[G.R.

No.

180356

February

16,

4th Quarter

2010]

April 16, 2000

453,182.91

Sub-total
SOUTH AFRICAN AIRWAYS, PETITIONER, VS. COMMISSIONER OF INTERNAL
REVENUE,

PhP 1,522,227.11

For Cargo

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

RESPONDENT.

May
30,
August
29,
November
29,
April 16, 2000

2000 PhP 81,531.00

2000
50,169.65
2000
36,383.74
37,454.88

Sub-total

DECISION

PhP 205,539.27

TOTAL

VELASCO JR., J.:

1,727,766.38

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue,
Revenue District Office No. 47, a claim for the refund of the amount of PhP

The Case

1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for the taxable
This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19,

year 2000. Such claim was unheeded. Thus, on April 14, 2003, petitioner filed a

2007 Decision and October 30, 2007 Resolution of the Court of Tax Appeals (CTA) En

Petition for Review with the CTA for the refund of the abovementioned amount. The

Banc in CTA E.B. Case No. 210, entitled South African Airways v. Commissioner of

case

was

docketed

as

CTA

Case

No.

6656.

Internal Revenue. The assailed decision affirmed the Decision dated May 10, 2006 and
3

On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack

Resolution dated August 11, 20064 rendered by the CTA First Division.

of merit. The CTA ruled that petitioner is a resident foreign corporation engaged in
The Facts

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)

Petitioner South African Airways is a foreign corporation organized and existing under

of 1997. The CTA, however, stated that petitioner is liable to pay a tax of 32% on its

and by virtue of the laws of the Republic of South Africa. Its principal office is located at

income derived from the sales of passage documents in the Philippines. On this ground,

Airways Park, Jones Road, Johannesburg International Airport, South Africa. In the

the

CTA

denied

petitioner's

claim

for

refund.

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).

Petitioner's Motion for Reconsideration of the above decision was denied by the CTA

Aerotel sells passage documents for compensation or commission for petitioner's off-

First

Division

in

Resolution

dated

August

11,

2006.

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

Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim

and Exchange Commission as a corporation, branch office, or partnership. It is not

for a refund of its tax payment on its GPB. This was denied by the CTA in its assailed

licensed

decision. A subsequent Motion for Reconsideration by petitioner was also denied in the

to

do

business

in

the

Philippines.

assailed

resolution

of

the

CTA En

Banc.

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

May
August
November

Hence, petitioner went to us.

2.5%
Phil. Billings

30,
29,
29,

2000 PhP 222,531.25

2000
424,046.95
2000
422,466.00

Gross

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

(2) Resident Corporations. - A corporation organized, authorized, or existing under the

1997

laws of a foreign country, engaged in trade or business within the Philippines, shall be

NIRC.

taxable as provided in subsection (a) of this section upon the total net income received
Whether or not the income derived by petitioner from the sale of passage documents

in

covering petitioner's off-line flights is Philippine-source income subject to Philippine

Philippines: Provided, however, that international carriers shall pay a tax of two and

income

one-half percent on their gross Philippine billings.

tax.

the

preceding

taxable

year

from

all

sources

within

the

Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax

This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined

on Gross Philippine Billings for the taxable year 2000 in the amount of P1,727,766.38.

GPB as follows:

"Gross Philippine billings" include gross revenue realized from uplifts anywhere in the
The Court's Ruling

world by any international carrier doing business in the Philippines of passage

documents sold therein, whether for passenger, excess baggage or mail, provided the

This petition must be denied.

Petitioner

cargo or mail originates from the Philippines.

Is

Subject

to

Income

Tax

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

at the Rate of 32% of Its Taxable Income

"Gross Philippine Billings" means gross revenue realized from uplifts of passengers
Preliminarily, we emphasize that petitioner is claiming that it is exempted from being

anywhere in the world and excess baggage, cargo and mail originating from the

taxed for its sale of passage documents in the Philippines. Petitioner, however, failed to

Philippines, covered by passage documents sold in the Philippines.

sufficiently

prove

such

contention.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in

In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation,6 we

the world, provided that the passage documents were sold in the Philippines.

held, "Since an action for a tax refund partakes of the nature of an exemption, which

Legislature departed from such concept in the 1997 NIRC where GPB is now defined

cannot be allowed unless granted in the most explicit and categorical language, it is

under Sec. 28(A)(3)(a):

strictly construed against the claimant who must discharge such burden convincingly."
"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage
Petitioner

has

failed

to

overcome

such

burden.

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

In essence, petitioner calls upon this Court to determine the legal implication of the

place of payment of the ticket or passage document.

amendment to Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB. It is petitioner's

contention that, with the new definition of GPB, it is no longer liable under Sec. 28(A)

Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and

(3)(a). Further, petitioner argues that because the 2 1/2% tax on GPB is inapplicable to

cargo

it,

it

is

thereby

excluded

from

the

imposition

of

any

income

occur

to

or

from

the

Philippines,

income

is

included

in

GPB.

tax.
As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or

Sec. 28(b)(2) of the 1939 NIRC provided:

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

or

not,

would

be

liable

for

the

tax

under

Sec.

28(A)(1).

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.

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

Such

position

is

untenable.

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

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British

here

is

Philippine-source

income

must

be

upheld.

Overseas Airways), which was decided under similar factual circumstances, this Court
7

ruled that off-line air carriers having general sales agents in the Philippines are

Petitioner further reiterates its argument that the intention of Congress in amending

engaged in or doing business in the Philippines and that their income from sales of

the definition of GPB is to exempt off-line air carriers from income tax by citing the

passage documents here is income from within the Philippines. Thus, in that case, we

pronouncements made by Senator Juan Ponce Enrile during the deliberations on the

held

provisions of the 1997 NIRC. Such pronouncements, however, are not controlling on

the off-line air carrier

liable

for the 32% tax on its

taxable

income.

this Court. We said in Espino v. Cleofe:8

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

A cardinal rule in the interpretation of statutes is that the meaning and intention of the

1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident foreign corporations,

law-making body must be sought, first of all, in the words of the statute itself, read and

such as itself, on all income from sources within the Philippines. Petitioner's

considered

interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international

significations, according to good and approved usage and without resorting to forced or

carrier that does not maintain flights to or from the Philippines, thereby having no GPB

subtle construction. Courts, therefore, as a rule, cannot presume that the law-making

as defined, it is exempt from paying any income tax at all. In other words, the

body does not know the meaning of words and rules of grammar. Consequently, the

existence of Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec.

grammatical reading of a statute must be presumed to yield its correct sense. x x x It

28(A)(1)

is also a well-settled doctrine in this jurisdiction that statements made by

to

it.

in

their

natural,

ordinary,

commonly-accepted

and

most

obvious

individual members of Congress in the consideration of a bill do not

Its

argument

has

no

merit.

necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law. (Emphasis supplied.)

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.

Moreover, an examination of the subject provisions of the law would show that
petitioner's

interpretation

of

those

provisions

is

erroneous.

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

Sec. 28(A)(1) and (A)(3)(a) provides:

SEC.

28.

Rates

of

Income

(A) Tax on Resident Foreign Corporations. -

Tax

on

Foreign

Corporations.

(1) In General. - Except as otherwise provided in this Code, a corporation organized,

In the instant case, the general rule is that resident foreign corporations shall be liable

authorized, or existing under the laws of any foreign country, engaged in trade or

for a 32% income tax on their income from within the Philippines, except for resident

business within the Philippines, shall be subject to an income tax equivalent to thirty-

foreign corporations that are international carriers that derive income "from carriage of

five percent (35%) of the taxable income derived in the preceding taxable year from all

persons, excess baggage, cargo and mail originating from the Philippines" which shall

sources within the Philippines: provided, That effective January 1, 1998, the rate of

be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international

income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall

carrier with no flights originating from the Philippines, does not fall under the

be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate

exception. As such, petitioner must fall under the general rule. This principle is

shall be thirty-two percent (32%).

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

(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

To reiterate, the correct interpretation of the above provisions is that, if an international

defined hereunder:

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

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross

flights to and from the Philippines but nonetheless earn income from other activities in

revenue derived from carriage of persons, excess baggage, cargo and mail originating

the

country

will

be

taxed

at

the

rate

of

32%

of

such

income.

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,

As to the denial of petitioner's claim for refund, the CTA denied the claim on the basis

That tickets revalidated, exchanged and/or indorsed to another international airline

that petitioner is liable for income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus,

form part of the Gross Philippine Billings if the passenger boards a plane in a port or

petitioner raises the issue of whether the existence of such liability would preclude their

point in the Philippines: Provided, further, That for a flight which originates from the

claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a). In answer to petitioner's

Philippines, but transshipment of passenger takes place at any port outside the

motion for reconsideration, the CTA First Division ruled in its Resolution dated August

Philippines on another airline, only the aliquot portion of the cost of the ticket

11, 2006, thus:

corresponding to the leg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings.

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

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are

proceed independently of a tax assessment and that the assessment cannot be offset

liable for 32% tax on all income from sources within the Philippines. Sec. 28(A)(3) is an

by

exception

to

this

general

its

claim

for

refund.

rule.
Petitioner's argument is erroneous. Petitioner premises its argument on the existence of

An exception is defined as "that which would otherwise be included in the provision

an assessment. In the assailed Decision, this Court did not, in any way, assess

from which it is excepted. It is a clause which exempts something from the operation of

petitioner of any deficiency corporate income tax. The power to make assessments

a statue by express words." Further, "an exception need not be introduced by the

against taxpayers is lodged with the respondent. For an assessment to be made,

words 'except' or 'unless.' An exception will be construed as such if it removes

respondent must observe the formalities provided in Revenue Regulations No. 12-99.

something

This Court merely pointed out that petitioner is liable for the regular corporate income

from

the

operation

of

provision

of

law."

10

tax by virtue of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to

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

speak of.

categorically held that taxes cannot be subject to set-off or compensation, thus:

Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)

We have consistently ruled that there can be no off-setting of taxes against the claims

(3)(a) with their liability under Sec. 28(A)(1), considering that there has not yet been

that the taxpayer may have against the government. A person cannot refuse to pay a

any assessment of their obligation under the latter provision. Petitioner argues that

tax on the ground that the government owes him an amount equal to or greater than

such offsetting is in the nature of legal compensation, which cannot be applied under

the tax being collected. The collection of a tax cannot await the results of a lawsuit

the

against the government.

12

circumstances

present

in

this

case.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines,

Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

Inc. v. Commission on Audit, which reiterated that:

Art.

1279.

In

order

that

compensation

may

be

proper,

it

is

necessary:
. . . a taxpayer may not offset taxes due from the claims that he may have against the

(1) That each one of the obligors be bound principally, and that he be at the same time

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

principal

creditor

of

the

other;

is not such a debt, demand, contract or judgment as is allowed to be set-off.

(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;

Verily, petitioner's argument is correct that the offsetting of its tax refund with its
alleged

(3)

That

the

two

debts

be

tax

deficiency

is

unavailing

under

Art.

1279

of

the

Civil

Code.

due;
Commissioner of Internal Revenue v. Court of Tax Appeals,14 however, granted the

(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.

offsetting of a tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying
petitioner's supplemental motion for reconsideration alleging bringing to said court's
attention the existence of the deficiency income and business tax assessment against

And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue,13 thus:

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

the same year. To award such refund despite the existence of that deficiency

pronouncement that taxes cannot be subject to compensation for the simple reason

assessment is an absurdity and a polarity in conceptual effects. Herein private

that the government and the taxpayer are not creditors and debtors of each other.

respondent cannot be entitled to refund and at the same time be liable for a tax

There is a material distinction between a tax and debt. Debts are due to the

deficiency

In

several instances

prior

to

the

instant

case, we

have

already

made

assessment

for

the

same

year.

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

The grant of a refund is founded on the assumption that the tax return is valid,

distinction.

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

taxes. This would necessarily include the determination of the correct liability of the

which, by itself and without unquestionable evidence, cannot be the basis for

taxpayer and, certainly, a determination of this case would constitute res judicata on

the

both parties as to all the matters subject thereof or necessarily involved therein.

grant

of

the

refund.

(Emphasis supplied.)
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

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC.

assessment is made in case of any list, statement, or return, which in the opinion of

The

above

pronouncements

are,

therefore,

still

applicable

today.

the Commissioner of Internal Revenue was false or fraudulent or contained any

understatement or undervaluation, no tax collected under such assessment shall be

Here, petitioner's similar tax refund claim assumes that the tax return that it filed was

recovered by any suits unless it is proved that the said list, statement, or return was

correct. Given, however, the finding of the CTA that petitioner, although not liable under

not false nor fraudulent and did not contain any understatement or undervaluation; but

Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the

this provision shall not apply to statements or returns made or to be made in good faith

return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a

regarding

refund.

annual

depreciation

of

oil

or

gas

wells

and

mines."

Moreover, to grant the refund without determination of the proper assessment and the

Be that as it may, this Court is unable to affirm the assailed decision and resolution of

tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency

the CTA En Banc on the outright denial of petitioner's claim for a refund. Even though

assessment should subsequently be upheld, the Government will be forced to institute

petitioner is not entitled to a refund due to the question on the propriety of petitioner's

anew a proceeding for the recovery of erroneously refunded taxes which recourse must

tax return subject of the instant controversy, it would not be proper to deny such claim

be filed within the prescriptive period of ten years after discovery of the falsity, fraud or

without

making

determination

of

petitioner's

liability

under

Sec.

28(A)(1).

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

It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while

on and a drain of government funds, and impede or delay the collection of much-

Sec. 28(A)(1) is based on taxable income, that is, gross income less deductions and

needed

exemptions, if any. It cannot be assumed that petitioner's liabilities under the two

revenue

for

governmental

operations.

provisions would be the same. There is a need to make a determination of petitioner's

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both

liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a

logically necessary and legally appropriate that the issue of the deficiency tax

tax deficiency exists. The assailed decision fails to mention having computed for the tax

assessment against Citytrust be resolved jointly with its claim for tax refund, to

due under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to

determine once and for all in a single proceeding the true and correct amount of tax

establish petitioner's taxable income. There is a necessity to receive evidence to

due

establish such amount vis- -vis the claim for refund. It is only after such amount is

or

refundable.

established

that

tax

refund

or

deficiency

may

be

correctly

pronounced.

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

WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of

avail of remedies under the law to defeat each other's claim and to determine all

the CTA En Banc in CTA E.B. Case No. 210 are SET ASIDE. The instant case

matters of dispute between them in one single case. It is important to note that in

is REMANDED to the CTA En Banc for further proceedings and appropriate action,

determining whether or not petitioner is entitled to the refund of the amount paid, it

more particularly, the reception of evidence for both parties and the corresponding

would [be] necessary to determine how much the Government is entitled to collect as

disposition of CTA E.B. Case No. 210 not otherwise inconsistent with our judgment in

this

Decision.

for the imposition and collection of taxes within the territorial jurisdiction of Quezon

SO ORDERED.

City.

QUEZON CITY and THE CITY G.R. No. 166408

TREASURER OF QUEZON CITY,
Petitioners,
Present:
YNARES-SANTIAGO, J.,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,

Charter of Quezon City. Petitioner City Treasurer of Quezon City is primarily responsible

Under Section 31, Article 13 of the Quezon City Revenue Code of 1993, [3] a
franchise tax was imposed on businesses operating within its jurisdiction. The provision
Chairp
erson,

states:
Section 31. Imposition of Tax. Any provision of special laws
or grant of tax exemption to the contrary notwithstanding, any
person, corporation, partnership or association enjoying a franchise
whether issued by the national government or local government and,
doing business in Quezon City, shall pay a franchise tax at the rate of
ten percent (10%) of one percent (1%) for 1993-1994, twenty
percent (20%) of one percent (1%) for 1995, and thirty percent
(30%) of one percent (1%) for 1996 and the succeeding years
thereafter, of gross receipts and sales derived from the operation of
the business in Quezon City during the preceding calendar year.

NACHURA, and
REYES, JJ.

ABS-CBN BROADCASTING Promulgated:

CORPORATION,
Respondent. October 6, 2008
x--------------------------------------------------x
DECISION

On May 3, 1995, ABS-CBN was granted the franchise to install and operate
REYES, R.T., J.:

radio and television broadcasting stations in the Philippines under R.A. No. 7966.
[4]

Section 8 of R.A. No. 7966 provides the tax liabilities of ABS-CBN which reads:

CLAIMS for tax exemption must be based on language in law too plain to be
mistaken. It cannot be made out of inference or implication.

The principle is relevant in this petition for review on certiorari of the Decision[1] of the
Court of Appeals (CA) and that[2] of the Regional Trial Court (RTC) ordering the refund
and declaring invalid the imposition and collection of local franchise tax by the City
Treasurer of Quezon City on ABS-CBN Broadcasting Corporation (ABS-CBN).

The Facts

Petitioner City Government of Quezon City is a local government unit duly organized
and existing by virtue of Republic Act (R.A.) No. 537, otherwise known as the Revised

Section 8. Tax Provisions. The grantee, its successors or

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

ABS-CBN had

been

paying

local

franchise

tax

imposed

by Quezon

City. However, in view of the above provision in R.A. No. 9766 that it shall pay a

franchise tax x x x in lieu of all taxes, the corporation developed the opinion that it is
not liable to pay the local franchise tax imposed by Quezon City. Consequently, ABSCBN paid under protest the local franchise tax imposed by Quezon City on the dates, in
the amounts and under the official receipts as follows:
O.R. No. Date Amount Paid
2464274 07-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66[5]

O.R. No. Date Amount Paid

2464274 7-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66[7]

Quezon City argued that the in lieu of all taxes provision in R.A. No. 9766
could not have been intended to prevail over a constitutional mandate which ensures
the viability and self-sufficiency of local government units. Further, that taxes collectible
by and payable to the local government were distinct from taxes collectible by and

On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax

payable to the national government, considering that the Constitution specifically

paid to Quezon City for 1996 and for the first quarter of 1997 in the total amount of

declared that the taxes imposed by local government units shall accrue exclusively to

Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and

the local governments. Lastly, the City contended that the exemption claimed by ABS-

29/100 centavos (P14,233,582.29) broken down as follows:

CBN under R.A. No. 7966 was withdrawn by Congress when the Local Government
Code (LGC) was passed.[8] Section 193 of the LGC provides:

O.R. No Date Amount Paid

2536134 1-22-96 P 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
Total P14,233,582.29[6]

In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its

Section 193. Withdrawal of Tax Exemption Privileges. Unless

otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether
natural
or
juridical,
including
government-owned
or
-controlled corporations, except local water districts, cooperatives
duly registered under R.A. 6938, non-stock and non-profit hospitals
and educational institutions, are hereby withdrawn upon the
effectivity of this Code. (Emphasis added)

claim for refund of local franchise taxes paid.

On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for
On June 25, 1997, for failure to obtain any response from the Quezon City
Treasurer, ABS-CBN filed a complaint before the RTC in Quezon City seeking the
declaration of nullity of the imposition of local franchise tax by the City Government of
Quezon City for being unconstitutional. It likewise prayed for the refund of local

refund the local franchise tax paid for the third quarter of 1997 in the amount of Two
Million Seven Hundred Thirty-One Thousand One Hundred Thirty-Five and 81/100
centavos (P2,731,135.81) and of other amounts of local franchise tax as may have
been and will be paid by ABS-CBN until the resolution of the case.

franchise tax in the amount of Nineteen Million Nine Hundred Forty-Four Thousand Six
Hundred Seventy-Two and 66/100 centavos (P19,944,672.66) broken down as follows:

Quezon City insisted that the claim for refund must fail because of the absence of a
prior written claim for it.

a conflict between two laws, one special and particular and the other general, the
RTC and CA Dispositions

special law must be taken as intended to constitute an exception to the general act.

On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition on

The RTC noted that the legislative franchise of ABS-CBN was granted years

and collection from ABS-CBN of local franchise tax paid pursuant to Quezon City

after the effectivity of the LGC. Thus, it was unavoidable to conclude that Section 8 of

Ordinance No. SP-91, S-93, after the enactment of R.A. No. 7966, and ordered the

R.A. No. 7966 was an exception since the legislature ought to be presumed to have

refund of all payments made. The dispositive portion of the RTC decision reads:

enacted it with the knowledge and awareness of the existence and prior enactment of
Section 137[11] of the LGC.

WHEREFORE, judgment is hereby rendered declaring the

imposition on and collection from plaintiff ABS-CBN BROADCASTING
CORPORATION of local franchise taxes pursuant to Quezon City
Ordinance No. SP-91, S-93 after the enactment of Republic Act No.
7966 to be invalid, and, accordingly, the Court hereby orders the
defendants to refund all its payments made after the effectivity of its
legislative franchise on May 3, 1995.
SO ORDERED.

[9]

In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan
Electric Power and Light Company, Inc. (CEPALCO),[12] ruled that the imposition of the
local franchise tax was an impairment of ABS-CBNs contract with the government. The
imposition of another franchise on the corporation by the local authority would
constitute an impairment of the formers charter, which is in the nature of a private

In its decision, the RTC ruled that the in lieu of all taxes provision contained in Section

contract between it and the government.

8 of R.A. No. 7966 absolutely excused ABS-CBN from the payment of local franchise
tax imposed under Quezon City Ordinance No. SP-91, S-93. The intent of the

As to the amounts to be refunded, the RTC rejected Quezon Citys position that a

legislature to excuse ABS-CBN from payment of local franchise tax could be discerned

written claim for refund pursuant to Section 196 of the LGC was a condition sine qua

from the usage of the in lieu of all taxes provision and from the absence of any

non before filing the case in court. The RTC ruled that although Fourteen Million Two

qualification except income taxes. Had Congress intended to exclude taxes imposed

Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos

from the exemption, it would have expressly mentioned so in a fashion similar to the

(P14,233,582.29) was the only amount stated in the letter to the Quezon City

proviso on income taxes.

Treasurer claiming refund, ABS-CBN should nonetheless be also refunded of all

payments made after the effectivity of R.A. No. 7966. The inaction of the City Treasurer

The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v.

on the claim for refund of ABS-CBN legally rendered any further claims for refund on

Cagayan Electric Power and Light Company, Inc. (CEPALCO).

the part of plaintiff absurd and futile in relation to the succeeding payments.

[10]

In said case, the

exemption of respondent electric company CEPALCO from payment of provincial

franchise tax was upheld on the ground that the franchise of CEPALCO was a special

The City of Quezon and its Treasurer filed a motion for reconsideration which was

law, while the Local Tax Code, on which the provincial ordinance imposing the local

subsequently denied by the RTC. Thus, appeal was made to the CA. On September 1,

franchise tax was based, was a general law. Further, it was held that whenever there is

2004, the CA dismissed the petition of Quezon City and its Treasurer. According to the

appellate court, the issues raised were purely legal questions cognizable only by the

Our Ruling

Supreme Court. The CA ratiocinated:

The second issue, being procedural in nature, shall be dealt with immediately. But there
For another, the issues which appellants submit for this
Courts consideration are more of legal query necessitating a legal
opinion rather than a call for adjudication on the matter in dispute.
xxxx
The first issue has earlier been categorized in Province of
Misamis Oriental v. Cagayan Electric and Power Co., Inc. to be a legal
one. There is no more argument to this.
The next issue although it may need the reexamination of
the pertinent provisions of the local franchise and the legislative
franchise given to appellee, also needs no evaluation of facts.It
suffices that there may be a conflict which may need to be reconciled,
without regard to the factual backdrop of the case.
The last issue deals with a legal question, because whether
or not there is a prior written claim for refund is no longer in
dispute. Rather, the question revolves on whether the said
requirement may be dispensed with, which obviously is not a factual
issue.[13]

are other resultant issues linked to the first.

I. The dismissal by the CA of petitioners appeal is in order because it

raised purely legal issues, namely:

1) Whether appellee, whose franchise expressly provides that its

payment of franchise tax shall be in lieu of all taxes in this
franchise or earnings thereof, is absolutely excused from paying
the franchise tax imposed by appellants;

2) Whether appellants imposition of local franchise tax is a violation

of appellees legislative franchise; and

On September 23, 2004, petitioner moved for reconsideration. The motion was,
however, denied by the CA in its Resolution dated December 16, 2004. Hence, the
present recourse.

3) Whether one can do away with the requirement on prior written

claim for refund.[15]

Issues
Obviously, these are purely legal questions, cognizable by this Court, to the exclusion
Petitioner submits the following issues for resolution:

of all other courts. There is a question of law when the doubt or difference arises as to
what the law is pertaining to a certain state of facts.[16]

I.
Whether or not the phrase in lieu of all taxes indicated in the
franchise of the respondent appellee (Section 8 of RA 7966) serves to
exempt it from the payment of the local franchise tax imposed by the
petitioners-appellants.
II.
Whether or not the petitioners-appellants raised factual and legal
issues before the Honorable Court of Appeals. [14]

Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the
CA under Rule 41 raising only questions of law is erroneous and shall be dismissed,
issues of pure law not being within its jurisdiction. [17] Consequently, the dismissal by the
CA of petitioners appeal was in order.

In the recent case of Sevilleno v. Carilo,[18] this Court ruled that the dismissal
of the appeal of petitioner was valid, considering the issues raised there were pure
questions of law, viz.:
Petitioners interposed an appeal to the Court of Appeals but it was
dismissed for being the wrong mode of appeal. The appellate court
held that since the issue being raised is whether the RTChas
jurisdiction over the subject matter of the case, which is a question of
law, the appeal should have been elevated to the Supreme Court
under Rule 45 of the 1997 Rules of Civil Procedure, as
amended. Section 2, Rule 41 of the same Rules which governs
appeals from judgments and final orders of the RTC to the Court of
Appeals, provides:
SEC. 2. Modes of appeal.

(a) Ordinary appeal. The appeal to the Court of

Appeals in cases decided by the Regional Trial
Court in the exercise of its original jurisdiction
shall be taken by filing a notice of appeal with
the court which rendered the judgment or final
order appealed from and serving a copy
thereof upon the adverse party. No record on
appeal shall be required except in special
proceedings and other cases of multiple or
separate appeals where the law or these Rules
so require. In such cases, the record on
appeal shall be filed and served in like manner.
(b) Petition for review. The appeal to the Court of
Appeals in cases decided by the Regional Trial
Court in the exercise of its appellate
jurisdiction shall be by petition for review in
accordance with Rule 42.
(c) Appeal by certiorari. In all cases where only
questions of law are raised or involved, the
appeal shall be to the Supreme Court by
petition for review on certiorari in accordance
with Rule 45.
In Macawili Gold Mining and Development Co., Inc. v. Court
of Appeals, we summarized the rule on appeals as follows:
(1) In all cases decided by the RTC in the exercise
of its original jurisdiction, appeal may be made
to the Court of Appeals by mere notice of
appeal where the appellant raises questions of
fact or mixed questions of fact and law;
(2) In all cases decided by the RTC in the exercise
of its original jurisdiction where the appellant
raises only questions of law, the appeal must
be taken to the Supreme Court on a petition
for review on certiorari under Rule 45;
(3) All appeals from judgments rendered by
the RTC in the exercise of its appellate
jurisdiction, regardless of whether the
appellant raises questions of fact, questions of
law, or mixed questions of fact and law, shall
be brought to the Court of Appeals by filing a
petition for review under Rule 42.
It is not disputed that the issue brought by petitioners to the
Court of Appeals involves the jurisdiction of the RTC over the subject
matter of the case. We have a long standing rule that a courts
jurisdiction over the subject matter of an action is conferred only by
the Constitution or by statute. Otherwise put, jurisdiction of a court
over the subject matter of the action is a matter of
law. Consequently, issues which deal with the jurisdiction of a court

over the subject matter of a case are pure questions of law. As

petitioners appeal solely involves a question of law, they should have
directly taken their appeal to this Court by filing a petition for review
on certiorari under Rule 45, not an ordinary appeal with the Court of
Appeals under Rule 41. Clearly, the appellate court did not err in
holding that petitioners pursued the wrong mode of appeal.

Indeed, the Court of Appeals did not err in dismissing

petitioners appeal. Section 2, Rule 50 of the same Rules provides
that an appeal from the RTC to the Court of Appeals raising only
questions of law shall be dismissed; and that an appeal erroneously
taken to the Court of Appeals shall be dismissed outright, x x x.
[19]
(Emphasis added)

However, to serve the demands of substantial justice and equity, the Court
opts to relax procedural rules and rule upon on the merits of the case. In Ong Lim Sing
Jr. v. FEB Leasing and Finance Corporation,[20] this Court stated:
Courts have the prerogative to relax procedural rules of even the
most mandatory character, mindful of the duty to reconcile both the
need to speedily put an end to litigation and the parties right to due
process. In
numerous
cases,
this
Court has allowed
liberal
construction of the rules when to do so would serve the demands of
substantial justice and equity. In Aguam v. Court of Appeals, the
Court explained:
The court has the discretion to dismiss or
not to dismiss an appellants appeal. It is a power
conferred on the court, not a duty. The discretion
must be a sound one, to be exercised in accordance
with the tenets of justice and fair play, having in
mind the circumstances obtaining in each
case. Technicalities, however, must be avoided. The
law abhors technicalities that impede the cause of
justice. The courts primary duty is to render or
dispense justice. A litigation is not a game of
technicalities. Lawsuits unlike duels are not to be
won by a rapiers thrust. Technicality, when it
deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy,
deserves
scant
consideration
from
courts. Litigations must be decided on their merits
and not on technicality. Every party litigant must be
afforded the amplest opportunity for the proper and
just determination of his cause, free from the
unacceptable plea of technicalities. Thus, dismissal
of appeals purely on technical grounds is frowned
upon where the policy of the court is to encourage

hearings of appeals on their merits and the rules of

procedure ought not to be applied in a very rigid,
technical sense; rules of procedure are used only to
help secure, not override substantial justice. It is a
far better and more prudent course of action for the
court to excuse a technical lapse and afford the
parties a review of the case on appeal to attain the
ends of justice rather than dispose of the case on
technicality and cause a grave injustice to the
parties, giving a false impression of speedy disposal
of cases while actually resulting in more delay, if
not a miscarriage of justice.[21]

II. The in lieu of all taxes provision in its franchise does not
exempt ABS-CBN from payment of local franchise tax.

A. The present controversy essentially boils down to a dispute between the inherent
taxing power of Congress and the delegated authority to tax of local governments
under the 1987 Constitution and effected under the LGC of 1991.

The power of the local government of Quezon City to impose franchise tax is based on
Section 151 in relation to Section 137 of the LGC, to wit:
Section 137. Franchise Tax. Notwithstanding any exemption
granted by any law or other special law, the province may impose a
tax on businesses enjoying a franchise, at the rate not exceeding fifty
percent (50%) of one percent (1%) of the gross annual receipts for
the preceding calendar year based on the incoming receipt, or
realized within its territorial jurisdiction. x x x
xxxx
Section 151. Scope of Taxing Powers. Except as otherwise
provided in this Code, the city may levy the taxes, fees and charges
which the province or municipality may impose: Provided, however,
That the taxes, fees and charges levied and collected by highly
urbanized and component cities shall accrue to them and distributed
in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the
maximum rates allowed for the province or municipality by not more
than fifty percent (50%) except the rates of professional and
amusement taxes. (Emphasis supplied)

Such taxing power by the local government, however, is limited in the sense
that Congress can enact legislation granting exemptions. This principle was upheld
in City Government of Quezon City, et al. v. Bayan Telecommunications, Inc. [22] Said
this Court:

This thus raises the question of whether or not the Citys

Revenue Code pursuant to which the city treasurer of Quezon
City levied real property taxes against Bayantels real properties
located within the City effectively withdrew the tax exemption
enjoyed by Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing that
once again it is only liable to pay the same taxes, as any other
persons or corporations on all its real or personal properties,
exclusive of its franchise.
Bayantels posture is well-taken. While the system of local
government taxation has changed with the onset of the 1987
Constitution, the power of local government units to tax is still
limited. As we explained in Mactan Cebu International Airport
Authority:
The power to tax is primarily vested in the
Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer
merely be virtue of a valid delegation as before, but
pursuant to direct authority conferred by Section 5,
Article X of the Constitution. Under the latter, the
exercise of the power may be subject to such
guidelines and limitations as the Congress may
provide which, however, must be consistent with
the basic policy of local autonomy. x x x
Clearly then, while a new slant on the subject of local
taxation now prevails in the sense that the former doctrine of local
government units delegated power to tax had been effectively
modified with Article X, Section 5 of the 1987 Constitution now in
place, the basic doctrine on local taxation remains essentially the
same. For as the Court stressed in Mactan, the power to tax is [still]
primarily vested in the Congress.
This new perspective is best articulated by Fr. Joaquin G.
Bernas, S.J., himself a Commissioner of the 1986 Constitutional
Commission which crafted the 1987 Constitution, thus:
What is the effect of Section 5 on the fiscal
position of municipal corporations? Section 5 does
not change the doctrine that municipal corporations

do not possess inherent powers of taxation. What it

does is to confer municipal corporations a general
power to levy taxes and otherwise create sources of
revenue. They no longer have to wait for a
statutory grant of these powers. The power of the
legislative authority relative to the fiscal powers of
local governments has been reduced to the
authority to impose limitations on municipal
powers. Moreover, these limitations must be
consistent with
the basic
policy of local
autonomy. The important legal effect of Section 5 is
thus to reverse the principle that doubts are
resolved
against
municipal
corporations. Henceforth, in interpreting statutory
provisions on municipal fiscal powers, doubts will be
resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local
government must be for a public purpose, uniform
within a locality, must not be confiscatory, and must
be within the jurisdiction of the local unit to pass.
In net effect, the controversy presently before the Court
involves, at bottom, a clash between the inherent taxing power of the
legislature, which necessarily includes the power to exempt, and the
local governments delegated power to tax under the aegis of the
1987 Constitution.
Now to go back to the Quezon City Revenue Code which
imposed real estate taxes on all real properties within the citys
territory and removed exemptions theretofore previously granted to,
or presently enjoyed by all persons, whether natural or juridical [x x
x] there can really be no dispute that the power of the Quezon City
Government to tax is limited by Section 232 of the LGC which
expressly provides that a province or city or municipality within the
Metropolitan Manila Area may levy an annual ad valorem tax on real
property such as land, building, machinery, and other improvement
not hereinafter specifically exempted. Under this law, the Legislature
highlighted its power to thereafter exempt certain realties from the
taxing power of local government units. An interpretation denying
Congress such power to exempt would reduce the phrase not
hereinafter specifically exempted as a pure jargon, without meaning
whatsoever. Needless to state, such absurd situation is unacceptable.
For sure, in Philippine Long Distance Telephone Company,
Inc. (PLDT) vs. City of Davao, this Court has upheld the power of
Congress to grant exemptions over the power of local government
units to impose taxes. There, the Court wrote:
Indeed, the grant of taxing powers to local
government units under the Constitution and the
LGC does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a
declared national policy. The legal effect of the
constitutional grant to local governments simply
means that in interpreting statutory provisions on

municipal taxing powers, doubts must be resolved

in favor of municipal corporations. [23] (Emphasis
supplied)

In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30,
1995, subsequent to the effectivity of the LGC on January 1, 1992. Under it, ABSCBNwas granted the franchise to install and operate radio and television broadcasting
stations in the Philippines. Likewise, Section 8 imposed on ABS-CBN the duty of paying
3% franchise tax. It bears stressing, however, that payment of the percentage
franchise tax shall be in lieu of all taxes on the said franchise. [24]

Congress has the inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of Quezon City to tax is prescribed by
Section 151 in relation to Section 137 of the LGC which expressly provides that
notwithstanding any exemption granted by any law or other special law, the City may
impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit
grant of future exemptions. As earlier discussed, this Court in City Government of
Quezon City v. Bayan Telecommunications, Inc. [25] sustained the power of Congress to
grant tax exemptions over and above the power of the local governments delegated
power to tax.

B. The more pertinent issue now to consider is whether or not by passing R.A.
No. 7966, which contains the in lieu of all taxes provision, Congress intended to
exemptABS-CBN from local franchise tax.

Petitioners argue that the in lieu of all taxes provision in ABS-CBNs franchise does not
expressly exempt it from payment of local franchise tax. They contend that a tax
exemption cannot be created by mere implication and that one who claims tax
exemptions must be able to justify his claim by clearest grant of organic law or statute.

Taxes are what civilized people pay for civilized society. They are the lifeblood
of the nation. Thus, statutes granting tax exemptions are construed stricissimi

franchise tax and income taxes under Title II of the NIRC. But whether the in lieu of all
taxes provision would include exemption from local tax is not unequivocal.

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

As adverted to earlier, the right to exemption from local franchise tax must be

mistaken. Otherwise stated, taxation is the rule, exemption is the exception. [26] The

clearly established and cannot be made out of inference or implications but must be

burden of proof rests upon the party claiming the exemption to prove that it is in fact

laid beyond reasonable doubt. Verily, the uncertainty in the in lieu of all taxes provision

covered by the exemption so claimed. [27]

should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is in
fact covered by the exemption so claimed. ABS-CBN miserably failed in this regard.

The basis for the rule on strict construction to statutory provisions granting tax
exemptions or deductions is to minimize differential treatment and foster impartiality,

ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal

fairness and equality of treatment among taxpayers. [28] He who claims an exemption

Revenue,[30] Manila Railroad v. Rafferty,[31] Philippine Railway Co. v. Collector of

from his share of common burden must justify his claim that the legislature intended to

Internal Revenue,[32] and Visayan Electric Co. v. David [33] to support its claim that that

exempt him by unmistakable terms. For exemptions from taxation are not favored in

the in lieu of all taxes clause includes exemption from all taxes.

law, nor are they presumed. They must be expressed in the clearest and most
unambiguous language and not left to mere implications. It has been held that

However, a review of the foregoing case law reveals that the grantees

exemptions are never presumed, the burden is on the claimant to establish clearly his

respective franchises expressly exempt them from municipal and provincial taxes. Said

right to exemption and cannot be made out of inference or implications but must be

the Court inManila Railroad v. Rafferty:[34]

laid beyond reasonable doubt. In other words, since taxation is the rule and exemption
the exception, the intention to make an exemption ought to be expressed in clear and
unambiguous terms.[29]

Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to

three (3) percent of all gross receipts of the radio/television business transacted under
the franchise and the franchise tax shall be in lieu of all taxes on the franchise or
earnings thereof.

The in lieu of all taxes provision in the franchise of ABS-CBN does not
expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear
whether the exemption would include both local, whether municipal, city or provincial,
and national tax. What is clear is that ABS-CBN shall be liable to pay three (3) percent

On the 7th day of July 1906, by an Act of the Philippine

Legislature, a special charter was granted to the Manila Railroad
Company. Subsection 12 of Section 1 of said Act (No. 1510) provides
that:
In consideration of the premises and of the
granting of this concession or franchise, there shall
be paid by the grantee to the Philippine
Government, annually, for the period of thirty (30)
years from the date hereof, an amount equal to
one-half (1/2) of one per cent of the gross earnings
of the grantee in respect of the lines covered
hereby for the preceding year; after said period of
thirty (30) years, and for the fifty (50) years
thereafter, the amount so to be paid annually shall
be an amount equal to one and one-half (1) per
cent of such gross earnings for the preceding year;
and after such period of eighty (80) years, the
percentage and amount so to be paid annually by
the grantee shall be fixed by the Philippine
Government.

Such annual payments, when promptly

and fully made by the grantee, shall be in lieu of all
taxes of every name and nature municipal,
provincial or central upon its capital stock,
franchises, right of way, earnings, and all other
property owned or operated by the grantee under
this
concession
or
franchise.[35] (Underscoring
supplied)

In the case under review, ABS-CBNs franchise did not embody an exemption

At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was
subject to 3% franchise tax under Section 117(b) of the 1977 National Internal
Revenue Code (NIRC), as amended, viz.:
SECTION 117. Tax on franchises. Any provision of general or
special laws to the contrary notwithstanding, there shall be levied,
assessed and collected in respect to all franchise, upon the gross
receipts from the business covered by the law granting the franchise,
a tax in accordance with the schedule prescribed hereunder:

similar to those in Carcar, Manila Railroad, Philippine Railway, and Visayan Electric. Too,

(a) On electric utilities, city gas, and water supplies

Two (2%) percent
(b) On telephone and/or telegraph systems, radio
and/or broadcasting stations Three (3%)
percent
(c) On other franchises Five (5%) percent.
(Emphasis supplied)

the franchise failed to specify the taxing authority from whose jurisdiction the taxing
power is withheld, whether municipal, provincial, or national. In fine, since ABSCBNfailed to justify its claim for exemption from local franchise tax, by a grant
expressed in terms too plain to be mistaken its claim for exemption for local franchise
tax must fail.

On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value
Added Tax Law,[36] took effect and subjected to VAT those services rendered by radio

C. The in lieu of all taxes clause in the franchise of ABS-CBN has become
functus officio with the abolition of the franchise tax on broadcasting companies with
yearly gross receipts exceeding Ten Million Pesos.

and/or broadcasting stations. Section 3 of R.A. No. 7716 provides:

Section 3. Section 102 of the National Internal Revenue
Code, as amended is hereby further amended to read as follows:
SEC. 102. Value-added tax on sale of
services and use or lease of properties. (a) Rate
and base of tax. There shall be levied, assessed and
collected, as value-added tax equivalent to 10% of
gross receipts derived from the sale or exchange of
services, including the use or lease of properties.

In its decision dated January 20, 1999, the RTC held that pursuant to the in
lieu of all taxes provision contained in Section 8 of R.A. No. 7966, ABS-CBN is exempt
from the payment of the local franchise tax. The RTC further pronounced that ABS-

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; x
x x services of franchise grantees of telephone and
telegraph, radio and television broadcasting and all
other franchise grantees except those under Section
117 of this Code; x x x (Emphasis supplied)

CBN shall instead be liable to pay a franchise tax of 3% of all gross receipts in lieu of all
other taxes.

On this score, the RTC ruling is flawed. In keeping with the laws that have
been passed since the grant of ABS-CBNs franchise, the corporation should now be
subject to VAT, instead of the 3% franchise tax.
Notably,

under

the

same

law,

telephone

and/or

telegraph

systems,

broadcasting stations and other franchise grantees were omitted from the list of entities
subject to franchise tax. The impression was that these entities were subject to 10%

VAT but not to franchise tax. Only the franchise tax on electric, gas and water utilities

On

the

other

hand,

radio

and/or

television

companies

with

yearly

gross

remained.Section 12 of R.A. No. 7716 provides:

receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102
of the NIRC.

Section 12. Section 117 of the National Internal Revenue

Code, as amended, is hereby further amended to read as follows:
SEC. 117. Tax on Franchises. Any provision
of general or special law to the contrary
notwithstanding there shall be levied, assessed and
collected in respect to all franchises on electric, gas
and water utilities a tax of two percent (2%) on the
gross receipts derived from the business covered by
the law granting the franchise. (Emphasis added)

On January 1, 1998, R.A. No. 8424[39] was passed confirming the 10% VAT liability of
radio and/or television companies with yearly gross receipts exceeding P10,000,000.00.

R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The
said law further amended the NIRC by increasing the rate of VAT to 12%. The

Subsequently, R.A. No. 8241 [37] took effect on January 1, 1997[38] containing
more amendments to the NIRC. Radio and/or television companies whose annual gross

effectivity of the imposition of the 12% VAT was later moved from January 1,
2006 to February 1, 2006.

receipts do not exceed P10,000,000.00 were granted the option to choose between
paying 3% national franchise tax or 10% VAT. Section 9 of R.A. No. 8241 provides:

In consonance with the above survey of pertinent laws on the matter, ABSCBN is subject to the payment of VAT. It does not have the option to choose between

SECTION 9. Section 12 of Republic Act No. 7716 is hereby

amended to read as follows:
Sec. 12. Section 117 of the National
Internal Revenue Code, as amended, is hereby
further amended to read as follows:
Sec. 117. Tax on franchise. Any provision
of general or special law to the contrary,
notwithstanding, there shall be levied, assessed
and collected in respect to allfranchises on radio
and/or television broadcasting companies whose
annual gross receipts of the preceding year does
not exceed Ten million pesos (P10,000,000.00),
subject to Section 107(d) of this Code, a tax of
three percent (3%) and on electric, gas and water
utilities, a tax of two percent (2%) on the gross
receipts derived from the business covered by the
law granting the franchise: Provided, however, That
radio and television broadcasting companies
referred to in this section, shall have an option to
be registered as a value-added tax payer and pay
the tax due thereon: Provided, further, That once
the option is exercised, it shall not be
revoked. (Emphasis supplied)

the payment of franchise tax or VAT since it is a broadcasting company with yearly
gross receipts exceeding Ten Million Pesos (P10,000,000.00).

VAT is a percentage tax imposed on any person whether or not a franchise

grantee, who in the course of trade or business, sells, barters, exchanges, leases,
goods or properties, renders services. It is also levied on every importation of goods
whether or not in the course of trade or business. The tax base of the VAT is limited
only to the value added to such goods, properties, or services by the seller, transferor
or lessor. Further, the VAT is an indirect tax and can be passed on to the buyer.

The franchise tax, on the other hand, is a percentage tax imposed only on
franchise holders. It is imposed under Section 119 of the Tax Code and is a direct
liability of the franchise grantee.

The clause in lieu of all taxes does not pertain to VAT or any other tax. It

sought to be exempted from. Neither did it particularize the jurisdiction from which the

cannot apply when what is paid is a tax other than a franchise tax. Since the franchise

taxing power is withheld. Second, the clause has become functus officio because as the

tax on the broadcasting companies with yearly gross receipts exceeding ten million

law now stands, ABS-CBN is no longer subject to a franchise tax. It is now liable for

pesos has been abolished, the in lieu of all taxes clause has now become functus

VAT.

officio, rendered inoperative.

WHEREFORE,
In sum, ABS-CBNs claims for exemption must fail on twin grounds. First, the
in lieu of all taxes clause in its franchise failed to specify the taxes the company is

the

petition

is GRANTED and

the

appealed

Decision REVERSED AND SET ASIDE. The petition in the trial court for refund of local
franchise tax isDISMISSED.