Contents

Lung Center of the Phils v Quezon City................................................................1

Luzon Stevedoring Corp v CTA...........................................................................10
Lutz v Araneta.................................................................................................... 13
Philex Mining Corp v CIR.................................................................................... 16
Maceda v Macaraig............................................................................................ 21
SSS v City of Bacolod......................................................................................... 40
Villegas v Hiu CHiong Tsai Pao............................................................................43
Victorias Milling v Municipality of Victorias.........................................................47
Phil. Rural Electric Coop v Secretary of DILG......................................................55
Nitafan v CIR...................................................................................................... 64
CIR v BPI............................................................................................................. 69
Pepsi Cola Bottling Co v Municipality of Tanauan...............................................76
Domingo v Garlitos............................................................................................. 80
Mamba v Lara.................................................................................................... 82
Tiu v CA.............................................................................................................. 90
SYLLABI/SYNOPSIS................................................................................................ 90
Chamber of Real Estate and Builders Assn v Executive Secretary.....................98
Commissioner v TODA...................................................................................... 124
Smart Communications v City of Davao...........................................................131
G.R. No. 155491.................................................................................................. 131
PBCom v CIR.................................................................................................... 136
SYLLABI/SYNOPSIS.............................................................................................. 136
CIR v Hantex Trading........................................................................................ 143

Lung Center of the Phils v Quezon City

EN BANC

[G.R. No. 144104. June 29, 2004]

LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and
CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City,respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as
amended, of the Decision[1] dated July 17, 2000 of the Court of Appeals in CA-G.R.
SP No. 57014 which affirmed the decision of the Central Board of Assessment
Appeals holding that the lot owned by the petitioner and its hospital building
constructed thereon are subject to assessment for purposes of real property tax.

The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity
established on January 16, 1981 by virtue of Presidential Decree No. 1823.[2] It is the
registered owner of a parcel of land, particularly described as Lot No. RP-3-B-3A-1-B1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road, Central
District, Quezon City. The lot has an area of 121,463 square meters and is covered
by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds of Quezon
City. Erected in the middle of the aforesaid lot is a hospital known as
the Lung Center of the Philippines. A big space at the ground floor is being leased to
private parties, for canteen and small store spaces, and to medical or professional
practitioners who use the same as their private clinics for their patients whom they
charge for their professional services. Almost one-half of the entire area on the left
side of the building along Quezon Avenue is vacant and idle, while a big portion on
the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased
for commercial purposes to a private enterprise known as the Elliptical Orchids
and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical
services to out-patients, both paying and non-paying. Aside from its income from
paying patients, the petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were
assessed for real property taxes in the amount of P4,554,860 by the City Assessor
of Quezon City.[3]Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C021-01231 (15-2518-A) were issued for the land and the hospital building,
respectively.[4] On August 25, 1993, the petitioner filed a Claim for Exemption [5] from
real property taxes with the City Assessor, predicated on its claim that it is a
charitable institution. The petitioners request was denied, and a petition was,
thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QCLBAA, for brevity) for the reversal of the resolution of the City Assessor. The
petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the
property is exempt from real property taxes. It averred that a minimum of 60% of its
hospital beds are exclusively used for charity patients and that the major thrust of
its hospital operation is to serve charity patients. The petitioner contends that it is a

charitable institution and, as such, is exempt from real property taxes. The QC-LBAA
rendered judgment dismissing the petition and holding the petitioner liable for real
property taxes.[6]
The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board
of Assessment Appeals of Quezon City (CBAA, for brevity) [7] which ruled that the
petitioner was not a charitable institution and that its real properties were not
actually, directly and exclusively used for charitable purposes; hence, it was not
entitled to real property tax exemption under the constitution and the law. The
petitioner sought relief from the Court of Appeals, which rendered judgment
affirming the decision of the CBAA.[8]
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED
TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING
AND IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY,
DIRECTLY AND EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT
UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE
EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of
Section 28(3), Article VI of the 1987 Constitution. It asserts that its character as a
charitable institution is not altered by the fact that it admits paying patients and
renders medical services to them, leases portions of the land to private parties, and
rents out portions of the hospital to private medical practitioners from which it
derives income to be used for operational expenses. The petitioner points out that
for the years 1995 to 1999, 100% of its out-patients were charity patients and of the
hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity
patients. It asserts that the fact that it receives subsidies from the government
attests to its character as a charitable institution. It contends that the exclusivity
required in the Constitution does not necessarily mean solely. Hence, even if a
portion of its real estate is leased out to private individuals from whom it derives
income, it does not lose its character as a charitable institution, and its exemption
from the payment of real estate taxes on its real property. The petitioner cited our
ruling in Herrera v. QC-BAA[9] to bolster its pose. The petitioner further contends that
even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is
not precluded from seeking tax exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the petitioner is not
a charitable entity. The petitioners real property is not exempt from the payment of
real estate taxes under P.D. No. 1823 and even under the 1987 Constitution
because it failed to prove that it is a charitable institution and that the said property
is actually, directly and exclusively used for charitable purposes. The respondents
noted that in a newspaper report, it appears that graft charges were filed with the
Sandiganbayan against the director of the petitioner, its administrative officer, and
Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden Center, for
entering into a lease contract over 7,663.13 square meters of the property in 1990
for only P20,000 a month, when the monthly rental should be P357,000 a month as
determined by the Commission on Audit; and that instead of complying with the
directive of the COA for the cancellation of the contract for being grossly prejudicial

to the government, the petitioner renewed the same on March 13, 1995 for a
monthly rental of only P24,000. They assert that the petitioner uses the subsidies
granted by the government for charity patients and uses the rest of its income from
the property for the benefit of paying patients, among other purposes. They aver
that the petitioner failed to adduce substantial evidence that 100% of its outpatients and 170 beds in the hospital are reserved for indigent patients. The
respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its record
of service. That before a patient is admitted for treatment in the Center, first
impression is that it is pay-patient and required to pay a certain amount as
deposit. That even if a patient is living below the poverty line, he is charged with
high hospital bills. And, without these bills being first settled, the poor patient
cannot be allowed to leave the hospital or be discharged without first paying the
hospital bills or issue a promissory note guaranteed and indorsed by an influential
agency or person known only to the Center; that even the remains of deceased poor
patients suffered the same fate. Moreover, before a patient is admitted for
treatment as free or charity patient, one must undergo a series of interviews and
must submit all the requirements needed by the Center, usually accompanied by
endorsement by an influential agency or person known only to the Center. These
facts were heard and admitted by the Petitioner LCP during the hearings before the
Honorable QC-BAA and Honorable CBAA. These are the reasons of indigent patients,
instead of seeking treatment with the Center, they prefer to be treated at the
Quezon Institute. Can such practice by the Center be called charitable? [10]

The Issues
The issues for resolution are the following: (a) whether the petitioner is a
charitable institution within the context of Presidential Decree No. 1823 and the
1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b)
whether the real properties of the petitioner are exempt from real property taxes.

The Courts Ruling

The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within
the context of the 1973 and 1987 Constitutions. To determine whether an enterprise
is a charitable institution/entity or not, the elements which should be considered
include the statute creating the enterprise, its corporate purposes, its constitution
and by-laws, the methods of administration, the nature of the actual work
performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties. [11]
In the legal sense, a charity may be fully defined as a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons,
either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or otherwise lessening the
burden of government.[12] It may be applied to almost anything that tend to promote

the well-doing and well-being of social man. It embraces the improvement and
promotion of the happiness of man.[13] The word charitable is not restricted to relief
of the poor or sick.[14] The test of a charity and a charitable organization are in law
the same. The test whether an enterprise is charitable or not is whether it exists to
carry out a purpose reorganized in law as charitable or whether it is maintained for
gain, profit, or private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be administered by the Office of
the President of thePhilippines with the Ministry of Health and the Ministry of Human
Settlements. It was organized for the welfare and benefit of the Filipino people
principally to help combat the high incidence of lung and pulmonary diseases in
the Philippines. The raison detre for the creation of the petitioner is stated in the
decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern, having
been the leading cause of illness and death in the Philippines, comprising more than
45% of the total annual deaths from all causes, thus, exacting a tremendous toll on
human resources, which ailments are likely to increase and degenerate into serious
lung diseases on account of unabated pollution, industrialization and unchecked
cigarette smoking in the country;
Whereas, the more common lung diseases are, to a great extent, preventable, and
curable with early and adequate medical care, immunization and through prompt
and intensive prevention and health education programs;
Whereas, there is an urgent need to consolidate and reinforce existing programs,
strategies and efforts at preventing, treating and rehabilitating people affected by
lung diseases, and to undertake research and training on the cure and prevention of
lung diseases, through a Lung Center which will house and nurture the above and
related activities and provide tertiary-level care for more difficult and problematical
cases;
Whereas, to achieve this purpose, the Government intends to provide material and
financial support towards the establishment and maintenance of a Lung Center for
the welfare and benefit of the Filipino people. [15]
The purposes for which the petitioner was created are spelled out in its Articles
of Incorporation, thus:
SECOND: That the purposes for which such corporation is formed are as follows:
1. To construct, establish, equip, maintain, administer and conduct an integrated
medical institution which shall specialize in the treatment, care, rehabilitation
and/or relief of lung and allied diseases in line with the concern of the government
to assist and provide material and financial support in the establishment and
maintenance of a lung center primarily to benefit the people of the Philippines and
in pursuance of the policy of the State to secure the well-being of the people by
providing them specialized health and medical services and by minimizing the
incidence of lung diseases in the country and elsewhere.

2. To promote the noble undertaking of scientific research related to the prevention

of lung or pulmonary ailments and the care of lung patients, including the holding of
a series of relevant congresses, conventions, seminars and conferences;
3. To stimulate and, whenever possible, underwrite scientific researches on the
biological, demographic, social, economic, eugenic and physiological aspects of lung
or pulmonary diseases and their control; and to collect and publish the findings of
such research for public consumption;
4. To facilitate the dissemination of ideas and public acceptance of information on
lung consciousness or awareness, and the development of fact-finding, information
and reporting facilities for and in aid of the general purposes or objects aforesaid,
especially in human lung requirements, general health and physical fitness, and
other relevant or related fields;
5. To encourage the training of physicians, nurses, health officers, social workers
and medical and technical personnel in the practical and scientific implementation
of services to lung patients;
6. To assist universities and research institutions in their studies about lung
diseases, to encourage advanced training in matters of the lung and related fields
and to support educational programs of value to general health;
7. To encourage the formation of other organizations on the national, provincial
and/or city and local levels; and to coordinate their various efforts and activities for
the purpose of achieving a more effective programmatic approach on the common
problems relative to the objectives enumerated herein;
8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be
given to the organization;
9. To extend, whenever possible and expedient, medical services to the public and,
in general, to promote and protect the health of the masses of our people, which
has long been recognized as an economic asset and a social blessing;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
maladies of the people in any and all walks of life, including those who are poor and
needy, all without regard to or discrimination, because of race, creed, color or
political belief of the persons helped; and to enable them to obtain treatment when
such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed and
carried on to promote the general health of the community;
12. To acquire and/or borrow funds and to own all funds or equipment, educational
materials and supplies by purchase, donation, or otherwise and to dispose of and
distribute the same in such manner, and, on such basis as the Center shall, from

time to time, deem proper and best, under the particular circumstances, to serve its
general and non-profit purposes and objectives;
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose
of properties, whether real or personal, for purposes herein mentioned; and
14. To do everything necessary, proper, advisable or convenient for the
accomplishment of any of the powers herein set forth and to do every other act and
thing incidental thereto or connected therewith. [16]
Hence, the medical services of the petitioner are to be rendered to the public in
general in any and all walks of life including those who are poor and the needy
without discrimination.After all, any person, the rich as well as the poor, may fall
sick or be injured or wounded and become a subject of charity. [17]
As a general principle, a charitable institution does not lose its character as such
and its exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or receives subsidies from
the government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. [18] In Congregational
Sunday School, etc. v. Board of Review,[19] the State Supreme Court of Illinois held,
thus:
[A]n institution does not lose its charitable character, and consequent exemption
from taxation, by reason of the fact that those recipients of its benefits who are able
to pay are required to do so, where no profit is made by the institution and the
amounts so received are applied in furthering its charitable purposes, and those
benefits are refused to none on account of inability to pay therefor. The
fundamental ground upon which all exemptions in favor of charitable institutions are
based is the benefit conferred upon the public by them, and a consequent relief, to
some extent, of the burden upon the state to care for and advance the interests of
its citizens.[20]
As aptly stated by the State Supreme Court of South Dakota in Lutheran
Hospital Association of South Dakota v. Baker:[21]
[T]he fact that paying patients are taken, the profits derived from attendance upon
these patients being exclusively devoted to the maintenance of the charity, seems
rather to enhance the usefulness of the institution to the poor; for it is a matter of
common observation amongst those who have gone about at all amongst the
suffering classes, that the deserving poor can with difficulty be persuaded to enter
an asylum of any kind confined to the reception of objects of charity; and that their
honest pride is much less wounded by being placed in an institution in which paying
patients are also received. The fact of receiving money from some of the patients
does not, we think, at all impair the character of the charity, so long as the money
thus received is devoted altogether to the charitable object which the institution is
intended to further.[22]
The money received by the petitioner becomes a part of the trust fund and must
be devoted to public trust purposes and cannot be diverted to private profit or
benefit.[23]

Under P.D. No. 1823, the petitioner is entitled to receive donations. The
petitioner does not lose its character as a charitable institution simply because the
gift or donation is in the form of subsidies granted by the government. As held by
the State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt
Lake County:[24]
Second, the government subsidy payments are provided to the project. Thus, those
payments are like a gift or donation of any other kind except they come from the
government. In both Intermountain Health Care and the present case, the crux is
the presence or absence of material reciprocity. It is entirely irrelevant to this
analysis that the government, rather than a private benefactor, chose to make up
the deficit resulting from the exchange between St. Marks Tower and the tenants by
making a contribution to the landlord, just as it would have been irrelevant
in Intermountain Health Care if the patients income supplements had come from
private individuals rather than the government.
Therefore, the fact that subsidization of part of the cost of furnishing such housing is
by the government rather than private charitable contributions does not dictate the
denial of a charitable exemption if the facts otherwise support such an exemption,
as they do here.[25]
In this case, the petitioner adduced substantial evidence that it spent its
income, including the subsidies from the government for 1991 and 1992 for its
patients and for the operation of the hospital. It even incurred a net loss in 1991
and 1992 from its operations.
Even as we find that the petitioner is a charitable institution, we hold, anent the
second issue, that those portions of its real property that are leased to private
entities are not exempt from real property taxes as these are not actually, directly
and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from tax
payments must be clearly shown and based on language in the law too plain to be
mistaken.[26] As held in Salvation Army v. Hoehn:[27]
An intention on the part of the legislature to grant an exemption from the taxing
power of the state will never be implied from language which will admit of any other
reasonable construction. Such an intention must be expressed in clear and
unmistakable terms, or must appear by necessary implication from the language
used, for it is a well settled principle that, when a special privilege or exemption is
claimed under a statute, charter or act of incorporation, it is to be construed strictly
against the property owner and in favor of the public. This principle applies with
peculiar force to a claim of exemption from taxation . [28]
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner,
specifically provides that the petitioner shall enjoy the tax exemptions and
privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation

organized primarily to help combat the high incidence of lung and pulmonary
diseases in the Philippines, all donations, contributions, endowments and equipment
and supplies to be imported by authorized entities or persons and by the Board of
Trustees of the Lung Center of the Philippines, Inc., for the actual use and benefit of
the Lung Center, shall be exempt from income and gift taxes, the same further
deductible in full for the purpose of determining the maximum deductible amount
under Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.
The Lung Center of the Philippines shall be exempt from the payment of taxes,
charges and fees imposed by the Government or any political subdivision or
instrumentality thereof with respect to equipment purchases made by, or for
the Lung Center.[29]
It is plain as day that under the decree, the petitioner does not enjoy any
property tax exemption privileges for its real properties as well as the building
constructed thereon. If the intentions were otherwise, the same should have been
among the enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the express mention of one person,
thing, or consequence implies the exclusion of all others. The rule is expressed in
the familiar maxim, expressio unius est exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated in a number
ways. One variation of the rule is principle that what is expressed puts an end
that which is implied. Expressium facit cessare tacitum. Thus, where a statute,
its terms, is expressly limited to certain matters, it may not, by interpretation
construction, be extended to other matters.

of
to
by
or

...
The rule of expressio unius est exclusio alterius and its variations are canons of
restrictive interpretation. They are based on the rules of logic and the natural
workings of the human mind. They are predicated upon ones own voluntary act and
not upon that of others. They proceed from the premise that the legislature would
not have made specified enumeration in a statute had the intention been not to
restrict its meaning and confine its terms to those expressly mentioned. [30]
The exemption must not be so enlarged by construction since the reasonable
presumption is that the State has granted in express terms all it intended to grant
at all, and that unless the privilege is limited to the very terms of the statute the
favor would be intended beyond what was meant. [31]
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation. [32]

The tax exemption under this constitutional provision covers property taxes
only.[33] As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: . . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or
educational purposes.[34]
Consequently, the constitutional provision is implemented by Section 234(b) of
Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) as
follows:
SECTION 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes.[35]
We note that under the 1935 Constitution, ... all lands, buildings, and
improvements used exclusively for charitable purposes shall be exempt from
taxation.[36] However, under the 1973 and the present Constitutions, for lands,
buildings, and improvements of the charitable institution to be considered exempt,
the same should not only be exclusively used for charitable purposes; it is required
that such property be used actually and directly for such purposes. [37]
In light of the foregoing substantial changes in the Constitution, the petitioner
cannot rely on our ruling in Herrera v. Quezon City Board of Assessment
Appeals which was promulgated on September 30, 1961 before the 1973 and 1987
Constitutions took effect.[38] As this Court held in Province of Abra v. Hernando:[39]
Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents
appurtenant thereto, and all lands, buildings, and improvements used exclusively
for religious, charitable, or educational purposes shall be exempt from taxation. The
present Constitution added charitable institutions, mosques, and non-profit
cemeteries and required that for the exemption of lands, buildings, and
improvements, they should not only be exclusively but also actually and directly
used for religious or charitable purposes. The Constitution is worded differently. The
change should not be ignored. It must be duly taken into consideration. Reliance on
past decisions would have sufficed were the words actually as well as directly not
added. There must be proof therefore of the actual and direct use of the lands,
buildings, and improvements for religious or charitable purposes to be exempt from
taxation.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used
for
charitable
purposes. Exclusive is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and exclusively is defined,

in a manner to exclude; as enjoying a privilege exclusively. [40] If real property is used

for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. [41] The words dominant use or principal use
cannot be substituted for the words used exclusively without doing violence to the
Constitutions and the law.[42] Solely is synonymous with exclusively.[43]
What is meant by actual, direct and exclusive use of the property for charitable
purposes is the direct and immediate and actual application of the property itself to
the purposes for which the charitable institution is organized. It is not the use of the
income from the real property that is determinative of whether the property is used
for tax-exempt purposes.[44]
The petitioner failed to discharge its burden to prove that the entirety of its real
property is actually, directly and exclusively used for charitable purposes. While
portions of the hospital are used for the treatment of patients and the dispensation
of medical services to them, whether paying or non-paying, other portions thereof
are being leased to private individuals for their clinics and a canteen. Further, a
portion of the land is being leased to a private individual for her business enterprise
under the business name Elliptical Orchids and Garden Center. Indeed, the
petitioners evidence shows that it collected P1,136,483.45 as rentals in 1991
and P1,679,999.28 for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to private entities as
well as those parts of the hospital leased to private individuals are not exempt from
such taxes.[45] On the other hand, the portions of the land occupied by the hospital
and portions of the hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The
respondent Quezon City Assessor is hereby DIRECTED to determine, after due
hearing, the precise portions of the land and the area thereof which are leased to
private persons, and to compute the real property taxes due thereon as provided for
by law.
SO ORDERED.
Davide, Jr., C.J., Puno, Panganiban, Quisumbing, Sandoval-Gutierrez, Carpio,
Corona, Carpio-Morales, Azcuna, and Tinga, JJ., concur.
Vitug, J., on official leave.
Ynares-Santiago, and Austria-Martinez, JJ., on leave.

Luzon Stevedoring Corp v CTA

G.R. No. L-30232 July 29, 1988
LUZON
STEVEDORING
CORPORATION, petitioner-appellant,
vs.
COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF
INTERNAL REVENUE, respondents-appellees.
H. San Luis & V.L. Simbulan for petitioner-appellant.

PARAS, J.:
This is a petition for review of the October 21, 1968 Decision * of the Court of Tax
Appeals in CTA Case No. 1484, "Luzon Stevedoring Corporation v. Hon. Ramon
Oben, Commissioner, Bureau of Internal Revenue", denying the various claims for
tax refund; and the February 20, 1969 Resolution of the same court denying the
motion for reconsideration.
Herein petitioner-appellant, in 1961 and 1962, for the repair and maintenance of its
tugboats, imported various engine parts and other equipment for which it paid,
under protest, the assessed compensating tax. Unable to secure a tax refund from
the Commissioner of Internal Revenue, on January 2, 1964, it filed a Petition for
Review (Rollo, pp. 14-18) with the Court of Tax Appeals, docketed therein as CTA
Case No. 1484, praying among others, that it be granted the refund of the amount
of P33,442.13. The Court of Tax Appeals, however, in a Decision dated October 21,
1969 (Ibid., pp. 22-27), denied the various claims for tax refund. The decretal
portion of the said decision reads:
WHEREFORE, finding petitioner's various claims for refund amounting to P33,442.13
without sufficient legal justification, the said claims have to be, as they are hereby,
denied. With costs against petitioner.
On January 24, 1969, petitioner-appellant filed a Motion for Reconsideration (Ibid.,
pp. 28-34), but the same was denied in a Resolution dated February 20, 1969 ( Ibid.,
p. 35). Hence, the instant petition.
This Court, in a Resolution dated March 13, 1969, gave due course to the petition
(Ibid., p. 40). Petitioner-appellant raised three (3) assignments of error, to wit:
I
The lower court erred in holding that the petitioner-appellant is engaged in business
as stevedore, the work of unloading and loading of a vessel in port, contrary to the
evidence on record.
II
The lower court erred in not holding that the business in which petitioner-appellant
is engaged, is part and parcel of the shipping industry.
III
The lower court erred in not allowing the refund sought by petitioner-appellant.
The instant petition is without merit.
The pivotal issue in this case is whether or not petitioner's tugboats" can be
interpreted to be included in the term "cargo vessels" for purposes of the tax
exemption provided for in Section 190 of the National Internal Revenue Code, as
amended by Republic Act No. 3176.

Said law provides:

Sec. 190. Compensating tax. ... And Provided further, That the tax imposed in this
section shall not apply to articles to be used by the importer himself in the
manufacture or preparation of articles subject to specific tax or those for
consignment abroad and are to form part thereof or to articles to be used by the
importer himself as passenger and/or cargo vessel, whether coastwise or
oceangoing, including engines and spare parts of said vessel. ....
Petitioner contends that tugboats are embraced and included in the term cargo
vessel under the tax exemption provisions of Section 190 of the Revenue Code, as
amended by Republic Act. No. 3176. He argues that in legal contemplation, the
tugboat and a barge loaded with cargoes with the former towing the latter for
loading and unloading of a vessel in part, constitute a single vessel. Accordingly, it
concludes that the engines, spare parts and equipment imported by it and used in
the repair and maintenance of its tugboats are exempt from compensating tax
(Rollo, p. 23).
On the other hand, respondents-appellees counter that petitioner-appellant's
"tugboats" are not "Cargo vessel" because they are neither designed nor used for
carrying and/or transporting persons or goods by themselves but are mainly
employed for towing and pulling purposes. As such, it cannot be claimed that the
tugboats in question are used in carrying and transporting passengers or cargoes as
a common carrier by water, either coastwise or oceangoing and, therefore, not
within the purview of Section 190 of the Tax Code, as amended by Republic Act No.
3176 (Brief for Respondents-Appellees, pp. 45).
This Court has laid down the rule that "as the power of taxation is a high prerogative
of sovereignty, the relinquishment is never presumed and any reduction or
dimunition thereof with respect to its mode or its rate, must be strictly construed,
and the same must be coached in clear and unmistakable terms in order that it may
be applied." (84 C.J.S. pp. 659-800), More specifically stated, the general rule is that
any claim for exemption from the tax statute should be strictly construed against
the taxpayer (Acting Commissioner of Customs v. Manila Electric Co. et al., 69 SCRA
469 [1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd., et al., 65
SCRA 142 [1975]).
As correctly analyzed by the Court of Tax Appeals, in order that the importations in
question may be declared exempt from the compensating tax, it is indispensable
that the requirements of the amendatory law be complied with, namely: (1) the
engines and spare parts must be used by the importer himself as a passenger
and/or cargo, vessel; and (2) the said passenger and/or cargo vessel must be used
in coastwise or oceangoing navigation (Decision, CTA Case No. 1484; Rollo, p. 24).
As pointed out by the Court of Tax Appeals, the amendatory provisions of Republic
Act No. 3176 limit tax exemption from the compensating tax to imported items to
be used by the importer himself as operator of passenger and/or cargo vessel (Ibid.,
p. 25).

As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as

follows:
A tugboat is a strongly built, powerful steam or power vessel, used for towing and,
now, also used for attendance on vessel. (Webster New International Dictionary, 2nd
Ed.)
A tugboat is a diesel or steam power vessel designed primarily for moving large
ships to and from piers for towing barges and lighters in harbors, rivers and canals.
(Encyclopedia International Grolier, Vol. 18, p. 256).
A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier's Law
Dictionary.) (Rollo, p. 24).
Under the foregoing definitions, petitioner's tugboats clearly do not fall under the
categories of passenger and/or cargo vessels. Thus, it is a cardinal principle of
statutory construction that where a provision of law speaks categorically, the need
for interpretation is obviated, no plausible pretense being entertained to justify noncompliance. All that has to be done is to apply it in every case that falls within its
terms (Allied Brokerage Corp. v. Commissioner of Customs, L-27641, 40 SCRA 555
[1971]; Quijano, etc. v. DBP, L-26419, 35 SCRA 270 [1970]).
And, even if construction and interpretation of the law is insisted upon, following
another fundamental rule that statutes are to be construed in the light of purposes
to be achieved and the evils sought to be remedied (People v. Purisima etc., et al.,
L-42050-66, 86 SCRA 544 [1978], it will be noted that the legislature in amending
Section 190 of the Tax Code by Republic Act 3176, as appearing in the records,
intended to provide incentives and inducements to bolster the shipping industry and
not the business of stevedoring, as manifested in the sponsorship speech of Senator
Gil Puyat (Rollo, p. 26).
On analysis of petitioner-appellant's transactions, the Court of Tax Appeals found
that no evidence was adduced by petitioner-appellant that tugboats are passenger
and/or cargo vessels used in the shipping industry as an independent business. On
the contrary, petitioner-appellant's own evidence supports the view that it is
engaged as a stevedore, that is, the work of unloading and loading of a vessel in
port; and towing of barges containing cargoes is a part of petitioner's undertaking
as a stevedore. In fact, even its trade name is indicative that its sole and principal
business is stevedoring and lighterage, taxed under Section 191 of the National
Internal Revenue Code as a contractor, and not an entity which transports
passengers or freight for hire which is taxed under Section 192 of the same Code as
a common carrier by water (Decision, CTA Case No. 1484; Rollo, p. 25).
Under the circumstances, there appears to be no plausible reason to disturb the
findings and conclusion of the Court of Tax Appeals.
As a matter of principle, this Court will not set aside the conclusion reached by an
agency such as the Court of Tax Appeals, which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has been an abuse

or improvident exercise of authority (Reyes v. Commissioner of Internal Revenue, 24

SCRA 199 [1981]), which is not present in the instant case.
PREMISES CONSIDERED, the instant petition is DISMISSED and the decision of the
Court of Tax Appeals is AFFIRMED.
SO ORDERED.
Melencio-Herrera, Padilla and Sarmiento, JJ., concur.

Lutz v Araneta
G.R. No. L-7859

December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the

deceased
Antonio
Jayme
Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendantappellee.
Ernesto
J.
Gonzaga
for
appellant.
Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General
Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the
legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as
the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of
emergency, due to the threat to our industry by the imminent imposition of export
taxes upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of
its preferential position in the United States market"; wherefore, the national policy
was expressed "to obtain a readjustment of the benefits derived from the sugar
industry by the component elements thereof" and "to stabilize the sugar industry so
as to prepare it for the eventuality of the loss of its preferential position in the
United States market and the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on
the manufacture of sugar, on a graduated basis, on each picul of sugar
manufactured; while section 3 levies on owners or persons in control of lands
devoted to the cultivation of sugar cane and ceded to others for a consideration, on
lease or otherwise

a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the assessed
value of such land.
According to section 6 of the law
SEC. 6. All collections made under this Act shall accrue to a special fund in the
Philippine Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,'
and shall be paid out only for any or all of the following purposes or to attain any or
all of the following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual
loss of the preferntial position of the Philippine sugar in the United States market,
and ultimately to insure its continued existence notwithstanding the loss of that
market and the consequent necessity of meeting competition in the free markets of
the world;
Second, to readjust the benefits derived from the sugar industry by all of the
component elements thereof the mill, the landowner, the planter of the sugar
cane, and the laborers in the factory and in the field so that all might continue
profitably to engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to the
production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve their
living and working conditions: Provided, That the President of the Philippines may,
until the adjourment of the next regular session of the National Assembly, make the
necessary disbursements from the fund herein created (1) for the establishment
and operation of sugar experiment station or stations and the undertaking of
researchers (a) to increase the recoveries of the centrifugal sugar factories with the
view of reducing manufacturing costs, (b) to produce and propagate higher yielding
varieties of sugar cane more adaptable to different district conditions in the
Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the buying
quality of denatured alcohol from molasses for motor fuel, (e) to determine the
possibility of utilizing the other by-products of the industry, (f) to determine what
crop or crops are suitable for rotation and for the utilization of excess cane lands,
and (g) on other problems the solution of which would help rehabilitate and stabilize
the industry, and (2) for the improvement of living and working conditions in sugar
mills and sugar plantations, authorizing him to organize the necessary agency or
agencies to take charge of the expenditure and allocation of said funds to carry out
the purpose hereinbefore enumerated, and, likewise, authorizing the disbursement
from the fund herein created of the necessary amount or amounts needed for
salaries, wages, travelling expenses, equipment, and other sundry expenses of said
agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate
of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue
the sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for

the crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional
and void, being levied for the aid and support of the sugar industry exclusively,
which in plaintiff's opinion is not a public purpose for which a tax may be
constitutioally levied. The action having been dismissed by the Court of First
Instance, the plaintifs appealed the case directly to this Court (Judiciary Act, section
17).
The basic defect in the plaintiff's position is his assumption that the tax provided for
in Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the
Act, and particularly of section 6 (heretofore quoted in full), will show that the tax is
levied with a regulatory purpose, to provide means for the rehabilitation and
stabilization of the threatened sugar industry. In other words, the act is primarily an
exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of the
great industries of our nation, sugar occupying a leading position among its export
products; that it gives employment to thousands of laborers in fields and factories;
that it is a great source of the state's wealth, is one of the important sources of
foreign exchange needed by our government, and is thus pivotal in the plans of a
regime committed to a policy of currency stability. Its promotion, protection and
advancement, therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded that the
sugar industry should be stabilized in turn; and in the wide field of its police power,
the lawmaking body could provide that the distribution of benefits therefrom be
readjusted among its components to enable it to resist the added strain of the
increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed.
835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs.
Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in
Florida
The protection of a large industry constituting one of the great sources of the state's
wealth and therefore directly or indirectly affecting the welfare of so great a portion
of the population of the State is affected to such an extent by public interests as to
be within the police power of the sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar
industry is a matter of public concern, it follows that the Legislature may determine
within reasonable bounds what is necessary for its protection and expedient for its
promotion. Here, the legislative discretion must be allowed fully play, subject only to
the test of reasonableness; and it is not contended that the means provided in
section 6 of the law (above quoted) bear no relation to the objective pursued or are
oppressive in character. If objective and methods are alike constitutionally valid, no
reason is seen why the state may not levy taxes to raise funds for their prosecution
and attainment. Taxation may be made the implement of the state's police power
(Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs.
Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed.
579).

That the tax to be levied should burden the sugar producers themselves can hardly
be a ground of complaint; indeed, it appears rational that the tax be obtained
precisely from those who are to be benefited from the expenditure of the funds
derived from it. At any rate, it is inherent in the power to tax that a state be free to
select the subjects of taxation, and it has been repeatedly held that "inequalities
which result from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301
U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised
under the Sugar Stabilization Act, now in question, should be exclusively spent in
aid of the sugar industry, since it is that very enterprise that is being protected. It
may be that other industries are also in need of similar protection; that the
legislature is not required by the Constitution to adhere to a policy of "all or none."
As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744,
"if the law presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied;" and that
"the legislative authority, exerted within its proper field, need not embrace all the
evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L.
Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that
the devotion of tax money to experimental stations to seek increase of efficiency in
sugar production, utilization of by-products and solution of allied problems, as well
as to the improvements of living and working conditions in sugar mills or
plantations, without any part of such money being channeled directly to private
persons, constitutes expenditure of tax money for private purposes, (compare
Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered.
Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and
Concepcion, JJ., concur.

Philex Mining Corp v CIR

THIRD DIVISION
[G.R. No. 125704. August 28, 1998]
PHILEX
MINING
CORPORATION, petitioner, vs. COMMISSIONER
OF
INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX
APPEALS,respondents.
DECISION

ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals
promulgated on April 8, 1996 in CA-G.R. SP No. 36975 [1] affirming the Court of Tax
Appeals decision in CTA Case No. 4872 dated March 16, 1995 [2] ordering it to pay
the amount of P110,677,668.52 as excise tax liability for the period from the
2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from
August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of
1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to
settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st
and 2nd quarter of 1992 in the total amount of P123,821,982.52 computed as
follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
------------------- ----------------- ----------------- --------------------47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52
========== ========== =========== ===========[3]
In a letter dated August 20, 1992, [4] Philex protested the demand for payment of the
tax liabilities stating that it has pending claims for VAT input credit/refund for the
taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus
interest. Therefore, these claims for tax credit/refund should be applied against the
tax liabilities, citing our ruling in Commissioner of Internal Revenue v. Itogon-Suyoc
Mines, Inc.[5]
In reply, the BIR, in a letter dated September 7, 1992, [6] found no merit in Philexs
position. Since these pending claims have not yet been established or determined
with certainty, it follows that no legal compensation can take place. Hence, he BIR
reiterated its demand that Philex settle the amount plus interest within 30 days
from the receipt of the letter.
In view of the BIRs denial of the offsetting of Philexs claim for VAT input
credit/refund against its exercise tax obligation, Philex raised the issue to the Court

of Tax Appeals on November 6, 1992.[7] In the course of the proceedings, the BIR
issued a Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which,
applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered
the latters tax obligation of P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the
remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. Liquidated debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition,
p. 259). In the instant case, the claims of the Petitioner for VAT refund is still
pending litigation, and still has to be determined by this Court (C.T.A. Case No.
4707). A fortiori, the liquidated debt of the Petitioner to the government cannot,
therefore, be set-off against the unliquidated claim which Petitioner conceived to
exist in its favor (see Compaia General de Tabacos vs. French and Unson, No. 14027,
November 8, 1918, 39 Phil. 34).[8]
Moreover, the Court of Tax Appeals ruled that taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract. [9] The dispositive
portion of the CTA decision[10] provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and
Petitioner is hereby ORDERED to PAY the Respondent the amount
of P110,677,668.52 representing excise tax liability for the period from the
2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from
August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as
amended.
Aggrieved with the decision, Philex appealed the case before the Court of Appeals
docketed as CA-G.R. CV No. 36975.[11] Nonetheless, on April 8, 1996, the Court of
Appeals affirmed the Court of Tax Appeals observation. The pertinent portion of
which reads:[12]
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the
decision dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless, denied in a
Resolution dated July 11, 1996.[13]
However, a few days after the denial of its motion for reconsideration, Philex was
able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991
but also for 1992 and 1994, computed as follows: [14]
Period Covered By Tax Credit Certificate Date Of Issue Amount
Claims For Vat Number
refund/credit
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01

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

1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends that the
same should, ipso jure, off-set its excise tax liabilities[15] since both had already
become due and demandable, as well as fully liquidated; [16] hence, legal
compensation can properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple reason
that the government and the taxpayer are not creditors and debtors of each other.
[17]
There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity.[18] We find no cogent reason to deviate from the aforementioned
distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, [19] we
categorically held that taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the
claims that the taxpayer may have against the government. A person cannot refuse
to pay a tax on the ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of tax cannot await the results
of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines,
Inc. v. Commission on Audit,[20] which reiterated that:
x x x a taxpayer may not offset taxes due from the claims that he may have against
the government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and
a claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off.
Further, Philexs reliance on our holding in Commissioner of Internal Revenue v.
Itogon-Suyoc Mines, Inc., wherein we ruled that a pending refund may be set off
against an existing tax liability even though the refund has not yet been approved
by the Commissioner,[21] is no longer without any support in statutory law.
It is important to note that the premise of our ruling in the aforementioned case was
anchored on Section 51(d) of the National Revenue Code of 1939. However, when
the National Internal Revenue Code of 1977 was enacted, the same provision upon
which the Itogon-Suyoc pronouncement was based was omitted.[22] Accordingly, the
doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex.

Despite the foregoing rulings clearly adverse to Philexs position, it asserts that the
imposition of surcharge and interest for the non-payment of the excise taxes within
the time prescribed was unjustified. Philex posits the theory that it had no obligation
to pay the excise liabilities within the prescribed period since, after all, it still has
pending claims for VAT input credit/refund with BIR. [23]
We fail to see the logic of Philexs claim for this is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance.[24] Evidently, to countenance Philexs
whimsical reason would render ineffective our tax collection system. Too simplistic,
it finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the
ground that it has a pending tax claim for refund or credit against the government
which has not yet been granted. It must be noted that a distinguishing feature of a
tax is that it is compulsory rather than a matter of bargain. [25] Hence, a tax does not
depend upon the consent of the taxpayer.[26] If any payer can defer the payment of
taxes by raising the defense that it still has a pending claim for refund or credit, this
would adversely affect the government revenue system. A taxpayer cannot refuse
to pay his taxes when they fall due simply because he has a claim against the
government or that the collection of the tax is contingent on the result of the
lawsuit it filed against the government. [27] Moreover, Philex's theory that would
automatically apply its VAT input credit/refund against its tax liabilities can easily
give rise to confusion and abuse, depriving the government of authority over the
manner by which taxpayers credit and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with
the government is immaterial for the imposition of charges and penalties prescribed
under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge
is mandatory and the BIR is not vested with any authority to waive the collection
thereof.[28] The same cannot be condoned for flimsy reasons, [29] similar to the one
advanced by Philex in justifying its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106(e) [30] of the National Internal
Revenue Code of 1977, which requires the refund of input taxes within 60 days,
[31]
when it took five years for the latter to grant its tax claim for VAT input
credit/refund.[32]
In this regard, we agree with Philex. While there is no dispute that a claimant
has the burden of proof to establish the factual basis of his or her claim for tax
credit or refund,[33] however, once the claimant has submitted all the required
documents, it is the function of the BIR to assess these documents with purposeful
dispatch. After all, since taxpayers owe honesty to government it is but just that
government render fair service to the taxpayers. [34]
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the
refund of these erroneously paid taxes was only granted in 1996. Obviously, had the
BIR been more diligent and judicious with their duty, it could have granted the
refund earlier. We need not remind the BIR that simple justice requires the speedy

refund of wrongly-held taxes.[35] Fair dealing and nothing less, is expected by the
taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas
v. Court of Tax Appeals:[36]
"The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collectot kill
the 'hen that lays the golden egg.' And, in the order to maintain the general public's
trust and confidence in the Government this power must be used justly and not
treacherously."
Despite our concern with the lethargic manner by which the BIR handled Philex's tax
claim, it is a settled rule that in the performance of governmental function, the
State is not bound by the neglect of its agents and officers. Nowhere is this more
true than in the field of taxation.[37] Again, while we understand Philex's
predicament, it must be stressed that the same is not valid reason for the nonpayment of its tax liabilities.
To be sure, this is not state that the taxpayer is devoid of remedy against public
servants or employees especially BIR examiners who, in investigating tax claims are
seen to drag their feet needlessly. First, if the BIR takes time in acting upon the
taxpayer's claims for refund, the latter can seek judicial remedy before the Court of
Tax Appeals in the manner prescribed by law. [38] Second, if the inaction can be
characterized as willful neglect of duty, then recourse under the Civil Code and the
Tax Code can also be availed of.
Article 27 of the Civil Code provides:
"Art. 27. Any person suffering material or moral loss because a public servant or
employee refuses or neglects, without just cause, to perform his official duty may
file an action for damages and other relief against the latter, without prejudice to
any disciplinary action that may be taken."
More importantly, Section 269 (c) of the National Internal Revenue Act of 1997
states:
"xxx xxx xxx
(c) wilfully neglecting to give receipts, as by law required for any sum collected in
the performance of duty or wilfully neglecting to perform, any other duties enjoined
by law."
Simply put, both provisions abhor official inaction, willful neglect and unreasonable
delay in the performance of official duties. [39] In no uncertain terms must we stress
that every public employee or servant must strive to render service to the people
with utmost diligence and efficiency. Insolence and delay have no place in
government service. The BIR, being the government collecting arm, must and
should do no less. It simply cannot be apathetic and laggard in rendering service to
the taxpayer if it wishes to remain true to its mission of hastening the country's
development. We take judicial notice of the taxpayer's generally negative

perception towards the BIR; hence, it is up to the latter to prove its detractors
wrong.
In sum, while we can never condone the BIR's apparent callousness in performing
its duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The
adage "no one should take the law into his own hands" should have guided Philex's
action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED.
The assailed decision of the Court of Appeals dated April 8, 1996 is hereby
AFFIRMED.
SO ORDERED.
Narvasa, C.J., (Chairman), Kapunan and Purisima, JJ., concur.

Maceda v Macaraig
G.R. No. 88291 June 8, 1993
ERNESTO
M.
MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary,
Office of the President, HON. VICENTE JAYME, ETC., ET AL., respondents.
Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum
Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex.

NOCON, J.:
Just like lightning which does strike the same place twice in some instances, this
matter of indirect tax exemption of the private respondent National Power
Corporation (NPC) is brought to this Court a second time. Unfazed by the Decision
We promulgated on May 31, 1991 1 petitioner Ernesto Maceda asks this Court to
reconsider said Decision. Lest We be criticized for denying due process to the
petitioner. We have decided to take a second look at the issues. In the process, a
hearing was held on July 9, 1992 where all parties presented their respective
arguments. Etched in this Court's mind are the paradoxical claims by both petitioner
and private respondents that their respective positions are for the benefit of the
Filipino people.

I
A Chronological review of the relevant NPC laws, specially with respect to its tax
exemption provisions, at the risk of being repetitious is, therefore, in order.
On November 3, 1936, Commonwealth Act No. 120 was enacted creating the
National Power Corporation, a public corporation, mainly to develop hydraulic power
from all water sources in the Philippines. 2 The sum of P250,000.00 was
appropriated out of the funds in the Philippine Treasury for the purpose of
organizing the NPC and conducting its preliminary work. 3 The main source of funds
for the NPC was the flotation of bonds in the capital markets 4 and these bonds
. . . issued under the authority of this Act shall be exempt from the payment of all
taxes by the Commonwealth of the Philippines, or by any authority, branch, division
or political subdivision thereof and subject to the provisions of the Act of Congress,
approved March 24, 1934, otherwise known as the Tydings McDuffle Law, which
facts shall be stated upon the face of said bonds. . . . . 5
On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds
needed for the initial operations of the NPC and reiterating the provision of the
flotation of bonds as soon as the first construction of any hydraulic power project
was to be decided by the NPC Board. 6 The provision on tax exemption in relation to
the issuance of the NPC bonds was neither amended nor deleted.
On September 30, 1939, C.A. No. 495 was enacted removing the provision on the
payment of the bond's principal and interest in "gold coins" but adding that
payment could be made in United States dollars. 7 The provision on tax exemption in
relation to the issuance of the NPC bonds was neither amended nor deleted.
On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the
Philippines to guarantee, absolutely and unconditionally, as primary obligor, the
payment of any and all NPC loans. 8 He was also authorized to contract on behalf of
the NPC with the International Bank for Reconstruction and Development (IBRD) for
NPC loans for the accomplishment of NPC's corporate objectives 9 and for the
reconstruction and development of the economy of the country. 10 It was expressly
stated that:
Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges,
contributions and restrictions of the Republic of the Philippines, its provinces, cities
and municipalities. 11
On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the
first time, to incur other types of indebtedness, aside from indebtedness incurred by
flotation of bonds. 12 As to the pertinent tax exemption provision, the law stated as
follows:
To facilitate payment of its indebtedness, the National Power Corporation shall be
exempt from all taxes, duties, fees, imposts, charges, and restrictions of the
Republic of the Philippines, its provinces, cities and municipalities. 13

On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside
from the IBRD, the President of the Philippines was authorized to negotiate, contract
and guarantee loans with the Export-Import Bank of of Washigton, D.C., U.S.A., or
any other international financial institution. 14 The tax provision for repayment of
these loans, as stated in R.A. No. 357, was not amended.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax
exemption for real estate taxes. As enacted, the law states as follows:
To facilitate payment of its indebtedness, the National Power Corporation shall be
exempt from all taxes, except real property tax, and from all duties, fees, imposts,
charges, and restrictions of the Republic of the Philippines, its provinces, cities, and
municipalities. 15
On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to
be funded by the increased indebtedness 16 should bear the National Economic
Council's stamp of approval. The tax exemption provision related to the payment of
this total indebtedness was not amended nor deleted.
On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign
loans NPC was authorized to incur to US$100,000,000.00 from the
US$50,000,000.00 ceiling in R.A. No. 357. 17 The tax provision related to the
repayment of these loans was not amended nor deleted.
On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to
December 31, 2000. 18 All laws or provisions of laws and executive orders contrary
to said R.A. No. 2058 were expressly repealed. 19
On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public
corporation into a stock corporation with an authorized capital stock of
P100,000,000.00 divided into 1,000.000 shares having a par value of P100.00 each,
with said capital stock wholly subscribed to by the Government. 20 No tax exemption
was incorporated in said Act.
On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned
authorized capital stock to P250,000,000.00 with the increase to be wholly
subscribed by the Government. 21 No tax provision was incorporated in said Act.
On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased
again to P300,000,000.00, the increase to be wholly subscribed by the Government.
No tax provision was incorporated in said Act. 22
On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC,
C.A. No. 120, as amended. Declared as primary objectives of the nation were:
Declaration of Policy. Congress hereby declares that (1) the comprehensive
development, utilization and conservation of Philippine water resources for all
beneficial uses, including power generation, and (2) the total electrification of the
Philippines through the development of power from all sources to meet the needs of
industrial development and dispersal and the needs of rural electrification are
primary objectives of the nation which shall be pursued coordinately and supported

by all instrumentalities and agencies of the government, including the financial

institutions. 23
Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8
(a) (Authority to incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur
Foreign Loans).
As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as
follows:
The bonds issued under the authority of this subsection shall be exempt from the
payment of all taxes by the Republic of the Philippines, or by any authority, branch,
division or political subdivision thereof which facts shall be stated upon the face of
said bonds. . . . 24
As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section
8(b), states as follows:
The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials and supplies by the Corporation,
paid from the proceeds of any loan, credit or indebtedeness incurred under this Act,
shall also be exempt from all taxes, fees, imposts, other charges and restrictions,
including import restrictions, by the Republic of the Philippines, or any of its
agencies and political subdivisions. 25
A new section was added to the charter, now known as Section 13, R.A. No. 6395,
which declares the non-profit character and tax exemptions of NPC as follows:
The Corporation shall be non-profit and shall devote all its returns from its capital
investment, as well as excess revenues from its operation, for expansion. To enable
the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the
Corporation is hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges costs and service
fees in any court or administrative proceedings in which it may be a party,
restrictions and duties to the Republic of the Philippines, its provinces, cities, and
municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies
and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and
wharfage fees on import of foreign goods required for its operations and projects;
and
(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities,
municipalities and other government agencies and instrumentalities, on all

petroleum products used by the Corporation in the generation, transmission,

utilization, and sale of electric power. 26
On November 7, 1972, Presidential Decree No. 40 was issued declaring that the
electrification of the entire country was one of the primary concerns of the country.
And in connection with this, it was specifically stated that:
The setting up of transmission line grids and the construction of associated
generation facilities in Luzon, Mindanao and major islands of the country, including
the Visayas, shall be the responsibility of the National Power Corporation (NPC) as
the authorized implementing agency of the State. 27
xxx xxx xxx
It is the ultimate objective of the State for the NPC to own and operate as a single
integrated system all generating facilities supplying electric power to the entire
area embraced by any grid set up by the NPC. 28
On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to
enable it to fulfill its role under aforesaid P.D. No. 40. Its authorized capital stock
was raised to P2,000,000,000.00, 29 its total domestic indebtedness was pegged at
a maximum of P3,000,000,000.00 at any one time, 30 and the NPC was authorized
to borrow a total of US$1,000,000,000.00 31 in foreign loans.
The relevant tax exemption provision for these foreign loans states as follows:
The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials, supplies and services, by the
Corporation, paid from the proceeds of any loan, credit or indebtedness incurred
under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts,
other charges and restrictions, including import restrictions previously and presently
imposed, and to be imposed by the Republic of the Philippines, or any of its
agencies and political subdivisions.32 (Emphasis supplied)
Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:
(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to
the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities including the taxes, duties, fees,
imposts and other charges provided for under the Tariff and Customs Code of the
Philippines, Republic Act Numbered Nineteen Hundred Thirty-Seven, as amended,
and as further amended by Presidential Decree No. 34 dated October 27, 1972, and
Presidential Decree No. 69, dated November 24, 1972, and costs and service fees in
any court or administrative proceedings in which it may be a party;
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly by the Republic of the Philippines, its provinces, cities, municipalities and
other government agencies and instrumentalities, on all petroleum products used

by the Corporation in the generation, transmission, utilization and sale of electric

power. 33 (Emphasis supplied)
On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the
NPC's sale of electricity to its different customers. 34 No tax exemption provision was
amended, deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be
appropriated annually to cover the unpaid subscription of the Government in the
NPC authorized capital stock, which amount would be taken from taxes accruing to
the General Funds of the Government, proceeds from loans, issuance of bonds,
treasury bills or notes to be issued by the Secretary of Finance for this particular
purpose. 35
On May 27, 1976 P.D. No. 938 was issued
(I)n view of the accelerated expansion programs for generation and transmission
facilities which includes nuclear power generation, the present capitalization of
National Power Corporation (NPC) and the ceilings for domestic and foreign
borrowings are deemed insufficient; 36
xxx xxx xxx
(I)n the application of the tax exemption provisions of the Revised Charter, the nonprofit character of NPC has not been fully utilized because of restrictive
interpretation of the taxing agencies of the government on said provisions; 37
xxx xxx xxx
(I)n order to effect the accelerated expansion program and attain the declared
objective of total electrification of the country, further amendments of certain
sections of Republic Act No. 6395, as amended by Presidential Decrees Nos. 380,
395 and 758, have become imperative; 38
Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic
indebtedness ceiling was increased to P12,000,000,000.00, 40 the total foreign loan
ceiling was raised to US$4,000,000,000.00 41 and Section 13 of R.A. No. 6395, was
amended to read as follows:
The Corporation shall be non-profit and shall devote all its returns from its capital
investment as well as excess revenues from its operation, for expansion. To enable
the Corporation to pay to its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the
Corporation, including its subsidiaries, is hereby declared exempt from the payment
of all forms of taxes, duties, fees, imposts as well as costs and service fees including
filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings. 42
II
On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos.
882, 1177, 1931 and Executive Order No. 93 (S'86).

On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC
with regard to imports as follows:
WHEREAS, importations by certain government agencies, including governmentowned or controlled corporation, are exempt from the payment of customs duties
and compensating tax; and
WHEREAS, in order to reduce foreign exchange spending and to protect domestic
industries, it is necessary to restrict and regulate such tax-free importations.
NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue
of the powers vested in me by the Constitution, and do hereby decree and order the
following:
Sec. 1. All importations of any government agency, including government-owned or
controlled corporations which are exempt from the payment of customs duties and
internal revenue taxes, shall be subject to the prior approval of an Inter-Agency
Committee which shall insure compliance with the following conditions:
(a) That no such article of local manufacture are available in sufficient quantity and
comparable quality at reasonable prices;
(b) That the articles to be imported are directly and actually needed and will be
used exclusively by the grantee of the exemption for its operations and projects or
in the conduct of its functions; and
(c) The shipping documents covering the importation are in the name of the grantee
to whom the goods shall be delivered directly by customs authorities.
xxx xxx xxx
Sec. 3. The Committee shall have the power to regulate and control the tax-free
importation of government agencies in accordance with the conditions set forth in
Section 1 hereof and the regulations to be promulgated to implement the provisions
of this Decree. Provided, however, That any government agency or governmentowned or controlled corporation, or any local manufacturer or business firm
adversely affected by any decision or ruling of the Inter-Agency Committee may file
an appeal with the Office of the President within ten days from the date of notice
thereof. . . . .
xxx xxx xxx
Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of all
general and special laws and decrees are hereby amended accordingly.
xxx xxx xxx
On July 30, 1977, P.D. 1177 was issued as it was
. . . declared the policy of the State to formulate and implement a National Budget
that is an instrument of national development, reflective of national objectives,
strategies and plans. The budget shall be supportive of and consistent with the

socio-economic development plan and shall be oriented towards the achievement of

explicit objectives and expected results, to ensure that funds are utilized and
operations are conducted effectively, economically and efficiently. The national
budget shall be formulated within a context of a regionalized government structure
and of the totality of revenues and other receipts, expenditures and borrowings of
all levels of government-owned or controlled corporations. The budget shall likewise
be prepared within the context of the national long-term plan and of a long-term
budget program. 43
In line with such policy, the law decreed that
All units of government, including government-owned or controlled corporations,
shall pay income taxes, customs duties and other taxes and fees are imposed under
revenues laws: provided, that organizations otherwise exempted by law from the
payment of such taxes/duties may ask for a subsidy from the General Fund in the
exact amount of taxes/duties due: provided, further, that a procedure shall be
established by the Secretary of Finance and the Commissioner of the Budget,
whereby such subsidies shall automatically be considered as both revenue and
expenditure of the General Fund. 44
The law also declared that
[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which
are inconsistent with the provisions of the Decree are hereby repealed and/or
modified accordingly. 45
On July 11, 1984, most likely due to the economic morass the Government found
itself in after the Aquino assassination, P.D. No. 1931 was issued to reiterate that:
WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant of
tax privileges to any government-owned or controlled corporation and all other units
of government; 46
and since there was a
. . . need for government-owned or controlled corporations and all other units of
government enjoying tax privileges to share in the requirements of development,
fiscal or otherwise, by paying the duties, taxes and other charges due from them. 47
it was decreed that:
Sec. 1. The provisions of special on general law to the contrary notwithstanding, all
exemptions from the payment of duties, taxes, fees, imposts and other charges
heretofore granted in favor of government-owned or controlled corporations
including their subsidiaries, are hereby withdrawn.
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under Presidential
Decree No. 776, is hereby empowered to restore, partially or totally, the exemptions
withdrawn by Section 1 above, any applicable tax and duty, taking into account,
among others, any or all of the following:

1) The effect on the relative price levels;

2) The relative contribution of the corporation to the revenue generation effort;
3) The nature of the activity in which the corporation is engaged in; or
4) In general the greater national interest to be served.
xxx xxx xxx
Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws,
decrees, executive orders, administrative orders, rules, regulations or parts thereof
which are inconsistent with this Decree are hereby repealed, amended or modified
accordingly.
On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct
presidential restoration or grant of tax exemption to other government and private
entities without benefit of review by the Fiscal Incentives Review Board, to wit:
WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and
October 14, 1984, respectively, withdrew the tax and duty exemption privileges,
including the preferential tax treatment, of government and private entities with
certain exceptions, in order that the requirements of national economic
development, in terms of fiscals and other resources, may be met more adequately;
xxx xxx xxx
WHEREAS, in addition to those tax and duty exemption privileges were restored by
the Fiscal Incentives Review Board (FIRB), a number of affected entities,
government and private, had their tax and duty exemption privileges restored or
granted by Presidential action without benefit or review by the Fiscal Incentives
Review Board (FIRB);
xxx xxx xxx
Since it was decided that:
[A]ssistance to government and private entities may be better provided where
necessary by explicit subsidy and budgetary support rather than tax and duty
exemption privileges if only to improve the fiscal monitoring aspects of government
operations.
It was thus ordered that:
Sec. 1. The Provisions of any general or special law to the contrary notwithstanding,
all tax and duty incentives granted to government and private entities are hereby
withdrawn, except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective internation agreement to which the Government of
the Republic of the Philippines is a signatory;
c) those enjoyed by enterprises registered with:

(i) the Board of Investment pursuant to Presidential Decree No. 1789, as amended;
(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66 as
amended;
(iii) the Philippine Veterans Investment Development Corporation
Authority pursuant to Presidential Decree No. 538, was amended.

Industrial

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter
of Instructions No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation of the Fiscal
Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No.
776, as amended, is hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax and/or duty exemption that may be
restored;
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date of period of effectivity of the restoration of tax and/or duty
exemption;
e) formulate and submit to the President for approval, a complete system for the
grant of subsidies to deserving beneficiaries, in lieu of or in combination with the
restoration of tax and duty exemptions or preferential treatment in taxation,
indicating the source of funding therefor, eligible beneficiaries and the terms and
conditions for the grant thereof taking into consideration the international
commitment of the Philippines and the necessary precautions such that the grant of
subsidies does not become the basis for countervailing action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review
Board shall take into account any or all of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue generation effort;
c) nature of the activity the beneficiary is engaged; and
d) in general, the greater national interest to be served.

xxx xxx xxx

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof
inconsistent with this Executive Order are hereby repealed or modified accordingly.
E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules
and regulations, to be issued by the Ministry of Finance. 49 Said rules and
regulations were promulgated and published in the Official Gazette
on February 23, 1987. These became effective on the 15th day after
promulgation 50 in the Official Gasetter, 51 which 15th day was March 10, 1987.
III
Now to some definitions. We refer to the very simplistic approach that all would-be
lawyers, learn in their TAXATION I course, which fro convenient reference, is as
follows:
Classifications or kinds of Taxes:
According to Persons who pay or who bear the burden:
a. Direct Tax the where the person supposed to pay the tax really pays
it. WITHOUT transferring the burden to someone else.
Examples: Individual income tax, corporate income tax, transfer taxes (estate tax,
donor's tax), residence tax, immigration tax
b. Indirect Tax that where the tax is imposed upon goods BEFORE reaching the
consumer who ultimately pays for it, not as a tax, but as a part of the purchase
price.
Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT)
and the tariff and customs indirect taxes (import duties, special import tax and
other dues) 52
IV
To simply matter, the issues raised by petitioner in his motion for reconsideration
can be reduced to the following:
(1) What kind of tax exemption privileges did NPC have?
(2) For what periods in time were these privileges being enjoyed?
(3) If there are taxes to be paid, who shall pay for these taxes?
V
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as
the phrase "all forms of taxes etc.," in its section 10, amending Section 13, R.A. No.
6395, as amended by P.D. No. 380, does not expressly include "indirect taxes."
His point is not well-taken.

A chronological review of the NPC laws will show that it has been the lawmaker's
intention that the NPC was to be completely tax exempt from all forms of taxes
direct and indirect.
NPC's tax exemptions at first applied to the bonds it was authorized to float to
finance its operations upon its creation by virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for foreign financing, any
loans obtained were to be completely tax exempt.
After the NPC was authorized to borrow from other sources of funds aside
issuance of bonds it was again specifically exempted from all types of taxes "to
facilitate payment of its indebtedness." Even when the ceilings for domestic and
foreign borrowings were periodically increased, the tax exemption privileges of the
NPC were maintained.
NPC's tax exemption from real estate taxes was, however, specifically withdrawn by
Rep. Act No. 987, as above stated. The exemption was, however, restored by R.A.
No. 6395.
Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax
exemptions allowed NPC. Its section 13(d) is the starting point of this bone of
contention among the parties. For easy reference, it is reproduced as follows:
[T]he Corporation is hereby declared exempt:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts and all other charges imposed by the
Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale of electric power.
P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now
reads as follows:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly by the Republic of the Philippines, its provinces, cities, municipalities and
other government agencies and instrumentalities, on all petroleum products used
by the Corporation in the generation, transmission, utilization and sale of electric
power. (Emphasis supplied)
Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very
simple paragraph as follows:
The Corporation shall be non-profit and shall devote all its returns from its capital
investment as well as excess revenues from its operation, for expansion. To enable
the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the
Corporation, including its subsidiaries, is hereby declared exempt from the payment

of ALL FORMS OF taxes, duties, fees, imposts as well as costs and service fees
including filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings. (Emphasis supplied)
Petitioner reminds Us that:
[I]t
must
be
borne
in
mind
that
Presidential
Decree
Nos.
380
and 938 were issued by one man, acting as such the Executive and Legislative. 53
xxx xxx xxx
[S]ince both presidential decrees were made by the same person, it would have
been very easy for him to retain the same or similar language used in P.D. No. 380
P.D. No. 938 if his intention were to preserve the indirect tax exemption of NPC. 54
Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no
matter what his fault were. It should be noted that section 13, R.A. No. 6395,
provided for tax exemptions for the following items:
13(a) : court or administrative proceedings;
13(b) : income, franchise, realty taxes;
13(c) : import of foreign goods required for its operations and projects;
13(d) : petroleum products used in generation of electric power.
P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF
TAXES, ETC.,", included 13(a) under the "as well as" clause and added PNOC
subsidiaries as qualified for tax exemptions.
This is the only conclusion one can arrive at if he has read all the NPC laws in the
order of enactment or issuance as narrated above in part I hereof. President Marcos
must have considered all the NPC statutes from C.A. No. 120 up to its latest
amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came up 55 with a
very simple Section 13, R.A. No. 6395, as amended by P.D. No. 938.
One common theme in all these laws is that the NPC must be enable to pay its
indebtedness 56 which, as of P.D. No. 938, was P12 Billion in total domestic
indebtedness, at any one time, and U$4 Billion in total foreign loans at any one
time. The NPC must be and has to be exempt from all forms of taxes if this goal is to
be achieved.
By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be
remembered that to pay the government share in its capital stock P.D. No. 758 was
issued mandating that P200 Million would be appropriated annually to cover the
said unpaid subscription of the Government in NPC's authorized capital stock. And
significantly one of the sources of this annual appropriation of P200 million is TAX
MONEY accruing to the General Fund of the Government. It does not stand to reason
then that former President Marcos would order P200 Million to be taken partially or
totally from tax money to be used to pay the Government subscription in the NPC,
on one hand, and then order the NPC to pay all its indirect taxes, on the other.

The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c)
and (d) into the phrase "All FORMS OF" is supported by the fact that he did not do
the same for the tax exemption provision for the foreign loans to be incurred.
The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as
follows:
The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials and supplies by the Corporation,
paid from the proceeds of any loan, credit or indebtedness incurred under this Act,
shall also be exempt from all taxes, fees, imposts, other charges and restrictions,
including import restrictions, by the Republic of the Philippines, or any of its
agencies and political subdivisions. 57
The same was amended by P.D. No. 380 as follows:
The loans, credits and indebtedness contracted this subsection and the payment of
the principal, interest and other charges thereon, as well as the importation of
machinery, equipment, materials, supplies and services, by the Corporation, paid
from the proceeds of any loan, credit or indebtedness incurred under this Act, shall
also be exempt from all direct and indirect taxes, fees, imposts, other charges and
restrictions, including import restrictions previously and presently imposed, and to
be imposed by the Republic of the Philippines, or any of its agencies and political
subdivisions. 58(Emphasis supplied)
P.D. No. 938 did not amend the same 59 and so the tax exemption provision in
Section 8 (b), R.A. No. 6395, as amended by P.D. No. 380, still stands. Since the
subject matter of this particular Section 8 (b) had to do only with loans and
machinery imported, paid for from the proceeds of these foreign loans, THERE WAS
NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax exemption stood
as
is

with
the
express
mention
of
"direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege
extended to "taxes, fees, imposts, other charges . . . to be imposed" in the future
surely, an indication that the lawmakers wanted the NPC to be exempt from ALL
FORMS of taxes direct and indirect.
It is crystal clear, therefore, that NPC had been granted tax exemption privileges for
both direct and indirect taxes under P.D. No. 938.
VI
Five (5) years on into the now discredited New Society, the Government decided to
rationalize government receipts and expenditures by formulating and implementing
a National Budget. 60 The NPC, being a government owned and controlled
corporation had to be shed off its tax exemption status privileges under P.D. No.
1177. It was, however, allowed to ask for a subsidy from the General Fund in the
exact amount of taxes/duties due.

Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation
privileges. It allowed, however, NPC to appeal said repeal with the Office of the
President and to avail of tax-free importation privileges under its Section 1, subject
to the prior approval of an Inter-Agency Committed created by virtue of said P.D. No.
882. It is presumed that the NPC, being the special creation of the State, was
allowed to continue its tax-free importations.
This Court notes that petitioner brought to the attention of this Court, the matter of
the abolition of NPC's tax exemption privileges by P.D. No. 1177 61 only in his
Common Reply/Comment to private Respondents' "Opposition" and "Comment" to
Motion for Reconsideration, four (4) months AFTER the motion for Reconsideration
had been filed. During oral arguments heard on July 9, 1992, he proceeded to
discuss this tax exemption withdrawal as explained by then Secretary of Justice
Vicente Abad Santos in opinion No. 133 (S '77). 62 A careful perusal of petitioner's
senate Blue Ribbon Committee Report No. 474, the basis of the petition at bar, fails
to yield any mention of said P.D. No. 1177's effect on NPC's tax exemption
privileges. 63 Applying by analogy Pulido vs. Pablo, 64 the court declares that the
matter of P.D. No. 1177 abolishing NPC's tax exemption privileges was not
seasonably invoked 65 by the petitioner.
Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the
NPC tax exemption privileges as this statute has been reiterated twice in P.D. No.
1931. The express repeal of tax privileges of any government-owned or controlled
corporation (GOCC). NPC included, was reiterated in the fourth whereas clause of
P.D. No. 1931's preamble. The subsidy provided for in Section 23, P.D. No. 1177,
being inconsistent with Section 2, P.D. No. 1931, was deemed repealed as the Fiscal
Incentives Revenue Board was tasked with recommending the partial or total
restoration of tax exemptions withdrawn by Section 1, P.D. No. 1931.
The records before Us do not indicate whether or not NPC asked for the subsidy
contemplated in Section 23, P.D. No. 1177. Considering, however, that under
Section 16 of P.D. No. 1177, NPC had to submit to the Office of the President its
request for the P200 million mandated by P.D. No. 758 to be appropriated annually
by the Government to cover its unpaid subscription to the NPC authorized capital
stock and that under Section 22, of the same P.D. No. NPC had to likewise submit to
the Office of the President its internal operating budget for review due to capital
inputs of the government (P.D. No. 758) and to the national government's guarantee
of the domestic and foreign indebtedness of the NPC, it is clear that NPC was
covered by P.D. No. 1177.
There is reason to believe that NPC availed of subsidy granted to exempt GOCC's
that suddenly found themselves having to pay taxes. It will be noted that Section
23, P.D. No. 1177, mandated that the Secretary of Finance and the Commissioner of
the Budget had to establish the necessary procedure to accomplish the tax
payment/tax subsidy scheme of the Government. In effect, NPC, did not put any
cash to pay any tax as it got from the General Fund the amounts necessary to pay
different revenue collectors for the taxes it had to pay.
In his memorandum filed July 16, 1992, petitioner submits:

[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty
and tax exemptions, whether direct or indirect. And so there was nothing to be
withdrawn or to be restored under P.D. No. 1931, issued on June 11, 1984. This is
evident from sections 1 and 2 of said P.D. No. 1931, which reads:
"Section 1. The provisions of special or general law to the contrary notwithstanding,
all exemptions from the payment of duties, taxes, fees, imports and other charges
heretofore granted in favor of government-owned or controlled corporations
including their subsidiaries are hereby withdrawn."
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under P.D. No. 776,
is hereby empowered to restore partially or totally, the exemptions withdrawn by
section 1 above. . . .
Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it
had already lost all its tax exemptions privilege with the issuance of P.D. No. 1177
seven (7) years earlier or on July 30, 1977, there were no tax exemptions to be
withdrawn by section 1 which could later be restored by the Minister of Finance
upon the recommendation of the FIRB under Section 2 of P.D. No. 1931.
Consequently, FIRB resolutions No. 10-85, and 1-86, were all illegally and validly
issued since FIRB acted beyond their statutory authority by creating and not merely
restoring the tax exempt status of NPC. The same is true for FIRB Res. No. 17-87
which restored NPC's tax exemption under E.O. No. 93 which likewise abolished all
duties and tax exemptions but allowed the President upon recommendation of the
FIRB to restore those abolished.
The Court disagrees.
Applying by analogy the weight of authority that:
When a revised and consolidated act re-enacts in the same or substantially the
same terms the provisions of the act or acts so revised and consolidated, the
revision and consolidation shall be taken to be a continuation of the former act or
acts, although the former act or acts may be expressly repealed by the revised and
consolidated
act;
and
all
rights
and liabilities under the former act or acts are preserved and may be enforced. 66
the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first
half of Section 23, P.D. No. 1177, on withdrawal of tax exemption privileges of all
GOCC's said Section 1, P.D. No. 1931 was deemed to be a continuation of the first
half of Section 23, P.D. No. 1177, although the second half of Section 23, P.D. No.
177, on the subsidy scheme for former tax exempt GOCCs had been expressly
repealed by Section 2 with its institution of the FIRB recommendation of partial/total
restoration of tax exemption privileges.
The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the
same NPC tax exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC
could no longer obtain a subsidy for the taxes it had to pay. It could, however, under
P.D. No. 1931, ask for a total restoration of its tax exemption privileges, which, it

did, and the same were granted under FIRB Resolutions Nos. 10-85
approved by the Minister of Finance.

67

and 1-86

68

as

Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and

1-86 were both legally and validly issued by the FIRB pursuant to P.D. No. 1931.
FIRB did not created NPC's tax exemption status but merely restored it. 69
Some quarters have expressed the view that P.D. No. 1931 was illegally issued
under the now rather infamous Amendment No. 6 70 as there was no showing that
President Marcos' encroachment on legislative prerogatives was justified under the
then prevailing condition that he could legislate "only if the Batasang Pambansa
'failed or was unable to act inadequately on any matter that in his judgment
required immediate action' to meet the 'exigency'. 71
Actually under said Amendment No. 6, then President Marcos could issue decrees
not only when the Interim Batasang Pambansa failed or was unable to act
adequately on any matter for any reason that in his (Marcos') judgment required
immediate action, but also when there existed a grave emergency or a threat or
thereof. It must be remembered that said Presidential Decree was issued only
around nine (9) months after the Philippines unilaterally declared a moratorium on
its foreign debt payments 72 as a result of the economic crisis triggered by loss of
confidence in the government brought about by the Aquino assassination. The
Philippines was then trying to reschedule its debt payments. 73 One of the big
borrowers was the NPC 74 which had a US$ 2.1 billion white elephant of a Bataan
Nuclear Power Plant on its back. 75 From all indications, it must have been this grave
emergency of a debt rescheduling which compelled Marcos to issue P.D. No. 1931,
under his Amendment 6 power. 76
The rule, therefore, that under the 1973 Constitution "no law granting a tax
exemption shall be passed without the concurrence of a majority of all the members
of the Batasang Pambansa" 77 does not apply as said P.D. No. 1931 was not passed
by the Interim Batasang Pambansa but by then President Marcos under His
Amendment No. 6 power.
P.D. No. 1931 was, therefore, validly issued by then President Marcos under his
Amendment No. 6 authority.
Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this
time, President Aquino. Its section 2 allowed the NPC to apply for the restoration of
its tax exemption privileges. The same was granted under FIRB Resolution No. 1787 78 dated June 24, 1987 which restored NPC's tax exemption privileges effective,
starting March 10, 1987, the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the President on October 5,
1987. 79 There is no indication, however, from the records of the case whether or
not similar approvals were given by then President Marcos for FIRB Resolutions Nos.
10-85 and 1- 86. This has led some quarters to believe that a "travesty of justice"
might have occurred when the Minister of Finance approved his own
recommendation as Chairman of the Fiscal Incentives Review Board as what

happened inZambales Chromate vs. Court of Appeals 80 when the Secretary of

Agriculture and Natural Resources approved a decision earlier rendered by him
when he was the Director of Mines, 81 and in Anzaldo vs. Clave 82 where Presidential
Executive Assistant Clave affirmed, on appeal to Malacaang, his own decision as
Chairman of the Civil Service Commission. 83
Upon deeper analysis, the question arises as to whether one can talk about "due
process" being violated when FIRB Resolutions Nos. 10-85 and 1-86 were approved
by the Minister of Finance when the same were recommended by him in his capacity
as Chairman of the Fiscal Incentives Review Board. 84
In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining
groups and scientist-doctors, respectively. Thus, there was a need for procedural
due process to be followed.
In the case of the tax exemption restoration of NPC, there is no other comparable
entity not even a single public or private corporation whose rights would be
violated if NPC's tax exemption privileges were to be restored. While there might
have been a MERALCO before Martial Law, it is of public knowledge that the
MERALCO generating plants were sold to the NPC in line with the State policy that
NPC was to be the State implementing arm for the electrification of the entire
country. Besides, MERALCO was limited to Manila and its environs. And as of 1984,
there was no more MERALCO as a producer of electricity which could have
objected to the restoration of NPC's tax exemption privileges.
It should be noted that NPC was not asking to be granted tax exemption privileges
for the first time. It was just asking that its tax exemption privileges be restored. It
is for these reasons that, at least in NPC's case, the recommendation and approval
of NPC's tax exemption privileges under FIRB Resolution Nos. 10-85 and 1-86, done
by the same person acting in his dual capacities as Chairman of the Fiscal
Incentives Review Board and Minister of Finance, respectively, do not violate
procedural due process.
While as above-mentioned, FIRB Resolution No. 17-87 was approved by President
Aquino on October 5, 1987, the view has been expressed that President Aquino, at
least with regard to E.O. 93 (S'86), had no authority to sub-delegate to the FIRB,
which was allegedly not a delegate of the legislature, the power delegated to her
thereunder.
A misconception must be cleared up.
When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive
and Legislative powers. Thus, there was no power delegated to her, rather it was
she who was delegating her power. She delegated it to the FIRB, which, for
purposes of E.O No. 93 (S'86), is a delegate of the legislature. Clearly, she was not
sub-delegating her power.
And E.O. No. 93 (S'86), as a delegating law, was complete in itself it set forth the
policy to be carried out 85 and it fixed the standard to which the delegate had to

conform in the performance of his functions, 86 both qualities having been

enunciated by this Court in Pelaez vs. Auditor General. 87
Thus, after all has been said, it is clear that the NPC had its tax exemption privileges
restored from June 11, 1984 up to the present.
VII
The next question that projects itself is who pays the tax?
The answer to the question could be gleamed from the manner by which the
Commissaries of the Armed Forces of the Philippines sell their goods.
By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and
their defendants but groceries and other goods free of all taxes and duties if bought
from any AFP Commissaries.
In practice, the AFP Commissary suppliers probably treat the unchargeable
specific, ad valorem and other taxes on the goods earmarked for AFP Commissaries
as an added cost of operation and distribute it over the total units of goods sold as
it would any other cost. Thus, even the ordinary supermarket buyer probably pays
for the specific,ad valorem and other taxes which theses suppliers do not charge
the AFP Commissaries. 89
IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies
have to absorb the taxes they add to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as May 14, 1954, the Secretary of
Justice renders an opinion, 90wherein he stated and We quote:
xxx xxx xxx
Republic Act No. 358 exempts the National Power Corporation from "all taxes,
duties, fees, imposts, charges, and restrictions of the Republic of the Philippines and
its provinces, cities, and municipalities." This exemption is broad enough to include
all taxes, whether direct or indirect, which the National Power Corporation may be
required to pay, such as the specific tax on petroleum products. That it is indirect or
is of no amount [should be of no moment], for it is the corporation that ultimately
pays it. The view which refuses to accord the exemption because the tax is first
paid by the seller disregards realities and gives more importance to form than to
substance. Equity and law always exalt substance over from.
xxx xxx xxx
Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as
knowledge that many impositions taxpayers have to pay are in the nature of
indirect taxes. To limit the exemption granted the National Power Corporation to
direct taxes notwithstanding the general and broad language of the statue will be to
thwrat the legislative intention in giving exemption from all forms of taxes and
impositions without distinguishing between those that are direct and those that are
not. (Emphasis supplied)

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 beheld 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 could they 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 the 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.
It should be noted at this point in time that the whole issue of who WILL pay these
indirect taxes HAS BEEN RENDERED moot and academic by E.O. No. 195 issued on
June 16, 1987 by virtue of which the ad valorem tax rate on bunker fuel oil was
reduced to ZERO (0%) PER CENTUM. Said E.O. no. 195 reads as follows:
EXECUTIVE ORDER NO. 195
AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF CERTAIN PETROLEUM
PRODUCTS.
xxx xxx xxx
Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as
amended, is hereby amended to read as follows:
Par. (b) For products subject to ad valorem tax only:
PRODUCT AD VALOREM TAX RATE
1. . . .
2. . . .
3. . . .
4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or
less the same generating power 0%
xxx xxx xxx
Sec. 3. This Executive Order shall take effect immediately.

Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen
hundred and eighty-seven. (Emphasis supplied)
The oil companies can now deliver bunker fuel oil to NPC without having to worry
about who is going to bear the economic burden of the ad valorem taxes. What this
Court will now dispose of are petitioner's complaints that some indirect tax money
has been illegally refunded by the Bureau of Internal Revenue to the NPC and that
more claims for refunds by the NPC are being processed for payment by the BIR.
A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in
favor of the NPC last July 7, 1986 for P58.020.110.79 which were for "erroneously
paid specific and ad valorem taxes during the period from October 31, 1984 to April
27, 1985. 91 Petitioner asks Us to declare this Tax Credit Memo illegal as the PNC did
not have indirect tax exemptions with the enactment of P.D. No. 938. As We have
already ruled otherwise, the only questions left are whether NPC Is entitled to a tax
refund for the tax component of the price of the bunker fuel oil purchased from
Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properly refunded
the amount to NPC.
After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs NPC included, it was only on May 8, 1985 when the
BIR issues its letter authority to the NPC authorizing it to withdraw tax-free bunker
fuel oil from the oil companies pursuant to FIRB Resolution No. 10-85. 92 Since the
tax exemption restoration was retroactive to June 11, 1984 there was a need.
therefore, to recover said amount as Caltex (PhiIs.) Inc. had already paid the BIR the
specific and ad valorem taxes on the bunker oil it sold NPC during the period above
indicated and had billed NPC correspondingly. 93 It should be noted that the NPC, in
its letter-claim dated September 11, 1985 to the Commissioner of the Bureau of
Internal Revenue DID NOT CATEGORICALLY AND UNEQUIVOCALLY STATE that itself
paid the P58.020,110.79 as part of the bunker fuel oil price it purchased from Caltex
(Phils) Inc. 94
The law governing recovery of erroneously or illegally, collected taxes is section 230
of the National Internal Revenue Code of 1977, as amended which reads as follows:
Sec. 230. Recover 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, 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.
xxx xxx xxx
Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, 95 the
Commissioner correctly issued the Tax Credit Memo in view of NPC's indirect tax
exemption.
Petitioner, however, asks Us to restrain the Commissioner from acting favorably on
NPC's claim for P410.580,000.00 which represents specific and ad valorem taxes
paid by the oil companies to the BIR from June 11, 1984 to the early part of 1986. 96
A careful examination of petitioner's pleadings and annexes attached thereto does
not reveal when the alleged claim for a P410,580,000.00 tax refund was filed. It is
only stated In paragraph No. 2 of the Deed of Assignment 97executed by and
between NPC and Caltex (Phils.) Inc., as follows:
That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of Internal
Revenue amounting to P442,887,716.16. P58.020,110.79 of which is due to
Assignor's oil purchases from the Assignee (Caltex [Phils.] Inc.)
Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot
restrain the BIR from refunding said amount because of Our ruling that NPC has
both direct and indirect tax exemption privileges. Neither can We order the BIR to
refund said amount to NPC as there is no pending petition for review on certiorariof
a suit for its collection before Us. At any rate, at this point in time, NPC can no
longer file any suit to collect said amount EVEN IF lt has previously filed a claim with
the BIR because it is time-barred under Section 230 of the National Internal
Revenue Code of 1977. as amended, which states:
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 afterpayment. . . . (Emphasis supplied)
The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that
payment by NPC for the amount of P410,580,000.00 had been made on said date. it
is clear that more than two (2) years had already elapsed from said date. At the
same time, We should note that there is no legal obstacle to the BIR granting, even
without a suit by NPC, the tax credit or refund claimed by NPC, assuming that NPC's
claim had been made seasonably, and assuming the amounts covered had actually
been paid previously by the oil companies to the BIR.
WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of
petitioner is hereby DENIED for lack of merit and the decision of this Court
promulgated on May 31, 1991 is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., Feliciano, Bidin, Regalado, Romero, Bellosillo and Melo, JJ., concur.
Padilla and Quiason, JJ. took no part.

SSS v City of Bacolod

G.R. No. L-35726 July 21, 1982
SOCIAL
SECURITY
SYSTEM, petitioner,
vs.
CITY OF BACOLOD and MIGUEL REYNALDO as City Treasurer of Bacolod
City, respondents.
Filemon Q. Almazan and Perlita C. Triatirona for petitioner.
Catalino A. Dayon (City Legal Officer) for respondents.

ESCOLIN, J.:
We set aside the decision of the Court of First instance of Negros Occidental in Civil
Case No. 5980, entitled "Social Security System versus City of Bacolod and Miguel
Reynaldo, as City Treasurer of Bacolod City," which sustained the forfeiture of
certain real properties of the Social Security System in favor of the City of Bacolod
for delinquency in payment of real estate taxes.
Petitioner Social Security System is a government agency created under Republic
Act No. 1161, whose primary function is to "develop, establish gradually and perfect
a social security system which shall be suitable to the needs of the people
throughout the Philippines, and shall provide protection against the hazards of
disability, sickness, old age, and death." 1
In pursuance of its operations, petitioner, maintains a number of regional offices,
one of which is the five-storey building, known as SSS Building in Bacolod City,
occupying four parcels of land. In 1970, said lands and building were assessed for
taxation at P1,744,840.00.
For petitioner's failure to pay the realty taxes for the years 1968, 1969 and 1970
which, including penalties, amounted to P104,956.06, respondent city sometime in
early 1970 levied upon said lands and building; and on April 3, 1970, it declared
said properties forfeited in its favor.
In protest thereto, petitioner addressed a letter dated July 27, 1970 to the City
Mayor of Bacolod, through respondent city treasurer, seeking reconsideration of the
forfeiture proceedings on the ground that petitioner, being a government-owned
and controlled corporation, is exempt from payment of real estate taxes.
When no action thereon was taken by respondent city treasurer, petitioner filed an
action in the Court of First Instance of Negros Occidental for nullification of the
forfeiture proceedings. In the same complaint it sought the issuance of a writ of

preliminary injunction to restrain respondent city from consolidating its ownership

over the forfeited properties, and this writ was issued by the court upon petitioner's
posting of a cash bond in the amount of P105,000.00.
After due hearing, the lower court rendered a decision declaring
... the properties of the Social Security System not exempt from the payment of real
property tax inasmuch as the SSS does not fall under the provisions of Section 29 of
the Charter of the City of Bacolod, and considering further that there is no law which
exempts said entity from taxes, the same should therefore be subject to taxation
like any other corporation in accordance with Section 27 of the City Charter of
Bacolod City. The complaint is hereby dismissed with costs against the plaintiff.
Hence, this petition.
We find the petition meritorious. Section 29 of the Commonwealth Act No. 326,
otherwise known as the Charter of the City of Bacolod, provides as follows:
|plain SECTION 29. Exemption from taxation. Lands and buildings owned by the
United States of America, the Commonwealth of the Philippines, the City of Bacolod,
the Province of Occidental Negros, and cemeteries, churches and their adjacent
parsonages and convents, and lands, buildings and improvements used exclusively
for religious, charitable, scientific or educational purposes, and not for profit, shall
be exempt from taxation; but such exemptions shall not extend to lands or buildings
held for investment, though the income therefrom be devoted to religious,
charitable, scientific or educational purposes.
The court a quo restricted the scope of the exemption contemplated by the above
section exclusively to those government agencies, entities and instrumentalities
exercising governmental or sovereign functions. It relied on the ruling laid down in
"NACOCO versus Bacani, et al." 2 to the effect that the National Coconut
Corporation, a government agency performing mere ministrant functions, is not
included in the term "Government of the Republic of the Philippines" for purposes of
exemption from the legal fees provided for in Rule 130 of the Rules of
Court. 3 Invoking the case of "SSS versus Hon. Soriano, et al." 4 where this Court
definitively categorized the SSS as a government agency performing proprietary
functions, the trial court concluded that petitioner SSS does not fall within the
coverage of Section 29 of the Charter of Bacolod City.
There can be no question that a government owned or controlled corporation is
subject to payment of the legal fees provided for in Rule 130 of the Rules of Court.
Such liability is plainly written in Section 1 of Republic Act No. 104, which reads:
... All corporations, agencies, or instrumentalities owned or controlled by the
government shall pay such duties, taxes, fees and other charges upon their
transaction, business, industry, sale, or income as are imposed by law upon
individuals, associations or corporations engaged in any taxable business, industry,
or activity except on goods or commodities imported or purchased and sold or
distributed for relief purposes as may be determined by President of the Philippines.

However, the subject of inquiry in the case at bar is not whether a government
corporation exercising ministrant or proprietary function, such as petitioner SSS, is
exempt from the payment of legal fees, but whether the properties in question,
which are concededly owned by the government, are exempt from realty taxes. We
hold that under Section 29 of the Charter of the City of Bacolod they are so exempt.
It bears emphasis that the said section does not contain any qualification
whatsoever in providing for the exemption from real estate taxes of "lands and
buildings owned by the Commonwealth or Republic of Philippines." Hence, when the
legislature exempted lands and buildings owned by the government from payment
of said taxes, what it intended was a broad and comprehensive application of such
mandate, regardless of whether such property is devoted to governmental or
proprietary purpose.
This conclusion is ineluctable from an examination of Commonwealth Act No. 470, a
statute which deals specifically with the incidence of real estate taxes and the
exemption thereto. It is to be noted that Section 3(a) of said statute contains a
similarly worded exemption from the payment of realty taxes of "properties owned
by ... the Republic of the Philippines, any province, city, municipality or municipal
district ..." And in "Board of Assessment Appeals vs. Court of Tax Appeals" 5, this
Court interpreted this provision in this wise:
... in exempting from taxation 'property owned by the Republic of the Philippines,
any province, city, municipality or municipal district ... said section 3(a) of Republic
Act No. 470 makes no distinction between property held in a sovereign,
governmental or political capacity and those possessed in a private propriety or
patrimonial character. And where the law does not distinguish neither may we,
unless there are facts and circumstances clearly showing that the lawmaker
intended the contrary, but no such facts and circumstances have been brought to
our attention. Indeed, the noun 'property' and the verb 'owned' used in said section,
3 (a) strongly suggest that the object of exemption is considered more from the
view point of dominion, than from that of domain. Moreover, taxes are financial
burdens imposed for the purpose of raising revenues with which to defray the cost
of the operation of the Government, and a tax on property of the Government,
whether national or local, would merely have the effect of taking money from one
pocket to put it in another pocket (Cooley on Taxation, Sec. 621, 4th Edition). Hence,
it would not serve, in the final analysis, the main purpose of taxation. What is more,
it would tend to defeat it, on account of the paper work, time and consequently,
expenses it would entail. (The Law on Local Taxation, by Justiniano Y. Castillo, p. 13).
The distinction laid down in "NACOCO vs. Bacani" 6 between government agencies
exercising constituent functions, on the one hand, and those performing ministrant
functions, on the other, has therefore no relevance to the issue before Us. What is
decisive is that the properties possessed by the SSS, albeit devoted to private or
proprietary purpose, are in fact owned by the government of the Philippines. As
such they are exempt from realty taxes. It is axiomatic that when public property is
involved, exemption is the rule and taxation, the exception.

In connection with the issue at hand, it would not be amiss to state that Presidential
Decree No. 24, which amended the Social Security Act of 1954, has already
removed all doubts as to the exemption of the SSS from taxation. Thus
SEC. 16. Exemption from tax, legal process, and lien. All laws to the contrary
notwithstanding, the SSS and all its assets, all contributions collected and all
accruals thereto and income therefrom as well as all benefit payments and all
papers or documents which may be required in connection with the operation or
execution of this Act shall be exempt from any tax, assessment, fee, charge or
customs or import duty; and all benefit payments made by the SSS shall likewise be
exempt from all kinds of taxes, fees or charges, and shall not be liable to
attachment, garnishments, levy or seizure by or under any legal or equitable
process whatsoever, either before or after receipt by the person or persons entitled
thereto, except to pay any debt of the covered employee to the SSS.
WHEREFORE, the decision under review is hereby set aside, and the surety bond
filed by petitioner cancelled.
SO ORDERED.
Barredo (Chairman), Concepcion, Jr., Guerrero, Abad Santos and De Castro, JJ.,
concur.

Villegas v Hiu CHiong Tsai Pao

G.R. No. L-29646 November 10, 1978
MAYOR
ANTONIO
J.
VILLEGAS, petitioner,
vs.
HIU CHIONG TSAI PAO HO and JUDGE FRANCISCO ARCA, respondents.
Angel C. Cruz, Gregorio A. Ejercito, Felix C. Chaves & Jose Laureta for petitioner.
Sotero H. Laurel for respondents.

FERNANDEZ, J.:
This is a petition for certiorari to review tile decision dated September 17, 1968 of
respondent Judge Francisco Arca of the Court of First Instance of Manila, Branch I, in
Civil Case No. 72797, the dispositive portion of winch reads.
Wherefore, judgment is hereby rendered in favor of the petitioner and against the
respondents, declaring Ordinance No. 6 37 of the City of Manila null and void. The
preliminary injunction is made permanent. No pronouncement as to cost.
SO ORDERED.

Manila, Philippines, September 17, 1968.

(SGD.) FRANCISCO ARCA
Judge 1
The controverted Ordinance No. 6537 was passed by the Municipal Board of Manila
on February 22, 1968 and signed by the herein petitioner Mayor Antonio J. Villegas
of Manila on March 27, 1968. 2
City Ordinance No. 6537 is entitled:
AN ORDINANCE MAKING IT UNLAWFUL FOR ANY PERSON NOT A CITIZEN OF THE
PHILIPPINES TO BE EMPLOYED IN ANY PLACE OF EMPLOYMENT OR TO BE ENGAGED
IN ANY KIND OF TRADE, BUSINESS OR OCCUPATION WITHIN THE CITY OF MANILA
WITHOUT FIRST SECURING AN EMPLOYMENT PERMIT FROM THE MAYOR OF MANILA;
AND FOR OTHER PURPOSES. 3
Section 1 of said Ordinance No. 6537 4 prohibits aliens from being employed or to
engage or participate in any position or occupation or business enumerated therein,
whether permanent, temporary or casual, without first securing an employment
permit from the Mayor of Manila and paying the permit fee of P50.00 except
persons employed in the diplomatic or consular missions of foreign countries, or in
the technical assistance programs of both the Philippine Government and any
foreign government, and those working in their respective households, and
members of religious orders or congregations, sect or denomination, who are not
paid monetarily or in kind.
Violations of this ordinance is punishable by an imprisonment of not less than three
(3) months to six (6) months or fine of not less than P100.00 but not more than
P200.00 or both such fine and imprisonment, upon conviction. 5
On May 4, 1968, private respondent Hiu Chiong Tsai Pao Ho who was employed in
Manila, filed a petition with the Court of First Instance of Manila, Branch I,
denominated as Civil Case No. 72797, praying for the issuance of the writ of
preliminary injunction and restraining order to stop the enforcement of Ordinance
No. 6537 as well as for a judgment declaring said Ordinance No. 6537 null and
void. 6
In this petition, Hiu Chiong Tsai Pao Ho assigned the following as his grounds for
wanting the ordinance declared null and void:
1) As a revenue measure imposed on aliens employed in the City of Manila,
Ordinance No. 6537 is discriminatory and violative of the rule of the uniformity in
taxation;
2) As a police power measure, it makes no distinction between useful and nonuseful occupations, imposing a fixed P50.00 employment permit, which is out of
proportion to the cost of registration and that it fails to prescribe any standard to
guide and/or limit the action of the Mayor, thus, violating the fundamental principle
on illegal delegation of legislative powers:

3) It is arbitrary, oppressive and unreasonable, being applied only to aliens who are
thus, deprived of their rights to life, liberty and property and therefore, violates the
due process and equal protection clauses of the Constitution. 7
On May 24, 1968, respondent Judge issued the writ of preliminary injunction and on
September 17, 1968 rendered judgment declaring Ordinance No. 6537 null and void
and making permanent the writ of preliminary injunction. 8
Contesting the aforecited decision of respondent Judge, then Mayor Antonio J.
Villegas filed the present petition on March 27, 1969. Petitioner assigned the
following as errors allegedly committed by respondent Judge in the latter's decision
of September 17,1968: 9
I
THE RESPONDENT JUDGE COMMITTED A SERIOUS AND PATENT ERROR OF LAW IN
RULING THAT ORDINANCE NO. 6537 VIOLATED THE CARDINAL RULE OF UNIFORMITY
OF TAXATION.
II
RESPONDENT JUDGE LIKEWISE COMMITTED A GRAVE AND PATENT ERROR OF LAW IN
RULING THAT ORDINANCE NO. 6537 VIOLATED THE PRINCIPLE AGAINST UNDUE
DESIGNATION OF LEGISLATIVE POWER.
III
RESPONDENT JUDGE FURTHER COMMITTED A SERIOUS AND PATENT ERROR OF LAW
IN RULING THAT ORDINANCE NO. 6537 VIOLATED THE DUE PROCESS AND EQUAL
PROTECTION CLAUSES OF THE CONSTITUTION.
Petitioner Mayor Villegas argues that Ordinance No. 6537 cannot be declared null
and void on the ground that it violated the rule on uniformity of taxation because
the rule on uniformity of taxation applies only to purely tax or revenue measures
and that Ordinance No. 6537 is not a tax or revenue measure but is an exercise of
the police power of the state, it being principally a regulatory measure in nature.
The contention that Ordinance No. 6537 is not a purely tax or revenue measure
because its principal purpose is regulatory in nature has no merit. While it is true
that the first part which requires that the alien shall secure an employment permit
from the Mayor involves the exercise of discretion and judgment in the processing
and approval or disapproval of applications for employment permits and therefore is
regulatory in character the second part which requires the payment of P50.00 as
employee's fee is not regulatory but a revenue measure. There is no logic or
justification in exacting P50.00 from aliens who have been cleared for employment.
It is obvious that the purpose of the ordinance is to raise money under the guise of
regulation.
The P50.00 fee is unreasonable not only because it is excessive but because it fails
to consider valid substantial differences in situation among individual aliens who are
required to pay it. Although the equal protection clause of the Constitution does not

forbid classification, it is imperative that the classification should be based on real

and substantial differences having a reasonable relation to the subject of the
particular legislation. The same amount of P50.00 is being collected from every
employed alien whether he is casual or permanent, part time or full time or whether
he is a lowly employee or a highly paid executive
Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor
in the exercise of his discretion. It has been held that where an ordinance of a
municipality fails to state any policy or to set up any standard to guide or limit the
mayor's action, expresses no purpose to be attained by requiring a permit,
enumerates no conditions for its grant or refusal, and entirely lacks standard, thus
conferring upon the Mayor arbitrary and unrestricted power to grant or deny the
issuance of building permits, such ordinance is invalid, being an undefined and
unlimited delegation of power to allow or prevent an activity per se lawful. 10
In Chinese Flour Importers Association vs. Price Stabilization Board, 11 where a law
granted a government agency power to determine the allocation of wheat flour
among importers, the Supreme Court ruled against the interpretation of
uncontrolled power as it vested in the administrative officer an arbitrary discretion
to be exercised without a policy, rule, or standard from which it can be measured or
controlled.
It was also held in Primicias vs. Fugoso 12 that the authority and discretion to grant
and refuse permits of all classes conferred upon the Mayor of Manila by the Revised
Charter of Manila is not uncontrolled discretion but legal discretion to be exercised
within the limits of the law.
Ordinance No. 6537 is void because it does not contain or suggest any standard or
criterion to guide the mayor in the exercise of the power which has been granted to
him by the ordinance.
The ordinance in question violates the due process of law and equal protection rule
of the Constitution.
Requiring a person before he can be employed to get a permit from the City Mayor
of Manila who may withhold or refuse it at will is tantamount to denying him the
basic right of the people in the Philippines to engage in a means of livelihood. While
it is true that the Philippines as a State is not obliged to admit aliens within its
territory, once an alien is admitted, he cannot be deprived of life without due
process of law. This guarantee includes the means of livelihood. The shelter of
protection under the due process and equal protection clause is given to all persons,
both aliens and citizens. 13
The trial court did not commit the errors assigned.
WHEREFORE, the decision
pronouncement as to costs.

appealed

from

is

hereby

affirmed,

SO ORDERED.
Barredo, Makasiar, Muoz Palma, Santos and Guerrero, JJ., concur.

without

Castro, C.J., Antonio and Aquino, Fernando, JJ., concur in the result.
Concepcion, Jr., J., took no part.

Victorias Milling v Municipality of Victorias

G.R. No. L-21183

September 27, 1968

VICTORIAS
MILLING
CO.,
vs.
THE
MUNICIPALITY
OF
VICTORIAS,
OCCIDENTAL, defendant-appellant.

INC., plaintiff-appellant,
PROVINCE

OF

NEGROS

Hilado
&
Hilado
for
plaintiff-appellant.
The Provincial Fiscal of Negros Occidental for defendant-appellant.

SANCHEZ, J.:
This case calls into question the validity of Ordinance No. 1, series of 1956, of the
Municipality of Victorias, Negros Occidental.
The disputed ordinance was approved by the municipal Council of Victorias on
September 22, 1956 by way of an amendment to two municipal ordinances
separately imposing license taxes on operators of sugar centrals 1 and sugar
refineries. 2 The changes were: with respect to sugar centrals, by increasing the
rates of license taxes; and as to sugar refineries, by increasing the rates of license
taxes as well as the range of graduated schedule of annual output capacity.
Ordinance No. 1 3 is labeled "An Ordinance Amending Ordinance No. 25, Series of
1953 and Ordinance No. 18, Series of 1947 on Sugar Central by Increasing the Rates
on Sugar Refinery Mill by Increasing the Range of Graduated Schedule on Capacity
Annual Output Respectively". It was, as the ordinance itself states, enacted
pursuant to the taxing power conferred by Commonwealth Act 472. By Section 1 of
the Ordinance: "Any person, corporation or other forms of companies, operating
sugar central or engage[d] in the manufacture of centrifugal sugar shall be required
to pay the following annual municipal license tax, payable quarterly, to wit: . . ."
Section 1 referred to prescribes a wide range of schedule. It starts with a sugar
central with mill having an annual output capacity of not less than 50,000 piculs of
centrifugal sugar, in which case an annual municipal license tax of P1,000.00 is
provided. Depending upon the annual output capacity the schedule of taxes
continues with P2,000.00 progressively upward in twelve other grades until an
output capacity of 1,500,001 piculs or more shall have been reached. For this, the
annual tax is P40,000.00. The tax on sugar refineries is likewise calibrated with
similar rates. It also starts with P1,000.00 for a refinery with mill having an annual

output capacity of not less than 25,000 bags of 100 lbs. of refined sugar. Then, it
continues with the second bracket of from 25,001 bags to 75,000 bags of 100 lbs.
Here, the municipal license tax is P1,500.00. Then follow the other rates in the
graduated scale with the ceiling placed at a capacity of 1,750,001 bags or more.
The annual municipal license tax for the last mentioned output capacity is
P40,000.00.
Of importance are the provisions of Section 1(m) relating to sugar centrals and
Section 2(m) covering sugar refineries with specific reference to the maximum
annual license tax, viz:
Section No. 1 Any person, corporation or other forms of Companies, operating
Sugar Central or engage[d] in the manufacture of centrifugal sugar shall be required
to pay the following annual municipal license tax, payable quarterly, to wit:
xxx

xxx

xxx

(m) Sugar Central with mill having a capacity of producing an annual output of from
1,500,001 piculs or more shall be required to pay an annual municipal license tax of
P40,000.00.
Section No. 2 Any person, corporation or other forms of Companies shall be
required to pay an annual municipal license tax for the operation of Sugar Refinery
Mill at the following rates:
xxx

xxx

xxx

(m) Sugar Refinery with mill having a capacity of producing an annual output of
from 1,750,001 bags of 100 lbs. or more shall be required to pay an annual
municipal license tax of P40,000.00.
For, the production of plaintiff Victorias Milling Co., Inc. in both its sugar central and
its sugar refinery located in the Municipality of Victorias comes within these items in
the schedule.
Plaintiff filed suit below 4 to ask for judgment declaring Ordinance No. 1, series of
1956, null and void; ordering the refund of all license taxes paid and to be paid
under protest; directing the officials of Victorias and the Province of Negros
Occidental to observe, during the pendency of the action, the provisions of section
357 of the Revised Manual of Instructions to Treasurers of Provinces, Cities and
Municipalities, 1954 edition, 5 regarding the treatment of license taxes paid under
protest by virtue of a disputed ordinance; and other reliefs. 6
The reasons put forth by plaintiff are that: (a) the ordinance exceeds the amounts
fixed in Provincial Circular 12-A issued by the Finance Department on February 27,
1940; (b) it is discriminatory since it singles out plaintiff which is the only operator
of a sugar central and a sugar refinery within the jurisdiction of defendant
municipality; (c) it constitutes double taxation; and (d) the national government has
preempted the field of taxation with respect to sugar centrals or refineries.

Upon the complaint as supplemented and amended, and the answer thereto, and
following hearing on the merits, the trial court rendered its judgment. After
declaring that "[t]here is no doubt that" the ordinance in question refers to license
taxes or fees," and that "[i]t is settled that a license tax should be limited to the
cost of licensing, regulating and surveillance," 7 the trial court ruled that said license
taxes in dispute are unreasonable, 8 and held that: "If the defendant has the power
to tax the plaintiff for purposes of revenue, it may do so by proper municipal
legislation, but not in the guise of a license tax." 9 The court added: "The Court is
not, however, prepared to order the refund of all the license taxes paid by the
plaintiff under protest and amounting, up to the second quarter of 1960, to
P280,000.00, considering that the plaintiff appears to have agreed to the payment
of the license taxes at the rates fixed prior to Ordinance No. 1, series of 1956; that
the defendant had evidently not complied with the provisions of Section 357 of the
Revised Manual of Instructions to Treasurers of Provinces, Cities and Municipalities,
1954 Edition, as the plaintiff herein seeks an order enjoining the defendant and its
appropriate officials to carry out said provisions; that the financial position of the
defendant would surely be disrupted if ordered to refund, while the plaintiff may
perhaps easily forego or forget what it had already parted with". 10 It disposes of the
suit in the following manner:
WHEREFORE, judgment is rendered (a) declaring that Ordinance No. 1, series of
1956, of the municipality of Victorias, Negros Occidental, is invalid; (b) ordering all
officials of the defendant to observe the provisions of Section 357 of the Revised
Manual of Instructions to Treasurers of Provinces, Cities and Municipalities, 1954
Edition, with particular reference to any license taxes paid by the plaintiff under said
Ordinance No. 1, series of 1956, after notice of this decision; and (c) ordering the
defendant to refund to the plaintiff any and all such license taxes paid under protest
after notice of this decision. 11
Both plaintiff and defendant appealed direct to this Court. Plaintiff questions that
portion of the decision denying the refund of the license taxes paid under protest in
the amount of P280,000 covering the period from the first quarter of 1957 to the
second quarter of 1960; and balked at the court's order limiting refund to "any and
all such license taxes paid under protest after notice of this decision." Defendant,
upon the other hand, challenges the correctness of the court's decision invalidating
Ordinance No. 1, series of 1956.
The questions raised in the appeals will be discussed in their proper sequence.
1. We first grapple with the threshold question: Was Ordinance No. 1, series of 1956,
passed by defendant's municipal council as a regulatory enactment or as a revenue
measure?
The trial court says, and plaintiff seconds, that the amounts set forth in the
ordinance in question did exceed the cost of licensing, regulating and surveillance,
and that defendant cannot impose a tax for revenue in the guise of a police or
a regulatory measure. Our finding, however, is the other way.1awphl.nt

The ordinance itself recites that its source of taxing power emanates from
Commonwealth Act 472, Section 1 of which reads:
Section 1. A municipal council or municipal district council shall have authority to
impose municipal license taxes upon persons engaged in any occupation or
business, or exercising privileges in the municipality or municipal district, by
requiring them to secure licenses at rates fixed by the municipal council, or
municipal district council, and to collect fees and charges for services rendered by
the municipality or municipal district and shall otherwise have power to levy for
public local purposes, and for school purposes, including teachers' salaries, just and
uniform taxes other than percentage taxes and taxes on specified articles.
Under the statute just quoted and pertinent jurisprudence, a municipality is
authorized to impose three kinds of licenses: (1) license for regulation of useful
occupations or enterprises; (2) license for restriction or regulation of non-useful
occupations or enterprises; and (3) license for revenue. 12 The first two easily fall
within the broad police power granted under the general welfare clause. 13 The third
class, however, is for revenue purposes. It is not a license fee, properly speaking,
and yet it is generally so termed. It rests on the taxing power. That taxing power
must be expressly conferred by statute upon the municipality. 14 It is so granted
under Commonwealth Act 472.
To be recalled at this point is that Ordinance No. 1, series of 1956, is but an
amendment of Ordinance No. 18, series of 1947, in reference to refineries, and
Ordinance No. 25, series of 1953, covering sugar centrals. Ordinance No. 18
imposes "municipal taxes on persons, firms or corporations operating refinery mills
in this municipality." 15 Ordinance No. 25 speaks of municipal taxes "relative to
the output of the sugar centrals." 16
What are these taxes for? Resolution No. 60 of the municipal council of
Victorias, 17 adopted also on September 22, 1956 in conjunction with Ordinance No.
1, series of 1956, furnishes a ready answer. It reads in part:
WHEREAS, the Municipal Treasurer informed the Municipal Council of the revenue of
the Municipality and the heavy obligations which confront it because of the
implementation of Minimum Wage Law on the salaries and wages it pays to its
municipal employees and laborers thus greatly draining the Municipal Treasury;
WHEREAS, this local administration is committed to the plan of ameliorating the
deplorable situation existing in the barrios, sitios and rural areas by giving them
essential and necessary facilities calculated to improve conditions thereat thru
improvements of roads and feeder roads;
WHEREAS, one of the causes of the municipality's financial difficulty is low rates of
municipal taxes imposed by some of the ordinances enacted by the local legislative
body;
WHEREAS, [in] . . . the ordinances known as Ordinance No. 25, Series of 1953,
dealing on the operation of Sugar Central, and Ordinance No. 18, Series of 1947,
which exclusively deals with the operation of Sugar Refinery Mill, the rates so given

are rates suggested and determined by the Provincial Circular No. 12-A, dated
February 27, 1940 issued by the Department of Finance as regards to Sugar
Centrals;
WHEREAS, the Municipal Council has come to the conclusion that the rates provided
for in such ordinances are no longer adequate if made in keeping with the present
high cost of living;
WHEREAS, the Municipal Council has also taken cognizance of the fact that the price
of sugar per picul today is more than twice its pre-war average price; . . . . 18
Given the purposes just mentioned, we find no warrant in logic to give our assent to
the view that the ordinance in question is solely for regulatory purpose. Plain is the
meaning conveyed. The ordinance is for raising money. To say otherwise is to
misread the purpose of the ordinance.1awphl.nt
We should not hang so heavy a meaning on the use of the term "municipal license
tax". This does not necessarily connote the idea that the tax is imposed as the
lower court would want it to mean a revenue measure in the guise of a license
tax. For really, this runs counter to the declared purpose to make money.
Besides, the term "license tax" has not acquired a fixed meaning. It is often "used
indiscriminately to designate impositions exacted for the exercise of various
privileges." 19 It does not refer solely to a license for regulation. In many instances, it
refers to "revenue-raising exactions on privileges or activities." 20 On the other
hand, license fees are commonly called taxes. But, legally speaking, the latter are
"for the purpose of raising revenues," in contrast to the former which are imposed
"in the exercise of police power for purposes of regulation." 21
We accordingly say that the designation given by the municipal authorities does not
decide whether the imposition is properly a license tax or a license fee. The
determining factors are the purpose and effect of the imposition as may be
apparent from the provisions of the ordinance. 22 Thus, "[w]hen no police inspection,
supervision, or regulation is provided, nor any standard set for the applicant 23 to
establish, or that he agrees to attain or maintain, but any and all persons engaged
in the business designated, without qualification or hindrance, may come, and a
license on payment of the stipulated sum will issue, to do business, subject to no
prescribed rule of conduct and under no guardian eye, but according to the
unrestrained judgment or fancy of the applicant and licensee, the presumption is
strong that the power of taxation, and not the police power, is being exercised." 24
Precisely because of these considerations the present imposition must be treated as
a levy for revenue purposes. A quick glance at the big amount of maximum annual
tax set forth in the ordinance, P40,000.00 for sugar centrals, and P40,000.00 for
sugar refineries, will readily convince one that the tax is really a revenue tax. And
then, we read in the ordinance nothing which would as much as indicate that the
tax imposed is merely for police inspection, supervision or regulation.
Our view that the tax imposed by the ordinance is for revenue purposes finds
support in judicial pronouncements which have gained foothold in this jurisdiction.

In Standard Vacuum vs. Antigua, 25 this Court had occasion to pass upon a similar
ordinance. In categorical terms, we there stated: "We are satisfied that the
graduated license tax imposed by the ordinance in question is an occupation tax,
imposed not under the police or regulatory power of the municipality but by virtue
of its taxing power for purposes of revenue, and is in accordance with the last part
of Section 1 of Commonwealth Act No. 472. It is, therefore, valid." 26
The present case is not to be analogized with Panaligan vs. City of Tacloban cited in
the decision below. 27 For there, the inspection fee sought to be collected upon
every head of specified animals to be transported out of the City of Tacloban (P2.00
per hog, P10.00 per cow and 20.00 per carabao) was in reality an export tax
specifically withheld from municipal taxing power under Section 2287 of the Revised
Administrative Code.
So also do we say that the cases of Pacific Commercial Co. vs. Romualdez, 28 Lacson
vs. City of Bacolod, 29 andSantos vs. Municipal Government of Caloocan, 30 used by
plaintiff as references, are entirely inopposite. InPacific Commercial, the tax
involved on frozen meat was nullified because tax measures on cold stores
were not then within the legislative grant to the City of Manila. In Lacson, the City of
Bacolod taxed every admission ticket sold in the moviehouses. And justification for
this imposition was moored to the general welfare clause of the city charter. This
Court held the ordinance ultra vires for the reason that the authority to
tax cannot be derived from the general welfare clause. In Santos, the taxes
in controversy were internal organs fees, meat inspection fees and corral fees,
separate from the slaughter or slaughterhouse fees. In annulling the taxes there
questioned, this Court declared: "[W]hen the Council ordained the payment of
internal organs fees, meat inspection fees and corral fees, aside from the slaughter
or slaughterhouse fees, it overstepped the limits of its statutory grant [Sec. 1, C.A.
655]. Only one fee was allowed by that law to be charged and that was slaughter or
slaughterhouse fees."
In the cases cited then, the tax ordinances did not find plain and clear statutory
prop. Such infirmity is not present here.
We, accordingly, rule that Ordinance No. 1, series of 1956, of the Municipality of
Victorias, was promulgated not in the exercise of the municipality's regulatory
power but as a revenue measure a tax on occupation or business. The authority
to impose such tax is backed by the express grant of power in Section 1 of
Commonwealth Act 472.
2. Not that the disputed ordinance lacks the imprimatur of the Secretary of Finance
required in paragraph 2, Section 4, of Commonwealth Act 472. This legal provision
necessitates such approval "[w]henever the rate of fixed municipal license taxes on
businesses not excepted in this Act or otherwise covered by the preceding
paragraph and subject to the fixed annual tax imposed in section one hundred
eighty-two of the National Internal Revenue Law, is in excess of fifty pesos per
annum; . . . ."

The ordinance here challenged was recommended by the Provincial Board of Negros
Occidental in its resolution (No. 1864) of October 26, 1956. 31 And, the
Undersecretary of Finance in his letter to the municipal council of Victorias on
December 18, 1956 approved said ordinance. But considering that it is amendatory
in nature, that approval was coupled with the mandate that the ordinance "should
take effect at the beginning of the ensuing calendar year [1957] pursuant to Section
2309 of the Revised Administrative Code." 32
3. Plaintiff argues that the municipality is bereft of authority to enact the ordinance
in question because the national government "had preempted it from entering the
field of taxation of sugar centrals and sugar refineries." 33 Plaintiff seeks refuge in
Section 189 of the National Internal Revenue Code which subjects proprietors or
operators of sugar centrals or sugar refineries to percentage tax.
The implausibility of this position is at once apparent. We are not dealing here with
percentage tax. Rather, we are concerned with a tax specifically for operators of
sugar centrals and sugar refineries. The rates imposed are based on the maximum
annual output capacity. Which is not a percentage. Because it is not a share. Nor is
it a tax based on the amount of the proceeds realized out of the sale of sugar,
centrifugal or refined. 34
What can be said at most is that the national government has preempted the field
of percentage taxation. Section 1 of Commonwealth Act 472, while granting
municipalities power to levy taxes, expressly removes from them the power to exact
"percentage taxes".
It is correct to say that preemption in the matter of taxation simply refers to an
instance where the national government elects to tax a particular area, impliedly
withholding from the local government the delegated power to tax the same field.
This doctrine primarily rests upon the intention of Congress. 35 Conversely, should
Congress allow municipal corporations to cover fields of taxation it already
occupies, then the doctrine of preemption will not apply.
In the case at bar, Section 4(1) of Commonwealth Act 472 clearly and specifically
allows municipal councils to tax persons engaged in "the same businesses or
occupation" on which "fixed internal revenue privilege taxes" are "regularly imposed
by the National Government." With certain exceptions specified in Section 3 of the
same statute. Our case does not fall within the exceptions. It would therefore be
futile to argue that Congress exclusively reserved to the national government the
right to impose the disputed taxes.
We rule that there is no preemption.
4. Petitioner advances the theory that the ordinance is excessive.
An ordinance carries with it the presumption of validity. The question of
reasonableness though is open to judicial inquiry. Much should be left thus to the
discretion of municipal authorities. Courts will go slow in writing off an ordinance as
unreasonable unless the amount is so excessive as to be prohibitive, arbitrary,
unreasonable, oppressive, or confiscatory. 36 A rule which has gained acceptance is

that factors relevant to such an inquiry are the municipal conditions as a whole and
the nature of the business made subject to imposition. 37
Plaintiff has however not sufficiently proven that, taking these factors together, the
license taxes are unreasonable. The presumption of validity subsists. For, plaintiff
has limited itself to insisting that the amounts levied exceed the cost of regulation
and that the municipality has adequate funds for the alleged purposes as evidenced
by the municipality's cash surplus for the fiscal year ending 1956.
The cost of regulation cannot be taken as a gauge, if the municipality really
intended to enact a revenue ordinance. For, "if the charge exceeds the expense of
issuance of a license and costs of regulation, it is a tax." 38And if it is, and it is validly
imposed, as in this case, "the rule that license fees for regulation must bear a
reasonable relation to the expense of the regulation has no application." 39
And then, a cash surplus alone cannot stop a municipality from enacting a revenue
ordinance increasing license taxes in anticipation of municipal needs. Discretion to
determine the amount of revenue required for the needs of the municipality is
lodged with the municipal authorities. Again, judicial intervention steps in only when
there is a flagrant, oppressive and excessive abuse of power by said municipal
authorities. 40
Not that defendant municipality was without reason. On February 27, 1940, the
Secretary of Finance, later President, Manuel A. Roxas, issued Provincial Circular 12A. In that circular, the then Finance Secretary stated that his "Department has
reached the conclusion that a tax on the basis of one centavo for every picul of
annual output capacity of sugar centrals ... would be just and reasonable." At that
time, the price of sugar was around P6.00 per picul. Sixteen years later 1956
when Ordinance No. 1 was approved, the market quotation for export sugar ranged
from P12.00 to P15.00 per picul. 41 And yet, since then the rate per output capacity
of a sugar central in Ordinance No. 1 was merely from one centavo to two centavos.
There is a statement in the municipality's brief 42 that thereafter the price of sugar
had never gone below P16.00 per picul; instead it had gone up.
The reasonableness of the ordinance may not be disputed. It is not confiscatory.
There was misapprehension in the decision below in its statement that the increase
of rates for refineries was 2,000%. We should not overlook the fact that the original
maximum rate covering refineries in Ordinance No. 18, series of 1947, was
P2,000.00; but that was only for a refinery with an output capacity of 90,000 or
more sacks. Under Section 2(c) of Ordinance No. 1, series of 1956, where the
refineries have an output capacity of from 75,001 bags to 100,000 bags, the tax
remains at P2,000.00. From here on, the ordinance provides for ten more scales for
the graduation of the tax depending upon the output capacity (P3,000.00,
P4,000.00,
P5,000.00,
P10,000.00,
P15,000.00,
P20,000.00,
P25,000.00,
P30,000.00, P35,000.00 and P40,000.00). But it is only where a refinery has an
output capacity of 1,750,001 or more bags that the present ordinance imposes a tax
of P40,000.00. The happenstance that plaintiff's refinery is in the last bracket calling

upon it to pay P40,000.00 per annum does not make the ordinance in question
unreasonable.
Neither may we tag the ordinance with excessiveness if we consider the capital
invested by plaintiff in both its sugar central and sugar refinery and its annual
income from both. Plaintiff's capital investment in the sugar central and sugar
refinery is more or less P26,000,000.00. 43 And here are its annual net income: for
the year 1956 P3,852,910; for the year 1957 P3,854,520; for the year 1958
P7,230,493; for the year 1959 P5,951,187; and for the year 1960
P7,809,250. 44 If these figures mean anything at all, they show that the ordinance in
question is neither confiscatory nor unjust and unreasonable.
5. Upon the averment that in the Municipality of Victorias plaintiff is the only
operator of a sugar central and sugar refinery, plaintiff now presses its argument
that Ordinance No. 1, series of 1956, is discriminatory. The ordinance does not
single out Victorias as the only object of the ordinance. Said ordinance is made to
apply to any sugar central or sugar refinery which may happen to operate in the
municipality. So it is, that the fact that plaintiff is actually the sole operator of a
sugar central and a sugar refinery does not make the ordinance discriminatory.
Argument along the same lines was rejected in Shell Co. of P.I., Ltd. vs. Vao, 45 this
Court holding that the circumstance "that there is no other person in the locality
who exercises" the occupation designated as installation manager "does not make
the ordinance discriminatory and hostile, inasmuch as it is and will be applicable to
any person or firm who exercises such calling or occupation." And in Ormoc Sugar
Company, Inc. vs. Municipal Board of Ormoc City, 46 declaratory relief was sought to
test the validity of a municipal ordinance which provides a city tax of twenty
centavos per picul of centrifugal sugar and one per centum on the gross sale of its
derivatives and by-products "produced by the Ormoc Sugar Company, Incorporated,
or by any other sugar mill in Ormoc City." Mr. Justice Enrique Fernando, delivering
the opinion of this Court, declared that the ordinance did not suffer "from a
constitutional or statutory infirmity." And yet, in Ormoc, it is to be observed that
Section 1 of the ordinance spelled out Ormoc Sugar Company, Incorporated
specifically by name. Not even the name of plaintiff herein was ever mentioned in
the ordinance now disputed.
No discrimination exists.
6. As infirm is plaintiff's stand that its business is not confined to the Municipality of
Victorias. It suffices that plantiff engages in a business or occupation subject to an
exaction by the municipality within the territorial boundaries of that municipality.
Plaintiff's sugar central and sugar refinery are located within the Municipality of
Victorias. In this central and refinery, plaintiff manufactures centrifugal sugar and
refined sugar, respectively.
But plaintiff insists that plaintiff's sugar milling and refining operations are not
wholly performed within the territorial limits of Victorias. According to plaintiff,
transportation of canes from plantation to the mill site, operation and maintenance
of telephone system, inspection of crop progress and other related activities, are
conducted not only in defendant's municipality but also in the municipalities of

Cadiz, Manapla, Sagay and Saravia as well. 47 We fail to see the relevance of these
facts. Because, if we follow plaintiff's ratiocination, neither Victorias nor any of the
municipalities just adverted to would be able to impose the tax. One thing certain,
of course, is that the tax is imposed upon the business of operating a sugar central
and a sugar refinery. And the situs of that business is precisely the Municipality of
Victorias.
7. Plaintiff finally impleads double taxation. Its reason is that in computing the
amount of taxes to be paid by the sugar refinery the cost of the raw sugar coming
from the sugar central is not deducted; ergo, plaintiff is taxed twice on the raw
sugar.
Double taxation has been otherwise described as "direct duplicate taxation." 48 For
double taxation to exist, "the same property must be taxed twice, when it should be
taxed but once." 49 Double taxation has also been "defined as taxing the same
person twice by the same jurisdiction for the same thing." 50 As stated in Manila
Motor Company, Inc. vs. Ciudad de Manila, 51 there is double taxation "cuando la
misma propiedad se sujeta a dos impuestos por la misma entidad o Gobierno, para
el mismo fin y durante el mismo periodo de tiempo."
With the foregoing precepts in mind, we find no difficulty in saying that plaintiff's
argument on double taxation does not inspire assent. First. The two taxes cover two
different objects. Section 1 of the ordinance taxes a person operating sugar centrals
or engaged in the manufacture of centrifugal sugar. While under Section 2, those
taxed are the operators of sugar refinery mills. One occupation or business is
different from the other. Second. The disputed taxes are imposed on occupation or
business. Both taxes are not on sugar. The amount thereof depends on the annual
output capacity of the mills concerned, regardless of the actual sugar milled.
Plaintiff's argument perhaps could make out a point if the object of taxation here
were the sugar it produces, not the business of producing it.
There is no double taxation.
For the reasons given
The judgment under review is hereby reversed; and
Judgment is hereby rendered: (a) declaring valid and subsisting Ordinance No. 1,
series of 1956, of the Municipality of Victorias, Province of Negros Occidental; and
(b) dismissing plaintiff's complaint as supplemented and amended. Costs against
plaintiff. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Angeles,
Fernando and Capistrano, JJ., concur.

Phil. Rural Electric Coop v Secretary of DILG

EN BANC

[G.R. No. 143076. June 10, 2003]

PHILIPPINE
RURAL
ELECTRIC
COOPERATIVES
ASSOCIATION,
INC.
(PHILRECA); AGUSAN DEL NORTE ELECTRIC COOPERATIVE, INC.
(ANECO); ILOILO I ELECTRIC COOPERATIVE, INC. (ILECO I); and
ISABELA I ELECTRIC COOPERATIVE, INC. (ISELCO I), petitioners, vs.
THE
SECRETARY,
DEPARTMENT OF
INTERIOR
AND
LOCAL
GOVERNMENT,
and
THE
SECRETARY, DEPARTMENT
OF
FINANCE, respondents.
DECISION
PUNO, J.:
This is a petition for Prohibition under Rule 65 of the Rules of Court with prayer
for the issuance of a temporary restraining order seeking to annul as
unconstitutional sections 193 and 234 of R.A. No. 7160 otherwise known as the
Local Government Code.
On May 23, 2000, a class suit was filed by petitioners in their own behalf and in
behalf of other electric cooperatives organized and existing under P.D. No. 269 who
are members of petitioner Philippine Rural Electric Cooperatives Association, Inc.
(PHILRECA). Petitioner PHILRECA is an association of 119 electric cooperatives
throughout the country. Petitioners Agusan del Norte Electric Cooperative, Inc.
(ANECO), Iloilo I Electric Cooperative, Inc. (ILECO I) and Isabela I Electric
Cooperative, Inc. (ISELCO I) are non-stock, non-profit electric cooperatives organized
and existing under P.D. No. 269, as amended, and registered with the National
Electrification Administration (NEA).
Under P.D. No. 269, as amended, or the National Electrification Administration
Decree, it is the declared policy of the State to provide the total electrification of the
Philippines on an area coverage basis the same being vital to the people and the
sound development of the nation. [1] Pursuant to this policy, P.D. No. 269 aims to
promote, encourage and assist all public service entities engaged in supplying
electric service, particularly electric cooperatives by giving every tenable support
and assistance to the electric cooperatives coming within the purview of the law.
[2]
Accordingly, Section 39 of P.D. No. 269 provides for the following tax incentives to
electric cooperatives:
SECTION 39. Assistance to Cooperatives; Exemption from Taxes, Imposts, Duties,
Fees; Assistance from the National Power Corporation. Pursuant to the national
policy declared in Section 2, the Congress hereby finds and declares that the
following assistance to cooperative is necessary and appropriate:
(a) Provided that it operates in conformity with the purposes and provisions of this
Decree, cooperatives (1) shall be permanently exempt from paying income

taxes, and (2) for a period ending on December 31 of the thirtieth full calendar year
after the date of a cooperative's organization or conversion hereunder, or until it
shall become completely free of indebtedness incurred by borrowing, whichever
event first occurs, shall be exempt from the payment (a) of all National
Government, local government and municipal taxes and fees, including
franchise, filing, recordation, license or permit fees or taxes and any fees,
charges, or costs involved in any court or administrative proceeding in
which it may be a party, and (b) of all duties or imposts on foreign goods
acquired for its operations, the period of such exemption for a new cooperative
formed by consolidation, as provided for in Section 29, to begin from as of the date
of the beginning of such period for the constituent consolidating cooperative which
was most recently organized or converted under this Decree: Provided, That the
Board of Administrators shall, after consultation with the Bureau of Internal
Revenue, promulgate rules and regulations for the proper implementation of the tax
exemptions provided for in this Decree.
.[3]
From 1971 to 1978, in order to finance the electrification projects envisioned by
P.D. No. 269, as amended, the Philippine Government, acting through the National
Economic Council (now National Economic Development Authority) and the NEA,
entered into six (6) loan agreements with the government of the United States of
America through the United States Agency for International Development (USAID)
with electric cooperatives, including petitioners ANECO, ILECO I and ISELCO I, as
beneficiaries. The six (6) loan agreements involved a total amount of approximately
US$86,000,000.00. These loan agreements are existing until today.
The loan agreements contain similarly worded provisions on the tax application
of the loan and any property or commodity acquired through the proceeds of the
loan. Thus, Section 6.5 of A.I.D. Loan No. 492-H-027 dated November 15, 1971
provides:
Section 6.5. Taxes and Duties. The Borrower covenants and agrees that this Loan
Agreement and the Loan provided for herein shall be free from, and the Principal
and interest shall be paid to A.I.D. without deduction for and free from, any taxation
or fees imposed under any laws or decrees in effect within the Republic of the
Philippines or any such taxes or fees so imposed or payable shall be reimbursed by
the Borrower with funds other than those provided under the Loan. To the extent
that (a) any contractor, including any consulting firm, any personnel of such
contractor financed hereunder, and any property or transactions relating to such
contracts and (b) any commodity procurement transactions financed hereunder, are
not exempt from identifiable taxes, tariffs, duties and other levies imposed under
laws in effect in the country of the Borrower, the Borrower and/or Beneficiary shall
pay or reimburse the same with funds other than those provided under the Loan. [4]
Petitioners contend that pursuant to the provisions of P.D. No. 269, as amended,
and the above-mentioned provision in the loan agreements, they are exempt from
payment of local taxes, including payment of real property tax. With the passage of
the Local Government Code, however, they allege that their tax exemptions have
been invalidly withdrawn. In particular, petitioners assail Sections 193 and 234 of
the Local Government Code on the ground that the said provisions discriminate
against them, in violation of the equal protection clause. Further, they submit that

the said provisions are unconstitutional because they impair the obligation of
contracts between the Philippine Government and the United States Government.
On July 25, 2000 we issued a Temporary Restraining Order. [5]
We note that the instant action was filed directly to this Court, in disregard of
the rule on hierarchy of courts. However, we opt to take primary jurisdiction over
the present petition and decide the same on its merits in view of the significant
constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt
disposition of the matter.
I
There is No Violation of the Equal Protection Clause
The pertinent parts of Sections 193 and 234 of the Local Government Code
provide:
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 and controlled
corporations, except local water districts, cooperatives duly registered under
R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code.
.
Section 234. Exemptions from real property tax.The following are exempted from
payment of the real property tax:
.
(d) All real property owned by duly registered cooperatives as provided
for under R.A. No. 6938; and
.
Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons whether natural or
juridical, including all government-owned and controlled corporations are hereby
withdrawn upon effectivity of this Code.[6]
Petitioners argue that the above provisions of the Local Government Code are
unconstitutional for violating the equal protection clause. Allegedly, said provisions
unduly discriminate against petitioners who are duly registered cooperatives under
P.D. No. 269, as amended, and not under R.A. No. 6938 or the Cooperative Code of
the Philippines. They stress that cooperatives registered under R.A. No. 6938 are
singled out for tax exemption privileges under the Local Government Code. They
maintain that electric cooperatives registered with the NEA under P.D. No. 269, as
amended, and electric cooperatives registered with the Cooperative Development
Authority (CDA) under R.A. No. 6938 are similarly situated for the following reasons:
a) petitioners are registered with the NEA which is a government agency like the
CDA; b) petitioners, like CDA-registered cooperatives, operate for service to their
member-consumers; and c) prior to the enactment of the Local Government Code,

petitioners, like CDA-registered cooperatives, were already tax-exempt. [7] Thus,

petitioners contend that to grant tax exemptions from local government taxes,
including real property tax under Sections 193 and 234 of the Local Government
Code only to registered cooperatives under R.A. No. 6938 is a violation of the equal
protection clause.
We are not persuaded. 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.[8] Thus, the guaranty of the equal protection of the laws is not
violated by a law based on reasonable classification. Classification, to be
reasonable, must (1) rest on substantial distinctions; (2) be germane to the
purposes of the law; (3) not be limited to existing conditions only; and (4) apply
equally to all members of the same class. [9]
We hold that there is reasonable classification under the Local Government
Code to justify the different tax treatment between electric cooperatives covered by
P.D. No. 269, as amended, and electric cooperatives under R.A. No. 6938.
First, substantial distinctions exist between cooperatives under P.D. No. 269, as
amended, and cooperatives under R.A. No. 6938. These distinctions are manifest in
at least two material respects which go into the nature of cooperatives envisioned
by R.A. No. 6938 and which characteristics are not present in the type of
cooperative associations created under P.D. No. 269, as amended.
a. Capital Contributions by Members
A cooperative under R.A. No. 6938 is defined as:
[A] duly registered association of persons with a common bond of interest,
who have voluntarily joined together to achieve a lawful common or social
economic end, making equitable contributions to the capital
required and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted cooperative principles.
[10]

The above definition provides for the following elements of a cooperative: a)

association of persons; b) common bond of interest; c) voluntary association; d)
lawful common social or economic end; e) capital contributions; f) fair share of risks
and benefits; g) adherence to cooperative values; and g) registration with the
appropriate government authority.[11]
The importance of capital contributions by members of a cooperative under R.A.
No. 6938 was emphasized during the Senate deliberations as one of the key factors
which distinguished electric cooperatives under P.D. No. 269, as amended, from
electric cooperatives under the Cooperative Code. Thus:
Senator Osmea. Will this Code, Mr. President, cover electric cooperatives as they
exist in the country today and are administered by the National Electrification
Administration?

Senator Aquino. That cannot be answered with a simple yes or no, Mr. President.
The answer will depend on what provisions we will eventually come up
with. Electric cooperatives as they exist today would not fall under the
term cooperative as used in this bill because the concept of a cooperative
is that which adheres and practices certain cooperative principles. .
.
Senator Aquino. To begin with, one of the most important requirements, Mr.
President, is the principle where members bind themselves to help
themselves. It is because of their collectivity that they can have some
economic benefits. In this particular case [cooperatives under P.D. No. 269], the
government is the one that funds these so-called electric cooperatives.
.
Senator Aquino. That is why in Article III we have the following definition:
A cooperative is an association of persons with a common bond of interest who
have voluntarily joined together to achieve a common social or economic end,
making equitable contributions to the capital required.
In this particular case [cooperatives under P.D. No. 269], Mr. President, the
members do not make substantial contribution to the capital required. It is
the government that puts in the capital, in most cases.
.
Senator Osmea. Under line 6, Mr. President, making equitable contributions to the
capital required would exclude electric cooperatives [under P.D. No. 269]. Because
the membership does not make equitable contributions.
Senator Aquino. Yes, Mr. President. This is precisely what I mean, that electric
cooperatives [under P.D. No. 269] do not qualify in the spirit of cooperatives. That is
the reason why they should be eventually assessed whether they intend to comply
with the cooperatives or not. Because, if after giving them a second time, they do
not comply, then, they should not be classified as cooperatives.
Senator Osmea. Mr. President, the measure of their qualifying as a
cooperative would be the requirement that a member of the electric
cooperative must contribute a pro rata share of the capital of the
cooperative in cash to be a cooperative.[12]
Nowhere in P.D. No. 269, as amended, does it require cooperatives to make
equitable contributions to capital. Petitioners themselves admit that to qualify as a
member of an electric cooperative under P.D. No. 269, only the payment of
a P5.00 membership fee is required which is even refundable the moment the
member is no longer interested in getting electric service from the cooperative or
will transfer to another place outside the area covered by the cooperative.
[13]
However, under the Cooperative Code, the articles of cooperation of a

cooperative applying for registration must be accompanied with the bonds of the
accountable officers and a sworn statement of the treasurer elected by the
subscribers showing that at least twenty-five per cent (25%) of the authorized share
capital has been subscribed and at least twenty-five per cent (25%) of the total
subscription has been paid and in no case shall the paid-up share capital be less
than Two thousand pesos (P2,000.00). [14]
b. Extent of Government Control over Cooperatives
Another principle adhered to by the Cooperative Code is the principle of
subsidiarity. Pursuant to this principle, the government may only engage in
development activities where cooperatives do not posses the capability nor the
resources to do so and only upon the request of such cooperatives. [15] Thus, Article 2
of the Cooperative Code provides:
Art. 2. Declaration of Policy. It is the declared policy of the State to foster the
creation and growth of cooperatives as a practical vehicle for prompting selfreliance and harnessing people power towards the attainment of economic
development and social justice. The State shall encourage the private sector to
undertake the actual formation and organization to cooperatives and shall create an
atmosphere that is conducive to the growth and development of these
cooperatives.
Towards this end, the Government and all its branches, subdivisions,
instrumentalities and agencies shall ensure the provision of technical guidance,
financial assistance and other services to enable said cooperatives to develop into
viable and responsive economic enterprises and thereby bring about a strong
cooperative movement that is free from any conditions that might infringe upon the
autonomy or organizational integrity of cooperatives.
Further, the State recognizes the principle of subsidiarity under which the
cooperative sector will initiate and regulate within its own ranks the
promotion and organization, training and research, audit and support
services relating to cooperatives with government assistance where
necessary.[16]
Accordingly, under the charter of the CDA, or the primary government agency
tasked to promote and regulate the institutional development of cooperatives, it is
the declared policy of the State that:
[g]overnment assistance to cooperatives shall be free from any restriction
and conditionality that may in any manner infringe upon the objectives and
character of cooperatives as provided in this Act.The State shall, except as
provided in this Act, maintain the policy of noninterference in the
management and operation of cooperatives.[17]
In contrast, P.D. No. 269, as amended by P.D. No. 1645, is replete with provisions
which grant the NEA, upon the happening of certain events, the power to control
and take over the management and operations of cooperatives registered under it.
Thus:

a) the NEA Administrator has the power to designate, subject to the

confirmation of the Board of Administrators, an Acting General Manager
and/or Project Supervisor for a cooperative where vacancies in the said
positions occur and/or when the interest of the cooperative or the program so
requires, and to prescribe the functions of the said Acting General
Manager and/or Project Supervisor, which powers shall not be nullified,
altered or diminished by any policy or resolution of the Board of
Directors of the cooperative concerned;[18]
b) the NEA is given the power of supervision and control over electric
cooperatives and pursuant to such powers, NEA may issue orders, rules and
regulations motu propio or upon petition of third parties to conduct
referenda and other similar actions in all matters affecting electric
cooperatives;[19]
c) No cooperative shall borrow money from any source without the approval of
the Board of Administrators of the NEA;[20] and
d) The management of a cooperative shall be vested in its Board, subject to
the supervision and control of NEA which shall have the right to be
represented and to participate in all Board meetings and deliberations and to
approve all policies and resolutions.[21]
The extent of government control over electric cooperatives covered by P.D. No.
269, as amended, is largely a function of the role of the NEA as a primary source
of funds of these electric cooperatives. It is crystal clear that NEA incurred loans
from various sources to finance the development and operations of the
electric cooperatives. Consequently, amendments to P.D. No. 269 were primarily
geared to expand the powers of the NEA over the electric cooperatives to ensure
that loans granted to them would be repaid to the government. In contrast,
cooperatives under R.A. No. 6938 are envisioned to be self-sufficient and
independent organizations with
minimal
government
intervention
or
regulation.
To be sure, the transitory provisions of R.A. No. 6938 are indicative of the
recognition by Congress of the fundamental distinctions between electric
cooperatives organized under P.D No. 269, as amended, and cooperatives under the
new Cooperative Code. Article 128 of the Cooperative Code provides that all
cooperatives registered under previous laws shall be deemed registered with the
CDA upon submission of certain requirements within one year. However,
cooperatives created under P.D. No. 269, as amended, are given three years within
which to qualify and register with the CDA, after which, provisions of P.D. No.
1645 which expand the powers of the NEA over electric cooperatives, would no
longer apply.[22]
Second, the classification of tax-exempt entities in the Local Government Code
is germane to the purpose of the law. The Constitutional mandate that every local
government unit shall enjoy local autonomy, does not mean that the exercise of
power by local governments is beyond regulation by Congress. Thus, while each
government unit is granted the power to create its own sources of revenue,
Congress, in light of its broad power to tax, has the discretion to determine
the extent of the taxing powers of local government units consistent with the
policy of local autonomy.[23]

Section 193 of the Local Government Code is indicative of the legislative intent
to vest broad taxing powers upon local government units and to limit exemptions
from local taxation to entities specifically provided therein. Section 193 provides:
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 and controlled
corporations, except local water districts, cooperatives duly registered under
R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. [24]
The above provision effectively withdraws exemptions from local taxation
enjoyed by various entities and organizations upon effectivity of the Local
Government Code except for a) local water districts; b) cooperatives duly
registered under R.A. No. 6938; and c) non-stock and non-profit hospitals
and educational institutions. Further, with respect to real property taxes, the
Local Government Code again specifically enumerates entities which are exempt
therefrom and withdraws exemptions enjoyed by all other entities upon the
effectivity of the code. Thus, Section 234 provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof had been granted for
consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, nonprofit or religious cemeteries and all lands, buildings and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by
local water districts and government-owned or controlled corporations engaged in
the supply and distribution of water and/or generation and transmission of electric
power;
(d) All real property owned by duly registered cooperatives as provided for
under R.A. No. 6938; and
(e) Machinery and equipment used for pollution control and environmental
protection.
Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code. [25]
In Mactan Cebu International Airport Authority v. Marcos,[26] this Court
held that the limited and restrictive nature of the tax exemption privileges under

the Local Government Code is consistent with the State policy to ensure autonomy
of local governments and the objective of the Local Government Code to grant
genuine and meaningful autonomy to enable local government units to attain their
fullest development as self-reliant communities and make them effective partners in
the attainment of national goals. The obvious intention of the law is to broaden the
tax base of local government units to assure them of substantial sources of
revenue.
While we understand petitioners predicament brought about by the withdrawal
of their local tax exemption privileges under the Local Government Code, it is not
the province of this Court to go into the wisdom of legislative enactments. Courts
can only interpret laws. The principle of separation of powers prevents them from
re-inventing the laws.
Finally, Sections 193 and 234 of the Local Government Code permit reasonable
classification as these exemptions are not limited to existing conditions and apply
equally to all members of the same class. Exemptions from local taxation, including
real property tax, are granted to all cooperatives covered by R.A. No. 6938 and such
exemptions exist for as long as the Local Government Code and the provisions
therein on local taxation remain good law.
II
There is No Violation of the Non-Impairment Clause
It is ingrained in jurisprudence that the constitutional prohibition on the
impairment of the obligation of contracts does not prohibit every change in existing
laws. To fall within the prohibition, the change must not only impair the obligation of
the existing contract, but the impairment must be substantial. [27] What constitutes
substantial impairment was explained by this Court in Clemons v. Nolting:[28]
A law which changes the terms of a legal contract between parties, either in the
time or mode of performance, or imposes new conditions, or dispenses with those
expressed, or authorizes for its satisfaction something different from that provided
in its terms, is law which impairs the obligation of a contract and is therefore null
and void.
Moreover, to constitute impairment, the law must affect a change in the rights of
the parties with reference to each other and not with respect to non-parties. [29]
Petitioners insist that Sections 193 and 234 of the Local Government Code
impair the obligations imposed under the six (6) loan agreements executed by the
NEA as borrower and USAID as lender. All six agreements contain similarly worded
provisions on the tax treatment of the proceeds of the loan and properties and
commodities acquired through the loan. Thus:
Section 6.5. Taxes and Duties. The Borrower covenants and agrees that this Loan
Agreement and the Loan provided for herein shall be free from, and the
Principal and interest shall be paid to A.I.D. without deduction for and free
from, any taxation or fees imposed under any laws or decrees in effect within
the Republic of the Philippines or any such taxes or fees so imposed or payable shall
be reimbursed by the Borrower with funds other than those provided under the
Loan. To the extent that (a) any contractor, including any consulting firm,

any personnel of such contractor financed hereunder, and any property or

transactions relating to such contracts and (b) any commodity
procurement transactions financed hereunder, are not exempt from
identifiable taxes, tariffs, duties and other levies imposed under laws in
effect in the country of the Borrower, the Borrower and/or Beneficiary shall
pay or reimburse the same with funds other than those provided under
the Loan.[30]
Petitioners contend that the withdrawal by the Local Government Code of the
tax exemptions of cooperatives under P.D. No. 269, as amended, is an impairment
of the tax exemptions provided under the loan agreements. Petitioners argue that
as beneficiaries of the loan proceeds, pursuant to the above provision, [a]ll the
assets of petitioners, such as lands, buildings, distribution lines acquired through
the proceeds of the Loan Agreements are tax exempt. [31]
We hold otherwise.
A plain reading of the provision quoted above readily shows that it does not
grant any tax exemption in favor of the borrower or the beneficiary either on the
proceeds of the loan itself or the properties acquired through the said loan. It simply
states that the loan proceeds and the principal and interest of the loan, upon
repayment by the borrower, shall be without deduction of any tax or fee that
may be payable under Philippine law as such tax or fee will be absorbed
by the borrower with funds other than the loan proceeds. Further, the
provision states that with respect to any payment made by the borrower to (1) any
contractor or any personnel of such contractor or any property transaction and (2)
any commodity transaction using the proceeds of the loan, the tax to be paid, if
any, on such transactions shall be absorbed by the borrower and/or
beneficiary through funds other than the loan proceeds.
Beyond doubt, the import of the tax provision in the loan agreements cited by
petitioners is twofold: (1) the borrower is entitled to receive from and is obliged to
pay the lender the principal amount of the loan and the interest thereon in full,
without any deduction of the tax component thereof imposed under
applicable Philippine law and any tax imposed shall be paid by the
borrower with funds other than the loan proceeds and (2) with respect to
payments made to any contractor, its personnel or any property or commodity
transaction entered into pursuant to the loan agreement and with the use of the
proceeds thereof, taxes payable under the said transactions shall be paid by the
borrower and/or beneficiary with the use of funds other than the loan
proceeds. The quoted provision does not purport to grant any tax exemption in
favor of any party to the contract, including the beneficiaries thereof. The provisions
simply shift the tax burden, if any, on the transactions under the loan agreements
to the borrower and/or beneficiary of the loan. Thus, the withdrawal by the Local
Government Code under Sections 193 and 234 of the tax exemptions previously
enjoyed by petitioners does not impair the obligation of the borrower, the lender or
the beneficiary under the loan agreements as in fact, no tax exemption is granted
therein.
III

Conclusion
Petitioners lament the difficulties they face in complying with the implementing
rules and regulations issued by the CDA for the conversion of electric cooperatives
under P.D. No. 269, as amended, to cooperatives under R.A. No. 6938. They allege
that because of the cumbersome legal and technical requirements imposed by the
Omnibus Rules and Regulations on the Registration of Electric Cooperatives under
R.A. No. 6938, petitioners cannot register and convert as stock cooperatives under
the Cooperative Code.[32]
The Court understands the plight of the petitioners. Their remedy, however, is
not judicial. Striking down Sections 193 and 234 of the Local Government Code as
unconstitutional or declaring them inapplicable to petitioners is not the proper
course of action for them to obtain their previous tax exemptions. The language of
the law and the intention of its framers are clear and unequivocal and courts have
no other duty except to uphold the law. The task to re-examine the rules and
guidelines on the conversion of electric cooperatives to cooperatives under R.A. No.
6938 and provide every assistance available to them should be addressed by the
proper authorities of government. This is necessary to encourage the growth and
viability of cooperatives as instruments of social justice and economic development.
WHEREFORE, the instant petition is DENIED and the temporary restraining
order heretofore issued is LIFTED.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Vitug, Panganiban, Quisumbing, Ynares-Santiago,
Sandoval-Gutierrez, Carpio, Austria-Martinez, Corona, Carpio-Morales, Callejo,
Sr., and Azcuna, JJ.,concur.

Nitafan v CIR
G.R. No. 78780

July 23, 1987

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

JR., petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE FINANCIAL OFFICER,
SUPREME COURT OF THE PHILIPPINES, respondents.
RESOLUTION
MELENCIO-HERRERA, J.:
Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19
and 53, respectively, of the Regional Trial Court, National Capital Judicial Region, all
with stations in Manila, seek to prohibit and/or perpetually enjoin respondents, the

Commissioner of Internal Revenue and the Financial Officer of the Supreme Court,
from making any deduction of withholding taxes from their salaries.
In a nutshell, they submit that "any tax withheld from their emoluments or
compensation as judicial officers constitutes a decrease or diminution of their
salaries, contrary to the provision of Section 10, Article VIII of the 1987 Constitution
mandating that "(d)uring their continuance in office, their salary shall not be
decreased," even as it is anathema to the Ideal of an independent judiciary
envisioned in and by said Constitution."
It may be pointed out that, early on, the Court had dealt with the matter
administratively in response to representations that the Court direct its Finance
Officer to discontinue the withholding of taxes from salaries of members of the
Bench. Thus, on June 4, 1987, the Court en banc had reaffirmed the Chief Justice's
directive as follows:
RE: Question of exemption from income taxation. The Court REAFFIRMED the
Chief Justice's previous and standing directive to the Fiscal Management and Budget
Office of this Court to continue with the deduction of the withholding taxes from the
salaries of the Justices of the Supreme Court as well as from the salaries of all other
members of the judiciary.
That should have resolved the question. However, with the filing of this petition, the
Court has deemed it best to settle the legal issue raised through this judicial
pronouncement. As will be shown hereinafter, the clear intent of the Constitutional
Commission was to delete the proposed express grant of exemption from payment
of income tax to members of the Judiciary, so as to "give substance to equality
among the three branches of Government" in the words of Commissioner Rigos. In
the course of the deliberations, it was further expressly made clear, specially with
regard to Commissioner Joaquin F. Bernas' accepted amendment to the amendment
of Commissioner Rigos, that the salaries of members of the Judiciary would be
subject to the general income tax applied to all taxpayers.
This intent was somehow and inadvertently not clearly set forth in the final text of
the Constitution as approved and ratified in February, 1987 (infra, pp. 7-8). Although
the intent may have been obscured by the failure to include in the General
Provisions a proscription against exemption of any public officer or employee,
including constitutional officers, from payment of income tax, the Court since then
has authorized the continuation of the deduction of the withholding tax from the
salaries of the members of the Supreme Court, as well as from the salaries of all
other members of the Judiciary. The Court hereby makes of record that it had then
discarded the ruling in Perfecto vs. Meer and Endencia vs. David, infra, that
declared the salaries of members of the Judiciary exempt from payment of the
income tax and considered such payment as a diminution of their salaries during
their continuance in office. The Court hereby reiterates that the salaries of Justices
and Judges are properly subject to a general income tax law applicable to all income
earners and that the payment of such income tax by Justices and Judges does not
fall within the constitutional protection against decrease of their salaries during
their continuance in office.

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

Constitution provided:
... (The members of the Supreme Court and all judges of inferior courts) shall
receive such compensation as may be fixed by law, which shall not
be diminished during their continuance in office ... 1 (Emphasis supplied).
Under the 1973 Constitution, the same provision read:
The salary of the Chief Justice and of the Associate Justices of the Supreme court,
and of judges of inferior courts shall be fixed by law, which shall not
be decreased during their continuance in office. ... 2 (Emphasis ours).
And in respect of income tax exemption, another provision in the same 1973
Constitution specifically stipulated:
No salary or any form of emolument of any public officer or employee, including
constitutional officers, shall be exempt from payment of income tax. 3
The provision in the 1987 Constitution, which petitioners rely on, reads:
The salary of the Chief Justice and of the Associate Justices of the Supreme Court,
and of judges of lower courts shall be fixed by law. During their continuance in
office, their salary shall not be decreased. 4(Emphasis supplied).
The 1987 Constitution does not contain a provision similar to Section 6, Article XV of
the 1973 Constitution, for which reason, petitioners claim that the intent of the
framers is to revert to the original concept of "non-diminution "of salaries of judicial
officers.
The deliberations of the 1986 Constitutional Commission relevant to Section 10,
Article VIII, negate such contention.
The draft proposal of Section 10, Article VIII, of the 1987 Constitution read:
Section 13. The salary of the Chief Justice and the Associate Justices of the Supreme
Court and of judges of the lower courts shall be fixed by law. During their
continuance in office, their salary shall not be diminished nor subjected to income
tax. Until the National Assembly shall provide otherwise, the Chief Justice shall
receive an annual salary of _____________ and each Associate Justice ______________
pesos. 5 (Emphasis ours)
During the debates on the draft Article (Committee Report No. 18), two
Commissioners presented their objections to the provision on tax exemption, thus:
MS. AQUINO. Finally, on the matter of exemption from tax of the salary of justices,
does this not violate the principle of the uniformity of taxation and the principle of
equal protection of the law? After all, tax is levied not on the salary but on the
combined income, such that when the judge receives a salary and it is comingled
with the other income, we tax the income, not the salary. Why do we have to give
special privileges to the salary of justices?

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

decrease of their salary during their term. This is an indirect way of decreasing their
salary and affecting the independence of the judges.
MS. AQUINO. I appreciate that to be in the nature of a clause to respect tenure, but
the special privilege on taxation might, in effect, be a violation of the principle of
uniformity in taxation and the equal protection clause. 6
xxx

xxx

xxx

MR. OPLE. x x x
Of course, we share deeply the concern expressed by the sponsor, Commissioner
Roberto Concepcion, for whom we have the highest respect, to surround the
Supreme Court and the judicial system as a whole with the whole armor of defense
against the executive and legislative invasion of their independence. But in so
doing, some of the citizens outside, especially the humble government employees,
might say that in trying to erect a bastion of justice, we might end up with the
fortress of privileges, an island of extra territoriality under the Republic of the
Philippines, because a good number of powers and rights accorded to the Judiciary
here may not be enjoyed in the remotest degree by other employees of the
government.
An example is the exception from income tax, which is a kind of economic
immunity, which is, of course, denied to the entire executive department and the
legislative. 7
And during the period of amendments on the draft Article, on July 14, 1986,
Commissioner Cirilo A. Rigos proposed that the term "diminished" be changed to
"decreased" and that the words "nor subjected to income tax" be deleted so as to
"give substance to equality among the three branches in the government.
Commissioner Florenz D. Regalado, on behalf of the Committee on the Judiciary,
defended the original draft and referred to the ruling of this Court in Perfecto vs.
Meer 8 that "the independence of the judges is of far greater importance than any
revenue that could come from taxing their salaries." Commissioner Rigos then
moved that the matter be put to a vote. Commissioner Joaquin G. Bernas stood up
"in support of an amendment to the amendment with the request for a modification
of the amendment," as follows:
FR. BERNAS. Yes. I am going to propose an amendment to the amendment saying
that it is not enough to drop the phrase "shall not be subjected to income tax,"
because if that is all that the Gentleman will do, then he will just fall back on the
decision in Perfecto vs. Meer and in Dencia vs. David [should be Endencia and Jugo
vs. David, etc., 93 Phil. 696[ which excludes them from income tax, but rather I
would propose that the statement will read: "During their continuance in office, their
salary shall not be diminished BUT MAY BE SUBJECT TO GENERAL INCOME TAX."IN
support of this position, I would say that the argument seems to be that the justice
and judges should not be subjected to income tax because they already gave up the
income from their practice. That is true also of Cabinet members and all other

employees. And I know right now, for instance, there are many people who have
accepted employment in the government involving a reduction of income and yet
are still subject to income tax. So, they are not the only citizens whose income is
reduced by accepting service in government.
Commissioner Rigos accepted the proposed amendment to the amendment.
Commissioner Rustico F. de los Reyes, Jr. then moved for a suspension of the
session. Upon resumption, Commissioner Bernas announced:
During the suspension, we came to an understanding with the original proponent,
Commissioner Rigos, that his amendment on page 6,. line 4 would read: "During
their continuance in office, their salary shall not be DECREASED."But this is on the
understanding that there will be a provision in the Constitution similar to Section 6
of Article XV, the General Provisions of the 1973 Constitution, which says:
No salary or any form of emolument of any public officer or employee, including
constitutional officers, shall be exempt from payment of income tax.
So, we put a period (.) after "DECREASED" on the understanding that the salary of
justices is subject to tax.
When queried about the specific Article in the General Provisions on non-exemption
from tax of salaries of public officers, Commissioner Bernas replied:
FR BERNAS. Yes, I do not know if such an article will be found in the General
Provisions. But at any rate, when we put a period (.) after "DECREASED," it is on the
understanding that the doctrine in Perfecto vs. Meer and Dencia vs. David will not
apply anymore.
The amendment to the original draft, as discussed and understood, was finally
approved without objection.
THE PRESIDING OFFICER (Mr. Bengzon). The understanding, therefore, is that there
will be a provision under the Article on General Provisions. Could Commissioner
Rosario Braid kindly take note that the salaries of officials of the government
including constitutional officers shall not be exempt from income tax? The
amendment proposed herein and accepted by the Committee now reads as follows:
"During their continuance in office, their salary shall not be DECREASED"; and the
phrase "nor subjected to income tax" is deleted. 9
The debates, interpellations and opinions expressed regarding the constitutional
provision in question until it was finally approved by the Commission disclosed that
the true intent of the framers of the 1987 Constitution, in adopting it, was to make
the salaries of members of the Judiciary taxable. The ascertainment of that intent is
but in keeping with the fundamental principle of constitutional construction that the
intent of the framers of the organic law and of the people adopting it should be
given effect.10 The primary task in constitutional construction is to ascertain and
thereafter assure the realization of the purpose of the framers and of the people in
the adoption of the Constitution. 11 it may also be safely assumed that the people in

ratifying the Constitution were guided mainly by the explanation offered by the
framers.121avvphi1
Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for
clarity, is again reproduced hereunder:
The salary of the Chief Justice and of the Associate Justices of the Supreme Court,
and of judges of lower courts shall be fixed by law. During their continuance in
office, their salary shall not be decreased. (Emphasis supplied).
it is plain that the Constitution authorizes Congress to pass a law fixing another rate
of compensation of Justices and Judges but such rate must be higher than that
which they are receiving at the time of enactment, or if lower, it would be applicable
only to those appointed after its approval. It would be a strained construction to
read into the provision an exemption from taxation in the light of the discussion in
the Constitutional Commission.
With the foregoing interpretation, and as stated heretofore, the ruling that "the
imposition of income tax upon the salary of judges is a dimunition thereof, and so
violates the Constitution" in Perfecto vs. Meer,13 as affirmed inEndencia vs.
David 14 must be declared discarded. The framers of the fundamental law, as
the alter ego of the people, have expressed in clear and unmistakable terms the
meaning and import of Section 10, Article VIII, of the 1987 Constitution that they
have adopted
Stated otherwise, we accord due respect to the intent of the people, through the
discussions and deliberations of their representatives, in the spirit that all citizens
should bear their aliquot part of the cost of maintaining the government and should
share the burden of general income taxation equitably.
WHEREFORE, the instant petition for Prohibition is hereby dismissed.
Teehankee, C.J., Fernan, Narvasa, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco,
Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Yap, J., is on leave.

CIR v BPI
G.R. No. 134062

April 17, 2007

COMMISSIONER
OF
INTERNAL
vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
DECISION

REVENUE, Petitioner,

CORONA, J.:
This is a petition for review on certiorari 1 of a decision2 of the Court of Appeals (CA)
dated May 29, 1998 in CA-G.R. SP No. 41025 which reversed and set aside the
decision3 and resolution4 of the Court of Tax Appeals (CTA) dated November 16,
1995 and May 27, 1996, respectively, in CTA Case No. 4715.
In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue
(CIR) assessed respondent Bank of the Philippine Islands (BPIs) deficiency
percentage and documentary stamp taxes for the year 1986 in the total amount
of P129,488,656.63:
1986 Deficiency Percentage Tax
Deficiency percentage tax

P 7,
270,892.88

Add: 25% surcharge

1,817,723.22

20% interest from 1-21-87 to 10-28-88

3,215,825.03
15,000.00

Compromise penalty

TOTAL AMOUNT DUE AND COLLECTIBLE

P12,319,441.1
3

1986 Deficiency Documentary Stamp Tax

Deficiency percentage tax

P93,723,372.40

Add: 25% surcharge

23,430,843.10
15,000.00

Compromise penalty
TOTAL
AMOUNT
COLLECTIBLE

DUE

AND P117,169,215.50
.5

Both notices of assessment contained the following note:

Please be informed that your [percentage and documentary stamp taxes have]
been assessed as shown above. Said assessment has been based on return (filed
by you) (as verified) (made by this Office) (pending investigation) (after
investigation). You are requested to pay the above amount to this Office or to our
Collection Agent in the Office of the City or Deputy Provincial Treasurer of xxx 6
In a letter dated December 10, 1988, BPI, through counsel, replied as follows:

1. Your "deficiency assessments" are no assessments at all. The taxpayer is not

informed, even in the vaguest terms, why it is being assessed a deficiency. The very
purpose of a deficiency assessment is to inform taxpayer why he has incurred a
deficiency so that he can make an intelligent decision on whether to pay or to
protest the assessment. This is all the more so when the assessment involves
astronomical amounts, as in this case.
We therefore request that the examiner concerned be required to state, even in the
briefest form, why he believes the taxpayer has a deficiency documentary and
percentage taxes, and as to the percentage tax, it is important that the taxpayer be
informed also as to what particular percentage tax the assessment refers to.
2. As to the alleged deficiency documentary stamp tax, you are aware of the
compromise forged between your office and the Bankers Association of the
Philippines [BAP] on this issue and of BPIs submission of its computations under
this compromise. There is therefore no basis whatsoever for this assessment,
assuming it is on the subject of the BAP compromise. On the other hand, if it relates
to documentary stamp tax on some other issue, we should like to be informed about
what those issues are.
3. As to the alleged deficiency percentage tax, we are completely at a loss on how
such assessment may be protested since your letter does not even tell the taxpayer
what particular percentage tax is involved and how your examiner arrived at the
deficiency. As soon as this is explained and clarified in a proper letter of
assessment, we shall inform you of the taxpayers decision on whether to pay or
protest the assessment.7
On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:
although in all respects, your letter failed to qualify as a protest under Revenue
Regulations No. 12-85 and therefore not deserving of any rejoinder by this office as
no valid issue was raised against the validity of our assessment still we obliged to
explain the basis of the assessments.
xxx xxx xxx
this constitutes the final decision of this office on the matter. 8
On July 6, 1991, BPI requested a reconsideration of the assessments stated in the
CIRs May 8, 1991 letter. 9 This was denied in a letter dated December 12, 1991,
received by BPI on January 21, 1992.10
On February 18, 1992, BPI filed a petition for review in the CTA. 11 In a decision dated
November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the
subject assessments had become final and unappealable. The CTA ruled that BPI
failed to protest on time under Section 270 of the National Internal Revenue Code
(NIRC) of 1986 and Section 7 in relation to Section 11 of RA 1125. 12 It denied
reconsideration in a resolution dated May 27, 1996. 13
On appeal, the CA reversed the tax courts decision and resolution and remanded
the case to the CTA14 for a decision on the merits.15 It ruled that the October 28,

1988 notices were not valid assessments because they did not inform the taxpayer
of the legal and factual bases therefor. It declared that the proper assessments were
those contained in the May 8, 1991 letter which provided the reasons for the
claimed deficiencies.16 Thus, it held that BPI filed the petition for review in the CTA
on time.17 The CIR elevated the case to this Court.
This petition raises the following issues:
1) whether or not the assessments issued to BPI for deficiency percentage and
documentary stamp taxes for 1986 had already become final and unappealable and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of the NIRC stated:
Sec. 270. Protesting of assessment. When the [CIR] 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 [CIR] shall issue an assessment based on
his findings.
xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28, 1988
notices19 were valid assessments. If they were not, as held by the CA, then the
correct assessments were in the May 8, 1991 letter, received by BPI on June 27,
1991. BPI, in its July 6, 1991 letter, seasonably asked for a reconsideration of the
findings which the CIR denied in his December 12, 1991 letter, received by BPI on
January 21, 1992. Consequently, the petition for review filed by BPI in the CTA on
February 18, 1992 would be well within the 30-day period provided by law. 20
The CIR argues that the CA erred in holding that the October 28, 1988 notices were
invalid assessments. He asserts that he used BIR Form No. 17.08 (as revised in
November 1964) which was designed for the precise purpose of notifying taxpayers
of the assessed amounts due and demanding payment thereof. 21 He contends that
there was no law or jurisprudence then that required notices to state the reasons for
assessing deficiency tax liabilities.22
BPI counters that due process demanded that the facts, data and law upon which
the assessments were based be provided to the taxpayer. It insists that the NIRC, as
worded now (referring to Section 228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void."
According to BPI, this is declaratory of what sound tax procedure is and a
confirmation of what due process requires even under the former Section 270.
BPIs contention has no merit. The present Section 228 of the NIRC provides:

Sec. 228. Protesting of Assessment. When the [CIR] or his duly authorized
representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings: Provided, however, That a preassessment
notice shall not be required in the following cases:
xxx xxx xxx
The taxpayer shall be informed in writing of the law and the facts on which
the assessment is made; otherwise, the assessment shall be void.
xxx xxx xxx (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of the law and facts on which the
assessments of the deficiency taxes were made. He merely notified BPI of his
findings, consisting only of the computation of the tax liabilities and a demand for
payment thereof within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the provisions of the former
Section 270 prior to its amendment by RA 8424 (also known as the Tax Reform Act
of 1997).23 In CIR v. Reyes,24 we held that:
In the present case, Reyes was not informed in writing of the law and the facts on
which the assessment of estate taxes had been made. She was merely notified of
the findings by the CIR, who had simply relied upon the provisions of former Section
229 prior to its amendment by [RA] 8424, otherwise known as the Tax Reform Act of
1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an
assessment. The old requirement of merely notifying the taxpayer of the
CIR's findings was changed in 1998 to informing the taxpayer of not only the
law, but also of the facts on which an assessment would be made; otherwise, the
assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued
against the estate. On April 22, 1998, the final estate tax assessment notice, as well
as demand letter, was also issued. During those dates, RA 8424 was already in
effect. The notice required under the old law was no longer sufficient under
the new law.25 (emphasis supplied; italics in the original)
Accordingly, when the assessments were made pursuant to the former Section 270,
the only requirement was for the CIR to "notify" or inform the taxpayer of his
"findings." Nothing in the old law required a written statement to the taxpayer of
the law and facts on which the assessments were based. The Court cannot read into
the law what obviously was not intended by Congress. That would be judicial
legislation, nothing less.
Jurisprudence, on the other hand, simply required that the assessments contain a
computation of tax liabilities, the amount the taxpayer was to pay and a demand for
payment within a prescribed period.26 Everything considered, there was no doubt
the October 28, 1988 notices sufficiently met the requirements of a valid
assessment under the old law and jurisprudence.

The sentence
[t]he taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void
was not in the old Section 270 but was only later on inserted in the renumbered
Section 228 in 1997. Evidently, the legislature saw the need to modify the former
Section 270 by inserting the aforequoted sentence. 27 The fact that the amendment
was necessary showed that, prior to the introduction of the amendment, the statute
had an entirely different meaning.28
Contrary to the submission of BPI, the inserted sentence in the renumbered Section
228 was not an affirmation of what the law required under the former Section 270.
The amendment introduced by RA 8424 was an innovation and could not be
reasonably inferred from the old law.29 Clearly, the legislature intended to insert a
new provision regarding the form and substance of assessments issued by the CIR.30
In ruling that the October 28, 1988 notices were not valid assessments, the CA
explained:
xxx. Elementary concerns of due process of law should have prompted the [CIR] to
inform [BPI] of the legal and factual basis of the formers decision to charge the
latter for deficiency documentary stamp and gross receipts taxes. 31
In other words, the CAs theory was that BPI was deprived of due process when the
CIR failed to inform it in writing of the factual and legal bases of the assessments
even if these were not called for under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic constitutional requirement
that "no person shall be deprived of his property without due process of law." 32 We
note, however, what the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that not only was [BPI] given
the opportunity to discuss with the [CIR] when the latter issued the former a PreAssessment Notice (which [BPI] ignored) but that the examiners themselves went to
[BPI] and "we talk to them and we try to [thresh] out the issues, present evidences
as to what they need." Now, how can [BPI] and/or its counsel honestly tell this Court
that they did not know anything about the assessments?
Not only that. To further buttress the fact that [BPI] indeed knew beforehand the
assessments[,] contrary to the allegations of its counsel[,] was the testimony of Mr.
Jerry Lazaro, Assistant Manager of the Accounting Department of [BPI]. He testified
to the fact that he prepared worksheets which contain his analysis regarding the
findings of the [CIRs] examiner, Mr. San Pedro and that the same worksheets were
presented to Mr. Carlos Tan, Comptroller of [BPI].
xxx xxx xxx

From all the foregoing discussions, We can now conclude that [BPI] was indeed
aware of the nature and basis of the assessments, and was given all the opportunity
to contest the same but ignored it despite the notice conspicuously written on the
assessments which states that "this ASSESSMENT becomes final and unappealable
if not protested within 30 days after receipt." Counsel resorted to dilatory tactics
and dangerously played with time. Unfortunately, such strategy proved fatal to the
cause of his client.33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], which by the very nature of its function is
dedicated exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will not be overturned
unless there has been an abuse or improvident exercise of authority. Such findings
can only be disturbed on appeal if they are not supported by substantial evidence or
there is a showing of gross error or abuse on the part of the [CTA]. 34
Under the former Section 270, there were two instances when an assessment
became final and unappealable: (1) when it was not protested within 30 days from
receipt and (2) when the adverse decision on the protest was not appealed to the
CTA within 30 days from receipt of the final decision: 35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation in such form and manner as may be prescribed by
the implementing regulations within thirty (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 [CTA] within
thirty (30) days from receipt of the said decision; otherwise, the decision shall
become final, executory and demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid assessments, BPI should
have protested the same within 30 days from receipt thereof. The December 10,
1988 reply it sent to the CIR did not qualify as a protest since the letter itself stated
that "[a]s soon as this is explained and clarified in a proper letter of assessment, we
shall inform you of the taxpayers decision on whether to pay or protest
the assessment."36 Hence, by its own declaration, BPI did not regard this letter as
a protest against the assessments. As a matter of fact, BPI never deemed this a
protest since it did not even consider the October 28, 1988 notices as valid or
proper assessments.
The inevitable conclusion is that BPIs failure to protest the assessments within the
30-day period provided in the former Section 270 meant that they became final and
unappealable. Thus, the CTA correctly dismissed BPIs appeal for lack of jurisdiction.

BPI was, from then on, barred from disputing the correctness of the assessments or
invoking any defense that would reopen the question of its liability on the
merits.37 Not only that. There arose a presumption of correctness when BPI failed to
protest the assessments:
Tax assessments by tax examiners are presumed correct and made in good faith.
The taxpayer has the duty to prove otherwise. In the absence of proof of any
irregularities in the performance of duties, an assessment duly made by a Bureau of
Internal Revenue examiner and approved by his superior officers will not be
disturbed. All presumptions are in favor of the correctness of tax assessments. 38
Even if we considered the December 10, 1988 letter as a protest, BPI must
nevertheless be deemed to have failed to appeal the CIRs final decision regarding
the disputed assessments within the 30-day period provided by law. The CIR, in his
May 8, 1991 response, stated that it was his "final decision on the matter." BPI
therefore had 30 days from the time it received the decision on June 27, 1991 to
appeal but it did not. Instead it filed a request for reconsideration and lodged its
appeal in the CTA only on February 18, 1992, way beyond the reglementary period.
BPI must now suffer the repercussions of its omission. We have already declared
that:
the [CIR] should always indicate to the taxpayer in clear and unequivocal
language whenever his action on an assessment questioned by a taxpayer
constitutes his final determination on the disputed assessment, as contemplated by
Sections 7 and 11 of [RA 1125], as amended. On the basis of his statement
indubitably showing that the Commissioner's communicated action is his
final decision on the contested assessment, the aggrieved taxpayer would
then be able to take recourse to the tax court at the opportune time.
Without needless difficulty, the taxpayer would be able to determine when
his right to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and opportunity on the
part of the taxpayer to continually delay the finality of the assessment
and, consequently, the collection of the amount demanded as taxes by
repeated requests for recomputation and reconsideration. On the part of the
[CIR], this would encourage his office to conduct a careful and thorough study of
every questioned assessment and render a correct and definite decision thereon in
the first instance. This would also deter the [CIR] from unfairly making the taxpayer
grope in the dark and speculate as to which action constitutes the decision
appealable to the tax court. Of greater import, this rule of conduct would meet a
pressing need for fair play, regularity, and orderliness in administrative
action.39 (emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve BPI of its
liability under the subject tax assessments.
We realize that these assessments (which have been pending for almost 20 years)
involve a considerable amount of money. Be that as it may, we cannot legally
presume the existence of something which was never there. The state will be

deprived of the taxes validly due it and the public will suffer if taxpayers will not be
held liable for the proper taxes assessed against them:
Taxes are the lifeblood of the government, for without taxes, the government can
neither exist nor endure. A principal attribute of sovereignty, 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 common good. The theory
behind the exercise of the power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting the general welfare and wellbeing of the people.40
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the
Court of Appeals in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.
SO ORDERED.
RENATO C. CORONA
Associate Justice

Pepsi Cola Bottling Co v Municipality of Tanauan

G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES,
appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL
AL., defendant appellees.

INC., plaintiff-

MAYOR,

ET

Sabido, Sabido & Associates for appellant.

Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and
Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for
appellees.

MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil
Case No. 3294, which was certified to Us by the Court of Appeals on October 6,
1969, as involving only pure questions of law, challenging the power of taxation
delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264,
as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the
Philippines, Inc., commenced a complaint with preliminary injunction before the
Court of First Instance of Leyte for that court to declare Section 2 of Republic Act No.

2264. 1 otherwise known as the Local Autonomy Act, unconstitutional as an undue

delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27,
series of 1962, of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material
portions of which state that, first, both Ordinances Nos. 23 and 27 embrace or cover
the same subject matter and the production tax rates imposed therein are
practically the same, and second, that on January 17, 1963, the acting Municipal
Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the PepsiCola Bottling Plant in said municipality, sought to enforce compliance by the latter
of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September
25, 1962, levies and collects "from soft drinks producers and manufacturers a tax of
one-sixteenth (1/16) of a centavo for every bottle of soft drink corked." 2 For the
purpose of computing the taxes due, the person, firm, company or corporation
producing soft drinks shall submit to the Municipal Treasurer a monthly report, of
the total number of bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28,
1962, levies and collects "on soft drinks produced or manufactured within the
territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of computing
the taxes due, the person, fun company, partnership, corporation or plant producing
soft drinks shall submit to the Municipal Treasurer a monthly report of the total
number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal
production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment
"dismissing the complaint and upholding the constitutionality of [Section 2, Republic
Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering
the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the
costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court
of Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the
Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory
and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose
percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?

1. The power of taxation is an essential and inherent attribute of sovereignty,

belonging as a matter of right to every independent government, without being
expressly conferred by the people. 6 It is a power that is purely legislative and which
the central legislative body cannot delegate either to the executive or judicial
department of the government without infringing upon the theory of separation of
powers. The exception, however, lies in the case of municipal corporations, to
which, said theory does not apply. Legislative powers may be delegated to local
governments in respect of matters of local concern. 7 This is sanctioned by
immemorial practice. 8 By necessary implication, the legislative power to create
political corporations for purposes of local self-government carries with it the power
to confer on such local governmental agencies the power to tax. 9 Under the New
Constitution, local governments are granted the autonomous authority to create
their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each
local government unit shall have the power to create its sources of revenue and to
levy taxes, subject to such limitations as may be provided by law." Withal, it cannot
be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere
of the legislative power to enact and vest in local governments the power of local
taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiffappellant's pretense, would not suffice to invalidate the said law as confiscatory and
oppressive. In delegating the authority, the State is not limited 6 the exact measure
of that which is exercised by itself. When it is said that the taxing power may be
delegated to municipalities and the like, it is meant that there may be delegated
such measure of power to impose and collect taxes as the legislature may deem
expedient. Thus, municipalities may be permitted to tax subjects which for reasons
of public policy the State has not deemed wise to tax for more general
purposes. 10 This is not to say though that the constitutional injunction against
deprivation of property without due process of law may be passed over under the
guise of the taxing power, except when the taking of the property is in the lawful
exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule
on uniformity of taxation is observed; (3) either the person or property taxed is
within the jurisdiction of the government levying the tax; and (4) in the assessment
and collection of certain kinds of taxes notice and opportunity for hearing are
provided. 11 Due process is usually violated where the tax imposed is for a private
as distinguished from a public purpose; a tax is imposed on property outside the
State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in
assessing and collecting taxes. But, a tax does not violate the due process clause,
as applied to a particular taxpayer, although the purpose of the tax will result in an
injury rather than a benefit to such taxpayer. Due process does not require that the
property subject to the tax or the amount of tax to be raised should be determined
by judicial inquiry, and a notice and hearing as to the amount of the tax and the
manner in which it shall be apportioned are generally not necessary to due process
of law. 12
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the

delegating authority specifies the limitations and enumerates the taxes over which
local taxation may not be exercised. 13 The reason is that the State has exclusively
reserved the same for its own prerogative. Moreover, double taxation, in general, is
not forbidden by our fundamental law, since We have not adopted as part thereof
the injunction against double taxation found in the Constitution of the United States
and some states of the Union. 14 Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same governmental entity 15 or by the
same jurisdiction for the same purpose, 16 but not in a case where one tax is
imposed by the State and the other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double
taxation, because these two ordinances cover the same subject matter and impose
practically the same tax rate. The thesis proceeds from its assumption that both
ordinances are valid and legally enforceable. This is not so. As earlier quoted,
Ordinance No. 23, which was approved on September 25, 1962, levies or collects
from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo
for .every bottle corked, irrespective of the volume contents of the bottle used.
When it was discovered that the producer or manufacturer could increase the
volume contents of the bottle and still pay the same tax rate, the Municipality of
Tanauan enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax
of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity.
The difference between the two ordinances clearly lies in the tax rate of the soft
drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle
corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity. The intention of the Municipal Council of Tanauan
in enacting Ordinance No. 27 is thus clear: it was intended as a plain substitute for
the prior Ordinance No. 23, and operates as a repeal of the latter, even without
words to that effect. 18 Plaintiff-appellant in its brief admitted that defendantsappellees are only seeking to enforce Ordinance No. 27, series of 1962. Even the
stipulation of facts confirms the fact that the Acting Municipal Treasurer of Tanauan,
Leyte sought t6 compel compliance by the plaintiff-appellant of the provisions of
said Ordinance No. 27, series of 1962. The aforementioned admission shows that
only Ordinance No. 27, series of 1962 is being enforced by defendants-appellees.
Even the Provincial Fiscal, counsel for defendants-appellees admits in his brief "that
Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as
the provisions of the latter are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes
a percentage or a specific tax. Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad enough as to extend
to almost "everything, accepting those which are mentioned therein." As long as the
text levied under the authority of a city or municipal ordinance is not within the
exceptions and limitations in the law, the same comes within the ambit of the
general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum
in cabisus non excepti 19 The limitation applies, particularly, to the prohibition
against municipalities and municipal districts to impose "any percentage tax or
other taxes in any form based thereon nor impose taxes on articles subject

to specific tax except gasoline, under the provisions of the National Internal
Revenue Code." For purposes of this particular limitation, a municipal ordinance
which prescribes a set ratio between the amount of the tax and the volume of sale
of the taxpayer imposes a sales tax and is null and void for being outside the power
of the municipality to enact. 20But, the imposition of "a tax of one centavo (P0.01)
on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks
produced or manufactured under Ordinance No. 27 does not partake of the nature
of a percentage tax on sales, or other taxes in any form based thereon. The tax is
levied on the produce (whether sold or not) and not on the sales. The volume
capacity of the taxpayer's production of soft drinks is considered solely for purposes
of determining the tax rate on the products, but there is not set ratio between the
volume of sales and the amount of the tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed
on specified articles, such as distilled spirits, wines, fermented liquors, products of
tobacco other than cigars and cigarettes, matches firecrackers, manufactured oils
and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing
cards, saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of
those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity
on all softdrinks, produced or manufactured, or an equivalent of 1- centavos per
case, 23 cannot be considered unjust and unfair. 24 an increase in the tax alone
would not support the claim that the tax is oppressive, unjust and confiscatory.
Municipal corporations are allowed much discretion in determining the reates of
imposable taxes. 25 This is in line with the constutional policy of according the
widest possible autonomy to local governments in matters of local taxation, an
aspect that is given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26
Unless the amount is so excessive as to be prohibitive, courts will go slow in writing
off an ordinance as unreasonable. 27 Reluctance should not deter compliance with
an ordinance such as Ordinance No. 27 if the purpose of the law to further
strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not
more than ten crowners or P2,000.00 with ten but not more than twenty crowners
imposed on manufacturers, producers, importers and dealers of soft drinks and/or
mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance
No. 41, series of 1968, of defendant Municipality, 29 appears not to affect the
resolution of the validity of Ordinance No. 27. Municipalities are empowered to
impose, not only municipal license taxes upon persons engaged in any business or
occupation but also to levy for public purposes, just and uniform taxes. The
ordinance in question (Ordinance No. 27) comes within the second power of a
municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise
known as the Local Autonomy Act, as amended, is hereby upheld and Municipal
Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-pealing

Municipal Ordinance No. 23, same series, is hereby declared of valid and legal
effect. Costs against petitioner-appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muoz Palma, Aquino
and Concepcion, Jr., JJ., concur.

Domingo v Garlitos
G.R. No. L-18994

June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First
Instance
of
Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the
late Walter Scott Price,respondents.
Office of the Solicitor General and
Benedicto and Martinez for respondents.

Atty.

G.

H.

Mantolino

for

petitioner.

LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the Court of First
Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain
orders of the court and for an order in this Court directing the respondent court
below to execute the judgment in favor of the Government against the estate of
Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L14674, January 30, 1960, this Court declared as final and executory the order for
the payment by the estate of the estate and inheritance taxes, charges and
penalties, amounting to P40,058.55, issued by the Court of First Instance of Leyte
in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the
Late Walter Scott Price." In order to enforce the claims against the estate the fiscal
presented a petition dated June 21, 1961, to the court below for the execution of the
judgment. The petition was, however, denied by the court which held that the
execution is not justifiable as the Government is indebted to the estate under
administration in the amount of P262,200. The orders of the court below dated
August 20, 1960 and September 28, 1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo
Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged
before Notary Public Salvador V. Esguerra, legal adviser in Malacaang to Executive

Secretary De Leon dated December 14, 1956, the note of His Excellency, Pres.
Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the latter to
pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act
No. 2700 appropriating the sum of P262.200.00 for the payment to the Leyte
Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, as
directed in the above note of the President. Considering these facts, the Court
orders that the payment of inheritance taxes in the sum of P40,058.55 due the
Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in
accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R.
No. L-14674, be deducted from the amount of P262,200.00 due and payable to the
Administratrix Simeona K. Price, in this estate, the balance to be paid by the
Government to her without further delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and it
orders that the payment of the claim of the Collector of Internal Revenue be
deferred until the Government shall have paid its accounts to the administratrix
herein amounting to P262,200.00. It may not be amiss to repeat that it is only fair
for the Government, as a debtor, to its accounts to its citizens-creditors before it can
insist in the prompt payment of the latter's account to it, specially taking into
consideration that the amount due to the Government draws interests while the
credit due to the present state does not accrue any interest. (Order of September
28, 1960)
The petition to set aside the above orders of the court below and for the execution
of the claim of the Government against the estate must be denied for lack of merit.
The ordinary procedure by which to settle claims of indebtedness against the estate
of a deceased person, as an inheritance tax, is for the claimant to present a claim
before the probate court so that said court may order the administrator to pay the
amount thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of
the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court for
the payment of debts and expenses of administration. The proper procedure is for
the court to order the sale of personal estate or the sale or mortgage of real
property of the deceased and all debts or expenses of administrator and with the
written notice to all the heirs legatees and devisees residing in the Philippines,
according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage
of real estate is to be made, the regulations contained in Rule 90, section 7, should
be complied with.1wph1.t
Execution may issue only where the devisees, legatees or heirs have entered into
possession of their respective portions in the estate prior to settlement and
payment of the debts and expenses of administration and it is later ascertained that
there are such debts and expenses to be paid, in which case "the court having
jurisdiction of the estate may, by order for that purpose, after hearing, settle the
amount of their several liabilities, and order how much and in what manner each
person shall contribute, and mayissue execution if circumstances require" (Rule 89,

section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not the
instant case.
The legal basis for such a procedure is the fact that in the testate or intestate
proceedings to settle the estate of a deceased person, the properties belonging to
the estate are under the jurisdiction of the court and such jurisdiction continues
until said properties have been distributed among the heirs entitled thereto. During
the pendency of the proceedings all the estate is in custodia legis and the proper
procedure is not to allow the sheriff, in case of the court judgment, to seize the
properties but to ask the court for an order to require the administrator to pay the
amount due from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the
court having jurisdiction of the estate had found that the claim of the estate against
the Government has been recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the
above circumstances, both the claim of the Government for inheritance taxes and
the claim of the intestate for services rendered have already become overdue and
demandable is well as fully liquidated. Compensation, therefore, takes place by
operation of law, in accordance with the provisions of Articles 1279 and 1290 of the
Civil Code, and both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguished both debts to the
concurrent amount, eventhough the creditors and debtors are not aware of the
compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment
for taxes against the estate of the deceased Walter Scott Price. Furthermore, the
petition for certiorari and mandamus is not the proper remedy for the petitioner.
Appeal is the remedy.
The petition is, therefore, dismissed, without costs.
Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and
Makalintal,
JJ.,
concur.
Bengzon, C.J., took no part.

Mamba v Lara
G.R. No. 165109

December 14, 2009

MANUEL N. MAMBA, RAYMUND P. GUZMAN and

FAUSTO, Petitioners,
vs.
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON

LEONIDES

O.

N.

PUYAWAN,

ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP, ESTRELLA P.

FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA MAEVE T.
LAYOS, PREFERRED VENTURES CORP., ASSET BUILDERS CORP., RIZAL
COMMERCIAL BANKING CORPORATION, MALAYAN INSURANCE CO., and
LAND BANK OF THE PHILIPPINES,Respondents.
DECISION
DEL CASTILLO, J.:
The decision to entertain a taxpayers suit is discretionary upon the Court. It can
choose to strictly apply the rule or take a liberal stance depending on the
controversy involved. Advocates for a strict application of the rule believe that
leniency would open floodgates to numerous suits, which could hamper the
government from performing its job. Such possibility, however, is not only remote
but also negligible compared to what is at stake - "the lifeblood of the State". For
this reason, when the issue hinges on the illegal disbursement of public funds, a
liberal approach should be preferred as it is more in keeping with truth and justice.
This Petition for Review on Certiorari with prayer for a Temporary Restraining
Order/Writ of Preliminary Injunction, under Rule 45 of the Rules of Court, seeks to
set aside the April 27, 2004 Order 1 of the Regional Trial Court (RTC), Branch 5,
Tuguegarao City, dismissing the Petition for Annulment of Contracts and Injunction
with prayer for the issuance of a Temporary Restraining Order/Writ of Preliminary
Injunction, 2 docketed as Civil Case No. 6283. Likewise assailed in this Petition is the
August 20, 2004 Resolution 3 of RTC, Branch 1, Tuguegarao City denying the Motion
for Reconsideration of the dismissal.
Factual Antecedents
On November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed Resolution
No. 2001-272 4 authorizing Governor Edgar R. Lara (Gov. Lara) to engage the
services of and appoint Preferred Ventures Corporation as financial advisor or
consultant for the issuance and flotation of bonds to fund the priority projects of the
governor without cost and commitment.
On November 19, 2001, the Sangguniang Panlalawigan, through Resolution No. 2902001, 5 ratified the Memorandum of Agreement (MOA) 6 entered into by Gov. Lara
and Preferred Ventures Corporation. The MOA provided that the provincial
government of Cagayan shall pay Preferred Ventures Corporation a one-time fee of
3% of the amount of bonds floated.
On February 15, 2002, the Sangguniang Panlalawigan approved Resolution No.
2002-061-A 7 authorizing Gov. Lara to negotiate, sign and execute contracts or
agreements pertinent to the flotation of the bonds of the provincial government in
an amount not to exceed P500 million for the construction and improvement of
priority projects to be approved by the Sangguniang Panlalawigan.
On May 20, 2002, the majority of the members of the Sangguniang Panlalawigan of
Cagayan approved Ordinance No. 19-2002, 8 authorizing the bond flotation of the

provincial government in an amount not to exceedP500 million to fund the

construction and development of the new Cagayan Town Center. The Resolution
likewise granted authority to Gov. Lara to negotiate, sign and execute contracts and
agreements necessary and related to the bond flotation subject to the approval and
ratification by the Sangguniang Panlalawigan.
On October 20, 2003, the Sangguniang Panlalawigan approved Resolution No. 3502003 9 ratifying the Cagayan Provincial Bond Agreements entered into by the
provincial government, represented by Gov. Lara, to wit:
a. Trust Indenture with the Rizal Commercial Banking Corporation (RCBC) Trust and
Investment Division and Malayan Insurance Company, Inc. (MICO).
b. Deed of Assignment by way of security with the RCBC and the Land Bank of the
Philippines (LBP).
c. Transfer and Paying Agency Agreement with the RCBC Trust and Investment
Division.
d. Guarantee Agreement with the RCBC Trust and Investment Division and MICO.
e. Underwriting Agreement with RCBC Capital Corporation.
On even date, the Sangguniang Panlalawigan also approved Resolution No. 3512003, 10 ratifying the Agreement for the Planning, Design, Construction, and Site
Development of the New Cagayan Town Center 11 entered into by the provincial
government, represented by Gov. Lara and Asset Builders Corporation, represented
by its President, Mr. Rogelio P. Centeno.
On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders
Corporation, giving to the latter the planning, design, construction and site
development of the town center project for a fee of P213,795,732.39. 12
Proceedings before the Regional Trial Court
On December 12, 2003, petitioners Manuel N. Mamba, Raymund P. Guzman and
Leonides N. Fausto filed a Petition for Annulment of Contracts and Injunction with
prayer for a Temporary Restraining Order/Writ of Preliminary Injunction 13 against
Edgar R. Lara, Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr.,
Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui, Cecilia
Maeve T. Layos, Preferred Ventures Corporation, Asset Builders Corporation, RCBC,
MICO and LBP.1avvphi1
At the time of the filing of the petition, Manuel N. Mamba was the Representative of
the 3rd Congressional District of the province of Cagayan 14 while Raymund P.
Guzman and Leonides N. Fausto were members of theSangguniang Panlalawigan of
Cagayan. 15
Edgar R. Lara was sued in his capacity as governor of Cagayan, 16 while Jenerwin C.
Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella
P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui and Cecilia Maeve T. Layos were
sued as members of the Sangguniang Panlalawigan of Cagayan. 17Respondents

Preferred Ventures Corporation, Asset Builders Corporation, RCBC, MICO and LBP
were all impleaded as indispensable or necessary parties.
Respondent Preferred Ventures Corporation is the financial advisor of the province
of Cagayan regarding the bond flotation undertaken by the province. 18 Respondent
Asset Builders Corporation was awarded the right to plan, design, construct and
develop the proposed town center. 19 Respondent RCBC, through its Trust and
Investment Division, is the trustee of the seven-year bond flotation undertaken by
the province for the construction of the town center, 20 while respondent MICO is the
guarantor. 21 Lastly, respondent LBP is the official depositary bank of the province. 22
In response to the petition, public respondents filed an Answer with Motion to
Dismiss, 23 raising the following defenses: a) petitioners are not the proper parties or
they lack locus standi in court; b) the action is barred by the rule on state immunity
from suit and c) the issues raised are not justiciable questions but purely political.
For its part, respondent Preferred Ventures Corporation filed a Motion to
Dismiss 24 on the following grounds: a) petitioners have no cause of action for
injunction; b) failure to join an indispensable party; c) lack of personality to sue and
d) lack of locus standi. Respondent MICO likewise filed a Motion to Dismiss 25 raising
the grounds of lack of cause of action and legal standing. Respondent RCBC
similarly argued in its Motion to Dismiss 26 that: a) petitioners are not the real
parties-in-interest or have no legal standing to institute the petition; b) petitioners
have no cause of action as the flotation of the bonds are within the right and power
of both respondent RCBC and the province of Cagayan and c) the viability of the
construction of a town center is not a justiciable question but a political question.
Respondent Asset Builders Corporation, on the other hand, filed an
Answer 27 interposing special and affirmative defenses of lack of legal standing and
cause of action. Respondent LBP also filed an Answer 28 alleging in the main that
petitioners have no cause of action against it as it is not an indispensable party or a
necessary party to the case.
Two days after the filing of respondents respective memoranda on the issues raised
during the hearing of the special and/or affirmative defenses, petitioners filed a
Motion
to
Admit Amended
Petition 29 attaching
thereto
the
amended
petition. 30 Public respondents opposed the motion for the following reasons: 1) the
motion was belatedly filed; 2) the Amended Petition is not sufficient in form and in
substance; 3) the motion is patently dilatory and 4) the Amended Petition was filed
to cure the defect in the original petition. 31
Petitioners also filed a Consolidated Opposition to the Motion to Dismiss 32 followed
by supplemental pleadings 33in support of their prayer for a writ of preliminary
injunction.
On April 27, 2004, the RTC issued the assailed Order denying the Motion to Admit
Amended Petition and dismissing the petition for lack of cause of action. It ruled
that:

The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil Procedure dealing
on the filing of an amended pleading is quite clear. As such, the Court rules that the
motion was belatedly filed. The granting of leave to file amended pleadings is a
matter peculiarly within the sound discretion of the trial court. But the rule allowing
amendments to pleadings is subject to the general but inflexible limitation that the
cause of action or defense shall not be substantially changed or the theory of the
case altered to the prejudice of the other party (Avecilla vs. Yatcvo, 103 Phil. 666).
On the assumption that the controversy presents justiciable issues which this Court
may take cognizance of, petitioners in the present case who presumably presented
legitimate interests in the controversy are not parties to the questioned contract.
Contracts produce effect as between the parties who execute them. Only a party to
the contract can maintain an action to enforce the obligations arising under said
contract (Young vs. CA, 169 SCRA 213). Since a contract is binding only upon the
parties thereto, a third person cannot ask for its rescission if it is in fraud of his
rights. One who is not a party to a contract has no rights under such contract and
even if the contrary may be voidable, its nullity can be asserted only by one who is
a party thereto; a third person would have absolutely no personality to ask for the
annulment (Wolfson vs. Estate of Martinez, 20 Phil. 340; Ibaez vs. Hongkong &
Shanghai Bank, 22 Phil. 572; Ayson vs. CA, G.R. Nos. L-6501 & 6599, May 21, 1955).
It was, however, held that a person who is not a party obliged principally or
subsidiarily in a contract may exercise an action for nullity of the contract if he is
prejudiced in his rights with respect to one of the contracting parties and can show
the detriment which would positively result to him from the contract in which he had
no intervention (Baez vs. CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA 110, 112113; Leodovica vs. CA, 65 SCRA 154-155). In the case at bar, petitioners failed to
show that they were prejudiced in their rights [or that a] detriment x x x would
positively result to them. Hence, they lack locus standi in court.
xxxx
To the mind of the Court, procedural matters in the present controversy may be
dispensed with, stressing that the instant case is a political question, a question
which the court cannot, in any manner, take judicial cognizance. Courts will not
interfere with purely political questions because of the principle of separation of
powers (Taada vs. Cuenco, 103 Phil. 1051). Political questions are those questions
which, under the Constitution, are to be decided by the people in their sovereign
capacity or in regard to which full discretionary authority has been delegated to the
legislative or [to the] executive branch of the government (Nuclear Free Phils.
Coalition vs. NPC, 141 SCRA 307 (1986); Torres vs. Gonzales, 152 SCRA 272;
Citizens Alliance for Consumer Protection vs. Energy Regulatory Board, G.R. No.
78888-90, June 23, 1988).
The citation made by the provincial government[, to] which this Court is inclined to
agree, is that the matter falls under the discretion of another department, hence the
decision reached is in the category of a political question and consequently may not
be the subject of judicial jurisdiction (Cruz in Political Law, 1998 Ed., page 81) is
correct.

It is [a] well-recognized principle that purely administrative and discretionary

functions may not be interfered with by the courts (Adm. Law Test & Cases, 2001
Ed., De Leon, De Leon, Jr.).
The case therefore calls for the doctrine of ripeness for judicial review. This
determines the point at which courts may review administrative action. The basic
principle of ripeness is that the judicial machinery should be conserved for problems
which are real and present or imminent and should not be squandered on problems
which are future, imaginary or remote. This case is not ripe for judicial
determination since there is no imminently x x x substantial injury to the
petitioners.
In other words, the putting up of the New Cagayan Town Center by the province
over the land fully owned by it and the concomitant contracts entered into by the
same is within the bounds of its corporate power, an undertaking which falls within
the ambit of its discretion and therefore a purely political issue which is beyond the
province of the court x x x. [Consequently, the court cannot,] in any manner, take
judicial cognizance over it. The act of the provincial government was in pursuance
of the mandate of the Local Government Code of 1991.
xxxx
Indeed, adjudication of the procedural issues presented for resolution by the present
action would be a futile exercise in exegesis.
What defeats the plea of the petitioners for the issuance of a writ of preliminary
injunction is the fact that their averments are merely speculative and founded on
conjectures. An injunction is not intended to protect contingent or future rights nor
is it a remedy to enforce an abstract right (Cerebo vs. Dictado, 160 SCRA 759; Ulang
vs. CA, 225 SCRA 637). An injunction, whether preliminary or final, will not issue to
protect a right not in in esse and which may never arise, or to restrain an act which
does not give rise to a cause of action. The complainants right on title, moreover,
must be clear and unquestioned [since] equity, as a rule, will not take cognizance of
suits to establish title and will not lend its preventive aid by injunction where the
complainants title or right is doubtful or disputed. The possibility of irreparable
damage, without proof of violation of an actual existing right, is no ground for
injunction being a mere damnum, absque injuria (Talisay-Silay Milling Company, Inc.
vs. CFI of Negros Occidental, et. al. 42 SCRA 577, 582).
xxxx
For lack of cause of action, the case should be dismissed.
The facts and allegations [necessarily] suggest also that this court may dismiss the
case for want of jurisdiction.
The rule has to be so because it can motu propio dismiss it as its only jurisdiction is
to dismiss it if it has no jurisdiction. This is in line with the ruling in Andaya vs.
Abadia, 46 SCAD 1036, G.R. No. 104033, Dec. 27, 1993 where the court may
dismiss a complaint even without a motion to dismiss or answer.

Upon the foregoing considerations, the case is hereby dismissed without costs.
SO ORDERED.

34

Petitioners filed a Motion for Reconsideration 35 to which respondents filed their

respective Oppositions. 36Petitioners then filed a Motion to Inhibit, which the court
granted. Accordingly, the case was re-raffled to Branch 1 of the RTC of Tuguegarao
City. 37
On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a Resolution
denying petitioners plea for reconsideration. The court found the motion to be a
mere scrap of paper as the notice of hearing was addressed only to the Clerk of
Court in violation of Section 5, Rule 15 of the Rules of Court. As to the merits, the
court sustained the findings of Branch 5 that petitioners lack legal standing to sue
and that the issue involved is political.
Issues
Hence, the present recourse where petitioners argue that:
A. The lower court decided a question of substance in a way not in accord with law
and with the applicable decision of the Supreme Court, and
B. The lower court has so far departed from the accepted and usual course of
judicial proceedings as to call for an exercise of the power of supervision in that:
I. It denied locus standi to petitioners;
II. [It] determined that the matter of contract entered into by the provincial
government is in the nature of a political question;
III. [It] denied the admission of Amended Petition; and
IV. [It] found a defect of substance in the petitioners Motion for Reconsideration.

38

Our Ruling
The petition is partially meritorious.
Petitioners have legal standing to sue as taxpayers
A taxpayer is allowed to sue where there is a claim that public funds are illegally
disbursed, or that the public money is being deflected to any improper purpose, or
that there is wastage of public funds through the enforcement of an invalid or
unconstitutional law. 39 A person suing as a taxpayer, however, must show that the
act complained of directly involves the illegal disbursement of public funds derived
from taxation. 40 He must also prove that he has sufficient interest in preventing the
illegal expenditure of money raised by taxation and that he will sustain a direct
injury because of the enforcement of the questioned statute or contract. 41 In other
words, for a taxpayers suit to prosper, two requisites must be met: (1) public funds
derived from taxation are disbursed by a political subdivision or instrumentality and
in doing so, a law is violated or some irregularity is committed and (2) the petitioner
is directly affected by the alleged act. 42

In light of the foregoing, it is apparent that contrary to the view of the RTC,
a taxpayer need not be a party to the contract to challenge its validity. 43 As long as
taxes are involved, people have a right to question contracts entered into by the
government.
In this case, although the construction of the town center would be primarily
sourced from the proceeds of the bonds, which respondents insist are not
taxpayers money, a government support in the amount of P187 million would still
be spent for paying the interest of the bonds. 44 In fact, a Deed of Assignment 45 was
executed by the governor in favor of respondent RCBC over the Internal Revenue
Allotment (IRA) and other revenues of the provincial government as payment and/or
security for the obligations of the provincial government under the Trust Indenture
Agreement dated September 17, 2003. Records also show that on March 4, 2004,
the governor requested the Sangguniang Panlalawigan to appropriate an amount
of P25 million for the interest of the bond. 46Clearly, the first requisite has been met.
As to the second requisite, the court, in recent cases, has relaxed the stringent
"direct injury test" bearing in mind that locus standi is a procedural
technicality. 47 By invoking "transcendental importance", "paramount public
interest", or "far-reaching implications", ordinary citizens and taxpayers were
allowed to sue even if they failed to show direct injury. 48 In cases where serious
legal issues were raised or where public expenditures of millions of pesos were
involved, the court did not hesitate to give standing to taxpayers. 49
We find no reason to deviate from the jurisprudential trend.
To begin with, the amount involved in this case is substantial. Under the various
agreements entered into by the governor, which were ratified by the Sangguniang
Panlalawigan, the provincial government of Cagayan would incur the following
costs: 50
Compensation to Preferred Ventures (3% of P205M)

51

P 6,150,000.00

Resolution No. 290-2001

Management and Underwriting Fees (1.5% of P205M)

3,075,000.00

52

Documentary Tax (0.75% of P205M)

Guarantee Fee

54

1,537,500.00

53

Construction and Design of town center

7,350,000.00
55

213,795,732.39

Total Cost -

P231,908,232.39

What is more, the provincial government would be shelling out a total amount
of P187 million for the period of seven years by way of subsidy for the interest of
the bonds. Without a doubt, the resolution of the present petition is of paramount
importance to the people of Cagayan who at the end of the day would bear the
brunt of these agreements.
Another point to consider is that local government units now possess more powers,
authority and resources at their disposal, 56 which in the hands of unscrupulous
officials may be abused and misused to the detriment of the public. To protect the
interest of the people and to prevent taxes from being squandered or wasted under
the guise of government projects, a liberal approach must therefore be adopted in
determining locus standi in public suits.
In view of the foregoing, we are convinced that petitioners have sufficient standing
to file the present suit. Accordingly, they should be given the opportunity to present
their case before the RTC.
Having resolved the core issue, we shall now proceed to the remaining issues.
The controversy involved is justiciable
A political question is a question of policy, which is to be decided by the people in
their sovereign capacity or by the legislative or the executive branch of the
government to which full discretionary authority has been delegated. 57
In filing the instant case before the RTC, petitioners seek to restrain public
respondents from implementing the bond flotation and to declare null and void all
contracts related to the bond flotation and construction of the town center. In the
petition before the RTC, they alleged grave abuse of discretion and clear violations
of law by public respondents. They put in issue the overpriced construction of the
town center; the grossly disadvantageous bond flotation; the irrevocable
assignment of the provincial governments annual regular income, including the IRA,
to respondent RCBC to cover and secure the payment of the bonds floated; and the
lack of consultation and discussion with the community regarding the proposed
project, as well as a proper and legitimate bidding for the construction of the town
center.
Obviously, the issues raised in the petition do not refer to the wisdom but to the
legality of the acts complained of. Thus, we find the instant controversy within the
ambit of judicial review. Besides, even if the issues were political in nature, it would
still come within our powers of review under the expanded jurisdiction conferred
upon us by Section 1, Article VIII of the Constitution, which includes the authority to
determine whether grave abuse of discretion amounting to excess or lack of
jurisdiction has been committed by any branch or instrumentality of the
government. 58
The Motion to Admit Amended Petition was properly denied

However, as to the denial of petitioners Motion to Admit Amended Petition, we find

no reason to reverse the same. The inclusion of the province of Cagayan as a
petitioner would not only change the theory of the case but would also result in an
absurd situation. The provincial government, if included as a petitioner, would in
effect be suing itself considering that public respondents are being sued in their
official capacity.
In any case, there is no need to amend the petition because petitioners, as we have
said, have legal standing to sue as taxpayers.
Section 5, Rule 15 of the Rules of Court was substantially complied with
This brings us to the fourth and final issue.
A perusal of the Motion for Reconsideration filed by petitioners would show that the
notice of hearing was addressed only to the Clerk of Court in violation of Section 5,
Rule 15 of the Rules of Court, which requires the notice of hearing to be addressed
to all parties concerned. This defect, however, did not make the motion a mere
scrap of paper. The rule is not a ritual to be followed blindly. 59 The purpose of a
notice of hearing is simply to afford the adverse parties a chance to be heard before
a motion is resolved by the court. 60 In this case, respondents were furnished copies
of the motion, and consequently, notified of the scheduled hearing. Counsel for
public respondents in fact moved for the postponement of the hearing, which the
court granted. 61 Moreover, respondents were afforded procedural due process as
they were given sufficient time to file their respective comments or oppositions to
the motion. From the foregoing, it is clear that the rule requiring notice to all parties
was substantially complied with. 62 In effect, the defect in the Motion for
Reconsideration was cured.
We cannot overemphasize that procedural rules are mere tools to aid the courts in
the speedy, just and inexpensive resolution of cases. 63 Procedural defects or lapses,
if negligible, should be excused in the higher interest of justice as technicalities
should not override the merits of the case. Dismissal of cases due to technicalities
should also be avoided to afford the parties the opportunity to present their case.
Courts must be reminded that the swift unclogging of the dockets although a
laudable objective must not be done at the expense of substantial justice. 64
WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27, 2004 Order of
Branch 5 and the August 20, 2004 Resolution of Branch 1 of the Regional Trial Court
of Tuguegarao City are hereby REVERSEDand SET ASIDE insofar as the dismissal
of the petition is concerned. Accordingly, the case is hereby REMANDEDto the
court a quo for further proceedings.
SO ORDERED.

Tiu v CA
SYLLABI/SYNOPSIS
EN BANC

[G.R. No. 127410. January 20, 1999]

CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M.

JUNGCO, petitioners, vs. COURT OF APPEALS, HON. TEOFISTO T.
GUINGONA JR., BASES CONVERSION AND DEVELOPMENT AUTHORITY,
SUBIC BAY METROPOLITAN AUTHORITY, BUREAU OF INTERNAL
REVENUE, CITY TREASURER OF OLONGAPO and MUNICIPAL
TREASURER OF SUBIC, ZAMBALES, respondents.
DECISION
PANGANIBAN, J.:
The constitutional right to equal protection of the law is not violated by an
executive order, issued pursuant to law, granting tax and duty incentives only to
businesses and residents within the secured area of the Subic Special Economic
Zone and denying them to those who live within the Zone but outside such fencedin territory. The Constitution does not require absolute equality among residents. It
is enough that all persons under like circumstances or conditions are given the
same privileges and required to follow the same obligations. In short, a classification
based on valid and reasonable standards does not violate the equal protection
clause.

The Case

Before us is a petition for review under Rule 45 of the Rules of Court, seeking
the reversal of the Court of Appeals Decision [1] promulgated on August 29, 1996,
and Resolution[2] dated November 13, 1996, in CA-GR SP No. 37788. [3] The
challenged Decision upheld the constitutionality and validity of Executive Order No.
97-A (EO 97-A), according to which the grant and enjoyment of the tax and duty
incentives authorized under Republic Act No. 7227 (RA 7227) were limited to the
business enterprises and residents within the fenced-in area of the Subic Special
Economic Zone (SSEZ).
The assailed Resolution denied the petitioners motion for reconsideration.

The Facts

On March 13, 1992, Congress, with the approval of the President, passed into
law RA 7227 entitled An Act Accelerating the Conversion of Military Reservations
Into Other Productive Uses, Creating the Bases Conversion and Development
Authority for this Purpose, Providing Funds Therefor and for Other Purposes. Section
12 thereof created the Subic Special Economic Zone and granted thereto special
privileges, as follows:
SEC. 12. Subic Special Economic Zone. -- Subject to the concurrence by resolution of
the sangguniang panlungsod of the City of Olongapo and the sangguniang bayan of
the Municipalities of Subic, Morong and Hermosa, there is hereby created a Special
Economic and Free-port Zone consisting of the City of Olongapo and the
Municipality of Subic, Province of Zambales, the lands occupied by the Subic Naval
Base and its contiguous extensions as embraced, covered, and defined by the 1947
Military Bases Agreement between the Philippines and the United States of America
as amended, and within the territorial jurisdiction of the Municipalities of Morong
and Hermosa, Province of Bataan, hereinafter referred to as the Subic Special
Economic Zone whose metes and bounds shall be delineated in a proclamation to
be issued by the President of the Philippines. Within thirty (30) days after the
approval of this Act, each local government unit shall submit its resolution of
concurrence to join the Subic Special Economic Zone to the Office of the
President. Thereafter, the President of the Philippines shall issue a proclamation
defining the metes and bounds of the zone as provided herein.
The abovementioned zone shall be subject to the following policies:
(a) Within the framework and subject to the mandate and limitations of the
Constitution and the pertinent provisions of the Local Government Code, the Subic
Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment opportunities
in and around the zone and to attract and promote productive foreign investments;
(b) The Subic Special Economic Zone shall be operated and managed as a separate
customs territory ensuring free flow or movement of goods and capital within, into
and exported out of the Subic Special Economic Zone, as well as provide incentives
such as tax and duty-free importations of raw materials, capital and
equipment. However, exportation or removal of goods from the territory of the Subic
Special Economic Zone to the other parts of the Philippine territory shall be subject
to customs duties and taxes under the Customs and Tariff Code and other relevant
tax laws of the Philippines;
(c) The provision of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within the Subic
Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross
income earned by all businesses and enterprises within the Subic Special Economic
Zone shall be remitted to the National Government, one percent (1%) each to the
local government units affected by the declaration of the zone in proportion to their
population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses
and enterprises within the Subic Special Economic Zone to be utilized for the

development of municipalities outside the City of Olongapo and the Municipality of

Subic, and other municipalities contiguous to the base areas.
In case of conflict between national and local laws with respect to tax exemption
privileges in the Subic Special Economic Zone, the same shall be resolved in favor
of the latter;
(d) No exchange control policy shall be applied and free markets for foreign
exchange, gold, securities and future shall be allowed and maintained in the Subic
Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and regulate the
operations of banks and other financial institutions within the Subic Special
Economic Zone;
(f) Banking and finance shall be liberalized with the establishment of foreign
currency depository units of local commercial banks and offshore banking units of
foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing
investment shall not be less than two hundred fifty thousand dollars ($250,000),
his/her spouse and dependent children under twenty-one (21) years of age, shall be
granted permanent resident status within the Subic Special Economic Zone. They
shall have the freedom of ingress and egress to and from the Subic Special
Economic Zone without any need of special authorization from the Bureau of
Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in
Section 13 of this Act may also issue working visas renewable every two (2) years to
foreign executives and other aliens possessing highly technical skills which no
Filipino within the Subic Special Economic Zone possesses, as certified by the
Department of Labor and Employment. The names of aliens granted permanent
residence status and working visas by the Subic Bay Metropolitan Authority shall be
reported to the Bureau of Immigration and Deportation within thirty (30) days after
issuance thereof;
(h) The defense of the zone and the security of its perimeters shall be the
responsibility of the National Government in coordination with the Subic Bay
Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide and
establish its own security and fire-fighting forces; and
(i) Except as herein provided, the local government units comprising the Subic
Special Economic Zone shall retain their basic autonomy and identity. The cities
shall be governed by their respective charters and the municipalities shall operate
and function in accordance with Republic Act No. 7160, otherwise known as the
Local Government Code of 1991.
On June 10, 1993, then President Fidel V. Ramos issued Executive Order No. 97
(EO 97), clarifying the application of the tax and duty incentives thus:

Section 1. On Import Taxes and Duties -- Tax and duty-free importations shall apply
only to raw materials, capital goods and equipment brought in by business
enterprises into the SSEZ. Except for these items, importations of other goods into
the SSEZ, whether by business enterprises or resident individuals, are subject to
taxes and duties under relevant Philippine laws.
The exportation or removal of tax and duty-free goods from the territory of the SSEZ
to other parts of the Philippine territory shall be subject to duties and taxes under
relevant Philippine laws.
Section 2. On All Other Taxes. -- In lieu of all local and national taxes (except import
taxes and duties), all business enterprises in the SSEZ shall be required to pay the
tax specified in Section 12(c) of R.A. No. 7227.
Nine days after, on June 19, 1993, the President issued Executive Order No. 97-A
(EO 97-A), specifying the area within which the tax-and-duty-free privilege was
operative, viz.:
Section 1.1. The Secured Area consisting of the presently fenced-in former Subic
Naval Base shall be the only completely tax and duty-free area in the SSEFPZ [Subic
Special Economic and Free Port Zone].Business enterprises and individuals (Filipinos
and foreigners) residing within the Secured Area are free to import raw materials,
capital goods, equipment, and consumer items tax and duty-free. Consumption
items, however, must be consumed within the Secured Area. Removal of raw
materials, capital goods, equipment and consumer items out of the Secured
Area for sale to non-SSEFPZ registered enterprises shall be subject to the usual
taxes and duties, except as may be provided herein
On October 26, 1994, the petitioners challenged before this Court the
constitutionality of EO 97-A for allegedly being violative of their right to equal
protection of the laws. In a Resolution dated June 27, 1995, this Court referred the
matter to the Court of Appeals, pursuant to Revised Administrative Circular No. 195.
Incidentally, on February 1, 1995, Proclamation No. 532 was issued by President
Ramos. It delineated the exact metes and bounds of the Subic Special Economic
and Free Port Zone, pursuant to Section 12 of RA 7227.

Ruling of the Court of Appeals

Respondent Court held that there is no substantial difference between the

provisions of EO 97-A and Section 12 of RA 7227. In both, the Secured Area is
precise and well-defined as xxx the lands occupied by the Subic Naval Base and its
contiguous extensions as embraced, covered and defined by the 1947 Military
Bases Agreement between the Philippines and the United States of America, as
amended, xxx. The appellate court concluded that such being the case, petitioners
could not claim that EO 97-A is unconstitutional, while at the same time maintaining
the validity of RA 7227.

The court a quo also explained that the intention of Congress was to confine the
coverage of the SSEZ to the secured area and not to include the entire Olongapo
City and other areas mentioned in Section 12 of the law. It relied on the following
deliberations in the Senate:
Senator Paterno. Thank you, Mr. President. My first question is the extent of
the economic zone. Since this will be a free port, in effect, I believe that it is
important to delineate or make sure that the delineation will be quite precise[. M]y
question is: Is it the intention that the entire of Olongapo City, the Municipality of
Subic and the Municipality of Dinalupihan will be covered by the special economic
zone or only portions thereof?
Senator Shahani. Only portions, Mr. President. In other words, where the
actual operations of the free port will take place.
Senator Paterno. I see. So, we should say, COVERING THE DESIGNATED
PORTIONS OR CERTAIN PORTIONS OF OLONGAPO CITY, SUBIC AND DINALUPIHAN to
make it clear that it is not supposed to cover the entire area of all of these
territories.
Senator Shahani. So, the Gentleman is proposing that the words CERTAIN
AREAS ...
The President. The Chair would want to invite the attention of the Sponsor and
Senator Paterno to letter C, which says: THE PRESIDENT OF THE PHILIPPINES IS
HEREBY AUTHORIZED TO PROCLAIM, DELINEATE AND SPECIFY THE METES AND
BOUNDS OF OTHER SPECIAL ECONOMIC ZONES WHICH MAY BE CREATED IN THE
CLARK MILITARY RESERVATIONS AND ITS EXTENSIONS.
Probably, this provision can be expanded since, apparently, the intention is that
what is referred to in Olongapo as Metro Olongapo is not by itself ipso jure already a
special economic zone.
Senator Paterno. That is correct.
The President. Someone, some authority must declare which portions of the
same shall be the economic zone. Is it the intention of the author that it is the
President of the Philippines who will make such delineation?
Senator Shahani. Yes, Mr. President.
The Court of Appeals further justified the limited application of the tax
incentives as being within the prerogative of the legislature, pursuant to its avowed
purpose [of serving] some public benefit or interest. It ruled that EO 97-A merely
implements the legislative purpose of [RA 7227].
Disagreeing, petitioners now seek before us a review of the aforecited Court of
Appeals Decision and Resolution.

The Issue

Petitioners submit the following issue for the resolution of the Court:

[W]hether or not Executive Order No. 97-A violates the equal protection clause of
the Constitution. Specifically the issue is whether the provisions of Executive Order
No. 97-A confining the application of R.A. 7227 within the secured area and
excluding the residents of the zone outside of the secured area is discriminatory or
not.[4]

The Courts Ruling

The petition[5] is bereft of merit.

Main Issue: The Constitutionality of EO 97-A

Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses

(1) the City of Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area
formerly occupied by the Subic Naval Base. However, EO 97-A, according to them,
narrowed down the area within which the special privileges granted to the entire
zone would apply to the present fenced-in former Subic Naval Base only. It has
thereby excluded the residents of the first two components of the zone from
enjoying the benefits granted by the law. It has effectively discriminated against
them, without reasonable or valid standards, in contravention of the equal
protection guarantee.
On the other hand, the solicitor general defends, on behalf of respondents, the
validity of EO 97-A, arguing that Section 12 of RA 7227 clearly vests in the President
the authority to delineate the metes and bounds of the SSEZ. He adds that the
issuance fully complies with the requirements of a valid classification.
We rule in favor of the constitutionality and validity of the assailed EO. Said
Order is not violative of the equal protection clause; neither is it
discriminatory. Rather, we find real and substantive distinctions between the
circumstances obtaining inside and those outside the Subic Naval Base, thereby
justifying a valid and reasonable classification.
The fundamental right of equal protection of the laws is not absolute, but is
subject to reasonable classification. If the groupings are characterized by
substantial distinctions that make real differences, one class may be treated and
regulated differently from another. [6] The classification must also be germane to the
purpose of the law and must apply to all those belonging to the same class.
[7]
Explaining the nature of the equal protection guarantee, the Court in
Ichong v. Hernandez[8] said:
The equal protection of the law clause is against undue favor and individual or class
privilege, as well as hostile discrimination or the oppression of inequality. It is not
intended to prohibit legislation which is limited either [by] the object to which it is
directed or by [the] territory within which it is to operate. It does not demand
absolute equality among residents; it merely requires that all persons shall be
treated alike, under like circumstances and conditions both as to privileges

conferred and liabilities enforced. The equal protection clause is not infringed by
legislation which applies only to those persons falling within a specified class, if it
applies alike to all persons within such class, and reasonable grounds exist for
making a distinction between those who fall within such class and those who do not.
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. [9]
We first determine the purpose of the law. From the very title itself, it is clear
that RA 7227 aims primarily to accelerate the conversion of military reservations
into productive uses. Obviously, the lands covered under the 1947 Military Bases
Agreement are its object. Thus, the law avows this policy:
SEC. 2. Declaration of Policies. -- It is hereby declared the policy of the Government
to accelerate the sound and balanced conversion into alternative productive uses of
the Clark and Subic military reservations and their extensions (John Hay Station,
Wallace Air Station, ODonnell Transmitter Station, San Miguel Naval
Communications Station and Capas Relay Station), to raise funds by the sale of
portions of Metro Manila military camps, and to apply said funds as provided herein
for the development and conversion to productive civilian use of the lands covered
under the 1947 Military Bases Agreement between the Philippines and the United
States of America, as amended.
To undertake the above objectives, the same law created the Bases Conversion
and Development Authority, some of whose relevant defined purposes are:
(b) To adopt, prepare and implement a comprehensive and detailed development
plan embodying a list of projects including but not limited to those provided in the
Legislative-Executive Bases Council (LEBC) framework plan for the sound and
balanced conversion of the Clark and Subic military reservations and their
extensions consistent with ecological and environmental standards, into other
productive uses to promote the economic and social development of Central Luzon
in particular and the country in general;
(c) To encourage the active participation of the private sector in transforming the
Clark and Subic military reservations and their extensions into other productive
uses;
Further, in creating the SSEZ, the law declared it a policy to develop the zone into a
self-sustaining, industrial, commercial, financial and investment center. [10]
From the above provisions of the law, it can easily be deduced that the real
concern of RA 7227 is to convert the lands formerly occupied by the US military
bases into economic or industrial areas. In furtherance of such objective, Congress
deemed it necessary to extend economic incentives to attract and encourage
investors, both local and foreign. Among such enticements are:[11] (1) a separate
customs territory within the zone, (2) tax-and-duty-free importations, (3)
restructured income tax rates on business enterprises within the zone, (4) no
foreign exchange control, (5) liberalized regulations on banking and finance, and (6)

the grant of resident status to certain investors and of working visas to certain
foreign executives and workers.
We believe it was reasonable for the President to have delimited the application
of some incentives to the confines of the former Subic military base. It is this
specific area which the government intends to transform and develop from
its status quo ante as an abandoned naval facility into a self-sustaining industrial
and commercial zone, particularly for big foreign and local investors to use as
operational bases for their businesses and industries. Why the seeming bias for big
investors? Undeniably, they are the ones who can pour huge investments to spur
economic growth in the country and to generate employment opportunities for the
Filipinos, the ultimate goals of the government for such conversion. The
classification is, therefore, germane to the purposes of the law. And as the legal
maxim goes, The intent of a statute is the law. [12]
Certainly, there are substantial differences between the big investors who are
being lured to establish and operate their industries in the so-called secured area
and the present business operators outside the area. On the one hand, we are
talking of billion-peso investments and thousands of new jobs. On the other hand,
definitely none of such magnitude. In the first, the economic impact will be national;
in the second, only local. Even more important, at this time the business activities
outside the secured area are not likely to have any impact in achieving the purpose
of the law, which is to turn the former military base to productive use for the benefit
of the Philippine economy. There is, then, hardly any reasonable basis to extend to
them the benefits and incentives accorded in RA 7227. Additionally, as the Court of
Appeals pointed out, it will be easier to manage and monitor the activities within the
secured area, which is already fenced off, to prevent fraudulent importation of
merchandise or smuggling.
It is well-settled that the equal-protection guarantee does not require territorial
uniformity of laws.[13] As long as there are actual and material differences between
territories, there is no violation of the constitutional clause. And of course, anyone,
including the petitioners, possessing the requisite investment capital can always
avail of the same benefits by channeling his or her resources or business operations
into the fenced-off free port zone.
We believe that the classification set forth by the executive issuance does not
apply merely to existing conditions. As laid down in RA 7227, the objective is to
establish a self-sustaining, industrial, commercial, financial and investment center in
the area. There will, therefore, be a long-term difference between such investment
center and the areas outside it.
Lastly, the classification applies equally to all the resident individuals and
businesses within the secured area. The residents, being in like circumstances or
contributing directly to the achievement of the end purpose of the law, are not
categorized further. Instead, they are all similarly treated, both in privileges granted
and in obligations required.
All told, the Court holds that no undue favor or privilege was extended. The
classification occasioned by EO 97-A was not unreasonable, capricious or
unfounded. To repeat, it was based, rather, on fair and substantive considerations
that were germane to the legislative purpose.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision
and Resolution are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Davide, Jr., C.J., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza,
Martinez, Quisumbing, Purisima, Pardo, Buena, and Gonzaga-Reyes, JJ., concur.

Chamber of Real Estate and Builders Assn v Executive Secretary

EN BANC

CHAMBER OF REAL G.R. No. 160756

ESTATE AND BUILDERS
ASSOCIATIONS, INC.,
Petitioner, Present:
PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,

ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.

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. Promulgated:

March 9, 2010

x-------------------------------------------------x
DECISION
CORONA, J.:

In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real
Estate and Builders Associations, Inc. is questioning the constitutionality of Section
27 (E) of Republic Act (RA) 8424 [2] 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.
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.

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 72003, is unconstitutional.

OVERVIEW
PROVISIONS

OF

THE

ASSAILED

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). [4] If 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. -

(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.

(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.

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 998 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.

xxx xxx xxx

Exempt

With a selling price of five

hundred
thousand
pesos
(P500,000.00) or less.
1.5%

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%

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 theperiodic 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:

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 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.
Exemp
t

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.

With a selling price of more than Five

Hundred Thousand Pesos (P500,000.00)

1.5%

but not more than Two Million Pesos

(P2,000,000.00).
3.0%

With a selling price of more than two

Million Pesos (P2,000,000.00).

5.0%

xxx xxx 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 xxx

However, if the buyer is engaged in trade or business, whether

a corporation or otherwise, these rules shall apply:

(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)

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]

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.

On February 11, 2003, RR No. 7-2003 [8] 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:
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;

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 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 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 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 EarthSavers 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.

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
PROCESS

NOT

VIOLATIVE

OF

DUE

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 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]

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:
(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.
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 goods[48] 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]
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]

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.
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]

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)

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 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
BETWEEN ORDINARY
CAPITAL ASSETS

DISTINCTIONS
ASSETS
AND

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
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.

CWT
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.

c) The payee is not required

to file an income tax return
for the particular income.[73]

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 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:

SEC. 57. Withholding of Tax at Source.

(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 payor-corporation and/or person and paid
in the same manner and subject to the same conditions as provided in
Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. The [Secretary] 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
income[76]

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 courts [78] 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.

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.
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]

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.[90] Under Section 57(B), it may choose what to subject to CWT.
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.

Commissioner v TODA
FIRST DIVISION

[G.R. No. 147188. September 14, 2004]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF
BENIGNO P. TODA, JR., Represented by Special Co-administrators
Lorna Kapunan and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning
scheme adopted by a corporation constitutes tax evasion that would justify an
assessment of deficiency income tax.
The petitioner seeks the reversal of the 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.
The case at bar stemmed from a Notice of Assessment sent to CIC by the
Commissioner of Internal Revenue for deficiency income tax arising from an alleged
simulated sale of a 16-storey commercial building known as Cibeles Building,
situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of
99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and

the two parcels of land on which the building stands for an amount of not less
than P90 million.[4]
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 ofP75,728.021. 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 ofP79,099,999.22.
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
Total Net Taxable Income P175,987,725.00
per investigation
Tax Due thereof at 35% P 61,595,703.75
Less: Payment already made
1. Per return P26,595,704.00
2. Thru Capital Gains

Tax made by R.A.

Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE 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 pre-conceived scheme was adopted by CIC, the
same constituted mere tax avoidance, and not tax evasion. There being no proof of
fraudulent transaction, the applicable period for the BIR to assess CIC is that
prescribed in Section 203 of the NIRC of 1986, which is three years after the last day

prescribed by law for the filing of the return. Thus, the 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.
As stated above, the prescriptive period to assess the correct taxes in case of
false returns is ten years from the discovery of the falsity. The false return was filed
on 15 April 1990, and the falsity thereof was claimed to have been discovered only
on 8 March 1991.[37] The assessment for the 1989 deficiency income tax of CIC was
issued on 9 January 1995. Clearly, the issuance of the correct assessment for
deficiency income tax was well within the prescriptive period.

Is respondent Estate liable

for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons
owning or composing it. Thus, the owners or stockholders of a corporation may not
generally be made to answer for the liabilities of a corporation and vice versa. There
are, however, certain instances in which personal liability may arise. It has been
held in a number of cases that personal liability of a corporate director, trustee, or
officer along, albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad
faith or gross negligence in directing its affairs, or (c) conflict of interest,
resulting in damages to the corporation, its stockholders, or other
persons;
2. He consents to the issuance of watered down stocks or, having
knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by specific provision of law, to personally answer for his
corporate action.[38]
It is worth noting that when the late Toda sold his shares of stock to Le Hun T.
Choa, he knowingly and voluntarily held himself personally liable for all the tax
liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of
the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has
no liabilities or obligations, contingent or otherwise, for taxes, sums of money or
insurance claims other than those reported in its audited financial statement as of
December 31, 1989, attached hereto as Annex B and made a part hereof. The
business of Cibeles has at all times been conducted in full compliance with all
applicable laws, rules and regulations. SELLER undertakes and agrees to hold
the BUYER and Cibeles free from any and all income tax liabilities of
Cibeles for the fiscal years 1987, 1988 and 1989.[39][Underscoring Supplied].

When the late Toda undertook and agreed to hold the BUYER and Cibeles free
from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and
1989, he thereby voluntarily held himself personally liable therefor. Respondent
estate cannot, therefore, deny liability for 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.

Smart Communications v City of Davao

THIRD DIVISION
SMART COMMUNICATIONS, INC.,
Petitioner,

G.R. No. 155491

Present:

- versus -

THE CITY OF DAVAO,

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

YNARES-SANTIAGO, J.,
Chairperson,
CHICO-NAZARIO,
NACHURA,
LEONARDO-DE CASTRO,* and
BERSAMIN,** JJ.

Promulgated:
July 21, 2009

x------------------------------------------------------------------------------------x
RESOLUTION
NACHURA, J.:

Before the Court is a Motion for Reconsideration [1] filed by Smart Communications,
Inc. (Smart) of the Decision[2] of the Court dated September 16, 2008, denying its
appeal of the Decision and Order of the Regional Trial Court (RTC) of Davao City,
dated July 19, 2002 and September 26, 2002, respectively.
Briefly, the factual antecedents are as follows:
On February 18, 2002, Smart filed a special civil action for declaratory relief [3] for
the ascertainment of its rights and obligations under the Tax Code of the City
of Davao, which imposes a franchise tax on businesses enjoying a franchise within
the territorial jurisdiction of Davao. Smart avers that its telecenter in Davao City is
exempt from payment of franchise tax to the City.
On July 19, 2002, the RTC rendered a Decision denying the petition. Smart filed a
motion for reconsideration, which was denied by the trial court in an Order dated
September 26, 2002. Smart filed an appeal before this Court, but the same was
denied in a decision dated September 16, 2008. Hence, the instant motion for
reconsideration raising the following grounds: (1) the in lieu of all taxes clause in
Smarts franchise, Republic Act No. 7294 (RA 7294), covers local taxes; the rule of
strict construction against tax exemptions is not applicable; (2) the in lieu of all
taxes clause is not rendered ineffective by the Expanded VAT Law; (3) Section 23 of
Republic Act No. 7925[4] (RA 7925) includes a tax exemption; and (4) the imposition
of a local franchise tax on Smart would violate the constitutional prohibition against
impairment of the obligation of contracts.
Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue. Section
9 of Smarts legislative franchise contains the contentious in lieu of all taxes
clause. The Section reads:

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

be liable to pay the same taxes on their real estate buildings and
personal property, exclusive of this franchise, as other persons or
corporations which are now or hereafter may be required by law to
pay. In addition thereto, the grantee, its successors or assigns
shall pay a franchise tax equivalent to three percent (3%) of all
gross receipts of the business transacted under this franchise
by the grantee, its successors or assigns and the said
percentage shall be in lieu of all taxes on this franchise or
earnings thereof: Provided, That the grantee, its successors or
assigns shall continue to be liable for income taxes payable under Title
II of the National Internal Revenue Code pursuant to Section 2 of
Executive Order No. 72 unless the latter enactment is amended or
repealed, in which case the amendment or repeal shall be applicable
thereto.
xxx[5]
Section 23 of RA 7925, otherwise known as the most favored treatment clause or
equality clause, contains the word exemption, viz.:
SEC. 23. Equality of Treatment in the Telecommunications
Industry Any advantage, favor, privilege, exemption, or immunity
granted under existing franchises, or may hereafter be granted, shall
ipso facto become part of previously granted telecommunications
franchises and shall be accorded immediately and unconditionally to
the grantees of such franchises: Provided, however, That the foregoing
shall neither apply to nor affect provisions of telecommunications
franchises concerning territory covered by the franchise, the life span
of the franchise, or the type of the service authorized by the franchise.
[6]

A review of the recent decisions of the Court on the matter of exemptions from local
franchise tax and the interpretation of the word exemption found in Section 23 of RA
7925 is imperative in order to resolve this issue once and for all.
In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,
[7]
Digitel used as an argument the in lieu of all taxes clauses/provisos found in the
legislative franchises of Globe,[8] Smart and Bell,[9] vis--vis Section 23 of RA 7925, in
order to claim exemption from the payment of local franchise tax. Digitel claimed,
just like the petitioner in this case, that it was exempt from the payment of any
other taxes except the national franchise and income taxes. Digitel alleged that
Smart was exempted from the payment of local franchise tax.
However, it failed to substantiate its allegation, and, thus, the Court denied Digitels
claim for exemption from provincial franchise tax. Cited was the ruling of the Court
in PLDT v. City of Davao,[10] wherein the Court, speaking through Mr. Justice Vicente
V. Mendoza, held that in approving Section 23 of RA No. 7925, Congress did not

intend it to operate as a blanket tax exemption to all telecommunications entities.

Section 23 cannot be considered as having amended PLDTs franchise so as to entitle
it to exemption from the imposition of local franchise taxes. The Court further held
that tax exemptions are highly disfavored and that a tax exemption must be
expressed in the statute in clear language that leaves no doubt of the intention of
the legislature to grant such exemption. And, even in the instances when it is
granted, the exemption must be interpreted instrictissimi juris against the taxpayer
and liberally in favor of the taxing authority.
The Court also clarified the meaning of the word exemption in Section 23 of RA
7925: that the word exemption as used in the statute refers or pertains merely to an
exemption from regulatory or reporting requirements of the Department of
Transportation and Communication or the National Transmission Corporation and
not to an exemption from the grantees tax liability.
In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna,
[11]
PLDT was a holder of a legislative franchise under Act No. 3436, as amended. On
August 24, 1991, the terms and conditions of its franchise were consolidated under
Republic Act No. 7082, Section 12 of which embodies the so-called "in-lieu-of-all
taxes" clause.Under the said Section, PLDT shall pay a franchise tax equivalent to
three percent (3%) of all its gross receipts, which franchise tax shall be "in lieu of all
taxes." The issue that the Court had to resolve was whether PLDT was liable to pay
franchise tax to the Province of Laguna in view of the in lieu of all taxes clause in its
franchise and Section 23 of RA 7925.
Applying the rule of strict construction of laws granting tax exemptions and
the rule that doubts are resolved in favor of municipal corporations in interpreting
statutory provisions on municipal taxing powers, the Court held that Section 23 of
RA 7925 could not be considered as having amended petitioner's franchise so as to
entitle it to exemption from the imposition of local franchise taxes.
In ruling against the claim of PLDT, the Court cited the previous decisions
in PLDT v. City of Davao[12] and PLDT v. City of Bacolod,[13] in denying the claim for
exemption from the payment of local franchise tax.
In sum, the aforecited jurisprudence suggests that aside from the national
franchise tax, the franchisee is still liable to pay the local franchise tax, unless it is
expressly and unequivocally exempted from the payment thereof under its
legislative franchise. The in lieu of all taxes clause in a legislative franchise should
categorically state that the exemption applies to both local and national taxes;
otherwise, the exemption claimed should be strictly construed against the taxpayer
and liberally in favor of the taxing authority.
Republic Act No. 7716, otherwise known as the Expanded VAT Law, did not remove
or abolish the payment of local franchise tax. It merely replaced the national
franchise tax that was previously paid by telecommunications franchise holders and
in its stead imposed a ten percent (10%) VAT in accordance with Section 108 of the

Tax Code. VAT replaced the national franchise tax, but it did not prohibit nor abolish
the imposition of local franchise tax by cities or municipaties.
The power to tax by local government units emanates from Section 5, Article
X of the Constitution which empowers them to create their own sources of revenues
and to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide. The imposition of local franchise tax is not inconsistent with
the advent of the VAT, which renders functus officio the franchise tax paid to the
national government. VAT inures to the benefit of the national government, while a
local franchise tax is a revenue of the local government unit.
WHEREFORE, the motion for reconsideration is DENIED, and this denial is
final.
SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

PBCom v CIR
SYLLABI/SYNOPSIS
SECOND DIVISION

[G.R. No. 112024. January 28, 1999]

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF

INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF
APPEALS, respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Resolution [1] of the Court of Appeals dated
September 22, 1993, affirming the Decision[2] and Resolution[3] of the Court of Tax
Appeals which denied the claims of the petitioner for tax refund and tax credits,
and disposing as follows:
IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED due
course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its
resolution dated July 20, 1993, are hereby AFFIRMED in toto.

SO ORDERED.[4]
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax for 1985
in the amount of P5,299,749.95 is hereby denied for having been filed beyond the
reglementary period. The 1986 claim for refund amounting to P234,077.69 is
likewise denied since petitioner has opted and in all likelihood automatically
credited the same to the succeeding year. The petition for review is dismissed for
lack of merit.
SO ORDERED.[5]
The facts on record show the antecedent circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking
corporation duly organized under Philippine laws, filed its quarterly income tax
returns for the first and second quarters of 1985, reported profits, and paid the total
income tax of P5,016,954.00. The taxes due were settled by applying PBComs tax
credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax
Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1, 615,253.00,
respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual
Income Tax Returns for the year-ended December 31, 1985, it declared a net loss
of P25,317,228.00, thereby showing no income tax liability. For the succeeding year,
ending December 31, 1986, the petitioner likewise reported a net loss
of P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased
properties. The lessees withheld and remitted to the BIR withholding creditable
taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue,
among others, for a tax credit of P5,016,954.00 representing the overpayment of
taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable
taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in
1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue,
petitioner instituted a Petition for Review on November 18, 1988 before the Court of
Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309
entitled: Philippine Bank of Communications vs. Commissioner of Internal Revenue.
The losses petitioner incurred as per the summary of petitioners claims for
refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are
as follows:
1985

1986

Net Income (Loss)

(P25,317,228.00)

(P14,129,602.00)

Tax Due

NIL

NIL

Quarterly tax
Payments Made

5,016,954.00

---

Tax Withheld at 282,795.50

Source

234,077.69

Excess
Payments

P234,077.69====
==========

Tax

P5,299,749.50*====
==========

*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty-five

centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset,
denied the request of petitioner for a tax refund or credit in the sum amount
of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary
period provided for by law. The petitioners claim for refund in 1986 amounting
to P234,077.69 was likewise denied on the assumption that it was automatically
credited by PBCom against its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs
decision but the same was denied due course for lack of merit. [6]
Thereafter, PBCom filed a petition for review of said decision and resolution of
the CTA with the Court of Appeals. However on September 22, 1993, the Court of
Appeals affirmed in toto the CTAs resolution dated July 20, 1993. Hence this petition
now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom -- which relied in good faith on the formal
assurances of BIR in RMC No. 7-85 and did not immediately file with the
CTA a petition for review asking for the refund/tax credit of its 1985-86
excess quarterly income tax payments -- can be prejudiced by the
subsequent BIR rejection, applied retroactively, of its assurances in RMC
No. 7-85 that the prescriptive period for the refund/tax credit of excess
quarterly income tax payments is not two years but ten (10). [7]
II. Whether the Court of Appeals seriously erred in affirming the CTA decision
which denied PBComs claim for the refund of P234,077.69 income tax
overpaid in 1986 on the mere speculation, without proof, that there were
taxes due in 1987 and that PBCom availed of tax-crediting that year. [8]

Simply stated, the main question is: Whether or not the Court of Appeals erred
in denying the plea for tax refund or tax credits on the ground of prescription,
despite petitioners reliance on RMC No. 7-85, changing the prescriptive period of
two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by
prescription relying on the applicability of Revenue Memorandum Circular No. 7-85
issued on April 1, 1985. The circular states that overpaid income taxes are not
covered by the two-year prescriptive period under the tax Code and that taxpayers
may claim refund or tax credits for the excess quarterly income tax with the BIR
within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of
the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE
INCOME TAX RESULTING FROM THE FILING OF THE FINAL
ADJUSTMENT RETURN
TO: All Internal Revenue Officers and Others Concerned
Sections 85 and 86 of the National Internal Revenue Code provide:
xxxxxxxxx
The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos.
10-77 which provide:
xxxxxxxxx
It has been observed, however, that because of the excess tax payments,
corporations file claims for recovery of overpaid income tax with the Court of Tax
Appeals within the two-year period from the date of payment, in accordance with
Sections 292 and 295 of the National Internal Revenue Code. It is obvious that the
filing of the case in court is to preserve the judicial right of the corporation to claim
the refund or tax credit.
It should be noted, however, that this is not a case of erroneously or illegally paid
tax under the provisions of Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the refund
of the overpaid income tax or claim for automatic tax credit. To insure prompt action
on corporate annual income tax returns showing refundable amounts arising from
overpaid quarterly income taxes, this Office has promulgated Revenue
Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in
processing said returns. Under these procedures, the returns are merely pre-audited
which consist mainly of checking mathematical accuracy of the figures of the
return. After which, the refund or tax credit is granted, and, this procedure was
adopted to facilitate immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the
Court of Tax Appeals in order to preserve the right to claim refund or tax
credit within the two-year period. As already stated, actions hereon by the
Bureau are immediate after only a cursory pre-audit of the income tax
returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue
excess income tax paid under the provisions of Section 86 of the Tax Code within 10
years from the date of payment considering that it is an obligation created by law
(Article 1144 of the Civil Code).[9] (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position
contrary to its declared circular if it would result to injustice to
taxpayers. Citing ABS-CBN
Broadcasting
Corporation
vs.
Court
of
Tax
Appeals[10] petitioner claims that rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive effect if it would be
prejudicial to taxpayers. In ABS-CBN case, the Court held that the government is
precluded from adopting a position inconsistent with one previously taken where
injustice would result therefrom or where there has been a misrepresentation to the
taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code
explicitly provides for this rule as follows:
Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or reversal of
any of the rules and regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by the Commissioner shall not
be given retroactive application if the revocation, modification, or reversal will be
prejudicial to the taxpayers except in the following cases:
a) where the taxpayer deliberately misstates or omits material facts from his return
or 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;
c) where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through the Solicitor General,
argues that the two-year prescriptive period for filing tax cases in court concerning
income tax payments of Corporations is reckoned from the date of filing the Final
Adjusted Income Tax Return, which is generally done on April 15 following the close
of the calendar year. As precedents, respondent Commissioner cited cases which
adhered to this principle, to wit: ACCRA Investments Corp. vs. Court of Appeals, et
al.,[11] and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al..
[12]
Respondent Commissioner also states that since the Final Adjusted Income Tax
Return of the petitioner for the taxable year 1985 was supposed to be filed on April
15, 1986, the latter had only until April 15, 1988 to seek relief from the
court.Further, respondent Commissioner stresses that when the petitioner filed the
case before the CTA on November 18, 1988, the same was filed beyond the time
fixed by law, and such failure is fatal to petitioners cause of action.

After a careful study of the records and applicable jurisprudence on the matter,
we find that, contrary to the petitioners contention, the relaxation of revenue
regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive
period set by law.
Basic is the principle that taxes are the lifeblood of the nation. The primary
purpose is to generate funds for the State to finance the needs of the citizenry and
to advance the common weal.[13] Due process of law under the Constitution does not
require judicial proceedings in tax cases. This must necessarily be so because it is
upon taxation that the government chiefly relies to obtain the means to carry on its
operations and it is of utmost importance that the modes adopted to enforce the
collection of taxes levied should be summary and interfered with as little as
possible.[14]
From the same perspective, claims for refund or tax credit should be exercised
within the time fixed by law because the BIR being an administrative body enforced
to collect taxes, its functions should not be unduly delayed or hampered by
incidental matters.
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec.
229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding
for the recovery of tax erroneously or illegally collected, viz.:
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 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. (Italics supplied)
The rule states that the taxpayer may file a claim for refund or credit with the
Commissioner of Internal Revenue, within two (2) years after payment of tax, before
any suit in CTA is commenced. The two-year prescriptive period provided, should be
computed from the time of filing the Adjustment Return and final payment of the
tax for the year.
[15]

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.,

this Court explained the application of Sec. 230 of 1977 NIRC, as follows:

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. In the present case, this date is April 16, 1984,
and two years from this date would be April 16, 1986. x x x As we have earlier said

in the TMX Sales case, Sections 68, [16] 69,[17] and 70[18] on Quarterly Corporate
Income Tax Payment and Section 321 should be considered in conjunction with it. [19]
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing
the prescriptive period of two years to ten years on claims of excess quarterly
income tax payments, such circular created a clear inconsistency with the provision
of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law;
rather it legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general interpretations
of tax laws) which are issued from time to time by the Commissioner of Internal
Revenue. It is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the
courts.Nevertheless, such interpretation is not conclusive and will be ignored if
judicially found to be erroneous.[20] Thus, courts will not countenance administrative
issuances that override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement.[21]
In the case of People vs. Lim,[22] it was held that rules and regulations issued by
administrative officials to implement a law cannot go beyond the terms and
provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only
inconsistent with but is contrary to the provisions and spirit of Act. No. 4003 as
amended, because whereas the prohibition prescribed in said Fisheries Act was for
any single period of time not exceeding five years duration, FAO No. 37-1 fixed no
period, that is to say, it establishes an absolute ban for all time. This discrepancy
between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the
part of Secretary of Agriculture and Natural Resources. Of course, in case of
discrepancy, the basic Act prevails, for the reason that the regulation or rule issued
to implement a law cannot go beyond the terms and provisions of the latter. x x x
In this connection, the attention of the technical men in the offices of Department
Heads who draft rules and regulation is called to the importance and necessity of
closely following the terms and provisions of the law which they intended to
implement, this to avoid any possible misunderstanding or confusion as in the
present case.[23]
Further, fundamental is the rule that the State cannot be put in estoppel by the
mistakes or errors of its officials or agents. [24] As pointed out by the respondent
courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of
Internal Revenue is an administrative interpretation which is not in harmony with
Sec. 230 of 1977 NIRC, for being contrary to the express provision of a
statute. Hence, his interpretation could not be given weight for to do so would, in
effect, amend the statute.
As aptly stated by respondent Court of Appeals:
It is likewise argued that the Commissioner of Internal Revenue, after promulgating
RMC No. 7-85, is estopped by the principle of non-retroactivity of BIR rulings. Again
We do not agree. The Memorandum Circular, stating that a taxpayer may recover

the excess income tax paid within 10 years from date of payment because this is an
obligation created by law, was issued by the Acting Commissioner of Internal
Revenue. On the other hand, the decision, stating that the taxpayer should still file
a claim for a refund or tax credit and the corresponding petition for review within
the two-year prescription period, and that the lengthening of the period of limitation
on refund from two to ten years would be adverse to public policy and run counter
to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial
interpretation of the Court of Tax Appeals. Estoppel has no application in the case at
bar because it was not the Commissioner of Internal Revenue who denied
petitioners claim of refund or tax credit. Rather, it was the Court of Tax Appeals who
denied (albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued
by the Commissioner of Internal Revenue is an administrative interpretation which
is out of harmony with or contrary to the express provision of a statute (specifically
Sec. 230, NIRC), hence, cannot be given weight for to do so would in effect amend
the statute.[25]
Article 8 of the Civil Code[26] recognizes judicial decisions, applying or
interpreting statutes as part of the legal system of the country. But administrative
decisions do not enjoy that level of recognition.A memorandum-circular of a bureau
head could not operate to vest a taxpayer with a shield against judicial action. For
there are no vested rights to speak of respecting a wrong construction of the law by
the administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same.[27] Moreover, the nonretroactivity of rulings by the Commissioner of Internal Revenue is not applicable in
this case because the nullity of RMC No. 7-85 was declared by respondent courts
and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as
repeatedly held by this Court, a claim for refund is in the nature of a claim for
exemption and should be construed in strictissimi juris against the taxpayer.[28]
On the second issue, the petitioner alleges that the Court of Appeals seriously
erred in affirming CTAs decision denying its claim for refund of P 234,077.69 (tax
overpaid in 1986), based on mere speculation, without proof, that PBCom availed of
the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC [29] (now Sec. 76 of the 1997 NIRC) provides that any
excess of the total quarterly payments over the actual income tax computed in the
adjustment or final corporate income tax return, shall either (a) be refunded to the
corporation, or (b) may be credited against the estimated quarterly income tax
liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate adjustment return (by
marking the option box provided in the BIR form) its intention, whether to request
for a refund or claim for an automatic tax credit for the succeeding taxable year. To
ease the administration of tax collection, these remedies are in the alternative, and
the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of Tax
Appeals, after examining the adjusted final corporate annual income tax return for
taxable year 1986, found out that petitioner opted to apply for automatic tax
credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax

return was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the
succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies
of refund and tax credit are alternative.[30]
That the petitioner opted for an automatic tax credit in accordance with Sec. 69
of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a
finding of fact which we must respect.Moreover, the 1987 annual corporate tax
return of the petitioner was not offered as evidence to controvert said fact. Thus, we
are bound by the findings of fact by respondent courts, there being no showing of
gross error or abuse on their part to disturb our reliance thereon. [31]
WHEREFORE, the petition is hereby DENIED. The decision of the Court of
Appeals appealed from is AFFIRMED, with COSTS against the petitioner.
SO ORDERED.
Bellosillo, (Chairman), Puno, Mendoza, and Buena, JJ., concur.

CIR v Hantex Trading

SECOND DIVISION

[G.R. No. 136975. March 31, 2005]

COMMISSION OF INTERNAL REVENUE, petitioner, vs. HANTEX TRADING CO.,
INC., respondent.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review of the Decision [ 1 ] of the Court of Appeals (CA)
which reversed the Decision[ 2 ] of the Court of Tax Appeals (CTA) in CTA Case No.
5126, upholding the deficiency income and sales tax assessments against
respondent Hantex Trading Co., Inc.

The Antecedents
The respondent is a corporation duly organized and existing under the laws of
the Philippines. Being engaged in the sale of plastic products, it imports synthetic
resin and other chemicals for the manufacture of its products. For this purpose, it is

required to file an Import Entry and Internal Revenue Declaration (Consumption

Entry) with the Bureau of Customs under Section 1301 of the Tariff and Customs
Code.
Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of CounterIntelligence Division of the Economic Intelligence and Investigation Bureau (EIIB),
received confidential information that the respondent had imported synthetic resin
amounting to P115,599,018.00 but only declared P45,538,694.57.[ 3 ] According to
the informer, based on photocopies of 77 Consumption Entries furnished by another
informer, the 1987 importations of the respondent were understated in its
accounting records.[ 4 ] Amoto submitted a report to the EIIB Commissioner
recommending that an inventory audit of the respondent be conducted by the
Internal Inquiry and Prosecution Office (IIPO) of the EIIB. [ 5 ]
Acting on the said report, Jose T. Almonte, then Commissioner of the EIIB, issued
Mission Order No. 398-89[ 6 ] dated November 14, 1989 for the audit and
investigation of the importations of Hantex for 1987. The IIPO issued subpoena
duces tecum and ad testificandum for the president and general manager of the
respondent to appear in a hearing and bring the following:
1. Books of Accounts for the year 1987;
2. Record of Importations of Synthetic Resin and Calcium Carbonate for the
year 1987;
3. Income tax returns & attachments for 1987; and
4. Record of tax payments.[ 7 ]
However, the respondents president and general manager refused to comply
with the subpoena, contending that its books of accounts and records of importation
of synthetic resin and calcium bicarbonate had been investigated repeatedly by the
Bureau of Internal Revenue (BIR) on prior occasions. [ 8 ] The IIPO explained that
despite such previous investigations, the EIIB was still authorized to conduct an
investigation pursuant to Section 26-A of Executive Order No. 127. Still, the
respondent refused to comply with the subpoena issued by the IIPO. The latter
forthwith secured certified copies of the Profit and Loss Statements for 1987 filed by
the respondent with the Securities and Exchange Commission (SEC). [ 9 ] However,
the IIPO failed to secure certified copies of the respondents 1987 Consumption
Entries from the Bureau of Customs since, according to the custodian thereof, the
original copies had been eaten by termites. [ 1 0 ]
In a Letter dated June 28, 1990, the IIPO requested the Chief of the Collection
Division, Manila International Container Port, and the Acting Chief of the Collection
Division, Port of Manila, to authenticate the machine copies of the import entries
supplied by the informer. However, Chief of the Collection Division Merlita D. Tomas
could not do so because the Collection Division did not have the original copies of
the entries. Instead, she wrote the IIPO that, as gleaned from the records, the
following entries had been duly processed and released after the payment of duties
and taxes:

IMPORTER HANTEX TRADING CO., INC. SERIES OF 1987

ENTRY NO. DATE RELEASED ENTRY NO. DATE RELEASED
03058-87 1-30-87 50265-87 12-09-87
09120-87 3-20-87 46427-87 11-27-87
18089-87 5-21-87 30764-87 8-21-87
19439-87 6-2-87 30833-87 8-20-87
19441-87 6-3-87 34690-87 9-16-87
11667-87 4-15-87 34722-87 9-11-87
23294-87 7-7-87 43234-87 11-2-87
45478-87 11-16-87 44850-87 11-16-87
45691-87 12-2-87 44851-87 11-16-87
25464-87 7-16-87 46461-87 11-19-87
26483-87 7-23-87 46467-87 11-18-87
29950-87 8-11-87 48091-87 11-27-87[ 1 1 ]
Acting Chief of the Collection Division of the Bureau of Customs Augusto S.
Danganan could not authenticate the machine copies of the import entries as well,
since the original copies of the said entries filed with the Bureau of Customs had
apparently been eaten by termites. However, he issued a certification that the
following enumerated entries were filed by the respondent which were processed
and released from the Port of Manila after payment of duties and taxes, to wit:
Hantex Trading Co., Inc.
Entry No. Date Released Entry No. Date Released
03903 1-29-87 22869 4-8-87
04414 1-20-87 19441 3-31-87
10683 2-17-87 24189 4-21-87
12611 2-24-87 26431 4-20-87
12989 2-26-87 45478 7-3-87

17050 3-13-87 26796 4-23-87

17169 3-13-87 28827 4-30-87
18089 3-16-87 31617 5-14-87
19439 4-1-87 39068 6-5-87
21189 4-3-87 42581 6-21-87
43451 6-29-87 42793 6-23-87
42795 6-23-87 45477 7-3-87
35582 not received 85830 11-13-87
45691 7-3-87 86650 not received
46187 7-8-87 87647 11-18-87
46427 7-3-87 88829 11-23-87
57669 8-12-87 92293 12-3-87
62471 8-28-87 93292 12-7-87
63187 9-2-87 96357 12-16-87
66859 9-15-87 96822 12-15-87
67890 9-17-87 98823 not received
68115 9-15-87 99428 12-28-87
69974 9-24-87 99429 12-28-87
72213 10-2-87 99441 12-28-87
77688 10-16-87 101406 1-5-87
84253 11-10-87 101407 1-8-87
85534 11-11-87 03118 1-19-87[ 1 2 ]
Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo Dionela, Lt.
Vicente Amoto and Lt. Rolando Gatmaitan conducted an investigation. They relied
on the certified copies of the respondents Profit and Loss Statement for 1987 and
1988 on file with the SEC, the machine copies of the Consumption Entries, Series of

1987, submitted by the informer, as well as excerpts from the entries certified by
Tomas and Danganan.
Based on the documents/records on hand, inclusive of the machine copies of the
Consumption Entries, the EIIB found that for 1987, the respondent had importations
totalingP105,716,527.00 (inclusive of advance sales tax). Compared with the
declared sales based on the Profit and Loss Statements filed with the SEC, the
respondent had unreported sales in the amount of P63,032,989.17, and its
corresponding income tax liability was P41,916,937.78, inclusive of penalty charge
and interests.
EIIB Commissioner Almonte transmitted the entire docket of the case to the BIR
and recommended the collection of the total tax assessment from the respondent.
[13]

On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a Memorandum

to the BIR Assistant Commissioner for Special Operations Service, directing the
latter to prepare a conference letter advising the respondent of its deficiency taxes.
[14]

Meanwhile, as ordered by the Regional Director, Revenue Enforcement Officers

Saturnino D. Torres and Wilson Filamor conducted an investigation on the 1987
importations of the respondent, in the light of the records elevated by the EIIB to
the BIR, inclusive of the photocopies of the Consumption Entries. They were to
ascertain the respondents liability for deficiency sales and income taxes for 1987, if
any. Per Torres and Filamors Report dated March 6, 1991 which was based on the
report of the EIIB and the documents/records appended thereto, there was a prima
facie case of fraud against the respondent in filing its 1987 Consumption Entry
reports with the Bureau of Customs. They found that the respondent had
unrecorded importation in the total amount of P70,661,694.00, and that the amount
was not declared in its income tax return for 1987. The District Revenue Officer and
the Regional Director of the BIR concurred with the report. [ 1 5 ]
Based on the said report, the Acting Chief of the Special Investigation Branch
wrote the respondent and invited its representative to a conference at 10:00 a.m. of
March 14, 1991 to discuss its deficiency internal revenue taxes and to present
whatever documentary and other evidence to refute the same. [ 1 6 ] Appended to the
letter was a computation of the deficiency income and sales tax due from the
respondent, inclusive of increments:
B. Computations:
1. Cost of Sales Ratio A2/A1 85.492923%
2. Undeclared Sales Imported A3/B1 110,079,491.61
3. Undeclared Gross Profit B2-A3 15,969,316.61
C. Deficiency Taxes Due:
1. Deficiency Income Tax B3 x 35% 5,589,261.00

50% Surcharge C1 x 50% 2,794,630.50

Interest to 2/28/91 C1 x 57.5% 3,213,825.08
Total 11,597,825.58
2. Deficiency Sales Tax
at 10% 7,290,082.72
at 20% 10,493,312.31
Total Due 17,783,395.03
Less: Advanced Sales Taxes Paid 11,636,352.00
Deficiency Sales Tax 6,147,043.03
50% Surcharge C2 x 50% 3,073,521.52
Interest to 2/28/91 5,532,338.73
Total 14,752,903.28[ 1 7 ]
===========
The invitation was reiterated in a Letter dated March 15, 1991. In his Reply
dated March 15, 1991, Mariano O. Chua, the President and General Manager of the
respondent, requested that the report of Torres and Filamor be set aside on the
following claim:
[W]e had already been investigated by RDO No. 23 under Letters of Authority Nos.
0322988 RR dated Oct. 1, 1987, 0393561 RR dated Aug. 17, 1988 and 0347838 RR
dated March 2, 1988, and re-investigated by the Special Investigation Team on Aug.
17, 1988 under Letter of Authority No. 0357464 RR, and the Intelligence and
Investigation Office on Sept. 27, 1988 under Letter of Authority No. 0020188 NA, all
for income and business tax liabilities for 1987. The Economic Intelligence and
Investigation Bureau on Nov. 20, 1989, likewise, confronted us on the same
information for the same year.
In all of these investigations, save your request for an informal conference, we
welcomed them and proved the contrary of the allegation. Now, with your new
inquiry, we think that there will be no end to the problem.
Madam, we had been subjected to so many investigations and re-investigations for
1987 and nothing came out except the payment of deficiency taxes as a result of
oversight. Tax evasion through underdeclaration of income had never been proven.
[18]

Invoking Section 235[ 1 9 ] of the 1977 National Internal Revenue Code (NIRC), as
amended, Chua requested that the inquiry be set aside.
The petitioner, the Commissioner of Internal Revenue, through Assistant
Commissioner for Collection Jaime M. Maza, sent a Letter dated April 15, 1991 to the
respondent demanding payment of its deficiency income tax of P13,414,226.40 and
deficiency sales tax of P14,752,903.25, inclusive of surcharge and interest.
[20]
Appended thereto were the Assessment Notices of Tax Deficiency Nos. FAS-1-8791-001654 and FAS-4-87-91-001655.[ 2 1 ]
On February 12, 1992, the Chief of the Accounts Receivables/Billing Division of
the BIR sent a letter to the respondent demanding payment of its tax liability due
for 1987 within ten (10) days from notice, on pain of the collection tax due via a
warrant of distraint and levy and/or judicial action. [ 2 2 ] The Warrant of Distraint
and/or Levy[ 2 3 ] was actually served on the respondent on January 21, 1992. On
September 7, 1992, it wrote the Commissioner of Internal Revenue protesting the
assessment on the following grounds:
I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS LEGAL BASIS, THE
FACT THAT NO INVESTIGATION OF OUR RECORDS WAS EVER MADE BY
THE EIIB WHICH RECOMMENDED ITS ISSUANCE.[ 2 4 ]
II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR PURCHASES FOR
1987 AMOUNTED TO P105,716,527.00 AS CLAIMED BY THE EIIB, THE
ASSESSMENT OF A DEFICIENCY INCOME TAX IS STILL DEFECTIVE FOR IT
FAILED TO CONSIDER OUR REAL PURCHASES OF P45,538,694.57.[ 2 5 ]
III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS ALSO BASELESS
AND UNFOUNDED CONSIDERING THAT WE HAVE DUTIFULLY PAID THE
SALES TAX DUE FROM OUR BUSINESS.[ 2 6 ]
In view of the impasse, administrative hearings were conducted on the
respondents protest to the assessment. During the hearing of August 20, 1993, the
IIPO representative presented the photocopies of the Consumption and Import
Entries and the Certifications issued by Tomas and Danganan of the Bureau of
Customs. The IIPO representative testified that the Bureau of Customs failed to
furnish the EIIB with certified copies of the Consumption and Import Entries; hence,
the EIIB relied on the machine copies from their informer. [ 2 7 ]
The respondent wrote the BIR Commissioner on July 12, 1993 questioning the
assessment on the ground that the EIIB representative failed to present the original,
or authenticated, or duly certified copies of the Consumption and Import Entry
Accounts, or excerpts thereof if the original copies were not readily available; or, if
the originals were in the official custody of a public officer, certified copies thereof
as provided for in Section 12, Chapter 3, Book VII, Administrative Procedure,
Administrative Order of 1987. It stated that the only copies of the Consumption
Entries submitted to the Hearing Officer were mere machine copies furnished by an
informer of the EIIB. It asserted that the letters of Tomas and Danganan were
unreliable because of the following:
In the said letters, the two collection officers merely submitted a listing of alleged
import entry numbers and dates released of alleged importations by Hantex Trading
Co., Inc. of merchandise in 1987, for which they certified that the corresponding

duties and taxes were paid after being processed in their offices. In said letters, no
amounts of the landed costs and advance sales tax and duties were stated, and no
particulars of the duties and taxes paid per import entry document was presented.
The contents of the two letters failed to indicate the particulars of the importations
per entry number, and the said letters do not constitute as evidence of the amounts
of importations of Hantex Trading Co., Inc. in 1987. [ 2 8 ]
The respondent cited the following findings of the Hearing Officer:
[T]hat the import entry documents do not constitute evidence only indicate that the
tax assessments in question have no factual basis, and must, at this point in time,
be withdrawn and cancelled. Any new findings by the IIPO representative who
attended the hearing could not be used as evidence in this hearing, because all the
issues on the tax assessments in question have already been raised by the herein
taxpayer.[ 2 9 ]
The respondent requested anew that the income tax deficiency assessment and
the sales tax deficiency assessment be set aside for lack of factual and legal basis.
The BIR Commissioner[ 3 0 ] wrote the respondent on December 10, 1993, denying
its letter-request for the dismissal of the assessments. [ 3 1 ] The BIR Commissioner
admitted, in the said letter, the possibility that the figures appearing in the
photocopies of the Consumption Entries had been tampered with. She averred,
however, that she was not proscribed from relying on other admissible evidence,
namely, the Letters of Torres and Filamor dated August 7 and 22, 1990 on their
investigation of the respondents tax liability. The Commissioner emphasized that
her decision was final.[ 3 2 ]
The respondent forthwith filed a petition for review in the CTA of the
Commissioners Final Assessment Letter dated December 10, 1993 on the following
grounds:
First. The alleged 1987 deficiency income tax assessment (including
increments) and the alleged 1987 deficiency sales tax assessment (including
increments) are void ab initio, since under Sections 16(a) and 49(b) of the Tax Code,
the Commissioner shall examine a return after it is filed and, thereafter, assess the
correct amount of tax. The following facts obtaining in this case, however, are
indicative of the incorrectness of the tax assessments in question: the deficiency
interests imposed in the income and percentage tax deficiency assessment notices
were computed in violation of the provisions of Section 249(b) of the NIRC of 1977,
as amended; the percentage tax deficiency was computed on an annual basis for
the year 1987 in accordance with the provision of Section 193, which should have
been computed in accordance with Section 162 of the 1977 NIRC, as amended by
Pres. Decree No. 1994 on a quarterly basis; and the BIR official who signed the
deficiency tax assessments was the Assistant Commissioner for Collection, who had
no authority to sign the same under the NIRC.
Second. Even granting arguendo that the deficiency taxes and increments for
1987 against the respondent were correctly computed in accordance with the
provisions of the Tax Code, the facts indicate that the above-stated assessments
were based on alleged documents which are inadmissible in either administrative or
judicial proceedings. Moreover, the alleged bases of the tax computations were

anchored on mere presumptions and not on actual facts. The alleged undeclared
purchases for 1987 were based on mere photocopies of alleged import entry
documents, not the original ones, and which had never been duly certified by the
public officer charged with the custody of such records in the Bureau of Customs.
According to the respondent, the alleged undeclared sales were computed based on
mere presumptions as to the alleged gross profit contained in its 1987 financial
statement. Moreover, even the alleged financial statement of the respondent was a
mere machine copy and not an official copy of the 1987 income and business tax
returns. Finally, the respondent was following the accrual method of accounting in
1987, yet, the BIR investigator who computed the 1987 income tax deficiency failed
to allow as a deductible item the alleged sales tax deficiency for 1987 as provided
for under Section 30(c) of the NIRC of 1986. [ 3 3 ]
The Commissioner did not adduce in evidence the original or certified true
copies of the 1987 Consumption Entries on file with the Commission on Audit.
Instead, she offered in evidence as proof of the contents thereof, the photocopies of
the Consumption Entries which the respondent objected to for being inadmissible in
evidence.[ 3 4 ] She also failed to present any witness to prove the correct amount of
tax due from it. Nevertheless, the CTA provisionally admitted the said documents in
evidence, subject to its final evaluation of their relevancy and probative weight to
the issues involved.[ 3 5 ]
On December 11, 1997, the CTA rendered a decision, the dispositive portion of
which reads:
IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered DENYING the
herein petition. Petitioner is hereby ORDERED TO PAY the respondent Commissioner
of Internal Revenue its deficiency income and sales taxes for the year 1987 in the
amounts
of P11,182,350.26
and P12,660,382.46,
respectively,
plus
20%
delinquency interest per annum on both deficiency taxes from April 15, 1991 until
fully paid pursuant to Section 283(c)(3) of the 1987 Tax Code, with costs against the
petitioner.
SO ORDERED.[ 3 6 ]
The CTA ruled that the respondent was burdened to prove not only that the
assessment was erroneous, but also to adduce the correct taxes to be paid by it.
The CTA declared that the respondent failed to prove the correct amount of taxes
due to the BIR. It also ruled that the respondent was burdened to adduce in
evidence a certification from the Bureau of Customs that the Consumption Entries in
question did not belong to it.
On appeal, the CA granted the petition and reversed the decision of the CTA.
The dispositive portion of the decision reads:
FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED and the
December 11, 1997 decision of the CTA in CTA Case No. 5162 affirming the 1987
deficiency income and sales tax assessments and the increments thereof, issued by
the BIR is hereby REVERSED. No costs.[ 3 7 ]

The Ruling of the Court of Appeals

The CA held that the income and sales tax deficiency assessments issued by the
petitioner were unlawful and baseless since the copies of the import entries relied
upon in computing the deficiency tax of the respondent were not duly authenticated
by the public officer charged with their custody, nor verified under oath by the EIIB
and the BIR investigators.[ 3 8 ] The CA also noted that the public officer charged with
the custody of the import entries was never presented in court to lend credence to
the alleged loss of the originals. [ 3 9 ] The CA pointed out that an import entry is a
public document which falls within the provisions of Section 19, Rule 132 of the
Rules of Court, and to be admissible for any legal purpose, Section 24, Rule 132 of
the Rules of Court should apply. [ 4 0 ] Citing the ruling of this Court in Collector of
Internal Revenue v. Benipayo,[ 4 1 ] the CA ruled that the assessments were unlawful
because they were based on hearsay evidence. The CA also ruled that the
respondent was deprived of its right to due process of law.
The CA added that the CTA should not have just brushed aside the legal
requisites provided for under the pertinent provisions of the Rules of Court in the
matter of the admissibility of public documents, considering that substantive rules
of evidence should not be disregarded. It also ruled that the certifications made by
the two Customs Collection Chiefs under the guise of supporting the respondents
alleged tax deficiency assessments invoking the best evidence obtainable rule
under the Tax Code should not be permitted to supplant the best evidence rule
under Section 7, Rule 130 of the Rules of Court.
Finally, the CA noted that the tax deficiency assessments were computed
without the tax returns. The CA opined that the use of the tax returns is
indispensable in the computation of a tax deficiency; hence, this essential
requirement must be complied with in the preparation and issuance of valid tax
deficiency assessments.[ 4 2 ]

The Present Petition

The Commissioner of Internal Revenue, the petitioner herein, filed the present
petition for review under Rule 45 of the Rules of Court for the reversal of the
decision of the CA and for the reinstatement of the ruling of the CTA.
As gleaned from the pleadings of the parties, the threshold issues for resolution
are the following: (a) whether the petition at bench is proper and complies with
Sections 4 and 5, Rule 7 of the Rules of Court; (b) whether the December 10, 1991
final assessment of the petitioner against the respondent for deficiency income tax
and sales tax for the latters 1987 importation of resins and calcium bicarbonate is
based on competent evidence and the law; and (c) the total amount of deficiency
taxes due from the respondent for 1987, if any.
On the first issue, the respondent points out that the petition raises both
questions of facts and law which cannot be the subject of an appeal by certiorari
under Rule 45 of the Rules of Court. The respondent notes that the petition is
defective because the verification and the certification against forum shopping were
not signed by the petitioner herself, but only by the Regional Director of the BIR.
The respondent submits that the petitioner should have filed a motion for
reconsideration with the CA before filing the instant petition for review. [ 4 3 ]

We find and so rule that the petition is sufficient in form. A verification and
certification against forum shopping signed by the Regional Director constitutes
sufficient compliance with the requirements of Sections 4 and 5, Rule 7 of the Rules
of Court. Under Section 10 of the NIRC of 1997, [ 4 4 ] the Regional Director has the
power to administer and enforce internal revenue laws, rules and regulations,
including the assessment and collection of all internal revenue taxes, charges and
fees. Such power is broad enough to vest the Revenue Regional Director with the
authority to sign the verification and certification against forum shopping in behalf
of the Commissioner of Internal Revenue. There is no other person in a better
position to know the collection cases filed under his jurisdiction than the Revenue
Regional Director.
Moreover, under Revenue Administrative Order No. 5-83, [ 4 5 ] the Regional
Director is authorized to sign all pleadings filed in connection with cases referred to
the Revenue Regions by the National Office which, otherwise, require the signature
of the petitioner.
We do not agree with the contention of the respondent that a motion for
reconsideration ought to have been filed before the filing of the instant petition. A
motion for reconsideration of the decision of the CA is not a condition sine qua non
for the filing of a petition for review under Rule 45. As we held in Almora v. Court of
Appeals:[ 4 6 ]
Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides that:
A party may appeal by certiorari from a judgment of the Court of Appeals, by filing
with the Supreme Court a petition for certiorari within fifteen (15) days from notice
of judgment, or of the denial of his motion for reconsideration filed in due time.
(Emphasis supplied)
The conjunctive or clearly indicates that the 15-day reglementary period for the
filing of a petition for certiorari under Rule 45 commences either from notice of the
questioned judgment or from notice of denial of the appellants motion for
reconsideration. A prior motion for reconsideration is not indispensable for a petition
for review on certiorari under Rule 45 to prosper. [ 4 7 ]
While Rule 45 of the Rules of Court provides that only questions of law may be
raised by the petitioner and resolved by the Court, under exceptional
circumstances, the Court may take cognizance thereof and resolve questions of
fact. In this case, the findings and conclusion of the CA are inconsistent with those
of the CTA, not to mention those of the Commissioner of Internal Revenue. The
issues raised in this case relate to the propriety and the correctness of the tax
assessments made by the petitioner against the respondent, as well as the
propriety of the application of Section 16, paragraph (b) of the 1977 NIRC, as
amended by Pres. Decree Nos. 1705, 1773, 1994 and Executive Order No. 273, in
relation to Section 3, Rule 132 of the Rules of Evidence. There is also an imperative
need for the Court to resolve the threshold factual issues to give justice to the
parties, and to determine whether the CA capriciously ignored, misunderstood or
misinterpreted cogent facts and circumstances which, if considered, would change
the outcome of the case.

On the second issue, the petitioner asserts that since the respondent refused to
cooperate and show its 1987 books of account and other accounting records, it was
proper for her to resort to the best evidence obtainable the photocopies of the
import entries in the Bureau of Customs and the respondents financial statement
filed with the SEC.[ 4 8 ] The petitioner maintains that these import entries were
admissible as secondary evidence under the best evidence obtainable rule, since
they were duly authenticated by the Bureau of Customs officials who processed the
documents and released the cargoes after payment of the duties and taxes due.
[49]
Further, the petitioner points out that under the best evidence obtainable rule,
the tax return is not important in computing the tax deficiency. [ 5 0 ]
The petitioner avers that the best evidence obtainable rule under Section 16 of
the 1977 NIRC, as amended, legally cannot be equated to the best evidence rule
under the Rules of Court; nor can the best evidence rule, being procedural law, be
made strictly operative in the interpretation of the best evidence obtainable rule
which is substantive in character. [ 5 1 ] The petitioner posits that the CTA is not strictly
bound by technical rules of evidence, the reason being that the quantum of
evidence required in the said court is merely substantial evidence. [ 5 2 ]
Finally, the petitioner avers that the respondent has the burden of proof to show
the correct assessments; otherwise, the presumption in favor of the correctness of
the assessments made by it stands.[ 5 3 ] Since the respondent was allowed to explain
its side, there was no violation of due process. [ 5 4 ]
The respondent, for its part, maintains that the resort to the best evidence
obtainable method was illegal. In the first place, the respondent argues, the EIIB
agents are not duly authorized to undertake examination of the taxpayers
accounting records for internal revenue tax purposes. Hence, the respondents
failure to accede to their demands to show its books of accounts and other
accounting records cannot justify resort to the use of the best evidence obtainable
method.[ 5 5 ] Secondly, when a taxpayer fails to submit its tax records upon demand
by the BIR officer, the remedy is not to assess him and resort to the best evidence
obtainable rule, but to punish the taxpayer according to the provisions of the Tax
Code.[ 5 6 ]
In any case, the respondent argues that the photocopies of import entries
cannot be used in making the assessment because they were not properly
authenticated, pursuant to the provisions of Sections 24 [ 5 7 ] and 25[ 5 8 ] of Rule 132 of
the Rules of Court. It avers that while the CTA is not bound by the technical rules of
evidence, it is bound by substantial rules. [ 5 9 ] The respondent points out that the
petitioner did not even secure a certification of the fact of loss of the original
documents from the custodian of the import entries. It simply relied on the report of
the EIIB agents that the import entry documents were no longer available because
they were eaten by termites. The respondent posits that the two collectors of the
Bureau of Customs never authenticated the xerox copies of the import entries;
instead, they only issued certifications stating therein the import entry numbers
which were processed by their office and the date the same were released. [ 6 0 ]
The respondent argues that it was not necessary for it to show the correct
assessment, considering that it is questioning the assessments not only because
they are erroneous, but because they were issued without factual basis and in
patent violation of the assessment procedures laid down in the NIRC of 1977, as

amended.[ 6 1 ] It is also pointed out that the petitioner failed to use the tax returns
filed by the respondent in computing the deficiency taxes which is contrary to law;
[62]
as such, the deficiency assessments constituted deprivation of property without
due process of law.[ 6 3 ]
Central to the second issue is Section 16 of the NIRC of 1977, as amended,
which provides that the Commissioner of Internal Revenue has the power to
make assessments and prescribe additional requirements for tax administration and
enforcement. Among such powers are those provided in paragraph (b) thereof,
which we quote:
[64]

(b) Failure to submit required returns, statements, reports and other documents.
When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by law or regulation
or when there is reason to believe that any such report is false, incomplete or
erroneous, the Commissioner shall assess the proper tax on the best evidence
obtainable.
In case a person fails to file a required return or other document at the time
prescribed by law, or willfully or otherwise files a false or fraudulent return or other
document, the Commissioner shall make or amend the return from his own
knowledge and from such information as he can obtain through testimony or
otherwise, which shall be prima facie correct and sufficient for all legal purposes. [ 6 5 ]
This provision applies when the Commissioner of Internal Revenue undertakes
to perform her administrative duty of assessing the proper tax against a taxpayer,
to make a return in case of a taxpayers failure to file one, or to amend a return
already filed in the BIR.
The petitioner may avail herself of the best evidence or other information or
testimony by exercising her power or authority under paragraphs (1) to (4) of
Section 7 of the NIRC:
(1) To examine any book, paper, record or other data which may be relevant or
material to such inquiry;
(2) To obtain information from any office or officer of the national and local
governments, government agencies or its instrumentalities, including the Central
Bank of the Philippines and government owned or controlled corporations;
(3) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the
books of accounts and other accounting records containing entries relating to the
business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and place specified in
the summons and to produce such books, papers, records, or other data, and to
give testimony;
(4) To take such testimony of the person concerned, under oath, as may be relevant
or material to such inquiry; [ 6 6 ]

The best evidence envisaged in Section 16 of the 1977 NIRC, as amended,

includes the corporate and accounting records of the taxpayer who is the subject of
the assessment process, the accounting records of other taxpayers engaged in the
same line of business, including their gross profit and net profit sales. [ 6 7 ] Such
evidence also includes data, record, paper, document or any evidence gathered by
internal revenue officers from other taxpayers who had personal transactions or
from whom the subject taxpayer received any income; and record, data, document
and information secured from government offices or agencies, such as the SEC, the
Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs
Commission.
The law allows the BIR access to all relevant or material records and data in the
person of the taxpayer. It places no limit or condition on the type or form of the
medium by which the record subject to the order of the BIR is kept. The purpose of
the law is to enable the BIR to get at the taxpayers records in whatever form they
may be kept. Such records include computer tapes of the said records prepared by
the taxpayer in the course of business. [ 6 8 ] In this era of developing informationstorage technology, there is no valid reason to immunize companies with computerbased, record-keeping capabilities from BIR scrutiny. The standard is not the form of
the record but where it might shed light on the accuracy of the taxpayers return.
In Campbell, Jr. v. Guetersloh,[ 6 9 ] the United States (U.S.) Court of Appeals (5th
Circuit) declared that it is the duty of the Commissioner of Internal Revenue to
investigate any circumstance which led him to believe that the taxpayer had
taxable income larger than reported. Necessarily, this inquiry would have to be
outside of the books because they supported the return as filed. He may take the
sworn testimony of the taxpayer; he may take the testimony of third parties; he
may examine and subpoena, if necessary, traders and brokers accounts and books
and the taxpayers book accounts. The Commissioner is not bound to follow any set
of patterns. The existence of unreported income may be shown by any practicable
proof that is available in the circumstances of the particular situation. Citing its
ruling in Kenney v. Commissioner,[ 7 0 ] the U.S. appellate court declared that where
the records of the taxpayer are manifestly inaccurate and incomplete, the
Commissioner may look to other sources of information to establish income made
by the taxpayer during the years in question. [ 7 1 ]
We agree with the contention of the petitioner that the best evidence obtainable
may consist of hearsay evidence, such as the testimony of third parties or accounts
or other records of other taxpayers similarly circumstanced as the taxpayer subject
of the investigation, hence, inadmissible in a regular proceeding in the regular
courts.[ 7 2 ] Moreover, the general rule is that administrative agencies such as the BIR
are not bound by the technical rules of evidence. It can accept documents which
cannot be admitted in a judicial proceeding where the Rules of Court are strictly
observed. It can choose to give weight or disregard such evidence, depending on its
trustworthiness.
However, the best evidence obtainable under Section 16 of the 1977 NIRC, as
amended, does not include mere photocopies of records/documents. The petitioner,
in making a preliminary and final tax deficiency assessment against a taxpayer,
cannot anchor the said assessment on mere machine copies of records/documents.
Mere photocopies of the Consumption Entries have no probative weight if offered as
proof of the contents thereof. The reason for this is that such copies are mere scraps

of paper and are of no probative value as basis for any deficiency income or
business taxes against a taxpayer. Indeed, in United States v. Davey,[ 7 3 ] the U.S.
Court of Appeals (2nd Circuit) ruled that where the accuracy of a taxpayers return is
being checked, the government is entitled to use the original records rather than be
forced to accept purported copies which present the risk of error or tampering. [ 7 4 ]
In Collector of Internal Revenue v. Benipayo,[ 7 5 ] the Court ruled that the
assessment must be based on actual facts. The rule assumes more importance in
this case since the xerox copies of the Consumption Entries furnished by the
informer of the EIIB were furnished by yet another informer. While the EIIB tried to
secure certified copies of the said entries from the Bureau of Customs, it was unable
to do so because the said entries were allegedly eaten by termites. The Court can
only surmise why the EIIB or the BIR, for that matter, failed to secure certified
copies of the said entries from the Tariff and Customs Commission or from the
National Statistics Office which also had copies thereof. It bears stressing that under
Section 1306 of the Tariff and Customs Code, the Consumption Entries shall be the
required number of copies as prescribed by regulations. [ 7 6 ] The Consumption Entry
is accomplished in sextuplicate copies and quadruplicate copies in other places. In
Manila, the six copies are distributed to the Bureau of Customs, the Tariff and
Customs Commission, the Declarant (Importer), the Terminal Operator, and the
Bureau of Internal Revenue. Inexplicably, the Commissioner and the BIR personnel
ignored the copy of the Consumption Entries filed with the BIR and relied on the
photocopies supplied by the informer of the EIIB who secured the same from
another informer. The BIR, in preparing and issuing its preliminary and final
assessments against the respondent, even ignored the records on the investigation
made by the District Revenue officers on the respondents importations for 1987.
The original copies of the Consumption Entries were of prime importance to the
BIR. This is so because such entries are under oath and are presumed to be true and
correct under penalty of falsification or perjury. Admissions in the said entries of the
importers documents are admissions against interest and presumptively correct. [ 7 7 ]
In fine, then, the petitioner acted arbitrarily and capriciously in relying on and
giving weight to the machine copies of the Consumption Entries in fixing the tax
deficiency assessments against the respondent.
The rule is that in the absence of the accounting records of a taxpayer, his tax
liability may be determined by estimation. The petitioner is not required to compute
such tax liabilities with mathematical exactness. Approximation in the calculation of
the taxes due is justified. To hold otherwise would be tantamount to holding that
skillful concealment is an invincible barrier to proof. [ 7 8 ] However, the rule does not
apply where the estimation is arrived at arbitrarily and capriciously. [ 7 9 ]
We agree with the contention of the petitioner that, as a general rule, tax
assessments by tax examiners are presumed correct and made in good faith. All
presumptions are in favor of the correctness of a tax assessment. It is to be
presumed, however, that such assessment was based on sufficient evidence. Upon
the introduction of the assessment in evidence, a prima facie case of liability on the
part of the taxpayer is made.[ 8 0 ] If a taxpayer files a petition for review in the CTA
and assails the assessment, the prima facie presumption is that the assessment
made by the BIR is correct, and that in preparing the same, the BIR personnel
regularly performed their duties. This rule for tax initiated suits is premised on

several factors other than the normal evidentiary rule imposing proof obligation on
the petitioner-taxpayer: the presumption of administrative regularity; the likelihood
that the taxpayer will have access to the relevant information; and the desirability
of bolstering the record-keeping requirements of the NIRC. [ 8 1 ]
However, the prima facie correctness of a tax assessment does not apply upon
proof that an assessment is utterly without foundation, meaning it is arbitrary and
capricious. Where the BIR has come out with a naked assessment, i.e., without any
foundation character, the determination of the tax due is without rational basis.
[82]
In such a situation, the U.S. Court of Appeals ruled [ 8 3 ] that the determination of
the Commissioner contained in a deficiency notice disappears. Hence, the
determination by the CTA must rest on all the evidence introduced and its ultimate
determination must find support in credible evidence.
The issue that now comes to fore is whether the tax deficiency assessment
against the respondent based on the certified copies of the Profit and Loss
Statement submitted by the respondent to the SEC in 1987 and 1988, as well as
certifications of Tomas and Danganan, is arbitrary, capricious and illegal. The CTA
ruled that the respondent failed to overcome the prima facie correctness of the tax
deficiency assessment issued by the petitioner, to wit:
The issue should be ruled in the affirmative as petitioner has failed to rebut the
validity or correctness of the aforementioned tax assessments. It is incongruous for
petitioner to prove its cause by simply drawing an inference unfavorable to the
respondent by attacking the source documents (Consumption Entries) which were
the bases of the assessment and which were certified by the Chiefs of the Collection
Division, Manila International Container Port and the Port of Manila, as having been
processed and released in the name of the petitioner after payment of duties and
taxes and the duly certified copies of Financial Statements secured from the
Securities and Exchange Commission. Any such inference cannot operate to relieve
petitioner from bearing its burden of proof and this Court has no warrant of
absolution. The Court should have been persuaded to grant the reliefs sought by the
petitioner should it have presented any evidence of relevance and competence
required, like that of a certification from the Bureau of Customs or from any other
agencies, attesting to the fact that those consumption entries did not really belong
to them.
The burden of proof is on the taxpayer contesting the validity or correctness of an
assessment to prove not only that the Commissioner of Internal Revenue is wrong
but the taxpayer is right (Tan Guan v. CTA, 19 SCRA 903), otherwise, the
presumption in favor of the correctness of tax assessment stands (Sy Po v. CTA, 164
SCRA 524). The burden of proving the illegality of the assessment lies upon the
petitioner alleging it to be so. In the case at bar, petitioner miserably failed to
discharge this duty.[ 8 4 ]
We are not in full accord with the findings and ratiocination of the CTA. Based on
the letter of the petitioner to the respondent dated December 10, 1993, the tax
deficiency assessment in question was based on (a) the findings of the agents of
the EIIB which was based, in turn, on the photocopies of the Consumption Entries;
(b) the Profit and Loss Statements of the respondent for 1987 and 1988; and (c) the
certifications of Tomas and Danganan dated August 7, 1990 and August 22, 1990:

In reply, please be informed that after a thorough evaluation of the attending facts,
as well as the laws and jurisprudence involved, this Office holds that you are liable
to the assessed deficiency taxes. The conclusion was arrived at based on the
findings of agents of the Economic Intelligence & Investigation Bureau (EIIB) and of
our own examiners who have painstakingly examined the records furnished by the
Bureau of Customs and the Securities & Exchange Commission (SEC). The
examination conducted disclosed that while your actual sales for 1987 amounted
to P110,731,559.00, you declared for taxation purposes, as shown in the Profit and
Loss Statements, the sum of P47,698,569.83 only. The difference, therefore,
of P63,032,989.17 constitutes as undeclared or unrecorded sales which must be
subjected to the income and sales taxes.
You also argued that our assessment has no basis since the alleged amount of
underdeclared importations were lifted from uncertified or unauthenticated xerox
copies of consumption entries which are not admissible in evidence. On this issue, it
must be considered that in letters dated August 7 and 22, 1990, the Chief and
Acting Chief of the Collection Division of the Manila International Container Port and
Port of Manila, respectively, certified that the enumerated consumption entries were
filed, processed and released from the port after payment of duties and taxes. It is
noted that the certification does not touch on the genuineness, authenticity and
correctness of the consumption entries which are all xerox copies, wherein the
figures therein appearing may have been tampered which may render said
documents inadmissible in evidence, but for tax purposes, it has been held that the
Commissioner is not required to make his determination (assessment) on the basis
of evidence legally admissible in a formal proceeding in Court (Mertens, Vol. 9, p.
214, citing Cohen v. Commissioner). A statutory notice may be based in whole or in
part upon admissible evidence (Llorente v. Commissioner, 74 TC 260
(1980); Weimerskirch v. Commissioner, 67 TC 672 (1977); and Rosano v.
Commissioner, 46 TC 681 (1966). In the case also of Weimerskirch v.
Commissioner (1977), the assessment was given due course in the presence of
admissible evidence as to how the Commissioner arrived at his determination,
although there was no admissible evidence with respect to the substantial issue of
whether the taxpayer had unreported or undeclared income from narcotics sale. [ 8 5 ]
Based on a Memorandum dated October 23, 1990 of the IIPO, the source
documents for the actual cost of importation of the respondent are the machine
copies of the Consumption Entries from the informer which the IIPO claimed to have
been certified by Tomas and Danganan:
The source documents for the total actual cost of importations, abovementioned,
were the different copies of Consumption Entries, Series of 1987, filed by subject
with the Bureau of Customs, marked Annexes F-1 to F-68. The total cost of
importations is the sum of the Landed Costs and the Advance Sales Tax as shown in
the annexed entries. These entries were duly authenticated as having been
processed and released, after payment of the duties and taxes due thereon, by the
Chief, Collection Division, Manila International Container Port, dated August 7, 1990,
Annex-G, and the Port of Manila, dated August 22, 1990, Annex-H. So, it was
established that subject-importations, mostly resins, really belong to HANTEX
TRADING CO., INC.[ 8 6 ]

It also appears on the worksheet of the IIPO, as culled from the photocopies of
the Consumption Entries from its informer, that the total cost of the respondents
importation for 1987 wasP105,761,527.00. Per the report of Torres and Filamor, they
also relied on the photocopies of the said Consumption Entries:
The importations made by taxpayer verified by us from the records of the Bureau of
Customs and xerox copies of which are hereto attached shows the big volume of
importations made and not declared in the income tax return filed by taxpayer.
Based on the above findings, it clearly shows that a prima facie case of fraud exists
in the herein transaction of the taxpayer, as a consequence of which, said
transaction has not been possibly entered into the books of accounts of the subject
taxpayer.[ 8 7 ]
In fine, the petitioner based her finding that the 1987 importation of the
respondent was underdeclared in the amount of P105,761,527.00 on the worthless
machine copies of the Consumption Entries. Aside from such copies, the petitioner
has no other evidence to prove that the respondent imported goods
costing P105,761,527.00. The petitioner cannot find solace on the certifications of
Tomas and Danganan because they did not authenticate the machine copies of the
Consumption Entries, and merely indicated therein the entry numbers of
Consumption Entries and the dates when the Bureau of Customs released the same.
The certifications of Tomas and Danganan do not even contain the landed costs and
the advance sales taxes paid by the importer, if any. Comparing the certifications of
Tomas and Danganan and the machine copies of the Consumption Entries, only 36
of the entry numbers of such copies are included in the said certifications; the entry
numbers of the rest of the machine copies of the Consumption Entries are not found
therein.
Even if the Court would concede to the petitioners contention that the
certification of Tomas and Danganan authenticated the machine copies of the
Consumption Entries referred to in the certification, it appears that the total cost of
importations inclusive of advance sales tax is only P64,324,953.00 far from the
amount of P105,716,527.00 arrived at by the EIIB and the BIR, [ 8 8 ] or even the
amount of P110,079,491.61 arrived at by Deputy Commissioner Deoferio, Jr. [ 8 9 ] As
gleaned from the certifications of Tomas and Danganan, the goods covered by the
Consumption Entries were released by the Bureau of Customs, from which it can be
presumed that the respondent must have paid the taxes due on the said
importation. The petitioner did not adduce any documentary evidence to prove
otherwise.
Thus, the computations of the EIIB and the BIR on the quantity and costs of the
importations of the respondent in the amount of P105,761,527.00 for 1987 have no
factual basis, hence, arbitrary and capricious. The petitioner cannot rely on the
presumption that she and the other employees of the BIR had regularly performed
their duties. As the Court held in Collector of Internal Revenue v. Benipayo,[ 9 0 ] in
order to stand judicial scrutiny, the assessment must be based on facts. The
presumption of the correctness of an assessment, being a mere presumption,
cannot be made to rest on another presumption.
Moreover, the uncontroverted fact is that the BIR District Revenue Office had
repeatedly examined the 1987 books of accounts of the respondent showing its

importations, and found that the latter had minimal business tax liability. In this
case, the presumption that the District Revenue officers performed their duties in
accordance with law shall apply. There is no evidence on record that the said
officers neglected to perform their duties as mandated by law; neither is there
evidence aliunde that the contents of the 1987 and 1988 Profit and Loss Statements
submitted by the respondent with the SEC are incorrect.
Admittedly, the respondent did not adduce evidence to prove its correct tax
liability. However, considering that it has been established that the petitioners
assessment is barren of factual basis, arbitrary and illegal, such failure on the part
of the respondent cannot serve as a basis for a finding by the Court that it is liable
for the amount contained in the said assessment; otherwise, the Court would
thereby be committing a travesty.
On the disposition of the case, the Court has two options, namely, to deny the
petition for lack of merit and affirm the decision of the CA, without prejudice to the
petitioners issuance of a new assessment against the respondent based on credible
evidence; or, to remand the case to the CTA for further proceedings, to enable the
petitioner to adduce in evidence certified true copies or duplicate original copies of
the Consumption Entries for the respondents 1987 importations, if there be any,
and the correct tax deficiency assessment thereon, without prejudice to the right of
the respondent to adduce controverting evidence, so that the matter may be
resolved once and for all by the CTA. In the higher interest of justice to both the
parties, the Court has chosen the latter option. After all, as the Tax Court of the
United States emphasized in Harbin v. Commissioner of Internal Revenue,
[91]
taxation is not only practical; it is vital. The obligation of good faith and fair
dealing in carrying out its provision is reciprocal and, as the government should
never be over-reaching or tyrannical, neither should a taxpayer be permitted to
escape payment by the concealment of material facts.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of
the Court of Appeals is SET ASIDE. The records are REMANDED to the Court of Tax
Appeals for further proceedings, conformably with the decision of this Court. No
costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.