Roque (2009), San Roque failed to comply with Section 112(A)11 of the NIRC of 1997, as
amended, and prematurely filed its administrative claim for the third quarter of 2002 on October 25, 2002,
when its zero-rated sales of electric power to NPC were made only in the fourth quarter of 2002, which
closed on December 31. 2002. In the instant case, San Roquedid not comply with the 120+30 day periods
under Section 112(C) of the NIRC, as amended, thus, the CTA did not acquire jurisdiction over the judicial
claims.
In the end, the CTA en bancdecreed:
Finding no reversible error, we affirm the assailed Decision dated January 10, 2011 and Resolution dated
May 31, 2011 rendered by the First Division in C.T.A. Case Nos. 7744 and 7802.
WHEREFORE, premises considered, the present Petition for Review is hereby DENIED, and accordingly
DISMISSEDfor lack of merit.12

The dispositive portion of the foregoing Decision of the CTA First Division reads:

In its Resolution dated January 21, 2013, the CTA en bancdenied the Motion for Reconsideration of San
Roque.

WHEREFORE, these consolidated Petitions for Review, CTA Case Nos. 7744 covering the first, third and
fourth quarter[s] and 7802 covering [the] second quarter are hereby DISMISSEDsince the Court has no
jurisdiction thereof.6

Hence, San Roque filed the Petition at bar assigning six reversible errors on the part of the CTA en banc,
viz:

San Roque filed a Motion for Reconsideration but it was denied by the CTA First Division in a
Resolution7 dated May 31, 2011.
San Roque filed a Petition for Review before the CTA en banc, protesting against the retroactive
application of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.8 In Aichi,
promulgated on October 6, 2010, the Supreme Court strictly required compliance with the 120+30 day
periods under Section 112 of the NIRC of 1997, as amended.
In its Decision dated June 4, 2012, the CTA en bancupheld the application of Aichiand explained that there
was no retroactive application of the same. The 120+30 day periods had already been provided in the
NIRC of 1997, as amended, evenbefore the promulgation of Aichi. Aichi merely interpreted the provisions
of Section 112 of the NIRC of 1997, as amended.
The CTA en bancapplied the 120+30 day periods and found, same as the CTA First Division, that while
San Roque timely filed its administrative claims for refund or tax credit of creditable input taxes for the

I. THE HONORABLE CTA EN BANCCOMMITTED REVERSIBLE ERROR IN DISMISSING [SAN

ROQUES] PETITIONS FOR REVIEW AND APPLYING RETROACTIVELY THE AICHI RULING IN
THAT AT THE TIME IT FILED ITS PETITIONS FOR REVIEW, [SAN ROQUE] ACTED IN GOOD
FAITH IN ACCORDANCE WITH THE THEN PREVAILING RULE AND JURISPRUDENCE
CONSISTENTLY UPHELD FOR ALMOST A DECADE BY THE HONORABLE CTA IN THE
ABSENCE THEN OF A RULING FROM THIS HONORABLE COURT.
II.THE HONORABLE CTA EN BANCCOMMITTED REVERSIBLE ERROR IN APPLYING THE
AICHI RULING TO [SAN ROQUES] CLAIM FILED YEARS BEFORE ITS PROMULGATION IN
THAT THE AICHI RULING, WHICH LAID DOWN A NEW RULE OF PROCEDURE WHICH
AFFECTS SUSBSTANTIVE RIGHTS, SHOULD BE APPLIED PROSPECTIVELY IN LIGHT OF THE
LAW AND SETTLED JURISPRUDENCE UPHOLDING THE PRINCIPLE OF PROSPECTIVITY.
III.THE HONORABLE CTA EN BANCCOMMITTED REVERSIBLE ERROR IN APPLYING
RETROACTIVELY THE AICHI RULING IN THAT ITS RETROACTIVE APPLICATION TO [SAN
ROQUES] PENDING CLAIM WILL BE UNJUST AND UNFAIR AND WILL CERTAINLY

57

PRODUCE SUBSTANTIAL INEQUITABLE RESULTS AND GRAVE INJUSTICE TO [SAN ROQUE]

AND MANY TAXPAYERS WHO RELIED IN GOOD FAITH ON ITS THEN CONSISTENT RULINGS
FOR ALMOST A DECADE.

Revenue v. San Roque Power Corporation, Taganito Mining Corporation v. Commissioner of Internal
Revenue, and Philex Mining Corporation v. Commissioner of Internal Revenue, promulgated in 2013 [San
Roque (2013)].15

IV.THE HONORABLE CTA EN BANCCOMMITTED REVERSIBLE ERROR IN APPLYING

RETROACTIVELY THE AICHI RULING IN THAT ITS RETROACTIVE APPLICATION GOES
AGAINST THE BASIC POLICIES AND THE SPIRIT OF THE EPIRA LAW.

According to the Court in San Roque (2013), the prescriptive periods under Section 112 of the NIRC of
1997, asamended, shall be interpreted as follows:

V.[SAN ROQUE] SHOULD BE GIVEN THE SAME TREATMENT AS THOSE DECIDED IN

PRECEDENT CASES PROMULGATED PRIOR TO THE PROMULGATION OF THE AICHI RULING
IN ACCORDANCE WITH THE EQUAL PROTECTION CLAUSE OF THE CONSTITUTION AND
THE DOCTRINEOF EQUITABLE ESTOPPEL.
VIRECENTLY, THIS HONORABLE COURT EN BANCHAS CATEGORICALLY RULED THAT THE
AICHI RULING SHALL BE APPLIED PROSPECTIVELY.13
There is no merit in the instant Petition.
At the crux of the controversy are the prescriptive periods for the filing of administrative and judicial
claims for refund or tax credit of creditable input taxes under Section 112 of the NIRC of 1997, as
amended, which provide:
SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-Rated or Effectively Zero-Rated Sales. Any VATregistered 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
paidattributable to such sales, except transitional input tax, to the extent thatsuch input tax has not been
applied against output tax: x x x
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) daysfrom the date of submission of complete documentsin support of the application
filed in accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the partof the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration ofthe one
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeal.
(Emphases supplied.)
Contrary to the assertion of San Roque, it was only in Aichithat the issue of the prescriptive periods under
Section 112 of the NIRC of 1997, as amended, was first squarelyraised before and addressed by the Court.
The Court significantly ruled in Aichithat: (a) Section 112 of the NIRC of 1997, as amended, particularly
governs claims for refund or tax credit of creditable input taxes, which is distinct from Sections 204(C)
and 229 of the same statute which concern erroneously or illegally collected taxes; (b) The twoyear
prescriptive period under Section 112(A) of the NIRC of 1997, as amended, pertains only to
administrative claims for refund or tax credit of creditable input taxes, and not to judicial claims for the
same; (c) Following Commissioner of Internal Revenue v. Mirant Pagbilao Corporation,14 the two-year
prescriptive period under Section 112(A) of the NIRC of 1997, as amended, is reckoned from the close
ofthe taxable quarter when the sales were made; (d) In determining the end of the two-year prescriptive
period under Section 112(A) of the NIRC of 1997, as amended, the Administrative Code of 1987 prevails
over the Civil Code, so that a year is composed of 12 calendar months; and (e) The 120-day period, under
what is presently Section 112(C) of the NIRC of 1997, asamended, is crucial in filing an appeal with the
CTA, for whether the CIR issues a decision on the administrative claim beforethe lapse of the 120-day
period or the CIR made no decision on the administrative claim after the 120-day period, the taxpayer has
30 days within which to file an appeal with the CTA.
The Court en banchad the opportunity tofurther expound on the prescriptive periods under Section 112 of
the NIRC of 1997, as amended, in its Decision in the consolidated cases of Commissioner of Internal

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The
taxpayer can file his administrative claim for refund or credit at anytime within the two-year prescriptive
period. If he files his claim on the last day of the two-year prescriptive period, his claim is still filed on
time. The Commissioner will have 120 days from such filing to decide the claim. If the Commissioner
decides the claim on the 120th day, or does not decide it on that day, the taxpayer still has 30 days to file
his judicial claim with the CTA. This is not only the plain meaning but also the only logical interpretation
of Section 112(A) and (C).16 (Emphasis deleted.)
The Court emphasized in San Roque (2013)that a claim for refund or tax credit, like a claim for tax
exemption, is construed strictly against the taxpayer. It cited Aichiand pointed out that one of the
conditions for a judicial claim for refund or tax credit under the VAT system is compliance with the
120+30 day mandatory and jurisdictional periods under Section 112(C) of the NIRC of 1997, as
amended.17
Guided by the aforementioned law and jurisprudence, the Court now determines whether or not San
Roque complied in the instant case with the prescriptive periods under Section 112 ofthe NIRC of 1997, as
amended.
As the following tables will show, San Roque filed its administrative claims for refund or tax credit of its
creditable input taxes for the four quarters of 2006 within the two-yearprescriptive period under Section
112(A) of the NIRC of 1997, as amended, whether reckoned from the close of the taxable quarter when
the relevant zero-rated or effectively zero-rated sales were made, in accordance with Mirantand Aichi; or
from the date of filing of the quarterly VAT return and payment of the tax due 20 days after the close of the
taxable quarter, following Atlas Consolidated Mining and Development Corporation v. Commissioner of
Internal Revenue18:
According to Mirant and Aichi
Tax Period
2006

Close of Quarter
When Relevant Sales
were Made

End of the Two-Year

Prescriptive Period

Date of Filing of
Administrative
Claim

First Quarter

March 31, 2006

March 31, 2008

April 11, 2007

Second Quarter

June 30, 2006

June 30, 2008

July 10, 2007

Third Quarter

September 30, 2006

September 30, 2008

August 31, 2007

Fourth Quarter

December 31, 2006

December 31, 2008

August 31, 2007

Filing of Returns and

Payment of Taxes 20

End of the Two-Year

Prescriptive Period

Date of Filing of
Administrative

According to Atlas
Tax Period
2006

58

Days after the Close

of Taxable Quarter

Claim

First Quarter

April 20, 2006

April 20, 2008

April 11, 2007

Second Quarter

July 20, 2006

July 20, 2008

July 10, 2007

Third Quarter

October 20, 2006

October 20, 2008

August 31, 2007

Fourth Quarter

January 21, 200619

January 21, 2009

August 31, 2007

San Roque, however, failed to comply with the 120+30 day periods for the filing of its judicial claims, as
can be gleaned from the table below:

Tax
Period
2006

Date of
Filing of
Administrativ
e
Claim

End of 120-Day Period

for
CIR to Decide

End of 30day
Period to
File
Appeal with
CTA

Date of
Actual
Filing of
Judicial
Claim

No. of Days:
End of 120day
Period to
Filing
of Judicial
Claim

First
Quarte
r

April 11, 2007

August 9, 2007

September
8,
200720

March 28,
2008

232 days

Second
Quarte
r

July 10, 2007

November 7,
2007

December 7,
2007

June 27, 2008

233 days

Third
Quarte
r

August 31,
2007

December 29,
2007

January 28,
2008

March 28,
2008

90 days

Fourth
Quarte
r

August 31,
2007

December 29,
2007

January 28,
2008

March 28,
2008

90 days

Because San Roque filed C.T.A. Case Nos. 7744 and 7802 beyond the 30-day mandatory period under
Section 112(C) of the NIRC of 1997, as amended, the CTA First Division did not acquire jurisdiction over
said cases and correctly dismissed the same.

San Roque in the present case is in exactly the same position as Philex Mining Corporation (Philex) in San
Roque (2013). Hence, the ruling of the Court on the judicial claim of Philex in San Roque (2013) is worth
reproducing hereunder:
Philex timely filed its administrative claim on 20 March 2006, within the two-year prescriptive period.
Even if the two-year prescriptive period is computed from the date of payment of the output VAT under
Section 229, Philex still filed its administrative claim on time. Thus, the Atlasdoctrine is immaterial in this
case.The Commissioner had until 17 July 2006, the last day ofthe 120-day period, to decide Philexs
claim. Since the Commissioner did not act on Philexs claim on or before 17 July 2006, Philex had until
17 August 2006, the last day of the 30-day period, to file its judicial claim. The CTA EB held that 17
August 2006 was indeed the last day for Philex to file its judicial claim.However, Philex filed its Petition
for Review withthe CTA only on 17 October 2007, or four hundred twenty-six (426) days after the last day
of filing. In short, Philex was late by one year and 61 days in filing its judicial claim.As the CTA EB
correctly found: Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days late.Thus,
the Petition for Review in C.T.A. Case No. 7687 should have been dismissed on the ground that the
Petition for Review was filed way beyond the 30-day prescribed period; thus, no jurisdiction was acquired
by the CTA Division; x x x.
Unlike San Roque and Taganito, Philexs case is not one of premature filing but of late filing. Philex did
not file any petition with the CTA within the 120-day period. Philex did not also file any petition with the
CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long afterthe
expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period. In any event,
whether governed by jurisprudence before, during, or after the Atlas case, Philexs judicial claim will have
to be rejected because of late filing.Whether the two-year prescriptive period is counted from the date of
payment of the output VAT following the Atlasdoctrine, or from the close of the taxable quarter when the
sales attributable to the input VAT were made following the Mirantand Aichidoctrines, Philexs judicial
claim was indisputably filed late.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inactionof the
Commissioner on Philexs claim during the 120-day period is, by express provision of law, "deemed a
denial" of Philexs claim. Philex had 30 days from the expiration of the 120-day period to file its judicial
claim with the CTA. Philexs failure to do so rendered the "deemed a denial" decision of the
Commissioner final and inappealable. The right to appeal to the CTA from a decision or "deemed a denial"
decision of the Commissioner is merely a statutory privilege, not a constitutional right. The exercise of
such statutory privilege requires strict compliance with the conditions attached by the statute for its
exercise. Philex failed to comply with the statutory conditions and must thus bear the
consequences.21 (Citations omitted.)
Both the CTA First Division and CTA en bancwent a step further and also computed the 120+30 day
periods from the date of filing by San Roque of its amended administrative claimson March 10, 2008 for
the first and second quarters of 2006, and on September 21, 2007 for the third and fourth quarters of 2006.
According to the CTA First Division and CTA en banc, if the 120-day period was reckoned from the dates
of filing of the amended administrative claims, the judicial claims for the first and second quarters were
premature, while the judicial claims for the third and fourth quarters were late.
For the Court, there is no morepoint in considering the amended administrative claims for the first and
second quarters of 2006. The amended administrative claims were filed on March 10, 2008after the
120+30 day periods for filing the judicialclaims, counting from the date of filing of the original
administrative claims for the first and second quarters of 2006, had already expired on September 8,
2007and December 7, 2007, respectively. Taking cognizance of the amended administrative claims in such
a situation would result in the revival of judicial claims that had already prescribed.
Meanwhile, San Roque filed its amended administrative claims for the third and fourth quarters of 2006
on September 21, 2007, before the end of the 120-day period for the CIR to decide on the original
administrative claims for the same taxable quarters. Nonetheless, even if the Court counts the 120+30 day
periods from the dateof filing of said amended administrative claims, the judicial claims of San Roque
would still be belatedly filed:

59

Tax
Period
2006

Date of
Filing of
Administrativ
e
Claim

End of 120-Day Period

for
CIR to Decide

End of 30day
Period to
File
Appeal with
CTA

Date of
Actual
Filing of
Judicial
Claim

No. of Days:
End of 120day
Period to
Filing
of Judicial
Claim

Third
Quarte
r

September 21,
2007

January 19,
2008

February 18,
2008

March 28,
2008

69 days

Fourth
Quarte
r

September 21,
2007

January 19,
2008

February 18,
2008

March 28,
2008

69 days

Unable to contest the belated filing of its judicial claims, San Roque argues against the supposedly
retroactive application of Aichiand the strict observance of the 120+30 day periods.
As the CTA en bancheld, Aichiwas not applied retroactively to San Roque in the instant case. The 120+30
day periods have already been prescribed under Section 112(C) of the NIRC of 1997, as amended, when
San Roque filed its administrative and judicial claims for refund or tax credit of its creditable input taxes
for the four quarters of 2006. The Court highlights the pronouncement in San Roque (2013)that strict
compliance with the 120+30 day periods is necessary for the judicial claim to prosper, except for the
period from the issuance of BIR Ruling No. DA-489-03 on December 10, 2003 to October 6, 2010when
Aichiwas promulgated, which again reinstated the 120+30day periods as mandatory and jurisdictional. 22
It is still necessary for the Court toexplain herein how BIR Ruling No. DA-489-03 is an exception to the
strict observance of the 120+30 day periods for judicial claims. BIR Ruling No. DA-489-03 affected only
the 120-day period as the BIR held therein that "a taxpayer-claimant need not wait for the lapse of the
120-day period before it could seek judicial relief with the CTA by way of Petition for Review. Neither is
it required that the Commissioner should first act on the claim of a particulartaxpayer before the CTA may
acquire jurisdiction, particularly if the claim is about to prescribe." Consequently, BIR Ruling No. DA489-03 may only be invoked by taxpayers who relied on the same and prematurely filedtheir judicial
claims before the expiration of the 120-day period for the CIR to act on their administrative claims,
provided that the taxpayers filed such judicial claims from December 10, 2003 to October 6,2010. BIR
Ruling No. DA-489-03 did not touch upon the 30-day prescriptive period for filing an appeal with the
CTA and cannot be cited by taxpayers, such as San Roque, who belatedly filedtheir judicial claims more
than 30 days after receipt of the adverse decision of the CIR on their administrative claims or the lapse of
120 days without the CIR acting on their administrative claims. Pertaining to the similarly situated Philex,
the Court ruled in San Roque (2013) that:
Philexs situation is not a case of premature filing of its judicial claim but of late filing, indeed verylate
filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means
nonexhaustion of the 120-day period for the Commissioner to act on an administrative claim. Philex
cannot claim the benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim
prematurely but filed it long after the lapse of the 30-day period following the expiration of the 120-day
period. In fact, Philex filed its judicial claim 426 days after the lapse of the 30-day period. 23
San Roque harps that the Court itself categorically declared in the following paragraph in San Roque
(2013)that Aichishall be applied prospectively:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a
difficult question of law.The abandonment of the Atlasdoctrine by Mirantand Aichiis proof that the
reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The
abandonment of the Atlasdoctrine did not result in Atlas, or other taxpayers similarly situated, being made
to return the tax refund or credit they received or could have received under Atlasprior to its abandonment.

This Court is applying Mirantand Aichi prospectively.Absent fraud, bad faith or misrepresentation, the
reversal by thisCourt of a general interpretative rule issued by the Commissioner, like the reversal of a
specific BIR ruling under Section 246, should also apply prospectively.x x x.24 (Emphases included.)
The Court is not persuaded. The aforequoted paragraph should be understood in the context of the entire
San Roque (2013). The statement of the Court on applying Mirantand Aichiprospectively should be
understood relative to, and never apart from, Atlasand BIR Ruling No. DA-489-03.
The Court explained in San Roque (2013), under the heading "Effectivity and Scope of the Atlas, Mirant
and Aichi Doctrines," that:
The Atlasdoctrine, which held that claims for refund or credit of input VAT must comply with the two-year
prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007 until
its abandonment on 12 September 2008 in Mirant. The Atlasdoctrine was limited to the reckoning of the
two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlasdoctrine, the
two-year prescriptive period for claiming refund or credit of input VAT should be governed by Section
112(A) following the verba legisrule. The Mirantruling, which abandoned the Atlas doctrine, adopted the
verba legisrule, thus applying Section 112(A) in computing the two-year prescriptive period in claiming
refund or credit of input VAT.
The Atlasdoctrine has no relevance to the 120+30 day periods under Section 112(C) because the
application of the 120+30 day periods was not in issue in Atlas. The application of the 120+30 day periods
was first raised in Aichi, which adopted the verba legisrule in holding that the 120+30 day periods are
mandatory and jurisdictional. x x x.
xxxx
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the
taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is
compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance with the
120+30 day periods is necessary for such a claim to prosper, whether before, during, or after the effectivity
of the Atlasdoctrine, except for the period from the issuance of BIR Ruling No. DA-489-03 on 10
December 2003 to 6 October 2010 when the Aichidoctrine was adopted, which again reinstated the
120+30 day periods as mandatory and jurisdictional.25 (Emphases supplied.)
As for BIR Ruling No. DA-489-03, the Court clarified its period of effectivity, thus:
There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA does not
acquire jurisdiction over a judicial claim that is filed before the expiration of the 120-day period. There
are, however, two exceptions to this rule. The first exception is if the Commissioner, through a specific
ruling, misleads a particular taxpayer to prematurely file a judicialclaim with the CTA. Such specific
ruling is applicable only to suchparticular taxpayer. The second exception is where the Commissioner,
through a general interpretative rule issued under Section 4 of the Tax Code, misleads all taxpayers into
filing prematurely judicial claims with the CTA. In these cases, the Commissioner cannot be allowed to
later on question the CTAs assumption of jurisdiction over such claim since equitable estoppel has set in
as expressly authorized under Section 246 of the Tax Code.
xxxx
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made,
notby a particular taxpayer, but by a government agency tasked with processing tax refunds and credits,
that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance.
This governmentagency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03.
Thus, while this government agency mentions in its query to the Commissioner the administrative claim of
Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do in
cases like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the
lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 isa general interpretative rule. Thus, all taxpayers can rely on BIR
Ruling No. DA-489-03 from the time of its issuanceon 10 December 2003 up to its reversal by this Court
in Aichion 6 October 2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional.26 (Emphasis supplied.)

60

Based on the foregoing, "prospective application" of Aichiand Mirant, in the context of San Roque (2013),
only meant that the rulings in said cases would not retroactively affect taxpayers who relied on Atlasand/or
DA-489-03 when they filed their administrative and judicial claims for refund or tax credit of creditable
input taxes during the period when Atlasand DA-489-03 were still in effect. Aichiand Mirantcan still be
applied to cases involving administrative and judicial claims filed prior to the promulgation of said cases
and outside the period of effectivity of Atlas and DA-489-03, such as the instant case.
WHEREFORE, premises considered, the instant Petition for Review is DENIED and the Decision dated
June 4, 2012 and Resolution dated January 21, 2013 of the Court of Tax Appeals en bane in C.T.A. EB No.
789 are AFFIRMED.

On 31 March 2005, respondent filed a Petition with the CTA docketed as C.T.A. Case No. 7187.
After trial, the CTA First Division rendered a Decision on 13 August 2007. It partly granted the Petition
and ordered the refund to respondent of the reduced amount of P4,138,397.57. That amount represented
the input VAT respondent paid on its purchases of goods, services, capital goods, and on its importation of
goods other than capital goods.

No costs.

On appeal, the CTA En Banc affirmed the CTA First Division after finding no reversible error. Respondent
was found to have complied with all the requisites for claiming a refund under Section 112 (A) of the
National Internal Revenue Code (NIRC) of 1997.

SO ORDERED.

THE ISSUES
Petitioner's appeal is anchored on the following grounds:ChanRoblesVirtualawlibrary
1

The Court of Tax Appeals sitting En Bane erred in holding that respondent is entitled to a
refund considering that respondent failed to comply with the requirements of a valid
application for a tax refund. Hence, the judicial claim made before the Court of Tax Appeals
deserve outright dismissal for being premature.

Respondent has not sufficiently proven its entitlement to a tax refund in the reduced amount of
P4,138,397.57 representing alleged input taxes paid by it for the period of January 1, 2003 to
March 31, 2003.4

THE COURT'S RULING

Section 112 of the NIRC of 1997 laid down the manner in which the refund or credit of input tax may be
made, to wit:ChanRoblesVirtualawlibrary
SEC. 112. Refunds or Tax Credits of Input Tax. FIRST DIVISION G.R. No. 183421, October 22, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. AICHI FORGING COMPANY OF
ASIA, INC.,Respondent.
DECISION
SERENO, C.J.:
This is a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure filed by
the Commissioner of Internal Revenue, (petitioner). The Petition assails the Decision 2 dated 30 April 2008
and Resolution3 dated 12 June 2008 issued by the Court of Tax Appeals En Banc (CTA En Banc) in C.T.A.
EB No. 324.
THE FACTS
Aichi Forging Company of Asia, Inc. (respondent) is engaged in the business of manufacturing,
producing, and processing all kinds of steel and steel by-products, such as closed impression die steel
forging, and all automotive steel parts.

On 29 March 2005, respondent filed with the Bureau of Internal Revenue (BIR), Revenue District Office
(RDO) No. 057, an application for tax credit/refund amounting to P5,057,120.95 representing the former's
paid input value-added taxes (VAT) for the first quarter of taxable year 2003. Respondent claimed that it
was entitled to a refund/credit of the input VAT paid on its purchases of goods, services, capital goods, and
on its importation of goods other than capital goods that were attributable to zero-rated sales in the total
amount of P149,174,477.94.

(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)(l), (2) and (B) and Section 108(B)(l) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and regulations of theBangko Senlral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zerorated 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.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.

61

At the outset, petitioner raises the issue of the timeliness of respondent's judicial claim before the CTA.
Petitioner contends that the Petition of respondent was prematurely filed with the CTA, considering that it
was filed barely two days after respondent had filed the administrative claim with the BIR. Allegedly,
petitioner was not given the chance to properly address the administrative claim. The CTA, however, held
that the judicial claim clearly fell within the two-year prescriptive period for filing claims for a refund of
input VAT.

Geothermal Partnership v. Commissioner of Internal Revenue,9 this Court has

reiterated:ChanRoblesVirtualawlibrary
Notwithstanding a strict construction of any claim for tax exemption or refund, the Court inSan
Roque recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel in favor of
taxpayers. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for
the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition
for Review." This Court discussed BIR Ruling No. DA-489-03 and its effect on taxpayers, thus:

This Court will clarify.

xxxx

Section 112(A) provides for a two-year prescriptive period after the close of the taxable quarter when the
sales were made, within which a VAT-registered person whose sales are zero-rated or effectively zerorated may apply for the issuance of a tax credit certificate or refund of creditable input tax. In the
consolidated tax cases Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito
Mining Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v.
Commissioner of Internal Revenue5 (hereby collectively referred to as San Roque), the Court clarified that
the two-year period refers to the filing of an administrative claim with the BIR.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR
Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court
in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional.

In this case, respondent's sales to PEZA-registered entities amounted to P149,075,454.37 for the period 1
January 2003 to 31 March 2003. Accordingly, respondent was not liable to pay any output VAT thereon,
and the unutilized input VAT incurred by and attributable to it may be the proper subject of a claim for a
refund. Therefore, considering that respondent was claiming the refund of input VAT incurred for the first
quarter of 2003, it had until 31 March 2005 - or the close of the taxable quarter when the zero-rated sales
were made - within which to file its administrative claim for a refund. On this note, we find that
petitioners had complied with the two-year prescriptive period when it filed its claim on 29 March 2005.
In accordance with Section 112(D) of the NIRC of 1997, petitioner had one hundred twenty (120) days
from the date of submission of complete documents in support of the application within which to decide
on the administrative claim. Considering that the burden to prove entitlement to a tax refund is on the
taxpayer, and absent any evidence to the contrary, it is presumed that in order to discharge its burden,
respondent attached to its application6 filed on 29 March 2005 complete supporting documents necessary
to prove its entitlement to a refund. Thus, the 120-day period for the CIR to act on the administrative claim
commenced on that date.

Therefore, respondent's filing of the judicial claim barely two days after the administrative claim is
acceptable, as it fell within the period during which the Court recognized the validity of BIR Ruling No.
DA-489-03.
The second issue raised by petitioner is purely factual.
WHEREFORE, premises considered, the instant Petition is DENIED.
SO ORDERED.
Leonardo-De Castro, Bersamin, Perez, and Perlas-Bernabe, JJ., concur.

We agree with petitioner that the judicial claim was prematurely filed on 31 March 2005, since respondent
failed to observe the mandatory 120-day waiting period to give the CIR an opportunity to act on the
administrative claim. However, the Court ruled in San Roque that BIR Ruling No. DA-489-03 allowed the
premature filing of a judicial claim, which means non-exhaustion of the 120-day period for the
Commissioner to act on an administrative claim:7
The old rule that the taxpayer may file the judicial claim, without waiting for the Commissioner's decision
if the two-year prescriptive period is about to expire, cannot apply because that rule was adopted before
the enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old rule,
so that under the VAT System the taxpayer will always have 30 days to file the judicial claim even if the
Commissioner acts only on the 120th day, or does not act at all during the 120-day period. With the 30-day
period always available to the taxpayer, the taxpayer can no longer file a judicial claim for refund or credit
of input VAT without waiting for the Commissioner to decide until the expiration of the 120-day period.
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the
taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is with the
12030 day mandatory and jurisdictional periods. Thus,strict compliance with the 120+30 day periods
is necessary for such a claim to prosper, whether before, during, or after the effectivity of
the Atlas doctrine, except for the period from the issuance of BIR Ruling No. DA-489-03 on 10
December 2003 to 6 October 2010 when the Aichi doctrine was adopted, which again reinstated the
120+30 day periods as mandatory and jurisdictional.8(Emphasis supplied)chanroblesvirtuallawlibrary
In Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue and Mindanao I

62

On March 26, 2004, petitioner filed with the Commissioner of Internal Revenue (respondent) an
application for tax refund and/or tax credit of its excess/unutilized input VAT from zero-rated sales in the
said amount ofP1,801,826.82.1cra1aw
To prevent the running of the prescriptive period, petitioner subsequently filed a petition for review with
the Court of Tax Appeals (CTA) which was docketed as CTA Case No. 6907 and lodged before its First
Division.
In support of its claim, petitioner presented documents including its Summary of Zero-Rated Sales
(Exhibit "DD") with corresponding supporting documents; VAT invoices on which were stamped "zerorated" and bank credit advices (Exhibits "EE-1" to "EE-56"); copies of Service Agreements (Exhibits "N"
to "Q"); and report of the commissioned certified public accountant (Exhibit "AA" to "AA-22").
After petitioner presented its evidence, respondent did not, despite notice, proffer any opposition to it. He
was eventually declared to have waived his right to present evidence.
By Decision of February 23, 2007,2cra1aw the CTA First Division, conceding that petitioner's transactions
fall under the classification of zero-rated sales, nevertheless denied petitioner's claim "for lack of
substantiation," disposing as follows:chan robles virtual law library
In reiteration, considering that the subject revenues pertain to gross receipts from services rendered by
petitioner, valid VAT official receipts and not mere sales invoices should have been submitted in support
thereof. Without proper VAT official receipts, the foreign currency payments received by petitioner from
services rendered for the four (4) quarters of taxable year 2002 in the sum of US$1,102,315.48 with the
peso equivalent of P56,898,744.05 cannot qualify for zero-rating for VAT purposes. Consequently, the
claimed input VAT payments allegedly attributable thereto in the amount of P1,801,826.82 cannot be
granted. It is clear from the provisions of Section 112 (A) of the NIRC of 1997 that there must be zerorated or effectively zero-rated sales in order that a refund of input VAT could prosper.
x x x3cra1aw (emphasis and underscoring supplied)

THIRD DIVISION G.R. No. 182364 : August 3, 2010

The CTA First Division, relying on Sections 1064cra1aw and 1085cra1aw of the Tax Code, held that since
petitioner is engaged in sale of services, VAT Official Receipts should have been presented in order to
substantiate its claim of zero-rated sales, not VAT invoices which pertain to sale of goods or properties.

AT&T COMMUNICATIONS SERVICES PHILIPPINES, INC., Petitioner, v. COMMISSIONER

OF INTERNAL REVENUE, Respondent.

On petition for review, the CTA En Banc, by Decision of February 18, 2008,6cra1aw affirmed that of the
CTA First Division. Petitioner's motion for reconsideration having been denied by Resolution of April 2,
2008, the present petition for review was filed.

DECISION

The petition is impressed with merit.

CARPIO MORALES, J.:

A taxpayer engaged in zero-rated transactions may apply for tax refund or issuance of tax credit certificate
for unutilized input VAT, subject to the following requirements: (1) the taxpayer is engaged in sales which
are zero-rated (i.e., export sales) or effectively zero-rated; (2) the taxpayer is VAT-registered; (3) the claim
must be filed within two years after the close of the taxable quarter when such sales were made; (4) the
creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the
extent that such input tax has not been applied against the output tax; and (5) in case of zero-rated sales
under Section 106 (A) (2) (a) (1) and (2), Section 106 (B) and Section 108 (B) (1) and (2), the acceptable
foreign currency exchange proceeds thereof have been duly accounted for in accordance with BSP rules
and regulations.7cra1aw

AT&T Communications Services Philippines, Inc. (petitioner) is a domestic corporation primarily engaged
in the business of providing information, promotional, supportive and liaison services to foreign
corporations such as AT&T Communications Services International Inc., AT&T Solutions, Inc., AT&T
Singapore, Pte. Ltd.,, AT&T Global Communications Services, Inc. and Acer, Inc., an enterprise registered
with the Philippine Economic Zone Authority (PEZA).
Under Service Agreements forged by petitioner with the above-named corporations, remuneration is paid
in U.S. Dollars and inwardly remitted in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP).
For the calendar year 2002, petitioner incurred input VAT when it generated and recorded zero-rated sales
in connection with its Service Agreements in the peso equivalent of P56,898,744.05. Petitioner also
incurred input VAT from purchases of capital goods and other taxable goods and services, and importation
of capital goods.
Despite the application of petitioner's input VAT against its output VAT, an excess of unutilized input VAT
in the amount of P2,050,736.69 remained. As petitioner's unutilized input VAT could not be directly and
exclusively attributed to either of its zero-rated sales or its domestic sales, an allocation of the input VAT
was made which resulted in the amount ofP1,801,826.82 as petitioner's claim attributable to its zero-rated
sales.

Commissioner of Internal Revenue v. Seagate Technology (Philippines)8cra1aw teaches that petitioner, as

zero-rated seller, hence, directly and legally liable for VAT, can claim a refund or tax credit certificate.
Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is
set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the
purchaser. The seller of such transactions charges no output tax but can claim a refund or a tax credit
certificate for the VAT previously charged by suppliers. x x x
Applying the destination principle to the exportation of goods, automatic zero rating is primarily 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. (emphasis and underscoring supplied)

63

Revenue Regulation No. 3-88 amending Revenue Regulation No. 5-87 provides the requirements in
claiming tax credits/refunds:chan robles virtual law library
Sec. 2. Section 16 of Revenue Regulations 5-87 is hereby amended to read as follows: x x x
(c) Claims for tax credits/refunds - Application for Tax Credit/Refund of Value-Added Tax Paid (BIR
Form No. 2552) shall be filed with the Revenue District Office of the city or municipality where the
principal place of business of the applicant is located or directly with the Commissioner, Attention: VAT
Division.
A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be submitted
together with the application. The original copy of the said invoice/receipt, however shall be presented for
cancellation prior to the issuance of the Tax Credit Certificate or refund. x x x (emphasis and underscoring
supplied)
Section 113 of the Tax Code does not create a distinction between a sales invoice and an official receipt.
Sec. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. (A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an invoice or
receipt. In addition to the information required under Section 237, the following information shall be
indicated in the invoice or receipt:chan robles virtual law library
(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number
(TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that
such amount includes the value-added tax. (emphasis, italics and underscoring supplied)
Section 110 of the 1997 Tax Code in fact provides:chan robles virtual law library
Section 110. Tax Credits A. Creditable Input Tax. (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section
113 hereof on the following transactions shall be creditable against the output tax:chan robles virtual law
library
(b) Purchase of services on which a value-added tax has actually been paid. (emphasis, italics and
underscoring supplied)
Parenthetically, to determine the validity of petitioner's claim as to unutilized input VAT, an invoice would
suffice provided the requirements under Sections 113 and 237 of the Tax Code are met.
Sales invoices are recognized commercial documents to facilitate trade or credit transactions. They are
proofs that a business transaction has been concluded, hence, should not be considered bereft of probative
value.9cra1aw Only the preponderance of evidence threshold as applied in ordinary civil cases is needed to
substantiate a claim for tax refund proper.10cra1aw
IN FINE, the Court finds that petitioner has complied with the substantiation requirements to prove
entitlement to refund/tax credit. The Court is not a trier of facts, however, hence the need to remand the
case to the CTA for determination and computation of petitioner's refund/tax credit.
WHEREFORE, the petition is GRANTED. The Decision of February 18, 2008 of the Court of Tax
Appeals En Banc is REVERSED and SET ASIDE. Let the case be REMANDED to the Court of Tax
Appeals First Division for the determination of petitioner's tax credit/refund.
SO ORDERED.

64

On December 30, 2003, Taganito filed with respondent Commissioner of Internal Revenue (CIR), through
its Excise Taxpayers Assistance Division under the Large Taxpayers Division, an application for refund of
its excess input VAT paid on its domestic purchases of taxable goods and services and importation of
goods amounting to 4,447,651.32 for theperiod January 1, 2002 to December 3, 2002.
On February 19, 2004, 51 days after the filing of its application withthe CIR, Taganito filed with the CTA
a petition for review. At that time, the CIR had not yet finally acted upon Taganitos application for refund.
TheCIR answered that the claim for refund was still subject to investigation.
On October 27, 2009, the CTA Division partially granted Taganitospetition and ordered the CIR to refund
the amount of 3,636,854.07. Thedispositive portion of the decision reads as follows:
WHEREFORE, premises considered, the instant Petition forReview is hereby PARTIALLY GRANTED.
Accordingly,respondent is hereby ORDERED TO REFUND to petitioner the amount of THREE
MILLION SIX HUNDRED THIRTY SIXTHOUSAND EIGHT HUNDRED FIFTY FOUR PESOS
AND 7/100CENTAVOS (3,636,854.07), representing its unutilized input taxes attributable to zero-rated
sales from January 1, 2002 toDecember 31, 2002.SO ORDERED.
The CIR moved for reconsideration, arguing that the petition for review was prematurely filed because
Taganito did not wait for the lapse of 120 days mandated by Section 112(D) of the National Internal
Revenue Code of 1997 (NIRC). Therefore, the CTA was bereft of jurisdiction to ruleon the petition. The
said motion was denied. The CIR then filed a petition for review before the CTA En Banc, claiming that
Taganito failed to exhaust administrative remedies under Section 112(D) of the NIRC before resorting to
judicial appeal, and that it failed to present concrete and convincing proof that the CIR did not have
enough reason to deny its administrative claim for refund.
In the assailed Decision, dated April 18, 2011, the CTA En Banc granted the petition, reversed and set
aside the decision and the resolution of the CTA Division, and ordered the case dismissed for being
prematurely filed.

SECOND DIVISION G.R. No. 198076 Nov 19 2014

TAGANITO MININGCORPORATION,Petitioner
vs.
COMMISSIONER OF INTERNAL REVENUE,Respondent.
DECISION
MENDOZA, J:
Before the Court is a petition for review on certiorari under Rule 45of the Rules of Court assailing the
April 18, 2011 Decision and the August9, 2011 Resolution of the Court of Tax Appeals ( CTA) En Banc,
in CT A EB Case No. 559, which reversed and set aside the July 31, 2009 Decisionof the Second Division
of the CTA (CTA Division) in CTA Case No. 6867,ordering the refund of unutilized input taxes in the
amount of 'P3,636,854.07to petitioner Taganito Mining Corporation (Taganito).
The Facts
Taganito is a corporation duly organized and existing under the laws of the Philippines, primarily engaged
in the business of exploring, producing and exporting beneficiated nickel silicate ores and chromite ores. It
is a dulyregistered VAT (value-added tax) entity and likewise registered \vi th the Board of Investments as
an exporter.
Taganito filed all its monthly and quarterly VAT returns from January1, 2002 to December 31, 2002, as
follows:
Period Covered

Date Filed

1st Quarter 2002

April 13, 2002

2nd Quarter 2002

July 11, 2002

3rd Quarter 2002

October 21, 2002

4th Quarter 2002

January 17, 2003

Citing the case of CIR v. Aichi Forging Company of Asia, Inc. (Aichi), the CTA En Banc concluded that
the premature filing of a petition for review before the CTA in a claim for refund or credit of input VAT
warranted a dismissal inasmuch as no jurisdiction was acquired by the CTA. It stated that in claiming a tax
refund or tax credit under Section 112 of the NIRC, the taxpayer should apply for refund/credit of
unutilized input VAT within two years after the close of the taxable quarter when the sales were made.
Thereafter, the CIR has 120 days from the date of the submission of the complete documents within which
to grant or deny the claim. If the CIR decided during the 120-day period, or failed to act on the application
for tax refund/credit after the 120-day period, the remedy of the tax payer is to appeal the decision or
inaction of the CIR to the CTA within 30 days from the decision or inaction.
The CTA En Banc ruled that a violation of Section 112 would lead to the dismissal of the petitioners
appeal or petition due to prematurity, notwithstanding the timely filing of the administrative application
for refund or tax credit. It stated that the petition did not comply with the prescribed period because
Taganito filed its application for tax refund or tax credit on December 30, 2003, but it appealed before the
CTA only 51 days later, on February 19, 2004, in clear contravention of Section 112 and Aichi. In fine, the
CTA En Banc dismissed the petition on the ground that the CTA Division failed to acquire jurisdcition
over the case. In the assailed Resolution, dated August 9, 2011, the CTA En Bancdenied Taganitos
motion for reconsideration. Hence, the present petition.
Grounds for the Petition
I. The Court of Tax Appeals En Banc committed serious errorand acted with grave abuse of
discretion tantamount to lack or excess of jurisdiction in erroneously applying the Aichidoctrine to
the instant case for the following reasons:
A. The Aichi ruling is issued in violation of Art.VIII, Sec. 4(3)6 of the 1987 Constitution.
B. The Aichi doctrine is an erroneous application ofthe law.
C. Even if the Aichi doctrine is good law, itsapplication to the instant case will be in violation of
Petitioners right to due process and the principles of stare decisis and lex prospicit, non respicit.

65

II. Respondent disputes Petitioners entitlement to the VAT refund merely on the basis of the
technicality offered by Aichi, and on an unsupported allegation that Petitioner did not prove that the
Respondent did not have enough reason to deny Petitioners claim
Taganito argued that prior to Aichi, it was well-settled that a taxpayer need not wait for the decision of the
CIR on its administrative claim for refund before it could file its judicial claim for refund, consonant with
the period provided in Section 229 of the NIRC stating that no suit for the recovery of erroneously or
illegally collected tax should be filed after the expiration of two years from the date of payment of the tax.
The CIR commented that the Aichi decision is a sound ruling which merely applied the clear provisions of
the law; that Section 229 of the NIRC does not apply because unutilized input VAT is not an erroneously
or illegally collected tax; and that Section 112 of the NIRC specifically governsrefunds of unutilized input
VAT.
Taganito replied that the issue on the prescriptive periods for filing the application for tax credit/refund of
unutilized input tax has been finally putto rest in the Courts decision in the consolidated cases of
Commission of Internal Revenue vs. San Roque Power Corporation (G.R. No. 187485), Taganito Mining
Corporation vs. Commissioner of Internal Revenue (G.R.No. 196113), and Philex Mining Corporation vs.
Commissioner of Internal Revenue (G.R. No. 197156) (San Roque)
Taganito, in accordance with the said decision, argued that since it filed its judicial claim after the issuance
of BIR Ruling No. DA-489-03, but before the adoption of the Aichi doctrine, it can invoke BIR Ruling
No. DA-489-03 which ruled that the taxpayer-claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of Petition for Review. Therefore, its petition for
review was not prematurely filed before the CTA.
Ruling of the Court
The sole issue at hand is whether or not Taganitos judicial claim for refund/credit was prematurely filed.
The Court finds merit in Taganitos position in its Reply.
The Court, in San Roque, conclusively settled that it is Section 112 of the NIRC which applies specifically
to claims for tax credit certificatesand tax refunds specifically for unutilized creditable input VAT, and not
Section 229. The recent case of Visayas Geothermal Power Company vs.Commissioner of Internal
Revenue, encapsulates the relevant ruling in SanRoque, as follows:
Two sections of the NIRC are pertinent to the issue at hand, namely Section 112 (A) and (D) and Section
229, to wit:
SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-rated or Effectively Zero-rated Sales.- Any VAT-registered person, whose sales are zerorated 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 zerorated 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 beallocated proportionately on the basis of the volume ofsales.
xxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made.- In proper cases,
theCommissioner shall grant a refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of submission of complete documents in
support of the application filed in accordance with Subsections (A) and (B)hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the taxpayer

affected may, within thirty (30) days from the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day period, appeal the decision or the unacted claim with the
Court of Tax Appeals.
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, of any sum alleged to have been excessively or in anymanner wrongfully
collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit
or proceeding may be maintained,whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon whichpayment was made, such payment appears clearly
tohave been erroneously paid. [Emphases supplied]
It has been definitively settled in the recent En Banc case of CIR v. San Roque Power Corporation (San
Roque), that it is Section 112 of the NIRC which applies to claims for tax credit certificates and tax
refunds arising from sales of VAT-registered persons that are zero-rated or effectively zero-rated, which
are, simply put, claims for unutilized creditable input VAT.
Thus, under Section 112(A), the taxpayer may, within 2 years after the close of the taxable quarter when
the sales were made, via an administrative claim with the CIR, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales. Under Section 112(D),
the CIR must then act on the claim within 120 days from the submission of the taxpayers complete
documents. In case of (a) a full or partial denial by the CIR of the claim, or (b) the CIRs failure to act on
the claim within 120 days, the taxpayer may file a judicial claim via an appeal with the CTA of the CIR
decision or unacted claim, within 30 days (a) from receipt of the decision; or (b) after the expiration of
the120-day period.
The 2-year period under Section 229 does not apply to appeals before the CTA in relation to claims
for a refund or tax credit for unutilized creditable input VAT. Section 229 pertains to the recovery of
taxes erroneously, illegally, or excessively collected. San Roque stressed that "input VAT is not
excessively collected as understood under Section 229 because, at the time the input VAT is collected,
the amount paid is correct and proper." It is, therefore, Section 112 which applies specifically with regard
to claiming a refund or tax credit for unutilized creditable input VAT.
Upholding the ruling in Aichi, San Roque held that the 120+30 day period prescribed under Section
112(D) is mandatory and jurisdictional. The jurisdiction of the CTA over decisions or inaction of the CIR
is only appellate in nature and, thus, necessarily requires the prior filing of an administrative case before
the CIR under Section 112. The CTA can only acquire jurisdiction over a case after the CIR has rendered
its decision, or after the lapse of the period for the CIR to act, in which case such inaction is considered a
denial. A petition filed prior to the lapse of the 120-day period prescribed under said Section would be
premature for violating the doctrine on the exhaustion of administrative remedies.
There is, however, an exception to the mandatory and jurisdictional nature of the 120+30 day period. The
Court in San Roque noted that BIR Ruling No. DA-489-03, dated December 10, 2003, expressly stated
that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial
relief with the CTA by way of Petition for Review." This BIR Ruling wasrecognized as a general
interpretative rule issued by the CIR under Section 4 of the NIRC and, thus, applicable to all taxpayers.
Since the CIR has exclusive and original jurisdiction to interpret tax laws, it was held that taxpayers acting
in good faith should not be made to suffer for adhering to such interpretations. Section 246 of the Tax
Code, in consonance with equitable estoppel, expressly provides that a reversal of a BIR regulation or
ruling cannot adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior
to its reversal. Hence, taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on
December 10, 2003 up to its reversal by this Court in Aichi on October 6, 2010, where it was held that the
120+30 day period was mandatory and jurisdictional.

66

Accordingly, the general rule is that the 120+30 day period ismandatory and jurisdictional from the
effectivity of the 1997 NIRC on January 1, 1998, up to the present. As an exception, judicial claims filed
from December 10, 2003 to October 6, 2010 need not wait for the exhaustion of the 120-day period.

On October 25, 2001, petitioner filed with the BIR Revenue District Office (RDO) No. 83 at Toledo City,
Province of Cebu, its Quarterly VAT Return for the third quarter of 2001, declaring among others, the
following:

From the foregoing, it is clear that the two-year period under Section 229 does not apply to claims for a
refund or tax credit for unutilized creditable input VAT because it is not considered "excessively"
collected.Instead, San Roque settled that Section l 12 applies to claims for a refund or tax credit for
unutilized creditable input VAT, thereby making the 120+ 30 day period prescribed therein mandatory and
jurisdictional in nature.

Zero-rated Sales/Receipts

P 143,000,032.37

Taxable Sales-Sale of Scrap/Others

378,651.74

As an exception to the mandatory and jurisdictional nature of the 120+ 30 day period, judicial claims filed
between December 10, 2003 or from the issuance of BIR Ruling No. DA-489-03, up to October 6, 20 I 0
or the reversal of the ruling in Aichi, need not wait for the lapse of the 120+ 30 day period in consonance
with the principle of equitable estoppel.

Output Tax

34,422.89

In the present case, Taganito filed its judicial claim with the CTA on February 19, 2004, clearly within the
period of exception of December I 0, 2003 to October 6, 20 I 0. Its judicial claim was, therefore, not
prematurely filed and should not have been dismissed by the CT A En Banc.

On Domestic Purchases

4,765,458.58

On Importation of Goods

1,242,792.00

Total Available Input Tax

6,008,250.58

Excess Input Tax & Overpayment

P 5,973,827.69

WHEREFORE, the petition is GRANTED. The April 18, 2011Decision and the August 9, 2011 Resolution
of the Court of Tax Appeals En Banc, in CTA EB Case No. 559 are REVERSED and SET ASIDE. The
July 31, 2009 Decision and the October 27, 2009 Resolution of the CTA Former Second Division in CTA
Case No. 6867 are hereby REINSTATED. The Commissioner of Internal Revenue is hereby ORDERED
TO REFUND or, in the alternative, TO ISSUE A TAX CREDITCERITICATE in favor of Taganito Mining
Corporation the amount of THREE MILLION SIX HUNDRED THIRTY SIX THOUSAND EIGHT
HUNDRED FIFTY FOUR PESOS AND 7/100 (P3,636,854.07),representing the unutilized input taxes
attributable to its zero-rated sa lcs from January 1, 2002 to December 31, 2002.
SO ORDERED.

THIRD DIVISIONG.R. No. 183880

January 20, 2014

Less: Input Tax

However, an amended Quarterly VAT Return for the same quarter of 2001was filed on November 22,
2001. The amended return shows unutilized input VAT credits of P5,909,588.96 arising from petitioners
taxable purchases for the third quarter of 2001 and the following other information:
Zero-rated Sales/Receipts

P 143,000,032.37

Taxable Sales-Sale of Scrap/Others

378,651.74

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
TOLEDO POWER, INC., Respondent.

Output Tax

34,422.89

DECISION

Less: Input Tax

PERALTA, J.:
This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the
reversal of the Court of Tax Appeals (CTA) En Banc Decision1 dated May 7, 2008, and Resolution2 dated
July 18, 2008.
The pertinent facts, as narrated by the CT A First Division, are as follows:
Petitioner (herein respondent Toledo Power, Inc.) is a general partnership duly organized and existing
under Philippine laws, with principal office at Sangi, Toledo City, Cebu. It is principally engaged in the
business of power generation and subsequent sale thereof to the National Power Corporation (NPC), Cebu
Electric Cooperative III (CEBECO), Atlas Consolidated Mining and Development Corporation, Atlas
Fertilizer Corporation and Cebu Industrial Park Development, Inc., and is registered with the Bureau of
Internal Revenue (BIR) as a Value
Added Tax taxpayer in accordance with Section 236 of the National Internal Revenue Code (NIRC) with
Tax Identification No. 003-883-626-VAT and BIR Certificate of Registration bearing RDO Control No.
94-083-000300.
On June 20, 2002, petitioner filed an application with the Energy Regulatory Commission (ERC) for the
issuance of a Certificate of Compliance pursuant to the Implementing Rules and Regulations of R.A.
9136, otherwise known as the "Electric Power Industry Reform Act of 2007" (EPIRA).

On Domestic Purchases

4,718,099.85

On Importation of Goods

1,225,912.00

Total Available Input Tax

5,944,011.85

Excess Input Tax & Overpayment

P 5,909,588.96

Thus, for the third quarter of 2001, petitioner allegedly has unutilized input VAT in the total amount
ofP5,909,588.96 on its domestic purchase of taxable goods and services and importation of goods, which
purchases and importations are all attributable to its zero-rated sale of power generation services to NPC,
CEBECO, Atlas Consolidated Mining and Development Corporation, Atlas Fertilizer Corporation and
Cebu Industrial Park Development, Inc. Said input VAT of P5,909,588.96 paid by petitioner on its
domestic purchase of goods and services for the third quarter of 2001 allegedly remained unutilized
against output VAT liability in said period or even in subsequent matters.
On January 25, 2002, petitioner filed with the BIR RDO No. 83 at Toledo City, Province of Cebu, its
Quarterly VAT Return for the fourth quarter of 2001 declaring, among others, the following:

67

Zero-rated Sales/Receipts

P 127,259,720.44

Taxable Sales-Sale of Scrap/Others

309,697.50

Output Tax

28,154.33

Acting on the petition, the CTA First Division issued a Decision dated May 17, 2007 partially granting
Toledo Power, Inc.s (TPI) refund claim or issuance of tax credit certificate. Pertinent portions of the
Decision read:
In sum, petitioner was able to show its entitlement to the refund or issuance of tax credit certificate in the
amount of P8,553,050.44 computed as follows:
Total Available Input VAT

P 9,191,947.49

Less: Input Tax

On Domestic Purchases

1,374,608.64

Less: Disallowed Input VAT

(P20,696.34+P52,363.64+P277,207.50)

350,267.48

On Importation of Goods

1,873,327.00

Substantiated available input VAT

P 8,841,680.01

Total Available Input Tax

3,247,935.64

Less: Output VAT

62,577.22

Excess Input Tax & Overpayment

P 3,219,781.31

Substantiated Unutilized Input VAT

P 8,779,102.79

Thus, petitioner allegedly had an excess input VAT credits of P3,219,781.31 for the fourth quarter of 2001
which remained unutilized against output VAT liability in said period or even in the subsequent quarters.
For the third and fourth quarters of 2001, petitioner incurred and accumulated input VAT from its domestic
purchase of goods and services, which are all attributable to its zero-rated sales of power generation
services to NPC, CEBECO, Atlas Consolidated Mining and Development

Multiply by the ratio of substantiated

zero-rated sales to the total zero-rated
sales

Corporation, Atlas Fertilizer Corporation and Cebu Industrial Park Development Inc., in the total amount
ofP9,129,370.27. Said excess and unutilized input VAT was allegedly not utilized against any output VAT
liability in the subsequent quarters nor carried over to the succeeding taxable quarters.

Substantiated zero-rated sales

263,300,858.02

Total zero-rated sales

270,259,752.81

Refundable Input VAT

P 8,553,050.44

On September 30, 2003, pursuant to the procedure prescribed in Revenue Regulations No. 7-95, as
amended, petitioner filed with the BIR RDO No. 83, an administrative claim for refund or unutilized input
VAT for the third and fourth quarter of 2001 in the amounts of P5,909,588.96 and P3,219,781.31,
respectively, or the aggregate amount of P9,129,370.27.
Respondent (herein petitioner Commissioner of Internal Revenue) has not ruled upon petitioners
administrative claim and in order to preserve its right to file a judicial claim for the refund or issuance of a
tax credit certificate of its unutilized input VAT, petitioner filed a Petition for
Review to suspend the running of the two-year prescriptive period under Section 112(D) of the 1997
NIRC and Section 4.106-2(c) of Revenue Regulations No. 7-95, as amended. On October 24, 2003,
petitioner filed a Petition for Review for the refund or issuance of a tax credit certificate in the amount
of P5,909,588.96 for the third quarter of 2001, docketed as CTA Case No. 6805 and, on January 22, 2004,
filed another Petition for Review for the refund or issuance of tax credit certificate in the amount
of P3,219,781.31 for the fourth quarter of 2001, docketed as CTA Case No. 6851, both for its unutilized
input VAT paid by petitioner on its domestic purchases of goods and services and importation of goods
attributable to zero-rated sales.
On January 30, 2004, petitioner filed a Motion for Consolidation CTA Case Nos. 6805 and 6851, since
these cases involve the same parties, same facts and issues. The said Motion was granted in open court on
February 27, 2004 and confirmed in a Resolution dated March 8, 2004.
xxxx
After presenting its testimonial and documentary evidence, petitioner formally offered its evidence on
February 16, 2006. On March 24, 2006, this Court promulgated a Resolution admitting all the exhibits
offered by petitioner. Respondent, on the other hand, failed to adduce any evidence.
In a Resolution dated July 6, 2006, this consolidated case was ordered submitted for decision with only
petitioners Memorandum, as respondent failed to file one within the period given by the Court. 3

IN VIEW OF THE FOREGOING, the Petition for Review is PARTIALLY GRANTED. Respondent is
hereby ORDERED to refund or to issue a tax credit certificate in favor of petitioner in the reduced amount
ofP8,553,050.44 representing the substantiated unutilized input VAT for the third and fourth quarters of
2001.
SO ORDERED.4
The Commissioner of Internal Revenue (CIR), thereafter, filed a Motion for Reconsideration against said
Decision. However, the same was denied in a Resolution dated October 15, 2007.
On appeal to the CTA En Banc, the CIR argued that TPI failed to comply with the invoicing requirements
to prove entitlement to the refund or issuance of tax credit certificate. In addition, he challenged the
jurisdiction of the CTA First Division to entertain respondents petition for review for failure on its part to
comply with the provisions of Section 112 (C) of the Tax Code.
In a Decision dated May 7, 2008, the CTA En Banc affirmed with modification the First Divisions
assailed decision. It held
x x x after re-examination of the records of this case, out of the alleged Zero-rated sales amounting
toP270,259,752.81, only the amount of P248,989,191.87 is fully substantiated. Therefore, respondent is
entitled to the refund or issuance of tax credit certificate in the amount of P8,088,151.07 computed as
follows:
Total Available Input VAT

P 9,191,947.49

68

Less: Disallowed Input VAT

(P20,696.34+P52,363.64+P277,207.50)

350,267.48

Substantiated available input VAT

P 8,841,680.01

Less: Output VAT

62,577.22

Substantiated Unutilized Input VAT

P 8,779,102.79

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: Provided, finally, That for a person
making sales that are zero-rated under Section 108(B)(6), the input taxes shall be allocated ratably
between his zero-rated and non-zero-rated sales.
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer may, within thirty
(30) days from the receipt of the decision denying the claim or after the expiration of the one hundred
twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.

Multiply by the ratio of substantiated

zero-rated sales to the total zero-rated
sales
Substantiated zero-rated sales

248,989,191.87

Total zero-rated sales

270,259,752.81

Refundable Input VAT

P 8,088,151.07

WHEREFORE, premises considered, the Petition for Review En Banc is DENIED for lack of merit.
Accordingly, the Decision dated May 17, 2007 and Resolution dated October 15, 2007 are AFFIRMED
with MODIFICATION. Petitioner is hereby ORDERED TO REFUND to respondent the sum of EIGHT
MILLION EIGHTY-EIGHT THOUSAND ONE HUNDRED FIFTY-ONE PESOS AND SEVEN
CENTAVOS (P8,088,151.07) only for the third and fourth quarters of taxable year 2001.
SO ORDERED.5
In a Resolution dated July 18, 2008, the CTA En Banc denied the CIRs motion for reconsideration.
Undaunted by the adverse ruling of the CTA, the CIR now seeks recourse to this Court on the following
ground:
THE COURT OF TAX APPEALS EN BANC ERRED IN RULING THAT THE GOVERNMENT IS
LIABLE TO REFUND PETITIONER FOR ALLEGED OVERPAYMENT OF VAT.6
In essence, two issues must be addressed to determine whether TPI is indeed entitled to its claim for
refund or issuance of tax credit certificate: (1) whether TPI complied with the 120+30 day rule under
Section 112 (C) of the Tax Code, and (2) whether TPI sufficiently complied with the invoicing
requirements under the Tax Code.
Let us discuss the issues in seriatim.
First, it must be emphasized that to validly claim a refund or tax credit of input tax, compliance with the
120+30 day rule under Section 112 of the Tax Code is mandatory.
Pertinent portions of Section 112 of the Tax Code, as amended by Republic Act No. 9337,7 state:
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 zerorated sale and also in taxable or exempt sale of goods of properties or services, and the amount of

Section 112 decrees that a VAT-registered person, whose sales are zero-rated or effectively zero-rated, may
apply for the issuance of a tax credit or refund creditable input tax due or paid attributable to such sales
within two years after the close of the taxable quarter when the sales were made. From the date of
submission of complete documents in support of its application, the CIR has 120 days to decide whether
or not to grant the claim for refund or issuance of tax credit certificate. In case of full or partial denial of
the claim for tax refund or tax credit, or the failure on the part of the CIR to act on the application within
the given period, the taxpayer may, within 30 days from receipt of the decision denying the claim or after
the expiration of the 120-day period, appeal with the CTA the decision or inaction of the CIR.
Recently, in the consolidated cases of Commissioner of Internal Revenue v. San Roque Power
Corporation,8 (San Roque), the Court confirmed the mandatory and jurisdictional nature of the 120+30
day rule. It ratiocinated as follows:
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods were
already in the law. Section 112 (C) expressly grants the Commissioner 120 days within which to decide
the taxpayers claim. The law is clear, plain and unequivocal: "x x x the Commissioner shall grant a refund
or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the
date of submission of complete documents." Following the verba legis doctrine, this law must be applied
exactly as worded since it is clear, plain and unequivocal. The taxpayer cannot simply file a petition with
the CTA without waiting for the Commissioners decision within the 120-day mandatory and jurisdictional
period. The CTA will have no jurisdiction because there will be no "decision" or "deemed a denial"
decision of the Commissioner for the CTA to review. In San Roques case, it filed its petition with the CTA
a mere 13 days after it filed its administrative claim with the Commissioner. Indisputably, San Roque
knowingly violated the mandatory 120-day period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or
inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim
or after the expiration of the one-hundred twenty day-period, appeal the decision or the unacted claim with
the Court of Tax Appeals. (Emphasis supplied.)
This law is clear, plain, and unequivocal.1avvphi1 Following the well-settled verba legis doctrine, this law
should be applied exactly as worded since it is clear, plain and unequivocal. As this law states, the
taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from
receipt of the Commissioners decision, or if the Commissioner does not act on the taxpayers claim
within the 120-day period, the taxpayer may appeal to the CTA within 30 days from the expiration of the
120-day period.
xxxx
When Section 112 (C) states that "the taxpayer affected may, within thirty (30) days from receipt of the
decision denying the claim or after the expiration of the one hundred twenty-day period, appeal the
decision or the unacted claim with the Court of Tax Appeals," the law does not make the 120+30 day
periods optional just because the law uses the word "may." The word "may" simply means that the

69

taxpayer may or may not appeal the decision of the Commissioner within 30 days from receipt of the
decision, or within 30 days from the expiration of the 120-day period. Certainly by no stretch of the
imagination can the word "may" be construed as making the 120+30 day periods optional, allowing the
taxpayer to file a judicial claim one day after filing the administrative claim with the Commissioner.
The old rule that the taxpayer may file the judicial claim, without waiting for the Commissioners decision
if the two-year prescriptive period is about to expire, cannot apply because that rule was adopted before
the enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old rule,
so that under the VAT System the taxpayer will always have 30 days to file the judicial claim even if the
Commissioner acts only on the 120th day, or does not act at all during the 120-day period. With the 30-day
period always available to the taxpayer, the taxpayer can no longer file a judicial claim for refund or credit
of input VAT without waiting for the Commissioner to decide until the expiration of the 120-day period.
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the
taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is
compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance with the
120+30 day periods is necessary for such a claim to prosper, whether before, during, or after the effectivity
of the Atlas doctrine, except for the period from the issuance of BIR Ruling No. DA-489-03 on 10
December 2003 to 6 October 2010 when the Aichi doctrine was adopted, which again reinstated the
120+30 day periods as mandatory and jurisdictional.9
In a nutshell, the rules on the determination of the prescriptive period for filing a tax refund or credit of
unutilized input VAT, as provided in Section 112 of the Tax Code, are as follows:
(1) An administrative claim must be filed with the CIR within two years after the close of the taxable
quarter when the zero-rated or effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit certificate. The
120-day period may extend beyond the two-year period from the filing of the administrative claim if the
claim is filed in the later part of the two-year period. If the 120-day period expires without any decision
from the CIR, then the administrative claim may be considered to be denied by inaction.
(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIRs decision
denying the administrative claim or from the expiration of the 120-day period without any action from the
CIR.
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an exception to the
mandatory and jurisdictional 120+30 day periods.10
Here, TPI filed its third and fourth quarterly VAT returns for 2001 on October 25, 2001 and January 25,
2002, respectively. It then filed an administrative claim for refund of its unutilized input VAT for the third
and fourth quarters of 2001 on September 30, 2003. Thus, the CIR had 120 days or until January 28, 2004,
after the submission of TPIs administrative claim and complete documents in support of its application,
within which to decide on its claim. Then, it is only after the expiration of the 120-day period, if there is
inaction on the part of the CIR, where TPI may elevate its claim with the CTA within 30 days.
In the present case, however, it appears that TPIs judicial claims for refund of its unutilized input VAT
covering the third and fourth quarters of 2001 were prematurely filed on October 24, 2003 and January 22,
2004, respectively.
However, although TPIs judicial claim for the fourth quarter of 2001 has been filed prematurely, the most
recent pronouncements of the Court provide for a window wherein the same may be entertained.
As held in the San Roque ponencia, strict compliance with the 120+30 day mandatory and jurisdictional
periods is not necessary when the judicial claims are filed between December 10, 2003 (issuance of BIR
Ruling No. DA-489-03 which states that the taxpayer need not wait for the 120-day period to expire
before it could seek judicial relief) to October 6, 2010 (promulgation of the Aichi doctrine).

Clearly, therefore, TPIs refund claim of unutilized input VAT for the third quarter of 2001 was denied for
being prematurely filed with the CTA, while its refund claim of unutilized input VAT for the fourth quarter
of 2001 may be entertained since it falls within the exception provided in the Courts most recent rulings.
With that settled, we now resolve the issue of whether TPI sufficiently complied with the invoicing
requirements under the Tax Code with respect to the fourth quarter of 2001.
Section 113 (A), in relation to Section 237 of the Tax Code, provides:
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons.
(A) Invoicing Requirements. A VAT-registered person shall, for every sale, issue an invoice or
receipt.1wphi1 In addition to the information shall be indicated in the invoice or receipt:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayers identification number
(TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that
such amount includes value-added tax.
xxxx
SEC. 237. Issuance of Receipts or Sales of Commercial Invoices. All persons subject to an internal
revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five
pesos (P25.00) or more, issue duly registered 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, however, That in the case of sales, receipts or transfers in the amount of One hundred
pesos (P100.00) or more, or regardless of the amount, where the sale or transfer is made by a person liable
to value-added tax to another person also liable 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: Provided,
further, That where the purchaser is a VAT-registered person, in addition to the information herein
required, the invoice or receipts shall further show the Taxpayer Identification Number (TIN) of the
purchaser.
Section 4.108-1 of Revenue Regulations No. 7-95 states:
Section 4.108-1. Invoicing Requirements All VAT-registered persons shall, for every sale or lease of
goods or properties or services, issue duly registered receipts or sales or commercial invoices which must
show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of merchandise or nature of service;
4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client;
5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and
6. the invoice value or consideration.11
In the present case, we agree with the CTAs findings that the words "zero-rated" appeared on the VAT
invoices/official receipts presented by the TPI in support of its refund claim. Although the same was
merely stamped and not pre-printed, the same is sufficient compliance with the law, since the imprinting
of the word "zero-rated" was required merely to distinguish sales subject to 10% VAT, those that are
subject to 0% VAT (zero-rated) and exempt sales, to enable the Bureau of Internal Revenue to properly
implement and enforce the other VAT provisions of the Tax Code.
Moreover, it is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA
which, by the very nature of its function of being dedicated exclusively to the resolution of tax problems,
has accordingly developed an expertise on the subject, unless there has been an abuse or improvident
exercise of authority.12

70

In Barcelon, Roxas Securities, Inc. v. Commissioner of Internal Revenue,13 the Court held that it accords
the findings of fact by the CTA with the highest respect. It ruled that factual findings made by the CTA can
only be disturbed on appeal if they are supported by substantial evidence or there is a showing of gross
error or abuse on the part of the Tax Court. In the absence of any clear and convincing proof to the
contrary, this Court must presume that the CTA rendered a decision which is valid in every respect. 14
WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. The Commissioner
of Internal Revenue is hereby ORDERED to refund or issue tax credit certificate in favor of Toledo Power,
Inc. only for the fourth quarter of 2001. This case is hereby REMANDED to the Court of Tax Appeals for
the proper computation of the refundable amount representing unutilized input VAT for the fourth quarter
of 2001.
SO ORDERED.

(PRDC) for the years ending 1986, 1987 and 1988. The said examination resulted in a recommendation
for the issuance of an assessment in the amounts of P7,498,434.65 and P3,015,236.35 for the years 1986
and 1987, respectively.
On March 1, 1995, the Commissioner of Internal Revenue filed a criminal complaint before the
Department of Justice against the PRDC, its President Rogelio A. Dio, and its Treasurer Virginia S. Dio,
alleging evasion of taxes in the total amount of P10,513,671 .00. Private respondents PRDC, et.al. filed an
Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment and tax liability.
On March 23, 1995, private respondents received a subpoena from the DOJ in connection with the
criminal complaint filed by the Commissioner of Internal Revenue (BIR) against them.1wphi1.nt
In a letter dated May 17, 1995, the CIR denied the urgent request for reconsideration/reinvestigation of the
private respondents on the ground that no formal assessment of the has as yet been issued by the
Commissioner.
Private respondents then elevated the Decision of the CIR dated May 17, 1995 to the Court of Tax Appeals
on a petition for review docketed as CTA Case No. 5271 on July 21, 1995. On September 6, 1995, the CIR
filed a Motion to Dismiss the petition on the ground that the CTA has no jurisdiction over the subject
matter of the petition, as there was no formal assessment issued against the petitioners. The CTA denied
the said motion to dismiss in a Resolution dated January 25, 1996 and ordered the CIR to file an answer
within thirty (30) days from receipt of said resolution. The CIR received the resolution on January 31,
1996 but did not file an answer nor did she move to reconsider the resolution.
Instead, the CIR filed this petition on June 7, 1996, alleging as grounds that:

THIRD DIVISION G.R. No. 128315 June 29, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PASCOR REALTY AND DEVELOPMENT CORPORATION, ROGELIO A. DIO and VIRGINIA
S. DIO,respondents.

Respondent Court of Tax Appeals acted with grave abuse of discretion and without jurisdiction in
considering the affidavit/report of the revenue officer and the indorsement of said report to the secretary of
justice as assessment which may be appealed to the Court of Tax Appeals;
Respondent Court Tax Appeals acted with grave abuse of discretion in considering the denial by petitioner
of private respondents' Motion for Reconsideration as [a] final decision which may be appealed to the
Court of Tax Appeals.

PANGANIBAN, J.:

In denying the motion to dismiss filed by the CIR, the Court of Tax Appeals stated:

An assessment contains not only a computation of tax liabilities, but also a demand for payment within a
prescribed period. It also signals the time when penalties and protests begin to accrue against the taxpayer.
To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on
and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the
tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an
assessment that can be questioned before the Court of Tax Appeals.

We agree with petitioners' contentions, that the criminal complaint for tax evasion is the assessment
issued, and that the letter denial of May 17, 1995 is the decision properly appealable to [u]s. Respondent's
ground of denial, therefore, that there was no formal assessment issued, is untenable.

Statement of the Case

It is the Court's honest belief, that the criminal case for tax evasion is already anassessment. The
complaint, more particularly, the Joint Affidavit of Revenue Examiners Lagmay and Savellano attached
thereto, contains the details of the assessment like the kind and amount of tax due, and the period covered:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying for
the nullification of the October 30, 1996
Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40853, which effectively affirmed the January 25,
1996 Resolution 3of the Court of Tax Appeals 4 CTA Case No. 5271. The CTA disposed as follows:

Petitioners are right, in claiming that the provisions of Republic Act No. 1125, relating to exclusive
appellate jurisdiction of this Court, do not, make any mention of "formal assessment." The law merely
states, that this Court has exclusive appellate jurisdiction over decisions of the Commissioner of Internal
Revenue on disputed assessments, and other matters arising under the National Internal Revenue Code,
other law or part administered by the Bureau of Internal Revenue Code.

WHEREFORE, finding [the herein petitioner's] "Motion to Dismiss" as UNMERITORIOUS, the same is
hereby DENIED. [The CIR] is hereby given a period of thirty (30) days from receipt hereof to file her
answer.

As far as this Court is concerned, the amount and kind of tax due, and the period covered, are sufficient
details needed for an "assessment." These details are more than complete, compared to the following
definitions of the term as quoted hereunder. Thus:

Petitioner also seeks to nullify the February 13, 1997 Resolution 5 of the Court of Appeals denying
reconsideration.

Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43 S.W. (2d) 386, 387, 163 Tenn. 332.
(Words and Phrases, Permanent Edition, Vol. 4, p. 446).

The Facts

The word assessment when used in connection with taxation, may have more than one meaning.The
ultimate purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is to
pay. More commonly, the word "assessment" means the official valuation of a taxpayer's property for
purpose of taxation. State v. New York, N.H. and H.R. Co. 22 A. 765, 768, 60 Conn. 326, 325. (Ibid. p.
445)

As found by the Court of Appeals, the undisputed facts of the case are as follows:
It appears that by virtue of Letter of Authority No. 001198, then BIR Commissioner Jose U. Ong
authorized Revenue Officers Thomas T. Que, Sonia T. Estorco and Emmanuel M. Savellano to examine
the books of accounts and other accounting records of Pascor Realty and Development Corporation.

71

From the above, it can be gleaned that an assessment simply states how much tax is due from a taxpayer.
Thus, based on these definitions, the details of the tax as given in the Joint Affidavit of respondent's
examiners, which was attached to the tax evasion complaint, more than suffice to qualify as an assessment.
Therefore, this assessment having been disputed by petitioners, and there being a denial of their letter
disputing such assessment, this Court unquestionably acquired jurisdiction over the instant petition for
review. 6
As earlier observed, the Court of Appeals sustained the CTA and dismissed the petition.
Hence, this recourse to this Court. 7
Ruling of the Court of Appeals
The Court of Appeals held that the tax court committed no grave abuse of discretion in ruling that the
Criminal Complaint for tax evasion filed by the Commissioner of Internal Revenue with the Department
of Justice constituted an "assessment" of the tax due, and that the said assessment could be the subject of a
protest. By definition, an assessment is simply the statement of the details and the amount of tax due from
a taxpayer. Based on this definition, the details of the tax contained in the BIR examiners' Joint
Affidavit, 8 which was attached to the criminal Complaint, constituted an assessment. Since the assailed
Order of the CTA was merely interlocutory and devoid of grave abuse of discretion, a petition
for certiorari did not lie.
Issues
Petitioners submit for the consideration of this Court following issues:
(1) Whether or not the criminal complaint for tax evasion can be construed as an assessment.

True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she has tax
liabilities. But not all documents coming from the BIR containing a computation of the tax liability can be
deemed assessments.
To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the
taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in addition
to the tax due, in case the taxpayer fails to pay deficiency tax within the time prescribed for its payment in
the notice of assessment. Likewise, an interest of 20 percent per annum, or such higher rates as may be
prescribed by rules and regulations, is to be collected form the date prescribed for its payment until the full
payment. 12
The issuance of an assessment is vital in determining, the period of limitation regarding its proper issuance
and the period within which to protest it. Section 203 13 of the NIRC provides that internal revenue taxes
must be assessed within three years from the last day within which to file the return. Section 222, 14 on the
other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or
in case of failure to file a return. Also, Section 228 15 of the same law states that said assessment may be
protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a
specific document constitutes an assessment. Otherwise, confusion would arise regarding the period
within which to make an assessment or to protest the same, or whether interest and penalty may accrue
thereon.
It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an
assessment is deemed made only when the collector of internal revenue releases, mails or sends such
notice to the taxpayer. 16

(2) Whether or not an assessment is necessary before criminal charges for tax evasion may be instituted.

In the present case, the revenue officers' Affidavit merely contained a computation of respondents' tax
liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary,
not to the taxpayers.

(3) Whether or not the CTA can take cognizance of the case in the absence of an assessment. 9

Respondents maintain that an assessment, in relation to taxation, is simply understood' to mean:

In the main, the Court will resolve whether the revenue officers' Affidavit-Report, which was attached to
criminal revenue Complaint filed the Department of Justice, constituted an assessment that could be
questioned before the Court of Tax Appeals.

A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof. 17

The Court's Ruling

The petition is meritorious.
Main Issue: Assessment
Petitioner argues that the filing of the criminal complaint with the Department of Justice cannot in any
way be construed as a formal assessment of private respondents' tax liabilities. This position is based on
Section 205 of the National Internal Revenue Code 10 (NIRC), which provides that remedies for the
collection of deficient taxes may be by either civil or criminal action. Likewise, petitioner cites Section
223(a) of the same Code, which states that in case of failure to file a return, the tax may be assessed or a
proceeding in court may be begun without assessment.
Respondents, on the other hand, maintain that an assessment is not an action or proceeding for the
collection of taxes, but merely a notice that the amount stated therein is due as tax and that the taxpayer is
required to pay the same. Thus, qualifying as an assessment was the BIR examiners' Joint Affidavit, which
contained the details of the supposed taxes due from respondent for taxable years ending 1987 and 1988,
and which was attached to the tax evasion Complaint filed with the DOJ. Consequently, the denial by the
BIR of private respondents' request for reinvestigation of the disputed assessment is properly appealable to
the CTA.
We agree with petitioner. Neither the NIRC nor the regulations governing the protest of
assessments 11 provide a specific definition or form of an assessment. However, the NIRC defines the
specific functions and effects of an assessment. To consider the affidavit attached to the Complaint as a
proper assessment is to subvert the nature of an assessment and to set a bad precedent that will prejudice
innocent taxpayers.

Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper presentation
of tax rolls. 18
Even these definitions fail to advance private respondents' case. That the BIR examiners' Joint Affidavit
attached to the Criminal Complaint contained some details of the tax liabilities of private respondents does
not ipso factomake it an assessment. The purpose of the Joint Affidavit was merely to support and
substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax due
and a demand to the private respondents for payment thereof.
The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not to
private respondents shows that the intent of the commissioner was to file a criminal complaint for tax
evasion, not to issue an assessment. Although the revenue officers recommended the issuance of an
assessment, the commissioner opted instead to file a criminal case for tax evasion. What private
respondents received was a notice from the DOJ that a criminal case for tax evasion had been filed against
them, not a notice that the Bureau of Internal Revenue had made an assessment.
In addition, what private respondents sent to the commissioner was a motion for a reconsideration of the
tax evasion charges filed, not of an assessment, as shown thus:
This is to request for reconsideration of the tax evasion charges against my client, PASCOR Realty and
Development Corporation and for the same to be referred to the Appellate Division in order to give my
client the opportunity of a fair and objective hearing. 19
Additional Issues: Assessment Not Necessary Before Filing of Criminal Complaint
Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment.
This is incorrect, because Section 222 of the NIRC specifically states that in cases where a false or
fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court
may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly mandates
that the civil and criminal aspects of the case may be pursued simultaneously. In Ungab v.

72

Cusi, 20 petitioner therein sought the dismissal of the criminal Complaints for being premature, since his
protest to the CTA had not yet been resolved. The Court held that such protests could not stop or suspend
the criminal action which was independent of the resolution of the protest in the CTA. This was because
the commissioner of internal revenue had, in such tax evasion cases, discretion on whether to issue an
assessment or to file a criminal case against the taxpayer or to do both.
Private respondents insist that Section 222 should be read in relation to Section 255 of the NLRC, 21 which
penalizes failure to file a return. They add that a tax assessment should precede a criminal indictment. We
disagree. To reiterate, said Section 222 states that an assessment is not necessary before a criminal charge
can be filed. This is the general rule. Private respondents failed to show that they are entitled to an
exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to
file a required return. This fact need not be proven by an assessment.
The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment
is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a
chance to submit position papers and documents to prove that the assessment is unwarranted. If the
commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the
latter specifically and clearly that an assessment has been made against him or her. In contrast, the
criminal charge need not go through all these. The criminal charge is filed directly with the DOJ.
Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the
commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to
demand payment, but to penalize the taxpayer for violation of the Tax Code.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision is REVERSED and SET ASIDE.
CTA Case No. 5271 is likewise DISMISSED. No costs.
SO ORDERED.
Vitug, Purisima and Gonzaga-Reyes, JJ., concur. Romero, J., abroad on official business.
FIRST DIVISION
G.R. No. 169225

November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
HAMBRECHT & QUIST PHILIPPINES, INC., Respondent.
DECISION
LEONARDO-DE CASTRO, J.:

On December 3, 1993, respondent, through its external auditors, filed with the same Accounts
Receivable/Billing Division of the BIRs National Office, its protest letter against the alleged deficiency
tax assessments for 1989 as indicated in the said tracer letter dated October 11, 1993.
The alleged deficiency income tax assessment apparently resulted from an adjustment made to
respondents taxable income for the year 1989, on account of the disallowance of certain items of expense,
namely, professional fees paid, donations, repairs and maintenance, salaries and wages, and management
fees. The latter item of expense, the management fees, made up the bulk of the disallowance, the examiner
alleging, among others, that petitioner failed to withhold the appropriate tax thereon. This is also the same
basis for the imposition of the deficiency withholding tax assessment on the management fees. Revenue
Regulations No. 6-85 (EWT Regulations) does not impose or prescribe EWT on management fees paid to
a non-resident.
On November 7, 2001, nearly eight (8) years later, respondents external auditors received a letter from
herein petitioner Commissioner of Internal Revenue dated October 27, 2001. The letter advised the
respondent that petitioner had rendered a final decision denying its protest on the ground that the protest
against the disputed tax assessment was allegedly filed beyond the 30-day reglementary period prescribed
in then Section 229 of the National Internal Revenue Code.
On December 6, 2001, respondent filed a Petition for Review docketed as CTA Case No. 6362 before the
then Court of Tax Appeals, pursuant to Section 7 of Republic Act No. 1125, otherwise known as an Act
Creating the Court of Tax Appeals and Section 228 of the NIRC, to appeal the final decision of the
Commissioner of Internal Revenue denying its protest against the deficiency income and withholding tax
assessments issued for taxable year 1989.3
In a Decision dated September 24, 2004, the CTA Original Division held that the subject assessment
notice sent by registered mail on January 8, 1993 to respondents former place of business was valid and
binding since respondent only gave formal notice of its change of address on February 18, 1993. Thus, the
assessment had become final and unappealable for failure of respondent to file a protest within the 30-day
period provided by law. However, the CTA (a) held that the CIR failed to collect the assessed taxes within
the prescriptive period; and (b) directed the cancellation and withdrawal of Assessment Notice No.
001543-89-5668. Petitioners Motion for Reconsideration and Supplemental Motion for Reconsideration
of said Decision filed on October 14, 2004 and November 22, 2004, respectively, were denied for lack of
merit.
Undaunted, the CIR filed a Petition for Review with the CTA En Banc but this was denied in a Decision
dated August 12, 2005, the dispositive portion reads:
WHEREFORE, the Petition for Review is DENIED DUE COURSE and the case is
accordingly DISMISSED for lack of merit.4

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the
Decision1dated August 12, 2005 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. No. 73
(C.T.A. Case No. 6362), entitled "Commissioner of Internal Revenue vs. Hambrecht & Quist Philippines,
Inc.," which affirmed the Decision2dated September 24, 2004 of the CTA Original Division in C.T.A. Case
No. 6362 canceling the assessment issued against respondent for deficiency income and expanded
withholding tax for the year 1989 for failure of petitioner Commissioner of Internal Revenue (CIR) to
enforce collection within the period allowed by law.

Hence, the instant Petition wherein the following issues are raised:

The CTA summarized the pertinent facts of this case, as follows:

WHETHER OR NOT THE PERIOD TO COLLECT THE ASSESSMENT HAS PRESCRIBED. 5

In a letter dated February 15, 1993, respondent informed the Bureau of Internal Revenue (BIR), through
its West-Makati District Office of its change of business address from the 2nd Floor Corinthian Plaza,
Paseo de Roxas, Makati City to the 22nd Floor PCIB Tower II, Makati Avenue corner H.V. De la Costa
Streets, Makati City. Said letter was duly received by the BIR-West Makati on February 18, 1993.

The petition is without merit.

On November 4, 1993, respondent received a tracer letter or follow-up letter dated October 11, 1993
issued by the Accounts Receivable/Billing Division of the BIRs National Office and signed by then
Assistant Chief Mr. Manuel B. Mina, demanding for payment of alleged deficiency income and expanded
withholding taxes for the taxable year 1989 amounting to P2,936,560.87.

I
WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION TO RULE THAT THE
GOVERNMENTS RIGHT TO COLLECT THE TAX HAS PRESCRIBED.
II

Anent the first issue, petitioner argues that the CTA had no jurisdiction over the case since the CTA itself
had ruled that the assessment had become final and unappealable. Citing Protectors Services, Inc. v. Court
of Appeals,6 the CIR argued that, after the lapse of the 30-day period to protest, respondent may no longer
dispute the correctness of the assessment and its appeal to the CTA should be dismissed. The CIR took
issue with the CTAs pronouncement that it had jurisdiction to decide "other matters" related to the tax
assessment such as the issue on the right to collect the same since the CIR maintains that when the law
says that the CTA has jurisdiction over "other matters," it presupposes that the tax assessment has not
become final and unappealable.

73

We cannot countenance the CIRs assertion with regard to this point. The jurisdiction of the CTA is
governed by Section 7 of Republic Act No. 1125, as amended, and the term "other matters" referred to by
the CIR in its argument can be found in number (1) of the aforementioned provision, to wit:

With respect to the second issue, the CIR insists that its right to collect the tax deficiency it assessed on
respondent is not barred by prescription since the prescriptive period thereof was allegedly suspended by
respondents request for reinvestigation.

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to
review by appeal, as herein provided

Based on the facts of this case, we find that the CIRs contention is without basis.1avvphi1 The pertinent
provision of the 1986 NIRC is Section 224, to wit:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters
arising under the National Internal Revenue Code or other law as part of law administered by the
Bureau of Internal Revenue. (Emphasis supplied.)

Section 224. Suspension of running of statute. The running of the statute of limitations provided in
Sections 203 and 223 on the making of assessment and the beginning of distraint or levy or a proceeding
in court for collection, in respect of any deficiency, shall be suspended for the period during which the
Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in
court and for sixty days thereafter; when the taxpayer requests for a re-investigation which is granted
by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed
upon which a tax is being assessed or collected:Provided, That, if the taxpayer informs the Commissioner
of any change in address, the statute will not be suspended; when the warrant of distraint and levy is duly
served upon the taxpayer, his authorized representative, or a member of his household with sufficient
discretion, and no property could be located; and when the taxpayer is out of the Philippines. (Emphasis
supplied.)

Plainly, the assailed CTA En Banc Decision was correct in declaring that there was nothing in the
foregoing provision upon which petitioners theory with regard to the parameters of the term "other
matters" can be supported or even deduced. What is rather clearly apparent, however, is that the term
"other matters" is limited only by the qualifying phrase that follows it.
Thus, on the strength of such observation, we have previously ruled that the appellate jurisdiction of the
CTA is not limited to cases which involve decisions of the CIR on matters relating to assessments or
refunds. The second part of the provision covers other cases that arise out of the National Internal Revenue
Code (NIRC) or related laws administered by the Bureau of Internal Revenue (BIR). 7
In the case at bar, the issue at hand is whether or not the BIRs right to collect taxes had already prescribed
and that is a subject matter falling under Section 223(c) of the 1986 NIRC, the law applicable at the time
the disputed assessment was made. To quote Section 223(c):
Any internal revenue tax which has been assessed within the period of limitation above-prescribed may
be collected by distraint or levy or by a proceeding in court within three years following the assessment
of the tax. (Emphases supplied.)
In connection therewith, Section 3 of the 1986 NIRC states that the collection of taxes is one of the duties
of the BIR, to wit:
Sec. 3. Powers and duties of Bureau. - The powers and duties of the Bureau of Internal Revenue shall
comprehend the assessment and collection of all national internal revenue taxes, fees, and charges and
the enforcement of all forfeitures, penalties, and fines connected therewith including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said
Bureau shall also give effect to and administer the supervisory and police power conferred to it by this
Code or other laws. (Emphasis supplied.)
Thus, from the foregoing, the issue of prescription of the BIRs right to collect taxes may be considered as
covered by the term "other matters" over which the CTA has appellate jurisdiction.
Furthermore, the phraseology of Section 7, number (1), denotes an intent to view the CTAs jurisdiction
over disputed assessments and over "other matters" arising under the NIRC or other laws administered by
the BIR as separate and independent of each other. This runs counter to petitioners theory that the latter is
qualified by the status of the former, i.e., an "other matter" must not be a final and unappealable tax
assessment or, alternatively, must be a disputed assessment.
Likewise, the first paragraph of Section 11 of Republic Act No. 1125,
as amended by Republic Act No. 9282,8 belies petitioners assertion as the provision is explicit that, for as
long as a party is adversely affected by any decision, ruling or inaction of petitioner, said party may file an
appeal with the CTA within 30 days from receipt of such decision or ruling. The wording of the provision
does not take into account the CIRs restrictive interpretation as it clearly provides that the mere existence
of an adverse decision, ruling or inaction along with the timely filing of an appeal operates to validate the
exercise of jurisdiction by the CTA.
To be sure, the fact that an assessment has become final for failure of the taxpayer to file a protest within
the time allowed only means that the validity or correctness of the assessment may no longer be
questioned on appeal. However, the validity of the assessment itself is a separate and distinct issue from
the issue of whether the right of the CIR to collect the validly assessed tax has prescribed. This issue of
prescription, being a matter provided for by the NIRC, is well within the jurisdiction of the CTA to decide.

The plain and unambiguous wording of the said provision dictates that two requisites must concur before
the period to enforce collection may be suspended: (a) that the taxpayer requests for reinvestigation, and
(b) that petitioner grants such request.
On this point, we have previously held that:
The above section is plainly worded. In order to suspend the running of the prescriptive periods for
assessment and collection, the request for reinvestigation must be granted by the CIR.9 (Emphasis
supplied.)
Consequently, the mere filing of a protest letter which is not granted does not operate to suspend the
running of the period to collect taxes. In the case at bar, the records show that respondent filed a request
for reinvestigation on December 3, 1993, however, there is no indication that petitioner acted upon
respondents protest. As the CTA Original Division in C.T.A. Case No. 6362 succinctly pointed out in its
Decision, to wit:
It is evident that the respondent did not conduct a reinvestigation, the protest having been dismissed on the
ground that the assessment has become final and executory. There is nothing in the record that would
show what action was taken in connection with the protest of the petitioner. In fact, petitioner did not hear
anything from the respondent nor received any communication from the respondent relative to its protest,
not until eight years later when the final decision of the Commissioner was issued (TSN, March 7, 2002,
p. 24). In other words, the request for reinvestigation was not granted. x x x.10 (Emphasis supplied.)
Since the CIR failed to disprove the aforementioned findings of fact of the CTA which are borne by
substantial evidence on record, this Court is constrained to uphold them as binding and true. This is in
consonance with our oft-cited ruling that instructs this Court to not lightly set aside the conclusions
reached by the CTA, which, by the very nature of its functions, is dedicated exclusively to the resolution
of tax problems and has accordingly developed an expertise on the subject unless there has been an abuse
or improvident exercise of authority.11
Indeed, it is contradictory for the CIR to argue that respondents December 3, 1993 protest which
contained a request for reinvestigation was filed beyond the reglementary period but still claim that the
same request for reinvestigation was implicitly granted by virtue of its October 27, 2001 letter. We find no
cogent reason to reverse the CTA when it ruled that the prescriptive period for the CIRs right to collect
was not suspended under the circumstances of this case.
WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Tax Appeals (CTA) En
Banc dated August 12, 2005 is AFFIRMED. No costs.
SO ORDERED.

74

January 31, 2002 and by the BIR Tax Fraud Division on February 4, 2002, and accepted by the Assistant
Commissioner of the Enforcement Service, Percival T. Salazar (Salazar).
This was followed by a second Waiver of Defense of Prescription 5 executed by Pasco on February 18,
2003, notarized on February 19, 2003, received by the BIR Tax Fraud Division on February 28, 2003 and
accepted by Assistant Commissioner Salazar.
On August 25, 2003, the BIR issued a Preliminary Assessment Notice for the taxable year 1998 against the
respondent. This was followed by a Formal Letter of Demand with Assessment Notices for taxable year
1998, dated September 26, 2003 which was received by respondent on November 12, 2003.
Respondent challenged the assessments by filing its "Protest on Various Tax Assessments" on December 3,
2003 and its "Legal Arguments and Documents in Support of Protests against Various Assessments" on
February 2, 2004.
On June 22, 2004, the BIR rendered a final Decision6 on the matter, requesting the immediate payment of
the following tax liabilities:

SECOND DIVISION
G.R. No. 178087

May 5, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
KUDOS METAL CORPORATION, Respondent.

Kind of Tax

Amount

Income Tax

P 9,693,897.85

VAT

13,962,460.90

EWT

1,712,336.76

Withholding Tax-Compensation

247,353.24

Penalties

8,000.00

Total

P25,624,048.76

DECISION
DEL CASTILLO, J.:

Ruling of the Court of Tax Appeals, Second Division

The prescriptive period on when to assess taxes benefits both the government and the
taxpayer.1 Exceptions extending the period to assess must, therefore, be strictly construed.

Believing that the governments right to assess taxes had prescribed, respondent filed on August 27, 2004
a Petition for Review7 with the CTA. Petitioner in turn filed his Answer.8

This Petition for Review on Certiorari seeks to set aside the Decision2 dated March 30, 2007 of the Court
of Tax Appeals (CTA) affirming the cancellation of the assessment notices for having been issued beyond
the prescriptive period and the Resolution3 dated May 18, 2007 denying the motion for reconsideration.

On April 11, 2005, respondent filed an "Urgent Motion for Preferential Resolution of the Issue on
Prescription."9

Factual Antecedents
On April 15, 1999, respondent Kudos Metal Corporation filed its Annual Income Tax Return (ITR) for the
taxable year 1998.
Pursuant to a Letter of Authority dated September 7, 1999, the Bureau of Internal Revenue (BIR) served
upon respondent three Notices of Presentation of Records. Respondent failed to comply with these notices,
hence, the BIR issued a Subpeona Duces Tecum dated September 21, 2006, receipt of which was
acknowledged by respondents President, Mr. Chan Ching Bio, in a letter dated October 20, 2000.
A review and audit of respondents records then ensued.
On December 10, 2001, Nelia Pasco (Pasco), respondents accountant, executed a Waiver of the Defense
of Prescription,4 which was notarized on January 22, 2002, received by the BIR Enforcement Service on

On October 4, 2005, the CTA Second Division issued a Resolution10 canceling the assessment notices
issued against respondent for having been issued beyond the prescriptive period. It found the first Waiver
of the Statute of Limitations incomplete and defective for failure to comply with the provisions of
Revenue Memorandum Order (RMO) No. 20-90. Thus:
First, the Assistant Commissioner is not the revenue official authorized to sign the waiver, as the tax case
involves more than P1,000,000.00. In this regard, only the Commissioner is authorized to enter into
agreement with the petitioner in extending the period of assessment;
Secondly, the waiver failed to indicate the date of acceptance. Such date of acceptance is necessary to
determine whether the acceptance was made within the prescriptive period;
Third, the fact of receipt by the taxpayer of his file copy was not indicated on the original copy. The
requirement to furnish the taxpayer with a copy of the waiver is not only to give notice of the existence of
the document but also of the acceptance by the BIR and the perfection of the agreement.1avvphi1

75

The subject waiver is therefore incomplete and defective. As such, the three-year prescriptive period was
not tolled or extended and continued to run. x x x11
Petitioner moved for reconsideration but the CTA Second Division denied the motion in a
Resolution12 dated April 18, 2006.

which the assessment can be made. In disputing the conclusion of the CTA that the waivers are invalid,
petitioner claims that respondent is estopped from adopting a position contrary to what it has previously
taken. Petitioner insists that by acquiescing to the audit during the period specified in the waivers,
respondent led the government to believe that the "delay" in the process would not be utilized against it.
Thus, respondent may no longer repudiate the validity of the waivers and raise the issue of prescription.

Ruling of the Court of Tax Appeals, En Banc

Respondents Arguments

On appeal, the CTA En Banc affirmed the cancellation of the assessment notices. Although it ruled that the
Assistant Commissioner was authorized to sign the waiver pursuant to Revenue Delegation Authority
Order (RDAO) No. 05-01, it found that the first waiver was still invalid based on the second and third
grounds stated by the CTA Second Division. Pertinent portions of the Decision read as follows:

Respondent maintains that prescription had set in due to the invalidity of the waivers executed by Pasco,
who executed the same without any written authority from it, in clear violation of RDAO No. 5-01. As to
the doctrine of estoppel by acquiescence relied upon by petitioner, respondent counters that the principle
of equity comes into play only when the law is doubtful, which is not present in the instant case.

While the Court En Banc agrees with the second and third grounds for invalidating the first waiver, it finds
that the Assistant Commissioner of the Enforcement Service is authorized to sign the waiver pursuant to
RDAO No. 05-01, which provides in part as follows:

Our Ruling

A. For National Office cases

Section 20315 of the National Internal Revenue Code of 1997 (NIRC) mandates the government to assess
internal revenue taxes within three years from the last day prescribed by law for the filing of the tax return
or the actual date of filing of such return, whichever comes later. Hence, an assessment notice issued after
the three-year prescriptive period is no longer valid and effective. Exceptions however are provided under
Section 22216 of the NIRC.

Designated Revenue Official

1. Assistant Commissioner (ACIR), For tax fraud and policy Enforcement Service cases
2. ACIR, Large Taxpayers Service For large taxpayers cases other than those cases falling under
Subsection B hereof
3. ACIR, Legal Service For cases pending verification and awaiting resolution of certain legal issues prior
to prescription and for issuance/compliance of Subpoena Duces Tecum
4. ACIR, Assessment Service (AS) For cases which are pending in or subject to review or approval by the
ACIR, AS

The petition is bereft of merit.

The waivers executed by respondents accountant did not extend the period within which the assessment
can be made
Petitioner does not deny that the assessment notices were issued beyond the three-year prescriptive period,
but claims that the period was extended by the two waivers executed by respondents accountant.
We do not agree.

Based on the foregoing, the Assistant Commissioner, Enforcement Service is authorized to sign waivers in
tax fraud cases. A perusal of the records reveals that the investigation of the subject deficiency taxes in this
case was conducted by the National Investigation Division of the BIR, which was formerly named the Tax
Fraud Division. Thus, the subject assessment is a tax fraud case.

Section 222 (b) of the NIRC provides that the period to assess and collect taxes may only be extended
upon a written agreement between the CIR and the taxpayer executed before the expiration of the threeyear period. RMO 20-9017 issued on April 4, 1990 and RDAO 05-0118 issued on August 2, 2001 lay down
the procedure for the proper execution of the waiver, to wit:

Nevertheless, the first waiver is still invalid based on the second and third grounds stated by the Court in
Division. Hence, it did not extend the prescriptive period to assess.

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but not after ______ 19
___", which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular
three-year period of prescription, should be filled up.

Moreover, assuming arguendo that the first waiver is valid, the second waiver is invalid for violating
Section 222(b) of the 1997 Tax Code which mandates that the period agreed upon in a waiver of the
statute can still be extended by subsequent written agreement, provided that it is executed prior to the
expiration of the first period agreed upon. As previously discussed, the exceptions to the law on
prescription must be strictly construed.

2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of
a corporation, the waiver must be signed by any of its responsible officials. In case the authority is
delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.

In the case at bar, the period agreed upon in the subject first waiver expired on December 31, 2002. The
second waiver in the instant case which was supposed to extend the period to assess to December 31, 2003
was executed on February 18, 2003 and was notarized on February 19, 2003. Clearly, the second waiver
was executed after the expiration of the first period agreed upon. Consequently, the same could not have
tolled the 3-year prescriptive period to assess. 13

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has
accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated. However,
before signing the waiver, the CIR or the revenue official authorized by him must make sure that the
waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly authorized
representative.

Petitioner sought reconsideration but the same was unavailing.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the
expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent
agreement is executed.

Issue
Hence, the present recourse where petitioner interposes that:
THE COURT OF TAX APPEALS EN BANC ERRED IN RULING THAT THE GOVERNMENTS
RIGHT TO ASSESS UNPAID TAXES OF RESPONDENT PRESCRIBED.14
Petitioners Arguments
Petitioner argues that the governments right to assess taxes is not barred by prescription as the two
waivers executed by respondent, through its accountant, effectively tolled or extended the period within

6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case,
the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt
by the taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was
notified of the acceptance of the BIR and the perfection of the agreement.19
A perusal of the waivers executed by respondents accountant reveals the following infirmities:

76

1. The waivers were executed without the notarized written authority of Pasco to sign the waiver in behalf
of respondent.
2. The waivers failed to indicate the date of acceptance.
3. The fact of receipt by the respondent of its file copy was not indicated in the original copies of the
waivers.
Due to the defects in the waivers, the period to assess or collect taxes was not extended. Consequently, the
assessments were issued by the BIR beyond the three-year period and are void.
Estoppel does not apply in this case
We find no merit in petitioners claim that respondent is now estopped from claiming prescription since by
executing the waivers, it was the one which asked for additional time to submit the required documents.
In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,20 the doctrine of estoppel
prevented the taxpayer from raising the defense of prescription against the efforts of the government to
collect the assessed tax. However, it must be stressed that in the said case, estoppel was applied as an
exception to the statute of limitations on collection of taxes and not on the assessment of taxes, as the BIR
was able to make an assessment within the prescribed period. More important, there was a finding that the
taxpayer made several requests or positive acts to convince the government to postpone the collection of
taxes, viz:
It appears that the first assessment made against respondent based on its second final return filed on
November 28, 1946 was made on February 11, 1947. Upon receipt of this assessment respondent
requested for at least one year within which to pay the amount assessed although it reserved its right to
question the correctness of the assessment before actual payment. Petitioner granted an extension of only
three months. When it failed to pay the tax within the period extended, petitioner sent respondent a letter
on November 28, 1950 demanding payment of the tax as assessed, and upon receipt of the letter
respondent asked for a reinvestigation and reconsideration of the assessment. When this request was
denied, respondent again requested for a reconsideration on April 25, 1952, which was denied on May 6,
1953, which denial was appealed to the Conference Staff. The appeal was heard by the Conference Staff
from September 2, 1953 to July 16, 1955, and as a result of these various negotiations, the assessment was
finally reduced on July 26, 1955. This is the ruling which is now being questioned after a protracted
negotiation on the ground that the collection of the tax has already prescribed.

Or, as was aptly said, "The tax could have been collected, but the government withheld action at the
specific request of the plaintiff. The plaintiff is now estopped and should not be permitted to raise the
defense of the Statute of Limitations." [Newport Co. vs. U.S., (DC-WIS), 34 F. Supp. 588].21
Conversely, in this case, the assessments were issued beyond the prescribed period. Also, there is no
showing that respondent made any request to persuade the BIR to postpone the issuance of the
assessments.
The doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on the
assessment of taxes considering that there is a detailed procedure for the proper execution of the waiver,
which the BIR must strictly follow. As we have often said, the doctrine of estoppel is predicated on, and
has its origin in, equity which, broadly defined, is justice according to natural law and right.22 As such, the
doctrine of estoppel cannot give validity to an act that is prohibited by law or one that is against public
policy.23 It should be resorted to solely as a means of preventing injustice and should not be permitted to
defeat the administration of the law, or to accomplish a wrong or secure an undue advantage, or to extend
beyond them requirements of the transactions in which they originate.24 Simply put, the doctrine of
estoppel must be sparingly applied.
Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO
20-90 and RDAO 05-01, which the BIR itself issued. As stated earlier, the BIR failed to verify whether a
notarized written authority was given by the respondent to its accountant, and to indicate the date of
acceptance and the receipt by the respondent of the waivers. Having caused the defects in the waivers, the
BIR must bear the consequence. It cannot shift the blame to the taxpayer. To stress, a waiver of the statute
of limitations, being a derogation of the taxpayers right to security against prolonged and unscrupulous
investigations, must be carefully and strictly construed.25
As to the alleged delay of the respondent to furnish the BIR of the required documents, this cannot be
taken against respondent. Neither can the BIR use this as an excuse for issuing the assessments beyond the
three-year period because with or without the required documents, the CIR has the power to make
assessments based on the best evidence obtainable.26
WHEREFORE, the petition is DENIED. The assailed Decision dated March 30, 2007 and Resolution
dated May 18, 2007 of the Court of Tax Appeals are hereby AFFIRMED.
SO ORDERED.

It is obvious from the foregoing that petitioner refrained from collecting the tax by distraint or levy or by
proceeding in court within the 5-year period from the filing of the second amended final return due to the
several requests of respondent for extension to which petitioner yielded to give it every opportunity to
prove its claim regarding the correctness of the assessment. Because of such requests, several
reinvestigations were made and a hearing was even held by the Conference Staff organized in the
collection office to consider claims of such nature which, as the record shows, lasted for several months.
After inducing petitioner to delay collection as he in fact did, it is most unfair for respondent to now take
advantage of such desistance to elude his deficiency income tax liability to the prejudice of the
Government invoking the technical ground of prescription.
While we may agree with the Court of Tax Appeals that a mere request for reexamination or
reinvestigation may not have the effect of suspending the running of the period of limitation for in such
case there is need of a written agreement to extend the period between the Collector and the taxpayer,
there are cases however where a taxpayer may be prevented from setting up the defense of prescription
even if he has not previously waived it in writing as when by his repeated requests or positive acts the
Government has been, for good reasons, persuaded to postpone collection to make him feel that the
demand was not unreasonable or that no harassment or injustice is meant by the Government. And when
such situation comes to pass there are authorities that hold, based on weighty reasons, that such an attitude
or behavior should not be countenanced if only to protect the interest of the Government.
This case has no precedent in this jurisdiction for it is the first time that such has risen, but there are
several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said: "The
applicable principle is fundamental and unquestioned. He who prevents a thing from being done may not
avail himself of the nonperformance which he has himself occasioned, for the law says to him in effect
"this is your own act, and therefore you are not damnified." "(R. H. Stearns Co. vs. U.S., 78 L. ed., 647).

77

Gross Income

P 833,186,319.00

Less: Deductions

347,343,565.00

Taxable Income

P 485,842,754.00

Tax Rate

x 35%

Tax Due

P 170,044,964.00

Less: Tax Credits/Payments

(a) Prior Years Excess Tax Credit

(b) 1st Quarter Payment

P236,679,254.00

(c) Creditable Withholding Tax

________________
(P 66,634,290.00)6

In view of the overpayment, no taxes were paid for the second and third quarters of 1997.7 Petitioners
ITR for the taxable year ending December 31, 1997 thereby reflected an overpayment of income taxes in
the amount ofP132,043,528.00, computed as follows:

FIRST DIVISION
G.R. No. 181298

Gross Income

P 1,182,473,910.00

Less: Deductions

879,485,278.00

Taxable Income

P 302,988,362.00

Tax Rate

x 35%

Tax Due

P 106,046,021.00

January 10, 2011

BELLE CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
DEL CASTILLO, J.:
Section 69 of the old National Internal Revenue Code (NIRC) allows unutilized tax credits to be refunded
as long as the claim is filed within the prescriptive period. This, however, no longer holds true under
Section 76 of the 1997 NIRC as the option to carry-over excess income tax payments to the succeeding
taxable year is now irrevocable.
This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeks to set aside the January
25, 2007 Decision2 and the January 21, 2008 Resolution3 of the Court of Appeals (CA).
Factual Antecedents
Petitioner Belle Corporation is a domestic corporation engaged in the real estate and property business. 4
On May 30, 1997, petitioner filed with the Bureau of Internal Revenue (BIR) its Income Tax Return (ITR)
for the first quarter of 1997, showing a gross income of P741,607,495.00, a deduction of P65,381,054.00,
a net taxable income of P676,226,441.00 and an income tax due of P236,679,254.00, which petitioner paid
on even date through PCI Bank, Tektite Tower Branch, an Authorized Agent Bank of the BIR. 5
On August 14, 1997, petitioner filed with the BIR its second quarter ITR, declaring an overpayment of
income taxes in the amount of P66,634,290.00. The computation of which is reproduced below:

Less: Tax Credits/Payments

(a) Prior Years Excess Tax Credit

(b) 1st Quarter Payment

P236,679,254.00

(c) Creditable Withholding Tax

(1,410,295.00)

(238,089,549.00)

(P 132,043,528.00)8

REFUNDABLE AMOUNT

Instead of claiming the amount as a tax refund, petitioner decided to apply it as a tax credit to the
succeeding taxable year by marking the tax credit option box in its 1997 ITR.9
For the taxable year 1998, petitioners amended ITR showed an overpayment of P106,447,318.00,
computed as follows:
Gross Income

P 1,279,810,489.00

Less: Deduction

1,346,553,546.00

Taxable Income (Loss)

(P 66,743,057.00)

Tax Rate

34%

78

Tax Due (Regular Income Tax)

- NIL

Minimum Corporate Income Tax

P 25,596,210.00

Tax Due

25,596,210.00

5. Petitioner failed miserably to show that the total amount of P106,447,318.00 claimed as overpaid or
excess income tax is refundable;
6. Taxes paid and collected are presumed to have been paid in accordance with law; hence, not refundable;
7. In an action for tax refund, the burden is on the taxpayer to establish its right to refund, and failure to
sustain the burden is fatal to the claim for refund;

Less: Tax Credits/Payments

(a) Prior years excess Tax Credits

(P 132,041,528.00)

(b) Quarterly payment

(c) Creditable tax withheld

Tax Payable/Overpayment

(P 106,447,318.00)10

8. It is incumbent upon petitioner to show that it has complied with the provisions of Section 204 (c) in
relation to Section 229 of the tax Code;
9. Well-established is the rule that refunds/tax credits are construed strictly against the taxpayer as they
partake the nature of tax exemptions.15

On April 12, 2000, petitioner filed with the BIR an administrative claim for refund of its unutilized excess
income tax payments for the taxable year 1997 in the amount of P106,447,318.00.11
Notwithstanding the filing of the administrative claim for refund, petitioner carried over the amount
ofP106,447,318.00 to the taxable year 1999 and applied a portion thereof to its 1999 Minimum Corporate
Income Tax (MCIT) liability, as evidenced by its 1999 ITR.12 Thus:
Gross Income

P 708,888,638.00

Less: Deduction

1,328,101,776.00

Taxable Income

(P 619,213,138.00)

Tax Due

Minimum Corporate Income Tax

P 14,185,874.00

Less: Tax Credits/Payments

(a) Prior years excess Credit

P 106,447,318.00

(b) Tax Payments for the 1st & 3rd Qtrs.

(c) Creditable tax withheld

TAX PAYABLE/REFUNDABLE

[T]hat all the allegations made by the Petitioner as well as the figures accompanying Petitioners claim are
substantiated by documentary evidence but noticed some flaws in Petitioners application of the pertinent
laws involved.
It bears stressing that the applicable provision in the case at bar is Section 69 of the old Tax Code and not
Section 76 of the 1997 Tax Code. Settled is the rule that under Section 69 of the old Tax Code, the
carrying forward of any excess/overpaid income tax for a given taxable year is limited only up to the
succeeding taxable year.
A painstaking scrutiny of Petitioners income tax returns would show that Petitioner carried over its 1997
refundable tax of P132,043,528.00 to the succeeding year of 1998 yielding an overpayment
of P106,447,318.00 (Exhibit I-1) after deducting therefrom the minimum Corporate Income tax
of P25,596,210.00. However, Petitioner even went further to the taxable year 1999 and applied the Prior
Years (1998) Excess Credit of P106,447,318.00 to its income tax liability.1avvphi1

Gross Income

P 708,888,638.00

P 106,447,318.00

Less: Deduction

1,328,101,776.00

(P 92,261,444.00)13

Taxable Income

(P 619,213,138.00)

On April 14, 2000, due to the inaction of the respondent Commissioner of Internal Revenue (CIR) and in
order to toll the running of the two-year prescriptive period, petitioner appealed its claim for refund of
unutilized excess income tax payments for the taxable year 1997 in the amount of P106,447,318.00 with
the CTA via a Petition for Review,14 docketed as CTA Case No. 6070.

4. Petitioners alleged claim for refund/tax credit is subject to administrative routinary

investigation/examination by respondents Bureau;

On April 10, 2001, the CTA rendered a Decision24 denying petitioners claim for refund. It found:

True enough, upon verification of Petitioners 1999 Corporate Annual Income Tax Return (Exh. I), this
Court found that the whole amount of P106,447,318.00 representing its prior year's excess credit (subject
of this claim) was carried forward to its 1999 income tax liability, details of the 1999 Income Tax Return
are shown below as follows:

Proceedings before the Court of Tax Appeals (CTA)

In answer thereto, respondent interposed that:

To prove entitlement to the refund, petitioner submitted, among others, the following documents: its ITR
for the first quarter of taxable year 1997 (Exhibit "B"),16 its tentative ITRs for taxable years 1997 (Exhibit
"D")17 and 1998 (Exhibit "H"),18 its final ITRs for taxable years 1997 (Exhibit "E"),19 1998 (Exhibit
"I")20 and 1999 (Exhibit "J"),21 its Letter Claim for Refund filed with the BIR (Exhibit "K")22 and the
Official Receipt issued by PCI Bank showing the income tax payment made by petitioner in the amount
of P236,679,254.00 for the first quarter of 1997 (Exhibit "C").23

Tax Due -

Minimum Corporate Income Tax

P 14,185,874.00

Less: Tax Credits/Payments

79

(a) Prior year's excess Credit

P 106,447,318.00

A.2. ASSUMING ARGUENDO THAT THE [DECISION IN THE] PBCOM CASE HAS NOT BEEN
REPEALED, IT HAS NO APPLICATION TO BELLE.

(b) Tax Payments for the 1st & 3rd Qtrs.

B. THE CA COMMITTED SERIOUS ERROR OF LAW IN FINDING THAT BELLES REFUND

CLAIM IS NOT ON ALL FOURS WITH THE CASES OF BPI FAMILY AND AB LEASING.

(c) Creditable tax withheld

TAX PAYABLE/REFUNDABLE

P106,447,318.00

(P 92,261,444.00)

B.1. BELLES CARRYING-OVER OF ITS EXCESS INCOME TAX PAID FOR 1997 TO 1999
(BEYOND THE SUBSEQUENT YEAR) IS IMMATERIAL.
B.2. BELLES PARTIAL USE OF ITS EXCESS INCOME TAX PAID IN 1998 (THE SUBSEQUENT
YEAR) DOES NOT PRECLUDE BELLE FROM ASKING FOR A REFUND.36
In a nutshell, the issue boils down to whether petitioner is entitled to a refund of its excess income tax
payments for the taxable year 1997 in the amount of P106,447,318.00.

It is an elementary rule in taxation that an automatic carry over of an excess income tax payment should
only be made for the succeeding year. (Paseo Realty and Devt. Corp. vs. CIR, CTA Case No. 4528, April
30, 1993) True enough, implicit from the provisions of Section 69 of the NIRC, as amended, (supra) is the
fact that the refundable amount may be credited against the income tax liabilities for the taxable quarters
of the succeeding taxable year not succeeding years; and that the carry-over is only limited to the quarters
of the succeeding taxable year. (citing ANSCOR Hagedorn Securities Inc. vs. CIR, CA-GR SP 38177,
December 21, 1999) To allow the application of excess taxes paid for two successive years would run
counter to the specific provision of the law above-mentioned.25 (Emphasis supplied.)
Petitioner sought reconsideration26 of the CTAs denial of its claim for refund, but the same was denied in
a Resolution27 dated June 5, 2001, prompting petitioner to elevate the matter to the CA via a Petition for
Review28under Rule 43 of the Rules of Court.
Ruling of the Court of Appeals
On January 25, 2007, the CA, applying Philippine Bank of Communications v. Commissioner of Internal
Revenue,29 denied the petition. The CA explained that the overpayment for taxable year 1997 can no
longer be carried over to taxable year 1999 because excess income payments can only be credited against
the income tax liabilities of the succeeding taxable year, in this case up to 1998 only and not
beyond.30 Neither can the overpayment be refunded as the remedies of automatic tax crediting and tax
refund are alternative remedies.31Thus, the CA ruled:
[W]hile BELLE may not have fully enjoyed the complete utilization of its option and the sum of
Php106,447,318 still remained after it opted for a tax carry over of its excess payment for the taxable year
1998, but be that as it may, BELLE has only itself to blame for making such useless and damaging option,
and BELLE may no longer opt to claim for a refund considering that the remedy of refund is barred after
the corporation has previously opted for the tax carry over remedy. As a matter of fact, the CTA even made
the factual findings that BELLE committed an aberration to exhaust its unutilized overpaid income tax by
carrying it over further to the taxable year 1999, which is a blatant transgression of the "succeeding
taxable year limit" provided for under Section 69 of the old NIRC. 32(Emphasis supplied)
Hence, the fallo of the Decision reads:
WHEREFORE, premises considered, the instant Petition for Review is DENIED, and accordingly, the
herein impugned April 10, 2001 Decision and June 5, 2001 Resolution of the CTA are hereby affirmed.
SO ORDERED.33
Petitioner moved for reconsideration.34 The CA, however, denied the same in a Resolution35 dated January
21, 2008.
Issues
Aggrieved, petitioner availed of the present recourse, raising the following assignment of errors:
A. THE CA COMMITTED SERIOUS ERROR OF LAW IN APPLYING THE PBCOM CASE.
A.1. THE [DECISION IN THE] PBCOM CASE HAS ALREADY BEEN REPEALED.

Petitioners Arguments
Petitioner insists that it is entitled to a refund as the ruling in Philippine Bank of Communications v.
Commissioner of Internal Revenue37 relied upon by the CA in denying its claim has been overturned
by BPI-Family Savings Bank, Inc. v. Court of Appeals,38 AB Leasing and Finance Corporation v.
Commissioner of Internal Revenue,39Calamba Steel Center, Inc. v. Commissioner of Internal
Revenue,40 and State Land Investment Corporation v. Commissioner of Internal Revenue.41 In these cases,
the taxpayers were allowed to claim refund of unutilized tax credits. 42 Similarly, in this case, petitioner
asserts that it may still recover unutilized tax credits via a claim for refund.43
And while petitioner admits that it has committed a "blatant transgression" of the "succeeding taxable year
limit" when it carried over its 1997 excess income tax payments beyond the taxable year 1998, petitioner
believes that this should not result in the denial of its claim for refund but should only invalidate the
application of its 1997 unutilized excess income tax payments to its 1999 income tax liabilities.44 Hence,
petitioner postulates that a claim for refund of its unutilized tax credits for the taxable year 1997 may still
be made because the carry-over thereof to the taxable year 1999 produced no legal effect, and is, therefore,
immaterial to the resolution of its claim for refund.45
Respondents Arguments
Respondent, on the other hand, maintains that the cases of BPI-Family Savings Bank46 and AB
Leasing47 are inapplicable as the facts obtaining therein are different from those of the present case.48 What
is controlling, therefore, is the ruling in Philippine Bank of Communications,49 that tax refund and tax
credit are alternative remedies; thus, "the choice of one precludes the other." 50 Respondent, therefore,
submits that since petitioner has already applied its 1997 excess income tax payments to its liabilities for
taxable year 1998, it is precluded from carrying over the same to taxable year 1999, or from filing a claim
for refund.51
Our Ruling
The petition has no merit.
Both the CTA and the CA erred in applying Section 6952 of the old NIRC. The law applicable is Section 76
of the NIRC.
Unutilized excess income tax payments may be refunded within two years from the date of payment under
Section 69 of the old NIRC
Under Section 69 of the old NIRC, in case of overpayment of income taxes, a corporation may either file a
claim for refund or carry-over the excess payments to the succeeding taxable year. Availment of one
remedy, however, precludes the other.53
Although these remedies are mutually exclusive, we have in several cases allowed corporations, which
have previously availed of the tax credit option, to file a claim for refund of their unutilized excess income
tax payments.
In BPI-Family Savings Bank,54 the bank availed of the tax credit option but since it suffered a net loss the
succeeding year, the tax credit could not be applied; thus, the bank filed a claim for refund to recover its
excess creditable taxes. Brushing aside technicalities, we granted the claim for refund.

80

Likewise, in Calamba Steel Center, Inc.,55 we allowed the refund of excess income taxes paid in 1995
since these could not be credited to taxable year 1996 due to business losses. In that case, we declared that
"a tax refund may be claimed even beyond the taxable year following that in which the tax credit arises x
x x provided that the claim for such a refund is made within two years after payment of said tax." 56

place before 1 January 1998. A keener appreciation of the nature and purpose of the varied provisions of
the 1997 NIRC cautions against sanctioning this reasoning.60
Accordingly, since petitioner already carried over its 1997 excess income tax payments to the succeeding
taxable year 1998, it may no longer file a claim for refund of unutilized tax credits for taxable year 1997.

In State Land Investment Corporation,57 we reiterated that "if the excess income taxes paid in a given
taxable year have not been entirely used by a x x x corporation against its quarterly income tax liabilities
for the next taxable year, the unused amount of the excess may still be refunded, provided that the claim
for such a refund is made within two years after payment of the tax." 58

To repeat, under the new law, once the option to carry-over excess income tax payments to the succeeding
years has been made, it becomes irrevocable. Thus, applications for refund of the unutilized excess income
tax payments may no longer be allowed.

Thus, under Section 69 of the old NIRC, unutilized tax credits may be refunded as long as the claim is
filed within the two-year prescriptive period.

WHEREFORE, the petition is hereby DENIED. The Decision dated January 25, 2007 and the Resolution
dated January 21, 2008 of the Court of Appeals are hereby AFFIRMED only insofar as the denial of
petitioners claim for refund is concerned.

The option to carry over excess income tax payments is irrevocable under Section 76 of the 1997 NIRC

SO ORDERED.

This rule, however, no longer applies as Section 76 of the 1997 NIRC now reads:
Section 76. Final Adjustment Return. Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the
refundable amount shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry
over and apply the excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered irrevocable for that taxable
period and no application for tax refund or issuance of a tax credit certificate shall be allowed therefor.
(Emphasis supplied)
Under the new law, in case of overpayment of income taxes, the remedies are still the same; and the
availment of one remedy still precludes the other. But unlike Section 69 of the old NIRC, the carry-over of
excess income tax payments is no longer limited to the succeeding taxable year. Unutilized excess income
tax payments may now be carried over to the succeeding taxable years until fully utilized. In addition, the
option to carry-over excess income tax payments is now irrevocable. Hence, unutilized excess income tax
payments may no longer be refunded.
In the instant case, both the CTA and the CA applied Section 69 of the old NIRC in denying the claim for
refund. We find, however, that the applicable provision should be Section 76 of the 1997 NIRC because at
the time petitioner filed its 1997 final ITR, the old NIRC was no longer in force. In Commissioner of
Internal Revenue v. McGeorge Food Industries, Inc.,59 we explained that:
Section 76 and its companion provisions in Title II, Chapter XII should be applied following the general
rule on the prospective application of laws such that they operate to govern the conduct of corporate
taxpayers the moment the 1997 NIRC took effect on 1 January 1998. There is no quarrel that at the time
respondent filed its final adjustment return for 1997 on 15 April 1998, the deadline under Section 77
(B) of the 1997 NIRC (formerly Section 70(b) of the 1977 NIRC), the 1997 NIRC was already in
force, having gone into effect a few months earlier on 1 January 1998. Accordingly, Section 76 is
controlling.
The lower courts grounded their contrary conclusion on the fact that respondents overpayment in 1997
was based on transactions occurring before 1 January 1998. This analysis suffers from the twin defects of
missing the gist of the present controversy and misconceiving the nature and purpose of Section 76. None
of respondents corporate transactions in 1997 is disputed here. Nor can it be argued that Section 76
determines the taxability of corporate transactions. To sustain the rulings below is to subscribe to the
untenable proposition that, had Congress in the 1997 NIRC moved the deadline for the filing of final
adjustment returns from 15 April to 15 March of each year, taxpayers filing returns after 15 March 1998
can excuse their tardiness by invoking the 1977 NIRC because the transactions subject of the returns took

81

On 14 April 2000, respondent simultaneously filed with the BIR and the Court of Tax Appeals (CTA) a
claim for refund of its overpayment in 1997 of P4,736,188. Petitioner Commissioner of Internal Revenue
(petitioner) opposed the suit at the CTA, alleging that the action preempted his own resolution of
respondents parallel claim for refund, and, at any rate, respondent has to prove its entitlement to refund.
The Ruling of the Court of Tax Appeals
The CTA5 ruled for respondent and ordered petitioner to refund the reduced amount of P4,598,716.98 to
account for two tax payments allegedly withheld at source which respondent failed to substantiate. The
CTA held that refund was proper because respondent complied with the requirements of timely filing of
the claim and its substantiation.
Petitioner sought reconsideration, contending that respondent is precluded from seeking a refund for its
overpayment in 1997 after respondent opted to carry-over and apply it to its future tax liability, following
Section 76 of the 1997 NIRC which provides that "[o]nce the option to carry-over and apply the excess
quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has
been made, such option shall be considered irrevocable for that taxable period and no application for cash
refund or issuance of a tax credit certificate shall be allowed therefor." Petitioner claimed that Section 76
applies to respondent because by the time respondent filed its final adjustment return for 1997 on 15 April
1998, the 1997 NIRC was already in force, having taken effect on 1 January 1998.
The CTA denied reconsideration,6 holding that the 1997 NIRC only covers transactions done after 1
January 1998. As the transactions subject of respondents claim for refund took place before this cut-off
date, respondent is covered by Section 697 of the former tax code, Presidential Decree No. 1158 (National
Internal Revenue Code of 1977 [1977 NIRC]) which, unlike Section 76 of the 1997 NIRC, does not carry
an "irrevocability of option" clause. Instead, Section 69 of the 1977 NIRC merely provides that "[i]n case
the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable
amount shown on its final adjustment return may be credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable year."
Petitioner appealed to the Court of Appeals.
SECOND DIVISION
G.R. No. 174157

The Ruling of the Court of Appeals

October 20, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
McGEORGE FOOD INDUSTRIES, INC., Respondent.

The Court of Appeals affirmed the CTA. Upholding the applicability of Section 69 of the 1977 NIRC, the
appellate court reasoned:

The Case

[T]he subject claim for refund pertains to the unutilized creditable withheld taxes for the year 1997 and the
transactions which gave rise to the claim for refund occurred in taxable year 1997. Such being the case,
the right to claim for refund or tax credit of these taxes must be governed by the law in effect at the time
the excess credits were earned. Thus, the pertinent law applicable to the case at bar is Section 69 of the old
Tax Code x x x. Hence, respondent corporation aside from opting to carry-over the excess tax to the next
succeeding quarter, may likewise avail of the remedy of refund, because the old Tax Code does not
preclude the exercise of one to the exclusion of the other.8

For review1 are the rulings2 of the Court of Appeals affirming a tax refund despite an earlier decision of
the corporate taxpayer to apply its overpayment to future tax liability.

The Court of Appeals likewise sustained the CTAs finding on the timeliness and substantiation of
respondents refund claim.

The Facts

Petitioner sought but was denied reconsideration.9

On 15 April 1998, more than three months after Republic Act No. 8424 or the Tax Reform Act of 1997
(1997 NIRC) took effect on 1 January 1998, respondent McGeorge Food Industries, Inc. (respondent) filed
with the Bureau of Internal Revenue (BIR) its final adjustment income tax return for the calendar year
ending 31 December 1997. The return indicated a tax liability of P5,393,988 against a total payment
of P10,130,176 for the first three quarters,3 resulting in a net overpayment of P4,736,188. Exercising its
option to either seek a refund of this amount or carry it over to the succeeding year as tax credit,
respondent chose the latter, indicating in its 1997 final return that it wished the amount "to be applied as
credit to next year."4

Hence, this petition. Petitioner reiterates his submission that the 1997 NIRC controls this case, precluding
respondent from seeking a refund after it had opted to carry-over and apply its creditable overpayment in
1997 to its 1998 tax liability. On the other hand, respondent invokes the rulings of the CTA and Court of
Appeals applying in its favor Section 69 of the 1977 NIRC which does not provide for the irrevocability of
a taxpayers preference to seek refund or off-set its credit to future liability.

DECISION
CARPIO, J.:

On 15 April 1999, respondent filed its final adjustment return for the calendar year ending 31 December
1998, indicating a tax liability of P5,799,056. Instead of applying to this amount its unused tax credit
carried over from 1997 (P4,736,188), as it was supposed to do, respondent merely deducted from its tax
liability the taxes withheld at source for 1998 (P217,179) and paid the balance of P5,581,877.

The Issue
The question is whether respondent is entitled to a tax refund for overpayment in 1997 after it opted, but
failed, to credit such to its tax liability in 1998.
The Ruling of the Court

82

We hold that respondent is not entitled to a refund under Section 76 of the 1997 NIRC, the law in effect at
the time respondent made known to the BIR its preference to carry over and apply its overpayment in
1997 to its tax liability in 1998. In lieu of refund, respondents overpayment should be applied to its tax
liability for the taxable years following 1998 until it is fully credited.
Section 76 of the 1997 NIRC Controls
Section 76 of the 1997 NIRC which provides:
Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment
return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes
paid, the excess amount shown on its final adjustment return may be carried over and credited against the
estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the
option to carry-over and apply the excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for
that taxable period and no application for cash refund or issuance of a tax credit certificate shall be
allowed therefor. (Emphasis supplied)
is, like its predecessor Section 69 of the 1977 NIRC, a tax administration measure crafted to ease tax
collection.10By requiring corporate taxpayers to indicate in their final adjustment return whether, in case of
overpayment, they wish to have the excess amount refunded or carried-over and applied to their future tax
liability, the provision aims to properly manage claims for refund or tax credit.11 Administratively
speaking, Section 76 serves the same purpose as its companion provisions in Title II, Chapter XII of the
1997 NIRC, namely, Section 74 on the declaration of income tax by individuals, Section 75 on the
declaration of quarterly corporate income tax, and Section 77 on the place and time of filing and payment
of quarterly corporate income tax they are all tools designed to promote rational and efficient
functioning of the tax system. These provisions should be distinguished from the provisions in Title II,
Chapter IV (Tax on Corporations) and Chapter VII (Allowable Deductions), among others, relating to the
question on the intrinsic taxability of corporate transactions.
Thus treated, Section 76 and its companion provisions in Title II, Chapter XII should be applied following
the general rule on the prospective application of laws12 such that they operate to govern the conduct of
corporate taxpayers the moment the 1997 NIRC took effect on 1 January 1998. There is no quarrel that at
the time respondent filed its final adjustment return for 1997 on 15 April 1998, the deadline under Section
77 (B) of the 1997 NIRC (formerly Section 70(b) of the 1977 NIRC), the 1997 NIRC was already in force,
having gone into effect a few months earlier on 1 January 1998. Accordingly, Section 76 is controlling.
The lower courts grounded their contrary conclusion on the fact that respondents overpayment in 1997
was based on transactions occurring before 1 January 1998. This analysis suffers from the twin defects of
missing the gist of the present controversy and misconceiving the nature and purpose of Section 76. None
of respondents corporate transactions in 1997 is disputed here. Nor can it be argued that Section 76
determines the taxability of corporate transactions. To sustain the rulings below is to subscribe to the
untenable proposition that, had Congress in the 1997 NIRC moved the deadline for the filing of final
adjustment returns from 15 April to 15 March of each year, taxpayers filing returns after 15 March 1998
can excuse their tardiness by invoking the 1977 NIRC because the transactions subject of the returns took
place before 1 January 1998. A keener appreciation of the nature and purpose of the varied provisions of
the 1997 NIRC cautions against sanctioning this reasoning.
Under Section 76, the Exercise of an Option
is Irrevocable and a Decision to Carry-over and Apply Tax
Overpayment Continues Until the Overpayment
has been Fully Applied to Tax Liabilities

Section 76 of the 1997 NIRC wrought two changes to its predecessor, Section 69 of the 1977 NIRC: first,
it mandates that the taxpayers exercise of its option to either seek refund or crediting is irrevocable; and
second, the taxpayers decision to carry-over and apply its current overpayment to future tax liability
continues until the overpayment has been fully applied, no matter how many tax cycles it takes. We
explained in Asiaworld Properties Philippine Corporation v. Commissioner of Internal Revenue: 13
[S]ection 76 of the NIRC of 1997 clearly states: "Once the option to carry-over and apply the excess
quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has
been made, such option shall be considered irrevocable for that taxable period and no application for cash
refund or issuance of a tax credit certificate shall be allowed therefore." Section 76 expressly states that
"the option shall be considered irrevocable for that taxable period" referring to the period comprising the
"succeeding taxable years." Section 76 further states that "no application for cash refund or issuance of a
tax credit certificate shall be allowed therefore" referring to "that taxable period" comprising the
"succeeding taxable years."
Section 76 of the NIRC of 1997 is different from the old provision, Section 69 of the 1977 NIRC, which
reads:
SEC. 69. Final Adjustment Return. Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the
refundable amount shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable year.
Under this old provision, the option to carry-over the excess or overpaid income tax for a given taxable
year is limited to the immediately succeeding taxable year only. In contrast, under Section 76 of the NIRC
of 1997, the application of the option to carry-over the excess creditable tax is not limited only to the
immediately following taxable year but extends to the next succeeding taxable years. The clear intent in
the amendment under Section 76 is to make the option, once exercised, irrevocable for the "succeeding
taxable years."
Thus, once the taxpayer opts to carry-over the excess income tax against the taxes due for the succeeding
taxable years, such option is irrevocable for the whole amount of the excess income tax, thus, prohibiting
the taxpayer from applying for a refund for that same excess income tax in the next succeeding taxable
years. The unutilized excess tax credits will remain in the taxpayers account and will be carried over and
applied against the taxpayers income tax liabilities in the succeeding taxable years until fully
utilized.14 (Boldfacing in the original; italicization supplied)
As respondent opted to carry-over and credit its overpayment in 1997 to its tax liability in 1998, Section
76 makes respondents exercise of such option irrevocable, barring it from later switching options to
"[apply] for cash refund." Instead, respondents overpayment in 1997 will be carried over to the
succeeding taxable years until it has been fully applied to respondents tax liabilities.1avvphi1
We are not unaware of our ruling in another case allowing refund for excess tax payment in 1997 despite
the taxpayers selection of the carry-over and credit option, following Section 69 of the 1977
NIRC.15 However, the issue of the applicability of the 1997 NIRC was never raised in that case. In the
present case, the applicability of Section 76 of the 1997 NIRC over Section 69 of the 1977 NIRC was
squarely raised as the core issue. In two other cases where the applicability of Section 76 of the 1997
NIRC was also squarely raised, the Court applied the irrevocability of the option clause under Section 76
to deny, as here, claims for refund without prejudice to the application of the overpayments to the
taxpayers liability in the succeeding tax cycles.16 We held in the leading case of Philam Asset
Management, Inc. v. Commissioner of Internal Revenue:17
[S]ection 76 remains clear and unequivocal. Once the carry-over option is taken, actually or
constructively, it becomes irrevocable. Petitioner has chosen that option for its 1998 creditable

83

withholding taxes. Thus, it is no longer entitled to a tax refund of P459,756.07, which corresponds to its
1998 excess tax credit. Nonetheless, the amount will not be forfeited in the governments favor, because it
may be claimed by petitioner as tax credits in the succeeding taxable years. (Emphasis supplied)
Accordingly, we hold that under Section 76 of the 1997 NIRC, respondents claim for refund is
unavailing. However, respondent is entitled to apply its unused creditable overpayment in 1997 to its tax
liability arising after 1998 until such has been fully applied.
WHEREFORE, we GRANT the petition. We REVERSE the Decision dated 31 January 2006 and the
Resolution dated 21 July 2006 of the Court of Appeals.
SO ORDERED.

submission of documents in support of its protest, as provided under Section 228 of the NIRC and Section
11 of R.A. No. 1125, otherwise known as theLaw Creating the Court of Tax Appeals.
Petitioner did not file a motion for reconsideration or an appeal to the CTA En Banc from the dismissal of
its petition for review. Consequently, the September 10, 2003 Resolution became final and executory on
October 1, 2003 and Entry of Judgment was made on December 1, 2003.9 Thereafter, respondent sent a
Demand Letter to petitioner for the payment of the deficiency tax assessments.
On February 20, 2004, petitioner filed a Petition for Relief from Judgment10 on the ground of excusable
negligence of its counsels secretary who allegedly misfiled and lost the September 10, 2003 Resolution.
The CTA Second Division set the case for hearing on April 2, 200411 during which petitioners counsel
was present.12Respondent filed an Opposition13 while petitioner submitted its Manifestation and CounterMotion.14
On May 3, 2004, the CTA Second Division rendered a Resolution 15 denying petitioners Petition for Relief
from Judgment.lawph!l.net
Petitioners motion for reconsideration was denied in a Resolution dated November 5, 2004,16 hence it
filed a petition for review with the CTA En Banc, docketed as C.T.A. EB No. 50, which affirmed the
assailed Resolutions of the CTA Second Division in a Decision dated June 7, 2005.
Hence, this petition for review based on the following grounds:
I.
THE HONORABLE CTA AND CTA EN BANC GRAVELY ERRED IN DENYING PETITIONERS
PETITION FOR RELIEF, WITHOUT FIRST AFFORDING IT THE OPPORTUNITY TO ADDUCE
EVIDENCE TO ESTABLISH THE FACTUAL ALLEGATIONS CONSTITUTING ITS ALLEGED
EXCUSABLE NEGLIGENCE, IN CLEAR VIOLATION OF PETITIONERS BASIC RIGHT TO DUE
PROCESS.

FIRST DIVISION
G.R. No. 168498

II.
June 16, 2006

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review under Rule 45 of the Rules of Court assailing the Decision1 of the Court of
Tax Appeals (CTA) En Banc dated June 7, 2005 in C.T.A. EB No. 50 which affirmed the Resolutions of
the CTA Second Division dated May 3, 20042 and November 5, 20043 in C.T.A. Case No. 6475 denying
petitioners Petition for Relief from Judgment and the Motion for Reconsideration thereof, respectively.
The undisputed facts are as follows:
On July 5, 2001, petitioner Rizal Commercial Banking Corporation received a Formal Letter of Demand
dated May 25, 2001 from the respondent Commissioner of Internal Revenue for its tax liabilities
particularly for Gross Onshore Tax in the amount of P53,998,428.29 and Documentary Stamp Tax for its
Special Savings Placements in the amount of P46,717,952.76, for the taxable year 1997.4
On July 20, 2001, petitioner filed a protest letter/request for reconsideration/reinvestigation pursuant to
Section 228 of the National Internal Revenue Code of 1997 (NIRC).5
As the protest was not acted upon by the respondent, petitioner filed on April 30, 2002 a petition for
review with the CTA for the cancellation of the assessments which was docketed as C.T.A. Case No.
6475.6
On July 15, 2003, respondent filed a motion to resolve first the issue of CTAs jurisdiction, 7 which was
granted by the CTA in a Resolution dated September 10, 2003.8 The petition for review was dismissed
because it was filed beyond the 30-day period following the lapse of 180 days from petitioners

CONSIDERING THAT THE SUBJECT ASSESSMENT, INSOFAR AS IT INVOLVES ALLEGED

DEFICIENCY DOCUMENTARY STAMP TAXES ON SPECIAL SAVINGS ACCOUNTS, IS AN ISSUE
AFFECTING ALL MEMBERS OF THE BANKING INDUSTRY, PETITIONER, LIKE ALL OTHER
BANKS, SHOULD BE AFFORDED AN EQUAL OPPORTUNITY TO FULLY LITIGATE THE ISSUE,
AND HAVE THE CASE DETERMINED BASED ON ITS MERITS, RATHER THAN ON A MERE
TECHNICALITY.17
Relief from judgment under Rule 38 of the Rules of Court is a legal remedy that is allowed only in
exceptional cases whereby a party seeks to set aside a judgment rendered against him by a court whenever
he was unjustly deprived of a hearing or was prevented from taking an appeal, in either case, because of
fraud, accident, mistake or excusable neglect. 18
Petitioner argues that it was denied due process when it was not given the opportunity to be heard to prove
that its failure to file a motion for reconsideration or appeal from the dismissal of its petition for review
was due to the failure of its employee to forward the copy of the September 10, 2003 Resolution which
constitutes excusable negligence.
Petitioners argument lacks merit.
It is basic that as long as a party is given the opportunity to defend his interests in due course, he would
have no reason to complain, for it is this opportunity to be heard that makes up the essence of due
process.19 InBatongbakal v. Zafra,20 the Court held that:
There is no question that the "essence of due process is a hearing before conviction and before an
impartial and disinterested tribunal" but due process as a constitutional precept does not, always and in all
situations, require a trial-type proceeding. The essence of due process is to be found in the reasonable
opportunity to be heard and submit any evidence one may have in support of ones defense. "To be
heard" does not only mean verbal arguments in court; one may be heard also through pleadings.
Where opportunity to be heard, either through oral arguments or pleadings, is accorded, there is no
denial of procedural due process.(Emphasis supplied)

84

As correctly pointed by the Office of the Solicitor General (OSG), the CTA Second Division set the case
for hearing on April 2, 2004 after the filing by the petitioner of its petition for relief from judgment.
Petitioners counsel was present on the scheduled hearing and in fact orally argued its petition.
Moreover, after the CTA Second Division dismissed the petition for relief from judgment in a Resolution
dated May 3, 2004, petitioner filed a motion for reconsideration and the court further required both parties
to file their respective memorandum. Indeed, petitioner was not denied its day in court considering the
opportunities given to argue its claim.
Relief cannot be granted on the flimsy excuse that the failure to appeal was due to the neglect of
petitioners counsel.21 Otherwise, all that a losing party would do to salvage his case would be to invoke
neglect or mistake of his counsel as a ground for reversing or setting aside the adverse judgment, thereby
putting no end to litigation.22
Negligence to be "excusable" must be one which ordinary diligence and prudence could not have guarded
against and by reason of which the rights of an aggrieved party have probably been impaired. 23 Petitioners
former counsels omission could hardly be characterized as excusable, much less unavoidable.
The Court has repeatedly admonished lawyers to adopt a system whereby they can always receive
promptly judicial notices and pleadings intended for them.24 Apparently, petitioners counsel was not only
remiss in complying with this admonition but he also failed to check periodically, as an act of prudence
and diligence, the status of the pending case before the CTA Second Division. The fact that counsel
allegedly had not renewed the employment of his secretary, thereby making the latter no longer attentive
or focused on her work, did not relieve him of his responsibilities to his client. It is a problem personal to
him which should not in any manner interfere with his professional commitments.

Following the periods provided for in the aforementioned laws, from July 20, 2001, that is, the date of
petitioners filing of protest, it had until September 18, 2001 to submit relevant documents and from
September 18, 2001, the Commissioner had until March 17, 2002 to issue his decision. As admitted by
petitioner, the protest remained unacted by the Commissioner of Internal Revenue. Therefore, it had until
April 16, 2002 within which to elevate the case to this court. Thus, when petitioner filed its Petition for
Review on April 30, 2002, the same is outside the thirty (30) period. 27
As provided in Section 228, the failure of a taxpayer to appeal from an assessment on time rendered the
assessment final, executory and demandable. Consequently, petitioner is precluded from disputing the
correctness of the assessment.
In Ker & Company, Ltd. v. Court of Tax Appeals,28 the Court held that while the right to appeal a decision
of the Commissioner to the Court of Tax Appeals is merely a statutory remedy, nevertheless the
requirement that it must be brought within 30 days is jurisdictional. If a statutory remedy provides as a
condition precedent that the action to enforce it must be commenced within a prescribed time, such
requirement is jurisdictional and failure to comply therewith may be raised in a motion to dismiss.
In fine, the failure to comply with the 30-day statutory period would bar the appeal and deprive the Court
of Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessment. 29
WHEREFORE, in view of the foregoing, the Decision of the Court of Tax Appeals En Banc dated June 7,
2005 in C.T.A. EB No. 50 affirming the Resolutions of the Court of Tax Appeals Second Division dated
May 3, 2004 and November 5, 2004 in C.T.A. Case No. 6475 denying petitioners Petition for Relief from
Judgment and Motion for Reconsideration, respectively, is AFFIRMED.
SO ORDERED.

In exceptional cases, when the mistake of counsel is so palpable that it amounts to gross negligence, this
Court affords a party a second opportunity to vindicate his right. But this opportunity is unavailing in the
case at bar, especially since petitioner had squandered the various opportunities available to it at the
different stages of this case. Public interest demands an end to every litigation and a belated effort to
reopen a case that has already attained finality will serve no purpose other than to delay the administration
of justice.25
Since petitioners ground for relief is not well-taken, it follows that the assailed judgment
stands.lavvphil.e+ Assuming ex gratia argumenti that the negligence of petitioners counsel is excusable,
still the petition must fail. As aptly observed by the OSG, even if the petition for relief from judgment
would be granted, petitioner will not fare any better if the case were to be returned to the CTA Second
Division since its action for the cancellation of its assessments had already prescribed. 26
Petitioner protested the assessments pursuant to Section 228 of the NIRC, which provides:
SEC. 228. Protesting of Assessment.- x x x.
xxxx
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to
respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized
representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all
relevant supporting documents shall have been submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days
from submission of documents, the taxpayer adversely affected by the decision or inaction may
appeal to the Court of Tax Appeals within (30) days from receipt of the said decision, or from the
lapse of the one hundred eighty (180)-day period; otherwise the decision shall become final,
executory and demandable. (Emphasis supplied)
The CTA Second Division held:

85

Consequently, respondent filed his claim with the Court of Tax Appeals (CTA), docketed as C.T.A. Case
No. 5527.
In due course, the CTA rendered a Decision dated February 15, 1999 ordering petitioner to refund to
respondent the amount of P118,350.00 as specific taxes. This prompted petitioner to file with the Court of
Appeals a petition for review with prayer for issuance of a writ of preliminary injunction.
On August 23, 1999, the Appellate Court rendered a Decision denying the petition and affirming the CTA
assailed Decision. The Court of Appeals held:
"It is the contention of the petitioner that stemmed-leaf tobacco is partially processed tobacco pursuant to
the provisions of Section 1 (L) of the Revenue Regulation No. 17-67, and thus embraced within the scope
of Section 141 (b). The respondent, however, failed to consider Section 137 of the Tax Code, which is the
applicable provision. Section 137 states:
Stemmed-leaf tobacco, fine cut shorts, the refuse of fine cut chewing tobacco, scraps, cuttings, clippings,
stems or midribs, and sweeping of tobacco may be sold in bulk as raw material by one manufacturer
directly to another, without payment of the tax.
Section 1 (h) of Revenue Regulations No. 17-67, known as The Revenue Tobacco Regulations, defined
manufacturer of tobacco as including every person whose business is to manufacture tobacco or snuff or
who employs others to manufacture tobacco or snuff, whether such manufacturing is by cutting, pressing
(not balancing), grinding, or rubbing (grating) any raw or leaf tobacco, or partially manufactured tobacco
and snuff or putting up for consumption scraps, refuse, or stems of tobacco resulting from any process of
handling tobacco stems, scraps, clippings, or waste sifting, twisting, screening or by any other process.
La Suerte is engaged in manufacturing cigarettes. La Suerte utilizes the stemmed-leaf tobacco to
manufacture cigarettes. It is thus a manufacturer of tobacco.

THIRD DIVISION
G.R. No. 139803 September 2, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioners,
vs.
LA SUERTE CIGAR AND CIGARETTE FACTORY, INC., Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
tify">For our resolution is the petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, assailing the Decision1 dated August 23, 1999 rendered by the Court of Appeals in
CA-G.R. SP No. 51371, entitled "Commissioner of Internal Revenue vs. La Suerte Cigar and Cigarette
Factory, Inc."
The facts as borne by the records are:
La Suerte Cigar and Cigarette Factory, Inc., respondent, is a corporation engaged in the manufacture of
cigar and cigarettes using imported stemmed-leaf tobacco.
On separate dates in 1995, respondent purchased from a foreign tobacco manufacturer 138,600 and 19,200
kilograms of stemmed-leaf tobacco. Subsequently, the Commissioner of Internal Revenue, petitioner,
imposed upon respondent specific taxes at the rate of P0.75 centavos per kilogram or P103,950.00 for
138,600 kgs. andP14,400.00 for 19,200 kgs. Petitioners assessment was pursuant to Section 141 of the
Tax Code2 in relation to Section 2 (m) of Revenue Regulations No. 17-67.3
On May 4, 1995, respondent paid petitioner P118,350.00 as specific taxes under protest.
On September 27, 1996 and October 2, 1996, respondent filed with the Office of the Commissioner of
Internal Revenue, a claim for refund of specific taxes covering the period from October, 1994 to May,
1995, including the disputed payment of P118,350.00. But petitioner failed to act on its claim.

When the law and regulations enumerate and define various categories of manufacturers subject to excise
tax and thereafter, exempt from excise tax the sale of stemmed- leaf tobacco by one manufacturer directly
to another, this broad and unqualified provision manifestly covers the sale of stemmed-leaf tobacco by
any manufacturer to another. Since Section 137 broadly grants excise tax exemption for tobacco products
sold as raw materials by one manufacturer directly to another, without distinction, it must be deemed to
refer to all manufacturers of tobacco products, whether they be manufacturers of cigars, manufacturers of
cigarettes or manufacturers of tobacco, and whether or not they are located abroad or in the Philippines.
Where the law uses a general term without qualification, it must be so understood. This means that Section
137 covers all manufacturers, without distinction. x x x.
Thus, La Suerte, a manufacturer of tobacco, cannot be held liable for the payment of any excise tax, since
it purchased stemmed-leaf tobacco in bulk from other tobacco manufacturers, and thus fell within the clear
terms of Section 137 of the Tax Code.
Any administrative attempt to restrict the application of Section 137 would amount to legislation which is
manifestly beyond the powers of the petitioner."
Hence, this petition for review on certiorari.
Petitioner contends that Section 137 (now Section 140) of the Tax Code, granting excise tax exemption for
stemmed-leaf tobacco sold as raw material from one manufacturer to another, must be interpreted in
relation to its implementing Regulation. Section 20 (a) of Revenue Regulation No. V-39 serves as a
limitation to the scope of Section 137. Section 20 (a) provides that stemmed-leaf tobacco is exempt from
specific tax only when sold as raw material by one L-74 directly to another L-7.
Respondent maintains that the phrase "stemmed-leaf tobacco x x x may be sold in bulk as raw material by
one manufacturer directly to another without payment of the tax" does not make a distinction whether
such phrase refers to manufacturers of cigars, manufacturers of cigarettes or manufacturers of tobacco or
whether they are located locally or abroad; and that restricting the application of Section 137 amounts to
legislation.
The sole issue for our resolution is whether respondent is entitled to the refund of P118,350.00
erroneously paid as specific taxes when it imported stemmed-leaf tobacco.

86

Sections 137 (now Section 140) of the Tax Code provides:

"SECTION 137. Removal of Tobacco products without prepayment of tax. Products of tobacco entirely
unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such
conditions as may be prescribed in the regulations of the Department of Finance. Stemmed-leaf tobacco,
fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, stems or midribs, and
sweeping of tobacco may be sold in bulk as raw material by one manufacturer directly to another,
without payment of the tax under such conditions as may be prescribed in the regulations of the
Department of Finance.
Stemmed-leaf tobacco, as herein used means leaf tobacco which has had the stem or midrib removed.
The term does not include broken leaf tobacco."
The above provision allows the sale of stemmed-leaf tobacco without any payment of tax. However,
a careful reading of the same provision shows that the sale is subject to "such conditions as may be
prescribed in the regulations of the Department of Finance." These conditions are provided by
Revenue Regulations Nos. V-39 and 17-67 issued to clarify and implement Section 137. Thus, its
provisions must be read and interpreted in accordance with the said regulations.
Section 20 of Revenue Regulation No. V-39 provides:
"Section 20. Exemption from tax of tobacco products intended for agricultural or industrial purposes.

domestic sale and re-drying of tobacco leaves, activities which are designated as falling either under L3R11 or L-6 under Revenue Regulation No. 17-67. Thus, not being designated as L-7 tobacco
manufacturer, petitioner cannot claim any exemption from payment of the specific tax on its stemmed-leaf
tobacco. In other words, petitioner, as a non-L-7 tobacco dealer of stemmed-leaf tobacco is liable to pay
the specific tax thereon. Hence, petitioner is not entitled to any refund of the specific taxes paid."
In the present case, there is no showing that respondent has been categorized as L-7 tobacco manufacturer.
It bears stressing that apparent from Section 20 of Revenue Regulation No. V-39 is the fact that the sale of
stemmed-leaf tobacco in bulk as raw material is from one L-7 directly to another L-7. This is not obtaining
here.
On respondents contention that Section 20 of Revenue Regulation No. V-39 amounts to administrative
legislation, this Court ruled in the same Compania General de Tabacos de Filipinas12 that Regulation No.
V-39 does not modify or deviate from the text of Section 137 but merely implemented and clarified the
said provision by providing certain conditions under which stemmed- leaf tobacco may be exempted from
prepayment of specific taxes.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision of the Court of Appeals in CAG.R. SP No. 51371 is REVERSED.
SO ORDERED.

(a) Sale of stemmed-leaf tobacco, etc., by one factory or another. Subject to the limitations herein
established, products of tobacco entirely unfit for chewing or smoking may be removed free of tax for
agricultural or industrial use; and stemmed-leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing
tobacco, scraps, cuttings, clippings, and sweepings of tobacco may be sold in bulk as raw material by one
manufacturer directly to another, without the prepayment of specific tax.
Stemmed-leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings,
and sweepings of leaf tobacco or partially manufactured or other refuse of tobacco may be transferred
from one factory to another under an official L-7 invoice on which shall be entered the exact weight of the
tobacco at the time of its removal, and entry shall be made in the L-7 register in the place provided on the
page of removals. Corresponding debit entry will be made in the L-7 register book of the factory receiving
the tobacco under the heading Refuse, etc., received from the other factory showing the date of receipts,
assessment and invoice numbers, name and address of the consignor, form in which received, and the
weight of the tobacco."
Section 20 must be construed in relation to Section 2 (m)(1) of Revenue Regulation No. 17-67 which
classifies stemmed-leaf tobacco as "partially manufactured tobacco," and Section 3 thereof providing for
the different designations for persons dealing with tobacco, such as: L-3,5 L-4,6 L-5,7 L-6,8 etc. Section 3
(h) of Revenue Regulation No. 17-67 describes an L-7 as a "manufacturer of tobacco products."
In Commissioner of Internal Revenue vs. La Compana Fabrica de Tabacos, Inc.9 this Court ruled that the
following conditions must be met for stemmed-leaf tobacco to be transferred without prepayment of
specific tax, thus:
(a) The transfer shall be made pursuant to an official L-7 invoice on which shall be entered the exact
weight of the tobacco at the time of its removal;
(b) Entry shall be made in the L-7 register in the place provided on the page removals; and
(c) Corresponding debit entry shall be made in the L-7 register book of the factory receiving the tobacco
under the heading "Refuse, etc., received from the other factory," showing the date of receipt, assessment
and invoice numbers, name and address of the consignor, form in which received, and the weight of the
tobacco.
Explaining the above conditions, this Court, in Compania General de Tabacos de Filipinas vs. Court of
Appeals,10held:
"From the foregoing, it is clear that an entity claiming exemption from specific tax under Section 137,
must prove that both the entity and the transferee are categorized as L-7 manufacturers since only an L-7
tobacco manufacturer has an L- invoice and an L- registry book. Here petitioner is engaged in the export,

87

(1) Customs Duties, taxes and other imposts on importations. - All importations of equipment, vehicles,
automobiles, boats, ships, barges, aircraft and such other gambling paraphernalia, including accessories or
related facilities, for the sole and exclusive use of the casinos, the proper and efficient management and
administration thereof and such other clubs, recreation or amusement places to be established under and
by virtue of this Franchise shall be exempt from the payment of duties, taxes and other imposts, including
all kinds of fees, levies, or charges of any kind or nature.
Vessels and/or accessory ferry boats imported or to be imported by any corporation having existing
contractual arrangements with the Corporation, for the sole and exclusive use of the casino or to be used to
service the operations and requirements of the casino, shall likewise be totally exempt from the payment
of all customs duties, taxes and other imposts, including all kinds of fees, levies, assessments or charges of
any kind or nature, whether National or Local.
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as
well as fees, charges, or levies of whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way
to the earnings of the Corporation, except a Franchise Tax of five percent (5%)of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established, or collected by any municipal,
provincial or national government authority.

G.R. No. 172087

March 15, 2011

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO
BUAG, in his official capacity as COMMISSIONER OF INTERNAL REVENUE, Public
Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under the authority of
Respondent.Public and Private Respondents.
DECISION
PERALTA, J.:
For resolution of this Court is the Petition for Certiorari and Prohibition1 with prayer for the issuance of a
Temporary Restraining Order and/or Preliminary Injunction, dated April 17, 2006, of petitioner Philippine
Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section 1 of
Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue Code
of 1997, by excluding petitioner from exemption from corporate income tax for being repugnant to
Sections 1 and 10 of Article III of the Constitution. Petitioner further seeks to prohibit the implementation
of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being contrary to law.

(b) Others: The exemption herein granted for earnings derived from the operations conducted under the
franchise, specifically from the payment of any tax, income or otherwise, as well as any form of charges,
fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or
individual(s) with whom the Corporation or operator has any contractual relationship in connection with
the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation as a result of essential facilities furnished
and/or technical services rendered to the Corporation or operator.
The fee or remuneration of foreign entertainers contracted by the Corporation or operator in pursuance of
this provision shall be free of any tax.
(3) Dividend Income. Notwithstanding any provision of law to the contrary, in the event the Corporation
should declare a cash dividend income corresponding to the participation of the private sector shall, as an
incentive to the beneficiaries, be subject only to a final flat income rate of ten percent (10%) of the regular
income tax rates. The dividend income shall not in such case be considered as part of the beneficiaries'
taxable income; provided, however, that such dividend income shall be totally exempted from income or
other form of taxes if invested within six (6) months from the date the dividend income is received in the
following:
(a) operation of the casino(s) or investments in any affiliate activity that will ultimately redound to the
benefit of the Corporation; or any other corporation with whom the Corporation has any existing
arrangements in connection with or related to the operations of the casino(s);
(b) Government bonds, securities, treasury notes, or government debentures; or
(c) BOI-registered or export-oriented corporation(s).7

The undisputed facts follow.

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by
Letter of Instruction No. 1430, which was issued in September 1984.

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A) was issued exempting
PAGCOR from the payment of any type of tax, except a franchise tax of five percent (5%) of the gross
revenue.4 Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's
exemption.5

On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue Code of 1997,
took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations
(GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government Service and
Insurance Corporation, the Social Security System, the Philippine Health Insurance Corporation, and the
Philippine Charity Sweepstakes Office, thus:

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 18696 was issued.
Section 13 thereof reads as follows:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of

existing special general laws to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the Government Service and Insurance
Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation

Sec. 13. Exemptions. x x x

88

(PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business, industry, or activity.9

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING
REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III
OF THE 1987 CONSTITUTION.

With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal Revenue
Code of 1997 were amended. The particular amendment that is at issue in this case is Section 1 of R.A.
No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by excluding
PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income tax, thus:

III

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of

existing special general laws to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned and controlled by the Government, except the Government Service and Insurance
Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their
taxable income as are imposed by this Section upon corporations or associations engaged in similar
business, industry, or activity.
Different groups came to this Court via petitions for certiorari and prohibition11 assailing the validity and
constitutionality of R.A. No. 9337, in particular:

WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB
INITIO FOR BEING BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108,
INSOFAR AS THE SAID REGULATION IMPOSED VAT ON THE SERVICES OF THE PETITIONER
AS WELL AS PETITIONERS LICENSEES OR FRANCHISEES WHEN THE BASIC LAW, AS
INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER
OR ON PETITIONERS LICENSEES OR FRANCHISEES.14
The BIR, in its Comment15 dated December 29, 2006, counters:
I
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND
CONSTITUTIONAL PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED
TOGETHER SO AS TO GIVE EFFECT TO ALL OF THEIR PROVISIONS WHENEVER POSSIBLE.

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties; Section 5,
which imposes a 10% VAT on importation of goods; and Section 6, which imposes a 10% VAT on sale of
services and use or lease of properties, all contain a uniform proviso authorizing the President, upon the
recommendation of the Secretary of Finance, to raise the VAT rate to 12%. The said provisions were
alleged to be violative of Section 28 (2), Article VI of the Constitution, which section vests in Congress
the exclusive authority to fix the rate of taxes, and of Section 1, Article III of the Constitution on due
process, as well as of Section 26 (2), Article VI of the Constitution, which section provides for the "no
amendment rule" upon the last reading of a bill;

II

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the
guarantee of equal protection of the laws, and Section 28 (1), Article VI of the Constitution; and

The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,16 concurred with
the arguments of the petitioner. It added that although the State is free to select the subjects of taxation and
that the inequity resulting from singling out a particular class for taxation or exemption is not an
infringement of the constitutional limitation, a tax law must operate with the same force and effect to all
persons, firms and corporations placed in a similar situation. Furthermore, according to the OSG, public
respondent BIR exceeded its statutory authority when it enacted RR No. 16-2005, because the latter's
provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.

3) other technical aspects of the passage of the law, questioning the manner it was passed.
On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No.
9337.12
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,13 specifically
identifying PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of the
National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The said revenue regulation, in
part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected Services.
xxxx
(h) x x x
Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless
of how their franchisees may have been granted, shall be subject to the 10% VAT imposed under Sec.108
of the Tax Code. This includes, among others, the Philippine Amusement and Gaming Corporation
(PAGCOR), and its licensees or franchisees.
Hence, the present petition for certiorari.

SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III
OF THE 1987 CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL
STRICKEN DOWN BY LAWFUL AUTHORITIES.

The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the
enactment of R.A. No. 9337.
After a careful study of the positions presented by the parties, this Court finds the petition partly
meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of
1977, petitioner is no longer exempt from corporate income tax as it has been effectively omitted from the
list of GOCCs that are exempt from it. Petitioner argues that such omission is unconstitutional, as it is
violative of its right to equal protection of the laws under Section 1, Article III of the Constitution:
Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any
person be denied the equal protection of the laws.
In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of equal protection, thus:

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING
REPUGNANT TO THE EQUAL PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III
OF THE 1987 CONSTITUTION.

Equal protection requires that all persons or things similarly situated should be treated alike, both as to
rights conferred and responsibilities imposed. Similar subjects, in other words, should not be treated
differently, so as to give undue favor to some and unjustly discriminate against others. The guarantee
means that no person or class of persons shall be denied the same protection of laws which is enjoyed by
other persons or other classes in like circumstances. The "equal protection of the laws is a pledge of the
protection of equal laws." It limits governmental discrimination. The equal protection clause extends to
artificial persons but only insofar as their property is concerned.

II

xxxx

PAGCOR raises the following issues:

I

89

Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable, the
law may operate only on some and not all of the people without violating the equal protection clause. The
classification must, as an indispensable requisite, not be arbitrary. To be valid, it must conform to the
following requirements:
1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.18
It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs
exempted from payment of corporate income tax as shown in R.A. No. 8424, Section 27 (c) of which,
reads:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of
existing special or general laws to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the Government Service and Insurance
Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business, industry, or activity.19
A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on
Means dated October 27, 1997 would show that the exemption of PAGCOR from the payment of
corporate income tax was due to the acquiescence of the Committee on Ways on Means to the request of
PAGCOR that it be exempt from such tax.20 The records of the Bicameral Conference Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.
HON. R. DIAZ. Tinanggal na ba natin yon?
CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal basis,
we included a tax on cockfighting winnings.
CHAIRMAN ENRILE. No, we removed the --HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.
CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will
accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would
reflect the VAT and other sales taxes--CHAIRMAN ENRILE. No, were talking of this measure only. We will not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that when we release
the money into the hands of the public, they will not use that to --- for wallpaper. They will spend that eh,
Mr. Chairman. So when they spend that--CHAIRMAN ENRILE. Theres a VAT.
HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a quantification? Is
there an approximation?
CHAIRMAN JAVIER. Not anything.
HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating in
the economy which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government, somebody receives
it in the form of wages and supplies and other services and other goods. They are not being taken from the
public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income for the
taxpayers.
HON. ROXAS. Precisely, so they will be spending it.21

The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying
corporate income tax was not based on a classification showing substantial distinctions which make for
real differences, but to reiterate, the exemption was granted upon the request of PAGCOR that it be
exempt from the payment of corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been excluded
from the enumeration of GOCCs that are exempt from paying corporate income tax. The records of the
Bicameral Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of
Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be
subject to the payment of corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent of the amendment.
SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we
want to show the world who our creditors, that we are increasing official revenues that go to the national
budget. Unfortunately today, Pagcor is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying some
small taxes that they are subjected to. Of the 9.7 billion, they claim they remitted to national government
seven billion. Pagkatapos, there are other specific remittances like to the Philippine Sports Commission,
etc., as mandated by various laws, and then about 400 million to the President's Social Fund. But all in all,
their net profit today should be about 12 billion. That's why I am questioning this two billion. Because
while essentially they claim that the money goes to government, and I will accept that just for the
sake of argument. It does not pass through the appropriation process. And I think that at least if we
can capture 35 percent or 32 percent through the budgetary process, first, it is reflected in our
official income of government which is applied to the national budget, and secondly, it goes through
what is constitutionally mandated as Congress appropriating and defining where the money is spent
and not through a board of directors that has absolutely no accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.
There is wisdom in the comments of my good friend from Cebu, Senator Osmea.
SEN. OSMEA. And Negros.
REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not want to put my
friends from the Department of Finance in a difficult position, but may we know your comments on this
knowing that as Senator Osmea just mentioned, he said, "I accept that that a lot of it is going to spending
for basic services," you know, going to most, I think, supposedly a lot or most of it should go to
government spending, social services and the like. What is your comment on this? This is going to affect a
lot of services on the government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEA. It goes from pocket to the other, Monico.
REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you may have your
own pre-judgment on this and I don't blame you. I don't blame you. And I know you have your own
research. But will this not affect a lot, the disbursements on social services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier for
you to explain to, say, foreign creditors, how do you explain to them that if there is a fiscal gap some of
our richest corporations has [been] spared [from] taxation by the government which is one rich source of
revenues. Now, why do you save, why do you spare certain government corporations on that, like Pagcor?
So, would it be easier for you to make an argument if everything was exposed to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we call Congressman
Teves?
MR. PURISIMA. Thank you, Mr. Chair.
Yes, from definitely improving the collection, it will help us because it will then enter as an official
revenue although when dividends declare it also goes in as other income. (sic)
xxxx
REP. TEVES. Mr. Chairman.
xxxx
THE CHAIRMAN (REP. LAPUS). Congressman Teves.
REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are talking
here on value-added tax. Do you mean to say we are going to amend it from income tax to valueadded tax, as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with regard to the
exemption from income tax of Pagcor.

90

xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that
are VATable? What will we VAT in Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?
xxxx
REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their contract, which
basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does not discuss a VAT
on Pagcor but it just takes away their exemption from non-payment of income tax.22
Taxation is the rule and exemption is the exception.23 The burden of proof rests upon the party claiming
exemption to prove that it is, in fact, covered by the exemption so claimed. 24 As a rule, tax exemptions are
construed strongly against the claimant.25 Exemptions must be shown to exist clearly and categorically,
and supported by clear legal provision.26
In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax,
considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue
Code of 1997 by omitting PAGCOR from the exemption. The legislative intent, as shown by the
discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax;
hence, the omission or removal of PAGCOR from exemption from the payment of corporate income tax. It
is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius.27 Thus, the express mention of the GOCCs exempted from payment of corporate income tax
excludes all others. Not being excepted, petitioner PAGCOR must be regarded as coming within the
purview of the general rule that GOCCs shall pay corporate income tax, expressed in the maxim: exceptio
firmat regulam in casibus non exceptis.28
PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records
of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means,
show that PAGCORs exemption from payment of corporate income tax, as provided in Section 27 (c) of
R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid
classification based on substantial distinctions and the other requirements of a reasonable classification by
legislative bodies, so that the law may operate only on some, and not all, without violating the equal
protection clause. The legislative records show that the basis of the grant of exemption to PAGCOR from
corporate income tax was PAGCORs own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the
non-impairment clause of the Constitution. Petitioner avers that laws form part of, and is read into, the
contract even without the parties expressly saying so. Petitioner states that the private parties/investors
transacting with it considered the tax exemptions, which inure to their benefit, as the main consideration
and inducement for their decision to transact/invest with it. Petitioner argues that the withdrawal of its
exemption from corporate income tax by R.A. No. 9337 has the effect of changing the main consideration
and inducement for the transactions of private parties with it; thus, the amendatory provision is violative
of the non-impairment clause of the Constitution.
Petitioners contention lacks merit.
The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that
no law impairing the obligation of contracts shall be passed. The non-impairment clause is limited in
application to laws that derogate from prior acts or contracts by enlarging, abridging or in any manner
changing the intention of the parties.29 There is impairment if a subsequent law changes the terms of a
contract between the parties, imposes new conditions, dispenses with those agreed upon or withdraws
remedies for the enforcement of the rights of the parties. 30
As regards franchises, Section 11, Article XII of the Constitution31 provides that no franchise or right shall
be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the
Congress when the common good so requires.32

In Manila Electric Company v. Province of Laguna,33 the Court held that a franchise partakes the nature of
a grant, which is beyond the purview of the non-impairment clause of the Constitution. 34 The pertinent
portion of the case states:
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as
being in the nature of contracts and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in
the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked,
are those agreed to by the taxing authority in contracts, such as those contained in government bonds or
debentures, lawfully entered into by them under enabling laws in which the government, acting in its
private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions
of this kind may not be revoked without impairing the obligations of contracts. These contractual tax
exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise
partakes the nature of a grant which is beyond the purview of the non-impairment clause of the
Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the
1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be
granted except under the condition that such privilege shall be subject to amendment, alteration or repeal
by Congress as and when the common good so requires.35
In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other
recreation or amusement places, sports, gaming pools, i.e., basketball, football, lotteries, etc., whether on
land or sea, within the territorial jurisdiction of the Republic of the Philippines.36 Under Section 11, Article
XII of the Constitution, PAGCORs franchise is subject to amendment, alteration or repeal by Congress
such as the amendment under Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No.
9337, amending Section 27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from
corporate income tax, which may affect any benefits to PAGCORs transactions with private parties, is not
violative of the non-impairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10%
VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that
petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption
from the payment of corporate income tax, which was already addressed above by this Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k)
thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:
Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax: x x x x
(k) Transactions which are exempt under international agreements to which the Philippines is a signatory
orunder special laws, except Presidential Decree No. 529.37
Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a special law
that grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which
retained Section 108 (B) (3) of R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further
amended to read as follows:
SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or
lease of properties: x x x x x x x
(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; x x x x

91

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
percent (0%) rate;x x x x38
As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No.
8424 by imposing VAT on other services not previously covered, it did not amend the portion of Section
108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and
extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation.39 Acesite was the owner and operator of the Holiday Inn Manila Pavilion Hotel. It leased a
portion of the hotels premises to PAGCOR. It incurred VAT amounting to P30,152,892.02 from its rental
income and sale of food and beverages to PAGCOR from January 1996 to April 1997. Acesite tried to shift
the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR. However, PAGCOR
refused to pay the taxes because of its tax-exempt status. PAGCOR paid only the amount due to Acesite
minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount of P30,152,892.02 to the
Commissioner of Internal Revenue, fearing the legal consequences of its non-payment. In May 1998,
Acesite sought the refund of the amount it paid as VAT on the ground that its transaction with PAGCOR
was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that PAGCOR and
Acesite were both exempt from paying VAT, thus:x x x x
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the
payment of taxes. Section 13 of P.D. 1869 pertinently provides:
Sec. 13. Exemptions. x x x x
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as
well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way
to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by any municipal,
provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted under the
franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges,
fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or
individual(s) with whom the Corporation or operator has any contractual relationship in connection with
the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.
Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to
indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also
exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to
PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect taxes,
PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities
contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly
exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to
persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not

liable for the P30, 152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent
rate under Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the
instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services
subject to VAT. Thus,by extending the tax exemption to entities or individuals dealing with PAGCOR
in casino operations, it is exempting PAGCOR from being liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said tax.
It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or
leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the value.
Verily, the seller or lessor has the option to follow either way in charging its clients and customer. In the
instant case, Acesite followed the latter method, that is, charging an additional 10% of the gross sales and
rentals. Be that as it may, the use of either method, and in particular, the first method, does not denigrate
the fact that PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable
for the payment of it as it is exempt in this particular transaction by operation of law to pay the indirect
tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now
Sec. 108 [b] [3] of R.A. 8424), which provides:
Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied, assessed
and collected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the
sale of services x x x; Provided, that the following services performed in the Philippines by VAT registered
persons shall be subject to 0%.x x x x
(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
(0%) rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such
exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from
the 1987 case ofCommissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax
exemption of the World Health Organization (WHO) upon an international agreement was upheld. We
held in said case that the exemption of contractee WHO should be implemented to mean that the entity or
person exempt is the contractor itself who constructed the building owned by contractee WHO, and such
does not violate the rule that tax exemptions are personal because the manifest intention of the agreement
is to exempt the contractor so that no contractor's tax may be shifted to the contractee WHO. Thus, the
proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino
operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR. 40
Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner
of Internal Revenue v. Acesite (Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax Code,
as amended, which section was retained as Section 108 (B) (3) in R.A. No. 8424,41 it is still applicable to
this case, since the provision relied upon has been retained in R.A. No. 9337.421avvphi1
It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to
implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the terms
and provisions of the basic law.43 RR No. 16-2005, therefore, cannot go beyond the provisions of R.A. No.
9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its authority in
subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory provision is hereby
nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending
Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine
Amusement and Gaming Corporation from the enumeration of government-owned and controlled
corporations exempted from corporate income tax is valid and constitutional, while BIR Revenue

92

Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary to
the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.
No costs.

OTHERS

SO ORDERED.

1,226,177,000

32.58%

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 BIRs
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

G.R. No. 163653

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 toP2,557,213,942.60 in 19969 and P3,360,889,677.48 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 FDCs 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 P500.7 million worth of shares in said joint venture company to RHPLs subscription
worth P433.8 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 P500.7 million, FDC eventually reported a net
loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.11

July 19, 2011

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 P4,306,777,000.00. 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, FLIs ownership structure was changed to the extent reflected
in the following tabular prcis, viz.:

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
ofP150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-00020-2000 for deficiency
documentary stamp taxes in the sum of P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-9700019-2000 for deficiency income taxes in the sum of P5,716,927.03 for 1997; and (d) Assessment Notice
No. SP-DST-97-00021-2000 for deficiency documentary stamp taxes in the sum of P5,796,699.40 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 "arms-length" interest rate and documentary stamp
taxes imposable on the advances FDC extended to its affiliates.14

Stockholder

Number and Percentage of

Shares Held Prior to the
Exchange

Number of
Additional Shares
Issued

Number and Percentage of

Shares Held After the Exchange

FDC

2,537,358,000

67.42%

42,217,000

2,579,575,000

61.03%

On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for deficiency
income taxes in the sum of P1,477,494,638.23 for the year 1997.15 Covered by Assessment Notice No. SPINC-97-0027-2000,16said 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

FAI

420,877,000

420,877,000

9.96%

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

93

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 FAI23 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 P5,691,972.03 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 P5,691,972.03 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 200533 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 Courts 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:
I 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

94

FILINVEST LAND INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR THE NONRECOGNITION 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 FDCS SHAREHOLDINGS IN
FAC IS NOT TAXABLE.36
The Courts Ruling
While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs 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 CTAs 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 provision39 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 arms 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 arms 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 partners 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

95

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 corporations 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 P263,386,921.00 should be recognized on the part of FDC and in the sum of P3,088,711,367.00 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 cotransferor 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

96

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 (P0.30) 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 (P250,000.00) 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 (P0.30) 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 P6,400,693.62 for documentary stamp tax, P3,999,793.44 in interests and P25,000.00 as
compromise penalty, for a total ofP10,425,487.06. Alongside the sum of P4,050,599.62 for documentary
stamp tax, the CIR similarly assessedP1,721,099.78 in interests and P25,000.00 as compromise penalty in
Assessment Notice No. SP-DST-97-00021-2000 or a total of P5,796,699.40. 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 FDCs 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 P500.7 million worth of shares of stock
representing a 60% equity participation in FAC. In turn, RHPL subscribed to P433.8 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 FDCs right and interests in the Project to the extent of P500.7 million.
1.16. FDC reported a net loss of P190,695,061.00 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

97

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 CAs 16 December 2003 Decision in G.R. No. 72992 is AFFIRMED in
toto. The CIRs petition in G.R. No. 167689 is PARTIALLY GRANTED and the CAs 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.

1994 and 1995, effectively extending the period of the Bureau of Internal Revenue (BIR) to assess up to
December 31, 2000.5
Subsequently, on January 27, 2000, RCBC received a Formal Letter of Demand together with Assessment
Notices from the BIR for the following deficiency tax assessments: 6
Particulars

Basic Tax

Interest

Compromise Penalties Total

1995 (ST-INC-950199-2000)
P 252,150,988.01

P 191,496,585.96

P 25,000.00

P 443,672,573.97

1994 (ST-INC-940200-2000)
216,478,397.90

207,819,261.99

25,000.00

424,322,659.89

Deficiency Income Tax

The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-00019-2000 and SPINC-97-0027-2000 issued for deficiency income assessed on (a) the "arms-length" interest from said
advances; (b) the gain from FDCs Deed of Exchange with FAI and FLI; and (c) income from the dilution
resulting from FDCs Shareholders Agreement with RHPL is, however, upheld.

Deficiency Gross Receipts Tax

1995 (ST-GRT-950201-2000)
13,697,083.68

12,428,696.21

2,819,745.52

28,945,525.41

SO ORDERED.

1994 (ST-GRT-940202-2000)
2,488,462.38

2,755,716.42

25,000.00

5,269,178.80

Deficiency Final Withholding Tax

THIRD DIVISION
G.R. No. 170257

September 7, 2011

1995 (ST-EWT95-0203-2000)

64,365,610.12

58,757,866.78

25,000.00

123,148,477.15

1994 (ST-EWT94-0204-2000)

53,058,075.25

59,047,096.34

25,000.00

112,130,171.59

Deficiency Final Tax on FCDU Onshore Income

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

1995 (ST-OT-950205-2000)

81,508,718.20

61,901,963,.52

25,000.00

143,435,681.72

DECISION

1994 (ST-OT-940206-2000)

34,429,503.10

33,052,322.98

25,000.00

67,506,826.08

MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 seeking to set aside the July 27, 2005
Decision1 and October 26, 2005 Resolution2 of the Court of Tax Appeals En Banc (CTA-En Banc) in
C.T.A. E.B. No. 83 entitled "Rizal Commercial Banking Corporation v. Commissioner of Internal
Revenue."
THE FACTS
Petitioner Rizal Commercial Banking Corporation (RCBC) is a corporation engaged in general banking
operations. It seasonably filed its Corporation Annual Income Tax Returns for Foreign Currency Deposit
Unit for the calendar years 1994 and 1995.3
On August 15, 1996, RCBC received Letter of Authority No. 133959 issued by then Commissioner of
Internal Revenue(CIR) Liwayway Vinzons-Chato, authorizing a special audit team to examine the books
of accounts and other accounting records for all internal revenue taxes from January 1, 1994 to December
31, 1995.4
On January 23, 1997, RCBC executed two Waivers of the Defense of Prescription Under the Statute of
Limitations of the National Internal Revenue Code covering the internal revenue taxes due for the years

Deficiency Expanded Withholding Tax

1995 (ST-EWT95-0207-2000)

5,051,415.22

4,583,640.33

113,000.00

9,748,055.55

1994 (ST-EWT94-0208-2000)

4,482,740.35

4,067,626.31

78,200.00

8,628,566.66

Deficiency Documentary Stamp Tax

1995 (ST-DST195-0209-2000)

351,900,539.39

315,804,946.26

250,000.00

667,955,485.65

1995 (ST-DST295-0210-2000)

367,207,105.29

331,535,844.68

300,000.00

699,042,949.97

1994 (ST-DST394-0211-2000)

460,370,640.05

512,193,460.02

300,000.00

972,864,100.07

1994 (ST-DST4-

223,037,675.89

240,050,706.09

300,000.00

463,388,381.98

98

94-0212-2000)

TOTALS

TOTALS

P2,130,226,954.83 P2,035,495,733.89 P4,335,945.52

P4,170,058,634.49

Disagreeing with the said deficiency tax assessment, RCBC filed a protest on February 24, 2000 and later
submitted the relevant documentary evidence to support it. Much later on November 20, 2000, it filed a
petition for review before the CTA, pursuant to Section 228 of the 1997 Tax Code.7
On December 6, 2000, RCBC received another Formal Letter of Demand with Assessment Notices dated
October 20, 2000, following the reinvestigation it requested, which drastically reduced the original amount
of deficiency taxes to the following:8
Particulars

Basic Tax

Interest

Compromise Penalties Total

P 164,712,903.44 P 126,155,645.38 P 12,291,947.73

P 303,160,496.55

On the same day, RCBC paid the following deficiency taxes as assessed by the BIR: 9
Particulars

1994

1995

Total

Deficiency Income Tax

P 2,965,549.44

P 722,236.11

P 3,687,785.55

Deficiency Gross Receipts Tax

300,695.84

6,701,893.17

7,002,589.01

Deficiency Final Withholding Tax

410,174.44

714,682.02

1,124,856.46

Deficiency Expanded Withholding Tax

672,490.14

1,052,753.48

1,725,243.62

Deficiency Documentary Stamp Tax

1,131,330.92

749,863.40

1,881,194.32

TOTALS

P 5,480,240.78

P 9,941,428.18

P 15,421,668.96

Deficiency Income Tax

1995 (INC-95-000003)

P 374,348.45

P 346,656.92

P 721,005.37

1994 (INC-94-000002)

1,392,366.28

1,568,605.52

2,960,971.80

RCBC, however, refused to pay the following assessments for deficiency onshore tax and documentary
stamp tax which remained to be the subjects of its petition for review: 10

Deficiency Gross Receipts Tax

1995 (GRT-95-000004)

2,000,926.96

3,322,589.63

P 1,367,222.04

6,690,738.63

1994 (GRT-94-000003)

138,368.61

161,872.32

300,240.93

Deficiency Final Withholding Tax

1995 (FT-95-000005)

362,203.47

351,287.75

713,491.22

1994 (FT-94-000004)

188,746.43

220,807.47

409,553.90

Deficiency Final Tax on FCDU Onshore Income

1995 (OT-95-000006)

81,508,718.20

79,052,291.08

160,561,009.28

1994 (OT-94-000005)

34,429,503.10

40,277,802.26

74,707,305.36

Deficiency Expanded Withholding Tax

1995 (EWT-95-000004) 520,869.72

505,171.80

25,000.00

1,051,041.03

1994 (EWT-94-000003) 297,949.95

348,560.63

25,000.00

671,510.58

149,972.68

749,863.40

1995 (DST2-95-000002) 24,953,842.46

6,238,460.62

31,192,303.08

1994 (DST-94-000005)

226,266.18

1,131,330.92

4,260,026.21

21,300,131.05

Particulars

1994

1995

Total

Deficiency Final Tax on FCDU Onshore Income

Basic

P 34,429,503.10

P 81,508,718.20

P 115,938,221.30

Interest

40,277,802.26

79,052,291.08

119,330,093.34

Sub Total

P 74,707,305.36

P 160,561,009.28

P 235,268,314.64

Deficiency Documentary Stamp Tax

Basic

P 17,040,104.84

P 24,953,842.46

P 41,993,947.30

Surcharge

4,260,026.21

6,238,460.62

10,498,486.83

Sub Total

P 21,300,131.05

P 31,192,303.08

P 52,492,434.13

TOTALS

P 96,007,436.41

P 191,753,312.36

P 287,760,748.77

Deficiency Documentary Stamp Tax

1995 (DST-95-000006)

599,890.72

905,064.74

1994 (DST2-94-000001) 17,040,104.84

RCBC argued that the waivers of the Statute of Limitations which it executed on January 23, 1997 were
not valid because the same were not signed or conformed to by the respondent CIR as required under
Section 222(b) of the Tax Code.11 As regards the deficiency FCDU onshore tax, RCBC contended that
because the onshore tax was collected in the form of a final withholding tax, it was the borrower,
constituted by law as the withholding agent, that was primarily liable for the remittance of the said tax. 12
On December 15, 2004, the First Division of the Court of Tax Appeals (CTA-First Division) promulgated
its Decision13which partially granted the petition for review. It considered as closed and terminated the

99

assessments for deficiency income tax, deficiency gross receipts tax, deficiency final withholding tax,
deficiency expanded withholding tax, and deficiency documentary stamp tax (not an industry issue) for
1994 and 1995.14 It, however, upheld the assessment for deficiency final tax on FCDU onshore income and
deficiency documentary stamp tax for 1994 and 1995 and ordered RCBC to pay the following amounts
plus 20% delinquency tax:15
Particulars

1994

1995

Total

Deficiency Final Tax on FCDU Onshore Income

Basic

P 22,356,324.43

P 16,067,952.86

P 115,938, 221.30

Interest

26,153,837.08

15,583,713.19

119,330,093.34

Sub Total

48,510,161.51

31,651,666.05

119,330,093.34

Deficiency Documentary Stamp Tax (Industry Issue)

after it had received and accepted certain benefits as a result of the execution of the said waivers. 21 As to
the deficiency onshore tax, it held that because the payor-borrower was merely designated by law to
withhold and remit the said tax, it would then follow that the tax should be imposed on RCBC as the
payee-bank.22 Finally, in relation to the assessment of the deficiency documentary stamp tax on
petitioners special savings account, it held that petitioners special savings account was a certificate of
deposit and, as such, was subject to documentary stamp tax.23
Hence, this petition.
While awaiting the decision of this Court, RCBC filed its Manifestation dated July 22, 2009, informing
the Court that this petition, relative to the DST deficiency assessment, had been rendered moot and
academic by its payment of the tax deficiencies on Documentary Stamp Tax (DST) on Special Savings
Account (SSA) for taxable years 1994 and 1995 after the BIR approved its applications for tax
abatement.24
In its November 17, 2009 Comment to the Manifestation, the CIR pointed out that the only remaining
issues raised in the present petition were those pertaining to RCBCs deficiency tax on FCDU Onshore
Income for taxable years 1994 and 1995 in the aggregate amount of P 80,161,827.56 plus 20%
delinquency interest per annum. The CIR prayed that RCBC be considered to have withdrawn its appeal
with respect to the CTA-En Banc ruling on its DST on SSA deficiency for taxable years 1994 and 1995
and that the questioned CTA decision regarding RCBCs deficiency tax on FCDU Onshore Income for the
same period be affirmed.25

Basic

P 17,040,104.84

P 24,953,842.46

P 41,993,947.30

Surcharge

4,260,026.21

6,238,460.62

10,498,486.83

Thus, only the following issues remain to be resolved by this Court:

Sub Total

21,300,131.05

31,192,303.08

52,492,434.13

Whether petitioner, by paying the other tax assessment covered by the waivers of the statute of
limitations, is rendered estopped from questioning the validity of the said waivers with respect to the
assessment of deficiency onshore tax.26

TOTALS

P 69,810,292.56

P 62,843,969.13

P 171,822,527.47

and

THE ISSUES

Unsatisfied, RCBC filed its Motion for Reconsideration on January 21, 2005, arguing that: (1) the CTA
erred in its addition of the total amount of deficiency taxes and the correct amount should only
be P 132,654,261.69 and not P171,822,527.47; (2) the CTA erred in holding that RCBC was estopped
from questioning the validity of the waivers; (3) it was the payor-borrower as withholding tax agent, and
not RCBC, who was liable to pay the final tax on FCDU, and (4) RCBCs special savings account was not
subject to documentary stamp tax.16

Whether petitioner, as payee-bank, can be held liable for deficiency onshore tax, which is mandated
by law to be collected at source in the form of a final withholding tax.27

In its Resolution17 dated April 11, 2005, the CTA-First Division substantially upheld its earlier ruling,
except for its inadvertence in the addition of the total amount of deficiency taxes. As such, it modified its
earlier decision and ordered RCBC to pay the amount of P 132,654,261.69 plus 20% delinquency tax.18

RCBC assails the validity of the waivers of the statute of limitations on the ground that the said waivers
were merely attested to by Sixto Esquivias, then Coordinator for the CIR, and that he failed to indicate
acceptance or agreement of the CIR, as required under Section 223 (b) of the 1977 Tax Code. 28 RCBC
further argues that the principle of estoppel cannot be applied against it because its payment of the other
tax assessments does not signify a clear intention on its part to give up its right to question the validity of
the waivers.29

RCBC elevated the case to the CTA-En Banc where it raised the following issues:
I.
Whether or not the right of the respondent to assess deficiency onshore tax and documentary stamp
tax for taxable year 1994 and 1995 had already prescribed when it issued the formal letter of
demand and assessment notices for the said taxable years.
II.
Whether or not petitioner is liable for deficiency onshore tax for taxable year 1994 and 1995.
III.
Whether or not petitioners special savings account is subject to documentary stamp tax under then
Section 180 of the 1993 Tax Code.19
The CTA-En Banc, in its assailed Decision, denied the petition for lack of merit. It ruled that by receiving,
accepting and paying portions of the reduced assessment, RCBC bound itself to the new assessment,
implying that it recognized the validity of the waivers.20 RCBC could not assail the validity of the waivers

THE COURTS RULING

Petitioner is estopped from
questioning the validity of the waivers

The Court disagrees.

Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the rule that "an admission
or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon." A party is precluded from denying his own acts, admissions or
representations to the prejudice of the other party in order to prevent fraud and falsehood.30
Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of the revised
assessments issued within the extended period as provided for in the questioned waivers, impliedly
admitted the validity of those waivers. Had petitioner truly believed that the waivers were invalid and that
the assessments were issued beyond the prescriptive period, then it should not have paid the reduced
amount of taxes in the revised assessment. RCBCs subsequent action effectively belies its insistence that
the waivers are invalid. The records show that on December 6, 2000, upon receipt of the revised
assessment, RCBC immediately made payment on the uncontested taxes. Thus, RCBC is estopped from
questioning the validity of the waivers. To hold otherwise and allow a party to gainsay its own act or deny

100

rights which it had previously recognized would run counter to the principle of equity which this
institution holds dear.31

derived from foreign currency loans, pursuant to Section 24(e)(3) of the National Internal Revenue Code
of 1993:

Liability for Deficiency

Onshore Withholding Tax

Sec. 24. Rates of tax on domestic corporations.

RCBC is convinced that it is the payor-borrower, as withholding agent, who is directly liable for the
payment of onshore tax, citing Section 2.57(A) of Revenue Regulations No. 2-98 which states:
(A) Final Withholding Tax. Under the final withholding tax system the amount of income tax withheld
by the withholding agent is constituted as a full and final payment of the income tax due from the payee
on the said income.The liability for payment of the tax rests primarily on the payor as a withholding
agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency
tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax
return for the particular income. (Emphasis supplied)
The petitioner is mistaken.
Before any further discussion, it should be pointed out that RCBC erred in citing the abovementioned
Revenue Regulations No. 2-98 because the same governs collection at source on income paid only on or
after January 1, 1998. The deficiency withholding tax subject of this petition was supposed to have been
withheld on income paid during the taxable years of 1994 and 1995. Hence, Revenue Regulations No. 298 obviously does not apply in this case.
In Chamber of Real Estate and Builders Associations, Inc. v. The Executive Secretary,32 the Court has
explained that the purpose of the withholding tax system is three-fold: (1) to provide the taxpayer with a
convenient way of paying his tax liability; (2) to ensure the collection of tax, and (3) to improve the
governments cashflow. Under the withholding tax system, the payor is the taxpayer upon whom the tax is
imposed, while the withholding agent simply acts as an agent or a collector of the government to ensure
the collection of taxes.33 1avvphi1
It is, therefore, indisputable that the withholding agent is merely a tax collector and not a taxpayer, as
elucidated by this Court in the case of Commissioner of Internal Revenue v. Court of Appeals,34 to wit:

xxxx
(e) Tax on certain incomes derived by domestic corporations
xxxx
(3) Tax on income derived under the Expanded Foreign Currency Deposit System. Income derived by a
depository bank under the expanded foreign currency deposit system from foreign currency transactions
with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of
foreign banks that may be authorized by the Central Bank to transact business with foreign currency
depository system units and other depository banks under the expanded foreign currency deposit system
shall be exempt from all taxes, except taxable income from such transactions as may be specified by the
Secretary of Finance, upon recommendation of the Monetary Board to be subject to the usual income tax
payable by banks: Provided, That interest income from foreign currency loans granted by such
depository banks under said expanded system to residents (other than offshore banking units in the
Philippines or other depository banks under the expanded system) shall be subject to a 10%
tax. (Emphasis supplied)
As a final note, this Court has consistently held that findings and conclusions of the CTA shall be accorded
the highest respect and shall be presumed valid, in the absence of any clear and convincing proof to the
contrary.36 The CTA, as a specialized court dedicated exclusively to the study and resolution of tax
problems, has developed an expertise on the subject of taxation. 37 As such, its decisions shall not be lightly
set aside on appeal, unless this Court finds that the questioned decision is not supported by substantial
evidence or there is a showing of abuse or improvident exercise of authority on the part of the Tax Court. 38
WHEREFORE, the petition is DENIED.
SO ORDERED.

In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting
no more than an agent of the government for the collection of the tax in order to ensure its payments; the
payer is the taxpayer he is the person subject to tax imposed by law; and the payee is the taxing
authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the
withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is
direct and independent from the taxpayer, because the income tax is still imposed on and due from
the latter. The agent is not liable for the tax as no wealth flowed into him he earned no income. The
Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to
withhold as distinguished from its duty to pay tax since:
"the governments cause of action against the withholding agent is not for the collection of income
tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance
with which is imposed on the withholding agent and not upon the taxpayer." 35 (Emphases supplied)
Based on the foregoing, the liability of the withholding agent is independent from that of the
taxpayer.1wphi1 The former cannot be made liable for the tax due because it is the latter who earned the
income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his
duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains
with the taxpayer because the gain was realized and received by him.
While the payor-borrower can be held accountable for its negligence in performing its duty to withhold the
amount of tax due on the transaction, RCBC, as the taxpayer and the one which earned income on the
transaction, remains liable for the payment of tax as the taxpayer shares the responsibility of making
certain that the tax is properly withheld by the withholding agent, so as to avoid any penalty that may arise
from the non-payment of the withholding tax due.
RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the payor-borrower as
the withholding agent. As such, it is liable for payment of deficiency onshore tax on interest income

101

formal claim for refund or tax credit in the amount of P30,652,890.55 covering deliveries from April to
June 2002.6
Since no action was taken by the petitioner on its claims, respondent filed petitions for review before the
CTA on September 19, 2003 and December 23, 2003, docketed as CTA Case Nos. 6775 and 6839,
respectively.
In its decision on the consolidated cases, the CTAs First Division ruled that respondent is entitled to the
refund of excise taxes in the reduced amount of P95,014,283.00. The CTA First Division relied on a
previous ruling rendered by the CTA En Banc in the case of "Pilipinas Shell Petroleum Corporation v.
Commissioner of Internal Revenue"7 where the CTA also granted respondents claim for refund on the
basis of excise tax exemption for petroleum products sold to international carriers of foreign registry for
their use or consumption outside the Philippines. Petitioners motion for reconsideration was denied by the
CTA First Division.
Petitioner elevated the case to the CTA En Banc which upheld the ruling of the First Division. The CTA
pointed out the specific exemption mentioned under Section 135 of the National Internal Revenue Code of
1997 (NIRC) of petroleum products sold to international carriers such as respondents clients. It said that
this Courts ruling in Maceda v. Macaraig, Jr.8 is inapplicable because said case only put to rest the issue of
whether or not the National Power Corporation (NPC) is subject to tax considering that NPC is a taxexempt entity mentioned in Sec. 135 (c) of the NIRC (1997), whereas the present case involves the tax
exemption of the sale of petroleum under Sec. 135 (a) of the same Code. Further, the CTA said that the
ruling in Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue9 likewise finds no
application because the party asking for the refund in said case was the seller-producer based on the
exemption granted under the law to the tax-exempt buyers, NPC and Voice of America (VOA), whereas in
this case it is the article or product which is exempt from tax and not the international carrier.
Petitioner filed a motion for reconsideration which the CTA likewise denied.
Hence, this petition anchored on the following grounds:
I
FIRST DIVISION
G.R. No. 188497

April 25, 2012

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Petitioner Commissioner of Internal Revenue appeals the Decision 1 dated March 25, 2009 and
Resolution2 dated June 24, 2009 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 415. The
CTA dismissed the petition for review filed by petitioner assailing the CTA First Divisions
Decision3 dated April 25, 2008 and Resolution4 dated July 10, 2008 which ordered petitioner to refund the
excise taxes paid by respondent Pilipinas Shell Petroleum Corporation on petroleum products it sold to
international carriers.
The facts are not disputed.
Respondent is engaged in the business of processing, treating and refining petroleum for the purpose of
producing marketable products and the subsequent sale thereof. 5
On July 18, 2002, respondent filed with the Large Taxpayers Audit & Investigation Division II of the
Bureau of Internal Revenue (BIR) a formal claim for refund or tax credit in the total amount
of P28,064,925.15, representing excise taxes it allegedly paid on sales and deliveries of gas and fuel oils to
various international carriers during the period October to December 2001. Subsequently, on October 21,
2002, a similar claim for refund or tax credit was filed by respondent with the BIR covering the period
January to March 2002 in the amount ofP41,614,827.99. Again, on July 3, 2003, respondent filed another

SECTION 148 OF THE NATIONAL INTERNAL REVENUE CODE EXPRESSLY SUBJECTS THE
PETROLEUM PRODUCTS TO AN EXCISE TAX BEFORE THEY ARE REMOVED FROM THE
PLACE OF PRODUCTION.
II
THE ONLY SPECIFIC PROVISION OF THE LAW WHICH GRANTS TAX CREDIT OR TAX
REFUND OF THE EXCISE TAXES PAID REFERS TO THOSE CASES WHERE GOODS LOCALLY
PRODUCED OR MANUFACTURED ARE ACTUALLY EXPORTED WHICH IS NOT SO IN THIS
CASE.
III
THE PRINCIPLES LAID DOWN IN MACEDA VS. MACARAIG, JR. AND PHILIPPINE
ACETYLENE CO. VS. CIR ARE APPLICABLE TO THIS CASE.10
The Solicitor General argues that the obvious intent of the law is to grant excise tax exemption to
international carriers and exempt entities as buyers of petroleum products and not to the manufacturers or
producers of said goods. Since the excise taxes are collected from manufacturers or producers before
removal of the domestic products from the place of production, respondent paid the subject excise taxes as
manufacturer or producer of the petroleum products pursuant to Sec. 148 of the NIRC. Thus, regardless of
who the buyer/purchaser is, the excise tax on petroleum products attached to the said goods before their
sale or delivery to international carriers, as in fact respondent averred that it paid the excise tax on its
petroleum products when it "withdrew petroleum products from its place of production for eventual sale
and delivery to various international carriers as well as to other customers." 11 Sec. 135 (a) and (c) granting
exemption from the payment of excise tax on petroleum products can only be interpreted to mean that the
respondent cannot pass on to international carriers and exempt agencies the excise taxes it paid as a
manufacturer or producer.

102

As to whether respondent has the right to file a claim for refund or tax credit for the excise taxes it paid for
the petroleum products sold to international carriers, the Solicitor General contends that Sec. 130 (D) is
explicit on the circumstances under which a taxpayer may claim for a refund of excise taxes paid on
manufactured products, which express enumeration did not include those excise taxes paid on petroleum
products which were eventually sold to international carriers (expressio unius est exclusio alterius).
Further, the Solicitor General asserts that contrary to the conclusion made by the CTA, the principles laid
down by this Court in Maceda v. Macaraig, Jr.12and Philippine Acetylene Co. v. Commissioner of Internal
Revenue13 are applicable to this case. Respondent must shoulder the excise taxes it previously paid on
petroleum products which it later sold to international carriers because it cannot pass on the tax burden to
the said international carriers which have been granted exemption under Sec. 135 (a) of the NIRC.
Considering that respondent failed to prove an express grant of a right to a tax refund, such claim cannot
be implied; hence, it must be denied.
On the other hand, respondent maintains that since petroleum products sold to qualified international
carriers are exempt from excise tax, no taxes should be imposed on the article, to which goods the tax
attaches, whether in the hands of the said international carriers or the petroleum manufacturer or producer.
As these excise taxes have been erroneously paid taxes, they can be recovered under Sec. 229 of the
NIRC. Respondent contends that contrary to petitioners assertion, Sections 204 and 229 authorizes
respondent to maintain a suit or proceeding to recover such erroneously paid taxes on the petroleum
products sold to tax-exempt international carriers.
As to the jurisprudence cited by the petitioner, respondent argues that they are not applicable to the case at
bar. It points out that Maceda v. Macaraig, Jr. is an adjudication on the issue of tax exemption of NPC
from direct and indirect taxes given the passage of various laws relating thereto. What was put in issue in
said case was NPCs right to claim for refund of indirect taxes. Here, respondents claim for refund is not
anchored on the exemption of the buyer from direct and indirect taxes but on the tax exemption of the
goods themselves under Sec. 135. Respondent further stressed that in Maceda v. Macaraig, Jr., this Court
recognized that if NPC purchases oil from oil companies, NPC is entitled to claim reimbursement from the
BIR for that part of the purchase price that represents excise taxes paid by the oil company to the BIR.
Philippine Acetylene Co. v. CIR, on the other hand, involved sales tax, which is a tax on the transaction,
which this Court held as due from the seller even if such tax cannot be passed on to the buyers who are
tax-exempt entities. In this case, the excise tax is a tax on the goods themselves. While indeed it is the
manufacturer who has the duty to pay the said tax, by specific provision of law, Sec. 135, the goods are
stripped of such tax under the circumstances provided therein. Philippine Acetylene Co., Inc. v. CIR was
thus not anchored on an exempting provision of law but merely on the argument that the tax burden cannot
be passed on to someone.
Respondent further contends that requiring it to shoulder the burden of excise taxes on petroleum products
sold to international carriers would effectively defeat the principle of international comity upon which the
grant of tax exemption on aviation fuel used in international flights was founded. If the excise taxes paid
by respondent are not allowed to be refunded or credited based on the exemption provided in Sec. 135 (a),
respondent avers that the manufacturers or oil companies would then be constrained to shift the tax burden
to international carriers in the form of addition to the selling price.
Respondent cites as an analogous case Commissioner of International Revenue v. Tours Specialists,
Inc.14 which involved the inclusion of hotel room charges remitted by partner foreign tour agents in
respondent TSIs gross receipts for purposes of computing the 3% contractors tax. TSI opposed the
deficiency assessment invoking, among others, Presidential Decree No. 31, which exempts foreign tourists
from paying hotel room tax. This Court upheld the CTA in ruling that while CIR may claim that the 3%
contractors tax is imposed upon a different incidence, i.e., the gross receipts of the tourist agency which
he asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and though
different, it nonetheless imposes a tax actually on room charges. One way or the other, said the CTA, it
would not have the effect of promoting tourism in the Philippines as that would increase the costs or
expenses by the addition of a hotel room tax in the overall expenses of said tourists.
The instant petition squarely raised the issue of whether respondent as manufacturer or producer of
petroleum products is exempt from the payment of excise tax on such petroleum products it sold to
international carriers.

In the previous cases15 decided by this Court involving excise taxes on petroleum products sold to
international carriers, what was only resolved is the question of who is the proper party to claim the refund
of excise taxes paid on petroleum products if such tax was either paid by the international carriers
themselves or incorporated into the selling price of the petroleum products sold to them. We have ruled in
the said cases that the statutory taxpayer, the local manufacturer of the petroleum products who is directly
liable for the payment of excise tax on the said goods, is the proper party to seek a tax refund. Thus, a
foreign airline company who purchased locally manufactured petroleum products for use in its
international flights, as well as a foreign oil company who likewise bought petroleum products from local
manufacturers and later sold these to international carriers, have no legal personality to file a claim for tax
refund or credit of excise taxes previously paid by the local manufacturers even if the latter passed on to
the said buyers the tax burden in the form of additional amount in the price.
Excise taxes, as the term is used in the NIRC, refer to taxes applicable to certain specified goods or
articles manufactured or produced in the Philippines for domestic sales or consumption or for any other
disposition and to things imported into the Philippines. These taxes are imposed in addition to the valueadded tax (VAT).16
As to petroleum products, Sec. 148 provides that excise taxes attach to the following refined and
manufactured mineral oils and motor fuels as soon as they are in existence as such:
(a) Lubricating oils and greases;
(b) Processed gas;
(c) Waxes and petrolatum;
(d) Denatured alcohol to be used for motive power;
(e) Naphtha, regular gasoline and other similar products of distillation;
(f) Leaded premium gasoline;
(g) Aviation turbo jet fuel;
(h) Kerosene;
(i) Diesel fuel oil, and similar fuel oils having more or less the same generating power;
(j) Liquefied petroleum gas;
(k) Asphalts; and
(l) Bunker fuel oil and similar fuel oils having more or less the same generating capacity.
Beginning January 1, 1999, excise taxes levied on locally manufactured petroleum products and
indigenous petroleum are required to be paid before their removal from the place of
production.17 However, Sec. 135 provides:
SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies.
Petroleum products sold to the following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their use or consumption outside the
Philippines: Provided, That the petroleum products sold to these international carriers shall be stored in a
bonded storage tank and may be disposed of only in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner;
(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for
their use or consumption: Provided, however, That the country of said foreign international carrier or
exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers,
entities or agencies; and
(c) Entities which are by law exempt from direct and indirect taxes.
Respondent claims it is entitled to a tax refund because those petroleum products it sold to international
carriers are not subject to excise tax, hence the excise taxes it paid upon withdrawal of those products

103

were erroneously or illegally collected and should not have been paid in the first place. Since the excise
tax exemption attached to the petroleum products themselves, the manufacturer or producer is under no
duty to pay the excise tax thereon.
We disagree.
Under Chapter II "Exemption or Conditional Tax-Free Removal of Certain Goods" of Title VI, Sections
133, 137, 138, 139 and 140 cover conditional tax-free removal of specified goods or articles, whereas
Sections 134 and 135 provide for tax exemptions. While the exemption found in Sec. 134 makes reference
to the nature and quality of the goods manufactured (domestic denatured alcohol) without regard to the tax
status of the buyer of the said goods, Sec. 135 deals with the tax treatment of a specified article (petroleum
products) in relation to its buyer or consumer. Respondents failure to make this important distinction
apparently led it to mistakenly assume that the tax exemption under Sec. 135 (a) "attaches to the goods
themselves" such that the excise tax should not have been paid in the first place.
On July 26, 1996, petitioner Commissioner issued Revenue Regulations 8-9618 ("Excise Taxation of
Petroleum Products") which provides:
SEC. 4. Time and Manner of Payment of Excise Tax on Petroleum Products, Non-Metallic Minerals and
Indigenous Petroleum
I. Petroleum Products
xxxx
a) On locally manufactured petroleum products
The specific tax on petroleum products locally manufactured or produced in the Philippines shall be paid
by the manufacturer, producer, owner or person having possession of the same, and such tax shall be paid
within fifteen (15) days from date of removal from the place of production. (Underscoring supplied.)
Thus, if an airline company purchased jet fuel from an unregistered supplier who could not present proof
of payment of specific tax, the company is liable to pay the specific tax on the date of purchase. 19 Since
the excise tax must be paid upon withdrawal from the place of production, respondent cannot anchor its
claim for refund on the theory that the excise taxes due thereon should not have been collected or paid in
the first place.
Sec. 229 of the NIRC allows the recovery of taxes erroneously or illegally collected. An "erroneous or
illegal tax" is defined as one levied without statutory authority, or upon property not subject to taxation or
by some officer having no authority to levy the tax, or one which is some other similar respect is illegal.20
Respondents locally manufactured petroleum products are clearly subject to excise tax under Sec. 148.
Hence, its claim for tax refund may not be predicated on Sec. 229 of the NIRC allowing a refund of
erroneous or excess payment of tax. Respondents claim is premised on what it determined as a tax
exemption "attaching to the goods themselves," which must be based on a statute granting tax exemption,
or "the result of legislative grace." Such a claim is to be construed strictissimi juris against the taxpayer,
meaning that the claim cannot be made to rest on vague inference. Where the rule of strict interpretation
against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, the
claimant must show that he clearly falls under the exempting statute.21
The exemption from excise tax payment on petroleum products under Sec. 135 (a) is conferred on
international carriers who purchased the same for their use or consumption outside the Philippines. The
only condition set by law is for these petroleum products to be stored in a bonded storage tank and may be
disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.
On January 22, 2008, or five years after the sale by respondent of the subject petroleum products, then
Secretary of Finance Margarito B. Teves issued Revenue Regulations No. 3-2008 "Amending Certain
Provisions of Existing Revenue Regulations on the Granting of Outright Excise Tax Exemption on
Removal of Excisable Articles Intended for Export or Sale/Delivery to International Carriers or to TaxExempt Entities/Agencies and Prescribing the Provisions for Availing Claims for Product Replenishment."
Said issuance recognized the "tax relief to which the taxpayers are entitled" by availing of the following

remedies: (a) a claim for excise tax exemption pursuant to Sections 204 and 229 of the NIRC; or (2) a
product replenishment.
SEC. 2. IMPOSITION OF EXCISE TAX ON REMOVAL OF EXCISABLE ARTICLES FOR EXPORT
OR SALE/DELIVERY TO INTERNATIONAL CARRIERS AND OTHER TAX-EXEMPT
ENTITIES/AGENCIES. Subject to the subsequent filing of a claim for excise tax credit/refund or
product replenishment, all manufacturers of articles subject to excise tax under Title VI of the NIRC of
1997, as amended, shall pay the excise tax that is otherwise due on every removal thereof from the place
of production that is intended for exportation or sale/delivery to international carriers or to tax-exempt
entities/agencies: Provided, That in case the said articles are likewise being sold in the domestic market,
the applicable excise tax rate shall be the same as the excise tax rate imposed on the domestically sold
articles.
In the absence of a similar article that is being sold in the domestic market, the applicable excise tax shall
be computed based on the value appearing in the manufacturers sworn statement converted to Philippine
currency, as may be applicable.
x x x x (Emphasis supplied.)
In this case, however, the Solicitor General has adopted a position contrary to existing BIR regulations and
rulings recognizing the right of oil companies to seek a refund of excise taxes paid on petroleum products
they sold to international carriers. It is argued that there is nothing in Sec. 135 (a) which explicitly grants
exemption from the payment of excise tax in favor of oil companies selling their petroleum products to
international carriers and that the only claim for refund of excise taxes authorized by the NIRC is the
payment of excise tax on exported goods, as explicitly provided in Sec. 130 (D), Chapter I under the same
Title VI:
(D) Credit for Excise Tax on Goods Actually Exported. -- When goods locally produced or manufactured
are removed and actually exported without returning to the Philippines, whether so exported in their
original state or as ingredients or parts of any manufactured goods or products, any excise tax paid thereon
shall be credited or refunded upon submission of the proof of actual exportation and upon receipt of the
corresponding foreign exchange payment: Provided, That the excise tax on mineral products, except coal
and coke, imposed under Section 151 shall not be creditable or refundable even if the mineral products are
actually exported.
According to the Solicitor General, Sec. 135 (a) in relation to the other provisions on excise tax and from
the nature of indirect taxation, may only be construed as prohibiting the manufacturers-sellers of
petroleum products from passing on the tax to international carriers by incorporating previously paid
excise taxes into the selling price. In other words, respondent cannot shift the tax burden to international
carriers who are allowed to purchase its petroleum products without having to pay the added cost of the
excise tax.
We agree with the Solicitor General.
In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue22 this Court held that petitioner
manufacturer who sold its oxygen and acetylene gases to NPC, a tax-exempt entity, cannot claim
exemption from the payment of sales tax simply because its buyer NPC is exempt from taxation. The
Court explained that the percentage tax on sales of merchandise imposed by the Tax Code is due from the
manufacturer and not from the buyer.
Respondent attempts to distinguish this case from Philippine Acetylene Co., Inc. on grounds that what was
involved in the latter is a tax on the transaction (sales) and not excise tax which is a tax on the goods
themselves, and that the exemption sought therein was anchored merely on the tax-exempt status of the
buyer and not a specific provision of law exempting the goods sold from the excise tax. But as already
stated, the language of Sec. 135 indicates that the tax exemption mentioned therein is conferred on
specified buyers or consumers of the excisable articles or goods (petroleum products). Unlike Sec. 134
which explicitly exempted the article or goods itself (domestic denatured alcohol) without due regard to
the tax status of the buyer or purchaser, Sec. 135 exempts from excise tax petroleum products which were
sold to international carriers and other tax-exempt agencies and entities.
Considering that the excise taxes attaches to petroleum products "as soon as they are in existence as
such,"23there can be no outright exemption from the payment of excise tax on petroleum products sold to

104

international carriers. The sole basis then of respondents claim for refund is the express grant of excise
tax exemption in favor of international carriers under Sec. 135 (a) for their purchases of locally
manufactured petroleum products. Pursuant to our ruling in Philippine Acetylene, a tax exemption being
enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the
goods for any tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products
under Sec. 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax exemption
granted to its buyers who are international carriers.
24

In Maceda v. Macaraig, Jr., the Court specifically mentioned excise tax as an example of an indirect tax
where the tax burden can be shifted to the buyer:
On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon
someone else". For example, the excise and ad valorem taxes that the oil companies pay to the Bureau of
Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer, like the
NPC, by adding them to the "cash" and/or "selling price."
An excise tax is basically an indirect tax. 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. 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.25
Further, in Maceda v. Macaraig, Jr., the Court ruled that because of the tax exemptions privileges being
enjoyed by NPC under existing laws, the tax burden may not be shifted to it by the oil companies who
shall pay for fuel oil taxes on oil they supplied to NPC. Thus:
In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel
oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of
indirect taxation, the economic burden of such taxation is expected to be passed on through the channels
of commerce to the user or consumer of the goods sold. Because, however, the NPC has been exempted
from both direct and indirect taxation, the NPC must be held exempted from absorbing the economic
burden of indirect taxation. This means, on the one hand, that the oil companies which wish to sell to NPC
absorb all or part of the economic burden of the taxes previously paid to BIR, which they could shift to
NPC if NPC did not enjoy exemption from indirect taxes. This means also, on the other hand, that the
NPC may refuse to pay that part of the "normal" purchase price of bunker fuel oil which represents all or
part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless purchases such oil from
the oil companies because to do so may be more convenient and ultimately less costly for NPC than
NPC itself importing and hauling and storing the oil from overseas NPC is entitled to be reimbursed by
the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil
company-vendor to the BIR.26 (Emphasis supplied.)
In the case of international air carriers, the tax exemption granted under Sec. 135 (a) is based on "a longstanding international consensus that fuel used for international air services should be tax-exempt." The
provisions of the 1944 Convention of International Civil Aviation or the "Chicago Convention", which
form binding international law, requires the contracting parties not to charge duty on aviation fuel already
on board any aircraft that has arrived in their territory from another contracting state. Between individual
countries, the exemption of airlines from national taxes and customs duties on a range of aviation-related
goods, including parts, stores and fuel is a standard element of the network of bilateral "Air Service
Agreements."27 Later, a Resolution issued by the International Civil Aviation Organization (ICAO)
expanded the provision as to similarly exempt from taxes all kinds of fuel taken on board for consumption
by an aircraft from a contracting state in the territory of another contracting State departing for the
territory of any other State.28 Though initially aimed at establishing uniformity of taxation among parties
to the treaty to prevent double taxation, the tax exemption now generally applies to fuel used in
international travel by both domestic and foreign carriers.
On April 21, 1978, then President Ferdinand E. Marcos issued Presidential Decree (P.D.) No. 1359:
PRESIDENTIAL DECREE No. 1359

AMENDING SECTION 134 OF THE NATIONAL INTERNAL REVENUE CODE OF 1977.

WHEREAS, under the present law oil products sold to international carriers are subject to the specific tax;
WHEREAS, some countries allow the sale of petroleum products to Philippine Carriers without payment
of taxes thereon;
WHEREAS, to foster goodwill and better relationship with foreign countries, there is a need to grant
similar tax exemption in favor of foreign international carriers;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers
vested in me by the Constitution, do hereby order and decree the following:
Section 1. Section 134 of the National Internal Revenue Code of 1977 is hereby amended to read as
follows:
"Sec. 134. Articles subject to specific tax. Specific internal revenue taxes apply to things manufactured or
produced in the Philippines for domestic sale or consumption and to things imported, but not to anything
produced or manufactured here which shall be removed for exportation and is actually exported without
returning to the Philippines, whether so exported in its original state or as an ingredient or part of any
manufactured article or product.
"HOWEVER, PETROLEUM PRODUCTS SOLD TO AN INTERNATIONAL CARRIER FOR ITS USE
OR CONSUMPTION OUTSIDE OF THE PHILIPPINES SHALL NOT BE SUBJECT TO SPECIFIC
TAX, PROVIDED, THAT THE COUNTRY OF SAID CARRIER EXEMPTS FROM TAX PETROLEUM
PRODUCTS SOLD TO PHILIPPINE CARRIERS.
"In case of importations the internal revenue tax shall be in addition to the customs duties, if any."
Section 2. This Decree shall take effect immediately.
Contrary to respondents assertion that the above amendment to the former provision of the 1977 Tax
Codesupports its position that it was not liable for excise tax on the petroleum products sold to
international carriers, we find that no such inference can be drawn from the words used in the amended
provision or its introductory part. Founded on the principles of international comity and reciprocity, P.D.
No. 1359 granted exemption from payment of excise tax but only to foreign international carriers who are
allowed to purchase petroleum products free of specific tax provided the country of said carrier also grants
tax exemption to Philippine carriers. Both the earlier amendment in the 1977 Tax Code and the present
Sec. 135 of the 1997 NIRC did not exempt the oil companies from the payment of excise tax on petroleum
products manufactured and sold by them to international carriers.
Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being no express
grant under the NIRC of exemption from payment of excise tax to local manufacturers of petroleum
products sold to international carriers, and absent any provision in the Code authorizing the refund or
crediting of such excise taxes paid, the Court holds that Sec. 135 (a) should be construed as prohibiting the
shifting of the burden of the excise tax to the international carriers who buys petroleum products from the
local manufacturers. Said provision thus merely allows the international carriers to purchase petroleum
products without the excise tax component as an added cost in the price fixed by the manufacturers or
distributors/sellers. Consequently, the oil companies which sold such petroleum products to international
carriers are not entitled to a refund of excise taxes previously paid on the goods.1wphi1
Time and again, we have held that tax refunds are in the nature of tax exemptions which result to loss of
revenue for the government. Upon the person claiming an exemption from tax payments rests the burden
of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted, 29 it
is never presumed30nor be allowed solely on the ground of equity.31 These exemptions, therefore, must not
rest on vague, uncertain or indefinite inference, but should be granted only by a clear and unequivocal
provision of law on the basis of language too plain to be mistaken. Such exemptions must be strictly
construed against the taxpayer, as taxes are the lifeblood of the government.32
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25, 2009
and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are hereby
REVERSED and SET ASIDE. The claims for tax refund or credit filed by respondent Pilipinas Shell
Petroleum Corporation are DENIED for lack of basis.

105

No pronouncement as to costs.
SO ORDERED.

and ST-DST-97-0217-00, in view of the tax amnesty program it had availed. The CTA Second Division
granted the said motion in a Resolution,5 dated March 31, 2008.
Consequently, on May 21, 2009, the CTA Second Division partially granted the petition. 6 It directed
petitioner to pay CIR a reduced tax liability of P1,994,390.86. The dispositive portion reads:
WHEREFORE, in view of the foregoing considerations, the instant Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, petitioner is hereby ORDERED TO PAY deficiency withholding
tax on compensation, expanded withholding tax and final tax in the reduced amount of P1,994,390.86,
computed as follows:
Basic

Surcharges

Interest

Total

P774,200.55

P193,550.14

P312.227.34

P1,279,978.03

132,724.02

33,181.01

53,526.27

219,431.30

299,391.84

74,847.96

120,741.73

494,981.53

P1,206,316.41

P301,579.11

P486,495.34

P1,994,390.86

Tax

Deficiency
Withholding
Tax on
Compensation
ST-WC-97-0221-99

Deficiency
Expanded
Withholding
G.R. No. 197117

April 10, 2013

FIRST LEPANTO TAISHO INSURANCE CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
Before the Court is a petition for review on certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure
filed by First Lepanto Taisho Corporation, now FLT Prime Insurance Corporation (petitioner), assailing
the March l, 2011 Decision2 and the May 27, 2011 Resolution3 of the Court of Tax Appeals (CTA) En
Bane, in CTA E.B. No. 563, which affirmed the May 21, 2009 Decision of the CTA-Second Division.

Tax ST-EWT-97-021899

Deficiency
Final
Withholding
Tax ST-FT-97-0219-99

The Facts:

TOTALS

Petitioner is a non-lire insurance corporation and considered as a "Large Taxpayer under Revenue
Regulations No. 6-85, as amended by Revenue Regulations No. 12-94 effective 1994." 4 After submitting
its corporate income tax return for taxable year ending December 31, 1997, petitioner received a Letter of
Authority, dated October 30, 1998, from respondent Commissioner of Internal Revenue (CIR) to allow it
to examine their books of account and other accounting records for 1997 and other unverified prior years.

Petitioners Motion for Partial Reconsideration7 was likewise denied by the CTA Second Division in its
October 29, 2009 Resolution.8

On December 29, 1999, CIR issued internal revenue tax assessments for deficiency income, withholding,
expanded withholding, final withholding, value-added, and documentary stamp taxes for taxable year
1997.
On February 24, 2000, petitioner protested the said tax assessments.
During the pendency of the case, particularly on February 15, 2008, petitioner filed its Motion for Partial
Withdrawal of Petition for Review of Assessment Notice Nos. ST-INC-97-0220-99; ST-VAT-97-0222-99

Unsatisfied, petitioner filed a Petition for Review before the CTA En Banc.9
On March 1, 2011, the CTA En Banc affirmed the decision of the CTA Second Division. 10
Petitioner contended that it was not liable to pay Withholding Tax on Compensation on the P500,000.00
Directors Bonus to their directors, specifically, Rodolfo Bausa, Voltaire Gonzales, Felipe Yap, and
Catalino Macaraig, Jr., because they were not employees and the amount was already subjected to
Expanded Withholding Tax. The CTA En Banc, however, ruled that Section 5 of Revenue Regulation No.
12-86 expressly identified a director to be an employee.

106

As to transportation, subsistence and lodging, and representation expenses, the expenses would not be
subject to withholding tax only if the same were reimbursement for actual expenses of the company. In the
present case, the CTA En Banc declared that petitioner failed to prove that they were so.
As to deficiency expanded withholding taxes on compensation, petitioner failed to substantiate that the
commissions earned totaling P905,428.36, came from reinsurance activities and should not be subject to
withholding tax. Petitioner likewise failed to prove its direct loss expense, occupancy cost and
service/contractors and purchases.
As to deficiency final withholding taxes, "petitioner failed to present proof of remittance to establish that it
had remitted the final tax on dividends paid as well as the payments for services rendered by the
Malaysian entity."11
As to the imposition of delinquency interest under Section 249 (c) (3) of the 1997 National Internal
Revenue Code (NIRC), records reveal that petitioner failed to pay the deficiency taxes within thirty (30)
days from receipt of the demand letter, thus, delinquency interest accrued from such non-payment.
Petitioner moved for partial reconsideration, but the CTA En Banc denied the same in its May 27, 2011
Resolution.12
Hence, this petition.13
The principal issue in this case is whether the CTA En Banc erred in holding petitioner liable for:
a. deficiency withholding taxes on compensation on directors bonuses under Assessment No. ST-WC-970021-99;
b. deficiency expanded withholding taxes on transportation, subsistence and lodging, and representation
expense; commission expense; direct loss expense; occupancy cost; and service/contractor and purchases
under Assessment No. ST-EWT-97-0218-99;
c. deficiency final withholding taxes on payment of dividends and computerization expenses to foreign
entities under Assessment No. ST-FT-97-0219-99; and
d. delinquency interest under Section 249 (c) (3) of the NIRC.

With regard to commission expense, no additional documentary evidence, like the reinsurance agreements
contracts, was presented to support petitioners allegation that the expenditure originated from reinsurance
activities that gave rise to reinsurance commissions, not subject to withholding tax. As to occupancy costs,
records reveal that petitioner failed to compute the correct total occupancy cost that should be subjected to
withholding tax, hence, petitioner is liable for the deficiency.
As to service/contractors and purchases, petitioner contends that both parties already stipulated that it
correctly withheld the taxes due. Thus, petitioner is of the belief that it is no longer required to present
evidence to prove the correct payment of taxes withheld. As correctly ruled by the CTA Second Division
and En Bane, however, stipulations cannot defeat the right of the State to collect the correct taxes due on
an individual or juridical person because taxes are the lifeblood of our nation so its collection should be
actively pursued without unnecessary impediment.
As to the deficiency final withholding tax assessments for payments of dividends and computerization
expenses incurred by petitioner to foreign entities, particularly Matsui Marine & Fire Insurance Co. Ltd.
(Matsui),17 the Court agrees with CIR that petitioner failed to present evidence to show the supposed
remittance to Matsui.
The Court likewise holds the imposition of delinquency interest under Section 249 (c) (3) of the 1997
NIRC to be proper, because failure to pay the deficiency tax assessed within the time prescribed for its
payment justifies the imposition of interest at the rate of twenty percent (20%) per annum, which interest
shall be assessed and collected from the date prescribed for its payment until full payment is made.
It is worthy to note that tax revenue statutes are not generally intended to be liberally
construed.18 Moreover, the CTA being a highly specialized court particularly created for the purpose of
reviewing tax and customs cases, it is settled that its findings and conclusions 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.19 Absent such errors, the challenged decision should be maintained.
WHEREFORE, the petition is DENIED. The March 1, 2011 Decision and the May 27, 2011 Resolution of
the Court of Tax Appeals En Bane, in CTA E.B. No. 563, are AFFIRMED.
SO ORDERED.

The Court finds no merit in the petition.

For taxation purposes, a director is considered an employee under Section 5 of Revenue Regulation No.
12-86,14to wit:
An individual, performing services for a corporation, whether as an officer and director or merely as a
director whose duties are confined to attendance at and participation in the meetings of the Board of
Directors, is an employee.
The non-inclusion of the names of some of petitioners directors in the companys Alpha List does not ipso
facto create a presumption that they are not employees of the corporation, because the imposition of
withholding tax on compensation hinges upon the nature of work performed by such individuals in the
company. Moreover, contrary to petitioners attestations, Revenue Regulation No. 2-98, 15 specifically,
Section 2.57.2. A (9) thereof,16 cannot be applied to this case as the latter is a later regulation while the
accounting books examined were for taxable year 1997.
As to the deficiency withholding tax assessment on transportation, subsistence and lodging, and
representation expense, commission expense, direct loss expense, occupancy cost, service/contractor and
purchases, the Court finds no cogent reason to deviate from the findings of the CTA En Banc. As correctly
observed by the CTA Second Division and the CTA En Banc, petitioner was not able to sufficiently
establish that the transportation expenses reflected in their books were reimbursement from actual
transportation expenses incurred by its employees in connection with their duties as the only document
presented was a Schedule of Transportation
Expenses without pertinent supporting documents. Without said documents, such as but not limited to,
receipts, transportation-related vouchers and/or invoices, there is no way of ascertaining whether the
amounts reflected in the schedule of expenses were disbursed for transportation.

107

After trial on the merits, the CTA Second Division found that petitioner indeed paid the total amount of
PHP 67,688,553.51 representing the 15% BPRT on its RBU profits amounting to PHP 451,257,023.29 for
2002 and prior taxable years. Records also disclose that for the year 2003, petitioner remitted to DB
Germany the amount of EURO 5,174,847.38 (or PHP 330,175,961.88 at the exchange rate of PHP
63.804:1 EURO), which is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the ground that the application for a tax treaty
relief was not filed with ITAD prior to the payment by the former of its BPRT and actual remittance of its
branch profits to DB Germany, or prior to its availment of the preferential rate of ten percent (10%) under
the RP-Germany Tax Treaty provision. The court a quo held that petitioner violated the fifteen (15) day
period mandated under Section III paragraph (2) of Revenue Memorandum Order (RMO) No. 1-2000.
Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation (formerly
Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal Revenue 9 (Mirant)
where the CTA En Banc ruled that before the benefits of the tax treaty may be extended to a foreign
corporation wishing to avail itself thereof, the latter should first invoke the provisions of the tax treaty and
prove that they indeed apply to the corporation.
THE CTA EN BANC RULING10

G.R. No. 188550

August 19, 2013
DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner) under Rule 45 of the
1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc)
Decision2 dated 29 May 2009 and Resolution3 dated 1 July 2009 in C.T.A. EB No. 456.
THE FACTS
In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of 1997, petitioner
withheld and remitted to respondent on 21 October 2003 the amount of PHP 67,688,553.51, which
represented the fifteen percent (15%) branch profit remittance tax (BPRT) on its regular banking unit
(RBU) net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years. 5
Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers
Assessment and Investigation Division on 4 October 2005 an administrative claim for refund or issuance
of its tax credit certificate in the total amount of PHP 22,562,851.17. On the same date, petitioner
requested from the International Tax Affairs Division (ITAD) a confirmation of its entitlement to the
preferential tax rate of 10% under the RP-Germany Tax Treaty.6 Alleging the inaction of the BIR on its
administrative claim, petitioner filed a Petition for Review7 with the CTA on 18 October 2005. Petitioner
reiterated its claim for the refund or issuance of its tax credit certificate for the amount of PHP
22,562,851.17 representing the alleged excess BPRT paid on branch profits remittance to DB Germany.
THE CTA SECOND DIVISION RULING8

The CTA En Banc affirmed the CTA Second Divisions Decision dated 29 August 2008 and Resolution
dated 14 January 2009. Citing Mirant, the CTA En Banc held that a ruling from the ITAD of the BIR must
be secured prior to the availment of a preferential tax rate under a tax treaty. Applying the principle of
stare decisis et non quieta movere, the CTA En Banc took into consideration that this Court had denied the
Petition in G.R. No. 168531 filed by Mirant for failure to sufficiently show any reversible error in the
assailed judgment.11 The CTA En Banc ruled that once a case has been decided in one way, any other case
involving exactly the same point at issue should be decided in the same manner. The court likewise ruled
that the 15-day rule for tax treaty relief application under RMO No. 1-2000 cannot be relaxed for
petitioner, unlike in CBK Power Company Limited v. Commissioner of Internal Revenue.12 In that case,
the rule was relaxed and the claim for refund of excess final withholding taxes was partially granted.
While it issued a ruling to CBK Power Company Limited after the payment of withholding taxes, the
ITAD did not issue any ruling to petitioner even if it filed a request for confirmation on 4 October 2005
that the remittance of branch profits to DB Germany is subject to a preferential tax rate of 10% pursuant to
Article 10 of the RP-Germany Tax Treaty.
ISSUE
This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 12000 will deprive persons or corporations of the benefit of a tax treaty.
THE COURTS RULING
The Petition is meritorious. Under Section 28(A)(5) of the NIRC, any profit remitted to its head office
shall be subject to a tax of 15% based on the total profits applied for or earmarked for remittance without
any deduction of the tax component. However, petitioner invokes paragraph 6, Article 10 of the RPGermany Tax Treaty, which provides that where a resident of the Federal Republic of Germany has a
branch in the Republic of the Philippines, this branch may be subjected to the branch profits remittance tax
withheld at source in accordance with Philippine law but shall not exceed 10% of the gross amount of the
profits remitted by that branch to the head office.
By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines, remitting
to its head office in Germany, the benefit of a preferential rate equivalent to 10% BPRT.
On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment of the tax treaty
relief must be preceded by an application with ITAD at least 15 days before the transaction. The Order
was issued to streamline the processing of the application of tax treaty relief in order to improve efficiency
and service to the taxpayers. Further, it also aims to prevent the consequences of an erroneous
interpretation and/or application of the treaty provisions (i.e., filing a claim for a tax refund/credit for the
overpayment of taxes or for deficiency tax liabilities for underpayment).13
The crux of the controversy lies in the implementation of RMO No. 1-2000.

108

Petitioner argues that, considering that it has met all the conditions under Article 10 of the RP-Germany
Tax Treaty, the CTA erred in denying its claim solely on the basis of RMO No. 1-2000. The filing of a tax
treaty relief application is not a condition precedent to the availment of a preferential tax rate. Further,
petitioner posits that, contrary to the ruling of the CTA, Mirant is not a binding judicial precedent to deny
a claim for refund solely on the basis of noncompliance with RMO No. 1-2000.
Respondent counters that the requirement of prior application under RMO No. 1-2000 is mandatory in
character. RMO No. 1-2000 was issued pursuant to the unquestioned authority of the Secretary of Finance
to promulgate rules and regulations for the effective implementation of the NIRC. Thus, courts cannot
ignore administrative issuances which partakes the nature of a statute and have in their favor a
presumption of legality.
The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance with this
prerequisite is fatal to the taxpayers availment of the preferential tax rate.
We disagree. A minute resolution is not a binding precedent At the outset, this Courts minute resolution
on Mirant is not a binding precedent. The Court has clarified this matter in Philippine Health Care
Providers, Inc. v. Commissioner of Internal Revenue14 as follows:
It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of
the merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being
questioned. As a result, our ruling in that case has already become final. When a minute resolution denies
or dismisses a petition for failure to comply with formal and substantive requirements, the challenged
decision, together with its findings of fact and legal conclusions, are deemed sustained. But what is its
effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it constitutes res
judicata. However, if other parties or another subject matter (even with the same parties and issues) is
involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel, the Court noted
that a previous case, CIR v. Baier-Nickel involving the same parties and the same issues, was previously
disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the CA.
Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the latter case because the two
cases involved different subject matters as they were concerned with the taxable income of different
taxable years.
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision.
The constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that
the facts and the law on which the judgment is based must be expressed clearly and distinctly applies only
to decisions, not to minute resolutions. A minute resolution is signed only by the clerk of court by
authority of the justices, unlike a decision. It does not require the certification of the Chief Justice.
Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports. Finally, the
proviso of Section 4(3) of Article VIII speaks of a decision. Indeed, as a rule, this Court lays down
doctrines or principles of law which constitute binding precedent in a decision duly signed by the
members of the Court and certified by the Chief Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision cannot bind this Court
in cases of a similar nature. There are differences in parties, taxes, taxable periods, and treaties involved;
more importantly, the disposition of that case was made only through a minute resolution.
Tax Treaty vs. RMO No. 1-2000
Our Constitution provides for adherence to the general principles of international law as part of the law of
the land.15 The time-honored international principle of pacta sunt servanda demands the performance in
good faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force
is binding upon the parties, and obligations under the treaty must be performed by them in good
faith.16 More importantly, treaties have the force and effect of law in this jurisdiction.17
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in
turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." 18 CIR v. S.C. Johnson
and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the elimination of
international juridical double taxation, which is defined as the imposition of comparable taxes in two or
more states on the same taxpayer in respect of the same subject matter and for identical periods. The

apparent rationale for doing away with double taxation is to encourage the free flow of goods and services
and the movement of capital, technology and persons between countries, conditions deemed vital in
creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against double taxation is crucial in
creating such a climate."19 Simply put, tax treaties are entered into to minimize, if not eliminate the
harshness of international juridical double taxation, which is why they are also known as double tax treaty
or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations undertaken." 20 Thus, laws
and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled
thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the RP-Germany Tax Treaty does not provide
for any pre-requisite for the availment of the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a deprivation
of entitlement to a tax treaty relief for failure to comply with the 15-day period. We recognize the clear
intention of the BIR in implementing RMO No. 1-2000, but the CTAs outright denial of a tax treaty relief
for failure to strictly comply with the prescribed period is not in harmony with the objectives of the
contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons
or corporations. Bearing in mind the rationale of tax treaties, the period of application for the availment of
tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it
would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial
of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the
administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty
relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 12000.1wphi1Logically, noncompliance with tax treaties has negative implications on international
relations, and unduly discourages foreign investors. While the consequences sought to be prevented by
RMO No. 1-2000 involve an administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who
are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring
prior application for tax treaty relief.
Prior Application vs. Claim for Refund
Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or application of
the treaty provisions. The objective of the BIR is to forestall assessments against corporations who
erroneously availed themselves of the benefits of the tax treaty but are not legally entitled thereto, as well
as to save such investors from the tedious process of claims for a refund due to an inaccurate application
of the tax treaty provisions. However, as earlier discussed, noncompliance with the 15-day period for prior
application should not operate to automatically divest entitlement to the tax treaty relief especially in
claims for refund.
The underlying principle of prior application with the BIR becomes moot in refund cases, such as the
present case, where the very basis of the claim is erroneous or there is excessive payment arising from
non-availment of a tax treaty relief at the first instance. In this case, petitioner should not be faulted for not
complying with RMO No. 1-2000 prior to the transaction. It could not have applied for a tax treaty relief
within the period prescribed, or 15 days prior to the payment of its BPRT, precisely because it erroneously
paid the BPRT not on the basis of the preferential tax rate under
the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior
application requirement becomes illogical. Therefore, the fact that petitioner invoked the provisions of the
RP-Germany Tax Treaty when it requested for a confirmation from the ITAD before filing an
administrative claim for a refund should be deemed substantial compliance with RMO No. 1-2000.
Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax recovery when there
has been an erroneous payment of tax.1wphi1 The outright denial of petitioners claim for a refund, on
the sole ground of failure to apply for a tax treaty relief prior to the payment of the BPRT, would defeat
the purpose of Section 229.

109

Petitioner is entitled to a refund It is significant to emphasize that petitioner applied though belatedly
for a tax treaty relief, in substantial compliance with RMO No. 1-2000. A ruling by the BIR would have
confirmed whether petitioner was entitled to the lower rate of 10% BPRT pursuant to the RP-Germany Tax
Treaty. Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:
Based on the evidence presented, both documentary and testimonial, petitioner was able to establish the
following facts:
a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a corporation organized and
existing under the laws of the Federal Republic of Germany;
b. That on October 21, 2003, it filed its Monthly Remittance Return of Final Income Taxes Withheld under
BIR Form No. 1601-F and remitted the amount of P67,688,553.51 as branch profits remittance tax with
the BIR; and
c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a clearance, petitioner remitted
to Frankfurt Head Office the amount of EUR5,174,847.38 (or P330,175,961.88 at 63.804 Peso/Euro)
representing its 2002 profits remittance.22
The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its RBU net income,
due for remittance to DB Germany amounting to PHP 451,257,023.29 for 2002 and prior taxable years. 23
Likewise, both the administrative and the judicial actions were filed within the two-year prescriptive
period pursuant to Section 229 of the NIRC.24 Clearly, there is no reason to deprive petitioner of the
benefit of a preferential tax rate of 10% BPRT in accordance with the RP-Germany Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income amounting to
PHP 451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT. Thus, it is proper to grant
petitioner a refund ofthe difference between the PHP 67,688,553.51 (15% BPRT) and PHP 45,125,702.34
(10% BPRT) or a total of PHP 22,562,851.17.
WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of Tax
Appeals En Banc Decision dated 29 May 2009 and Resolution dated 1 July 2009 are REVERSED and
SET ASIDE. A new one is hereby entered ordering respondent Commissioner of Internal Revenue to
refund or issue a tax credit certificate in favor of petitioner Deutsche Bank AG Manila Branch the amount
of TWENTY TWO MILLION FIVE HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FIFTY
ONE PESOS AND SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine currency, representing
the erroneously paid BPRT for 2002 and prior taxable years. SO ORDERED.
THIRD DIVISION
G.R. No. 171251

March 5, 2012

LASCONA LAND CO., INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
PERALTA, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the
reversal of the Decision1 dated October 25, 2005 and Resolution2 dated January 20, 2006 of the Court of
Appeals (CA) in CA-G.R. SP No. 58061 which set aside the Decision 3 dated January 4, 2000 and
Resolution4 dated March 3, 2000 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5777 and
declared Assessment Notice No. 0000047-93-407 dated March 27, 1998 to be final, executory and
demandable.
The facts, as culled from the records, are as follows:
On March 27, 1998, the Commissioner of Internal Revenue (CIR) issued Assessment Notice No.
0000047-93-4075 against Lascona Land Co., Inc. (Lascona) informing the latter of its alleged deficiency
income tax for the year 1993 in the amount of P753,266.56.

Consequently, on April 20, 1998, Lascona filed a letter protest, but was denied by Norberto R. Odulio,
Officer-in-Charge (OIC), Regional Director, Bureau of Internal Revenue, Revenue Region No. 8, Makati
City, in his Letter6dated March 3, 1999, which reads, thus:
xxxx
Subject: LASCONA LAND CO., INC.
1993 Deficiency Income Tax
Madam,
Anent the 1993 tax case of subject taxpayer, please be informed that while we agree with the arguments
advanced in your letter protest, we regret, however, that we cannot give due course to your request to
cancel or set aside the assessment notice issued to your client for the reason that the case was not elevated
to the Court of Tax Appeals as mandated by the provisions of the last paragraph of Section 228 of the Tax
Code. By virtue thereof, the said assessment notice has become final, executory and demandable.
In view of the foregoing, please advise your client to pay its 1993 deficiency income tax liability in the
amount of P753,266.56.
x x x x (Emphasis ours)
On April 12, 1999, Lascona appealed the decision before the CTA and was docketed as C.T.A. Case No.
5777. Lascona alleged that the Regional Director erred in ruling that the failure to appeal to the CTA
within thirty (30) days from the lapse of the 180-day period rendered the assessment final and executory.
The CIR, however, maintained that Lascona's failure to timely file an appeal with the CTA after the lapse
of the 180-day reglementary period provided under Section 228 of the National Internal Revenue Code
(NIRC) resulted to the finality of the assessment.
On January 4, 2000, the CTA, in its Decision,7 nullified the subject assessment. It held that in cases of
inaction by the CIR on the protested assessment, Section 228 of the NIRC provided two options for the
taxpayer: (1) appeal to the CTA within thirty (30) days from the lapse of the one hundred eighty (180)-day
period, or (2) wait until the Commissioner decides on his protest before he elevates the case.
The CIR moved for reconsideration. It argued that in declaring the subject assessment as final, executory
and demandable, it did so pursuant to Section 3 (3.1.5) of Revenue Regulations No. 12-99 dated
September 6, 1999 which reads, thus:
If the Commissioner or his duly authorized representative fails to act on the taxpayer's protest within one
hundred eighty (180) days from date of submission, by the taxpayer, of the required documents in support
of his protest, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the lapse
of the said 180-day period; otherwise, the assessment shall become final, executory and demandable.
On March 3, 2000, the CTA denied the CIR's motion for reconsideration for lack of merit.8 The CTA held
that Revenue Regulations No. 12-99 must conform to Section 228 of the NIRC. It pointed out that the
former spoke of an assessment becoming final, executory and demandable by reason of the inaction by the
Commissioner, while the latter referred to decisions becoming final, executory and demandable should the
taxpayer adversely affected by the decision fail to appeal before the CTA within the prescribed period.
Finally, it emphasized that in cases of discrepancy, Section 228 of the NIRC must prevail over the revenue
regulations.
Dissatisfied, the CIR filed an appeal before the CA.9
In the disputed Decision dated October 25, 2005, the Court of Appeals granted the CIR's petition and set
aside the Decision dated January 4, 2000 of the CTA and its Resolution dated March 3, 2000. It further
declared that the subject Assessment Notice No. 0000047-93-407 dated March 27, 1998 as final,
executory and demandable.
Lascona moved for reconsideration, but was denied for lack of merit.
Thus, the instant petition, raising the following issues:

110

I
THE HONORABLE COURT HAS, IN THE REVISED RULES OF COURT OF TAX APPEALS WHICH
IT RECENTLY PROMULGATED, RULED THAT AN APPEAL FROM THE INACTION OF
RESPONDENT COMMISSIONER IS NOT MANDATORY.
II
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD THAT THE ASSESSMENT HAS
BECOME FINAL AND DEMANDABLE BECAUSE, ALLEGEDLY, THE WORD "DECISION" IN
THE LAST PARAGRAPH OF SECTION 228 CANNOT BE STRICTLY CONSTRUED AS
REFERRING ONLY TO THE DECISION PER SE OF THE COMMISSIONER, BUT SHOULD ALSO
BE CONSIDERED SYNONYMOUS WITH AN ASSESSMENT WHICH HAS BEEN PROTESTED,
BUT THE PROTEST ON WHICH HAS NOT BEEN ACTED UPON BY THE COMMISSIONER. 10
In a nutshell, the core issue to be resolved is: Whether the subject assessment has become final, executory
and demandable due to the failure of petitioner to file an appeal before the CTA within thirty (30) days
from the lapse of the One Hundred Eighty (180)-day period pursuant to Section 228 of the NIRC.
Petitioner Lascona, invoking Section 3,11 Rule 4 of the Revised Rules of the Court of Tax Appeals,
maintains that in case of inaction by the CIR on the protested assessment, it has the option to either: (1)
appeal to the CTA within 30 days from the lapse of the 180-day period; or (2) await the final decision of
the Commissioner on the disputed assessment even beyond the 180-day period in which case, the
taxpayer may appeal such final decision within 30 days from the receipt of the said decision. Corollarily,
petitioner posits that when the Commissioner failed to act on its protest within the 180-day period, it had
the option to await for the final decision of the Commissioner on the protest, which it did.
The petition is meritorious.
Section 228 of the NIRC is instructional as to the remedies of a taxpayer in case of the inaction of the
Commissioner on the protested assessment, to wit:
SEC. 228. Protesting of Assessment. x x x
xxxx
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to
respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized
representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations.
Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been
submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from
submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the
Court of Tax Appeals within (30) days from receipt of the said decision, or from the lapse of the one
hundred eighty (180)-day period; otherwise the decision shall become final, executory and demandable.
(Emphasis supplied).
Respondent, however, insists that in case of the inaction by the Commissioner on the protested assessment
within the 180-day reglementary period, petitioner should have appealed the inaction to the CTA.
Respondent maintains that due to Lascona's failure to file an appeal with the CTA after the lapse of the
180-day period, the assessment became final and executory.
We do not agree.
In RCBC v. CIR,12 the Court has held that in case the Commissioner failed to act on the disputed
assessment within the 180-day period from date of submission of documents, a taxpayer can either: (1) file
a petition for review with the Court of Tax Appeals within 30 days after the expiration of the 180-day

period; or (2) await the final decision of the Commissioner on the disputed assessments and appeal such
final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such decision. 13
This is consistent with Section 3 A (2), Rule 4 of the Revised Rules of the Court of Tax Appeals, 14 to wit:
SEC. 3. Cases within the jurisdiction of the Court in Divisions. The Court in Divisions shall exercise:
(a) Exclusive original or appellate jurisdiction to review by appeal the following:
(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under
the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue;
(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code or other applicable law provides a specific period for action: Provided,
that in case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one
hundred eighty day-period under Section 228 of the National Internal revenue Code shall be deemed a
denial for purposes of allowing the taxpayer to appeal his case to the Court and does not necessarily
constitute a formal decision of the Commissioner of Internal Revenue on the tax case; Provided, further,
that should the taxpayer opt to await the final decision of the Commissioner of Internal Revenue on the
disputed assessments beyond the one hundred eighty day-period abovementioned, the taxpayer may
appeal such final decision to the Court under Section 3(a), Rule 8 of these Rules; and Provided, still
further, that in the case of claims for refund of taxes erroneously or illegally collected, the taxpayer must
file a petition for review with the Court prior to the expiration of the two-year period under Section 229 of
the National Internal Revenue Code;
(Emphasis ours)
In arguing that the assessment became final and executory by the sole reason that petitioner failed to
appeal the inaction of the Commissioner within 30 days after the 180-day reglementary period,
respondent, in effect, limited the remedy of Lascona, as a taxpayer, under Section 228 of the NIRC to just
one, that is - to appeal the inaction of the Commissioner on its protested assessment after the lapse of the
180-day period. This is incorrect.
As early as the case of CIR v. Villa,15 it was already established that the word "decisions" in paragraph 1,
Section 7 of Republic Act No. 1125, quoted above, has been interpreted to mean the decisions of the
Commissioner of Internal Revenue on the protest of the taxpayer against the assessments. Definitely, said
word does not signify the assessment itself. We quote what this Court said aptly in a previous case:
In the first place, we believe the respondent court erred in holding that the assessment in question is the
respondent Collector's decision or ruling appealable to it, and that consequently, the period of thirty days
prescribed by section 11 of Republic Act No. 1125 within which petitioner should have appealed to the
respondent court must be counted from its receipt of said assessment. Where a taxpayer questions an
assessment and asks the Collector to reconsider or cancel the same because he (the taxpayer) believes he is
not liable therefor, the assessment becomes a "disputed assessment" that the Collector must decide, and
the taxpayer can appeal to the Court of Tax Appeals only upon receipt of the decision of the Collector on
the disputed assessment, . . . 16
Therefore, as in Section 228, when the law provided for the remedy to appeal the inaction of the CIR, it
did not intend to limit it to a single remedy of filing of an appeal after the lapse of the 180-day prescribed
period. Precisely, when a taxpayer protested an assessment, he naturally expects the CIR to decide either
positively or negatively. A taxpayer cannot be prejudiced if he chooses to wait for the final decision of the
CIR on the protested assessment. More so, because the law and jurisprudence have always contemplated a
scenario where the CIR will decide on the protested assessment.
It must be emphasized, however, that in case of the inaction of the CIR on the protested assessment, while
we reiterate the taxpayer has two options, either: (1) file a petition for review with the CTA within 30
days after the expiration of the 180-day period; or (2) await the final decision of the Commissioner on the
disputed assessment and appeal such final decision to the CTA within 30 days after the receipt of a copy of

111

such decision, these options are mutually exclusive and resort to one bars the application of the
other.
Accordingly, considering that Lascona opted to await the final decision of the Commissioner on the
protested assessment, it then has the right to appeal such final decision to the Court by filing a petition for
review within thirty days after receipt of a copy of such decision or ruling, even after the expiration of the
180-day period fixed by law for the Commissioner of Internal Revenue to act on the disputed
assessments.17 Thus, Lascona, when it filed an appeal on April 12, 1999 before the CTA, after its receipt of
the Letter18 dated March 3, 1999 on March 12, 1999, the appeal was timely made as it was filed within 30
days after receipt of the copy of the decision.1wphi1
Finally, the CIR should be reminded that taxpayers cannot be left in quandary by its inaction on the
protested assessment. It is imperative that the taxpayers are informed of its action in order that the
taxpayer should then at least be able to take recourse to the tax court at the opportune time. As correctly
pointed out by the tax court:
x x x to adopt the interpretation of the respondent will not only sanction inefficiency, but will likewise
condone the Bureau's inaction. This is especially true in the instant case when despite the fact that
respondent found petitioner's arguments to be in order, the assessment will become final, executory and
demandable for petitioner's failure to appeal before us within the thirty (30) day period. 19
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On
the other hand, such collection should be made in accordance with law as any arbitrariness will negate the
very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests
of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the
common good, may be achieved.20 Thus, even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure.21
WHEREFORE, the petition is GRANTED. The Decision dated October 25, 2005 and the Resolution dated
January 20, 2006 of the Court of Appeals in CA-G.R. SP No. 58061 are REVERSED and SET
ASIDE. Accordingly, the Decision dated January 4, 2000 of the Court of Tax Appeals in C.T.A. Case No.
5777 and its Resolution dated March 3, 2000 are REINSTATED.

liquors and in dealing in any material, article, or thing required in connection with or incidental to its
principal business.3 It is registered with the Bureau of Internal Revenue (BIR) as an excise tax taxpayer,
with Tax Identification No. 000-161-879-000.4
For the periodNovember 1, 2003 to December 31, 2004, Diageo purchased raw alcohol from its supplier
for use in the manufacture of its beverage and liquor products. The supplier imported the raw alcohol and
paid the related excise taxes thereon before the same were sold to the petitioner.5 The purchase price for
the raw alcohol included, among others, the excise taxes paid by the supplierin the total amount of
P12,007,528.83.6
Subsequently, Diageo exported its locally manufactured liquor products to Japan, Taiwan, Turkey and
Thailand and received the corresponding foreign currency proceeds of such export sales. 7
Within two (2) years from the time the supplier paid the subject excise taxes, Diageo filed with the BIR
Large Taxpayers Audit and Investigation Division II applications for tax refund/issuance of tax credit
certificates corresponding to the excise taxes which its supplier paid but passed on to it as part of the
purchase price of the subject raw alcohol invoking Section 130(D) of the Tax Code.
However, due to the failure of the respondent Commissioner of Internal Revenue (CIR) to act upon
Diageos claims, the latter was constrained to timely file a petition for review before the CTA. 8
On December 27, 2005, the CIR filed its Answer assailing Diageos lack of legal personality to institute
the claim for refund because it was not the one that paid the alleged excise taxes but its
supplier.9 Subsequently, the CIR filed a motion to dismiss reiterating the same issue.10
The Ruling of the Court of Tax Appeals
On July 20, 2006, the CTA Second Division issued a Resolution11dismissing the petition on the ground
that Diageo is not the real party in interest to file the claim for refund. Citing Philippine Acetylene Co.,
Inc. v. Commissioner of Internal Revenue,12 the CTA Second Division ruled that although an excise tax is
an indirect tax which can be passed on to the purchaser of goods, the liability therefor still remains with
the manufacturer or seller, hence, the right to claim refund is only available to it. 13 Diageo filed a motion
for reconsideration which was subsequently denied in the Resolution dated January 8, 2007. 14

SO ORDERED.

On February 13, 2007, Diageo filed a petition for review15 which the CTAEn Bancin its Decision dated
July 2, 2008dismissed,thereby affirming the ruling of the CTA Second Division. 16

G.R. No. 183553

Citing Rule 3, Section 2,17 of the Rules of Court, the CTA En Banc held that the right to a refund or tax
credit of the excise taxes under Section 130(D) of the Tax Code is available only to persons enumerated in
Sections 130(A)(1)18 and (2)19 of the same Code because they are the ones primarily and legally liable to
pay such taxes. As Diageo failed to prove that it had actually paid the claimed excise taxes as
manufacturer-exporter, the CTA En Banc likewise did not find it as the proper party to claim a
refund.Hence, the instant petition.

November 12, 2012

DIAGEO PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
PERLAS-BERNABE, J.:
Before the Court is a Petition for Review under Rule 45 of the Rules of Court assailing the Decision 1 of
the Court of Tax Appeals (CTA) En Banc dated July 2, 2008 in CTA EB No. 260.
The petition seeks the proper interpretation of Section 130(D)2 of the National Internal Revenue Code of
1997 (Tax Code), particularly, on the question of who may claim the refund or tax credit of excise taxes
paid on goods actually exported.
The Factual Antecedents
Petitioner Diageo Philippines, Inc. (Diageo) is a domestic corporation organized and existing under the
laws of the Republic of Philippines and is primarily engaged in the business of importing, exporting,
manufacturing, marketing, distributing, buying and selling, by wholesale, all kinds of beverages and

Diageo claims to be a real party in interest entitled to recover the subject refund or tax credit because it
stands to be benefited or injured by the judgment in this suit.20 It contends that the tax privilege under
Section 130(D) applies to every exporter provided the conditions therein set forth are complied with,
namely, (1) the goods are exported either in their original state or as ingredients or part of any
manufactured goods or products; (2) the exporter submits proof of exportation; and (3) the exporter
likewise submits proof of receipt of the corresponding foreign exchange payment. 21It argues that Section
130(D) does not limit the grant of the tax privilege to manufacturers/producers-exporters only but to every
exporter of locally manufactured/produced goods subject only to the conditions aforementioned. 22
The Issue
The sole issue to be resolved is whether Diageo has the legal personality to file aclaim for refund or tax
credit for the excise taxes paid by its supplier on the raw alcohol it purchased and used in the manufacture
of its exported goods.
Ruling of the Court
The petition is without merit.

112

Excise taxes partake of the nature of

indirect taxes.

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

Diageo bases its claim for refund on Section 130 of the Tax Code which reads:

xxxx

Section 130.Filing of Return and Payment of Excise Tax on Domestic Products. xxx

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

(A) Persons Liable to File a Return, Filing of Return on Removal and Payment of Tax.(1) Persons Liable to File a Return. Every person liable to pay excise tax imposed under this Title shall
file a separate return for each place of production setting forth, among others, the description and quantity
or volume of products to be removed, the applicable tax base and the amount of tax due thereon; Provided
however, That in the case of indigenous petroleum, natural gas or liquefied natural gas, the excise tax shall
be paid by the first buyer, purchaser or transferee for local sale, barter or transfer, while the excise tax on
exported products shall be paid by the owner, lessee, concessionaire or operator of the mining
claim.Should domestic products be removed from the place of production without the payment of the tax,
the owner or person having possession thereof shall be liable for the tax due thereon.
xxxx
(D) Credit for Excise tax on Goods Actually Exported.- When goods locally produced or manufactured are
removed and actually exported without returning to the Philippines, whether so exported in their original
state or as ingredients or parts of any manufactured goods or products, any excise tax paid thereon shall be
credited or refunded upon submission of the proof of actual exportation and upon receipt of the
corresponding foreign exchange payment: Provided, That the excise tax on mineral products, except coal
and coke, imposed under Section 151 shall not be creditable or refundable even if the mineral products are
actually exported.

Pursuant to the foregoing, the person entitled to claim a tax refund is the statutory taxpayer or the person
liable for or subject to tax.29 In the present case, it is not disputed that the supplier of Diageo imported the
subject raw alcohol, hence, it was the one directly liable and obligated to file a return and pay the excise
taxes under the Tax Code before the goods or products are removed from the customs house. It is,
therefore, the statutory taxpayer as contemplated by law and remains to be so, even if it shifts the burden
of tax to Diageo. Consequently, the right to claim a refund, if legally allowed, belongs to it and cannot be
transferred to another, in this case Diageo, without any clear provision of law allowing the same.
Unlike the law on Value Added Tax which allows the subsequent purchaser under the tax credit method to
refund or credit input taxes passed on to it by a supplier,30 no provision for excise taxes exists granting
non-statutory taxpayer like Diageo to claim a refund or credit. It should also be stressed that when the
excise taxes were included in the purchase price of the goods sold to Diageo, the same was no longer in
the nature of a tax but already formed part of the cost of the goods.

A reading of the foregoing provision, however, reveals that contrary to the position of Diageo, the right to
claim a refund or be credited with the excise taxes belongs to its supplier. The phrase "any excise tax paid
thereon shall be credited or refunded" requires that the claimant be the same person who paid the excise
tax. In Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue, the Court has categorically
declared that "[t]he proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer,
the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof
to another."23

Finally, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in
favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in
law too plain to be mistaken.31 Unfortunately, Diageo failed to meet the burden of proof that it is covered
by the exemption granted under Section 130(D) of the Tax Code.

Excise taxes imposed under Title VI of the Tax Code are taxes on property24 which are imposed on "goods
manufactured or produced in the Philippines for domestic sales or consumption or for any other
disposition and to things imported."25 Though excise taxes are paid by the manufacturer or producer before
removal of domestic products from the place of production26 or by the owner or importer before the
release of imported articles from the customshouse,27 the same partake of the nature of indirect taxes when
it is passed on to the subsequent purchaser.

WHIEREFORE, the petition is DENIED and the assailed CTA En Banc Decision in CTA EB No. 260
dated July 2, 2008 is AFFIRMED.

In sum, Diageo, not being the party statutorily liable to pay excise taxes and having failed to prove that it
is covered by the exemption granted under Section 130(D) of the Tax Code, is not the proper party to
claim a refund or credit of the excise taxes paid on the ingredients of its exported locally produced liquor.

SO ORDERED.

Indirect taxesare defined asthose wherein the liability for the payment of the tax falls on one person but
the burden thereof can be shifted to another person. 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.28
Accordingly, when the excise taxes paid by the supplier were passed on to Diageo, what was shifted is not
the tax per se but anadditional cost of the goods sold. Thus, the supplier remains the statutory taxpayer
even if Diageo, the purchaser, actually shoulders the burden of tax.
The statutory taxpayer is the proper
party to claim refund of indirect
taxes.
As defined in Section 22(N) of the Tax Code, a taxpayer means any person subject to tax.1wphi1 He is,
therefore, the person legally liable to file a return and pay the tax as provided for in Section 130(A). As
such, he is the person entitled to claim a refund.
Relevant isSection 204(C) of the Tax Code which provides:

113

Antecedents
In 1997, the respondent, a Philippine corporation, earned an income of P24,000,000.00 from its
professional services rendered to UEM-MARA Philippines Corporation (UMPC), from which income
UMPC withheldP1,200,000.00 as the respondent's withholding agent.2
In its 1997 income tax return (ITR) filed on April 13, 1998, the respondent reported a net loss
of P983,037.00, but expressly signified that it had a creditable withholding tax of P1,200,000.00 for
taxable year 1997 to be claimed as tax credit in taxable year 1998.3
On April 13, 1999, the respondent submitted its ITR for taxable year 1998, in which it declared a net loss
ofP2,772,043.00. Due to its net-loss position, the respondent was unable to claim the P1,200,000.00 as tax
credit.
On April 12, 2000, the respondent filed with the petitioner a written claim for the refund of
the P1,200,000.00 unutilized creditable withholding tax for taxable year 1997.4 However, the petitioner
did not act on the claim.
Ruling of the CTA
Due to the petitioner's inaction, the respondent filed a petition for review in the CTA (CTA Case No. 6107)
on April 14, 2000, thereby commencing its judicial action.
On December 10, 2001, the CTA denied the respondent's claim on the ground of prescription,5 to wit:
Records reveal that Petitioner filed its Annual Income Tax Return for taxable year 1997 on April 13, 1998
(Exhibit "A") and its claim for refund with the BIR on April 12, 2000 (Exhibit "D" and No. 2 of the
Statement of Admitted Facts and Issues). Several days thereafter, or on April 14, 2000, Petitioner filed an
appeal with this Court.
The aforementioned facts clearly show that the judicial claim for refund via this Petition for Review was
already filed beyond the two-year prescriptive period mandated by Sections 204 (C) and 229 of the Tax
Code xxx
xxx

THIRD DIVISIONG.R. No. 160949

April 4, 2011
COMMISSIONER OF INTERNAL REVENUE Petitioner,
vs.
PL MANAGEMENT INTERNATIONAL PHILIPPINES, INC., Respondent.
DECISION
BERSAMIN, J.:
How may the respondent taxpayer still recover its unutilized creditable withholding tax for taxable year
1997 after its written claim for refund was not acted upon by the petitioner, whose inaction was upheld by
the Court of Tax Appeals (CTA) on the ground of the claim for tax refund being already barred by
prescription?
Nature of the Case
The inaction of petitioner Commissioner of Internal Revenue (Commissioner) on the respondent's written
claim for tax refund or tax credit impelled the latter to commence judicial action for that purpose in the
CTA. However, the CTA denied the claim on December 10, 2001 for being brought beyond two years
from the accrual of the claim.
On appeal, the Court of Appeals (CA) reversed the CTA's denial through the decision promulgated in
C.A.-G.R. Sp. No. 68461 on November 28, 2002, and directed the petitioner to refund the unutilized
creditable withholding tax to the respondent.1

As earlier mentioned, Petitioner filed its Annual ITR on April 13, 1998 and filed its judicial claim for
refund only on April 14, 2000 which is beyond the two-year period earlier discussed. The aforequoted
Sections 204 (C) and 229 of the Tax Code mandates that both the administrative and judicial claims for
refund must be filed within the two-year period, otherwise the taxpayer's cause of action shall be barred by
prescription. Unfortunately, this lapse on the part of Petitioner proved fatal to its claim.
xxx
WHEREFORE, in view of the foregoing the Petition for Review is hereby DENIED due to prescription.
Ruling of the CA
Aggrieved, the respondent appealed to the CA, assailing the correctness of the CTA's denial of its judicial
claim for refund on the ground of bar by prescription.
As earlier mentioned, the CA promulgated its decision on November 28, 2002, holding that the two-year
prescriptive period, which was not jurisdictional (citing Oral and Dental College v. Court of Tax
Appeal6andCommissioner of Internal Revenue v. Philippine American Life Insurance Company 7), might be
suspended for reasons of equity.8 The CA thus disposed as follows:
WHEREFORE, the petition is partly GRANTED and the assailed CTA Decision partly ANNULLED.
Respondent Commissioner of Internal Revenue is hereby ordered to refund to petitioner PL Management
International Phils., Inc., the amount of P1,200,000.00 representing its unutilized creditable withholding
tax in taxable year 1997.9
The CA rejected the petitioner's motion for reconsideration. 10
Issues

Hence, the petitioner appeals.

114

In this appeal, the petitioner insists that:

(a) Pay the excess tax still due; or

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE TWO-YEAR PRESCRIPTIVE

PERIOD UNDER SECTION 229 OF THE TAX CODE IS NOT JURISDICTIONAL, THUS THE
CLAIM FOR REFUND OF RESPONDENT IS SUSPENDED FOR REASONS OF EQUITY.

(b) Be refunded the excess amount paid, as the case may be.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT'S JUDICIAL RIGHT TO
CLAIM FOR REFUND BROUGHT BEFORE THE COURT OF APPEALS ON APRIL 14, 2000 WAS
ONE DAY LATE ONLY.11
The petitioner argues that the decision of the CA suspending the running of the two-year period set by
Section 229 of the National Internal Revenue Code of 1997 (NIRC of 1997) on ground of equity was
erroneous and had no legal basis; that equity could not supplant or replace a clear mandate of a law that
was still in force and effect; that a claim for a tax refund or tax credit, being in the nature of a tax
exemption to be treated as in derogation of sovereign authority, must be construed in strictissimi juris
against the taxpayer; that the respondent's two-year prescriptive period under Section 229 of the NIRC of
1997 commenced to run on April 13, 1998, the date it filed its ITR for taxable year 1997; that by
reckoning the period from April 13, 1998, the respondent had only until April 12, 2000 within which to
commence its judicial action for refund with the CTA, the year 2000 being a leap year; that its filing of the
judicial action on April 14, 2000 was already tardy; and that the factual findings of the CTA, being
supported by substantial evidence, should be accorded the highest respect.
In its comment, the respondent counters that it filed its judicial action for refund within the statutory twoyear period because the correct reckoning started from April 15, 1998, the last day for the filing of the ITR
for taxable year 1997; that the two-year prescriptive period was also not jurisdictional and might be
relaxed on equitable reasons; and that a disallowance of its claim for refund would result in the unjust
enrichment of the Government at its expense.1avvphi1
Ruling of the Court
We reverse and set aside the decision of the CA to the extent that it orders the petitioner to refund to the
respondent the P1,200,000.00 representing the unutilized creditable withholding tax in taxable year 1997,
but permit the respondent to apply that amount as tax credit in succeeding taxable years until fully
exhausted.
Section 76 of the NIRC of 1997 provides:
Section 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable income of that year the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the
refundable amount shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carryover and apply the excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered irrevocable for that taxable
period and no application for tax refund or issuance of a tax credit certificate shall be allowed therefor.
The predecessor provision of Section 76 of the NIRC of 1997 is Section 79 of the NIRC of 1985, which
provides:
Section 79. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable net income of that year the corporation shall either:

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes-paid, the
refundable amount shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable year.
As can be seen, Congress added a sentence to Section 76 of the NIRC of 1997 in order to lay down the
irrevocability rule, to wit:
xxx Once the option to carry-over and apply the excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for tax refund or issuance of a tax credit certificate
shall be allowed therefor.
In Philam Asset Management, Inc. v. Commissioner of Internal Revenue,12 the Court expounds on the two
alternative options of a corporate taxpayer whose total quarterly income tax payments exceed its tax
liability, and on how the choice of one option precludes the other, viz:
The first option is relatively simple. Any tax on income that is paid in excess of the amount due the
government may be refunded, provided that a taxpayer properly applies for the refund.
The second option works by applying the refundable amount, as shown on the FAR of a given taxable
year, against the estimated quarterly income tax liabilities of the succeeding taxable year.
These two options under Section 76 are alternative in nature. The choice of one precludes the other.
Indeed, in Philippine Bank of Communications v. Commissioner of Internal Revenue, the Court ruled that
a corporation must signify its intention - whether to request a tax refund or claim a tax credit - by marking
the corresponding option box provided in the FAR. While a taxpayer is required to mark its choice in the
form provided by the BIR, this requirement is only for the purpose of facilitating tax collection.
One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. xxx
In Commissioner of Internal Revenue v. Bank of the Philippine Islands,13 the Court, citing the aforequoted
pronouncement in Philam Asset Management, Inc., points out that Section 76 of the NIRC of 1997 is clear
and unequivocal in providing that the carry-over option, once actually or constructively chosen by a
corporate taxpayer, becomes irrevocable. The Court explains:
Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an
option; and once it had already done so, it could no longer make another one. Consequently, after the
taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or
not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in
stating that once the option to carry over has been made, "no application for tax refund or issuance of a tax
credit certificate shall be allowed therefor."
The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and apply the
excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that taxable period and no
application for tax refund or issuance of a tax credit certificate shall be allowed therefor." The phrase "for
that taxable period" merely identifies the excess income tax, subject of the option, by referring to the
taxable period when it was acquired by the taxpayer. In the present case, the excess income tax credit,
which BPI opted to carry over, was acquired by the said bank during the taxable year 1998. The option of
BPI to carry over its 1998 excess income tax credit is irrevocable; it cannot later on opt to apply for a
refund of the very same 1998 excess income tax credit.
The Court of Appeals mistakenly understood the phrase "for that taxable period" as a prescriptive period
for the irrevocability rule. This would mean that since the tax credit in this case was acquired in 1998, and
BPI opted to carry it over to 1999, then the irrevocability of the option to carry over expired by the end of
1999, leaving BPI free to again take another option as regards its 1998 excess income tax credit. This
construal effectively renders nugatory the irrevocability rule. The evident intent of the legislature, in
adding the last sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping on
its options, and avoid confusion and complication as regards said taxpayer's excess tax credit. The

115

interpretation of the Court of Appeals only delays the flip-flopping to the end of each succeeding taxable
period.
The Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim for refund
of BPI, because of the irrevocability rule, would be tantamount to unjust enrichment on the part of the
government. The Court addressed the very same argument in Philam, where it elucidated that there would
be no unjust enrichment in the event of denial of the claim for refund under such circumstances, because
there would be no forfeiture of any amount in favor of the government. The amount being claimed as a
refund would remain in the account of the taxpayer until utilized in succeeding taxable years, as provided
in Section 76 of the NIRC of 1997. It is worthy to note that unlike the option for refund of excess income
tax, which prescribes after two years from the filing of the FAR, there is no prescriptive period for the
carrying over of the same. Therefore, the excess income tax credit of BPI, which it acquired in 1998 and
opted to carry over, may be repeatedly carried over to succeeding taxable years, i.e., to 1999, 2000, 2001,
and so on and so forth, until actually applied or credited to a tax liability of BPI.
Inasmuch as the respondent already opted to carry over its unutilized creditable withholding tax
of P1,200,000.00 to taxable year 1998, the carry-over could no longer be converted into a claim for tax
refund because of the irrevocability rule provided in Section 76 of the NIRC of 1997. Thereby, the
respondent became barred from claiming the refund.
However, in view of it irrevocable choice, the respondent remained entitled to utilize that amount
of P1,200,000.00 as tax credit in succeeding taxable years until fully exhausted. In this regard, prescription
did not bar it from applying the amount as tax credit considering that there was no prescriptive period for
the carrying over of the amount as tax credit in subsequent taxable years. 14
The foregoing result has rendered unnecessary any discussion of the assigned errors committed by the CA.
WHEREFORE, we reverse and set aside the decision dated November 28, 2002 promulgated in C.A.-G.R.
Sp. No. 68461 by the Court of Appeals, and declare that PL Management International Phils., Inc. is not
entitled to the refund of the unutilized creditable withholding tax of P1,200,000.00 on account of the
irrevocability rule provided in Section 76 of the National Internal Revenue Code of 1997.

As petitioner did not heed the subpoena, respondent thereafter filed a criminal complaint against petitioner
for violation of Sections 5 (c) and 266 of the 1997 Internal Revenue Code, which complaint was dismissed
for insufficiency of evidence.3
Respondent sent, on August 6, 2003, petitioner a Final Assessment Notice of income tax and VAT
deficienciestotaling P67,597,336.75 for the taxable year 1999,4 which assessment petitioner contested by
letter of September 23, 2003.5
Respondent thereafter issued a Final Decision on Disputed Assessment dated August 2, 2005, which
petitioner received on August 4, 2005, denying its letter of protest, apprising it of its income tax and VAT
liabilities in the amounts of "P15,396,905.24 and P63,688,434.40 [sic], respectively, for the taxable year
1999,"6 and requesting the immediate payment thereof, "inclusive of penalties incident to delinquency."
Respondent added that if petitioner disagreed, it may appeal to the Court of Tax Appeals (CTA) "within
thirty (30) days from date of receipt hereof, otherwise our said deficiency income and value-added taxes
assessments shall become final, executory, and demandable." 7
Instead of appealing to the CTA, petitioner filed, on September 1, 2005, a Letter of Reconsideration dated
August 31, 2005.8
By a Preliminary Collection Letter dated September 6, 2005, respondent demanded payment of
petitioners tax liabilities,9 drawing petitioner to file on October 20, 2005 a Petition for Review10 before
the CTA.
In his Answer,11 respondent argued, among other things, that the petition was filed out of time which
argument the First Division of the CTA upheld and accordingly dismissed the petition. 12
Petitioner filed a Motion for Reconsideration13 which was denied.14 The Resolution denying its motion for
reconsideration was received by petitioner on October 31, 2006.15
On November 21, 2006, petitioner filed a petition for review before the CTA En Banc 16 which, by
Decision17 of July 5, 2007, held that the petition before the First Division, as well as that before it, was
filed out of time.

We rule that PL Management International Phils., Inc. may still use the creditable withholding tax
ofP1,200,000.00 as tax credit in succeeding taxable years until fully exhausted.

Hence, the present petition,18 petitioner arguing that the CTA En Banc erred in holding that the petition it
filed before the CTA First Division as well as that filed before it (CTA En Banc) was filed out of time.

No pronouncement on costs of suit.

The petition is bereft of merit.

SO ORDERED.

Section 228 of the 1997 Tax Code provides that an assessment

FIRST DIVISION
G.R. No. 179343

January 21, 2010

FISHWEALTH CANNING CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO MORALES, J.:
The Commissioner of Internal Revenue (respondent), by Letter of Authority dated May 16, 2000,1 ordered
the examination of the internal revenue taxes for the taxable year 1999 of Fishwealth Canning Corp.
(petitioner). The investigation disclosed that petitioner was liable in the amount of P2,395,826.88
representing income tax, value added tax (VAT), withholding tax deficiencies and other miscellaneous
deficiencies. Petitioner eventually settled these obligations on August 30, 2000.2
On August 25, 2000, respondent reinvestigated petitioners books of accounts and other records of internal
revenue taxes covering the same period for the purpose of which it issued a subpoena duces tecum
requiring petitioner to submit its records and books of accounts. Petitioner requested the cancellation of
the subpoena on the ground that the same set of documents had previously been examined.

x x x may be protested administratively by filing a request for reconsideration or reinvestigation within

thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by
implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from
submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the
Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one
hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable.
(underscoring supplied)1avvphi1
In the case at bar, petitioners administrative protest was denied by Final Decision on Disputed
Assessment dated August 2, 2005 issued by respondent and which petitioner received on August 4, 2005.
Under the above-quoted Section 228 of the 1997 Tax Code, petitioner had 30 days to appeal respondents
denial of its protest to the CTA.
Since petitioner received the denial of its administrative protest on August 4, 2005, it had until September
3, 2005 to file a petition for review before the CTA Division. It filed one, however, on October 20, 2005,
hence, it was filed out of time. For a motion for reconsideration of the denial of the administrative
protest does not toll the 30-day period to appeal to the CTA.
On petitioners final contention that it has a meritorious case in view of the dismissal of the abovementioned criminal case filed against it for violation of the 1997 Internal Revenue Code, 19 the same fails.

116

For the criminal complaint was instituted not to demand payment, but to penalize the taxpayer for
violation of the Tax Code.20
WHEREFORE, the petition is DISMISSED.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98.
Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there
is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection
of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of
ordinary assets and capital assets and second, respondent Secretary of Finance has no authority to collect
CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties
classified as ordinary assets.

Costs against petitioner.

SO ORDERED.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due
process clause because, like the MCIT, the government collects income tax even when the net income has
not yet been determined. They contravene the equal protection clause as well because the CWT is being
levied upon real estate enterprises but not on other business enterprises, more particularly those in the
manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary
assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of
2% of its gross income when such MCIT is greater than the normal corporate income tax imposed under
Section 27(A).4If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT.
Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal
income tax for the three immediately succeeding taxable years. Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -

G.R. No. 160756

(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable
year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the
fourth taxable year immediately following the year in which such corporation commenced its business
operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this
Section for the taxable year.

March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING
SECRETARY OF FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondents.
DECISION
CORONA, J.:
1

In this original petition for certiorari and mandamus, petitioner Chamber of Real Estate and Builders
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 84242 and
the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said
provision and those involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former
Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then
Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations
and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.

(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income tax as
computed under Subsection (A) of this Section shall be carried forward and credited against the normal
income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby authorized to
suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged
labor dispute, or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner,
the necessary rules and regulations that shall define the terms and conditions under which he may suspend
the imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection (E) hereof,
the term gross income shall mean gross sales less sales returns, discounts and allowances and cost of
goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.

117

For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales
returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and specialists directly rendering the service and
(B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment
used and cost of supplies: Provided, however, that in the case of banks, "cost of services" shall include
interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The
pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable
year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed
upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable
year in which such corporation commenced its business operations. The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever the amount of minimum corporate
income tax is greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed
under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.
xxx

xxx

xxx

(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax as computed
under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the normal
income tax for the three (3) immediately succeeding taxable years.
xxx

xxx

xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR,
promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of
taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of
real property, other than capital assets, by persons residing in the Philippines and habitually engaged in the
real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx

xxx

xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of. Real property, other than capital assets, sold by an individual, corporation,
estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate
business in accordance with the following schedule
Those which are exempt from a withholding tax
at source as prescribed in Sec. 2.57.5 of these
regulations.

Exempt

With a selling price of five hundred thousand

pesos (P500,000.00) or less.

1.5%

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With a selling price of more than five hundred

thousand pesos (P500,000.00) but not more than
two million pesos (P2,000,000.00).

3.0%

With selling price of more than two million

pesos (P2,000,000.00)

5.0%

xxx

xxx

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not
exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment
plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the
tax based on the gross selling price or fair market value of the property, whichever is higher, on the first
installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT]
due on the sale, transfer or exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)

xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange, as determined in the Income Tax
Regulations shall be used.
Where the consideration or part thereof is payable on installment, no withholding tax is required to be
made on the periodic installment payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on
the last installment or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be
deducted and withheld by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:

xxx

xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross
selling price/total amount of consideration or the fair market value determined in accordance with Section
6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real
property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance with
the following schedule:
Where the seller/transferor is exempt from [CWT] in accordance with Sec.
2.57.5 of these regulations.

Exempt

Upon the following values of real property, where the seller/transferor is

habitually engaged in the real estate business.
With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less.

xxx

xxx

1.5%

5.0%

xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange shall be considered as the
consideration.
xxx

xxx

On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining
whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT,
among others. The pertinent portions thereof state:

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;
xxx

xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall
apply:

xxx

xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or
current fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher,
and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as
the case may be, based on net taxable income.
xxx

With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) 3.0%
but not more than Two Million Pesos (P2,000,000.00).
With a selling price of more than two Million Pesos (P2,000,000.00).

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable expanded
withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid xxxx.

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived
from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to
applicable taxes imposed under the Code, depending on whether the subject properties are classified as
capital assets or ordinary assets;

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that
such transfers and conveyances have been reported and the taxes thereof have been duly paid: 7

xxx

xxx

c. In the case of domestic corporations.

xxx

xxx

xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are located in
the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended,
and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the Code,
whichever is applicable.
xxx

xxx

xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question before
the court must be ripe for adjudication; (3) the person challenging the validity of the act must have

119

standing to do so; (4) the question of constitutionality must have been raised at the earliest opportunity and
(5) the issue of constitutionality must be the very lis mota of the case.9
Respondents aver that the first three requisites are absent in this case. According to them, there is no actual
case calling for the exercise of judicial power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by
the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that
its members have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner
has raised concerns in mere abstract and hypothetical form without any actual, specific and concrete
instances cited that the assailed law and revenue regulations have actually and adversely affected it.
Lacking empirical data on which to base any conclusion, any discussion on the constitutionality of the
MCIT or CWT on sales of real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract
issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does not
really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims
which is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or
dispute.11 On the other hand, a question is considered ripe for adjudication when the act being challenged
has a direct adverse effect on the individual challenging it. 12
Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their
operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we
stated in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to
have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation
of the Constitution and/or the law is enough to awaken judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such
question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners
did not allege that [it] itself is in the real estate business. It did not allege any material interest or any
wrong that it may suffer from the enforcement of [the assailed provisions].15
Legal standing or locus standi is a partys personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. 16 In Holy Spirit
Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing because its
members stood to be injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the
individual members of petitioner association are residents of the NGC. As such they are covered and stand
to be either benefited or injured by the enforcement of the IRR, particularly as regards the selection
process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may assail
those provisions in the IRR which it believes to be unfavorable to the rights of its members. xxx Certainly,
petitioner and its members have sustained direct injury arising from the enforcement of the IRR in that
they have been disqualified and eliminated from the selection process.18
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing when paramount public interest is
involved.19 The questioned MCIT and CWT affect not only petitioners but practically all domestic
corporate taxpayers in our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance of this petition. 20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation
system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing

the true income of corporations.21 It was devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more difficult to control and enforce. It is a means
to ensure that everyone will make some minimum contribution to the support of the public sector. The
congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting
constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first time a new concept called the
[MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for
administrative convenience. This will go a long way in ensuring that corporations will pay their just
share in supporting our public life and our economic advancement.22
Domestic corporations owe their corporate existence and their privilege to do business to the government.
They also benefit from the efforts of the government to improve the financial market and to ensure a
favorable business climate. It is therefore fair for the government to require them to make a reasonable
contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report
minimal or negative net income resulting in minimal or zero income taxes year in and year out, through
under-declaration of income or over-deduction of expenses otherwise called tax shelters. 23
Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the
[MCIT]. Because from experience too, you have corporations which have been losing year in and year out
and paid no tax. So, if the corporation has been losing for the past five years to ten years, then that
corporation has no business to be in business. It is dead. Why continue if you are losing year in and year
out? So, we have this provision to avoid this type of tax shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements and
its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed
in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it
prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was
lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into
the law:
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately
following the year in which the corporation commenced its operations. 25 This grace period allows a new
business to stabilize first and make its ventures viable before it is subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax
which shall be credited against the normal income tax for the three immediately succeeding years. 27
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary
of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor
dispute, force majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries
already had their own system of minimum corporate income taxation. Our lawmakers noted that most
developing countries, particularly Latin American and Asian countries, have the same form of safeguards
as we do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent (0.5%) of
gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course
the different countries have different basis for that minimum income tax.

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The other thing youll notice is the preponderance of Latin American countries that employed this method.
Okay, those are additional Latin American countries.29
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their
own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of
law. It explains that gross income as defined under said provision only considers the cost of goods sold
and other direct expenses; other major expenditures, such as administrative and interest expenses which
are equally necessary to produce gross income, were not taken into account.31 Thus, pegging the tax base
of the MCIT to a corporations gross income is tantamount to a confiscation of capital because gross
income, unlike net income, is not "realized gain." 32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure.
The exercise of taxing power derives its source from the very existence of the State whose social contract
with its citizens obliges it to promote public interest and the common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this
means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs (place) of taxation. 36 It has the authority to prescribe a certain
tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other
words, the legislature wields the power to define what tax shall be imposed, why it should be imposed,
how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be
imposed.
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature
no limits, so that the principal check against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay it.37 Nevertheless, it is circumscribed
by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption
of constitutionality.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation
in the sale of its goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the
capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income
tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of
net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base
the corporations gross income.
Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible
items and at the same time reducing the applicable tax rate.49
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in
many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of
taxation.50
The United States has a similar alternative minimum tax (AMT) system which is generally characterized
by a lower tax rate but a broader tax base.51 Since our income tax laws are of American origin,
interpretations by American courts of our parallel tax laws have persuasive effect on the interpretation of
these laws.52 Although our MCIT is not exactly the same as the AMT, the policy behind them and the
procedure of their implementation are comparable. On the question of the AMTs constitutionality, the
United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.
xxx

xxx

xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional. 54
The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a
minimum amount of taxes was a legitimate governmental end to which the AMT bore a reasonable
relation.55

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life,
liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due
process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure 39 when it
amounts to a confiscation of property.40 But in the same case, we also explained that we will not strike
down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer.41 There must be a factual foundation to such an unconstitutional
taint.42 This merely adheres to the authoritative doctrine that, where the due process clause is invoked,
considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such
persuasive character.43

American courts have also emphasized that Congress has the power to condition, limit or deny deductions
from gross income in order to arrive at the net that it chooses to tax.56 This is because deductions are a
matter of legislative grace.57

Petitioner is correct in saying that income is distinct from capital. 44 Income means all the wealth which
flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one
distinct point in time while income denotes a flow of wealth during a definite period of time. 45 Income is
gain derived and severed from capital.46 For income to be taxable, the following requisites must exist:

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary
and confiscatory. The Court cannot strike down a law as unconstitutional simply because of its
yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely affects property
rights.59 The party alleging the laws unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60

(1) there must be gain;

(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In
other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on
capital.

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of
the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members
nor does it present empirical data to show that the implementation of the MCIT resulted in the confiscation
of their property.

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT
is being imposed and collected even when there is actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax due
from such corporation. (Emphasis supplied)

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RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation incurs
a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to
an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on gross
income notwithstanding the amount of the net income. But the law also states that the MCIT is to be paid
only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT would be
less than the net income of the corporation which posts a zero or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including income taxes) are
collected.61 Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into
three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at
source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT) and
maintains that the revenue regulations on the collection of CWT on sale of real estate categorized as
ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends
that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were
promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"62 because they ignore such distinctions. Petitioners conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value (FMV)
of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary
assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents
cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and
payment of taxes on income from the sale of capital and ordinary assets.
Petitioners arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property
Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such authority is
subject to the limitation that the rules and regulations must not override, but must remain consistent and in
harmony with, the law they seek to apply and implement.64 It is well-settled that an administrative agency
cannot amend an act of Congress.65
We have long recognized that the method of withholding tax at source is a procedure of collecting income
tax which is sanctioned by our tax laws.66 The withholding tax system was devised for three primary
reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability;
second, to ensure the collection of income tax which can otherwise be lost or substantially reduced
through failure to file the corresponding returns and third, to improve the governments cash flow.67 This
results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated means and remedies. 68
Respondent Secretary has the authority to require the withholding of a tax on items of income payable to
any person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B)
of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source.
xxx

xxx

xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR],
require the withholding of a tax on the items of income payable to natural or juridical persons, residing in
the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one
percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B)
to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is
imposed on the income payable and the tax is creditable against the income tax liability of the taxpayer for
the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the
Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business
income tax from net income to GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
possible tax obligation. 69 They are installments on the annual tax which may be due at the end of the
taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets
remains to be the entitys net income imposed under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions.
The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the taxable
year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real
property classified as ordinary assets remains to be the net taxable income:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;
xxx

xxx

xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;
xxx

xxx

xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV]
as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently,
to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may
be, based on net taxable income.
xxx

xxx

xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land and/or
building treated as capital asset), regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the same
Code, whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes
withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax

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withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its
net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax
does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the end of
the taxable year. Instead, said withholding agents knowledge and privity are limited only to the particular
transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as these are the
only factors reasonably known or knowable by him in connection with the performance of his duties as a
withholding agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized
as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6%
on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax
is also withheld at source.72
The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary
assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are
distinguished as follows:
FWT

CWT

a) The amount of income tax withheld by the

withholding agent is constituted as a full and final
payment of the income tax due from the payee on
the said income.

a) Taxes withheld on certain income payments

are intended to equal or at least approximate the
tax due of the payee on said income.

b)The liability for payment of the tax rests

primarily on the payor as a withholding agent.

b) Payee of income is required to report the

income and/or pay the difference between the tax
withheld and the tax due on the income. The
payee also has the right to ask for a refund if the
tax withheld is more than the tax due.

c) The payee is not required to file an income tax

return for the particular income.73

c) The income recipient is still required to file an

income tax return, as prescribed in Sec. 51 and
Sec. 52 of the NIRC, as amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on
the sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove
petitioners contention that ordinary assets are being lumped together with, and treated similarly as, capital
assets in contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to
the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of
income tax involving ordinary assets.75
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same
way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT.
The withholding agent/buyers act of collecting the tax at the time of the transaction by withholding the
tax due from the income payable is the essence of the withholding tax method of tax collection.
No Rule that Only Passive
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It
follows that Section 57(B) on CWT should also be limited to passive income:

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary]
may promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by
certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)
(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)
(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payorcorporation and/or person and paid in the same manner and subject to the same conditions as provided in
Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against
the income tax liability of the taxpayer for the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates
these as passive income. The BIR defines passive income by stating what it is not:
if the income is generated in the active pursuit and performance of the corporations primary purposes,
the same is not passive income76
It is income generated by the taxpayers assets. These assets can be in the form of real properties that
return rental income, shares of stock in a corporation that earn dividends or interest income received from
savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to
natural or juridical persons, residing in the Philippines." There is no requirement that this income be
passive income. If that were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to
CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses any
income other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A)
and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has
been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its functions. 77 Similarly,
considering that the law uses the general term "income," the Secretary and CIR may specify the kinds of
income the rules will apply to based on what is feasible. In addition, administrative rules and regulations
ordinarily deserve to be given weight and respect by the courts78 in view of the rule-making authority
given to those who formulate them and their specific expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business, gain is
never assured by mere receipt of the selling price. As a result, the government is collecting tax from net
income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end
of the taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes
withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the
constitutional guarantee of due process. More importantly, the due process requirement applies to the
power to tax.79 The CWT does not impose new taxes nor does it increase taxes.80 It relates entirely to the
method and time of payment.

SEC. 57. Withholding of Tax at Source.

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Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers
have to wait years and may even resort to litigation before they are granted a refund.81 This argument is
misleading. The practical problems encountered in claiming a tax refund do not affect the constitutionality
and validity of the CWT as a method of collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay
labor wages, materials, cost of money and other expenses which can then save the entity from having to
obtain loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the
trade which add to the burden of the realty industry: huge investments and borrowings; long gestation
period; sudden and unpredictable interest rate surges; continually spiraling development/construction
costs; heavy taxes and prohibitive "up-front" regulatory fees from at least 20 government agencies. 82
Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners
complaints are essentially matters of policy best addressed to the executive and legislative branches of the
government. Besides, the CWT is applied only on the amounts actually received or receivable by the real
estate entity. Sales on installment are taxed on a per-installment basis. 83 Petitioners desire to utilize for its
operational and capital expenses money earmarked for the payment of taxes may be a practical business
option but it is not a fundamental right which can be demanded from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT
is being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not
much different from that of a real estate enterprise. Like a manufacturing concern, a real estate business is
involved in a continuous process of production and it incurs costs and expenditures on a regular basis. The
only difference is that "goods" produced by the real estate business are house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same
place and in like circumstances."85 Stated differently, all persons belonging to the same class shall be taxed
alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation based on
a reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions; (2) be
germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply equally to
all members of the same class.86

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The
sales of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are
also subject to CWT for their transactions with said 5,000 corporations. 91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not
effect the regisration of any document transferring real property unless a certification is issued by the CIR
that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except
to rely on its contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this
provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in
accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source.
(E) Registration with Register of Deeds. - No registration of any document transferring real property
shall be effected by the Register of Deeds unless the [CIR] or his duly authorized representative has
certified that such transfer has been reported, and the capital gains or [CWT], if any, has been paid:
xxxx any violation of this provision by the Register of Deeds shall be subject to the penalties imposed
under Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to
understand is the income tax."92 When a party questions the constitutionality of an income tax measure, it
has to contend not only with Einsteins observation but also with the vast and well-established
jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner has miserably
failed to discharge its burden of convincing the Court that the imposition of MCIT and CWT is
unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.

The taxing power has the authority to make reasonable classifications for purposes of
taxation.87 Inequalities which result from a singling out of one particular class for taxation, or exemption,
infringe no constitutional limitation.88 The real estate industry is, by itself, a class and can be validly
treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to
realize that what distinguishes the real estate business from other manufacturing enterprises, for purposes
of the imposition of the CWT, is not their production processes but the prices of their goods sold and the
number of transactions involved. The income from the sale of a real property is bigger and its frequency of
transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several
thousand customers every month involving both minimal and substantial amounts. To require the
customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions with
their tens or hundreds of suppliers may result in an inefficient and unmanageable system of taxation and
may well defeat the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not
similarly subjected to the CWT.89 As already discussed, the Secretary may adopt any reasonable method to
carry out its functions.90Under Section 57(B), it may choose what to subject to CWT.

THIRD DIVISION G.R. No. 180356

February 16, 2010
SOUTH AFRICAN AIRWAYS, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
VELASCO, JR., J.:
The Case

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This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007 Decision 1 and
October 30, 2007 Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA E.B. Case No. 210,
entitled South African Airways v. Commissioner of Internal Revenue. The assailed decision affirmed the
Decision dated May 10, 20063 and Resolution dated August 11, 20064 rendered by the CTA First Division.
The Facts
Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of
the laws of the Republic of South Africa. Its principal office is located at Airways Park, Jones Road,
Johannesburg International Airport, South Africa. In the Philippines, it is an internal air carrier having no
landing rights in the country. Petitioner has a general sales agent in the Philippines, Aerotel Limited
Corporation (Aerotel). Aerotel sells passage documents for compensation or commission for petitioners
off-line flights for the carriage of passengers and cargo between ports or points outside the territorial
jurisdiction of the Philippines. Petitioner is not registered with the Securities and Exchange Commission
as a corporation, branch office, or partnership. It is not licensed to do business in the Philippines.
For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line
flights, summarized as follows:

For Passenger

Period

Date Filed

1st Quarter
2nd Quarter
3rd Quarter
4th Quarter

May 30, 2000

August 29, 2000
November 29, 2000
April 16, 2000

Sub-total

For Cargo

1st Quarter
2nd Quarter
3rd Quarter
4th Quarter

Sub-total
TOTAL

May 30, 2000

August 29, 2000
November 29, 2000
April 16, 2000

2.5% Gross
Phil. Billings

PhP

222,531.25
424,046.95
422,466.00
453,182.91

PhP

1,522,227.11

PhP

81,531.00
50,169.65
36,383.74
37,454.88

PhP

205,539.27
1,727,766.38

The Issues
Whether or not petitioner, as an off-line international carrier selling passage documents through an
independent sales agent in the Philippines, is engaged in trade or business in the Philippines subject to the
32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC.
Whether or not the income derived by petitioner from the sale of passage documents covering petitioners
off-line flights is Philippine-source income subject to Philippine income tax.
Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on Gross Philippine
Billings for the taxable year 2000 in the amount of P1,727,766.38.5
The Courts Ruling
This petition must be denied.
Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable Income
Preliminarily, we emphasize that petitioner is claiming that it is exempted from being taxed for its sale of
passage documents in the Philippines. Petitioner, however, failed to sufficiently prove such contention.
In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation,6 we held, "Since an
action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in
the most explicit and categorical language, it is strictly construed against the claimant who must discharge
such burden convincingly."
Petitioner has failed to overcome such burden.
In essence, petitioner calls upon this Court to determine the legal implication of the amendment to Sec.
28(A)(3)(a) of the 1997 NIRC defining GPB. It is petitioners contention that, with the new definition of
GPB, it is no longer liable under Sec. 28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax
on GPB is inapplicable to it, it is thereby excluded from the imposition of any income tax.
Sec. 28(b)(2) of the 1939 NIRC provided:
(2) Resident Corporations. A corporation organized, authorized, or existing under the laws of a foreign
country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a)
of this section upon the total net income received in the preceding taxable year from all sources within the
Philippines: Provided, however, that international carriers shall pay a tax of two and one-half percent on
their gross Philippine billings.
This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows:

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue, Revenue District
Office No. 47, a claim for the refund of the amount of PhP 1,727,766.38 as erroneously paid tax on Gross
Philippine Billings (GPB) for the taxable year 2000. Such claim was unheeded. Thus, on April 14, 2003,
petitioner filed a Petition for Review with the CTA for the refund of the abovementioned amount. The case
was docketed as CTA Case No. 6656.

"Gross Philippine billings" include gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold therein, whether for
passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines.

On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of merit. The
CTA ruled that petitioner is a resident foreign corporation engaged in trade or business in the Philippines.
It further ruled that petitioner was not liable to pay tax on its GPB under Section 28(A)(3)(a) of the
National Internal Revenue Code (NIRC) of 1997. The CTA, however, stated that petitioner is liable to pay
a tax of 32% on its income derived from the sales of passage documents in the Philippines. On this
ground, the CTA denied petitioners claim for a refund.

"Gross Philippine Billings" means gross revenue realized from uplifts of passengers anywhere in the
world and excess baggage, cargo and mail originating from the Philippines, covered by passage
documents sold in the Philippines.

Petitioners Motion for Reconsideration of the above decision was denied by the CTA First Division in a
Resolution dated August 11, 2006.
Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for a refund of its
tax payment on its GPB. This was denied by the CTA in its assailed decision. A subsequent Motion for
Reconsideration by petitioner was also denied in the assailed resolution of the CTA En Banc.

In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:

Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world,
provided that the passage documents were sold in the Philippines. Legislature departed from such concept
in the 1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):
"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or passage document.
Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or from
the Philippines, income is included in GPB.

Hence, petitioner went to us.

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As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from the Philippines,
it is not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. This much was also found by the CTA. But
petitioner further posits the view that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded
from paying any other income tax for its sale of passage documents in the Philippines.
Such position is untenable.
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas
Airways),7 which was decided under similar factual circumstances, this Court ruled that off-line air
carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines
and that their income from sales of passage documents here is income from within the Philippines. Thus,
in that case, we held the off-line air carrier liable for the 32% tax on its taxable income.

(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall
be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: provided, That effective January 1, 1998,
the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirtythree percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent
(32%). x x x x
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two
and one-half percent (2 1/2%) on its Gross Philippine Billings as defined hereunder:

Petitioner argues, however, that because British Overseas Airways was decided under the 1939 NIRC, it
does not apply to the instant case, which must be decided under the 1997 NIRC. Petitioner alleges that the
1939 NIRC taxes resident foreign corporations, such as itself, on all income from sources within the
Philippines. Petitioners interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an
international carrier that does not maintain flights to or from the Philippines, thereby having no GPB as
defined, it is exempt from paying any income tax at all. In other words, the existence of Sec. 28(A)(3)(a)
according to petitioner precludes the application of Sec. 28(A)(1) to it.

(a) International Air Carrier. Gross Philippine Billings refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international
airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the
cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings.

Its argument has no merit. First, the difference cited by petitioner between the 1939 and 1997 NIRCs with
regard to the taxation of off-line air carriers is more apparent than real.

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax
on all income from sources within the Philippines. Sec. 28(A)(3) is an exception to this general rule.

We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all
international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, had legislatures
intentions been to completely exclude all international air carriers from the application of the general rule
under Sec. 28(A)(1), it would have used the appropriate language to do so; but the legislature did not.
Thus, the logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer,
then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) does not apply, a
resident foreign corporation, whether an international air carrier or not, would be liable for the tax under
Sec. 28(A)(1).

An exception is defined as "that which would otherwise be included in the provision from which it is
excepted. It is a clause which exempts something from the operation of a statue by express
words."9 Further, "an exception need not be introduced by the words except or unless. An exception
will be construed as such if it removes something from the operation of a provision of law." 10

Clearly, no difference exists between British Overseas Airways and the instant case, wherein petitioner
claims that the former case does not apply. Thus, British Overseas Airways applies to the instant case. The
findings therein that an off-line air carrier is doing business in the Philippines and that income from the
sale of passage documents here is Philippine-source income must be upheld.
Petitioner further reiterates its argument that the intention of Congress in amending the definition of GPB
is to exempt off-line air carriers from income tax by citing the pronouncements made by Senator Juan
Ponce Enrile during the deliberations on the provisions of the 1997 NIRC. Such pronouncements,
however, are not controlling on this Court. We said in Espino v. Cleofe:8
A cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making body
must be sought, first of all, in the words of the statute itself, read and considered in their natural, ordinary,
commonly-accepted and most obvious significations, according to good and approved usage and without
resorting to forced or subtle construction. Courts, therefore, as a rule, cannot presume that the law-making
body does not know the meaning of words and rules of grammar. Consequently, the grammatical reading
of a statute must be presumed to yield its correct sense. x x x It is also a well-settled doctrine in this
jurisdiction that statements made by individual members of Congress in the consideration of a bill do not
necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of law.
(Emphasis supplied.)
Moreover, an examination of the subject provisions of the law would show that petitioners interpretation
of those provisions is erroneous.
Sec. 28(A)(1) and (A)(3)(a) provides:
SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. -

In the instant case, the general rule is that resident foreign corporations shall be liable for a 32% income
tax on their income from within the Philippines, except for resident foreign corporations that are
international carriers that derive income "from carriage of persons, excess baggage, cargo and mail
originating from the Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings.
Petitioner, being an international carrier with no flights originating from the Philippines, does not fall
under the exception. As such, petitioner must fall under the general rule. This principle is embodied in the
Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being excepted
must be regarded as coming within the purview of the general rule.11
To reiterate, the correct interpretation of the above provisions is that, if an international air carrier
maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine
Billings, while international air carriers that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such
income. As to the denial of petitioners claim for refund, the CTA denied the claim on the basis that
petitioner is liable for income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus, petitioner raises the issue
of whether the existence of such liability would preclude their claim for a refund of tax paid on the basis
of Sec. 28(A)(3)(a). In answer to petitioners motion for reconsideration, the CTA First Division ruled in
its Resolution dated August 11, 2006, thus:
On the fourth argument, petitioner avers that a deficiency tax assessment does not, in any way, disqualify a
taxpayer from claiming a tax refund since a refund claim can proceed independently of a tax assessment
and that the assessment cannot be offset by its claim for refund.
Petitioners argument is erroneous. Petitioner premises its argument on the existence of an assessment. In
the assailed Decision, this Court did not, in any way, assess petitioner of any deficiency corporate income
tax. The power to make assessments against taxpayers is lodged with the respondent. For an assessment to
be made, respondent must observe the formalities provided in Revenue Regulations No. 12-99. This Court
merely pointed out that petitioner is liable for the regular corporate income tax by virtue of Section 28(A)
(3) of the Tax Code. Thus, there is no assessment to speak of. 12
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their
liability under Sec. 28(A)(1), considering that there has not yet been any assessment of their obligation

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under the latter provision. Petitioner argues that such offsetting is in the nature of legal compensation,
which cannot be applied under the circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue,13 thus:
In several instances prior to the instant case, we have already made the pronouncement that taxes cannot
be subject to compensation for the simple reason that the government and the taxpayer are not creditors
and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. We
find no cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes
cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on the ground that the government
owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await
the results of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on
Audit, which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes
cannot be the subject of compensation because the government and taxpayer are not mutually creditors
and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off.
Verily, petitioners argument is correct that the offsetting of its tax refund with its alleged tax deficiency is
unavailing under Art. 1279 of the Civil Code. Commissioner of Internal Revenue v. Court of Tax
Appeals,14 however, granted the offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners supplemental
motion for reconsideration alleging bringing to said courts attention the existence of the deficiency
income and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately
related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the
same year. To award such refund despite the existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein private respondent cannot be entitled to refund and at the same time
be liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated
therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and
constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and
without unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law
when the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list,

statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent
or contained any understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent
and did not contain any understatement or undervaluation; but this provision shall not apply to statements
or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would
inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently
be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously
refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of
the falsity, fraud or omission in the false or fraudulent return involved.This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose a burden on and a drain of
government funds, and impede or delay the collection of much-needed revenue for governmental
operations.1avvphi1
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary
and legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly
with its claim for tax refund, to determine once and for all in a single proceeding the true and correct
amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded,it would be only just and fair that the
taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to
defeat each others claim and to determine all matters of dispute between them in one single case. It is
important to note that in determining whether or not petitioner is entitled to the refund of the amount paid,
it would [be] necessary to determine how much the Government is entitled to collect as taxes. This would
necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination
of this case would constitute res judicata on both parties as to all the matters subject thereof or necessarily
involved therein. (Emphasis supplied.)
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.
Here, petitioners similar tax refund claim assumes that the tax return that it filed was correct. Given,
however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997
NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt.
As such, we cannot grant the prayer for a refund. Be that as it may, this Court is unable to affirm the
assailed decision and resolution of the CTA En Banc on the outright denial of petitioners claim for a
refund. Even though petitioner is not entitled to a refund due to the question on the propriety of
petitioners tax return subject of the instant controversy, it would not be proper to deny such claim without
making a determination of petitioners liability under Sec. 28(A)(1).
It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based
on taxable income, that is, gross income less deductions and exemptions, if any. It cannot be assumed that
petitioners liabilities under the two provisions would be the same. There is a need to make a
determination of petitioners liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming
or that a tax deficiency exists. The assailed decision fails to mention having computed for the tax due
under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to establish petitioners taxable
income. There is a necessity to receive evidence to establish such amount vis--vis the claim for refund. It
is only after such amount is established that a tax refund or deficiency may be correctly pronounced.
WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the CTA En Banc
in CTA E.B. Case No. 210 are SET ASIDE. The instant case is REMANDED to the CTA En Banc for
further proceedings and appropriate action, more particularly, the reception of evidence for both parties
and the corresponding disposition of CTA E.B. Case No. 210 not otherwise inconsistent with our judgment
in this Decision. SO ORDERED.

127