I. Tax Ruling (NAFCEA), REPRESENTED BY ITS PRESIDENT SOLIDAD B.

4. Power of the CIR to Interpret/Review/Appeal to Sec. BERNARDO, COMMISSION ON ELECTIONS EMPLOYEES

of Finance (Sec.4 of NIRC) UNION (COMELEC EU), REPRESENTED BY ITS PRESIDENT
MARK CHRISTOPHER D. RAMIREZ, MINES AND
EN BANC GEOSCIENCES BUREAU EMPLOYEES ASSOCIATION
G.R. No. 213446, July 03, 2018 CENTRAL OFFICE (MGBEA CO), REPRESENTED BY ITS
CONFEDERATION FOR UNITY, RECOGNITION AND PRESIDENT MAYBELLYN A. ZEPEDA, LIVESTOCK
ADVANCEMENT OF GOVERNMENT EMPLOYEES DEVELOPMENT COUNCIL EMPLOYEES ASSOCIATION
(COURAGE); JUDICIARY EMPLOYEES ASSOCIATION OF (LDCEA), REPRESENTED BY ITS PRESIDENT JOVITA M.
THE PHILIPPINES (JUDEA-PHILS); SANDIGANBAYAN GONZALES, ASSOCIATION OF CONCERNED EMPLOYEES
EMPLOYEES ASSOCIATION (SEA); SANDIGAN NG MGA OF PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY
EMPLEYADONG NAGKAKAISA SA ADHIKAIN NG (ACE OF PFDA), REPRESENTED BY ITS PRESIDENT
DEMOKRATIKONG ORGANISASYON (S.E.N.A.D.O.); ROSARIO DEBLOIS, Intervenors.
ASSOCIATION OF COURT OF APPEALS EMPLOYEES
(ACAE); DEPARTMENT OF AGRARIAN REFORM G.R. No. 213658, July 3, 2018
EMPLOYEES ASSOCIATION (DAREA); SOCIAL WELFARE
EMPLOYEES ASSOCIATION OF THE PHILIPPINES- JUDGE ARMANDO A. YANGA, IN HIS PERSONAL CAPACITY
DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT AND IN HIS CAPACITY AS PRESIDENT OF THE RTC JUDGES
(SWEAP-DSWD); DEPARTMENT OF TRADE AND INDUSTRY ASSOCIATION OF MANILA, AND MA. CRISTINA CARMELA I.
EMPLOYEES UNION (DTI-EU); KAPISANAN PARA SA JAPZON, IN HER PERSONAL CAPACITY AND IN HER
KAGALINGAN NG MGA KAWANI NG METRO MANILA CAPACITY AS PRESIDENT OF THE PHILIPPINE
DEVELOPMENT AUTHORITY (KKK-MMDA); WATER SYSTEM ASSOCIATION OF COURT EMPLOYEES-MANILA
EMPLOYEES RESPONSE (WATER); CONSOLIDATED UNION CHAPTER, Petitioners, v. HON. COMMISSIONER KIM S.
OF EMPLOYEES OF THE NATIONAL HOUSING JACINTO-HENARES, IN HER CAPACITY AS COMMISSIONER
AUTHORITIES (CUE-NHA); AND KAPISANAN NG MGA OF THE BUREAU OF INTERNAL REVENUE, Respondent.
MANGGAGAWA AT KAWANI NG QUEZON CITY (KASAMA
KA-QC), Petitioners, v. COMMISSIONER, BUREAU OF THE MEMBERS OF THE ASSOCIATION OF REGIONAL TRIAL
INTERNAL REVENUE AND THE SECRETARY, DEPARTMENT COURT JUDGES IN ILOILO CITY,Intervenors.
OF FINANCE, Respondents.
DECISION
NATIONAL FEDERATION OF EMPLOYEES ASSOCIATIONS CAGUIOA, J.:
OF THE DEPARTMENT OF AGRICULTURE (NAFEDA), G.R. Nos. 213446 and 213658 are petitions for Certiorari,
REPRESENTED BY ITS EXECUTIVE VICE PRESIDENT Prohibition and/or Mandamus under Rule 65 of the Rules of
ROMAN M. SANCHEZ, DEPARTMENT OF AGRICULTURE Court, with Application for Issuance of Temporary Restraining
EMPLOYEES ASSOCIATION OFFICE OF THE SECRETARY Order and/or Writ of Preliminary Injunction, uniformly seeking to:
(DAEA-OSEC), REPRESENTED BY ITS ACTING PRESIDENT (a) issue a Temporary Restraining Order to enjoin the
ROWENA GENETE, NATIONAL AGRICULTURAL AND implementation of Revenue Memorandum Order (RMO) No. 23-
FISHERIES COUNCIL EMPLOYEES ASSOCIATION 2014 dated June 20, 2014 issued by the Commissioner of
Internal Revenue (CIR); and (b) declare null, void and alleged to be considered by law as non-taxable fringe and de
unconstitutional paragraphs A, B, C, and D of Section III, and minimis benefits, to wit:
Sections IV, VI and VII of RMO No. 23-2014. The petition in G.R. I. Legislative Fringe Benefits
No. 213446 also prays for the issuance of a Writ of Mandamus to a. Anniversary Bonus
compel respondents to upgrade the P30,000.00 non-taxable b. Additional Food Subsidy
ceiling of the 13th month pay and other benefits for the concerned c. 13th Month Pay
officials and employees of the government. d. Food Subsidy
e. Cash Gift
The Antecedents f. Cost of Living Assistance
On June 20, 2014, respondent CIR issued the assailed RMO No. g. Efficiency Incentive Bonus
23-2014, in furtherance of Revenue Memorandum Circular (RMC) h. Financial Relief Assistance
No. 23-2012 dated February 14, 2012 on the "Reiteration of the i. Grocery Allowance
Responsibilities of the Officials and Employees of Government j. Hospitalization
Offices for the Withholding of Applicable Taxes on Certain k. Inflationary Assistance Allowance
Income Payments and the Imposition of Penalties for Non- l. Longevity Service Pay
Compliance Thereof," in order to clarify and consolidate the m. Medical Allowance
responsibilities of the public sector to withhold taxes on its n. Mid-Year Eco. Assistance
transactions as a customer (on its purchases of goods and o. Productivity Incentive Benefit
services) and as an employer (on compensation paid to its p. Transition Allowance
officials and employees) under the National Internal Revenue q. Uniform Allowance
Code (NIRC or Tax Code) of 1997, as amended, and other II. Judiciary Benefits
special laws. a. Additional Compensation Income
b. Extraordinary & Miscellaneous Expenses
The Petitions c. Monthly Special Allowance
G.R. No. 213446 d. Additional Cost of Living Allowance (from
On August 6, 2014, petitioners Confederation for Unity, Judiciary Development Fund)
Recognition and Advancement of Government Employees e. Productivity Incentive Benefit
(COURAGE), et al., organizations/unions of government f. Grocery Allowance
employees from the Sandiganbayan, Senate of the Philippines, g. Clothing Allowance
Court of Appeals, Department of Agrarian Reform, Department of h. Emergency Economic Assistance
Social Welfare and Development, Department of Trade and i. Year-End Bonus (13th Month Pay)
Industry, Metro Manila Development Authority, National Housing j. Cash Gift
Authority and local government of Quezon City, filed a Petition for k. Loyalty Cash Award (Milestone Bonus)
Prohibition and Mandamus,1 imputing grave abuse of discretion l. Christmas Allowance m. Anniversary Bonus2
on the part of respondent CIR in issuing RMO No. 23-2014. Petitioners further assert that the imposition of withholding tax on
According to petitioners, RMO No. 23-2014 classified as taxable these allowances, bonuses and benefits, which have been
compensation, the following allowances, bonuses, compensation allotted by the Government to its employees free of tax for a long
for services granted to government employees, which they time, violates the prohibition on non-diminution of benefits under
Article 100 of the Labor Code;3 and infringes upon the fiscal
autonomy of the Legislature, Judiciary, Constitutional
Commissions and Office of the Ombudsman granted by the
Constitution.4
Petitioners also claim that RMO No. 23-2014 (1) constitutes a
usurpation of legislative power and diminishes the delegated
power of local government units inasmuch as it defines new
offenses and prescribes penalty therefor, particularly upon local
government officials;5 and (2) violates the equal protection clause
of the Constitution as it discriminates against government officials
and employees by imposing fringe benefit tax upon their
allowances and benefits, as opposed to the allowances and
benefits of employees of the private sector, the fringe benefit tax
of which is borne and paid by their employers.6
Further, the petition also prays for the issuance of a writ of
mandamus ordering respondent CIR to perform its duty under
Section 32(B)(7)(e)(iv) of the NIRC of 1997, as amended, to
upgrade the ceiling of the 13th month pay and other benefits for
the concerned officials and employees of the government,
including petitioners.7
G.R. No. 213658
On August 19, 2014, petitioners Armando A. Yanga, President of
the Regional Trial Court (RTC) Judges Association of Manila, and
Ma. Cristina Carmela I. Japzon, President of the Philippine
Association of Court Employees – Manila Chapter, filed a Petition
for Certiorari and Prohibition8 as duly authorized representatives
of said associations, seeking to nullify RMO No. 23-2014 on the
following grounds: (1) respondent CIR is bereft of any authority to
issue the assailed RMO. The NIRC of 1997, as amended,
expressly vests to the Secretary of Finance the authority to
promulgate all needful rules and regulations for the effective
enforcement of tax provisions;9 and (2) respondent CIR
committed grave abuse of discretion amounting to lack or excess
of jurisdiction in the issuance of RMO No. 23-2014 when it
subjected to withholding tax benefits and allowances of court
employees which are tax-exempt such as: (a) Special Allowance
for Judiciary (SAJ) under Republic Act (RA) No. 9227 and
additional cost of living allowance (AdCOLA) granted under
Presidential Decree (PD) No. 1949 which are considered as non-
taxable fringe benefits under Section 33(A) of the NIRC of 1997,
as amended; (b) cash gift, loyalty awards, uniform and clothing
allowance and additional compensation (ADCOM) granted to
court employees which are considered de minimis under Section
33(C)(4) of the same Code; (c) allowances and benefits granted
by the Judiciary which are not taxable pursuant to Section
32(7)(E) of the NIRC of 1997, as amended; and (d) expenses for
the Judiciary provided under Commission on Audit (COA) Circular
2012-001.10
Petitioners further assert that RMO No. 23-2014 violates their
right to due process of law because while it is ostensibly
denominated as a mere revenue issuance, it is an illegal and
unwarranted legislative action which sharply increased the tax
burden of officials and employees of the Judiciary without the
benefit of being heard.11
On October 21, 2014, the Court resolved to consolidate the
foregoing cases.12
Respondents, through the Office of the Solicitor General (OSG),
filed their Consolidated Comment13 on December 23, 2014. They
argue that the petitions are barred by the doctrine of hierarchy of
courts and petitioners failed to present any special and important
reasons or exceptional and compelling circumstance to justify
direct recourse to this Court.14
Maintaining that RMO No. 23-2014 was validly issued in
accordance with the power of the CIR to make rulings and
opinion in connection with the implementation of internal revenue
laws, respondents aver that unlike Revenue Regulations (RRs),
RMOs do not require the approval or signature of the Secretary of
Finance, as these merely provide directives or instructions in the
implementation of stated policies, goals, objectives, plans and
programs of the Bureau.15 According to them, RMO No. 23-2014
is in fact a mere reiteration of the Tax Code and previous RMOs,
and can be traced back to RR No. 01-87 dated April 2, 1987
implementing Executive Order No. 651 which was promulgated
by then Secretary of Finance Jaime V. Ongpin upon
recommendation of then CIR Bienvenido A. Tan, Jr. Thus, the
CIR never usurped the power and authority of the legislature in
the issuance of the assailed RMO.16 Also, contrary to petitioners'
assertion, the due process requirements of hearing and
publication are not applicable to RMO No. 23-2014.17
Respondents further argue that petitioners' claim that RMO No.
23-2014 is unconstitutional has no leg to stand on. They explain
that the constitutional guarantee of fiscal autonomy to Judiciary
and Constitutional Commissions does not include exemption from
payment of taxes, which is the lifeblood of the nation.18 They also
aver that RMO No. 23-2014 never intended to diminish the
powers of local government units. It merely reiterates the
obligation of the government as an employer to withhold taxes,
which has long been provided by the Tax Code.19
Moreover, respondents assert that the allowances and benefits
enumerated in Section III A, B, C, and D, are not fringe benefits
which are exempt from taxation under Section 33 of the Tax
Code, nor de minimis benefits excluded from employees' taxable
basic salary. They explain that the SAJ under RA No. 9227 and
AdCOLA under PD No. 1949 are additional allowances which
form part of the employee's basic salary; thus, subject to
withholding taxes.20
Respondents also claim that RMO No. 23-2014 does not violate
petitioners' right to equal protection of laws as it covers all
employees and officials of the government. It does not create a
new category of taxable income nor make taxable those which
are not taxable but merely reflect those incomes which are
deemed taxable under existing laws.21
Lastly, respondents aver that mandamus will not lie to compel
respondents to increase the ceiling for tax exemptions because
the Tax Code does not impose a mandatory duty on the part of
respondents to do the same.22
The Petitions-in-Intervention
Meanwhile, on September 11, 2014, the National Federation of
Employees Associations of the Department of Agriculture
(NAFEDA) et al., duly registered union/association of employees
of the Department of Agriculture, National Agricultural and
Fisheries Council, Commission on Elections, Mines and
Geosciences Bureau, and Philippine Fisheries Development
Authority, claiming similar interest as petitioners in G.R. No.
213446, filed a Petition-in-Intervention23 seeking the nullification
of items III, VI and VII of RMO No. 23-2014 based on the
following grounds: (1) that respondent CIR acted with grave
abuse of discretion and usurped the power of the Legislature in
issuing RMO No. 23-2014 which imposes additional taxes on
government employees and prescribes penalties for government
official's failure to withhold and remit the same;24 (2) that RMO
No. 23-2014 violates the equal protection clause because the
Commission on Human Rights (CHR) was not included among
the constitutional commissions covered by the issuance and the
ADCOM of employees of the Judiciary was subjected to
withholding tax but those received by employees of the
Legislative and Executive branches are not;25 and (3) that
respondent CIR failed to upgrade the tax exemption ceiling for
benefits under Section 32(B)(7) of the NIRC of 1997, as
amended.26
In its Comment,27 respondents, through the OSG, sought the
denial of the Petition-in-Intervention for failure of the intervenors
to seek prior leave of Court and to demonstrate that the existing
consolidated petitions are not sufficient to protect their interest as
parties affected by the assailed RMO.28 They further contend
that, contrary to the intervenors' position, the CHR is not exempt
from the applicability of RMO No. 23-2014.29 They explain that
the enumeration of government offices and constitutional bodies
covered by RMO No. 23-2014 is not exclusive; Section III thereof
in fact states that RMO No. 23-2014 covers all employees of the
public sector.30 They also allege that the ADCOM referred to in
Section III(B) of the assailed RMO is unique to the Judiciary;
employees and officials in the executive and legislative do not
receive this specific type of ADCOM enjoyed by the employees
and officials of the Judicial branch.31
On October 10, 2014, a Motion for Intervention with attached
Complaint in Intervention32 was filed, in G.R. No. 213658, by the
Members of the Association of Regional Trial Court Judges in
Iloilo City. Claiming that they are similarly situated with
petitioners, said intervenors pray that the Court declare null and
void RMO No. 23-2014 and direct the Bureau of Internal Revenue
(BIR) to refund the amount illegally exacted from the
salaries/compensations of the judges by virtue of the
implementation of RMO No. 23-2014.33The intervenors claim that
RMO No. 23-2014 violates their right to due process as it takes
away a portion of their salaries and compensation without giving
them the opportunity to be heard.34 They also aver that the
implementation of RMO No. 23-2014 resulted in the diminution of
their salaries/compensation in violation of Sections 3 and 10,
Article VIII of the Constitution.35
In their Comment36 to the Motion, respondents adopted the
arguments in their Consolidated Comment and further stated that:
(1) RMO No. 23-2014 does not diminish the salaries and
compensation of members of the judiciary as it has been judicially
settled that the imposition of taxes on salaries and compensation
of judges and justices is not equivalent to diminution of the
same;37 (2) the allowances and benefits enumerated under
Section III(B) of RMO No. 23-2014 are not fringe benefits exempt
from taxation;38 (3) the AdCOLA and SAJ are not fringe benefits
as these are considered part of the basic salary of government
employees subject to income tax;39 and (4) there is no valid
ground for the refund of the taxes withheld pursuant to RMO No.
23-2014.40
In sum, petitioners and intervenors (collectively referred to as
petitioners) argue that:
1. RMO No. 23-2014 is ultra vires insofar as:
a. Sections III and IV of RMO No. 23-2014, for
subjecting to withholding taxes non-taxable
allowances, bonuses and benefits received by
government employees;
b. Sections VI and VII, for defining new offenses and
prescribing penalties therefor, particularly upon
government officials;
2. RMO No. 23-2014 violates the equal protection clause as
it discriminates against government employees;
3. RMO No. 23-2014 violates fiscal autonomy enjoyed by
government agencies;
4. The implementation of RMO No. 23-2014 results in
diminution of benefits of government employees, a
violation of Article 100 of the Labor Code; and
5. Respondents may be compelled through a writ of
mandamus to increase the tax-exempt ceiling for 13th
month pay and other benefits.
On the other hand, respondents counter that:
1. The instant consolidated petitions are barred by the
doctrine of hierarchy of courts;
2. The CIR did not abuse its discretion in the issuance of
RMO No. 23-2014 because:
a. It was issued pursuant to the CIR's power to
interpret the NIRC of 1997, as amended, and
other tax laws, under Section 4 of the NIRC of
1997, as amended;
b. RMO No. 23-2014 does not discriminate against
government employees. It does not create a new
category of taxable income nor make taxable
those which are exempt;
c. RMO No. 23-2014 does not result in diminution of
benefits;
d. The allowances, bonuses or benefits listed under
Section III of the assailed RMO are not fringe
benefits;
e. The fiscal autonomy granted by the Constitution
does not include tax exemption; and
3. Mandamus does not lie against respondents because the
NIRC of 1997, as amended, does not impose a
mandatory duty upon them to increase the tax-exempt
ceiling for 13th month pay and other benefits.
Incidentally, in a related case docketed as A.M. No. 16-12-04-SC,
the Court, on July 11, 2017, issued a Resolution directing the
Fiscal Management and Budget Office of the Court to maintain
the status quo by the non-withholding of taxes from the benefits
authorized to be granted to judiciary officials and personnel,
namely, the Mid-year Economic Assistance, the Year-end
Economic Assistance, the Yuletide Assistance, the Special
Welfare Assistance (SWA) and the Additional SWA, until such
time that a decision is rendered in the instant consolidated cases.
The Court's Ruling
I.
Procedural
Non-exhaustion of administrative remedies.
It is an unquestioned rule in this jurisdiction that certiorari under
Rule 65 will only lie if there is no appeal, or any other plain,
speedy and adequate remedy in the ordinary course of law
against the assailed issuance of the CIR.41 The plain, speedy and
adequate remedy expressly provided by law is an appeal of the
assailed RMO with the Secretary of Finance under Section 4 of
the NIRC of 1997, as amended, to wit:
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases. – The power to interpret the provisions of
this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal
Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals.42
The CIR's exercise of its power to interpret tax laws comes in the
form of revenue issuances, which include RMOs that provide
"directives or instructions; prescribe guidelines; and outline
processes, operations, activities, workflows, methods and
procedures necessary in the implementation of stated policies,
goals, objectives, plans and programs of the Bureau in all areas
of operations, except auditing."43 These revenue issuances are
subject to the review of the Secretary of Finance. In relation
thereto, Department of Finance Department Order No. 007-
0244 issued by the Secretary of Finance laid down the procedure
and requirements for filing an appeal from the adverse ruling of
the CIR to the said office. A taxpayer is granted a period of thirty
(30) days from receipt of the adverse ruling of the CIR to file with
the Office of the Secretary of Finance a request for review in
writing and under oath.45
In Asia International Auctioneers, Inc. v. Parayno, Jr.,46 the Court
dismissed the petition seeking the nullification of RMC No. 31-
2003 for failing to exhaust administrative remedies. The Court
held:
x x x It is settled that the premature invocation of the court's
intervention is fatal to one's cause of action. If a remedy within
the administrative machinery can still be resorted to by giving the
administrative officer every opportunity to decide on a matter that
comes within his jurisdiction, then such remedy must first be
exhausted before the court's power of judicial review can be
sought. The party with an administrative remedy must not only
initiate the prescribed administrative procedure to obtain relief but
also pursue it to its appropriate conclusion before seeking judicial
intervention in order to give the administrative agency an
opportunity to decide the matter itself correctly and prevent
unnecessary and premature resort to the court.47
The doctrine of exhaustion of administrative remedies is not
without practical and legal reasons. For one thing, availment of
administrative remedy entails lesser expenses and provides for a
speedier disposition of controversies. It is no less true to state
that courts of justice for reasons of comity and convenience will
shy away from a dispute until the system of administrative
redress has been completed and complied with so as to give the
administrative agency concerned every opportunity to correct its
error and to dispose of the case.48 While there are recognized
exceptions to this salutary rule, petitioners have failed to prove
the presence of any of those in the instant case.
Violation of the rule on hierarchy of courts.
Moreover, petitioners violated the rule on hierarchy of courts as
the petitions should have been initially filed with the CTA, having
the exclusive appellate jurisdiction to determine the
constitutionality or validity of revenue issuances.
In The Philippine American Life and General Insurance Co. v.
Secretary of Finance,49 the Court held that rulings of the
Secretary of Finance in its exercise of its power of review under
Section 4 of the NIRC of 1997, as amended, are appealable to
the CTA.50 The Court explained that while there is no law which
explicitly provides where rulings of the Secretary of Finance
under the adverted to NIRC provision are appealable, Section
7(a)51 of RA No. 1125, the law creating the CTA, is nonetheless
sufficient, albeit impliedly, to include appeals from the Secretary's
review under Section 4 of the NIRC of 1997, as amended.
Moreover, echoing its pronouncements in City of Manila v.
Grecia-Cuerdo,52 that the CTA has the power of certiorari within
its appellate jurisdiction, the Court declared that "it is now within
the power of the CTA, through its power of certiorari, to rule on
the validity of a particular administrative rule or regulation so long
as it is within its appellate jurisdiction. Hence, it can now rule not
only on the propriety of an assessment or tax treatment of a
certain transaction, but also on the validity of the revenue
regulation or revenue memorandum circular on which the said
assessment is based."53
Subsequently, in Banco de Oro v. Republic,54 the Court,
sitting En Banc, further held that the CTA has exclusive appellate
jurisdiction to review, on certiorari, the constitutionality or validity
of revenue issuances, even without a prior issuance of an
assessment. The Court En Banc reasoned:
We revert to the earlier rulings in Rodriguez, Leal, and Asia
International Auctioneers, Inc. The Court of Tax Appeals has
exclusive jurisdiction to determine the constitutionality or validity
of tax laws, rules and regulations, and other administrative
issuances of the Commissioner of Internal Revenue.
Article VIII, Section 1 of the 1987 Constitution provides the
general definition of judicial power:
ARTICLE [VIII]
JUDICIAL DEPARTMENT
Section 1. The judicial power shall be vested in one Supreme
Court and in such lower courts as may be established by law.
Judicial power includes the duty of the courts of justice to settle
actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not
there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or instrumentality
of the Government. (Emphasis supplied)
Based on this constitutional provision, this Court recognized, for
the first time, in The City of Manila v. Hon. Grecia-Cuerdo, the
Court of Tax Appeals' jurisdiction over petitions for certiorari
assailing interlocutory orders issued by the Regional Trial Court in
a local tax case. Thus:
[W]hile there is no express grant of such power, with respect to
the CTA, Section 1, Article VIII of the 1987 Constitution provides,
nonetheless, that judicial power shall be vested in one Supreme
Court and in such lower courts as may be established by law and
that judicial power includes the duty of the courts of justice to
settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not
there has been a grave abuse of discretion amounting to lack
or excess of jurisdiction on the part of any branch or
instrumentality of the Government.
On the strength of the above constitutional provisions, it can be
fairly interpreted that the power of the CTA includes that of
determining whether or not there has been grave abuse of
discretion amounting to lack or excess of jurisdiction on the part
of the RTC in issuing an interlocutory order in cases falling within
the exclusive appellate jurisdiction of the tax court. It, thus,
follows that the CTA, by constitutional mandate, is vested with
jurisdiction to issue writs of certiorari in these cases. (Emphasis in
the original)
This Court further explained that the Court of Tax Appeals'
authority to issue writs of certiorari is inherent in the exercise of
its appellate jurisdiction:
A grant of appellate jurisdiction implies that there is included in it
the power necessary to exercise it effectively, to make all orders
that will preserve the subject of the action, and to give effect to
the final determination of the appeal. It carries with it the power to
protect that jurisdiction and to make the decisions of the court
thereunder effective. The court, in aid of its appellate jurisdiction,
has authority to control all auxiliary and incidental matters
necessary to the efficient and proper exercise of that jurisdiction.
For this purpose, it may, when necessary, prohibit or restrain the
performance of any act which might interfere with the proper
exercise of its rightful jurisdiction in cases pending before it.
Lastly, it would not be amiss to point out that a court which is
endowed with a particular jurisdiction should have powers which
are necessary to enable it to act effectively within such
jurisdiction. These should be regarded as powers which are
inherent in its jurisdiction and the court must possess them in
order to enforce its rules of practice and to suppress any abuses
of its process and to defeat any attempted thwarting of such
process.
In this regard, Section 1 of RA 9282 states that the CTA shall be
of the same level as the CA and shall possess all the inherent
powers of a court of justice.
Indeed, courts possess certain inherent powers which may be
said to be implied from a general grant of jurisdiction, in addition
to those expressly conferred on them. These inherent powers are
such powers as are necessary for the ordinary and efficient
exercise of jurisdiction; or are essential to the existence, dignity
and functions of the courts, as well as to the due administration of
justice; or are directly appropriate, convenient and suitable to the
execution of their granted powers; and include the power to
maintain the court's jurisdiction and render it effective in behalf of
the litigants.
Thus, this Court has held that "while a court may be expressly
granted the incidental powers necessary to effectuate its
jurisdiction, a grant of jurisdiction, in the absence of prohibitive
legislation, implies the necessary and usual incidental powers
essential to effectuate it, and, subject to existing laws and
constitutional provisions, every regularly constituted court has
power to do all things that are reasonably necessary for the
administration of justice within the scope of its jurisdiction and for
the enforcement of its judgments and mandates." Hence,
demands, matters or questions ancillary or incidental to, or
growing out of, the main action, and coming within the above
principles, may be taken cognizance of by the court and
determined, since such jurisdiction is in aid of its authority over
the principal matter, even though the court may thus be called on
to consider and decide matters which, as original causes of
action, would not be within its cognizance. (Citations omitted)
Judicial power likewise authorizes lower courts to determine the
constitutionality or validity of a law or regulation in the first
instance. This is contemplated in the Constitution when it speaks
of appellate review of final judgments of inferior courts in cases
where such constitutionality is in issue.
On June 16, 1954, Republic Act No. 1125 created the Court of
Tax Appeals not as another superior administrative agency as
was its predecessor — the former Board of Tax Appeals — but as
a part of the judicial system with exclusive jurisdiction to act on
appeals from:
(1) Decisions of the Collector of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by
the Bureau of Internal Revenue;
(2) Decisions of the Commissioner of Customs in cases
involving liability for customs duties, fees or other money
charges; seizure, detention or release of property affected
fines, forfeitures or other penalties imposed in relation
thereto; or other matters arising under the Customs Law or
other law or part of law administered by the Bureau of
Customs; and
(3) Decisions of provincial or city Boards of Assessment
Appeals in cases involving the assessment and taxation of
real property or other matters arising under the Assessment
Law, including rules and regulations relative thereto.
Republic Act No. 1125 transferred to the Court of Tax Appeals
jurisdiction over all matters involving assessments that were
previously cognizable by the Regional Trial Courts (then courts of
first instance).
In 2004, Republic Act No. 9282 was enacted. It expanded the
jurisdiction of the Court of Tax Appeals and elevated its rank to
the level of a collegiate court with special jurisdiction. Section 1
specifically provides that the Court of Tax Appeals is of the same
level as the Court of Appeals and possesses "all the inherent
powers of a Court of Justice."
Section 7, as amended, grants the Court of Tax Appeals the
exclusive jurisdiction to resolve all tax-related issues:
Section 7. Jurisdiction. — The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as
herein provided:
jurisdiction;
4) Decisions of the Commissioner of Customs in cases
involving liability for customs duties, fees or other
money charges, seizure, detention or release of
property affected, fines, forfeitures or other penalties in
relation thereto, or other matters arising under the
Customs Law or other laws administered by the Bureau
of Customs;

1) Decisions of the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;
5) Decisions of the Central Board of Assessment Appeals
in the exercise of its appellate jurisdiction over cases
involving the assessment and taxation of real property
originally decided by the provincial or city board of
assessment appeals;

6) Decisions of the Secretary of Finance on customs

2) Inaction by the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where
the National Internal Revenue Code provides a specific
7)
period of action, in which case the inaction shall be
deemed a denial;
3) Decisions, orders or resolutions of the Regional Trial
Courts in local tax cases originally decided or resolved
by them in the exercise of their original or appellate
cases elevated to him automatically for review from
decisions of the Commissioner of Customs which are
adverse to the Government under Section 2315 of the
Tariff and Customs Code;
Decisions of the Secretary of Trade and Industry, in the
case of nonagricultural product, commodity or article,
and the Secretary of Agriculture in the case of
agricultural product, commodity or article, involving
dumping and countervailing duties under Section 301
and 302, respectively, of the Tariff and Customs Code,
and safeguard measures under Republic Act No. 8800,
where either party may appeal the decision to impose or

not to impose said duties.
The Court of Tax Appeals has undoubted jurisdiction to pass
upon the constitutionality or validity of a tax law or
regulation when raised by the taxpayer as a defense in
disputing or contesting an assessment or claiming a refund.
It is only in the lawful exercise of its power to pass upon all
matters brought before it, as sanctioned by Section 7 of
Republic Act No. 1125, as amended.
This Court, however, declares that the Court of Tax Appeals
may likewise take cognizance of cases directly challenging
the constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue
memorandum circulars, rulings).
Section 7 of Republic Act No. 1125, as amended, is explicit that,
except for local taxes, appeals from the decisions of quasi-judicial
agencies (Commissioner of Internal Revenue, Commissioner of
Customs, Secretary of Finance, Central Board of Assessment
Appeals, Secretary of Trade and Industry) on tax-related
problems must be brought exclusively to the Court of Tax
Appeals.
In other words, within the judicial system, the law intends the
Court of Tax Appeals to have exclusive jurisdiction to resolve all
tax problems. Petitions for writs of certiorari against the acts and
omissions of the said quasi-judicial agencies should, thus, be filed
before the Court of Tax Appeals.
Republic Act No. 9282, a special and later law than Batas
Pambansa Blg. 129 provides an exception to the original
jurisdiction of the Regional Trial Courts over actions questioning
the constitutionality or validity of tax laws or regulations. Except
for local tax cases, actions directly challenging the
constitutionality or validity of a tax law or regulation or
administrative issuance may be filed directly before the Court of
Tax Appeals.
Furthermore, with respect to administrative issuances
(revenue orders, revenue memorandum circulars, or rulings),
these are issued by the Commissioner under its power to
make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws.
Tax rulings, on the other hand, are official positions of the
Bureau on inquiries of taxpayers who request clarification on
certain provisions of the National Internal Revenue Code,
other tax laws, or their implementing regulations. Hence, the
determination of the validity of these issuances clearly falls
within the exclusive appellate jurisdiction of the Court of Tax
Appeals under Section 7(1) of Republic Act No. 1125, as
amended, subject to prior review by the Secretary of
Finance, as required under Republic Act No. 8424.55
A direct invocation of this Court's jurisdiction should only be
allowed when there are special, important and compelling
reasons clearly and specifically spelled out in the petition.56
Nevertheless, despite the procedural infirmities of the petitions
that warrant their outright dismissal, the Court deems it prudent, if
not crucial, to take cognizance of, and accordingly act on, the
petitions as they assail the validity of the actions of the CIR that
affect thousands of employees in the different government
agencies and instrumentalities. The Court, following recent
jurisprudence, avails itself of its judicial prerogative in order not to
delay the disposition of the case at hand and to promote the vital
interest of justice. As the Court held in Bloomberry Resorts and
Hotels, Inc. v. Bureau of Internal Revenue:57
From the foregoing jurisprudential pronouncements, it would
appear that in questioning the validity of the subject revenue
memorandum circular, petitioner should not have resorted directly
before this Court considering that it appears to have failed to
comply with the doctrine of exhaustion of administrative remedies
and the rule on hierarchy of courts, a clear indication that the
case was not yet ripe for judicial remedy. Notably, however, in
addition to the justifiable grounds relied upon by petitioner for its
immediate recourse (i.e., pure question of law, patently illegal act
by the BIR, national interest, and prevention of multiplicity of
suits), we intend to avail of our jurisdictional prerogative in order
not to further delay the disposition of the issues at hand, and also
to promote the vital interest of substantial justice. To add, in
recent years, this Court has consistently acted on direct
actions assailing the validity of various revenue regulations,
revenue memorandum circulars, and the likes, issued by the
CIR. The position we now take is more in accord with latest
jurisprudence. x x x 58
II.
Substantive
The petitions assert that the CIR's issuance of RMO No. 23-2014,
particularly Sections III, IV, VI and VII thereof, is tainted with
grave abuse of discretion. "By grave abuse of discretion is meant,
such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction."59 It is an evasion of a positive
duty or a virtual refusal to perform a duty enjoined by law or to act
in contemplation of law as when the judgment rendered is not
based on law and evidence but on caprice, whim and
despotism.60
As earlier stated, Section 4 of the NIRC of 1997, as amended,
grants the CIR the power to issue rulings or opinions interpreting
the provisions of the NIRC or other tax laws. However, the CIR
cannot, in the exercise of such power, issue administrative rulings
or circulars inconsistent with the law sought to be applied. Indeed,
administrative issuances must not override, supplant or modify
the law, but must remain consistent with the law they intend to
carry out.61 The courts will not countenance administrative
issuances that override, instead of remaining consistent and in
harmony with the law they seek to apply and implement.62 Thus,
in Philippine Bank of Communications v. Commissioner of
Internal Revenue,63the Court upheld the nullification of RMC No.
7-85 issued by the Acting Commissioner of Internal Revenue
because it was contrary to the express provision of Section 230 of
the NIRC of 1977.
Also, in Banco de Oro v. Republic,64 the Court nullified BIR Ruling
Nos. 370-2011 and DA 378-2011 because they completely
disregarded the 20 or more-lender rule added by Congress in the
NIRC of 1997, as amended, and created a distinction for
government debt instruments as against those issued by private
corporations when there was none in the law.65
Conversely, if the assailed administrative rule conforms with the
law sought to be implemented, the validity of said issuance must
be upheld. Thus, in The Philippine American Life and General
Insurance Co. v. Secretary of Finance,66 the Court declared valid
Section 7 (c.2.2) of RR No. 06-08 and RMC No. 25-11, because
they merely echoed Section 100 of the NIRC that the amount by
which the fair market value of the property exceeded the value of
the consideration shall be deemed a gift; thus, subject to donor's
tax.67
In this case, the Court finds the petitions partly meritorious only
insofar as Section VI of the assailed RMO is concerned. On the
other hand, the Court upholds the validity of Sections III, IV and
VII thereof as these are in fealty to the provisions of the NIRC of
1997, as amended, and its implementing rules.
Sections III and IV of RMO No. 23-2014 are valid.
Compensation income is the income of the individual taxpayer
arising from services rendered pursuant to an employer-
employee relationship.68 Under the NIRC of 1997, as amended,
every form of compensation for services, whether paid in cash or
in kind, is generally subject to income tax and consequently to
withholding tax.69 The name designated to the compensation
income received by an employee is immaterial.70 Thus, salaries,
wages, emoluments and honoraria, allowances, commissions,
fees, (including director's fees, if the director is, at the same time,
an employee of the employer/corporation), bonuses, fringe
benefits (except those subject to the fringe benefits tax under
Section 33 of the Tax Code), pensions, retirement pay, and other
income of a similar nature, constitute compensation income71that
are taxable and subject to withholding.
The withholding tax system was devised for three primary
reasons, namely: (1) to provide the taxpayer a convenient
manner to meet his probable income tax liability; (2) to ensure the
collection of income tax which can otherwise be lost or
substantially reduced through failure to file the corresponding
returns; and (3) to improve the government's cash flow.72 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.73
Section 79(A) of the NIRC of 1997, as amended, states:
SEC. 79. Income Tax Collected at Source. –
(A) Requirement of Withholding - Except in the case of a
minimum wage earner as defined in Section 22(HH) of this
Code, every employer making payment of wages shall deduct
and withhold upon such wages a tax determined in
accordance with the rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation of the
Commissioner.74
In relation to the foregoing, Section 2.78 of RR No. 2-98,75 as
amended, issued by the Secretary of Finance to implement the
withholding tax system under the NIRC of 1997, as amended,
provides:
SECTION 2.78. Withholding Tax on Compensation. — The
withholding of tax on compensation income is a method of
collecting the income tax at source upon receipt of the income. It
applies to all employed individuals whether citizens or
aliens, deriving income from compensation for services
rendered in the Philippines. The employer is constituted as
the withholding agent.76
Section 2.78.3 of RR No. 2-98 further states that the term
employee "covers all employees, including officers and
employees, whether elected or appointed, of the Government of
the Philippines, or any political subdivision thereof or any agency
or instrumentality"; while an employer, as Section 2.78.4 of the
same regulation provides, "embraces not only an individual and
an organization engaged in trade or business, but also includes
an organization exempt from income tax, such as charitable and
religious organizations, clubs, social organizations and societies,
as well as the Government of the Philippines, including its
agencies, instrumentalities, and political subdivisions."
The law is therefore clear that withholding tax on compensation
applies to the Government of the Philippines, including its
agencies, instrumentalities, and political subdivisions. The
Government, as an employer, is constituted as the withholding
agent, mandated to deduct, withhold and remit the corresponding
tax on compensation income paid to all its employees.
However, not all income payments to employees are subject to
withholding tax. The following allowances, bonuses or benefits,
excluded by the NIRC of 1997, as amended, from the employee's
compensation income, are exempt from withholding tax on
compensation:
1. Retirement benefits received under RA No. 7641 and
those received by officials and employees of private firms,
whether individual or corporate, under a reasonable
private benefit plan maintained by the employer subject to
the requirements provided by the Code [Section
32(B)(6)(a) of the NIRC of 1997, as amended and Section
2.78.1(B)(1)(a) of RR No. 2-98];
2. Any amount received by an official or employee or by his
heirs from the employer due to death, sickness or other
physical disability or for any cause beyond the control of
the said official or employee, such as retrenchment,
redundancy, or cessation of business [Section 32(B)(6)(b)
of the NIRC of 1997, as amended and Section
2.78.1(B)(1)(b) of RR No. 2-98];
3. Social security benefits, retirement gratuities, pensions
and other similar benefits received by residents or non-
resident citizens of the Philippines or aliens who come to
reside permanently in the Philippines from foreign
government agencies and other institutions private or
public [Section 32(B)(6)(c) of the NIRC of 1997, as
amended and Section 2.78.1(B)(1)(c) of RR No. 2-98];
4. Payments of benefits due or to become due to any person
residing in the Philippines under the law of the United
States administered by the United States Veterans
Administration [Section 32(B)(6)(d) of the NIRC of 1997,
as amended and Section 2.78.1(B)(1)(d) of RR No. 2-98];
5. Payments of benefits made under the Social Security
System Act of 1954 as amended [Section 32(B)(6)(e) of
the NIRC of 1997, as amended and Section
2.78.1(B)(1)(e) of RR No. 2-98];
6. Benefits received from the GSIS Act of 1937, as
amended, and the retirement gratuity received by
government officials and employees [Section 32(B)(6)(f)
 of the NIRC of 1997, as amended and Section
2.78.1(B)(1)(f) of RR No.2- 98];
7. Thirteenth (13th) month pay and other benefits received
by officials and employees of public and private entities
not exceeding P82,000.00 [Section 32(B)(7)(e) of the
NIRC of 1997, as amended, and Section 2.78.1(8)(11) of
RR No. 2-98, as amended by RR No. 03-15];
8. GSIS, SSS, Medicare and Pag-Ibig contributions, and
union dues of individual employees [Section 32(B)(7)(f) of
the NIRC of 1997, as amended and Section 2.78.1(8)(12)
of RR No. 2-98];
9. Remuneration paid for agricultural labor [Section 2.78.1
(B)(2) of RR No. 2-98];
10. Remuneration for domestic services [Section 28, RA No.
10361 and Section 2.78.1 (B)(3) of RR No. 2-98];
11. Remuneration for casual labor not in the course of an
employer's trade or business [Section 2.78.1(8)(4) of RR
No. 2-98];
12. Remuneration not more than the statutory minimum wage
and the holiday pay, overtime pay, night shift differential
pay and hazard pay received by Minimum Wage Earners
[Section 24(A)(2) of the NIRC of 1997, as amended];
13. Compensation for services by a citizen or resident of the
Philippines for a foreign government or an international
organization [Section 2.78.1(8)(5) of RR No. 2-98];
14. Actual, moral, exemplary and nominal damages received
by an employee or his heirs pursuant to a final judgment
or compromise agreement arising out of or related to an
employer-employee relationship [Section 32(B)(4) of the
NIRC of 1997, as amended and Section 2.78.1 (B)(6) of
RR No. 2-98];
15. The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a
single sum or otherwise, provided however, that interest
payments agreed under the policy for the amounts which
are held by the insured under such an agreement shall be
included in the gross income [Section 32(B)(1) of the
NIRC of 1997, as amended and Section 2.78.1 (B)(7) of
RR No. 2-98];
16. The amount received by the insured, as a return of
premium or premiums paid by him under life insurance,
endowment, or annuity contracts either during the term or
at the maturity of the term mentioned in the contract or
upon surrender of the contract [Section 32(8)(2) of the
NIRC of 1997, as amended and Section 2.78.1(B)(8) of
RR No. 2-98];
17. Amounts received through Accident or Health Insurance
or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the
amount of any damages received whether by suit or
agreement on account of such injuries or sickness
[Section 32(8)(4) of the NIRC of 1997, as amended and
Section 2.78.1(8)(9) of RR No. 2-98];
18. Income of any kind to the extent required by any treaty
obligation binding upon the Government of the Philippines
[Section 32(8)(5) of the NIRC of 1997, as amended and
Section 2.78.1(B)(10) of RR No. 2-98];
19. Fringe and De minimis Benefits. [Section 33(C) of the
NIRC of 1997, as amended); and
20. Other income received by employees which are exempt
under special laws (RATA granted to public officers and
employees under the General Appropriations Act and
Personnel Economic Relief Allowance granted to
government personnel).
Petitioners assert that RMO No. 23-2014 went beyond the
provisions of the NIRC of 1997, as amended, insofar as Sections
III and IV thereof impose new or additional taxes to allowances,
benefits or bonuses granted to government employees. A closer
look at the assailed Sections, however, reveals otherwise.
For reference, Sections III and IV of RMO No. 23-2014 read, as
follows:
III. OBLIGATION TO WITHHOLD ON COMPENSATION PAID
TO GOVERNMENT OFFICIALS AND EMPLOYEES
As an employer, government offices including government-owned
or controlled corporations (such as but not limited to the Bangko
Sentral ng Pilipinas, Metropolitan Waterworks and Sewerage
System, Philippine Deposit Insurance Corporation, Government
Service Insurance System, Social Security System), as well as
provincial, city and municipal governments are constituted as
withholding agents for purposes of the creditable tax required to
be withheld from compensation paid for services of its
employees.
Under Section 32(A) of the NIRC of 1997, as amended,
compensation for services, in whatever form paid and no matter
how called, form part of gross income. Compensation income
includes, among others, salaries, fees, wages, emoluments and
honoraria, allowances, commissions (e.g. transportation,
representation, entertainment and the like); fees including
director's fees, if the director is, at the same time, an employee of
the employer/corporation; taxable bonuses and fringe benefits
except those which are subject to the fringe benefits tax under
Section 33 of the NIRC; taxable pensions and retirement pay; and
other income of a similar nature.
The foregoing also includes allowances, bonuses, and other
benefits of similar nature received by officials and employees of
the Government of the Republic of the Philippines or any of its
branches, agencies and instrumentalities, its political
subdivisions, including government-owned and/or controlled
corporations (herein referred to as officials and employees in the
public sector) which are composed of (but are not limited to) the
following:
A. Allowances, bonuses, honoraria or benefits
received by employees and officials in the
Legislative Branch, such as anniversary bonus,
Special Technical Assistance Allowance,
Efficiency Incentive Benefits, Additional Food
Subsidy, Eight[h] (8th) Salary Range Level
Allowance, Hospitalization Benefits, Medical
Allowance, Clothing Allowance, Longevity Pay,
Food Subsidy, Transition Allowance, Cost of
Living Allowance, Inflationary Adjustment
Assistance, Mid-Year Economic Assistance,
Financial Relief Assistance, Grocery Allowance,
Thirteenth (13th Month Pay, Cash Gift and
Productivity Incentive Benefit and other
allowances, bonuses and benefits given by the
Philippine Senate and House of Representatives
to their officials and employees, subject to the
exemptions enumerated herein.
B. Allowances, bonuses, honoraria or benefits
received by employees and officials in the Judicial
Branch, such as the Additional Compensation
(ADCOM), Extraordinary and Miscellaneous
Expenses (EME), Monthly Special Allowance from
the Special Allowance for the Judiciary, Additional
Cost of Living Allowance from the Judiciary
Development Fund, Productivity Incentive Benefit,
Grocery Allowance, Clothing Allowance,
Emergency Economic Allowance, Year-End
Bonus, Cash Gift, Loyalty Cash Award (Milestone
Bonus), SC Christmas Allowance, anniversary
bonuses and other allowances, bonuses and
benefits given by the Supreme Court of the
Philippines and all other courts and offices under
the Judicial Branch to their officials and
employees, subject to the exemptions
enumerated herein.
C. Compensation for services in whatever form paid,
including, but not limited to allowances, bonuses,
honoraria or benefits received by employees and
officials in the Constitutional bodies (Commission
on Election, Commission on Audit, Civil Service
Commission) and the Office of the
Ombudsman, subject to the exemptions
enumerated herein.
D. Allowances, bonuses, honoraria or benefits
received by employees and officials in the
Executive Branch, such as the Productivity
Enhancement Incentive (PEI), Performance-
 Based Bonus, anniversary bonus and other
allowances, bonuses and benefits given by the
departments, agencies and other offices under
the Executive Branch to their officials and
employees, subject to the exemptions
enumerated herein.
Any amount paid either as advances or reimbursements for
expenses incurred or reasonably expected to be incurred by the
official and employee in the performance of his/her duties are not
compensation subject to withholding, if the following conditions
are satisfied:
1. The employee was duly authorized to incur such
expenses on behalf of the government; and
2. Compliance with pertinent laws and regulations
on accounting and liquidation of advances and
reimbursements, including, but not limited to
withholding tax rules. The expenses should be
duly receipted for and in the name of the
government office concerned.
Other than those pertaining to intelligence funds duly
appropriated and liquidated, any amount not in compliance with
the foregoing requirements shall be considered as part of the
gross taxable compensation income of the taxpayer. Intelligence
funds not duly appropriated and not properly liquidated shall form
part of the compensation of the government officials/personnel
concerned, unless returned.
IV. NON-TAXABLE COMPENSATION INCOME – Subject to
existing laws and issuances, the following income received by the
officials and employees in the public sector are not subject to
income tax and withholding tax on compensation:
A.
A. Thirteenth (13th Month Pay and Other Benefits not
exceeding Thirty Thousand Pesos
(P30,000.00) paid or accrued during the year. Any
amount exceeding Thirty Thousand Pesos
(P30,000.00) are taxable compensation. This
includes:
1. Benefits received by officials and
employees of the national and local
government pursuant to Republic Act no.
6686 ("An Act Authorizing Annual
Christmas Bonus to National and Local
Government Officials and Employees
Starting CY 1998");
2. Benefits received by employees pursuant
to Presidential Decree No. 851
("Requiring All Employers to Pay Their
Employees a 13th Month Pay"), as
amended by Memorandum Order No. 28,
dated August 13, 1986;
3. Benefits received by officials and
employees not covered by Presidential
Decree No. 851, as amended by
Memorandum Order No. 28, dated August
19, 1986;
4. Other benefits such as Christmas bonus,
productivity incentive bonus, loyalty
award, gift in cash or in kind and other
benefits of similar nature actually received
by officials and employees of government
offices, including the additional
compensation allowance (ACA) granted
and paid to all officials and employees of
the National Government Agencies
(NGAs) including state universities and
colleges (SUCs), government-owned
and/or controlled corporations (GOCCs),
government financial institutions (GFIs)
and Local Government Units (LGUs).
B. Facilities and privileges of relatively small value or
"De Minimis Benefits" as defined in existing
issuances and conforming to the ceilings
prescribed therein;
 C. Fringe benefits which are subject to the fringe
benefits tax under Section 33 of the NIRC, as
amended;
D. Representation and Transportation Allowance
(RATA) granted to public officers and employees
under the General Appropriations Act;
E. Personnel Economic Relief Allowance (PERA)
granted to government personnel;
F. The monetized value of leave credits paid to
government officials and employees;
G. Mandatory/compulsory GSIS, Medicare and Pag-
Ibig Contributions, provided that, voluntary
contributions to these institutions in excess of the
amount considered mandatory/compulsory are
not excludible from the gross income of the
taxpayer and hence, not exempt from Income Tax
and Withholding Tax;
H. Union dues of individual employees;
I. Compensation income of employees in the public
sector with compensation income of not more
than the Statutory Minimum Wage (SMW) in the
non-agricultural sector applicable to the place
where he/she is assigned;
J. Holiday pay, overtime pay, night shift differential
pay, and hazard pay received by Minimum Wage
Earners (MWEs);
K. Benefits received from the GSIS Act of 1937, as
amended, and the retirement gratuity/benefits
received by government officials and employees
under pertinent retirement laws;
L. All other benefits given which are not included in
the above enumeration but are exempted from
income tax as well as withholding tax on
compensation under existing laws, as confirmed
by BIR.77
Clearly, Sections III and IV of the assailed RMO do not charge
any new or additional tax. On the contrary, they merely mirror the
relevant provisions of the NIRC of 1997, as amended, and its
implementing rules on the withholding tax on compensation
income as discussed above. The assailed Sections simply
reinforce the rule that every form of compensation for personal
services received by all employees arising from employer-
employee relationship is deemed subject to income tax and,
consequently, to withholding tax,78 unless specifically exempted
or excluded by the Tax Code; and the duty of the Government, as
an employer, to withhold and remit the correct amount of
withholding taxes due thereon.
While Section III enumerates certain allowances which may be
subject to withholding tax, it does not exclude the possibility that
these allowances may fall under the exemptions identified under
Section IV – thus, the phrase, "subject to the exemptions
enumerated herein." In other words, Sections III and IV articulate
in a general and broad language the provisions of the NIRC of
1997, as amended, on the forms of compensation income
deemed subject to withholding tax and the allowances, bonuses
and benefits exempted therefrom. Thus, Sections III and IV
cannot be said to have been issued by the CIR with grave abuse
of discretion as these are fully in accordance with the provisions
of the NIRC of 1997, as amended, and its implementing rules.
Furthermore, the Court finds untenable petitioners' contention
that the assailed provisions of RMO No. 23-2014 contravene the
equal protection clause, fiscal autonomy, and the rule on non-
diminution of benefits.
The constitutional guarantee of equal protection is not violated by
an executive issuance which was issued to simply reinforce
existing taxes applicable to both the private and public sector. As
discussed, the withholding tax system embraces not only private
individuals, organizations and corporations, but also covers
organizations exempt from income tax, including the Government
of the Philippines, its agencies, instrumentalities, and political
subdivisions. While the assailed RMO is a directive to the
Government, as a reminder of its obligation as a withholding
agent, it did not, in any manner or form, alter or amend the
provisions of the Tax Code, for or against the Government or its
employees.
Moreover, the fiscal autonomy enjoyed by the Judiciary,
Ombudsman, and Constitutional Commissions, as envisioned in
the Constitution, does not grant immunity or exemption from the
common burden of paying taxes imposed by law. To borrow
former Chief Justice Corona's words in his Separate Opinion
in Francisco, Jr. v. House of Representatives,79 "fiscal autonomy
entails freedom from outside control and limitations, other than
those provided by law. It is the freedom to allocate and utilize
funds granted by law, in accordance with law and pursuant to
the wisdom and dispatch its needs may require from time to
time."80
It bears to emphasize the Court's ruling in Nitafan v.
Commissioner of Internal Revenue81 that the imposition of taxes
on salaries of Judges does not result in diminution of benefits.
This applies to all government employees because the intent of
the framers of the Organic Law and of the people adopting it is
"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."82
Determination of existence of fringe benefits is a question of fact.
Petitioners, nonetheless, insist that the allowances, bonuses and
benefits enumerated in Section III of the assailed RMO are, in
fact, fringe and de minimis benefits exempt from withholding tax
on compensation. The Court cannot, however, rule on this issue
as it is essentially a question of fact that cannot be determined in
this petition questioning the constitutionality of the RMO.
To be sure, settled is the rule that exemptions from tax are
construed strictissimi juris against the taxpayer and liberally in
favor of the taxing authority.83 One who claims tax exemption
must point to a specific provision of law conferring, in clear and
plain terms, exemption from the common burden84 and prove,
through substantial evidence, that it is, in fact, covered by the
exemption so claimed.85 The determination, therefore, of the
merits of petitioners' claim for tax exemption would necessarily
require the resolution of both legal and factual issues, which this
Court, not being a trier of facts, has no jurisdiction to do; more so,
in a petition filed at first instance.
Among the factual issues that need to be resolved, at the first
instance, is the nature of the fringe benefits granted to
employees. The NIRC of 1997, as amended, does not impose
income tax, and consequently a withholding tax, on payments to
employees which are either (a) required by the nature of, or
necessary to, the business of the employer; or (b) for the
convenience or advantage of the employer.86 This, however,
requires proper documentation. Without any documentary proof
that the payment ultimately redounded to the benefit of the
employer, the same shall be considered as a taxable benefit to
the employee, and hence subject to withholding taxes.87
Another factual issue that needs to be confirmed is the recipient
of the alleged fringe benefit. Fringe benefits furnished or granted,
in cash or in kind, by an employer to its managerial or supervisory
employees, are not considered part of compensation income;
thus, exempt from withholding tax on compensation.88 Instead,
these fringe benefits are subject to a fringe benefit tax equivalent
to 32% of the grossed-up monetary value of the benefit, which the
employer is legally required to pay.89 On the other hand, fringe
benefits given to rank and file employees, while exempt from
fringe benefit tax,90form part of compensation income taxable
under the regular income tax rates provided in Section 24(A)(2) of
the NIRC, of 1997, as amended;91 and consequently, subject to
withholding tax on compensation.
Furthermore, fringe benefits of relatively small value furnished by
the employer to his employees (both managerial/supervisory and
rank and file) as a means of promoting health, goodwill,
contentment, or efficiency, otherwise known as de
minimis benefits, that are exempt from both income tax on
compensation and fringe benefit tax; hence, not subject to
withholding tax,92 are limited and exclusive only to those
enumerated under RR No. 3-98, as amended.93 All other benefits
given by the employer which are not included in the said list,
although of relatively small value, shall not be considered as de
minimis benefits; hence, shall be subject to income tax as well as
withholding tax on compensation income, for rank and file
employees, or fringe benefits tax for managerial and supervisory
employees, as the case may be.94
Based on the foregoing, it is clear that to completely determine
the merits of petitioners' claimed exemption from withholding tax
on compensation, under Section 33 of the NIRC of 1997, there is
a need to confirm several factual issues. As such, petitioners
cannot but first resort to the proper courts and administrative
agencies which are better equipped for said task.
All told, the Court finds Sections III and IV of the assailed RMO
valid. The NIRC of 1997, as amended, is clear that all forms of
compensation income received by the employee from his
employer are presumed taxable and subject to withholding taxes.
The Government of the Philippines, its agencies,
instrumentalities, and political subdivisions, as an employer, is
required by law to withhold and remit to the BIR the appropriate
taxes due thereon. Any claims of exemption from withholding
taxes by an employee, as in the case of petitioners, must be
brought and resolved in the appropriate administrative and
judicial proceeding, with the employee having the burden to prove
the factual and legal bases thereof.
Section VII of RMO No. 23-2014 is valid; Section VI contravenes,
in part, the provisions of the NIRC of 1997, as amended, and its
implementing rules.
Petitioners claim that RMO No. 23-2014 is ultra vires insofar as
Sections VI and VII thereof define new offenses and prescribe
penalties therefor, particularly upon government officials.
The NIRC of 1997, as amended, clearly provides the offenses
and penalties relevant to the obligation of the withholding agent to
deduct, withhold and remit the correct amount of withholding
taxes on compensation income, to wit:
TITLE
Statutory Offenses and Penalties
CHAPTER
Additions to the Tax
SEC. 247. General Provisions. –
(a) The additions to the tax or deficiency tax prescribed in this
Chapter shall apply to all taxes, fees and charges imposed in this
Code. The amount so added to the tax shall be collected at the
same time, in the same manner and as part of the tax.
(b) If the withholding agent is the Government or any of its
agencies, political subdivisions or instrumentalities, or a
government owned or -controlled corporation, the employee
thereof responsible for the withholding and remittance of the tax
shall be personally liable for the additions to the tax prescribed
herein.
(c) The term "person", as used in this Chapter, includes an officer
or employee of a corporation who as such officer, employee or
member is under a duty to perform the act in respect of which the
violation occurs.
SEC. 248. Civil Penalties. — x x x95
SEC. 249. Interest. – x x x96
xxxx
SEC. 251. Failure of a Withholding Agent to Collect and Remit
Tax. – Any person required to withhold, account for, and remit
any tax imposed by this Code or who willfully fails to withhold
such tax, or account for and remit such tax, or aids or abets in
any manner to evade any such tax or the payment thereof, shall,
in addition to other penalties provided for under this Chapter, be
liable upon conviction to a penalty equal to the total amount of the
tax not withheld, or not accounted for and remitted.97
SEC. 252. Failure of a Withholding Agent to Refund Excess
Withholding Tax. – Any employer/withholding agent who fails or
refuses to refund excess withholding tax shall, in addition to the
penalties provided in this Title, be liable to a penalty equal to the
total amount of refunds which was not refunded to the employee
resulting from any excess of the amount withheld over the tax
actually due on their return.
CHAPTER II
X Crimes, Other Offenses and Forfeitures
xxxx
I SEC. 255. Failure to File Return, Supply Correct and Accurate
Information, Pay Tax, Withhold and Remit Tax and Refund
Excess Taxes Withheld on Compensation. – Any person required
under this Code or by rules and regulations promulgated
thereunder to pay any tax, make a return, keep any record, or
supply correct and accurate information, who willfully fails to pay
such tax, make such return, keep such record, or supply such
correct and accurate information, or withhold or remit taxes
withheld, or refund excess taxes withheld on compensation, at
the time or times required by law or rules and regulations shall, in
addition to other penalties provided by law, upon conviction
thereof, be punished by a fine of not less than Ten thousand
pesos (P10,000) and suffer imprisonment of not less than one (l)
year but not more than ten (10) years.
CHAPTER III
Penalties Imposed on Public Officers
xxxx
SEC. 272. Violation of Withholding Tax Provision. – Every officer
or employee of the Government of the Republic of the Philippines
or any of its agencies and instrumentalities, its political
subdivisions, as well as government-owned or -controlled
corporations, including the Bangko Sentral ng Pilipinas (BSP),
who, under the provisions of this Code or rules and regulations
promulgated thereunder, is charged with the duty to deduct and
withhold any internal revenue tax and to remit the same in
accordance with the provisions of this Code and other laws is
guilty of any offense hereinbelow specified shall, upon conviction
for each act or omission be punished by a fine of not less than
Five thousand pesos (P5,000) but not more than Fifty thousand
pesos (P50,000) or suffer imprisonment of not less than six (6)
months and one day (1) but not more than two (2) years, or both:
(a) Failing or causing the failure to deduct and withhold any
internal revenue tax under any of the withholding tax laws and
implementing rules and regulations;
(b) Failing or causing the failure to remit taxes deducted and
withheld within the time prescribed by law, and implementing
rules and regulations; and
(c) Failing or causing the failure to file return or statement within
the time prescribed, o rendering or furnishing a false or fraudulent
return or statement required under the withholding tax laws and
rules and regulations.98
Based on the foregoing, and similar to Sections III and IV of the
assailed RMO, the Court finds that Section VII thereof was issued
in accordance with the provisions of the NIRC of 1997, as
amended, and RR No. 2-98. For easy reference, Section VII of
RMO No. 23-2014 states:
VII. PENALTY PROVISION
In case of non-compliance with their obligation as withholding
agents, the abovementioned persons shall be liable for the
following sanctions:
A. Failure to Collect and Remit Taxes (Section 251,
NIRC) "Any person required to withhold, account
for, and remit any tax imposed by this Code or
who willfully fails to withhold such tax, or account
for and remit such tax, or aids or abets in any
manner to evade any such tax or the payment
thereof, shall, in addition to other penalties
provided for under this Chapter, be liable upon
conviction to a penalty equal to the total amount
of the tax not withheld, or not accounted for and
remitted."
B. Failure to File Return, Supply Correct and
Accurate Information, Pay Tax Withhold and
Remit Tax and Refund Excess Taxes Withheld on
Compensation (Section 255, NIRC) "Any person
required under this Code or by rules and
regulations promulgated thereunder to pay any
tax make a return, keep any record, or supply
correct the accurate information, who willfully fails
to pay such tax, make such return, keep such
record, or supply correct and accurate
information, or withhold or remit taxes withheld, or
refund excess taxes withheld on compensation, at
the time or times required by law or rules and
regulations shall, in addition to other penalties
provided by law, upon conviction thereof, be
punished by a fine of not less than Ten thousand
pesos (P10,000) and suffer imprisonment of not
less than one (1) year but not more than ten (10)
years.
 Any person who attempts to make it appear for
any reason that he or another has in fact filed a
return or statement, or actually files a return or
statement and subsequently withdraws the same
return or statement after securing the official
receiving seal or stamp of receipt of internal
revenue office wherein the same was actually
filed shall, upon conviction therefor, be punished
by a fine of not less than Ten thousand pesos
(P10,000) but not more than Twenty thousand
pesos (P20,000) and suffer imprisonment of not
less than one (1) year but not more than three (3)
years."
C. Violation of Withholding Tax Provisions (Section
272, NIRC)
"Every officer or employee of the Government of the Republic of
the Philippines or any of its agencies and instrumentalities, its
political subdivisions, as well as government-owned or controlled
corporations, including the Bangko Sentral ng Pilipinas (BSP),
who is charged with the duty to deduct and withhold any internal
revenue tax and to remit the same is guilty of any offense herein
below specified shall, upon conviction for each act or omission be
punished by a fine of not less than Five thousand pesos (P5,000)
but not more than Fifty thousand pesos (P50,000) or suffer
imprisonment of not less than six (6) months and one (1) day but
not more than two (2) years, or both:
1. Failing or causing the failure to deduct and
withhold any internal revenue tax under
any of the withholding tax laws and
implementing rules and regulations; or
2. Failing or causing the failure to remit taxes
deducted and withheld within the time
prescribed by law, and implementing rules
and regulations; or
3. Failing or causing the failure to file return
or statement within the time prescribed, or
rendering or furnishing a false or
fraudulent return or statement required
under the withholding tax laws and rules
and regulations."
All revenue officials and employees concerned shall take
measures to ensure the full enforcement of the provisions of this
Order and in case of any violation thereof, shall commence the
appropriate legal action against the erring withholding agent.
Verily, tested against the provisions of the NIRC of 1997, as
amended, Section VII of RMO No. 23-2014 does not define a
crime and prescribe a penalty therefor. Section VII simply mirrors
the relevant provisions of the NIRC of 1997, as amended, on the
penalties for the failure of the withholding agent to withhold and
remit the correct amount of taxes, as implemented by RR No. 2-
98.
However, with respect to Section VI of the assailed RMO, the
Court finds that the CIR overstepped the boundaries of its
authority to interpret existing provisions of the NIRC of 1997, as
amended.
Section VI of RMO No. 23-2014 reads:
VI. PERSONS RESPONSIBLE FOR WITHHOLDING
The following officials are duty bound to deduct, withhold and
remit taxes:
a) For Office of the Provincial Government-province- the Chief
Accountant, Provincial Treasurer and the Governor;
b) For Office of the City Government-cities- the Chief
Accountant, City Treasurer and the City Mayor;
c) For Office of the Municipal Government-municipalities- the
Chief Accountant, Municipal Treasurer and the Mayor;
d) Office of the Barangay-Barangay Treasurer and Barangay

Captain
e) For NGAs, GOCCs and other Government Offices, the Chief
Accountant and the Head of Office or the Official holding the
highest position (such as the President, Chief Executive
Officer, Governor, General Manager).
To recall, the Government of the Philippines, or any political
subdivision or agency thereof, or any GOCC, as an employer, is
constituted by law as the withholding agent, mandated to deduct,
withhold and remit the correct amount of taxes on the
compensation income received by its employees. In relation
thereto, Section 82 of the NIRC of 1997, as amended, states that
the return of the amount deducted and withheld upon any wage
paid to government employees shall be made by the officer or
employee having control of the payments or by any officer or
employee duly designated for such purpose.99 Consequently, RR
No. 2-98 identifies the Provincial Treasurer in provinces, the City
Treasurer in cities, the Municipal Treasurer in municipalities,
Barangay Treasurer in barangays, Treasurers of government-
owned or -controlled corporations (GOCCs), and the Chief
Accountant or any person holding similar position and performing
similar function in national government offices, as persons
required to deduct and withhold the appropriate taxes on the
income payments made by the government.100
However, nowhere in the NIRC of 1997, as amended, or in RR
No. 2-98, as amended, would one find the Provincial Governor,
Mayor, Barangay Captain and the Head of Government Office or
the "Official holding the highest position (such as the President,
Chief Executive Officer, Governor, General Manager)" in an
Agency or GOCC as one of the officials required to deduct,
withhold and remit the correct amount of withholding taxes. The
CIR, in imposing upon these officials the obligation not found in
law nor in the implementing rules, did not merely issue an
interpretative rule designed to provide guidelines to the law which
it is in charge of enforcing; but instead, supplanted details thereon
— a power duly vested by law only to respondent Secretary of
Finance under Section 244 of the NIRC of 1997, as amended.
Moreover, respondents' allusion to previous issuances of the
Secretary of Finance designating the Governor in provinces, the
City Mayor in cities, the Municipal Mayor in municipalities, the
Barangay Captain in barangays, and the Head of Office (official
holding the highest position) in departments, bureaus, agencies,
instrumentalities, government-owned or -controlled corporations,
and other government offices, as officers required to deduct and
withhold,101 is bereft of legal basis. Since the 1977 NIRC and
Executive Order No. 651, which allegedly breathed life to these
issuances, have already been repealed with the enactment of the
NIRC of 1997, as amended, and RR No. 2-98, these previous
issuances of the Secretary of Finance have ceased to have the
force and effect of law.
Accordingly, the Court finds that the CIR gravely abused its
discretion in issuing Section VI of RMO No. 23-2014 insofar as it
includes the Governor, City Mayor, Municipal Mayor, Barangay
Captain, and Heads of Office in agencies, GOCCs, and other
government offices, as persons required to withhold and remit
withholding taxes, as they are not among those officials
designated by the 1997 NIRC, as amended, and its implementing
rules.
Petition for Mandamus is moot and academic.
As regards the prayer for the issuance of a writ of mandamus to
compel respondents to increase the P30,000.00 non-taxable
income ceiling, the same has already been rendered moot and
academic due to the enactment of RA No. 10653.102
The Court takes judicial notice of RA No. 10653, which was
signed into law on February 12, 2015, which increased the
income tax exemption for 13th month pay and other benefits,
under Section 32(B)(7)(e) of the NIRC of 1997, as amended, from
P30,000.00 to P82,000.00.103 Said law also states that every
three (3) years after the effectivity of said Act, the President of the
Philippines shall adjust the amount stated therein to its present
value using the Consumer Price Index, as published by the
National Statistics Office.104
Recently, RA No. 10963,105 otherwise known as the "Tax Reform other government offices, as persons required to withhold and
for Acceleration and Inclusion (TRAIN)" Act, further increased the remit withholding taxes.
income tax exemption for 13th month pay and other benefits to
P90,000.00.106 Sections III, IV and VII of RMO No. 23-2014
A case is considered moot and academic if it ceases to present a are DECLARED valid inasmuch as they merely mirror the
justiciable controversy by virtue of supervening events, so that an provisions of the National Internal Revenue Code of 1997, as
adjudication of the case or a declaration on the issue would be of amended. However, the Court cannot rule on petitioners' claims
no practical value or use. Courts generally decline jurisdiction of exemption from withholding tax on compensation income
over such case or dismiss it on the ground of mootness.107 because these involve issues that are essentially factual or
With the enactment of RA Nos. 10653 and 10963, which not only evidentiary in nature, which must be raised in the appropriate
increased the tax exemption ceiling for 13th month pay and other administrative and/or judicial proceeding.
benefits, as petitioners prayed, but also conferred upon the
President the power to adjust said amount, a supervening event The Court's Decision upholding the validity of Sections III and IV
has transpired that rendered the resolution of the issue on of the assailed RMO is to be applied only prospectively.
whether mandamus lies against respondents, of no practical
value. Accordingly, the petition for mandamus should be Finally, the Petition for Mandamus in G.R. No. 213446 is
dismissed for being moot and academic. hereby DENIED on the ground of mootness.
As a final point, the Court cannot turn a blind eye to the adverse
effects of this Decision on ordinary government employees, SO ORDERED.
including petitioners herein, who relied in good faith on the belief
that the appropriate taxes on all the income they receive from
their respective employers are withheld and paid. Nor does the
Court ignore the situation of the relevant officers of the different
departments of government that had believed, in good faith, that
there was no need to withhold the taxes due on the compensation
received by said ordinary government employees. Thus, as a
measure of equity and compassionate social justice, the Court
deems it proper to clarify and declare, pro hac vice, that its ruling
on the validity of Sections III and IV of the assailed RMO is to be
given only prospective effect.108

WHEREFORE, premises considered, the Petitions and Petitions-

in Interventions are PARTIALLY GRANTED. Section VI of
Revenue Memorandum Order No. 23-2014 is DECLARED null
and void insofar as it names the Governor, City Mayor, Municipal
Mayor, Barangay Captain, and Heads of Office in government
agencies, government-owned or -controlled corporations, and
 5. Non-Retroactivity of Rulings (Sec. 246 of the NIRC)
FIRST DIVISION
G.R. No. 168129 April 24, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari
under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
seeking to reverse the Decision1 dated February 18, 2005 and
Resolution dated May 9, 2005 of the Court of Appeals (Fifteenth
Division) in CA-G.R. SP No. 76449.
The factual antecedents of this case, as culled from the records,
are:
The Philippine Health Care Providers, Inc., herein respondent, is
a corporation organized and existing under the laws of the
Republic of the Philippines. Pursuant to its Articles of
Incorporation,2 its primary purpose is "To establish, maintain,
conduct and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care of the
sick and disabled persons enrolled in the health care plan and to
provide for the administrative, legal, and financial responsibilities
of the organization."1^vvphi1.net
On July 25, 1987, President Corazon C. Aquino issued Executive
Order (E.O.) No. 273, amending the National Internal Revenue
Code of 1977 (Presidential Decree No. 1158) by imposing Value-
Added Tax (VAT) on the sale of goods and services. This E.O.
took effect on January 1, 1988.
Before the effectivity of E.O. No. 273, or on December 10, 1987,
respondent wrote the Commissioner of Internal Revenue (CIR),
petitioner, inquiring whether the services it provides to the
participants in its health care program are exempt from the
payment of the VAT.
On June 8, 1988, petitioner CIR, through the VAT Review
Committee of the Bureau of Internal Revenue (BIR), issued VAT
Ruling No. 231-88 stating that respondent, as a provider of
medical services, is exempt from the VAT coverage. This Ruling
was subsequently confirmed by Regional Director Osmundo G.
Umali of Revenue Region No. 8 in a letter dated April 22, 1994.
Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716
(Expanded VAT or E-VAT Law) took effect, amending further the
National Internal Revenue Code of 1977. Then on January 1,
1998, R.A. No. 8424 (National Internal Revenue Code of 1997)
became effective. This new Tax Code substantially adopted and
reproduced the provisions of E.O. No. 273 on VAT and R.A. No.
7716 on E-VAT.
In the interim, on October 1, 1999, the BIR sent respondent a
Preliminary Assessment Notice for deficiency in its payment of
the VAT and documentary stamp taxes (DST) for taxable years
1996 and 1997.
On October 20, 1999, respondent filed a protest with the BIR.
On January 27, 2000, petitioner CIR sent respondent a letter
demanding payment of "deficiency VAT" in the amount of
₱100,505,030.26 and DST in the amount of ₱124,196,610.92, or
a total of ₱224,702,641.18 for taxable years 1996 and 1997.
Attached to the demand letter were four (4) assessment notices.
On February 23, 2000, respondent filed another protest
questioning the assessment notices.
Petitioner CIR did not take any action on respondent's protests.
Hence, on September 21, 2000, respondent filed with the Court of
Tax Appeals (CTA) a petition for review, docketed as CTA Case
No. 6166.
On April 5, 2002, the CTA rendered its Decision, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, the instant Petition for
Review is PARTIALLY GRANTED. Petitioner is hereby
ORDERED TO PAY the deficiency VAT amounting to
₱22,054,831.75 inclusive of 25% surcharge plus 20% interest
from January 20, 1997 until fully paid for the 1996 VAT deficiency
and ₱31,094,163.87 inclusive of 25% surcharge plus 20%
interest from January 20, 1998 until paid for the 1997 VAT
deficiency.1awphi1.nét Accordingly, VAT Ruling No. 231-88 is
declared void and without force and effect. The 1996 and 1997
deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to
DESIST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent filed a motion for partial reconsideration of the above
judgment concerning its liability to pay the deficiency VAT.
In its Resolution3 dated March 23, 2003, the CTA granted
respondent's motion, thus:
WHEREFORE, in view of the foregoing, the instant Motion for
Partial Reconsideration is GRANTED. Accordingly, the VAT
assessment issued by herein respondent against petitioner for
the taxable years 1996 and 1997 is hereby WITHDRAWN and
SET ASIDE.
SO ORDERED.
The CTA held:
Moreover, this court adheres to its conclusion that petitioner is
a service contractor subject to VAT since it does not actually
render medical service but merely acts as a conduit between the
members and petitioner's accredited and recognized hospitals
and clinics.
However, after a careful review of the facts of the case as well as
the Law and jurisprudence applicable, this court resolves to grant
petitioner's "Motion for Partial Reconsideration." We are in accord
with the view of petitioner that it is entitled to the benefit of non-
retroactivity of rulings guaranteed under Section 246 of the Tax
Code, in the absence of showing of bad faith on its part. Section
246 of the Tax Code provides:
Sec. 246. Non-Retroactivity of Rulings. - Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding Sections or any of
the rulings or circulars promulgated by the Commissioner shall
not be given retroactive application if the revocation, modification
or reversal will be prejudicial to the taxpayers, x x x.
Clearly, undue prejudice will be caused to petitioner if the
revocation of VAT Ruling No. 231-88 will be retroactively applied
to its case. VAT Ruling No. 231-88 issued by no less than the
respondent itself has confirmed petitioner's entitlement to VAT
exemption under Section 103 of the Tax Code. In saying so,
respondent has actually broadened the scope of "medical
services" to include the case of the petitioner. This VAT ruling
was even confirmed subsequently by Regional Director Ormundo
G. Umali in his letter dated April 22, 1994 (Exhibit M). Exhibit P,
which served as basis for the issuance of the said VAT ruling in
favor of the petitioner sufficiently described the business of
petitioner and there is no way BIR could be misled by the said
representation as to the real nature of petitioner's business. Such
being the case, this court is convinced that petitioner's reliance on
the said ruling is premised on good faith. The facts of the case do
not show that petitioner deliberately committed mistakes or
omitted material facts when it obtained the said ruling from the
Bureau of Internal Revenue. Thus, in the absence of such proof,
this court upholds the application of Section 246 of the Tax Code.
Consequently, the pronouncement made by the BIR in VAT
Ruling No. 231-88 as to the VAT exemption of petitioner should
be upheld.
Petitioner seasonably filed with the Court of Appeals a petition for
review, docketed as CA-G.R. SP No. 76449.
In its Decision dated February 18, 2005, the Court of Appeals
affirmed the CTA Resolution.
Petitioner CIR filed a motion for reconsideration, but it was denied
by the appellate court in its Resolution4 dated May 9, 2005.
Hence, the instant petition for review on certiorari raising these
two issues: (1) whether respondent's services are subject to VAT;
and (2) whether VAT Ruling No. 231-88 exempting respondent
from payment of VAT has retroactive application.
On the first issue, respondent is contesting petitioner's
assessment of its VAT liabilities for taxable years 1996 and 1997.
Section 1025 of the National Internal Revenue Code of 1977, as
amended by E.O. No. 273 (VAT Law) and R.A. No. 7716 (E-VAT
Law), provides:
SEC. 102. Value-added tax on sale of services and use or lease
of properties. - (a) Rate and base of tax. - There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of
gross receipts derived from the sale or exchange of services,
including the use or lease of properties.
The phrase "sale or exchange of service" means the performance
of all kinds of services in the Philippines for a fee, remuneration
or consideration, including those performed or rendered by
construction and service contractors x x x.
Section 1036 of the same Code specifies the exempt transactions
from the provision of Section 102, thus:
SEC. 103. Exempt Transactions. - The following shall be exempt
from the value-added tax:
xxx
(l) Medical, dental, hospital and veterinary services except those
rendered by professionals
xxx
The import of the above provision is plain. It requires no
interpretation. It contemplates the exemption from VAT of
taxpayers engaged in the performance of medical, dental,
hospital, and veterinary services. In Commissioner of
International Revenue v. Seagate Technology (Philippines),7 we
defined an exempt transaction as one involving goods or services
which, by their nature, are specifically listed in and expressly
exempted from the VAT, under the Tax Code, without regard to
the tax status of the party in the transaction. In Commissioner of
Internal Revenue v. Toshiba Information Equipment (Phils.)
Inc.,8 we reiterated this definition.
In its letter to the BIR requesting confirmation of its VAT-exempt
status, respondent described its services as follows:
Under the prepaid group practice health care delivery system
adopted by Health Care, individuals enrolled in Health Care's
health care program are entitled to preventive, diagnostic, and
corrective medical services to be dispensed by Health Care's duly
licensed physicians, specialists, and other professional technical
staff participating in said group practice health care delivery
system established and operated by Health Care. Such medical
services will be dispensed in a hospital or clinic owned, operated,
or accredited by Health Care. To be entitled to receive such
medical services from Health Care, an individual must enroll in
Health Care's health care program and pay an annual fee.
Enrollment in Health Care's health care program is on a year-to-
year basis and enrollees are issued identification cards.
From the foregoing, the CTA made the following conclusions:
a) Respondent "is not actually rendering medical
service but merely acting as a conduit between the
members and their accredited and recognized
hospitals and clinics."
b) It merely "provides and arranges for the provision
of pre-need health care services to its members for a
fixed prepaid fee for a specified period of time."
c) It then "contracts the services of physicians,
medical and dental practitioners, clinics and
hospitals to perform such services to its enrolled
members;" and
d) Respondent "also enters into contract with clinics,
hospitals, medical professionals and then negotiates
with them regarding payment schemes, financing and
other procedures in the delivery of health services."
We note that these factual findings of the CTA were neither
modified nor reversed by the Court of Appeals. It is a doctrine that
findings of fact of the CTA, a special court exercising particular
expertise on the subject of tax, are generally regarded as final,
binding, and conclusive upon this Court, more so where these do
not conflict with the findings of the Court of Appeals.9 Perforce,
as respondent does not actually provide medical and/or
hospital services, as provided under Section 103 on exempt
transactions, but merely arranges for the same, its services
are not VAT-exempt.
Relative to the second issue, Section 246 of the 1997 Tax Code,
as amended, provides that rulings, circulars, rules and regulations
promulgated by the Commissioner of Internal Revenue have no
retroactive application if to apply them would prejudice the
taxpayer. The exceptions to this rule are: (1) 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;
(2) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which
the ruling is based, or (3) where the taxpayer acted in bad faith.
We must now determine whether VAT Ruling No. 231-88
exempting respondent from paying its VAT liabilities has
retroactive application.
In its Resolution dated March 23, 2003, the CTA found that there
is no showing that respondent "deliberately committed mistakes
or omitted material facts" when it obtained VAT Ruling No. 231-
88 from the BIR. The CTA held that respondent's letter which
served as the basis for the VAT ruling "sufficiently described" its
business and "there is no way the BIR could be misled by the
said representation as to the real nature" of said business.
In sustaining the CTA, the Court of Appeals found that "the failure
of respondent to refer to itself as a health maintenance
organization is not an indication of bad faith or a deliberate
attempt to make false representations." As "the term health
maintenance organization did not as yet have any particular
significance for tax purposes," respondent's failure "to include a
term that has yet to acquire its present definition and significance
cannot be equated with bad faith."
We agree with both the Tax Court and the Court of Appeals that
respondent acted in good faith. In Civil Service Commission v.
Maala,10 we described good faith as "that state of mind denoting
honesty of intention and freedom from knowledge of
circumstances which ought to put the holder upon inquiry; an
honest intention to abstain from taking any unconscientious
advantage of another, even through technicalities of law, together
with absence of all information, notice, or benefit or belief of facts
which render transaction unconscientious."
According to the Court of Appeals, respondent's failure to
describe itself as a "health maintenance organization," which is
subject to VAT, is not tantamount to bad faith. We note that the
term "health maintenance organization" was first recorded in the
Philippine statute books only upon the passage of "The National
Health Insurance Act of 1995" (Republic Act No. 7875). Section 4
(o) (3) thereof defines a health maintenance organization as "an
entity that provides, offers, or arranges for coverage of
designated health services needed by plan members for a fixed
prepaid premium." Under this law, a health maintenance
organization is one of the classes of a "health care provider."
It is thus apparent that when VAT Ruling No. 231-88 was issued
in respondent's favor, the term "health maintenance organization"
was yet unknown or had no significance for taxation purposes.
Respondent, therefore, believed in good faith that it was VAT
exempt for the taxable years 1996 and 1997 on the basis of VAT
Ruling No. 231-88.
Court, would be contrary to the tenets of good faith, equity, and
fair play.
This Court has consistently reaffirmed its ruling in ABS-CBN
Broadcasting Corp. in the later cases of Commissioner of Internal
Revenue v. Borroughs, Ltd.,12 Commissioner of Internal Revenue
v. Mega Gen. Mdsg. Corp.13Commissioner of Internal Revenue v.
Telefunken Semiconductor (Phils.) Inc.,14 and Commissioner of
Internal Revenue v. Court of Appeals.15 The rule is that the BIR
rulings have no retroactive effect where a grossly unfair deal
would result to the prejudice of the taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet
Corporation,16 wherein the taxpayer was entitled to tax refunds or
credits based on the BIR's own issuances but later was suddenly
saddled with deficiency taxes due to its subsequent ruling
changing the category of the taxpayer's transactions for the
purpose of paying its VAT, this Court ruled that applying such
ruling retroactively would be prejudicial to the taxpayer.
WHEREFORE, we DENY the petition and AFFIRM the assailed
Decision and Resolution of the Court of Appeals in CA-G.R. SP
No. 76449. No costs.
SO ORDERED.

In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,11 this

Court held that under Section 246 of the 1997 Tax Code, the
Commissioner of Internal Revenue is precluded from
adopting a position contrary to one previously taken where
injustice would result to the taxpayer. Hence, where an
assessment for deficiency withholding income taxes was made,
three years after a new BIR Circular reversed a previous one
upon which the taxpayer had relied upon, such an assessment
was prejudicial to the taxpayer. To rule otherwise, opined the

SECOND DIVISION
G.R. No. 153205 January 22, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Respondent.
DECISION
CARPIO, J.:
The Case
This petition for review1 seeks to set aside the 16 April 2002
Decision2 of the Court of Appeals in CA-G.R. SP No. 66341
affirming the 8 August 2001 Decision3 of the Court of Tax Appeals
(CTA). The CTA ordered the Commissioner of Internal Revenue
(petitioner) to issue a tax credit certificate for P6,994,659.67 in
favor of Burmeister and Wain Scandinavian Contractor Mindanao,
Inc. (respondent).
The Antecedents
The CTA summarized the facts, which the Court of Appeals
adopted, as follows:
[Respondent] is a domestic corporation duly organized and
existing under and by virtue of the laws of the Philippines with
principal address located at Daruma Building, Jose P. Laurel
Avenue, Lanang, Davao City.
It is represented that a foreign consortium composed of
Burmeister and Wain Scandinavian Contractor A/S (BWSC-
Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui
and Co., Ltd. entered into a contract with the National Power
Corporation (NAPOCOR) for the operation and maintenance of
[NAPOCOR’s] two power barges. The Consortium appointed
BWSC-Denmark as its coordination manager.
BWSC-Denmark established [respondent] which subcontracted
the actual operation and maintenance of NAPOCOR’s two power
barges as well as the performance of other duties and acts which
necessarily have to be done in the Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in a
mixture of currencies (Mark, Yen, and Peso). The freely
convertible non-Peso component is deposited directly to the
Consortium’s bank accounts in Denmark and Japan, while the
Peso-denominated component is deposited in a separate and
special designated bank account in the Philippines. On the other
hand, the Consortium pays [respondent] in foreign currency
inwardly remitted to the Philippines through the banking system.
In order to ascertain the tax implications of the above
transactions, [respondent] sought a ruling from the BIR which
responded with BIR Ruling No. 023-95 dated February 14, 1995,
declaring therein that if [respondent] chooses to register as a VAT
person and the consideration for its services is paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas, the
aforesaid services shall be subject to VAT at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26,
1995, the Certificate of Registration bearing RDO Control No. 95-
113-007556 was issued in favor of [respondent] by the Revenue
District Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly currency and accounted for in accordance with the rules and
Value-Added Tax Returns reflecting, among others, a total zero- regulations of the BSP."
rated sales of P147,317,189.62 with VAT input taxes
of P3,361,174.14, detailed as follows: x x x x x x x x x x.

Date Zero-Rated In [conformity] with the aforecited Revenue Regulations,

Qtr. Exh. VAT Input Tax [respondent] subjected its sale of services to the Consortium to
Filed Sales
the 10% VAT in the total amount of P103,558,338.11
representing April to December 1996 sales since said Revenue
1st E 04-18-96 P 33,019,651.07 P608,953.48 Regulations No. 5-96 became effective only on April 1996. The
sum of P43,893,951.07, representing January to March 1996
2nd F 07-16-96 37,108,863.33 756,802.66 sales was subjected to zero rate. Consequently, [respondent]
filed its 1996 amended VAT return consolidating therein the VAT
3rd G 10-14-96 34,196,372.35 930,279.14 output and input taxes for the four calendar quarters of 1996. It
paid the amount of P6,994,659.67 through BIR’s collecting agent,
4th H 01-20-97 42,992,302.87 1,065,138.86
PCIBank, as its output tax liability for the year 1996, computed as
follows:
Totals P147,317,189.62 P3,361,174.14
Amount subject to 10% VAT P103,558,338.11

Multiply by 10%
On December 29, 1997, [respondent] availed of the Voluntary
Assessment Program (VAP) of the BIR. It allegedly
misinterpreted Revenue Regulations No. 5-96 dated February 20, VAT Output Tax P 10,355,833.81
1996 to be applicable to its case. Revenue Regulations No. 5-96
provides in part thus: Less: 1996 Input VAT P 3,361,174.14

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue
Regulations No. 7-95 are hereby amended to read as follows:
Section 4.102-2(b)(2) – "Services other than processing,
manufacturing or repacking for other persons doing business
outside the Philippines for goods which are subsequently
exported, as well as services by a resident to a non-resident
foreign client such as project studies, information services,
engineering and architectural designs and other similar services,
the consideration for which is paid for in acceptable foreign
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling
No. 003-99 from the VAT Review Committee which reconfirmed
BIR Ruling No. 023-95 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%)."
On the strength of the aforementioned rulings, [respondent] on
April 22,1999, filed a claim for the issuance of a tax credit
certificate with Revenue District No. 113 of the BIR. [Respondent]
believed that it erroneously paid the output VAT for 1996 due to
its availment of the Voluntary Assessment Program (VAP) of the
BIR.4
On 27 December 1999, respondent filed a petition for review with
the CTA in order to toll the running of the two-year prescriptive
period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue
a tax credit certificate for P6,994,659.67 in favor of respondent.
The CTA’s ruling stated:
[Respondent’s] sale of services to the Consortium [was] paid for
in acceptable foreign currency inwardly remitted to the Philippines
and accounted for in accordance with the rules and regulations of
Bangko Sentral ng Pilipinas. These were established by various
BPI Credit Memos showing remittances in Danish Kroner (DKK)
and US dollars (US$) as payments for the specific invoices billed
by [respondent] to the consortium. These remittances were
further certified by the Branch Manager x x x of BPI-Davao
Lanang Branch to represent payments for sub-contract fees that
came from Den Danske Aktieselskab Bank-Denmark for the
account of [respondent]. Clearly, [respondent’s] sale of services
to the Consortium is subject to VAT at 0% pursuant to Section
108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondent’s] sale of services to the
Consortium was even confirmed by the [petitioner] in BIR Ruling
No. 023-95 dated February 15, 1995, and later by VAT Ruling No.
003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered
by [respondent] were indeed subject to VAT at zero percent, it
follows that it mistakenly availed of the Voluntary Assessment
Program by paying output tax for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires
the return of what has been delivered by mistake, the [petitioner]
is obligated to issue the tax credit certificate prayed for by
[respondent]. x x x5
Petitioner filed a petition for review with the Court of Appeals,
which dismissed the petition for lack of merit and affirmed the
CTA decision.6
Hence, this petition.
The Court of Appeals’ Ruling
In affirming the CTA, the Court of Appeals rejected petitioner’s
view that since respondent’s services are not destined for
consumption abroad, they are not of the same nature as project
studies, information services, engineering and architectural
designs, and other similar services mentioned in Section 4.102-
2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT.
Thus, according to petitioner, respondent’s services cannot
legally qualify for 0% VAT but are subject to the regular 10%
VAT.8
The Court of Appeals found untenable petitioner’s contention that
under VAT Ruling No. 040-98, respondent’s services should be
destined for consumption abroad to enjoy zero-rating. Contrary to
petitioner’s interpretation, there are two kinds of transactions or
services subject to zero percent VAT under VAT Ruling No. 040-
98. These are (a) services other than repacking goods for other
persons doing business outside the Philippines which goods are
subsequently exported; and (b) services by a resident to a non-
resident foreign client, such as project studies, information
services, engineering and architectural designs and other similar
services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first classification is
required by the provision to be consumed abroad in order to be
taxed at zero rate. In x x x the absence of such express or implied
stipulation in the statute, the second classification need not be
consumed abroad."10
The Court of Appeals further held that assuming petitioner’s
interpretation of Section 4.102-2(b)(2) of Revenue Regulations
No. 5-96 is correct, such administrative provision is void being an
amendment to the Tax Code. Petitioner went beyond merely
providing the implementing details by adding another requirement
to zero-rating. "This is indicated by the additional phrase ‘as well
as services by a resident to a non-resident foreign client, such as
project studies, information services and engineering and
architectural designs and other similar services.’ In effect, this
phrase adds not just one but two requisites: (a) services must be
rendered by a resident to a non-resident; and (b) these must be in
the nature of project studies, information services, etc."11
The Court of Appeals explained that under Section 108(b)(2) of
the Tax Code,12 for services which were performed in the
Philippines to enjoy zero-rating, these must comply only with two
requisites, to wit: (1) payment in acceptable foreign currency and
(2) accounted for in accordance with the rules of the BSP.
Section 108(b)(2) of the Tax Code does not provide that services
must be "destined for consumption abroad" in order to be VAT
zero-rated.13
The Court of Appeals disagreed with petitioner’s argument that
our VAT law generally follows the destination principle (i.e.,
exports exempt, imports taxable).14 The Court of Appeals stated
that "if indeed the ‘destination principle’ underlies and is the basis
of the VAT laws, then petitioner’s proper remedy would be to
recommend an amendment of Section 108(b)(2) to Congress.
Without such amendment, however, petitioner should apply the
terms of the basic law. Petitioner could not resort to
administrative legislation, as what [he] had done in this case."15
The Issue
The lone issue for resolution is whether respondent is entitled to
the refund of P6,994,659.67 as erroneously paid output VAT for
the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant
petition is not on the ground that respondent’s services are
subject to 0% VAT. Rather, it is based on the non-retroactivity of
the prejudicial revocation of BIR Ruling No. 023-9517 and VAT
Ruling No. 003-99,18 which held that respondent’s services are
subject to 0% VAT and which respondent invoked in applying for
refund of the output VAT.
Section 102(b) of the Tax Code,19 the applicable provision in 1996
when respondent rendered the services and paid the VAT in
question, enumerates which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The following services
performed in the Philippines by VAT-registered persons shall be
subject to 0%:
(1) Processing, manufacturing or repacking goods for
other persons doing business outside the
Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign
currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas(BSP);
 (2) Services other than those mentioned in the
preceding sub-paragraph, the consideration for which is
paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose
exemption under special laws or international agreements
to which the Philippines is a signatory effectively subjects
the supply of such services to zero rate;
(4) Services rendered to vessels engaged exclusively in
international shipping; and
(5) Services performed by subcontractors and/or
contractors in processing, converting, or manufacturing
goods for an enterprise whose export sales exceed
seventy percent (70%) of total annual production.
(Emphasis supplied)
In insisting that its services should be zero-rated, respondent
claims that it complied with the requirements of the Tax Code for
zero rating under the second paragraph of Section 102(b).
Respondent asserts that (1) the payment of its service fees was
in acceptable foreign currency, (2) there was inward remittance of
the foreign currency into the Philippines, and (3) accounting of
such remittance was in accordance with BSP rules. Moreover,
respondent contends that its services which "constitute the actual
operation and management of two (2) power barges in Mindanao"
are not "even remotely similar to project studies, information
services and engineering and architectural designs under Section
4.102-2(b)(2) of Revenue Regulations No. 5-96." As such,
respondent’s services need not be "destined to be consumed
abroad in order to be VAT zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be other than
"processing, manufacturing or repacking of goods" and that
payment for such services be in acceptable foreign currency
accounted for in accordance with BSP rules. Another essential
condition for qualification to zero-rating under Section 102(b)(2) is
that the recipient of such services is doing business outside the
Philippines. While this requirement is not expressly stated in the
second paragraph of Section 102(b), this is clearly provided in the
first paragraph of Section 102(b) where the listed services must
be "for other persons doing business outside the Philippines."
The phrase "for other persons doing business outside the
Philippines" not only refers to the services enumerated in the first
paragraph of Section 102(b), but also pertains to the general term
"services" appearing in the second paragraph of Section 102(b).
In short, services other than processing, manufacturing, or
repacking of goods must likewise be performed for persons doing
business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If
the provider and recipient of the "other services" are both doing
business in the Philippines, the payment of foreign currency is
irrelevant. Otherwise, those subject to the regular VAT under
Section 102(a) can avoid paying the VAT by simply stipulating
payment in foreign currency inwardly remitted by the recipient of
services. To interpret Section 102(b)(2) to apply to a payer-
recipient of services doing business in the Philippines is to make
the payment of the regular VAT under Section 102(a) dependent
on the generosity of the taxpayer. The provider of services can
choose to pay the regular VAT or avoid it by stipulating payment
in foreign currency inwardly remitted by the payer-recipient. Such
interpretation removes Section 102(a) as a tax measure in the
Tax Code, an interpretation this Court cannot sanction. A tax is a
mandatory exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign
currency" under BSP rules, the law clearly envisions the payer-
recipient of services to be doing business outside the Philippines.
Only those not doing business in the Philippines can be required
under BSP rules20 to pay in acceptable foreign currency for their
purchase of goods or services from the Philippines. In a domestic
transaction, where the provider and recipient of services are both
doing business in the Philippines, the BSP cannot require any
party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature
of export sales since the payer-recipient of services is doing
business outside the Philippines. Under BSP rules,21 the
proceeds of export sales must be reported to the Bangko Sentral
ng Pilipinas. Thus, there is reason to require the provider of
services under Section 102(b) (1) and (2) to account for the
foreign currency proceeds to the BSP. The same rationale does
not apply if the provider and recipient of the services are both
doing business in the Philippines since their transaction is not in
the nature of an export sale even if payment is denominated in
foreign currency.
Further, when the provider and recipient of services are both
doing business in the Philippines, their transaction falls squarely
under Section 102(a) governing domestic sale or exchange of
services. Indeed, this is a purely local sale or exchange of
services subject to the regular VAT, unless of course the
transaction falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than
those mentioned in the preceding subparagraph," the
legislative intent is that only the services are different between
subparagraphs 1 and 2. The requirements for zero-rating,
including the essential condition that the recipient of services is
doing business outside the Philippines, remain the same under
both subparagraphs.
Significantly, the amended Section 108(b)22 [previously Section
102(b)] of the present Tax Code clarifies this legislative intent.
Expressly included among the transactions subject to 0% VAT
are "[s]ervices other than those mentioned in the [first] paragraph
[of Section 108(b)] rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the
services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP."
In this case, the payer-recipient of respondent’s services is the
Consortium which is a joint-venture doing business in the
Philippines. While the Consortium’s principal members are non-
resident foreign corporations, the Consortium itself is doing
business in the Philippines. This is shown clearly in BIR Ruling
No. 023-95 which states that the contract between the
Consortium and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a
clarification of the tax implications of a contract between a
consortium composed of Burmeister & Wain Scandinavian
Contractor A/S ("BWSC"), Mitsui Engineering & Shipbuilding, Ltd.
(MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to
hereinafter as the "Consortium", and the National Power
Corporation ("NAPOCOR") for the operation and maintenance
of two 100-Megawatt power barges ("Power Barges")
acquired by NAPOCOR for a 15-year term.23 (Emphasis
supplied)
Considering this length of time, the Consortium’s operation and
maintenance of NAPOCOR’s power barges cannot be classified
as a single or isolated transaction. The Consortium does not fall
under Section 102(b)(2) which requires that the recipient of the
services must be a person doing business outside the
Philippines. Therefore, respondent’s services to the Consortium,
not being supplied to a person doing business outside the
Philippines, cannot legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and
maintains NAPOCOR’s power barges in the Philippines.
NAPOCOR pays the Consortium, through its non-resident
partners, partly in foreign currency outwardly remitted. In turn, the
Consortium pays respondent also in foreign currency inwardly
remitted and accounted for in accordance with BSP rules. This
payment scheme does not entitle respondent to 0% VAT. As the
Court held in Commissioner of Internal Revenue v. American
Express International, Inc. (Philippine Branch),24 the place of
payment is immaterial, much less is the place where the output of
the service is ultimately used. An essential condition for
entitlement to 0% VAT under Section 102(b)(1) and (2) is that the
recipient of the services is a person doing business outside the
Philippines. In this case, the recipient of the services is the
Consortium, which is doing business not outside, but within the
Philippines because it has a 15-year contract to operate and
maintain NAPOCOR’s two 100-megawatt power barges in
Mindanao.
The Court recognizes the rule that the VAT system generally
follows the "destination principle" (exports are zero-rated whereas
imports are taxed). However, as the Court stated in American
Express, there is an exception to this rule.25 This exception refers
to the 0% VAT on services enumerated in Section 102 and
performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person
doing business outside the Philippines. Thus, to be exempt from
the destination principle under Section 102(b)(1) and (2), the
services must be (a) performed in the Philippines; (b) for a person
doing business outside the Philippines; and (c) paid in acceptable
foreign currency accounted for in accordance with BSP rules.
Respondent’s reliance on the ruling in American Express26 is
misplaced. That case involved a recipient of services, specifically
American Express International, Inc. (Hongkong Branch), doing
business outside the Philippines. There, the Court stated:
Respondent [American Express International, Inc. (Philippine
Branch)] is a VAT-registered person that facilitates the collection
and payment of receivables belonging to its non-resident foreign
client [American Express International, Inc. (Hongkong Branch)],
for which it gets paid in acceptable foreign currency inwardly
remitted and accounted for in accordance with BSP rules and
regulations. x x x x27 (Emphasis supplied)
In contrast, this case involves a recipient of services – the
Consortium – which is doing business in the Philippines. Hence,
American Express’ services were subject to 0% VAT, while
respondent’s services should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax,
respondent relied on VAT Ruling No. 003-99,28 which reconfirmed
BIR Ruling No. 023-9529 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%)."
Respondent’s reliance on these BIR rulings binds petitioner.
Petitioner’s filing of his Answer before the CTA challenging
respondent’s claim for refund effectively serves as a revocation of
VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However,
such revocation cannot be given retroactive effect since it will
prejudice respondent. Changing respondent’s status will deprive
respondent of a refund of a substantial amount representing
excess output tax.30 Section 246 of the Tax Code provides that
any revocation of a ruling by the Commissioner of Internal
Revenue shall not be given retroactive application if the
revocation will prejudice the taxpayer. Further, there is no
showing of the existence of any of the exceptions enumerated in
Section 246 of the Tax Code for the retroactive application of
such revocation.
However, upon the filing of petitioner’s Answer dated 2 March
2000 before the CTA contesting respondent’s claim for refund,
respondent’s services shall be subject to the regular 10%
VAT.31 Such filing is deemed a revocation of VAT Ruling No. 003-
99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.
 FIRST DIVISION
G.R. No. 117982 February 6, 1997
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and
ALHAMBRA INDUSTRIES, INC., respondents.
BELLOSILLO, J.:
ALHAMBRA INDUSTRIES, INC., is a domestic corporation
engaged in the manufacture and sale of cigar and cigarette
products. On 7 May 1991 private respondent received a letter
dated 26 April 1991 from the Commissioner of Internal Revenue
assessing it deficiency Ad Valorem Tax (AVT) in the total amount
of Four Hundred Eighty-Eight Thousand Three Hundred Ninety-
Six Pesos and Sixty-Two Centavos (P488,396.62), inclusive of
increments, on the removals of cigarette products from their place
of production during the period 2 November 1990 to 22 January
1991.1 Petitioner computes the deficiency thus —
Total AVT due per manufacturer's declaration P
4,279,042.33
Less: AVT paid under BIR Ruling No. 473-88
3,905,348.85
——————
Deficiency AVT 373,693.48
Add: Penalties:
25% Surcharge (Sec. 248[c][3] NIRC) 93,423.37
20% Interest (P467,116.85 x 82/360 days)
21,279.27
——————
Total Amount Due P 488,396.62
In a letter dated 22 May 1991 received by petitioner on even date,
private respondent thru counsel filed a protest against the
proposed assessment with a request that the same be withdrawn
and cancelled. On 31 May 1991 private respondent received
petitioner's reply dated 27 May 1991 denying its protest and
request for cancellation stating that the decision was final, and at
the same time requesting payment of the revised amount of Five
Hundred Twenty Thousand Eight Hundred Thirty-Five Pesos and
Twenty-Nine Centavos (P520,835.29), with interest updated,
within ten (10) days from receipt thereof. In a letter dated 10 June
1991 which petitioner received on the same day, private
respondent requested for the reconsideration of petitioner's denial
of its protest. Without waiting for petitioner's reply to its request
for reconsideration, private respondent filed on 19 June 1991 a
petition for review with the Court of Tax Appeals. On 25 June
1991 private respondent received from petitioner a letter dated 21
June 1991 denying its request for reconsideration declaring again
that its decision was final. On 8 July 1991 private respondent paid
under protest the disputed ad valorem tax in the sum of
P520,835.29.2
In its Decision3 of 1 December 1993 the Court of Tax Appeals
ordered petitioner to refund to private respondent the amount of
Five Hundred Twenty Thousand Eight Hundred Thirty-Five Pesos
and Twenty-Nine Centavos (P520,835.29) representing
erroneously paid ad valorem tax for the period 2 November 1990
to 22 January 1991.
The Court of Tax Appeals explained that the subject deficiency
excise tax assessment resulted from private respondent's use of
the computation mandated by BIR Ruling 473-88 dated 4 October
1988 as basis for computing the fifteen percent (15%) ad valorem
tax due on its removals of cigarettes from 2 November 1990 to 22
January 1991. BIR Circular 473-88 was issued by Deputy
Commissioner Eufracio D. Santos to Insular-Yebana Tobacco
Corporation allowing the latter to exclude the value-added tax
(VAT) in the determination of the gross selling price for purposes
of computing the ad valorem tax of its cigar and cigarette
products in accordance with Sec. 127 of the Tax Code as
amended by Executive Order No. 273 which provides as follows:
Sec. 127. Payment of excise taxes on domestic
products. — . . . . (b) Determination of gross
selling price of goods subject to ad valorem tax.
— Unless otherwise provided, the price, excluding
the value-added tax, at which the goods are sold
at wholesale in the place of production or through
their sales agents to the public shall constitute the
gross selling price.
The computation, pursuant to the ruling, is illustrated by
way of example thus —
P 44.00x1/1 = P 4.00 VAT
P 44.00 - P 4.00 = P 40.00 price
without VAT
P 40.00 x 15% = P 6.00 Ad
Valorem Tax
For the period 2 November 1990 to 22 January 1991
private respondent paid P3,905,348.85 ad valorem tax,
applying Sec. 127 (b) of the NIRC as interpreted by BIR
Ruling 473-88 by excluding the VAT in the determination
of the gross selling price.
Thereafter, on 11 February 1991, petitioner issued BIR Ruling
017-91 to Insular-Yebana Tobacco Corporation revoking BIR
Ruling 473-88 for being violative of Sec. 142 of the Tax Code. It
included back the VAT to the gross selling price in determining
the tax base for computing the ad valorem tax on cigarettes.
Cited as basis by petitioner is Sec. 142 of the Tax Code, as
amended by E.O. No. 273 —
Sec. 142. Cigar and cigarettes — . . . For
purposes of this section, manufacturer's or
importer's registered. wholesale price shall
include the ad valorem tax imposed in paragraphs
(a), (b), (c) or (d) hereof and the amount intended
to cover the value added tax imposed under Title
IV of this Code.
Petitioner sought to apply the revocation retroactively to private
respondent's removals of cigarettes for the period starting 2
November 1990 to 22 January 1991 on the ground that private
respondent allegedly acted in bad faith which is an exception to
the rule on non-retroactivity of BIR Rulings. 4
On appeal, the Court of Appeals affirmed the Court of Tax
Appeals holding that the retroactive application of BIR Ruling
017-91 cannot be allowed since private respondent did not act in
bad faith; private respondent's computation under BIR Ruling
473-88 was not shown to be motivated by ill will or dishonesty
partaking the nature of fraud; hence, this petition.
Petitioner imputes error to the Court of Appeals: (1) in failing to
consider that private respondent's reliance on BIR Ruling 473-88
being contrary to Sec. 142 of the Tax Code does not confer
vested rights to private respondent in the computation of its ad
valorem tax; (2) in failing to consider that good faith and prejudice
to the taxpayer in cases of reliance on a void BIR Ruling is
immaterial and irrelevant and does not place the government in
estoppel in collecting taxes legally due; (3) in holding that private
respondent acted in good faith in applying BIR Ruling 473-88;
and, (4) in failing to consider that the assessment of petitioner is
presumed to be regular and the claim for tax refund must be
strictly construed against private respondent for being in
derogation of sovereign authority.
Petitioner claims that the main issue before us is whether private
respondent's reliance on a void BIR ruling conferred upon the
latter a vested right to apply the same in the computation of its ad
valorem tax and claim for tax refund. Sec. 142 (d) of the Tax
Code, which provides for the inclusion of the VAT in the tax base
for purposes of computing the 15% ad valorem tax, is the
applicable law in the instant case as it specifically applies to the
manufacturer's wholesale price of cigar and cigarette products
and not Sec. 127 (b) of the Tax Code which applies in general to
the wholesale of goods or domestic products. Sec. 142 being a
specific provision applicable to cigar and cigarettes must perforce
prevail over Sec. 127 (b), a general provision of law insofar as the
imposition of the ad valorem tax on cigar and cigarettes is
concerned.5 Consequently, the application of Sec. 127 (b) to the
wholesale price of cigar and cigarette products for purposes of
computing the ad valorem tax is patently erroneous. Accordingly,
BIR Ruling 473-88 is void ab initio as it contravenes the express
provisions of Sec. 142 (d) of the Tax Code.6
Petitioner contends that BIR Ruling 473-88 being an erroneous
interpretation of Sec. 142 (b) of the Tax Code does not confer any
vested right to private respondent as to exempt it from the
retroactive application of BIR Ruling 017-91. Thus Art. 2254 of
the New Civil Code is explicit that "(n)o vested or acquired right
can arise from acts or omissions which are against the law . . .
"7 It is argued that the Court of Appeals erred in ruling that
retroactive application cannot be made since private respondent
acted in good faith. The following circumstances would show that
private respondent's reliance on BIR Ruling 473-88 was induced
by ill will: first, private respondent despite knowledge that Sec.
142 of the Tax Code was the specific provision applicable still
shifted its accounting method pursuant to Sec. 127 (b) of the Tax
Code; and, second, the shift in accounting method was made
without any prior consultation with the BIR.8
It is further contended by petitioner that claims for tax refund must
be construed against private respondent. A tax refund being in
the nature of a tax exemption is regarded as in derogation of the
sovereign authority and is strictly construed against private
respondent as the same partakes the nature of a tax exemption.
Tax exemptions cannot merely be implied but must be
categorically and unmistakably expressed.9
We cannot sustain petitioner. The deficiency tax assessment
issued by petitioner against private respondent is without legal
basis because of the prohibition against the retroactive
application of the revocation of BIR rulings in the absence of bad
faith on the part of private respondent.
The present dispute arose from the discrepancy in the taxable
base on which the excise tax is to apply on account of two
incongruous BIR Rulings: (1) BIR Ruling 473-88 dated 4 October
1988 which excluded the VAT from the tax base in computing the
fifteen percent (15%) excise tax due; and, (2) BIR Ruling 017-91
dated 11 February 1991 which included back the VAT in
computing the tax base for purposes of the fifteen percent (15%)
ad valorem tax.
The question as to the correct computation of the excise tax on
cigarettes in the case at bar has been sufficiently addressed by
BIR Ruling 017-91 dated 11 February 1991 which revoked BIR
Ruling 473-88 dated 4 October 1988 —
It is to be noted that Section 127 (b) of the Tax
Code as amended applies in general to domestic
products and excludes the value-added tax in the
determination of the gross selling price, which is
the tax base for purposes of the imposition of ad
valorem tax. On the other hand, the last
paragraph of Section 142 of the same Code which
includes the value-added tax in the computation
of the ad valorem tax, refers specifically to cigar
and cigarettes only. It does not include/apply to
any other articles or goods subject to the ad
valorem tax. Accordingly, Section 142 must
perforce prevail over Section 127 (b) which is a
 general provision of law insofar as the imposition
of the ad valorem tax on cigar and cigarettes is
concerned.
Moreover, the phrase unless otherwise
provided in Section 127 (b) purports of exceptions
to the general rule contained therein, such as that
of Section 142, last paragraph thereof which
explicitly provides that in the case of cigarettes,
the tax base for purposes of the ad valorem tax
shall include, among others, the value-added tax.
Private respondent did not question the correctness of the above
BIR ruling. In fact, upon knowledge of the effectivity of BIR Ruling
No. 017-91, private respondent immediately implemented the
method of computation mandated therein by restoring the VAT in
computing the tax base for purposes of the 15% ad valorem tax.
However, well-entrenched is the rule that rulings and circulars,
rules and regulations promulgated by the Commissioner of
Internal Revenue would have no retroactive application if to so
apply them would be prejudicial to the taxpayers. 10
The applicable law is Sec. 246 of the Tax Code which provides —
Sec. 246. Non-retroactivity of rulings. — Any
revocation, modification, or reversal of any rules
and regulations promulgated in accordance with
the preceding section or any of the rulings or
circulars promulgated by the Commissioner of
Internal Revenue 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; or c) where the
taxpayer acted in bad faith.
Without doubt, private respondent would be prejudiced by the
retroactive application of the revocation as it would be assessed
deficiency excise tax.
What is left to be resolved is petitioner's claim that private
respondent falls under the third exception in Sec. 246, i.e., that
the taxpayer has acted in bad faith.
Bad faith imports a dishonest purpose or some moral obliquity
and conscious doing of wrong. It partakes of the nature of fraud; a
breach of a known duty through some motive of interest or ill
will. 11 We find no convincing evidence that private respondent's
implementation of the computation mandated by BIR Ruling 473-
88 was ill-motivated or attended with a dishonest purpose. To the
contrary, as a sign of good faith, private respondent immediately
reverted to the computation mandated by BIR Ruling 017-91
upon knowledge of its issuance on 11 February 1991.
As regards petitioner's argument that private respondent should
have made consultations with it before private respondent used
the computation mandated by BIR Ruling 473-88, suffice it to
state that the aforesaid BIR Ruling was clear and categorical thus
leaving no room for interpretation. The failure of private
respondent to consult petitioner does not imply bad faith on the
part of the former.
Admittedly the government is not estopped from collecting taxes
legally due because of mistakes or errors of its agents. But like
other principles of law, this admits of exceptions in the interest of
justice and fair play, as where injustice will result to the
taxpayer. 12
WHEREFORE, there being no reversible error committed by EN BANC
respondent Court of Appeals, the petition is DENIED and
petitioner COMMISSIONER OF INTERNAL REVENUE is ordered G.R. No. 163653 July 19, 2011
to refund private respondent ALHAMBRA INDUSTRIES, INC., the
amount of P520,835.29 upon finality of this Decision. COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
SO ORDERED. FILINVEST DEVELOPMENT CORPORATION, Respondent.

Padilla, Kapunan and Hermosisima, Jr., JJ., concur. x - - - - - - - - - - - - - - - - - - - - - - -x

Separate Opinions G.R. No. 167689

VITUG, J., concurring: COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
I concur in the ponencia written by my esteemed colleague, Mr. FILINVEST DEVELOPMENT CORPORATION, Respondent.
Justice Josue N. Bellosillo. I only would like to stress that the
1988 opinion of the Commissioner of Internal Revenue cannot be DECISION
considered void, considering that it evinces what the former
Commissioner must have felt to be a real inconsistency between PEREZ, J.:
Section 127 and Section 142 of the Tax Code. The non-
retroactivity proscription under Section 246 of the Tax Code can
Assailed in these twin petitions for review on certiorari filed
thus aptly apply. I reserve my vote, however, in a situation where,
pursuant to Rule 45 of the 1997 Rules of Civil Procedure are the
as the Solicitor General so points out, the revoked ruling is
decisions rendered by the Court of Appeals (CA) in the following
patently null and void in which case it could possibly be
cases: (a) Decision dated 16 December 2003 of the then Special
disregarded as being in existent from the very beginning.
Fifth Division in CA-G.R. SP No. 72992;1 and, (b) Decision dated
26 January 2005 of the then Fourteenth Division in CA-G.R. SP
No. 74510.2

The Facts

The owner of 80% of the outstanding shares of respondent

Filinvest Alabang, Inc. (FAI), respondent Filinvest Development
Corporation (FDC) is a holding company which also owned
67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On
29 November 1996, FDC and FAI entered into a Deed of
Exchange with FLI whereby the former both transferred in favor of
the latter parcels of land appraised at ₱4,306,777,000.00. In
exchange for said parcels which were intended to facilitate
development of medium-rise residential and commercial
buildings, 463,094,301 shares of stock of FLI were issued to FDC
and FAI.3 As a result of the exchange, FLI’s ownership structure
was changed to the extent reflected in the following tabular
précis, viz.:
On 13 January 1997, FLI requested a ruling from the Bureau of
Internal Revenue (BIR) to the effect that no gain or loss should be
recognized in the aforesaid transfer of real properties. Acting on
the request, the BIR issued Ruling No. S-34-046-97 dated 3
February 1997, finding that the exchange is among those
contemplated under Section 34 (c) (2) of the old National Internal
Revenue Code (NIRC)4 which provides that "(n)o gain or loss
shall be recognized if property is transferred to a corporation by a
person in exchange for a stock in such corporation of which as a
result of such exchange said person, alone or together with
others, not exceeding four (4) persons, gains control of said
corporation."5 With the BIR’s reiteration of the foregoing ruling
upon the 10 February 1997 request for clarification filed by
FLI,6 the latter, together with FDC and FAI, complied with all the
requirements imposed in the ruling.7
On various dates during the years 1996 and 1997, in the
meantime, FDC also extended advances in favor of its affiliates,
namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and
Filinvest Capital, Inc. (FCI).8 Duly evidenced by instructional
letters as well as cash and journal vouchers, said cash advances
amounted to ₱2,557,213,942.60 in 19969 and ₱3,360,889,677.48
in 1997.10 On 15 November 1996, FDC also entered into a
Shareholders’ Agreement with Reco Herrera PTE Ltd. (RHPL) for
the formation of a Singapore-based joint venture company called
Filinvest Asia Corporation (FAC), tasked to develop and manage
FDC’s 50% ownership of its PBCom Office Tower Project (the
Project). With their equity participation in FAC respectively
pegged at 60% and 40% in the Shareholders’ Agreement, FDC
subscribed to ₱500.7 million worth of shares in said joint venture
company to RHPL’s subscription worth ₱433.8 million. Having
paid its subscription by executing a Deed of Assignment
transferring to FAC a portion of its rights and interest in the
Project worth ₱500.7 million, FDC eventually reported a net loss
of ₱190,695,061.00 in its Annual Income Tax Return for the
taxable year 1996.11
On 3 January 2000, FDC received from the BIR a Formal Notice
of Demand to pay deficiency income and documentary stamp
taxes, plus interests and compromise penalties,12 covered by the
following Assessment Notices, viz.: (a) Assessment Notice No.
SP-INC-96-00018-2000 for deficiency income taxes in the sum of
₱150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-
96-00020-2000 for deficiency documentary stamp taxes in the
sum of ₱10,425,487.06 for 1996; (c) Assessment Notice No. SP-
INC-97-00019-2000 for deficiency income taxes in the sum of
₱5,716,927.03 for 1997; and (d) Assessment Notice No. SP-DST-
97-00021-2000 for deficiency documentary stamp taxes in the
sum of ₱5,796,699.40 for 1997.13 The foregoing deficiency taxes
were assessed on the taxable gain supposedly realized by FDC
from the Deed of Exchange it executed with FAI and FLI, on the
dilution resulting from the Shareholders’ Agreement FDC
executed with RHPL as well as the "arm’s-length" interest rate
and documentary stamp taxes imposable on the advances FDC
extended to its affiliates.14
On 3 January 2000, FAI similarly received from the BIR a Formal
Letter of Demand for deficiency income taxes in the sum of
₱1,477,494,638.23 for the year 1997.15 Covered by Assessment
Notice No. SP-INC-97-0027-2000,16said deficiency tax was also
assessed on the taxable gain purportedly realized by FAI from the
Deed of Exchange it executed with FDC and FLI.17 On 26
January 2000 or within the reglementary period of thirty (30) days
from notice of the assessment, both FDC and FAI filed their
respective requests for reconsideration/protest, on the ground
that the deficiency income and documentary stamp taxes
assessed by the BIR were bereft of factual and legal
basis.18Having submitted the relevant supporting documents
pursuant to the 31 January 2000 directive from the BIR Appellate
Division, FDC and FAI filed on 11 September 2000 a letter
requesting an early resolution of their request for
reconsideration/protest on the ground that the 180 days
prescribed for the resolution thereof under Section 228 of the
NIRC was going to expire on 20 September 2000.19
In view of the failure of petitioner Commissioner of Internal
Revenue (CIR) to resolve their request for reconsideration/protest
within the aforesaid period, FDC and FAI filed on 17 October
2000 a petition for review with the Court of Tax Appeals (CTA)
pursuant to Section 228 of the 1997 NIRC. Docketed before said
court as CTA Case No. 6182, the petition alleged, among other
matters, that as previously opined in BIR Ruling No. S-34-046-97,
no taxable gain should have been assessed from the subject
Deed of Exchange since FDC and FAI collectively gained further
control of FLI as a consequence of the exchange; that correlative
to the CIR's lack of authority to impute theoretical interests on the
cash advances FDC extended in favor of its affiliates, the rule is
settled that interests cannot be demanded in the absence of a
stipulation to the effect; that not being promissory notes or
certificates of obligations, the instructional letters as well as the
cash and journal vouchers evidencing said cash advances were
not subject to documentary stamp taxes; and, that no income tax
may be imposed on the prospective gain from the supposed
appreciation of FDC's shareholdings in FAC. As a consequence,
FDC and FAC both prayed that the subject assessments for
deficiency income and documentary stamp taxes for the years
1996 and 1997 be cancelled and annulled.20
On 4 December 2000, the CIR filed its answer, claiming that the
transfer of property in question should not be considered tax free
since, with the resultant diminution of its shares in FLI, FDC did
not gain further control of said corporation. Likewise calling
attention to the fact that the cash advances FDC extended to its
affiliates were interest free despite the interest bearing loans it
obtained from banking institutions, the CIR invoked Section 43 of
the old NIRC which, as implemented by Revenue Regulations
No. 2, Section 179 (b) and (c), gave him "the power to allocate,
distribute or apportion income or deductions between or among
such organizations, trades or business in order to prevent
evasion of taxes." The CIR justified the imposition of
documentary stamp taxes on the instructional letters as well as
cash and journal vouchers for said cash advances on the strength
of Section 180 of the NIRC and Revenue Regulations No. 9-94
which provide that loan transactions are subject to said tax
irrespective of whether or not they are evidenced by a formal
agreement or by mere office memo. The CIR also argued that
FDC realized taxable gain arising from the dilution of its shares in
FAC as a result of its Shareholders' Agreement with RHPL.21
At the pre-trial conference, the parties filed a Stipulation of Facts,
Documents and Issues22 which was admitted in the 16 February
2001 resolution issued by the CTA. With the further admission of
the Formal Offer of Documentary Evidence subsequently filed by
FDC and FAI23 and the conclusion of the testimony of Susana
Macabelda anent the cash advances FDC extended in favor of its
affiliates,24 the CTA went on to render the Decision dated 10
September 2002 which, with the exception of the deficiency
income tax on the interest income FDC supposedly realized from
the advances it extended in favor of its affiliates, cancelled the
rest of deficiency income and documentary stamp taxes
assessed against FDC and FAI for the years 1996 and
1997,25 thus:
WHEREFORE, in view of all the foregoing, the court finds the
instant petition partly meritorious. Accordingly, Assessment
Notice No. SP-INC-96-00018-2000 imposing deficiency income
tax on FDC for taxable year 1996, Assessment Notice No. SP-
DST-96-00020-2000 and SP-DST-97-00021-2000 imposing
deficiency documentary stamp tax on FDC for taxable years 1996
and 1997, respectively and Assessment Notice No. SP-INC-97-
0027-2000 imposing deficiency income tax on FAI for the taxable
year 1997 are hereby CANCELLED and SET ASIDE. However,
[FDC] is hereby ORDERED to PAY the amount of ₱5,691,972.03
as deficiency income tax for taxable year 1997. In addition,
petitioner is also ORDERED to PAY 20% delinquency interest
computed from February 16, 2000 until full payment thereof
pursuant to Section 249 (c) (3) of the Tax Code.26
Finding that the collective increase of the equity participation of
FDC and FAI in FLI rendered the gain derived from the exchange
tax-free, the CTA also ruled that the increase in the value of
FDC's shares in FAC did not result in economic advantage in the
absence of actual sale or conversion thereof. While likewise
finding that the documents evidencing the cash advances FDC
extended to its affiliates cannot be considered as loan
agreements that are subject to documentary stamp tax, the CTA
enunciated, however, that the CIR was justified in assessing
undeclared interests on the same cash advances pursuant to his
authority under Section 43 of the NIRC in order to forestall tax
evasion. For persuasive effect, the CTA referred to the equivalent
provision in the Internal Revenue Code of the United States (IRC-
US), i.e., Sec. 482, as implemented by Section 1.482-2 of 1965-
1969 Regulations of the Law of Federal Income Taxation.27
Dissatisfied with the foregoing decision, FDC filed on 5 November
2002 the petition for review docketed before the CA as CA-G.R.
No. 72992, pursuant to Rule 43 of the 1997 Rules of Civil
Procedure. Calling attention to the fact that the cash advances it
extended to its affiliates were interest-free in the absence of the
express stipulation on interest required under Article 1956 of the
Civil Code, FDC questioned the imposition of an arm's-length
interest rate thereon on the ground, among others, that the CIR's
authority under Section 43 of the NIRC: (a) does not include the
power to impute imaginary interest on said transactions; (b) is
directed only against controlled taxpayers and not against mother
or holding corporations; and, (c) can only be invoked in cases of
understatement of taxable net income or evident tax
evasion.28 Upholding FDC's position, the CA's then Special Fifth
Division rendered the herein assailed decision dated 16
December 2003,29 the decretal portion of which states:
WHEREFORE, premises considered, the instant petition is
hereby GRANTED. The assailed Decision dated September 10,
2002 rendered by the Court of Tax Appeals in CTA Case No.
6182 directing petitioner Filinvest Development Corporation to
pay the amount of ₱5,691,972.03 representing deficiency income
tax on allegedly undeclared interest income for the taxable year
1997, plus 20% delinquency interest computed from February 16,
2000 until full payment thereof is REVERSED and SET ASIDE
and, a new one entered annulling Assessment Notice No. SP-
INC-97-00019-2000 imposing deficiency income tax on petitioner
for taxable year 1997. No pronouncement as to costs.30
With the denial of its partial motion for reconsideration of the
same 11 December 2002 resolution issued by the CTA,31 the CIR
also filed the petition for review docketed before the CA as CA-
G.R. No. 74510. In essence, the CIR argued that the CTA
reversibly erred in cancelling the assessment notices: (a) for
deficiency income taxes on the exchange of property between
FDC, FAI and FLI; (b) for deficiency documentary stamp taxes on
the documents evidencing FDC's cash advances to its affiliates;
and (c) for deficiency income tax on the gain FDC purportedly
realized from the increase of the value of its shareholdings in
FAC.32 The foregoing petition was, however, denied due course
and dismissed for lack of merit in the herein assailed decision
dated 26 January 200533 rendered by the CA's then Fourteenth
Division, upon the following findings and conclusions, to wit:
1. As affirmed in the 3 February 1997 BIR Ruling No. S-
34-046-97, the 29 November 1996 Deed of Exchange
resulted in the combined control by FDC and FAI of more
than 51% of the outstanding shares of FLI, hence, no
taxable gain can be recognized from the transaction
under Section 34 (c) (2) of the old NIRC;
2. The instructional letters as well as the cash and journal
vouchers evidencing the advances FDC extended to its
affiliates are not subject to documentary stamp taxes
pursuant to BIR Ruling No. 116-98, dated 30 July 1998,
since they do not partake the nature of loan agreements;
3. Although BIR Ruling No. 116-98 had been
subsequently modified by BIR Ruling No. 108-99, dated
15 July 1999, to the effect that documentary stamp taxes
are imposable on inter-office memos evidencing cash
advances similar to those extended by FDC, said latter
ruling cannot be given retroactive application if to do so
would be prejudicial to the taxpayer;
4. FDC's alleged gain from the increase of its
shareholdings in FAC as a consequence of the
Shareholders' Agreement it executed with RHPL cannot
be considered taxable income since, until actually
converted thru sale or disposition of said shares, they
merely represent unrealized increase in capital.34
Respectively docketed before this Court as G.R. Nos. 163653
and 167689, the CIR's petitions for review on certiorari assailing
the 16 December 2003 decision in CA-G.R. No. 72992 and the 26
January 2005 decision in CA-G.R. SP No. 74510 were
consolidated pursuant to the 1 March 2006 resolution issued by
this Court’s Third Division.
The Issues
In G.R. No. 163653, the CIR urges the grant of its petition on the
following ground:
THE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE COURT OF TAX APPEALS AND IN
HOLDING THAT THE ADVANCES EXTENDED BY
RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO
INCOME TAX.35
In G.R. No. 167689, on the other hand, petitioner proffers the
following issues for resolution:
I
THE HONORABLE COURT OF APPEALS COMMITTED
GRAVE ABUSE OF DISCRETION IN HOLDING THAT
THE EXCHANGE OF SHARES OF STOCK FOR
PROPERTY AMONG FILINVEST DEVELOPMENT
CORPORATION (FDC), FILINVEST ALABANG,
INCORPORATED (FAI) AND FILINVEST LAND
INCORPORATED (FLI) MET ALL THE REQUIREMENTS
FOR THE NON-RECOGNITION OF TAXABLE GAIN
UNDER SECTION 34 (c) (2) OF THE OLD NATIONAL
INTERNAL REVENUE CODE (NIRC) (NOW SECTION
40 (C) (2) (c) OF THE NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN HOLDING THAT THE
LETTERS OF INSTRUCTION OR CASH VOUCHERS
EXTENDED BY FDC TO ITS AFFILIATES ARE NOT
DEEMED LOAN AGREEMENTS SUBJECT TO
DOCUMENTARY STAMP TAXES UNDER SECTION 180
OF THE NIRC.
 III
THE HONORABLE COURT OF APPEALS GRAVELY
ERRED IN HOLDING THAT GAIN ON DILUTION AS A
RESULT OF THE INCREASE IN THE VALUE OF FDC’S
SHAREHOLDINGS IN FAC IS NOT TAXABLE.36
The Court’s Ruling
While the petition in G.R. No. 163653 is bereft of merit, we find
the CIR’s petition in G.R. No. 167689 impressed with partial
merit.
In G.R. No. 163653, the CIR argues that the CA erred in
reversing the CTA’s finding that theoretical interests can be
imputed on the advances FDC extended to its affiliates in 1996
and 1997 considering that, for said purpose, FDC resorted to
interest-bearing fund borrowings from commercial banks. Since
considerable interest expenses were deducted by FDC when said
funds were borrowed, the CIR theorizes that interest income
should likewise be declared when the same funds were sourced
for the advances FDC extended to its affiliates. Invoking Section
43 of the 1993 NIRC in relation to Section 179(b) of Revenue
Regulation No. 2, the CIR maintains that it is vested with the
power to allocate, distribute or apportion income or deductions
between or among controlled organizations, trades or businesses
even in the absence of fraud, since said power is intended "to
prevent evasion of taxes or clearly to reflect the income of any
such organizations, trades or businesses." In addition, the CIR
asseverates that the CA should have accorded weight and
respect to the findings of the CTA which, as the specialized court
dedicated to the study and consideration of tax matters, can take
judicial notice of US income tax laws and regulations.37
Admittedly, Section 43 of the 1993 NIRC38 provides that, "(i)n any
case of two or more organizations, trades or businesses (whether
or not incorporated and whether or not organized in the
Philippines) owned or controlled directly or indirectly by the same
interests, the Commissioner of Internal Revenue is authorized to
distribute, apportion or allocate gross income or deductions
between or among such organization, trade or business, if he
determines that such distribution, apportionment or allocation is
necessary in order to prevent evasion of taxes or clearly to reflect
the income of any such organization, trade or business." In
amplification of the equivalent provision39 under Commonwealth
Act No. 466,40 Sec. 179(b) of Revenue Regulation No. 2 states as
follows:
Determination of the taxable net income of controlled taxpayer. –
(A) DEFINITIONS. – When used in this section –
(1) The term "organization" includes any kind,
whether it be a sole proprietorship, a partnership,
a trust, an estate, or a corporation or association,
irrespective of the place where organized, where
operated, or where its trade or business is
conducted, and regardless of whether domestic or
foreign, whether exempt or taxable, or whether
affiliated or not.
(2) The terms "trade" or "business" include any
trade or business activity of any kind, regardless
of whether or where organized, whether owned
individually or otherwise, and regardless of the
place where carried on.
(3) The term "controlled" includes any kind of
control, direct or indirect, whether legally
enforceable, and however exercisable or
exercised. It is the reality of the control which is
decisive, not its form or mode of exercise. A
presumption of control arises if income or
deductions have been arbitrarily shifted.
 (4) The term "controlled taxpayer" means any one
of two or more organizations, trades, or
businesses owned or controlled directly or
indirectly by the same interests.
(5) The term "group" and "group of controlled
taxpayers" means the organizations, trades or
businesses owned or controlled by the same
interests.
(6) The term "true net income" means, in the case
of a controlled taxpayer, the net income (or as the
case may be, any item or element affecting net
income) which would have resulted to the
controlled taxpayer, had it in the conduct of its
affairs (or, as the case may be, any item or
element affecting net income) which would have
resulted to the controlled taxpayer, had it in the
conduct of its affairs (or, as the case may be, in
the particular contract, transaction, arrangement
or other act) dealt with the other members or
members of the group at arm’s length. It does not
mean the income, the deductions, or the item or
element of either, resulting to the controlled
taxpayer by reason of the particular contract,
transaction, or arrangement, the controlled
taxpayer, or the interest controlling it, chose to
make (even though such contract, transaction, or
arrangement be legally binding upon the parties
thereto).
(B) SCOPE AND PURPOSE. - The purpose of Section 44
of the Tax Code is to place a controlled taxpayer on a tax
parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer, the
true net income from the property and business of a
controlled taxpayer. The interests controlling a group of
controlled taxpayer are assumed to have complete power
to cause each controlled taxpayer so to conduct its affairs
that its transactions and accounting records truly reflect
the net income from the property and business of each of
the controlled taxpayers. If, however, this has not been
done and the taxable net income are thereby understated,
the statute contemplates that the Commissioner of
Internal Revenue shall intervene, and, by making such
distributions, apportionments, or allocations as he may
deem necessary of gross income or deductions, or of any
item or element affecting net income, between or among
the controlled taxpayers constituting the group, shall
determine the true net income of each controlled
taxpayer. The standard to be applied in every case is that
of an uncontrolled taxpayer. Section 44 grants no right to
a controlled taxpayer to apply its provisions at will, nor
does it grant any right to compel the Commissioner of
Internal Revenue to apply its provisions.
(C) APPLICATION – Transactions between controlled
taxpayer and another will be subjected to special scrutiny
to ascertain whether the common control is being used to
reduce, avoid or escape taxes. In determining the true net
income of a controlled taxpayer, the Commissioner of
Internal Revenue is not restricted to the case of improper
accounting, to the case of a fraudulent, colorable, or
sham transaction, or to the case of a device designed to
reduce or avoid tax by shifting or distorting income or
deductions. The authority to determine true net income
extends to any case in which either by inadvertence or
design the taxable net income in whole or in part, of a
controlled taxpayer, is other than it would have been had
the taxpayer in the conduct of his affairs been an
uncontrolled taxpayer dealing at arm’s length with another
uncontrolled taxpayer.41
As may be gleaned from the definitions of the terms "controlled"
and "controlled taxpayer" under paragraphs (a) (3) and (4) of the
foregoing provision, it would appear that FDC and its affiliates
come within the purview of Section 43 of the 1993 NIRC. Aside
from owning significant portions of the shares of stock of FLI, FAI,
DSCC and FCI, the fact that FDC extended substantial sums of
money as cash advances to its said affiliates for the purpose of
providing them financial assistance for their operational and
capital expenditures seemingly indicate that the situation sought
to be addressed by the subject provision exists. From the tenor of
paragraph (c) of Section 179 of Revenue Regulation No. 2, it may
also be seen that the CIR's power to distribute, apportion or
allocate gross income or deductions between or among controlled
taxpayers may be likewise exercised whether or not fraud inheres
in the transaction/s under scrutiny. For as long as the controlled
taxpayer's taxable income is not reflective of that which it would
have realized had it been dealing at arm's length with an
uncontrolled taxpayer, the CIR can make the necessary
rectifications in order to prevent evasion of taxes.
Despite the broad parameters provided, however, we find that the
CIR's powers of distribution, apportionment or allocation of gross
income and deductions under Section 43 of the 1993 NIRC and
Section 179 of Revenue Regulation No. 2 does not include the
power to impute "theoretical interests" to the controlled taxpayer's
transactions. Pursuant to Section 28 of the 1993 NIRC,42 after all,
the term "gross income" is understood to mean all income from
whatever source derived, including, but not limited to the following
items: compensation for services, including fees, commissions,
and similar items; gross income derived from business; gains
derived from dealings in property;" interest; rents; royalties;
dividends; annuities; prizes and winnings; pensions; and partner’s
distributive share of the gross income of general professional
partnership.43 While it has been held that the phrase "from
whatever source derived" indicates a legislative policy to include
all income not expressly exempted within the class of taxable
income under our laws, the term "income" has been variously
interpreted to mean "cash received or its equivalent", "the amount
of money coming to a person within a specific time" or "something
distinct from principal or capital."44 Otherwise stated, there must
be proof of the actual or, at the very least, probable receipt or
realization by the controlled taxpayer of the item of gross income
sought to be distributed, apportioned or allocated by the CIR.
Our circumspect perusal of the record yielded no evidence of
actual or possible showing that the advances FDC extended to its
affiliates had resulted to the interests subsequently assessed by
the CIR. For all its harping upon the supposed fact that FDC had
resorted to borrowings from commercial banks, the CIR had
adduced no concrete proof that said funds were, indeed, the
source of the advances the former provided its affiliates. While
admitting that FDC obtained interest-bearing loans from
commercial banks,45 Susan Macabelda - FDC's Funds
Management Department Manager who was the sole witness
presented before the CTA - clarified that the subject advances
were sourced from the corporation's rights offering in 1995 as
well as the sale of its investment in Bonifacio Land in
1997.46 More significantly, said witness testified that said
advances: (a) were extended to give FLI, FAI, DSCC and FCI
financial assistance for their operational and capital expenditures;
and, (b) were all temporarily in nature since they were repaid
within the duration of one week to three months and were
evidenced by mere journal entries, cash vouchers and
instructional letters."47
Even if we were, therefore, to accord precipitate credulity to the
CIR's bare assertion that FDC had deducted substantial interest
expense from its gross income, there would still be no factual
basis for the imputation of theoretical interests on the subject
advances and assess deficiency income taxes thereon. More so,
when it is borne in mind that, pursuant to Article 1956 of the Civil
Code of the Philippines, no interest shall be due unless it has
been expressly stipulated in writing. Considering that taxes, being
burdens, are not to be presumed beyond what the applicable
statute expressly and clearly declares,48 the rule is likewise
settled that tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer.49 Accordingly,
the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by
implication.50 While it is true that taxes are the lifeblood of the
government, it has been held that their assessment and collection
should be in accordance with law as any arbitrariness will negate
the very reason for government itself.51
In G.R. No. 167689, we also find a dearth of merit in the CIR's
insistence on the imposition of deficiency income taxes on the
transfer FDC and FAI effected in exchange for the shares of stock
of FLI. With respect to the Deed of Exchange executed between
FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently
provides as follows:
Sec. 34. Determination of amount of and recognition of gain or
loss.-
xxxx
(c) Exception – x x x x
No gain or loss shall also be recognized if property is transferred
to a corporation by a person in exchange for shares of stock in
such corporation of which as a result of such exchange said
person, alone or together with others, not exceeding four
persons, gains control of said corporation; Provided, That stocks
issued for services shall not be considered as issued in return of
property.
As even admitted in the 14 February 2001 Stipulation of Facts
submitted by the parties,52 the requisites for the non-recognition
of gain or loss under the foregoing provision are as follows: (a)
the transferee is a corporation; (b) the transferee exchanges its
shares of stock for property/ies of the transferor; (c) the transfer is
made by a person, acting alone or together with others, not
exceeding four persons; and, (d) as a result of the exchange the
transferor, alone or together with others, not exceeding four,
gains control of the transferee.53 Acting on the 13 January 1997
request filed by FLI, the BIR had, in fact, acknowledged the
concurrence of the foregoing requisites in the Deed of Exchange
the former executed with FDC and FAI by issuing BIR Ruling No.
S-34-046-97.54 With the BIR's reiteration of said ruling upon the
request for clarification filed by FLI,55 there is also no dispute that
said transferee and transferors subsequently complied with the
requirements provided for the non-recognition of gain or loss from
the exchange of property for tax, as provided under Section 34 (c)
(2) of the 1993 NIRC.56
Then as now, the CIR argues that taxable gain should be
recognized for the exchange considering that FDC's controlling
interest in FLI was actually decreased as a result thereof. For
said purpose, the CIR calls attention to the fact that, prior to the
exchange, FDC owned 2,537,358,000 or 67.42% of FLI's
3,763,535,000 outstanding capital stock. Upon the issuance of
443,094,000 additional FLI shares as a consequence of the
exchange and with only 42,217,000 thereof accruing in favor of
FDC for a total of 2,579,575,000 shares, said corporation’s
controlling interest was supposedly reduced to 61%.03 when
reckoned from the transferee's aggregate 4,226,629,000
outstanding shares. Without owning a share from FLI's initial
3,763,535,000 outstanding shares, on the other hand, FAI's
acquisition of 420,877,000 FLI shares as a result of the exchange
purportedly resulted in its control of only 9.96% of said transferee
corporation's 4,226,629,000 outstanding shares. On the principle
that the transaction did not qualify as a tax-free exchange under
Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that
taxable gain in the sum of ₱263,386,921.00 should be recognized
on the part of FDC and in the sum of ₱3,088,711,367.00 on the
part of FAI.57
The paucity of merit in the CIR's position is, however, evident
from the categorical language of Section 34 (c) (2) of the 1993
NIRC which provides that gain or loss will not be recognized in
case the exchange of property for stocks results in the control of
the transferee by the transferor, alone or with other transferors
not exceeding four persons. Rather than isolating the same as
proposed by the CIR, FDC's 2,579,575,000 shares or 61.03%
control of FLI's 4,226,629,000 outstanding shares should,
therefore, be appreciated in combination with the 420,877,000
new shares issued to FAI which represents 9.96% control of said
transferee corporation. Together FDC's 2,579,575,000 shares
(61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to
3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares.
Since the term "control" is clearly defined as "ownership of stocks
in a corporation possessing at least fifty-one percent of the total
voting power of classes of stocks entitled to one vote" under
Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of property
for stocks between FDC FAI and FLI clearly qualify as a tax-free
transaction under paragraph 34 (c) (2) of the same provision.
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the
CIR cites then Supreme Court Justice Jose Vitug and CTA
Justice Ernesto D. Acosta who, in their book Tax Law and
Jurisprudence, opined that said provision could be inapplicable if
control is already vested in the exchangor prior to
exchange.58 Aside from the fact that that the 10 September 2002
Decision in CTA Case No. 6182 upholding the tax-exempt status
of the exchange between FDC, FAI and FLI was penned by no
less than Justice Acosta himself,59 FDC and FAI significantly point
out that said authors have acknowledged that the position taken
by the BIR is to the effect that "the law would apply even when
the exchangor already has control of the corporation at the time
of the exchange."60 This was confirmed when, apprised in FLI's
request for clarification about the change of percentage of
ownership of its outstanding capital stock, the BIR opined as
follows:
Please be informed that regardless of the foregoing, the
transferors, Filinvest Development Corp. and Filinvest Alabang,
Inc. still gained control of Filinvest Land, Inc. The term 'control'
shall mean ownership of stocks in a corporation by possessing at
least 51% of the total voting power of all classes of stocks entitled
to vote. Control is determined by the amount of stocks received,
i.e., total subscribed, whether for property or for services by the
transferor or transferors. In determining the 51% stock ownership,
only those persons who transferred property for stocks in the
same transaction may be counted up to the maximum of five (BIR
Ruling No. 547-93 dated December 29, 1993.61
At any rate, it also appears that the supposed reduction of FDC's
shares in FLI posited by the CIR is more apparent than real. As
the uncontested owner of 80% of the outstanding shares of FAI, it
cannot be gainsaid that FDC ideally controls the same
percentage of the 420,877,000 shares issued to its said co-
transferor which, by itself, represents 7.968% of the outstanding
shares of FLI. Considered alongside FDC's 61.03% control of FLI
as a consequence of the 29 November 1996 Deed of Transfer,
said 7.968% add up to an aggregate of 68.998% of said
transferee corporation's outstanding shares of stock which is
evidently still greater than the 67.42% FDC initially held prior to
the exchange. This much was admitted by the parties in the 14
February 2001 Stipulation of Facts, Documents and Issues they
submitted to the CTA.62 Inasmuch as the combined ownership of
FDC and FAI of FLI's outstanding capital stock adds up to a total
of 70.99%, it stands to reason that neither of said transferors can
be held liable for deficiency income taxes the CIR assessed on
the supposed gain which resulted from the subject transfer.
On the other hand, insofar as documentary stamp taxes on loan
agreements and promissory notes are concerned, Section 180 of
the NIRC provides follows:
Sec. 180. Stamp tax on all loan agreements, promissory notes,
bills of exchange, drafts, instruments and securities issued by the
government or any of its instrumentalities, certificates of deposit
bearing interest and others not payable on sight or demand. – On
all loan agreements signed abroad wherein the object of the
contract is located or used in the Philippines; bill of exchange
(between points within the Philippines), drafts, instruments and
securities issued by the Government or any of its instrumentalities
or certificates of deposits drawing interest, or orders for the
payment of any sum of money otherwise than at sight or on
demand, or on all promissory notes, whether negotiable or non-
negotiable, except bank notes issued for circulation, and on each
renewal of any such note, there shall be collected a documentary
stamp tax of Thirty centavos (₱0.30) on each two hundred pesos,
or fractional part thereof, of the face value of any such
agreement, bill of exchange, draft, certificate of deposit or note:
Provided, That only one documentary stamp tax shall be imposed
on either loan agreement, or promissory notes issued to secure
such loan, whichever will yield a higher tax: Provided however,
That loan agreements or promissory notes the aggregate of
which does not exceed Two hundred fifty thousand pesos
(₱250,000.00) executed by an individual for his purchase on
installment for his personal use or that of his family and not for
business, resale, barter or hire of a house, lot, motor vehicle,
appliance or furniture shall be exempt from the payment of
documentary stamp tax provided under this Section.
When read in conjunction with Section 173 of the 1993
NIRC,63 the foregoing provision concededly applies to "(a)ll loan
agreements, whether made or signed in the Philippines, or
abroad when the obligation or right arises from Philippine sources
or the property or object of the contract is located or used in the
Philippines." Correlatively, Section 3 (b) and Section 6 of
Revenue Regulations No. 9-94 provide as follows:
Section 3. Definition of Terms. – For purposes of these
Regulations, the following term shall mean:
(b) 'Loan agreement' – refers to a contract in writing where one of
the parties delivers to another money or other consumable thing,
upon the condition that the same amount of the same kind and
quality shall be paid. The term shall include credit facilities, which
may be evidenced by credit memo, advice or drawings.
The terms 'Loan Agreement" under Section 180 and "Mortgage'
under Section 195, both of the Tax Code, as amended, generally
refer to distinct and separate instruments. A loan agreement shall
be taxed under Section 180, while a deed of mortgage shall be
taxed under Section 195."
"Section 6. Stamp on all Loan Agreements. – All loan agreements
whether made or signed in the Philippines, or abroad when the
obligation or right arises from Philippine sources or the property
or object of the contract is located in the Philippines shall be
subject to the documentary stamp tax of thirty centavos (₱0.30)
on each two hundred pesos, or fractional part thereof, of the face
value of any such agreements, pursuant to Section 180 in relation
to Section 173 of the Tax Code.
In cases where no formal agreements or promissory notes have
been executed to cover credit facilities, the documentary stamp
tax shall be based on the amount of drawings or availment of the
facilities, which may be evidenced by credit/debit memo, advice
or drawings by any form of check or withdrawal slip, under
Section 180 of the Tax Code.
Applying the aforesaid provisions to the case at bench, we find
that the instructional letters as well as the journal and cash
vouchers evidencing the advances FDC extended to its affiliates
in 1996 and 1997 qualified as loan agreements upon which
documentary stamp taxes may be imposed. In keeping with the
caveat attendant to every BIR Ruling to the effect that it is valid
only if the facts claimed by the taxpayer are correct, we find that
the CA reversibly erred in utilizing BIR Ruling No. 116-98, dated
30 July 1998 which, strictly speaking, could be invoked only by
ASB Development Corporation, the taxpayer who sought the
same. In said ruling, the CIR opined that documents like those
evidencing the advances FDC extended to its affiliates are not
subject to documentary stamp tax, to wit:
On the matter of whether or not the inter-office memo covering
the advances granted by an affiliate company is subject to
documentary stamp tax, it is informed that nothing in Regulations
No. 26 (Documentary Stamp Tax Regulations) and Revenue
Regulations No. 9-94 states that the same is subject to
documentary stamp tax. Such being the case, said inter-office
memo evidencing the lendings or borrowings which is neither a
form of promissory note nor a certificate of indebtedness issued
by the corporation-affiliate or a certificate of obligation, which are,
more or less, categorized as 'securities', is not subject to
documentary stamp tax imposed under Section 180, 174 and 175
of the Tax Code of 1997, respectively. Rather, the inter-office
memo is being prepared for accounting purposes only in order to
avoid the co-mingling of funds of the corporate affiliates. 1av vphi1
In its appeal before the CA, the CIR argued that the foregoing
ruling was later modified in BIR Ruling No. 108-99 dated 15 July
1999, which opined that inter-office memos evidencing lendings
or borrowings extended by a corporation to its affiliates are akin
to promissory notes, hence, subject to documentary stamp
taxes.64 In brushing aside the foregoing argument, however, the
CA applied Section 246 of the 1993 NIRC65 from which proceeds
the settled principle that rulings, circulars, rules and regulations
promulgated by the BIR have no retroactive application if to so
apply them would be prejudicial to the taxpayers.66 Admittedly,
this rule does not apply: (a) where the taxpayer deliberately
misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; (b)
where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which the ruling
is based; or (c) where the taxpayer acted in bad faith.67 Not being
the taxpayer who, in the first instance, sought a ruling from the
CIR, however, FDC cannot invoke the foregoing principle on non-
retroactivity of BIR rulings.
Viewed in the light of the foregoing considerations, we find that
both the CTA and the CA erred in invalidating the assessments
issued by the CIR for the deficiency documentary stamp taxes
due on the instructional letters as well as the journal and cash
vouchers evidencing the advances FDC extended to its affiliates
in 1996 and 1997. In Assessment Notice No. SP-DST-96-00020-
2000, the CIR correctly assessed the sum of ₱6,400,693.62 for
documentary stamp tax, ₱3,999,793.44 in interests and
₱25,000.00 as compromise penalty, for a total of ₱10,425,487.06.
Alongside the sum of ₱4,050,599.62 for documentary stamp tax,
the CIR similarly assessed ₱1,721,099.78 in interests and
₱25,000.00 as compromise penalty in Assessment Notice No.
SP-DST-97-00021-2000 or a total of ₱5,796,699.40. The
imposition of deficiency interest is justified under Sec. 249 (a) and
(b) of the NIRC which authorizes the assessment of the same "at
the rate of twenty percent (20%), or such higher rate as may be
prescribed by regulations", from the date prescribed for the
payment of the unpaid amount of tax until full payment.68 The
imposition of the compromise penalty is, in turn, warranted under
Sec. 25069 of the NIRC which prescribes the imposition thereof "in
case of each failure to file an information or return, statement or
list, or keep any record or supply any information required" on the
date prescribed therefor.
To our mind, no reversible error can, finally, be imputed against
both the CTA and the CA for invalidating the Assessment Notice
issued by the CIR for the deficiency income taxes FDC is
supposed to have incurred as a consequence of the dilution of its
shares in FAC. Anent FDC’s Shareholders’ Agreement with
RHPL, the record shows that the parties were in agreement about
the following factual antecedents narrated in the 14 February
2001 Stipulation of Facts, Documents and Issues they submitted
before the CTA,70 viz.:
"1.11. On November 15, 1996, FDC entered into a
Shareholders’ Agreement (‘SA’) with Reco Herrera Pte.
Ltd. (‘RHPL’) for the formation of a joint venture company
named Filinvest Asia Corporation (‘FAC’) which is based
in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7,
Answer).
1.12. FAC, the joint venture company formed by FDC and
RHPL, is tasked to develop and manage the 50%
ownership interest of FDC in its PBCom Office Tower
Project (‘Project’) with the Philippine Bank of
Communications (par. 6.12, Petition; par. 7, Answer).
 1.13. Pursuant to the SA between FDC and RHPL, the
equity participation of FDC and RHPL in FAC was 60%
and 40% respectively.
1.14. In accordance with the terms of the SA, FDC
subscribed to ₱500.7 million worth of shares of stock
representing a 60% equity participation in FAC. In turn,
RHPL subscribed to ₱433.8 million worth of shares of
stock of FAC representing a 40% equity participation in
FAC.
1.15. In payment of its subscription in FAC, FDC
executed a Deed of Assignment transferring to FAC a
portion of FDC’s right and interests in the Project to the
extent of ₱500.7 million.
increase in the value of FDC's shareholdings in FAC until the
same is actually sold at a profit.
WHEREFORE, premises considered, the CIR's petition for review
on certiorari in G.R. No. 163653 is DENIED for lack of merit and
the CA’s 16 December 2003 Decision in G.R. No. 72992 is
AFFIRMED in toto. The CIR’s petition in G.R. No. 167689 is
PARTIALLY GRANTED and the CA’s 26 January 2005 Decision
in CA-G.R. SP No. 74510 is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000
and SP-DST-97-00021-2000 issued for deficiency documentary
stamp taxes due on the instructional letters as well as journal and
cash vouchers evidencing the advances FDC extended to its
affiliates are declared valid.

1.16. FDC reported a net loss of ₱190,695,061.00 in its The cancellation of Assessment Notices Nos. SP-INC-96-00018-
Annual Income Tax Return for the taxable year 1996."71 2000, SP-INC-97-00019-2000 and SP-INC-97-0027-2000 issued
for deficiency income assessed on (a) the "arms-length" interest
Alongside the principle that tax revenues are not intended to be from said advances; (b) the gain from FDC’s Deed of Exchange
liberally construed,72 the rule is settled that the findings and with FAI and FLI; and (c) income from the dilution resulting from
conclusions of the CTA are accorded great respect and are FDC’s Shareholders’ Agreement with RHPL is, however, upheld.
generally upheld by this Court, unless there is a clear showing of
a reversible error or an improvident exercise of authority.73 Absent SO ORDERED.
showing of such error here, we find no strong and cogent reasons
to depart from said rule with respect to the CTA's finding that no
deficiency income tax can be assessed on the gain on the
supposed dilution and/or increase in the value of FDC's
shareholdings in FAC which the CIR, at any rate, failed to
establish. Bearing in mind the meaning of "gross income" as
above discussed, it cannot be gainsaid, even then, that a mere
increase or appreciation in the value of said shares cannot be
considered income for taxation purposes. Since "a mere advance
in the value of the property of a person or corporation in no sense
constitute the ‘income’ specified in the revenue law," it has been
held in the early case of Fisher vs. Trinidad,74 that it "constitutes
and can be treated merely as an increase of capital." Hence, the
CIR has no factual and legal basis in assessing income tax on the
 EN BANC of Tax Appeals (CTA Second Division) in CTA Case No. 6647.
The CTA Second Division ordered the Commissioner of Internal
G.R. No. 187485 February 12, 2013 Revenue (Commissioner) to refund or issue a tax credit for
P483,797,599.65 to San Roque Power Corporation (San Roque)
COMMISSIONER OF INTERNAL REVENUE, Petitioner, for unutilized input value-added tax (VAT) on purchases of capital
vs. goods and services for the taxable year 2001.
SAN ROQUE POWER CORPORATION, Respondent.
G.R. No. 196113 is a petition for review6 assailing the
X----------------------------X Decision7 promulgated on 8 December 2010 as well as the
Resolution8 promulgated on 14 March 2011 by the CTA EB in
CTA EB No. 624. In its Decision, the CTA EB reversed the 8
G.R. No. 196113
January 2010 Decision9 as well as the 7 April 2010 Resolution10of
the CTA Second Division and granted the CIR’s petition for
TAGANITO MINING CORPORATION, Petitioner, review in CTA Case No. 7574. The CTA EB dismissed, for having
vs. been prematurely filed, Taganito Mining Corporation’s (Taganito)
COMMISSIONER OF INTERNAL REVENUE, Respondent. judicial claim for P8,365,664.38 tax refund or credit.

x----------------------------x G.R. No. 197156 is a petition for review11 assailing the

G.R. No. 197156
PHILEX MINING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
The Cases
G.R. No. 187485 is a petitiOn for review1 assailing the
Decision2 promulgated on 25 March 2009 as well as the
Resolution3 promulgated on 24 April 2009 by the Court of Tax
Appeals En Banc (CTA EB) in CTA EB No. 408. The CTA EB
affirmed the 29 November 2007 Amended Decision4 as well as
the 11 July 2008 Resolution5 of the Second Division of the Court
Decision12promulgated on 3 December 2010 as well as the
Resolution13 promulgated on 17 May 2011 by the CTA EB in CTA
EB No. 569. The CTA EB affirmed the 20 July 2009 Decision as
well as the 10 November 2009 Resolution of the CTA Second
Division in CTA Case No. 7687. The CTA Second Division
denied, due to prescription, Philex Mining Corporation’s (Philex)
judicial claim for P23,956,732.44 tax refund or credit.
On 3 August 2011, the Second Division of this Court resolved14 to
consolidate G.R. No. 197156 with G.R. No. 196113, which were
pending in the same Division, and with G.R. No. 187485, which
was assigned to the Court En Banc. The Second Division also
resolved to refer G.R. Nos. 197156 and 196113 to the Court En
Banc, where G.R. No. 187485, the lower-numbered case, was
assigned.
G.R. No. 187485
CIR v. San Roque Power Corporation
 The Facts
The CTA EB’s narration of the pertinent facts is as follows:
[CIR] is the duly appointed Commissioner of Internal Revenue,
empowered, among others, to act upon and approve claims for
refund or tax credit, with office at the Bureau of Internal Revenue
("BIR") National Office Building, Diliman, Quezon City.
[San Roque] is a domestic corporation duly organized and
existing under and by virtue of the laws of the Philippines with
principal office at Barangay San Roque, San Manuel,
Pangasinan. It was incorporated in October 1997 to design,
construct, erect, assemble, own, commission and operate power-
generating plants and related facilities pursuant to and under
contract with the Government of the Republic of the Philippines,
or any subdivision, instrumentality or agency thereof, or any
governmentowned or controlled corporation, or other entity
engaged in the development, supply, or distribution of energy.
As a seller of services, [San Roque] is duly registered with the
BIR with TIN/VAT No. 005-017-501. It is likewise registered with
the Board of Investments ("BOI") on a preferred pioneer status, to
engage in the design, construction, erection, assembly, as well as
to own, commission, and operate electric power-generating plants
and related activities, for which it was issued Certificate of
Registration No. 97-356 on February 11, 1998.
On October 11, 1997, [San Roque] entered into a Power
Purchase Agreement ("PPA") with the National Power
Corporation ("NPC") to develop hydro-potential of the Lower
Agno River and generate additional power and energy for the
Luzon Power Grid, by building the San Roque Multi-Purpose
Project located in San Manuel, Pangasinan. The PPA provides,
among others, that [San Roque] shall be responsible for the
design, construction, installation, completion, testing and
commissioning of the Power Station and shall operate and
maintain the same, subject to NPC instructions. During the
cooperation period of twenty-five (25) years commencing from the
completion date of the Power Station, NPC will take and pay for
all electricity available from the Power Station.
On the construction and development of the San Roque Multi-
Purpose Project which comprises of the dam, spillway and power
plant, [San Roque] allegedly incurred, excess input VAT in the
amount of ₱559,709,337.54 for taxable year 2001 which it
declared in its Quarterly VAT Returns filed for the same year.
[San Roque] duly filed with the BIR separate claims for refund, in
the total amount of ₱559,709,337.54, representing unutilized
input taxes as declared in its VAT returns for taxable year 2001.
However, on March 28, 2003, [San Roque] filed amended
Quarterly VAT Returns for the year 2001 since it increased its
unutilized input VAT to the amount of ₱560,200,283.14.
Consequently, [San Roque] filed with the BIR on even date,
separate amended claims for refund in the aggregate amount of
₱560,200,283.14.
[CIR’s] inaction on the subject claims led to the filing by [San
Roque] of the Petition for Review with the Court [of Tax Appeals]
in Division on April 10, 2003.
Trial of the case ensued and on July 20, 2005, the case was
submitted for decision.15
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division initially denied San Roque’s claim. In
its Decision16 dated 8 March 2006, it cited the following as bases
for the denial of San Roque’s claim: lack of recorded zero-rated
or effectively zero-rated sales; failure to submit documents
specifically identifying the purchased goods/services related to
the claimed input VAT which were included in its Property, Plant
and Equipment account; and failure to prove that the related
construction costs were capitalized in its books of account and
subjected to depreciation.
The CTA Second Division required San Roque to show that it
complied with the following requirements of Section 112(B) of
Republic Act No. 8424 (RA 8424)17 to be entitled to a tax refund
or credit of input VAT attributable to capital goods imported or
locally purchased: (1) it is a VAT-registered entity; (2) its input
taxes claimed were paid on capital goods duly supported by VAT
invoices and/or official receipts; (3) it did not offset or apply the
claimed input VAT payments on capital goods against any output
VAT liability; and (4) its claim for refund was filed within the two-
year prescriptive period both in the administrative and judicial
levels.
The CTA Second Division found that San Roque complied with
the first, third, and fourth requirements, thus:
The fact that [San Roque] is a VAT registered entity is admitted
(par. 4, Facts Admitted, Joint Stipulation of Facts, Records, p.
157). It was also established that the instant claim of
₱560,200,823.14 is already net of the ₱11,509.09 output tax
declared by [San Roque] in its amended VAT return for the first
quarter of 2001. Moreover, the entire amount of ₱560,200,823.14
was deducted by [San Roque] from the total available input tax
reflected in its amended VAT returns for the last two quarters of
2001 and first two quarters of 2002 (Exhibits M-6, O-6, OO-1 &
QQ-1). This means that the claimed input taxes of
₱560,200,823.14 did not form part of the excess input taxes of
₱83,692,257.83, as of the second quarter of 2002 that was to be
carried-over to the succeeding quarters. Further, [San Roque’s]
claim for refund/tax credit certificate of excess input VAT was filed
within the two-year prescriptive period reckoned from the dates of
filing of the corresponding quarterly VAT returns.
For the first, second, third, and fourth quarters of 2001, [San
Roque] filed its VAT returns on April 25, 2001, July 25, 2001,
October 23, 2001 and January 24, 2002, respectively (Exhibits
"H, J, L, and N"). These returns were all subsequently amended
on March 28, 2003 (Exhibits "I, K, M, and O"). On the other hand,
[San Roque] originally filed its separate claims for refund on July
10, 2001, October 10, 2001, February 21, 2002, and May 9, 2002
for the first, second, third, and fourth quarters of 2001,
respectively, (Exhibits "EE, FF, GG, and HH") and subsequently
filed amended claims for all quarters on March 28, 2003 (Exhibits
"II, JJ, KK, and LL"). Moreover, the Petition for Review was filed
on April 10, 2003. Counting from the respective dates when [San
Roque] originally filed its VAT returns for the first, second, third
and fourth quarters of 2001, the administrative claims for refund
(original and amended) and the Petition for Review fall within the
two-year prescriptive period.18
San Roque filed a Motion for New Trial and/or Reconsideration
on 7 April 2006. In its 29 November 2007 Amended
Decision,19 the CTA Second Division found legal basis to partially
grant San Roque’s claim. The CTA Second Division ordered the
Commissioner to refund or issue a tax credit in favor of San
Roque in the amount of ₱483,797,599.65, which represents San
Roque’s unutilized input VAT on its purchases of capital goods
and services for the taxable year 2001. The CTA based the
adjustment in the amount on the findings of the independent
certified public accountant. The following reasons were cited for
the disallowed claims: erroneous computation; failure to ascertain
whether the related purchases are in the nature of capital goods;
and the purchases pertain to capital goods. Moreover, the
reduction of claims was based on the following: the difference
between San Roque’s claim and that appearing on its books; the
official receipts covering the claimed input VAT on purchases of
local services are not within the period of the claim; and the
amount of VAT cannot be determined from the submitted official
receipts and invoices. The CTA Second Division denied San
Roque’s claim for refund or tax credit of its unutilized input VAT
attributable to its zero-rated or effectively zero-rated sales
because San Roque had no record of such sales for the four
quarters of 2001.
The dispositive portion of the CTA Second Division’s 29
November 2007 Amended Decision reads:
WHEREFORE, [San Roque’s] "Motion for New Trial and/or
Reconsideration" is hereby PARTIALLY GRANTED and this
Court’s Decision promulgated on March 8, 2006 in the instant
case is hereby MODIFIED.
Accordingly, [the CIR] is hereby ORDERED to REFUND or in the
alternative, to ISSUE A TAX CREDIT CERTIFICATE in favor of
[San Roque] in the reduced amount of Four Hundred Eighty
Three Million Seven Hundred Ninety Seven Thousand Five
Hundred Ninety Nine Pesos and Sixty Five Centavos
(₱483,797,599.65) representing unutilized input VAT on
purchases of capital goods and services for the taxable year
2001.
SO ORDERED.20
The Commissioner filed a Motion for Partial Reconsideration on
20 December 2007. The CTA Second Division issued a
Resolution dated 11 July 2008 which denied the CIR’s motion for
lack of merit.
The Court of Tax Appeals’ Ruling: En Banc
The Commissioner filed a Petition for Review before the CTA EB
praying for the denial of San Roque’s claim for refund or tax credit
in its entirety as well as for the setting aside of the 29 November
2007 Amended Decision and the 11 July 2008 Resolution in CTA
Case No. 6647.
The CTA EB dismissed the CIR’s petition for review and affirmed
the challenged decision and resolution.
The CTA EB cited Commissioner of Internal Revenue v. Toledo
Power, Inc.21 and Revenue Memorandum Circular No. 49-03,22 as
its bases for ruling that San Roque’s judicial claim was not
prematurely filed. The pertinent portions of the Decision state:
More importantly, the Court En Banc has squarely and
exhaustively ruled on this issue in this wise:
It is true that Section 112(D) of the abovementioned
provision applies to the present case. However, what the
petitioner failed to consider is Section 112(A) of the same
provision. The respondent is also covered by the two (2) year
prescriptive period. We have repeatedly held that the claim for
refund with the BIR and the subsequent appeal to the Court of
Tax Appeals must be filed within the two-year period.
Accordingly, the Supreme Court held in the case of Atlas
Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue that the two-year prescriptive
period for filing a claim for input tax is reckoned from the date of
the filing of the quarterly VAT return and payment of the tax
due. If the said period is about to expire but the BIR has not
yet acted on the application for refund, the taxpayer may
interpose a petition for review with this Court within the two
year period.
In the case of Gibbs vs. Collector, the Supreme Court held that if,
however, the Collector (now Commissioner) takes time in
deciding the claim, and the period of two years is about to end,
the suit or proceeding must be started in the Court of Tax
Appeals before the end of the two-year period without awaiting
the decision of the Collector.
Furthermore, in the case of Commissioner of Customs and
Commissioner of Internal Revenue vs. The Honorable Court of
Tax Appeals and Planters Products, Inc., the Supreme Court
held that the taxpayer need not wait indefinitely for a
decision or ruling which may or may not be forthcoming and
which he has no legal right to expect. It is disheartening
enough to a taxpayer to keep him waiting for an indefinite period
of time for a ruling or decision of the Collector (now
Commissioner) of Internal Revenue on his claim for refund. It
would make matters more exasperating for the taxpayer if we
were to close the doors of the courts of justice for such a relief
until after the Collector (now Commissioner) of Internal Revenue,
would have, at his personal convenience, given his go signal.
This Court ruled in several cases that once the petition is filed,
the Court has already acquired jurisdiction over the claims and
the Court is not bound to wait indefinitely for no reason for
whatever action respondent (herein petitioner) may take. At
stake are claims for refund and unlike disputed
assessments, no decision of respondent (herein petitioner)
is required before one can go to this Court. (Emphasis
supplied and citations omitted)
Lastly, it is apparent from the following provisions of Revenue
Memorandum Circular No. 49-03 dated August 18, 2003, that [the
CIR] knows that claims for VAT refund or tax credit filed with the
Court [of Tax Appeals] can proceed simultaneously with the ones
filed with the BIR and that taxpayers need not wait for the lapse of
the subject 120-day period, to wit:
In response to [the] request of selected taxpayers for adoption of
procedures in handling refund cases that are aligned to the
statutory requirements that refund cases should be elevated to
the Court of Tax Appeals before the lapse of the period
prescribed by law, certain provisions of RMC No. 42-2003 are
hereby amended and new provisions are added thereto.
In consonance therewith, the following amendments are being
introduced to RMC No. 42-2003, to wit:
I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby
revised to read as follows:
In cases where the taxpayer has filed a "Petition for Review"
with the Court of Tax Appeals involving a claim for
refund/TCC that is pending at the administrative agency
(Bureau of Internal Revenue or OSS-DOF), the administrative
agency and the tax court may act on the case
separately. While the case is pending in the tax court and at the
same time is still under process by the administrative agency, the
litigation lawyer of the BIR, upon receipt of the summons from the
tax court, shall request from the head of the
investigating/processing office for the docket containing certified
true copies of all the documents pertinent to the claim. The
docket shall be presented to the court as evidence for the BIR in
its defense on the tax credit/refund case filed by the taxpayer. In
the meantime, the investigating/processing office of the
administrative agency shall continue processing the refund/TCC
case until such time that a final decision has been reached by
either the CTA or the administrative agency.
If the CTA is able to release its decision ahead of the
evaluation of the administrative agency, the latter shall cease
from processing the claim. On the other hand, if the
administrative agency is able to process the claim of the taxpayer
ahead of the CTA and the taxpayer is amenable to the findings
thereof, the concerned taxpayer must file a motion to withdraw
the claim with the CTA.23 (Emphasis supplied)
G.R. No. 196113
Taganito Mining Corporation v. CIR
The Facts
The CTA Second Division’s narration of the pertinent facts is as
follows:
Petitioner, Taganito Mining Corporation, is a corporation duly
organized and existing under and by virtue of the laws of the
Philippines, with principal office at 4th Floor, Solid Mills Building,
De La Rosa St., Lega[s]pi Village, Makati City. It is duly registered
with the Securities and Exchange Commission with Certificate of
Registration No. 138682 issued on March 4, 1987 with the
following primary purpose:
To carry on the business, for itself and for others, of mining lode
and/or placer mining, developing, exploiting, extracting, milling,
concentrating, converting, smelting, treating, refining, preparing
for market, manufacturing, buying, selling, exchanging, shipping,
transporting, and otherwise producing and dealing in nickel,
chromite, cobalt, gold, silver, copper, lead, zinc, brass, iron, steel,
limestone, and all kinds of ores, metals and their by-products and
which by-products thereof of every kind and description and by
whatsoever process the same can be or may hereafter be
produced, and generally and without limit as to amount, to buy,
sell, locate, exchange, lease, acquire and deal in lands, mines,
and mineral rights and claims and to conduct all business
appertaining thereto, to purchase, locate, lease or otherwise
acquire, mining claims and rights, timber rights, water rights,
concessions and mines, buildings, dwellings, plants machinery,
spare parts, tools and other properties whatsoever which this
corporation may from time to time find to be to its advantage to
mine lands, and to explore, work, exercise, develop or turn to
account the same, and to acquire, develop and utilize water rights
in such manner as may be authorized or permitted by law; to
purchase, hire, make, construct or otherwise, acquire, provide,
maintain, equip, alter, erect, improve, repair, manage, work and
operate private roads, barges, vessels, aircraft and vehicles,
private telegraph and telephone lines, and other communication
media, as may be needed by the corporation for its own purpose,
and to purchase, import, construct, machine, fabricate, or
otherwise acquire, and maintain and operate bridges, piers,
wharves, wells, reservoirs, plumes, watercourses, waterworks,
aqueducts, shafts, tunnels, furnaces, cook ovens, crushing works,
gasworks, electric lights and power plants and compressed air
plants, chemical works of all kinds, concentrators, smelters,
smelting plants, and refineries, matting plants, warehouses,
workshops, factories, dwelling houses, stores, hotels or other
buildings, engines, machinery, spare parts, tools, implements and
other works, conveniences and properties of any description in
connection with or which may be directly or indirectly conducive
to any of the objects of the corporation, and to contribute to,
subsidize or otherwise aid or take part in any operations;
and is a VAT-registered entity, with Certificate of Registration
(BIR Form No. 2303) No. OCN 8RC0000017494. Likewise,
[Taganito] is registered with the Board of Investments (BOI) as an
exporter of beneficiated nickel silicate and chromite ores, with
BOI Certificate of Registration No. EP-88-306.
Respondent, on the other hand, is the duly appointed
Commissioner of Internal Revenue vested with authority to
exercise the functions of the said office, including inter alia, the
power to decide refunds of internal revenue taxes, fees and other
charges, penalties imposed in relation thereto, or other matters
arising under the National Internal Revenue Code (NIRC) or other
laws administered by Bureau of Internal Revenue (BIR) under
Section 4 of the NIRC. He holds office at the BIR National Office
Building, Diliman, Quezon City.
[Taganito] filed all its Monthly VAT Declarations and Quarterly Vat
Returns for the period January 1, 2005 to December 31, 2005.
For easy reference, a summary of the filing dates of the original
and amended Quarterly VAT Returns for taxable year 2005 of
[Taganito] is as follows:
As can be gleaned from its amended Quarterly VAT Returns,
[Taganito] reported zero-rated sales amounting to
P1,446,854,034.68; input VAT on its domestic purchases and
importations of goods (other than capital goods) and services
amounting to P2,314,730.43; and input VAT on its domestic
purchases and importations of capital goods amounting to
P6,050,933.95, the details of which are summarized as follows:
On November 14, 2006, [Taganito] filed with [the CIR], through
BIR’s Large Taxpayers Audit and Investigation Division II (LTAID
II), a letter dated November 13, 2006 claiming a tax credit/refund
of its supposed input VAT amounting to ₱8,365,664.38 for the
period covering January 1, 2004 to December 31, 2004. On the
same date, [Taganito] likewise filed an Application for Tax
Credits/Refunds for the period covering January 1, 2005 to
December 31, 2005 for the same amount.
On November 29, 2006, [Taganito] sent again another letter
dated November 29, 2004 to [the CIR], to correct the period of the
above claim for tax credit/refund in the said amount of
₱8,365,664.38 as actually referring to the period covering
January 1, 2005 to December 31, 2005.
As the statutory period within which to file a claim for refund for
said input VAT is about to lapse without action on the part of the
[CIR], [Taganito] filed the instant Petition for Review on February
17, 2007.
In his Answer filed on March 28, 2007, [the CIR] interposes the
following defenses:
4. [Taganito’s] alleged claim for refund is subject to
administrative investigation/examination by the Bureau of
Internal Revenue (BIR);
5. The amount of ₱8,365,664.38 being claimed by
[Taganito] as alleged unutilized input VAT on domestic
purchases of goods and services and on importation of
capital goods for the period January 1, 2005 to December
31, 2005 is not properly documented;
6. [Taganito] must prove that it has complied with the
provisions of Sections 112 (A) and (D) and 229 of the
National Internal Revenue Code of 1997 (1997 Tax Code)
on the prescriptive period for claiming tax refund/credit;
7. Proof of compliance with the prescribed checklist of
requirements to be submitted involving claim for VAT
refund pursuant to Revenue Memorandum Order No. 53-
98, otherwise there would be no sufficient compliance
with the filing of administrative claim for refund, the
administrative claim thereof being mere proforma,
which is a condition sine qua non prior to the filing of
judicial claim in accordance with the provision of Section
229 of the 1997 Tax Code. Further, Section 112 (D) of the
Tax Code, as amended, requires the submission of
complete documents in support of the application
filed with the BIR before the 120-day audit period shall
apply, and before the taxpayer could avail of judicial
remedies as provided for in the law. Hence,
 [Taganito’s] failure to submit proof of compliance with the
above-stated requirements warrants immediate dismissal
of the petition for review.
8. [Taganito] must prove that it has complied with the
invoicing requirements mentioned in Sections 110 and
113 of the 1997 Tax Code, as amended, in relation to
provisions of Revenue Regulations No. 7-95.
9. In an action for refund/credit, the burden of proof is on
the taxpayer to establish its right to refund, and failure to
sustain the burden is fatal to the claim for
refund/credit (Asiatic Petroleum Co. vs. Llanes, 49 Phil.
466 cited in Collector of Internal Revenue vs. Manila
Jockey Club, Inc., 98 Phil. 670);
10. Claims for refund are construed strictly against the
claimant for the same partake the nature of exemption
from taxation (Commissioner of Internal Revenue vs.
Ledesma, 31 SCRA 95) and as such, they are looked
upon with disfavor (Western Minolco Corp. vs.
Commissioner of Internal Revenue, 124 SCRA 1211).
SPECIAL AND AFFIRMATIVE DEFENSES
11. The Court of Tax Appeals has no jurisdiction to entertain the
instant petition for review for failure on the part of [Taganito] to
comply with the provision of Section 112 (D) of the 1997 Tax
Code which provides, thus:
Section 112. Refunds or Tax Credits of Input Tax. –
xxx xxx xxx
(D) Period within which refund or Tax Credit of Input Taxes shall
be Made. – In proper cases, the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input
taxes within one hundred (120) days from the date of
submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B)
hereof.
In cases of full or partial denial for tax refund or tax credit, or the
failure on the part of the Commissioner to act on the application
within the period prescribed above, the taxpayer affected
may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred
twenty dayperiod, appeal the decision or the unacted claim
with the Court of Tax Appeals. (Emphasis supplied.)
12. As stated, [Taganito] filed the administrative claim for refund
with the Bureau of Internal Revenue on November 14, 2006.
Subsequently on February 14, 2007, the instant petition was filed.
Obviously the 120 days given to the Commissioner to decide on
the claim has not yet lapsed when the petition was filed. The
petition was prematurely filed, hence it must be dismissed for lack
of jurisdiction.
During trial, [Taganito] presented testimonial and documentary
evidence primarily aimed at proving its supposed entitlement to
the refund in the amount of ₱8,365,664.38, representing input
taxes for the period covering January 1, 2005 to December 31,
2005. [The CIR], on the other hand, opted not to present
evidence. Thus, in the Resolution promulgated on January 22,
2009, this case was submitted for decision as of such date,
considering [Taganito’s] "Memorandum" filed on January 19,
2009 and [the CIR’s] "Memorandum" filed on December 19,
2008.24
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division partially granted Taganito’s claim. In its
Decision25 dated 8 January 2010, the CTA Second Division found
that Taganito complied with the requirements of Section 112(A) of
RA 8424, as amended, to be entitled to a tax refund or credit of
input VAT attributable to zero-rated or effectively zero-rated
sales.26
The pertinent portions of the CTA Second Division’s Decision
read:
Finally, records show that [Taganito’s] administrative claim filed
on November 14, 2006, which was amended on November 29,
2006, and the Petition for Review filed with this Court on February
14, 2007 are well within the two-year prescriptive period,
reckoned from March 31, 2005, June 30, 2005, September 30,
2005, and December 31, 2005, respectively, the close of each
taxable quarter covering the period January 1, 2005 to December
31, 2005.
In fine, [Taganito] sufficiently proved that it is entitled to a tax
credit certificate in the amount of ₱8,249,883.33 representing
unutilized input VAT for the four taxable quarters of 2005.
WHEREFORE, premises considered, the instant Petition for
Review is hereby PARTIALLY GRANTED. Accordingly, [the CIR]
is hereby ORDERED to REFUND to [Taganito] the amount of
EIGHT MILLION TWO HUNDRED FORTY NINE THOUSAND
EIGHT HUNDRED EIGHTY THREE PESOS AND THIRTY
THREE CENTAVOS (P8,249,883.33) representing its unutilized
input taxes attributable to zero-rated sales from January 1, 2005
to December 31, 2005.
SO ORDERED.27
The Commissioner filed a Motion for Partial Reconsideration on
29 January 2010. Taganito, in turn, filed a Comment/Opposition
on the Motion for Partial Reconsideration on 15 February 2010.
In a Resolution dated 7 April 2010, the CTA Second Division
28
denied the CIR’s motion. The CTA Second Division ruled that the
legislature did not intend that Section 112 (Refunds or Tax
Credits of Input Tax) should be read in isolation from Section 229
(Recovery of Tax Erroneously or Illegally Collected) or vice versa.
The CTA Second Division applied the mandatory statute of
limitations in seeking judicial recourse prescribed under Section
229 to claims for refund or tax credit under Section 112.
The Court of Tax Appeals’ Ruling: En Banc
On 29 April 2010, the Commissioner filed a Petition for Review
before the CTA EB assailing the 8 January 2010 Decision and the
7 April 2010 Resolution in CTA Case No. 7574 and praying that
Taganito’s entire claim for refund be denied.
In its 8 December 2010 Decision,29 the CTA EB granted the CIR’s
petition for review and reversed and set aside the challenged
decision and resolution.
The CTA EB declared that Section 112(A) and (B) of the 1997
Tax Code both set forth the reckoning of the two-year prescriptive
period for filing a claim for tax refund or credit over input VAT to
be the close of the taxable quarter when the sales were made.
The CTA EB also relied on this Court’s rulings in the cases
of Commissioner of Internal Revenue v. Aichi Forging Company
of Asia, Inc. (Aichi)30 and Commisioner of Internal Revenue v.
Mirant Pagbilao Corporation
(Mirant).31 Both Aichi and Mirant ruled that the two-year
prescriptive period to file a refund for input VAT arising from zero-
rated sales should be reckoned from the close of the taxable
quarter when the sales were made. Aichi further emphasized that
the failure to await the decision of the Commissioner or the lapse
of 120-day period prescribed in Section 112(D) amounts to a
premature filing.
The CTA EB found that Taganito filed its administrative claim on
14 November 2006, which was well within the period prescribed
under Section 112(A) and (B) of the 1997 Tax Code. However,
the CTA EB found that Taganito’s judicial claim was prematurely
filed. Taganito filed its Petition for Review before the CTA Second
Division on 14 February 2007. The judicial claim was filed after
the lapse of only 92 days from the filing of its administrative claim
before the CIR, in violation of the 120-day period prescribed in
Section 112(D) of the 1997 Tax Code.
The dispositive portion of the Decision states:
WHEREFORE, the instant Petition for Review is hereby
GRANTED. The assailed Decision dated January 8, 2010 and
Resolution dated April 7, 2010 of the Special Second Division of
this Court are hereby REVERSED and SET ASIDE. Another one
is hereby entered DISMISSING the Petition for Review filed in
CTA Case No. 7574 for having been prematurely filed.
SO ORDERED.32
In his dissent,33 Associate Justice Lovell R. Bautista insisted that
Taganito timely filed its claim before the CTA. Justice Bautista
read Section 112(C) of the 1997 Tax Code (Period within which
Refund or Tax Credit of Input Taxes shall be Made) in conjunction
with Section 229 (Recovery of Tax Erroneously or Illegally
Collected). Justice Bautista also relied on this Court’s ruling
in Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue (Atlas),34 which stated that
refundable or creditable input VAT and illegally or erroneously
collected national internal revenue tax are the same, insofar as
both are monetary amounts which are currently in the hands of
the government but must rightfully be returned to the taxpayer.
Justice Bautista concluded:
Being merely permissive, a taxpayer claimant has the option of
seeking judicial redress for refund or tax credit of excess or
unutilized input tax with this Court, either within 30 days from
receipt of the denial of its claim, or after the lapse of the 120-day
period in the event of inaction by the Commissioner, provided that
both administrative and judicial remedies must be undertaken
within the 2-year period.35
Taganito filed its Motion for Reconsideration on 29 December
2010. The Commissioner filed an Opposition on 26 January 2011.
The CTA EB denied for lack of merit Taganito’s motion in a
Resolution36 dated 14 March 2011. The CTA EB did not see any
justifiable reason to depart from this Court’s rulings
in Aichi and Mirant.
G.R. No. 197156
Philex Mining Corporation v. CIR
The Facts
The CTA EB’s narration of the pertinent facts is as follows:
[Philex] is a corporation duly organized and existing under the
laws of the Republic of the Philippines, which is principally
engaged in the mining business, which includes the exploration
and operation of mine properties and commercial production and
marketing of mine products, with office address at 27 Philex
Building, Fairlaine St., Kapitolyo, Pasig City.
[The CIR], on the other hand, is the head of the Bureau of Internal
Revenue ("BIR"), the government entity tasked with the
duties/functions of assessing and collecting all national internal
revenue taxes, fees, and charges, and enforcement of all
forfeitures, penalties and fines connected therewith, including the
execution of judgments in all cases decided in its favor by [the
Court of Tax Appeals] and the ordinary courts, where she can be
served with court processes at the BIR Head Office, BIR Road,
Quezon City.
On October 21, 2005, [Philex] filed its Original VAT Return for the
third quarter of taxable year 2005 and Amended VAT Return for
the same quarter on December 1, 2005.
On March 20, 2006, [Philex] filed its claim for refund/tax credit of
the amount of ₱23,956,732.44 with the One Stop Shop Center of
the Department of Finance. However, due to [the CIR’s] failure to
act on such claim, on October 17, 2007, pursuant to Sections 112
and 229 of the NIRC of 1997, as amended, [Philex] filed a
Petition for Review, docketed as C.T.A. Case No. 7687.
In [her] Answer, respondent CIR alleged the following special and
affirmative defenses:
4. Claims for refund are strictly construed against the
taxpayer as the same partake the nature of an exemption;
5. The taxpayer has the burden to show that the taxes
were erroneously or illegally paid. Failure on the part of
[Philex] to prove the same is fatal to its cause of action;
6. [Philex] should prove its legal basis for claiming for the
amount being refunded.37
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division, in its Decision dated 20 July 2009,
denied Philex’s claim due to prescription. The CTA Second
Division ruled that the two-year prescriptive period specified in
Section 112(A) of RA 8424, as amended, applies not only to the
filing of the administrative claim with the BIR, but also to the filing
of the judicial claim with the CTA. Since Philex’s claim covered
the 3rd quarter of 2005, its administrative claim filed on 20 March
2006 was timely filed, while its judicial claim filed on 17 October
2007 was filed late and therefore barred by prescription.
On 10 November 2009, the CTA Second Division denied Philex’s
Motion for Reconsideration.
The Court of Tax Appeals’ Ruling: En Banc
Philex filed a Petition for Review before the CTA EB praying for a
reversal of the 20 July 2009 Decision and the 10 November 2009
Resolution of the CTA Second Division in CTA Case No. 7687.
The CTA EB, in its Decision38 dated 3 December 2010, denied
Philex’s petition and affirmed the CTA Second Division’s Decision
and Resolution.
The pertinent portions of the Decision read:
In this case, while there is no dispute that [Philex’s] administrative
claim for refund was filed within the two-year prescriptive period;
however, as to its judicial claim for refund/credit, records show
that on March 20, 2006, [Philex] applied the administrative claim
for refund of unutilized input VAT in the amount of
₱23,956,732.44 with the One Stop Shop Center of the
Department of Finance, per Application No. 52490. From March
20, 2006, which is also presumably the date [Philex] submitted
supporting documents, together with the aforesaid application for
refund, the CIR has 120 days, or until July 18, 2006, within which
to decide the claim. Within 30 days from the lapse of the 120-day
period, or from July 19, 2006 until August 17, 2006, [Philex]
should have elevated its claim for refund to the CTA. However,
[Philex] filed its Petition for Review only on October 17, 2007,
which is 426 days way beyond the 30- day period prescribed by
law.
Evidently, the Petition for Review in CTA Case No. 7687 was filed
426 days late. Thus, the Petition for Review in CTA Case No.
7687 should have been dismissed on the ground that the Petition
for Review was filed way beyond the 30-day prescribed period;
thus, no jurisdiction was acquired by the CTA in Division; and not
due to prescription.
WHEREFORE, premises considered, the instant Petition for
Review is hereby DENIED DUE COURSE, and accordingly,
DISMISSED. The assailed Decision dated July 20, 2009,
dismissing the Petition for Review in CTA Case No. 7687 due to
prescription, and Resolution dated November 10, 2009 denying
[Philex’s] Motion for Reconsideration are hereby AFFIRMED, with
modification that the dismissal is based on the ground that the
Petition for Review in CTA Case No. 7687 was filed way beyond
the 30-day prescribed period to appeal.
SO ORDERED.39
G.R. No. 187485
CIR v. San Roque Power Corporation
The Commissioner raised the following grounds in the Petition for
Review:
I. The Court of Tax Appeals En Banc erred in holding that
[San Roque’s] claim for refund was not prematurely filed.
II. The Court of Tax Appeals En Banc erred in affirming
the amended decision of the Court of Tax Appeals
(Second Division) granting [San Roque’s] claim for refund
of alleged unutilized input VAT on its purchases of capital
goods and services for the taxable year 2001 in the
amount of P483,797,599.65. 40
G.R. No. 196113
Taganito Mining Corporation v. CIR
Taganito raised the following grounds in its Petition for Review:
I. The Court of Tax Appeals En Banc committed serious
error and acted with grave abuse of discretion tantamount
to lack or excess of jurisdiction in erroneously applying
the Aichi doctrine in violation of [Taganito’s] right to due
process.
II. The Court of Tax Appeals committed serious error and
acted with grave abuse of discretion amounting to lack or
excess of jurisdiction in erroneously interpreting the
provisions of Section 112 (D).41
G.R. No. 197156
Philex Mining Corporation v. CIR
Philex raised the following grounds in its Petition for Review:
I. The CTA En Banc erred in denying the petition due to
alleged prescription. The fact is that the petition was filed
with the CTA within the period set by prevailing court
rulings at the time it was filed.
II. The CTA En Banc erred in retroactively applying the
Aichi ruling in denying the petition in this instant case.42
The Court’s Ruling
For ready reference, the following are the provisions of the Tax
Code applicable to the present cases:
Section 105:
Persons Liable. — Any person who, in the course of trade or
business, sells, barters, exchanges, leases goods or
properties, renders services, and any person who imports
goods shall be subject to the value-added tax (VAT) imposed
in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax
may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of Republic Act
No. 7716.
 xxxx
Section 110(B):
Sec. 110. Tax Credits. —
(B) Excess Output or Input Tax. — If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the
succeeding quarter or quarters: [Provided, That the input tax
inclusive of input VAT carried over from the previous quarter that
may be credited in every quarter shall not exceed seventy
percent (70%) of the output VAT:]43 Provided, however, That any
input tax attributable to zero-rated sales by a VAT-registered
person may at his option be refunded or credited against
other internal revenue taxes, subject to the provisions of
Section 112.
Section 112:44
Sec. 112. Refunds or Tax Credits of Input Tax. —
(A) Zero-Rated or Effectively Zero-Rated Sales.— Any
VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after
the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate
or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax,
to the extent that such input tax has not been applied
against output tax: Provided, however, That in the case of
zero-rated sales under Section 106(A)(2) (a)(1), (2) and
(B) and Section 108(B)(1) and (2), the acceptable foreign
currency exchange proceeds thereof had been duly
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in
zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods or properties or services,
and the amount of creditable input tax due or paid cannot
be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the
basis of the volume of sales.
(B) Capital Goods.- A VAT — registered person may
apply for the issuance of a tax credit certificate or refund
of input taxes paid on capital goods imported or locally
purchased, to the extent that such input taxes have not
been applied against output taxes. The application may
be made only within two (2) years after the close of the
taxable quarter when the importation or purchase was
made.
(C) Cancellation of VAT Registration. — A person whose
registration has been cancelled due to retirement from or
cessation of business, or due to changes in or cessation
of status under Section 106(C) of this Code may, within
two (2) years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input
tax which may be used in payment of his other internal
revenue taxes
(D) Period within which Refund or Tax Credit of Input
Taxes shall be Made. — In proper cases, the
Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred
twenty (120) days from the date of submission of
complete documents in support of the application filed in
accordance with Subsection (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund
or tax credit, or the failure on the part of the
Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within
 thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals.
(E) Manner of Giving Refund. — Refunds shall be made
upon warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of being
countersigned by the Chairman, Commission on Audit,
the provisions of the Administrative Code of 1987 to the
contrary notwithstanding: Provided, that refunds under
this paragraph shall be subject to post audit by the
Commission on Audit.
Section 229:
Recovery of Tax Erroneously or Illegally Collected. — No suit or
proceeding shall be maintained in any court for the recovery of
any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum
alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed
with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the
expiration of two (2) years from the date of payment of the
tax or penalty regardless of any supervening cause that may
arise after payment: Provided, however, That the Commissioner
may, even without a written claim therefor, refund or credit any
tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously
paid.
(All emphases supplied)
I. Application of the 120+30 Day Periods
a. G.R. No. 187485 - CIR v. San Roque Power Corporation
On 10 April 2003, a mere 13 days after it filed its amended
administrative claim with the Commissioner on 28 March 2003,
San Roque filed a Petition for Review with the CTA docketed as
CTA Case No. 6647. From this we gather two crucial facts: first,
San Roque did not wait for the 120-day period to lapse before
filing its judicial claim; second, San Roque filed its judicial claim
more than four (4) years before the Atlas45 doctrine, which was
promulgated by the Court on 8 June 2007.
Clearly, San Roque failed to comply with the 120-day waiting
period, the time expressly given by law to the Commissioner to
decide whether to grant or deny San Roque’s application for tax
refund or credit. It is indisputable that compliance with the 120-
day waiting period is mandatory and jurisdictional. The waiting
period, originally fixed at 60 days only, was part of the provisions
of the first VAT law, Executive Order No. 273, which took effect
on 1 January 1988. The waiting period was extended to 120 days
effective 1 January 1998 under RA 8424 or the Tax Reform Act of
1997. Thus, the waiting period has been in our statute books
for more than fifteen (15) years before San Roque filed its
judicial claim.
Failure to comply with the 120-day waiting period violates a
mandatory provision of law. It violates the doctrine of exhaustion
of administrative remedies and renders the petition premature
and thus without a cause of action, with the effect that the CTA
does not acquire jurisdiction over the taxpayer’s petition.
Philippine jurisprudence is replete with cases upholding and
reiterating these doctrinal principles.46
The charter of the CTA expressly provides that its jurisdiction is to
review on appeal "decisions of the Commissioner of Internal
Revenue in cases involving x x x refunds of internal revenue
taxes."47 When a taxpayer prematurely files a judicial claim for tax
refund or credit with the CTA without waiting for the decision of
the Commissioner, there is no "decision" of the Commissioner to
review and thus the CTA as a court of special jurisdiction has no
jurisdiction over the appeal. The charter of the CTA also
expressly provides that if the Commissioner fails to decide within
"a specific period" required by law, such "inaction shall be
deemed a denial"48 of the application for tax refund or credit. It is
the Commissioner’s decision, or inaction "deemed a denial," that
the taxpayer can take to the CTA for review. Without a decision or
an "inaction x x x deemed a denial" of the Commissioner, the
CTA has no jurisdiction over a petition for review.49
San Roque’s failure to comply with the 120-
day mandatory period renders its petition for review with the CTA
void. Article 5 of the Civil Code provides, "Acts executed against
provisions of mandatory or prohibitory laws shall be void, except
when the law itself authorizes their validity." San Roque’s void
petition for review cannot be legitimized by the CTA or this Court
because Article 5 of the Civil Code states that such void petition
cannot be legitimized "except when the law itself authorizes [its]
validity." There is no law authorizing the petition’s validity.
It is hornbook doctrine that a person committing a void act
contrary to a mandatory provision of law cannot claim or acquire
any right from his void act. A right cannot spring in favor of a
person from his own void or illegal act. This doctrine is repeated
in Article 2254 of the Civil Code, which states, "No vested or
acquired right can arise from acts or omissions which are against
the law or which infringe upon the rights of others."50 For violating
a mandatory provision of law in filing its petition with the CTA,
San Roque cannot claim any right arising from such void petition.
Thus, San Roque’s petition with the CTA is a mere scrap of
paper.
This Court cannot brush aside the grave issue of the mandatory
and jurisdictional nature of the 120-day period just because the
Commissioner merely asserts that the case was prematurely filed
with the CTA and does not question the entitlement of San Roque
to the refund. The mere fact that a taxpayer has undisputed
excess input VAT, or that the tax was admittedly illegally,
erroneously or excessively collected from him, does not entitle
him as a matter of right to a tax refund or credit. Strict compliance
with the mandatory and jurisdictional conditions prescribed by law
to claim such tax refund or credit is essential and necessary for
such claim to prosper. Well-settled is the rule that tax refunds
or credits, just like tax exemptions, are strictly construed
against the taxpayer.51 The burden is on the taxpayer to show
that he has strictly complied with the conditions for the grant of
the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional
conditions mandated by law simply because the Commissioner
chose not to contest the numerical correctness of the claim for tax
refund or credit of the taxpayer. Non-compliance with mandatory
periods, non-observance of prescriptive periods, and non-
adherence to exhaustion of administrative remedies bar a
taxpayer’s claim for tax refund or credit, whether or not the
Commissioner questions the numerical correctness of the claim
of the taxpayer. This Court should not establish the precedent
that non-compliance with mandatory and jurisdictional conditions
can be excused if the claim is otherwise meritorious, particularly
in claims for tax refunds or credit. Such precedent will render
meaningless compliance with mandatory and jurisdictional
requirements, for then every tax refund case will have to be
decided on the numerical correctness of the amounts claimed,
regardless of non-compliance with mandatory and jurisdictional
conditions.
San Roque cannot also claim being misled, misguided or
confused by the Atlas doctrine because San Roque filed its
petition for review with the CTA more than four years
before Atlas was promulgated. The Atlas doctrine did not exist
at the time San Roque failed to comply with the 120- day period.
Thus, San Roque cannot invoke the Atlas doctrine as an excuse
for its failure to wait for the 120-day period to lapse. In any event,
the Atlas doctrine merely stated that the two-year prescriptive
period should be counted from the date of payment of the output
VAT, not from the close of the taxable quarter when the sales
involving the input VAT were made. The Atlas doctrine does
not interpret, expressly or impliedly, the 120+3052 day
periods.
In fact, Section 106(b) and (e) of the Tax Code of 1977 as
amended, which was the law cited by the Court in Atlas as the
applicable provision of the law did not yet provide for the 30-day
period for the taxpayer to appeal to the CTA from the decision or
inaction of the Commissioner.53 Thus, the Atlas doctrine cannot
be invoked by anyone to disregard compliance with the 30-
day mandatory and jurisdictional period. Also, the difference
between the Atlas doctrine on one hand, and the Mirant54 doctrine
on the other hand, is a mere 20 days. The Atlas doctrine counts
the two-year prescriptive period from the date of payment of the
output VAT, which means within 20 days after the close of the
taxable quarter. The output VAT at that time must be paid at the
time of filing of the quarterly tax returns, which were to be filed
"within 20 days following the end of each quarter."
Thus, in Atlas, the three tax refund claims listed below were
deemed timely filed because the administrative claims filed with
the Commissioner, and the petitions for review filed with the CTA,
were all filed within two years from the date of payment of the
output VAT, following Section 229:
Atlas paid the output VAT at the time it filed the quarterly tax
returns on the 20th, 18th, and 20th day after the close of the
taxable quarter. Had the twoyear prescriptive period been
counted from the "close of the taxable quarter" as expressly
stated in the law, the tax refund claims of Atlas would have
already prescribed. In contrast, the Mirant doctrine counts the
two-year prescriptive period from the "close of the taxable quarter
when the sales were made" as expressly stated in the law, which
means the last day of the taxable quarter. The 20-day
difference55 between the Atlas doctrine and the
later Mirant doctrine is not material to San Roque’s claim for
tax refund.
Whether the Atlas doctrine or the Mirant doctrine is applied to
San Roque is immaterial because what is at issue in the present
case is San Roque’s non-compliance with the 120-day mandatory
and jurisdictional period, which is counted from the date it filed its
administrative claim with the Commissioner. The 120-day period
may extend beyond the two-year prescriptive period, as long as
the administrative claim is filed within the two-year prescriptive
period. However, San Roque’s fatal mistake is that it did not wait
for the Commissioner to decide within the 120-day period, a
mandatory period whether the Atlas or the Mirant doctrine is
applied.
At the time San Roque filed its petition for review with the CTA,
the 120+30 day mandatory periods were already in the law.
Section 112(C)56 expressly grants the Commissioner 120 days
within which to decide the taxpayer’s claim. The law is clear,
plain, and unequivocal: "x x x the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of
submission of complete documents." Following the verba
legis doctrine, this law must be applied exactly as worded since it
is clear, plain, and unequivocal. The taxpayer cannot simply file a
petition with the CTA without waiting for the Commissioner’s
decision within the 120-day mandatory and jurisdictional period.
The CTA will have no jurisdiction because there will be no
"decision" or "deemed a denial" decision of the Commissioner for
the CTA to review. In San Roque’s case, it filed its petition with
the CTA a mere 13 days after it filed its administrative claim with
the Commissioner. Indisputably, San Roque knowingly violated
the mandatory 120-day period, and it cannot blame anyone but
itself.
Section 112(C) also expressly grants the taxpayer a 30-day
period to appeal to the CTA the decision or inaction of the
Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals.
(Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-
settled verba legis doctrine, this law should be applied exactly as
worded since it is clear, plain, and unequivocal. As this law
states, the taxpayer may, if he wishes, appeal the decision of the
Commissioner to the CTA within 30 days from receipt of the
Commissioner’s decision, or if the Commissioner does not act on
the taxpayer’s claim within the 120-day period, the taxpayer may
appeal to the CTA within 30 days from the expiration of the 120-
day period.
b. G.R. No. 196113 - Taganito Mining Corporation v. CIR
Like San Roque, Taganito also filed its petition for review with the
CTA without waiting for the 120-day period to lapse. Also, like
San Roque, Taganito filed its judicial claim before the
promulgation of the Atlas doctrine. Taganito filed a Petition for
Review on 14 February 2007 with the CTA. This is almost four
months before the adoption of the Atlas doctrine on 8 June 2007.
Taganito is similarly situated as San Roque - both cannot claim
being misled, misguided, or confused by the Atlas doctrine.
However, Taganito can invoke BIR Ruling No. DA-489-0357 dated
10 December 2003, which expressly ruled that the "taxpayer-
claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of
Petition for Review." Taganito filed its judicial claim after the
issuance of BIR Ruling No. DA-489-03 but before the adoption of
the Aichi doctrine. Thus, as will be explained later, Taganito is
deemed to have filed its judicial claim with the CTA on time.
c. G.R. No. 197156 – Philex Mining Corporation v. CIR
Philex (1) filed on 21 October 2005 its original VAT Return for the
third quarter of taxable year 2005; (2) filed on 20 March 2006 its
administrative claim for refund or credit; (3) filed on 17 October
2007 its Petition for Review with the CTA. The close of the third
taxable quarter in 2005 is 30 September 2005, which is the
reckoning date in computing the two-year prescriptive period
under Section 112(A).
Philex timely filed its administrative claim on 20 March 2006,
within the two-year prescriptive period. Even if the two-year
prescriptive period is computed from the date of payment of the
output VAT under Section 229, Philex still filed its administrative
claim on time. Thus, the Atlas doctrine is immaterial in this
case. The Commissioner had until 17 July 2006, the last day of
the 120-day period, to decide Philex’s claim. Since the
Commissioner did not act on Philex’s claim on or before 17 July
2006, Philex had until 17 August 2006, the last day of the 30-day
period, to file its judicial claim. The CTA EB held that 17 August
2006 was indeed the last day for Philex to file its judicial
claim. However, Philex filed its Petition for Review with the CTA
only on 17 October 2007, or four hundred twenty-six (426) days
after the last day of filing. In short, Philex was late by one year
and 61 days in filing its judicial claim. As the CTA EB correctly
found:
Evidently, the Petition for Review in C.T.A. Case No. 7687
was filed 426 days late. Thus, the Petition for Review in C.T.A.
Case No. 7687 should have been dismissed on the ground that
the Petition for Review was filed way beyond the 30-day
prescribed period; thus, no jurisdiction was acquired by the CTA
Division; x x x58 (Emphasis supplied)
Unlike San Roque and Taganito, Philex’s case is not one of
premature filing but of late filing. Philex did not file any petition
with the CTA within the 120-day period. Philex did not also file
any petition with the CTA within 30 days after the expiration of the
120-day period. Philex filed its judicial claim long after the
expiration of the 120-day period, in fact 426 days after the lapse
of the 120-day period. In any event, whether governed by
jurisprudence before, during, or after the Atlas case, Philex’s
judicial claim will have to be rejected because of late
filing. Whether the two-year prescriptive period is counted from
the date of payment of the output VAT following
the Atlas doctrine, or from the close of the taxable quarter when
the sales attributable to the input VAT were made following
the Mirant and Aichi doctrines, Philex’s judicial claim was
indisputably filed late.
The Atlas doctrine cannot save Philex from the late filing of its
judicial claim. The inaction of the Commissioner on Philex’s
claim during the 120-day period is, by express provision of law,
"deemed a denial" of Philex’s claim. Philex had 30 days from the
expiration of the 120-day period to file its judicial claim with the
CTA. Philex’s failure to do so rendered the "deemed a denial"
decision of the Commissioner final and inappealable. The right to
appeal to the CTA from a decision or "deemed a denial" decision
of the Commissioner is merely a statutory privilege, not a
constitutional right. The exercise of such statutory privilege
requires strict compliance with the conditions attached by the
statute for its exercise.59 Philex failed to comply with the statutory
conditions and must thus bear the consequences.
II. Prescriptive Periods under Section 112(A) and (C)
There are three compelling reasons why the 30-day period need
not necessarily fall within the two-year prescriptive period, as long
as the administrative claim is filed within the two-year prescriptive
period.
First, Section 112(A) clearly, plainly, and unequivocally
provides that the taxpayer "may, within two (2)
years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit
certificate or refund of the creditable input tax due or
paid to such sales." In short, the law states that the
taxpayer may apply with the Commissioner for a refund or
credit "within two (2) years," which means at anytime
within two years. Thus, the application for refund or
credit may be filed by the taxpayer with the Commissioner
on the last day of the two-year prescriptive period and it
will still strictly comply with the law. The twoyear
prescriptive period is a grace period in favor of the
taxpayer and he can avail of the full period before his right
to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner
shall decide the application for refund or credit "within one
hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in
accordance with Subsection (A)." The reference in
Section 112(C) of the submission of documents "in
support of the application filed in accordance with
Subsection A" means that the application in Section
112(A) is the administrative claim that the Commissioner
must decide within the 120-day period. In short, the two-
year prescriptive period in Section 112(A) refers to the
period within which the taxpayer can file an administrative
claim for tax refund or credit. Stated otherwise, the two-
year prescriptive period does not refer to the filing of
the judicial claim with the CTA but to the filing of the
 administrative claim with the Commissioner. As held
in Aichi, the "phrase ‘within two years x x x apply for the
issuance of a tax credit or refund’ refers to applications
for refund/credit with the CIR and not to appeals
made to the CTA."
Third, if the 30-day period, or any part of it, is required to
fall within the two-year prescriptive period (equivalent to
730 days60), then the taxpayer must file his administrative
claim for refund or credit within the first 610 days of the
two-year prescriptive period. Otherwise, the filing of the
administrative claim beyond the first 610 days will
result in the appeal to the CTA being filed beyond the
two-year prescriptive period. Thus, if the taxpayer files
his administrative claim on the 611th day, the
Commissioner, with his 120-day period, will have until the
731st day to decide the claim. If the Commissioner
decides only on the 731st day, or does not decide at all,
the taxpayer can no longer file his judicial claim with the
CTA because the two-year prescriptive period (equivalent
to 730 days) has lapsed. The 30-day period granted by
law to the taxpayer to file an appeal before the CTA
becomes utterly useless, even if the taxpayer complied
with the law by filing his administrative claim within the
two-year prescriptive period.
The theory that the 30-day period must fall within the two-year
prescriptive period adds a condition that is not found in the law. It
results in truncating 120 days from the 730 days that the law
grants the taxpayer for filing his administrative claim with the
Commissioner. This Court cannot interpret a law to defeat, wholly
or even partly, a remedy that the law expressly grants in clear,
plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear,
plain, and unequivocal language. The taxpayer can file his
administrative claim for refund or credit at anytime within the two-
year prescriptive period. If he files his claim on the last day of the
two-year prescriptive period, his claim is still filed on time. The
Commissioner will have 120 days from such filing to decide the
claim. If the Commissioner decides the claim on the 120th day, or
does not decide it on that day, the taxpayer still has 30 days to
file his judicial claim with the CTA. This is not only the plain
meaning but also the only logical interpretation of Section 112(A)
and (C).
III. "Excess" Input VAT and "Excessively" Collected Tax
The input VAT is not "excessively" collected as understood under
Section 229 because at the time the input VAT is collected the
amount paid is correct and proper. The input VAT is a tax
liability of, and legally paid by, a VAT-registered seller61 of goods,
properties or services used as input by another VAT-registered
person in the sale of his own goods, properties, or services. This
tax liability is true even if the seller passes on the input VAT to the
buyer as part of the purchase price. The second VAT-registered
person, who is not legally liable for the input VAT, is the one who
applies the input VAT as credit for his own output VAT.62 If the
input VAT is in fact "excessively" collected as understood under
Section 229, then it is the first VAT-registered person - the
taxpayer who is legally liable and who is deemed to have legally
paid for the input VAT - who can ask for a tax refund or credit
under Section 229 as an ordinary refund or credit outside of the
VAT System. In such event, the second VAT-registered taxpayer
will have no input VAT to offset against his own output VAT.
In a claim for refund or credit of "excess" input VAT under Section
110(B) and Section 112(A), the input VAT is not "excessively"
collected as understood under Section 229. At the time of
payment of the input VAT the amount paid is the correct and
proper amount. Under the VAT System, there is no claim or issue
that the input VAT is "excessively" collected, that is, that the input
VAT paid is more than what is legally due. The person legally
liable for the input VAT cannot claim that he overpaid the input
VAT by the mere existence of an "excess" input VAT. The term
"excess" input VAT simply means that the input VAT available as
credit exceeds the output VAT, not that the input VAT is
excessively collected because it is more than what is legally due.
Thus, the taxpayer who legally paid the input VAT cannot claim
for refund or credit of the input VAT as "excessively" collected
under Section 229.
Under Section 229, the prescriptive period for filing a judicial
claim for refund is two years from the date of payment of the tax
"erroneously, x x x illegally, x x x excessively or in any manner
wrongfully collected." The prescriptive period is reckoned from
the date the person liable for the tax pays the tax. Thus, if the
input VAT is in fact "excessively" collected, that is, the person
liable for the tax actually pays more than what is legally due, the
taxpayer must file a judicial claim for refund within two years from
his date of payment. Only the person legally liable to pay the
tax can file the judicial claim for refund. The person to whom
the tax is passed on as part of the purchase price has no
personality to file the judicial claim under Section 229.63
Under Section 110(B) and Section 112(A), the prescriptive period
for filing a judicial claim for "excess" input VAT is two years from
the close of the taxable quarter when the sale was made by the
person legally liable to pay the output VAT. This prescriptive
period has no relation to the date of payment of the
"excess" input VAT. The "excess" input VAT may have been paid
for more than two years but this does not bar the filing of a judicial
claim for "excess" VAT under Section 112(A), which has a
different reckoning period from Section 229. Moreover, the
person claiming the refund or credit of the input VAT is not the
person who legally paid the input VAT. Such person seeking the
VAT refund or credit does not claim that the input VAT was
"excessively" collected from him, or that he paid an input VAT
that is more than what is legally due. He is not the taxpayer who
legally paid the input VAT.
As its name implies, the Value-Added Tax system is a tax on the
value added by the taxpayer in the chain of transactions. For
simplicity and efficiency in tax collection, the VAT is imposed not
just on the value added by the taxpayer, but on the entire selling
price of his goods, properties or services. However, the taxpayer
is allowed a refund or credit on the VAT previously paid by those
who sold him the inputs for his goods, properties, or services. The
net effect is that the taxpayer pays the VAT only on the value that
he adds to the goods, properties, or services that he actually
sells.
Under Section 110(B), a taxpayer can apply his input VAT only
against his output VAT. The only exception is when the taxpayer
is expressly "zero-rated or effectively zero-rated" under the law,
like companies generating power through renewable sources of
energy.64 Thus, a non zero-rated VAT-registered taxpayer who
has no output VAT because he has no sales cannot claim a tax
refund or credit of his unused input VAT under the VAT System.
Even if the taxpayer has sales but his input VAT exceeds his
output VAT, he cannot seek a tax refund or credit of his "excess"
input VAT under the VAT System. He can only carry-over and
apply his "excess" input VAT against his future output VAT.
If such "excess" input VAT is an "excessively" collected tax, the
taxpayer should be able to seek a refund or credit for such
"excess" input VAT whether or not he has output VAT. The VAT
System does not allow such refund or credit. Such "excess" input
VAT is not an "excessively" collected tax under Section 229. The
"excess" input VAT is a correctly and properly collected tax.
However, such "excess" input VAT can be applied against the
output VAT because the VAT is a tax imposed only on the value
added by the taxpayer. If the input VAT is in fact "excessively"
collected under Section 229, then it is the person legally liable to
pay the input VAT, not the person to whom the tax was passed
on as part of the purchase price and claiming credit for the input
VAT under the VAT System, who can file the judicial claim under
Section 229.
Any suggestion that the "excess" input VAT under the VAT
System is an "excessively" collected tax under Section 229 may
lead taxpayers to file a claim for refund or credit for such "excess"
input VAT under Section 229 as an ordinary tax refund or credit
outside of the VAT System. Under Section 229, mere payment of
a tax beyond what is legally due can be claimed as a refund or
credit. There is no requirement under Section 229 for an output
VAT or subsequent sale of goods, properties, or services using
materials subject to input VAT.
From the plain text of Section 229, it is clear that what can be
refunded or credited is a tax that is "erroneously, x x x illegally, x
x x excessively or in any manner wrongfully collected." In short,
there must be a wrongful payment because what is paid, or part
of it, is not legally due. As the Court held in Mirant, Section 229
should "apply only to instances of erroneous payment or
illegal collection of internal revenue taxes." Erroneous or
wrongful payment includes excessive payment because they all
refer to payment of taxes not legally due. Under the VAT
System, there is no claim or issue that the "excess" input VAT is
"excessively or in any manner wrongfully collected." In fact, if the
"excess" input VAT is an "excessively" collected tax under
Section 229, then the taxpayer claiming to apply such
"excessively" collected input VAT to offset his output VAT may
have no legal basis to make such offsetting. The person legally
liable to pay the input VAT can claim a refund or credit for such
"excessively" collected tax, and thus there will no longer be any
"excess" input VAT. This will upend the present VAT System as
we know it.
IV. Effectivity and Scope of
the Atlas , Mirant and Aichi Doctrines
The Atlas doctrine, which held that claims for refund or credit of
input VAT must comply with the two-year prescriptive period
under Section 229, should be effective only from its
promulgation on 8 June 2007 until its abandonment on 12
September 2008 in Mirant. The Atlas doctrine was limited to the
reckoning of the two-year prescriptive period from the date of
payment of the output VAT. Prior to the Atlas doctrine, the two-
year prescriptive period for claiming refund or credit of input VAT
should be governed by Section 112(A) following the verba
legis rule. The Mirant ruling, which abandoned the Atlas doctrine,
adopted the verba legis rule, thus applying Section 112(A) in
computing the two-year prescriptive period in claiming refund or
credit of input VAT.
The Atlas doctrine has no relevance to the 120+30 day periods
under Section 112(C) because the application of the 120+30 day
periods was not in issue in Atlas. The application of the 120+30
day periods was first raised in Aichi, which adopted the verba
legis rule in holding that the 120+30 day periods are mandatory
and jurisdictional. The language of Section 112(C) is plain, clear,
and unambiguous. When Section 112(C) states that "the
Commissioner shall grant a refund or issue the tax credit within
one hundred twenty (120) days from the date of submission of
complete documents," the law clearly gives the Commissioner
120 days within which to decide the taxpayer’s claim. Resort to
the courts prior to the expiration of the 120-day period is a patent
violation of the doctrine of exhaustion of administrative remedies,
a ground for dismissing the judicial suit due to prematurity.
Philippine jurisprudence is awash with cases affirming and
reiterating the doctrine of exhaustion of administrative
remedies.65 Such doctrine is basic and elementary.
When Section 112(C) states that "the taxpayer affected may,
within thirty (30) days from receipt of the decision denying the
claim or after the expiration of the one hundred twenty-day
period, appeal the decision or the unacted claim with the Court of
Tax Appeals," the law does not make the 120+30 day periods
optional just because the law uses the word "may." The word
"may" simply means that the taxpayer may or may not
appeal the decision of the Commissioner within 30 days from
receipt of the decision, or within 30 days from the expiration of the
120-day period. Certainly, by no stretch of the imagination can
the word "may" be construed as making the 120+30 day periods
optional, allowing the taxpayer to file a judicial claim one day after
filing the administrative claim with the Commissioner.
The old rule66 that the taxpayer may file the judicial claim, without
waiting for the Commissioner’s decision if the two-year
prescriptive period is about to expire, cannot apply because that
rule was adopted before the enactment of the 30-day period. The
30-day period was adopted precisely to do away with the old
rule, so that under the VAT System the taxpayer will always
have 30 days to file the judicial claim even if the
Commissioner acts only on the 120th day, or does not act at
all during the 120-day period. With the 30-day period always
available to the taxpayer, the taxpayer can no longer file a judicial
claim for refund or credit of input VAT without waiting for the
Commissioner to decide until the expiration of the 120-day period.
To repeat, a claim for tax refund or credit, like a claim for tax
exemption, is construed strictly against the taxpayer. One of the
conditions for a judicial claim of refund or credit under the VAT
System is compliance with the 120+30 day mandatory and
jurisdictional periods. Thus, strict compliance with the 120+30 day
periods is necessary for such a claim to prosper, whether before,
during, or after the effectivity of the Atlas doctrine, except for the
period from the issuance of BIR Ruling No. DA-489-03 on 10
December 2003 to 6 October 2010 when the Aichi doctrine was
adopted, which again reinstated the 120+30 day periods as
mandatory and jurisdictional.
V. Revenue Memorandum Circular No. 49-03 (RMC 49-03)
dated 15 April 2003
There is nothing in RMC 49-03 that states, expressly or impliedly,
that the taxpayer need not wait for the 120-day period to expire
before filing a judicial claim with the CTA. RMC 49-03 merely
authorizes the BIR to continue processing the administrative
claim even after the taxpayer has filed its judicial claim, without
saying that the taxpayer can file its judicial claim before the
expiration of the 120-day period. RMC 49-03 states: "In cases
where the taxpayer has filed a ‘Petition for Review’ with the Court
of Tax Appeals involving a claim for refund/TCC that is pending at
the administrative agency (either the Bureau of Internal Revenue
or the One- Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center of the Department of Finance), the
administrative agency and the court may act on the case
separately." Thus, if the taxpayer files its judicial claim before the
expiration of the 120-day period, the BIR will nevertheless
continue to act on the administrative claim because such
premature filing cannot divest the Commissioner of his statutory
power and jurisdiction to decide the administrative claim within
the 120-day period.
On the other hand, if the taxpayer files its judicial claim after the
120- day period, the Commissioner can still continue to evaluate
the administrative claim. There is nothing new in this because
even after the expiration of the 120-day period, the Commissioner
should still evaluate internally the administrative claim for
purposes of opposing the taxpayer’s judicial claim, or even for
purposes of determining if the BIR should actually concede to the
taxpayer’s judicial claim. The internal administrative evaluation of
the taxpayer’s claim must necessarily continue to enable the BIR
to oppose intelligently the judicial claim or, if the facts and the law
warrant otherwise, for the BIR to concede to the judicial claim,
resulting in the termination of the judicial proceedings.
What is important, as far as the present cases are
concerned, is that the mere filing by a taxpayer of a judicial
claim with the CTA before the expiration of the 120-day
period cannot operate to divest the Commissioner of his
jurisdiction to decide an administrative claim within the 120-
day mandatory period, unless the Commissioner has clearly
given cause for equitable estoppel to apply as expressly
recognized in Section 246 of the Tax Code.67
VI. BIR Ruling No. DA-489-03 dated 10 December 2003
BIR Ruling No. DA-489-03 does provide a valid claim for
equitable estoppel under Section 246 of the Tax Code. BIR
Ruling No. DA-489-03 expressly states that the "taxpayer-
claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of
Petition for Review." Prior to this ruling, the BIR held, as shown
by its position in the Court of Appeals,68 that the expiration of the
120-day period is mandatory and jurisdictional before a judicial
claim can be filed.
There is no dispute that the 120-day period is mandatory and
jurisdictional, and that the CTA does not acquire jurisdiction over
a judicial claim that is filed before the expiration of the 120-day
period. There are, however, two exceptions to this rule. The first
exception is if the Commissioner, through a specific ruling,
misleads a particular taxpayer to prematurely file a judicial claim
with the CTA. Such specific ruling is applicable only to such
particular taxpayer. The second exception is where the
Commissioner, through a general interpretative rule issued under
Section 4 of the Tax Code, misleads all taxpayers into filing
prematurely judicial claims with the CTA. In these cases, the
Commissioner cannot be allowed to later on question the CTA’s
assumption of jurisdiction over such claim since equitable
estoppel has set in as expressly authorized under Section 246 of
the Tax Code.
Section 4 of the Tax Code, a new provision introduced by RA
8424, expressly grants to the Commissioner the power to
interpret tax laws, thus:
Sec. 4. Power of the Commissioner To Interpret Tax Laws and To
Decide Tax Cases. — The power to interpret the provisions of
this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by the
Secretary of Finance.
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal
Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals.
Since the Commissioner has exclusive and original jurisdiction
to interpret tax laws, taxpayers acting in good faith should not
be made to suffer for adhering to general interpretative rules of
the Commissioner interpreting tax laws, should such
interpretation later turn out to be erroneous and be reversed by
the Commissioner or this Court. Indeed, Section 246 of the Tax
Code expressly provides that a reversal of a BIR regulation or
ruling cannot adversely prejudice a taxpayer who in good faith
relied on the BIR regulation or ruling prior to its reversal. Section
246 provides 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
Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the
taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits
material facts from his return or any document required of
him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau
of Internal Revenue are materially different from the facts
on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis
supplied)
Thus, a general interpretative rule issued by the Commissioner
may be relied upon by taxpayers from the time the rule is issued
up to its reversal by the Commissioner or this Court. Section 246
is not limited to a reversal only by the Commissioner because this
Section expressly states, "Any revocation, modification or
reversal" without specifying who made the revocation,
modification or reversal. Hence, a reversal by this Court is
covered under Section 246.
Taxpayers should not be prejudiced by an erroneous
interpretation by the Commissioner, particularly on a difficult
question of law. The abandonment of the Atlas doctrine
by Mirant and Aichi69 is proof that the reckoning of the prescriptive
periods for input VAT tax refund or credit is a difficult question of
law. The abandonment of the Atlas doctrine did not result in Atlas,
or other taxpayers similarly situated, being made to return the tax
refund or credit they received or could have received
under Atlas prior to its abandonment. This Court is
applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general
interpretative rule issued by the Commissioner, like the reversal
of a specific BIR ruling under Section 246, should also apply
prospectively. As held by this Court in CIR v. Philippine Health
Care Providers, Inc.:70
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this
Court held that under Section 246 of the 1997 Tax Code, the
Commissioner of Internal Revenue is precluded from
adopting a position contrary to one previously taken where
injustice would result to the taxpayer. Hence, where an
assessment for deficiency withholding income taxes was made,
three years after a new BIR Circular reversed a previous one
upon which the taxpayer had relied upon, such an assessment
was prejudicial to the taxpayer. To rule otherwise, opined the
Court, would be contrary to the tenets of good faith, equity, and
fair play.
This Court has consistently reaffirmed its ruling in ABS-CBN
Broadcasting Corp. in the later cases of Commissioner of
1âwphi1
Internal Revenue v. Borroughs, Ltd., Commissioner of Internal
Revenue v. Mega Gen. Mdsg. Corp., Commissioner of Internal
Revenue v. Telefunken Semiconductor (Phils.) Inc.,
and Commissioner of Internal Revenue v. Court of Appeals. The
rule is that the BIR rulings have no retroactive effect where a
grossly unfair deal would result to the prejudice of the
taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet
Corporation, wherein the taxpayer was entitled to tax refunds or
credits based on the BIR’s own issuances but later was suddenly
saddled with deficiency taxes due to its subsequent ruling
changing the category of the taxpayer’s transactions for the
purpose of paying its VAT, this Court ruled that applying such
ruling retroactively would be prejudicial to the taxpayer.
(Emphasis supplied)
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a
general interpretative rule applicable to all taxpayers or a specific
ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule
because it was a response to a query made, not by a particular
taxpayer, but by a government agency tasked with processing tax
refunds and credits, that is, the One Stop Shop Inter-Agency
Tax Credit and Drawback Center of the Department of
Finance. This government agency is also the addressee, or the
entity responded to, in BIR Ruling No. DA-489-03. Thus, while
this government agency mentions in its query to the
Commissioner the administrative claim of Lazi Bay Resources
Development, Inc., the agency was in fact asking the
Commissioner what to do in cases like the tax claim of Lazi Bay
Resources Development, Inc., where the taxpayer did not wait for
the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule.
Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from
the time of its issuance on 10 December 2003 up to its reversal
by this Court in Aichi on 6 October 2010, where this Court held
that the 120+30 day periods are mandatory and jurisdictional
However, BIR Ruling No. DA-489-03 cannot be given retroactive
effect for four reasons: first, it is admittedly an erroneous
interpretation of the law; second, prior to its issuance, the BIR
held that the 120-day period was mandatory and jurisdictional,
which is the correct interpretation of the law; third, prior to its
issuance, no taxpayer can claim that it was misled by the BIR into
filing a judicial claim prematurely; and fourth, a claim for tax
refund or credit, like a claim for tax exemption, is strictly
construed against the taxpayer.
San Roque, therefore, cannot benefit from BIR Ruling No. DA-
489-03 because it filed its judicial claim prematurely on 10 April
2003, before the issuance of BIR Ruling No. DA-489-03 on 10
December 2003. To repeat, San Roque cannot claim that it was
misled by the BIR into filing its judicial claim prematurely because
BIR Ruling No. DA-489-03 was issued only after San Roque filed
its judicial claim. At the time San Roque filed its judicial claim, the
law as applied and administered by the BIR was that the
Commissioner had 120 days to act on administrative claims. This
was in fact the position of the BIR prior to the issuance of BIR
Ruling No. DA-489-03. Indeed, San Roque never claimed the
benefit of BIR Ruling No. DA-489-03 or RMC 49-03, whether
in this Court, the CTA, or before the Commissioner.
Taganito, however, filed its judicial claim with the CTA on 14
February 2007, after the issuance of BIR Ruling No. DA-489-03
on 10 December 2003. Truly, Taganito can claim that in filing its
judicial claim prematurely without waiting for the 120-day period
to expire, it was misled by BIR Ruling No. DA-489-03. Thus,
Taganito can claim the benefit of BIR Ruling No. DA-489-03,
which shields the filing of its judicial claim from the vice of
prematurity.
Philex’s situation is not a case of premature filing of its judicial
claim but of late filing, indeed very late filing. BIR Ruling No. DA-
489-03 allowed premature filing of a judicial claim, which means
non-exhaustion of the 120-day period for the Commissioner to act
on an administrative claim. Philex cannot claim the benefit of BIR
Ruling No. DA-489-03 because Philex did not file its judicial claim
prematurely but filed it long after the lapse of the 30-day
period following the expiration of the 120-day period. In fact,
Philex filed its judicial claim 426 days after the lapse of the 30-day
period.
VII. Existing Jurisprudence
There is no basis whatsoever to the claim that in five cases this
Court had already made a ruling that the filing dates of the
administrative and judicial claims are inconsequential, as long as
they are within the two-year prescriptive period. The effect of the
claim of the dissenting opinions is that San Roque’s failure to wait
for the 120-day mandatory period to lapse is inconsequential,
thus allowing San Roque to claim the tax refund or credit.
However, the five cases cited by the dissenting opinions do not
support even remotely the claim that this Court had already made
such a ruling. None of these five cases mention, cite, discuss,
rule or even hint that compliance with the 120-day mandatory
period is inconsequential as long as the administrative and
judicial claims are filed within the two-year prescriptive
period.
In CIR v. Toshiba Information Equipment (Phils.), Inc.,71 the issue
was whether any output VAT was actually passed on to Toshiba
that it could claim as input VAT subject to tax credit or refund.
The Commissioner argued that "although Toshiba may be a VAT-
registered taxpayer, it is not engaged in a VAT-taxable business."
The Commissioner cited Section 4.106-1 of Revenue Regulations
No. 75 that "refund of input taxes on capital goods shall be
allowed only to the extent that such capital goods are used in
VAT-taxable business." In the words of the Court, "Ultimately,
however, the issue still to be resolved herein shall be whether
respondent Toshiba is entitled to the tax credit/refund of its input
VAT on its purchases of capital goods and services, to which this
Court answers in the affirmative." Nowhere in this case did the
Court discuss, state, or rule that the filing dates of the
administrative and judicial claims are inconsequential, as long as
they are within the two-year prescriptive period.
In Intel Technology Philippines, Inc. v. CIR,72 the Court stated:
"The issues to be resolved in the instant case are (1) whether the
absence of the BIR authority to print or the absence of the TIN-V
in petitioner’s export sales invoices operates to forfeit its
entitlement to a tax refund/credit of its unutilized input VAT
attributable to its zero-rated sales; and (2) whether petitioner’s
failure to indicate "TIN-V" in its sales invoices automatically
invalidates its claim for a tax credit certification." Again, nowhere
in this case did the Court discuss, state, or rule that the filing
dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year
prescriptive period.
In AT&T Communications Services Philippines, Inc. v. CIR,73 the
Court stated: "x x x the CTA First Division, conceding that
petitioner’s transactions fall under the classification of zero-rated
sales, nevertheless denied petitioner’s claim ‘for lack of
substantiation,’ x x x." The Court quoted the ruling of the First
Division that "valid VAT official receipts, and not mere sale
invoices, should have been submitted" by petitioner to
substantiate its claim. The Court further stated: "x x x the CTA En
Banc, x x x affirmed x x x the CTA First Division," and "petitioner’s
motion for reconsideration having been denied x x x, the present
petition for review was filed." Clearly, the sole issue in this case is
whether petitioner complied with the substantiation requirements
in claiming for tax refund or credit. Again, nowhere in this case
did the Court discuss, state, or rule that the filing dates of the
administrative and judicial claims are inconsequential, as long as
they are within the two-year prescriptive period.
In CIR v. Ironcon Builders and Development Corporation,74 the
Court put the issue in this manner: "Simply put, the sole issue the
petition raises is whether or not the CTA erred in granting
respondent Ironcon’s application for refund of
its excess creditable VAT withheld." The Commissioner argued
that "since the NIRC does not specifically grant taxpayers the
option to refund excess creditable VAT withheld, it follows that
such refund cannot be allowed." Thus, this case is solely about
whether the taxpayer has the right under the NIRC to ask for a
cash refund of excess creditable VAT withheld. Again, nowhere
in this case did the Court discuss, state, or rule that the filing
dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year
prescriptive period.
In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu
Toyo was exempt or subject to VAT. Compliance with the 120-
day period was never an issue in Cebu Toyo. As the Court
explained:
Both the Commissioner of Internal Revenue and the Office of the
Solicitor General argue that respondent Cebu Toyo Corporation,
as a PEZA-registered enterprise, is exempt from national and
local taxes, including VAT, under Section 24 of Rep. Act No.
7916 and Section 109 of the NIRC. Thus, they contend that
respondent Cebu Toyo Corporation is not entitled to any refund or
credit on input taxes it previously paid as provided under Section
4.103-1 of Revenue Regulations No. 7-95, notwithstanding its
registration as a VAT taxpayer. For petitioner claims that said
registration was erroneous and did not confer upon the
respondent any right to claim recognition of the input tax credit.
The respondent counters that it availed of the income tax holiday
under E.O. No. 226 for four years from August 7, 1995 making it
exempt from income tax but not from other taxes such as
VAT. Hence, according to respondent, its export sales are
not exempt from VAT, contrary to petitioner’s claim, but its
export sales is subject to 0% VAT. Moreover, it argues that it
was able to establish through a report certified by an independent
Certified Public Accountant that the input taxes it incurred from
April 1, 1996 to December 31, 1997 were directly attributable to
its export sales. Since it did not have any output tax against which
said input taxes may be offset, it had the option to file a claim for
refund/tax credit of its unutilized input taxes.
Considering the submission of the parties and the evidence on
record, we find the petition bereft of merit.
Petitioner’s contention that respondent is not entitled to
refund for being exempt from VAT is untenable. This
argument turns a blind eye to the fiscal incentives granted to
PEZA-registered enterprises under Section 23 of Rep. Act No.
7916. Note that under said statute, the respondent had two
options with respect to its tax burden. It could avail of an income
tax holiday pursuant to provisions of E.O. No. 226, thus exempt it
from income taxes for a number of years but not from other
internal revenue taxes such as VAT; or it could avail of the tax
exemptions on all taxes, including VAT under P.D. No. 66 and
pay only the preferential tax rate of 5% under Rep. Act No. 7916.
Both the Court of Appeals and the Court of Tax Appeals found
that respondent availed of the income tax holiday for four (4)
years starting from August 7, 1995, as clearly reflected in its 1996
and 1997 Annual Corporate Income Tax Returns, where
respondent specified that it was availing of the tax relief under
E.O. No. 226. Hence, respondent is not exempt from VAT and
it correctly registered itself as a VAT taxpayer. In fine, it is
engaged in taxable rather than exempt transactions.
(Emphasis supplied)
Clearly, the issue in Cebu Toyo was whether the taxpayer
was exempt from VAT or subject to VAT at 0% tax rate. If
subject to 0% VAT rate, the taxpayer could claim a refund or
credit of its input VAT. Again, nowhere in this case did the Court
discuss, state, or rule that the filing dates of the administrative
and judicial claims are inconsequential, as long as they are within
the two-year prescriptive period.
While this Court stated in the narration of facts in Cebu Toyo that
the taxpayer "did not bother to wait for the Resolution of its
(administrative) claim by the CIR" before filing its judicial claim
with the CTA, this issue was not raised before the Court.
Certainly, this statement of the Court is not a binding precedent
that the taxpayer need not wait for the 120-day period to lapse.
Any issue, whether raised or not by the parties, but not
passed upon by the Court, does not have any value as
precedent. As this Court has explained as early as 1926:
It is contended, however, that the question before us was
answered and resolved against the contention of the appellant in
the case of Bautista vs. Fajardo (38 Phil. 624). In that case no
question was raised nor was it even suggested that said section
216 did not apply to a public officer. That question was not
discussed nor referred to by any of the parties interested in that
case. It has been frequently decided that the fact that a statute
has been accepted as valid, and invoked and applied for many
years in cases where its validity was not raised or passed on,
does not prevent a court from later passing on its validity, where
that question is squarely and properly raised and
presented. Where a question passes the Court sub silentio,
the case in which the question was so passed is not binding
on the Court (McGirr vs. Hamilton and Abreu, 30 Phil. 563),
nor should it be considered as a precedent. (U.S. vs. Noriega
and Tobias, 31 Phil. 310; Chicote vs. Acasio, 31 Phil. 401; U.S.
vs. More, 3 Cranch [U.S.] 159, 172; U.S. vs. Sanges, 144 U.S.
310, 319; Cross vs. Burke, 146 U.S. 82.) For the reasons given in
the case of McGirr vs. Hamilton and Abreu, supra, the decision in
the case of Bautista vs. Fajardo, supra, can have no binding force
in the interpretation of the question presented here.76 (Emphasis
supplied)
In Cebu Toyo, the nature of the 120-day period, whether it is
mandatory or optional, was not even raised as an issue by any of
the parties. The Court never passed upon this issue.
Thus, Cebu Toyo does not constitute binding precedent on the
nature of the 120-day period.
There is also the claim that there are numerous CTA decisions
allegedly supporting the argument that the filing dates of the
administrative and judicial claims are inconsequential, as long as
they are within the two-year prescriptive period. Suffice it to state
that CTA decisions do not constitute precedents, and do not bind
this Court or the public. That is why CTA decisions are
appealable to this Court, which may affirm, reverse or modify the
CTA decisions as the facts and the law may warrant. Only
decisions of this Court constitute binding precedents, forming part
of the Philippine legal system.77 As held by this Court in The
Philippine Veterans Affairs Office v. Segundo:78
x x x Let it be admonished that decisions of the Supreme Court
"applying or interpreting the laws or the Constitution . . . form part
of the legal system of the Philippines," and, as it were, "laws" by
their own right because they interpret what the laws say or
mean. Unlike rulings of the lower courts, which bind the
parties to specific cases alone, our judgments are universal
in their scope and application, and equally mandatory in
character. Let it be warned that to defy our decisions is to court
contempt. (Emphasis supplied)
The same basic doctrine was reiterated by this Court in De Mesa
v. Pepsi Cola Products Phils., Inc.:79
The principle of stare decisis et non quieta movere is entrenched
in Article 8 of the Civil Code, to wit:
ART. 8. Judicial decisions applying or interpreting the laws or the
Constitution shall form a part of the legal system of the
Philippines.
It enjoins adherence to judicial precedents. It requires our
courts to follow a rule already established in a final decision
of the Supreme Court. That decision becomes a judicial
precedent to be followed in subsequent cases by all courts in the
land. The doctrine of stare decisis is based on the principle that
once a question of law has been examined and decided, it should
be deemed settled and closed to further argument. (Emphasis
supplied)
VIII. Revenue Regulations No. 7-95 Effective 1 January 1996
Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own
express terms, applies only if the taxpayer files the judicial claim
"after" the lapse of the 60-day period, a period with which San
Roque failed to comply. Under Section 4.106-2(c), the 60-day
period is still mandatory and jurisdictional.
Moreover, it is a hornbook principle that a prior administrative
regulation can never prevail over a later contrary law, more so in
this case where the later law was enacted precisely to amend the
prior administrative regulation and the law it implements.
The laws and regulation involved are as follows:
1977 Tax Code, as amended by Republic Act No. 7716 (1994)
Sec. 106. Refunds or tax credits of creditable input tax. —
(a) x x x x
(d) Period within which refund or tax credit of input tax
shall be made - In proper cases, the Commissioner shall
grant a refund or issue the tax credit for creditable input
taxes within sixty (60) days from the date of submission
of complete documents in support of the application filed
in accordance with subparagraphs (a) and (b) hereof. In
case of full or partial denial of the claim for tax refund or
tax credit, or the failure on the part of the
Commissioner to act on the application within the
period prescribed above, the taxpayer affected may,
within thirty (30) days from receipt of the decision
denying the claim or after the expiration of the sixty-
 day period, appeal the decision or the unacted claim
with the Court of Tax Appeals.
Revenue Regulations No. 7-95 (1996)
Section 4.106-2. Procedures for claiming refunds or tax credits of
input tax — (a) x x x
xxxx
(c) Period within which refund or tax credit of input taxes shall be
made. — In proper cases, the Commissioner shall grant a tax
credit/refund for creditable input taxes within sixty (60) days from
the date of submission of complete documents in support of the
application filed in accordance with subparagraphs (a) and (b)
above.
In case of full or partial denial of the claim for tax credit/refund as
decided by the Commissioner of Internal Revenue, the taxpayer
may appeal to the Court of Tax Appeals within thirty (30) days
from the receipt of said denial, otherwise the decision will become
final. However, if no action on the claim for tax credit/refund
has been taken by the Commissioner of Internal
Revenue after the sixty (60) day period from the date of
submission of the application but before the lapse of the two
(2) year period from the date of filing of the VAT return for
the taxable quarter, the taxpayer may appeal to the Court of
Tax Appeals.
xxxx
1997 Tax Code
Section 112. Refunds or Tax Credits of Input Tax —
(A) x x x
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall
be made. — In proper cases, the Commissioner shall grant the
refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application
filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or
tax credit, or the failure on the part of the Commissioner to
act on the application within the period prescribed above,
the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the
expiration of the hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals.
There can be no dispute that under Section 106(d) of the 1977
Tax Code, as amended by RA 7716, the Commissioner has a 60-
day period to act on the administrative claim. This 60-day period
is mandatory and jurisdictional.
Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change
this, so that the 60-day period is no longer mandatory and
jurisdictional? The obvious answer is no.
Section 4.106-2(c) itself expressly states that if, "after the sixty
(60) day period," the Commissioner fails to act on the
administrative claim, the taxpayer may file the judicial claim even
"before the lapse of the two (2) year period." Thus, under
Section 4.106-2(c) the 60-day period is still mandatory and
jurisdictional.
Section 4.106-2(c) did not change Section 106(d) as amended by
RA 7716, but merely implemented it, for two
reasons. First, Section 4.106-2(c) still expressly requires
compliance with the 60-day period. This cannot be disputed. 1âwphi1
Second, under the novel amendment introduced by RA 7716,
mere inaction by the Commissioner during the 60-day period
is deemed a denial of the claim. Thus, Section 4.106-2(c) states
that "if no action on the claim for tax refund/credit has been taken
by the Commissioner after the sixty (60) day period," the
taxpayer "may" already file the judicial claim even long before the
lapse of the two-year prescriptive period. Prior to the amendment
by RA 7716, the taxpayer had to wait until the two-year
prescriptive period was about to expire if the Commissioner did
not act on the claim.80 With the amendment by RA 7716, the
taxpayer need not wait until the two-year prescriptive period is
about to expire before filing the judicial claim because mere
inaction by the Commissioner during the 60-day period is deemed
a denial of the claim. This is the meaning of the phrase "but
before the lapse of the two (2) year period" in Section 4.106-
2(c). As Section 4.106- 2(c) reiterates that the judicial claim can
be filed only "after the sixty (60) day period," this period
remains mandatory and jurisdictional. Clearly, Section 4.106-2(c)
did not amend Section 106(d) but merely faithfully implemented it.
Even assuming, for the sake of argument, that Section 4.106-2(c)
of Revenue Regulations No. 7-95, an administrative issuance,
amended Section 106(d) of the Tax Code to make the period
given to the Commissioner non-mandatory, still the 1997 Tax
Code, a much later law, reinstated the original intent and
provision of Section 106(d) by extending the 60-day period to 120
days and re-adopting the original wordings of Section 106(d).
Thus, Section 4.106-2(c), a mere administrative issuance,
becomes inconsistent with Section 112(D), a later law. Obviously,
the later law prevails over a prior inconsistent administrative
issuance.
Section 112(D) of the 1997 Tax Code is clear, unequivocal, and
categorical that the Commissioner has 120 days to act on an
administrative claim. The taxpayer can file the judicial claim
(1) only within thirty days after the Commissioner partially or
fully denies the claim within the 120- day period, or (2) only
within thirty days from the expiration of the 120- day period if
the Commissioner does not act within the 120-day period.
There can be no dispute that upon effectivity of the 1997 Tax
Code on 1 January 1998, or more than five years before San
Roque filed its administrative claim on 28 March 2003, the law
has been clear: the 120- day period is mandatory and
jurisdictional. San Roque’s claim, having been filed
administratively on 28 March 2003, is governed by the 1997 Tax
Code, not the 1977 Tax Code. Since San Roque filed its judicial
claim before the expiration of the 120-day mandatory and
jurisdictional period, San Roque’s claim cannot prosper.
San Roque cannot also invoke Section 4.106-2(c), which
expressly provides that the taxpayer can only file the judicial
claim "after" the lapse of the 60-day period from the filing of the
administrative claim. San Roque filed its judicial claim just 13
days after filing its administrative claim. To recall, San Roque
filed its judicial claim on 10 April 2003, a mere 13 days after it
filed its administrative claim.
Even if, contrary to all principles of statutory construction as well
as plain common sense, we gratuitously apply now Section
4.106-2(c) of Revenue Regulations No. 7-95, still San Roque
cannot recover any refund or credit because San Roque did
not wait for the 60-day period to lapse, contrary to the
express requirement in Section 4.106-2(c). In short, San
Roque does not even comply with Section 4.106-2(c). A claim for
tax refund or credit is strictly construed against the taxpayer, who
must prove that his claim clearly complies with all the conditions
for granting the tax refund or credit. San Roque did not comply
with the express condition for such statutory grant.
A final word. Taxes are the lifeblood of the nation. The Philippines
has been struggling to improve its tax efficiency collection for the
longest time with minimal success. Consequently, the Philippines
has suffered the economic adversities arising from poor tax
collections, forcing the government to continue borrowing to fund
the budget deficits. This Court cannot turn a blind eye to this EN BANC
economic malaise by being unduly liberal to taxpayers who do not
comply with statutory requirements for tax refunds or credits. The G.R. No. 187485 October 8, 2013
tax refund claims in the present cases are not a pittance. Many
other companies stand to gain if this Court were to rule otherwise. COMMISSIONER OF INTERNAL REVENUE, Petitioner,
The dissenting opinions will turn on its head the well-settled vs.
doctrine that tax refunds are strictly construed against the SAN ROQUE POWER CORPORATION, Respondent.
taxpayer.
x-----------------------x
WHEREFORE, the Court hereby (1) GRANTS the petition of the
Commissioner of Internal Revenue in G.R. No. 187485
G.R. No. 196113
to DENY the P483,797,599.65 tax refund or credit claim of San
Roque Power Corporation; (2) GRANTS the petition of Taganito
Mining Corporation in G.R. No. 196113 for a tax refund or credit TAGANITO MINING CORPORATION, Petitioner,
of P8,365,664.38; and (3) DENIES the petition of Philex Mining vs.
Corporation in G.R. No. 197156 for a tax refund or credit of COMMISSIONER OF INTERNAL REVENUE, Respondent.
P23,956,732.44.
x-----------------------x

G.R. No. 197156

PHILEX MINING CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CARPIO, J.:

This Resolution resolves the Motion for Reconsideration and the

Supplemental Motion for Reconsideration filed by San Roque
Power Corporation (San Roque) in G.R. No. 187485, the
Comment to the Motion for Reconsideration filed by the
Commissioner of Internal Revenue (CIR) in G.R. No. 187485, the
Motion for Reconsideration filed by the CIR in G.R.No. 196113,
and the Comment to the Motion for Reconsideration filed by
Taganito Mining Corporation (Taganito) in G.R. No. 196113.
San Roque prays that the rule established in our 12 February
2013 Decision be given only a prospective effect, arguing that
"the manner by which the Bureau of Internal Revenue (BIR) and
the Court of Tax Appeals(CTA) actually treated the 120 + 30 day
periods constitutes an operative fact the effects and
consequences of which cannot be erased or undone."1
The CIR, on the other hand, asserts that Taganito Mining
Corporation's (Taganito) judicial claim for tax credit or refund was
prematurely filed before the CTA and should be disallowed
because BIR Ruling No. DA-489-03 was issued by a Deputy
Commissioner, not by the Commissioner of Internal Revenue.
We deny both motions.
The Doctrine of Operative Fact
The general rule is that a void law or administrative act cannot be
the source of legal rights or duties. Article 7 of the Civil Code
enunciates this general rule, as well as its exception: "Laws are
repealed only by subsequent ones, and their violation or non-
observance shall not be excused by disuse, or custom or practice
to the contrary. When the courts declared a law to be inconsistent
with the Constitution, the former shall be void and the latter shall
govern. Administrative or executive acts, orders and regulations
shall be valid only when they are not contrary to the laws or the
Constitution."
The doctrine of operative fact is an exception to the general rule,
such that a judicial declaration of invalidity may not necessarily
obliterate all the effects and consequences of a void act prior to
such declaration.2 In Serrano de Agbayani v. Philippine National
Bank,3 the application of the doctrine of operative fact was
discussed as follows:
The decision now on appeal reflects the orthodox view that an
unconstitutional act, for that matter an executive order or a
municipal ordinance likewise suffering from that infirmity, cannot
be the source of any legal rights or duties. Nor can it justify any
official act taken under it. Its repugnancy to the fundamental law
once judicially declared results in its being to all intents and
purposes a mere scrap of paper. As the new Civil Code puts it:
"When the courts declare a law to be inconsistent with the
Constitution, the former shall be void and the latter shall govern.
Administrative or executive acts, orders and regulations shall be
valid only when they are not contrary to the laws of the
Constitution." It is understandable why it should be so, the
Constitution being supreme and paramount. Any legislative or
executive act contrary to its terms cannot survive.
Such a view has support in logic and possesses the merit of
simplicity. It may not however be sufficiently realistic. It does not
admit of doubt that prior to the declaration of nullity such
challenged legislative or executive act must have been in force
and had to be complied with. This is so as until after the judiciary,
in an appropriate case, declares its invalidity, it is entitled to
obedience and respect. Parties may have acted under it and may
have changed their positions. What could be more fitting than that
in a subsequent litigation regard be had to what has been done
while such legislative or executive act was in operation and
presumed to be valid in all respects. It is now accepted as a
doctrine that prior to its being nullified, its existence as a fact must
be reckoned with. This is merely to reflect awareness that
precisely because the judiciary is the governmental organ which
has the final say on whether or not a legislative or executive
measure is valid, a period of time may have elapsed before it can
exercise the power of judicial review that may lead to a
declaration of nullity. It would be to deprive the law of its quality of
fairness and justice then, if there be no recognition of what had
transpired prior to such adjudication.
In the language of an American Supreme Court decision: "The
actual existence of a statute, prior to such a determination of
unconstitutionality, is an operative fact and may have
consequences which cannot justly be ignored. The past cannot
always be erased by a new judicial declaration. The effect of the
subsequent ruling as to invalidity may have to be considered in
various aspects, with respect to particular relations, individual and
corporate, and particular conduct, private and official." This
language has been quoted with approval in a resolution in
Araneta v. Hill and the decision in Manila Motor Co., Inc. v.
Flores. An even more recent instance is the opinion of Justice
Zaldivar speaking for the Court in Fernandez v. Cuerva and Co.
(Boldfacing and italicization supplied)
Clearly, for the operative fact doctrine to apply, there must be a
"legislative or executive measure," meaning a law or executive
issuance, that is invalidated by the court. From the passage of
such law or promulgation of such executive issuance until its
invalidation by the court, the effects of the law or executive
issuance, when relied upon by the public in good faith, may have
to be recognized as valid. In the present case, however, there is
no such law or executive issuance that has been invalidated by
the Court except BIR Ruling No. DA-489-03.
To justify the application of the doctrine of operative fact as an
exemption, San Roque asserts that "the BIR and the CTA in
actual practice did not observe and did not require refund seekers
to comply with the120+30 day periods."4This is glaring error
because an administrative practice is neither a law nor an
executive issuance. Moreover, in the present case, there is even
no such administrative practice by the BIR as claimed by San
Roque.
In BIR Ruling No. DA-489-03 dated 10 December 2003, the
Department of Finance’s One-Stop Shop Inter-Agency Tax Credit
and Duty Drawback Center (DOF-OSS) asked the BIR to rule on
the propriety of the actions taken by Lazi Bay Resources
Development, Inc. (LBRDI). LBRDI filed an administrative claim
for refund for alleged input VAT for the four quarters of 1998.
Before the lapse of 120 days from the filing of its administrative
claim, LBRDI also filed a judicial claim with the CTA on 28March
2000 as well as a supplemental judicial claim on 29 September
2000.In its Memorandum dated 13 August 2002 before the BIR,
the DOF-OSS pointed out that LBRDI is "not yet on the right
forum in violation of the provision of Section 112(D) of the NIRC"
when it sought judicial relief before the CTA. Section 112(D)
provides for the 120+30 day periods for claiming tax refunds.
The DOF-OSS itself alerted the BIR that LBRDI did not follow
the120+30 day periods. In BIR Ruling No. DA-489-03, Deputy
Commissioner Jose Mario C. Buñag ruled that "a taxpayer-
claimant need not wait for the lapse of the 120-day period before
it could seek judicial relief with the CTA by way of Petition for
Review." Deputy Commissioner Buñag, citing the 7February 2002
decision of the Court of Appeals (CA) in Commissioner of Internal
Revenue v. Hitachi Computer Products (Asia)
Corporation5 (Hitachi), stated that the claim for refund with the
Commissioner could be pending simultaneously with a suit for
refund filed before the CTA.
Before the issuance of BIR Ruling No. DA-489-03 on 10
December 2003, there was no administrative practice by the BIR
that supported simultaneous filing of claims. Prior to BIR Ruling
No. DA-489-03, the BIR considered the 120+30 day periods
mandatory and jurisdictional.
Thus, prior to BIR Ruling No. DA-489-03, the BIR’s actual
administrative practice was to contest simultaneous filing of
claims at the administrative and judicial levels, until the CA
declared in Hitachi that the BIR’s position was wrong. The CA’s
Hitachi decision is the basis of BIR Ruling No. DA-489-03 dated
10 December 2003 allowing simultaneous filing. From then on
taxpayers could rely in good faith on BIR Ruling No. DA-489-03
even though it was erroneous as this Court subsequently decided
in Aichi that the 120+30 day periods were mandatory and
jurisdictional.
We reiterate our pronouncements in our Decision as follows:
At the time San Roque filed its petition for review with the CTA,
the 120+30 day mandatory periods were already in the law.
Section112(C) expressly grants the Commissioner 120 days
within which to decide the taxpayer’s claim. The law is clear,
plain, and unequivocal: "x x x the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of
submission of complete documents." Following the verbalegis
doctrine, this law must be applied exactly as worded since it is
clear, plain, and unequivocal. The taxpayer cannot simply file a
petition with the CTA without waiting for the Commissioner’s
decision within the 120-daymandatory and jurisdictional period.
The CTA will have no jurisdiction because there will be no
"decision" or "deemed a denial" decision of the Commissioner for
the CTA to review. In San Roque’s case, it filed its petition with
the CTA a mere 13 days after it filed its administrative claim with
the Commissioner. Indisputably, San Roque knowingly violated
the mandatory 120-day period, and it cannot blame anyone but
itself.
Section 112(C) also expressly grants the taxpayer a 30-day
period to appeal to the CTA the decision or inaction of the
Commissioner x x x.
xxxx
To repeat, a claim for tax refund or credit, like a claim for tax
exemption, is construed strictly against the taxpayer. One of the
1âwphi1
conditions for a judicial claim of refund or credit under the VAT
System is compliance with the 120+30 day mandatory and
jurisdictional periods. Thus, strict compliance with the 120+30 day
periods is necessary for such a claim to prosper, whether before,
during, or after the effectivity of the Atlas doctrine, except for the
period from the issuance of BIR Ruling No. DA-489-03 on 10
December 2003 to 6 October 2010 when the Aichi doctrine was
adopted, which again reinstated the 120+30 day periods as
mandatory and jurisdictional.6
San Roque’s argument must, therefore, fail. The doctrine of
operative fact is an argument for the application of equity and fair
play. In the present case, we applied the doctrine of operative fact
when we recognized simultaneous filing during the period
between 10 December 2003, when BIR Ruling No. DA-489-03
was issued, and 6 October 2010, when this Court promulgated
Aichi declaring the 120+30 day periods mandatory and
jurisdictional, thus reversing BIR Ruling No. DA-489-03.
The doctrine of operative fact is in fact incorporated in Section
246 of the Tax Code, which provides:
SEC. 246. Non-Retroactivity of Rulings. - Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding Sections or any of
the rulings or circulars promulgated by the Commissioner shall
not be given retroactive application if the revocation, modification
or reversal will be prejudicial to the taxpayers, except in the
following cases:
(a) Where the taxpayer deliberately misstates or omits
material facts from his return or any document required of
him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau
of Internal Revenue are materially different from the facts
on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis
supplied)
Under Section 246, taxpayers may rely upon a rule or ruling
issued by the Commissioner from the time the rule or ruling is
issued up to its reversal by the Commissioner or this Court. The
reversal is not given retroactive effect. This, in essence, is the
doctrine of operative fact. There must, however, be a rule or
ruling issued by the Commissioner that is relied upon by the
taxpayer in good faith. A mere administrative practice, not
formalized into a rule or ruling, will not suffice because such a
mere administrative practice may not be uniformly and
consistently applied. An administrative practice, if not formalized
as a rule or ruling, will not be known to the general public and can
be availed of only by those within formal contacts with the
government agency.
Since the law has already prescribed in Section 246 of the Tax
Code how the doctrine of operative fact should be applied, there
can be no invocation of the doctrine of operative fact other than
what the law has specifically provided in Section 246. In the
present case, the rule or ruling subject of the operative fact
doctrine is BIR Ruling No. DA-489-03 dated 10 December 2003.
Prior to this date, there is no such rule or ruling calling for the
application of the operative fact doctrine in Section 246.
Section246, being an exemption to statutory taxation, must be
applied strictly against the taxpayer claiming such exemption.
San Roque insists that this Court should not decide the present
case in violation of the rulings of the CTA; otherwise, there will be
adverse effects on the national economy. In effect, San Roque’s
doomsday scenario is a protest against this Court’s power of
appellate review. San Roque cites cases decided by the CTA to
underscore that the CTA did not treat the 120+30 day periods as
mandatory and jurisdictional. However, CTA or CA rulings are not
the executive issuances covered by Section 246 of the Tax Code,
which adopts the operative fact doctrine. CTA or CA decisions
are specific rulings applicable only to the parties to the case and
not to the general public. CTA or CA decisions, unlike those of
this Court, do not form part of the law of the land. Decisions of
lower courts do not have any value as precedents. Obviously,
decisions of lower courts are not binding on this Court. To hold
that CTA or CA decisions, even if reversed by this Court, should
still prevail is to turn upside down our legal system and hierarchy
of courts, with adverse effects far worse than the dubious
doomsday scenario San Roque has conjured.
San Roque cited cases7 in its Supplemental Motion for
Reconsideration to support its position that retroactive application
of the doctrine in the present case will violate San Roque’s right
to equal protection of the law. However, San Roque itself admits
that the cited cases never mentioned the issue of premature or
simultaneous filing, nor of compliance with the 120+30 day period
requirement. We reiterate that "any issue, whether raised or not
by the parties, but not passed upon by the Court, does not have
any value as precedent."8 Therefore, the cases cited by San
Roque to bolster its claim against the application of the 120+30
day period requirement do not have any value as precedents in
the present case.
Authority of the Commissioner
to Delegate Power
In asking this Court to disallow Taganito’s claim for tax refund or
credit, the CIR repudiates the validity of the issuance of its own
BIR Ruling No. DA-489-03. "Taganito cannot rely on the
pronouncements in BIR Ruling No. DA-489-03, being a mere
issuance of a Deputy Commissioner."9
Although Section 4 of the 1997 Tax Code provides that the
"power to interpret the provisions of this Code and other tax laws
shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance,"
Section 7 of the same Code does not prohibit the delegation of
such power. Thus, "the Commissioner may delegate the powers
vested in him under the pertinent provisions of this Code to any or
such subordinate officials with the rank equivalent to a division
chief or higher, subject to such limitations and restrictions as may
be imposed under rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the
Commissioner."
WHEREFORE, we DENY with FINALITY the Motions for
Reconsideration filed by San Roque Power Corporation in G.R.
No. 187485,and the Commissioner of Internal Revenue in G.R.
No. 196113.
SO ORDERED.
EN BANC
August 16, 2016
G.R. No. 198756
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING
CORPORATION, METROPOLITAN BANK & TRUST
COMPANY, PHILIPPINE BANK OF COMMUNICATIONS,
PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS
BANK, AND PLANTERS DEVELOPMENT BANK, Petitioners
vs.
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC
CAPITAL CORPORATION, Petitioners-Intervenors
x-----------------------x
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-
Intevenor,
vs.
REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF
FINANCE, THE NATIONAL TREASURER, AND BUREAU OF
TREASURY, Respondents.
RESOLUTION
LEONEN, J.:
This resolves separate motions for reconsideration and
clarification filed by the Office of the Solicitor General 1 and
petitioners-intervenors Rizal Commercial Banking Corporation
and RCBC Capital Corporation2 of our Decision dated January
13, 2015, which: (1) granted the Petition and Petitions-in-
Intervention and nullified Bureau of Internal Revenue (BIR) Ruling
Nos. 370-2011 and DA 378-2011; and (2) reprimanded the
Bureau of Treasury for its continued retention of the amount
corresponding to the 20% final withholding tax that it withheld on
October 18, 2011, and ordered it to release the withheld amount
to the bondholders.
In the notice to all Government Securities Eligible Dealers
(GSEDs) entitled Public Offering of Treasury Bonds3(Public
Offering) dated October 9, 2001, the Bureau of Treasury
announced that "P30.0 [billion] worth of 10- year Zero[-]Coupon
Bonds [would] be auctioned on October 16, 2001[.]"4 It stated that
"the issue being limited to 19 lenders and while taxable shall not
be subject to the 20% final withholding [tax]."5
On October 12, 2001, the Bureau of Treasury released a memo
on the Formula for the Zero-Coupon Bond. 6 The memo stated in
part that the formula, in determining the purchase price and
settlement amount, "is only applicable to the zeroes that are not
subject to the 20% final withholding due to the 19 buyer/lender
limit."7
On October 15, 2001, one (1) day before the auction date, the
Bureau of Treasury issued the Auction Guidelines for the 10-year
Zero-Coupon Treasury Bond to be Issued on October 16, 2001
(Auction Guidelines).8 The Auction Guidelines reiterated that the
Bonds to be auctioned are "[n]ot subject to 20% withholding tax
as the issue will be limited to a maximum of 19 lenders in the
primary market (pursuant to BIR Revenue Regulation No. 020
2001 )."9
At the auction held on October 16, 2001, Rizal Commercial
Banking Corporation (RCBC) participated on behalf of Caucus of
Development NGO Networks (CODE-NGO) and won the
bid. 10 Accordingly, on October 18, 2001, the Bureau of Treasury
issued P35 billion worth of Bonds at yield-tomaturity of 12.75% to
RCBC for approximately P10.17 billion, 11 resulting in a discount
of approximately P24.83 billion.
Likewise, on October 16, 2001, RCBC Capital entered into an
underwriting agreement12 with CODE-NGO, where RCBC Capital
was appointed as the Issue Manager and Lead Underwriter for
the offering of the PEACe Bonds. 13RCBC Capital agreed to
underwrite14 on a firm basis the offering, distribution, and sale of
the P3 5 billion Bonds at the price of Pll,995,513,716.51. 15 In
Section 7(r) of the underwriting agreement, CODE-NGO
represented that "[a]ll income derived from the Bonds, inclusive of
premium on redemption and gains on the trading of the same, are
exempt from all forms of taxation as confirmed by [the] Bureau of
Internal Revenue . . . letter rulings dated 31 May 2001 and 16
August 2001, respectively." 16
RCBC Capital sold and distributed the Government Bonds for an
issue price of Pll,995,513,716.51. 17 Banco de Oro, et al.
purchased the PEACe Bonds on different dates. 18
On October 7, 2011, barely 11 days before maturity of the PEACe
Bonds, the Commissioner of Internal Revenue issued BIR Ruling
No. 370- 201119 declaring that the PEACe Bonds, being deposit
substitutes, were subject to 20% final withholding tax. 20 Under
this ruling, the Secretary of Finance directed the Bureau of
Treasury to withhold a 20% final tax from the face value of the
PEACe Bonds upon their payment at maturity on October 18,
2011.21
On October 17, 2011, replying to an urgent query from the
Bureau of Treasury, the Bureau of Internal Revenue issued BIR
Ruling No. DA 378-201122 clarifying that the final withholding tax
due on the discount or interest earned on the PEACe Bonds
should "be imposed and withheld not only on RCBC/CODE NGO
but also [on] 'all subsequent holders of the Bonds. "'23
On October 17, 2011, petitioners filed before this Court a Petition
for Certiorari, Prohibition, and/or Mandamus (with urgent
application for a temporary restraining order and/or writ of
preliminary injunction).24
On October 18, 2011, this Court issued a temporary restraining
order25 "enjoining the implementation of BIR Ruling No. 370-2011
against the [PEACe Bonds,] ... subject to the condition that the
20% final withholding tax on interest income therefrom shall be
withheld by the petitioner banks and placed in escrow pending
resolution of [the] petition."26
RCBC and RCBC Capital, as well as CODE-NGO separately
moved for leave of court to intervene and to admit the Petition-in-
Intervention. The Motions were granted by this Court. 27
Meanwhile, on November 9, 2011, petitioners filed their
Manifestation with Urgent Ex Parte Motion to Direct Respondents
to Comply with the TR0.28
On November 15, 2011, this Court directed respondents to: "(1)
show cause why they failed to comply with the October 18, 2011
resolution; and (2) comply with the Court's resolution in order that
petitioners may place the corresponding funds in escrow pending
resolution of the petition. " 29
On December 6, 2011, this Court noted respondents'
compliance. 30
On November 27, 2012, petitioners filed their Manifestation with
Urgent Reiterative Motion [To Direct Respondents to Comply with
the Temporary Restraining Order]. 31
On December 4, 2012, this Court noted petitioners' Manifestation
with Urgent Reiterative Motion and required respondents to
comment. 32 Respondents filed their Comment, 33 to which
petitioners filed their Reply. 34
On January 13, 2015, this Court promulgated the On July 6, 2015, petitioners Banco de Oro, et al. filed their
Decision35 granting the Petition and the Petitions-in-Intervention.
Applying Section 22(Y) of the National Internal Revenue Code, Consolidated Comment39 on respondents' Motion for
we held that the number of lenders/investors at every transaction Reconsideration and Clarification and petitioners-intervenors
is determinative of whether a debt instrument is a deposit RCBC and RCBC Capital Corporation's Motion for Clarification
substitute subject to 20% final withholding tax. When at any and/or Partial Reconsideration.
transaction, funds are simultaneously obtained from 20 or more
lenders/investors, there is deemed to be a public borrowing and On October 29, 2015, petitioners Banco de Oro, et al. filed their
the bonds at that point in time are deemed deposit substitutes. Urgent Reiterative Motion [to Direct Respondents to Comply with
Consequently, the seller is required to withhold the 20% final the Temporary Restraining Order].40
withholding tax on the imputed interest income from the bonds.
We further declared void BIR Rulings Nos. 370-2011 and DA
The issues raised in the motions revolve around the following:
378-2011 for having disregarded the 20-lender rule provided in
Section 22(Y). The Decision disposed as follows:
First, the proper interpretation and application of the 20-lender
rule under Section 22(Y) of the National Internal Revenue Code,
WHEREFORE, the petition for review and petitions-in-
particularly in relation to issuances of government debt
intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA
instruments;
378- 2011 are NULLIFIED.
Second, whether the seller in the secondary market can be the
Furthermore, respondent Bureau of Treasury
proper withholding agent of the final withholding tax due on the
is REPRIMANDED for its continued retention of the amount
yield or interest income derived from government debt
corresponding to the 20% final withholding tax despite this court's
instruments considered as deposit substitutes;
directive in the temporary restraining order and in the resolution
dated November 15, 2011 to deliver the amounts to the banks to
be placed in escrow pending resolution of this case. Third, assuming the PEACe Bonds are considered "deposit
substitutes," whether government or the Bureau of Internal
Revenue is estopped from imposing and/or collecting the 20%
Respondent Bureau of Treasury is hereby ORDERED to
final withholding tax from the face value of these Bonds. Further:
immediately release and pay to the bondholders the amount
corresponding to the 20% final withholding tax that it withheld on
October 18, 2011. 36 (a) Will the imposition of the 20% final withholding tax violate the
non-impairment clause of the Constitution?
On March 13, 2015, respondents filed by registered mail their
Motion for Reconsideration and Clarification. 37 (b) Will it constitute a deprivation of property without due process
of law?
On March 16, 2015, petitioners-intervenors RCBC and RCBC
Capital moved for clarification and/or partial reconsideration.38 Lastly, whether the respondent Bureau of Treasury is liable to pay
6% legal interest.
 I the Commissioner of Internal Revenue are appealable to that
Before going into the substance of the motions for
reconsideration, we find it necessary to clarify on the procedural
aspects of this case. This is with special emphasis on the
jurisdiction of the Court of Tax Appeals in view of the previous
conflicting rulings of this Court.
Earlier, respondents questioned the propriety of petitioners' direct
resort to this Court. They argued that petitioners should have
challenged first the 2011 Bureau of Internal Revenue rulings
before the Secretary of Finance, consistent with the doctrine on
exhaustion of administrative remedies.
In the assailed Decision, we agreed that interpretative rulings of
the Bureau of Internal Revenue are reviewable by the Secretary
of Finance under Section 441 of the National Internal Revenue
Code. However, we held that because of the special
circumstances availing in this case-namely: the question involved
is purely legal; the urgency of judicial intervention given the
impending maturity of the PEA Ce Bonds; and the futility of an
appeal to the Secretary of Finance as the latter appeared to have
adopted the challenged Bureau of Internal Revenue rulings-there
was no need for petitioners to exhaust all administrative remedies
before seeking judicial relief.
We also stated that:
[T]he jurisdiction to review the rulings of the Commissioner of
Internal Revenue pertains to the Court of Tax Appeals. The
questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were
issued in connection with the implementation of the 1997 National
Internal Revenue Code on the taxability of the _interest income
from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax
Appeals), as amended by Republic Act No. 9282, such rulings of
court, thus:
SEC. 7. Jurisdiction. -The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein
provided:
1. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or
other matters arising under the National Internal Revenue or
other laws administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. -
Any party adversely affected by a decision, ruling or inaction of
the Commissioner of Internal Revenue, the Commissioner of
Customs, the Secretary of Finance, the Secretary of Trade and
Industry or the Secretary of Agriculture or the Central Board of
Assessment Appeals or the Regional Trial Courts may file an
appeal with the CTA within thirty (30) days after the receipt of
such decision or ruling or after the expiration of the period fixed
by law for action as referred to in Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil
proceeding involving matters arising under the National Internal
Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as ·herein
provided, until and unless an appeal has been previously filed
with the CTA and disposed of in accordance with the provisions
of this Act.
In Commissioner of Internal Revenue v. Leal, citing Rodriguez v.
Blaquera, this court emphasized the jurisdiction of the Court of
Tax Appeals over rulings of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the
petition for certiorari, however, let it be stressed that the
jurisdiction to review the rulings of the Commissioner of Internal
Revenue pertains to the Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually
rulings or opinions of the Commissioner implementing the Tax
Code on the taxability of pawnshops.
....
Such revenue orders were issued pursuant to petitioner's powers
under Section 245 of the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate
rules and regulations. - The Secretary of Finance, upon
recommendation of the Commissioner, shall promulgate all
needful rules and regulations for the effective enforcement of the
provisions of this Code.
The authority of the Secretary of Finance to determine articles
similar or analogous to those subject to a rate of sales tax under
certain category enumerated in Section 163 and 165 of this Code
shall be without prejudice to the power of the Commissioner of
Internal Revenue to make rulings or opinions in connection with
the implementation of the provisions of internal revenue laws,
including ruling on the classification of articles of sales and similar
purposes."
....
The Court, in Rodriguez etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the
Collector of Internal Revenue, but merely an attempt to nullify
General Circular No. V-148, which does not adjudicate or settle
any controversy, and that, accordingly, this case is not within the
jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148
directs the officers charged with the collection of taxes and
license fees to adhere strictly to the interpretation given by the
defendant to the statutory provisions above mentioned, as set
forth in the Circular. The same incorporates, therefore, a decision
of the Collector of Internal Revenue (now Commissioner of
Internal Revenue) on the manner of enforcement of the said
statute, the administration of which is entrusted by law to the
Bureau of Internal Revenue. As such, it comes within the purview
of Republic Act No. 1125, Section 7 of which provides that the
Court of Tax Appeals 'shall exercise exclusive appellate
jurisdiction to review by appeal . . . decisions of the Collector of
Internal Revenue in . . . matters arising under the National
Internal Revenue Code or other law or part of the law
administered by the Bureau of Internal Revenue. "[['42]]
In Commissioner of Internal Revenue v. Leal, 43 the Commissioner
issued Revenue Memorandum Order (RMO) No. 15-91 imposing
5% lending investors tax on pawnshops, and Revenue
Memorandum Circular (RMC) No. 43-91 subjecting the pawn
ticket to documentary stamp tax.44 Leal, a pawnshop owner and
operator, asked for reconsideration of the revenue orders, but it
was denied by the Commissioner in BIR Ruling No. 221-
91.45 Thus, Leal filed before the Regional Trial Court a petition for
prohibition seeking to prohibit the Commissioner from
implementing the revenue orders. 46 This Court held that Leal
should have filed her petition for prohibition before the Court of
Tax Appeals, not the Regional Trial Court, because "the
questioned RMO No. 15-91 and RMC No. 43-91 are actually
rulings or opinions of the Commissioner implementing the Tax
Code on the taxability of pawnshops."47 This Court held that such
rulings in connection with the implementation of internal revenue
laws are appealable to the Court of Tax Appeals under Republic
Act No. 1125, as amended.48
Likewise, in Asia International Auctioneers, Inc. v. Hon. Parayno,
Jr., 49 this Court upheld the jurisdiction of the Court of Tax Appeals
over the Regional Trial Courts, on the issue of the validity of
revenue memorandum circulars.50 It explained that "the assailed
revenue regulations and revenue memorandum circulars [were]
actually rulings or opinions of the [Commissioner of Internal
Revenue] on the tax treatment of motor vehicles sold at public
auction within the [Subic Special Economic Zone] to implement
Section 12 of [Republic Act] No. 7227." This Court further held
that the taxpayers' invocation of this Court's intervention was
premature for its failure to first ask the Commissioner of Internal
Revenue for reconsideration of the assailed revenue regulations
and revenue memorandum circulars.
However, a few months after the promulgation of Asia
International Auctioneers, British American Tobacco v.
Camacho51 pointed out that although Section 7 of Republic Act
No. 1125, as amended, confers on the Court of Tax Appeals
jurisdiction to resolve tax disputes in general, this does not
include cases where the constitutionality of a law or rule is
challenged. Thus:
The jurisdiction of the Court of Tax Appeals is defined in Republic
Act No. 1125, as amended by Republic Act No. 9282. Section 7
thereof states, in pertinent part:
....
While the above statute confers on the CTA jurisdiction to resolve
tax disputes in general, this does not include cases where the
constitutionality of a law or rule is challenged. Where what is
assailed is the validity or constitutionality of a law, or a rule or
regulation issued by the administrative agency in the performance
of its quasi-legislative function, the regular courts have jurisdiction
to pass upon the same. The determination of whether a specific
rule or set of rules issued by an administrative agency
contravenes the law or the constitution is within the jurisdiction of
the regular courts. Indeed, the Constitution vests the power of
judicial review or the power to declare a law, treaty, international
or executive agreement, presidential decree, order, instruction,
ordinance, or regulation in the courts, including the regional trial
courts. This is within the scope of judicial power, which includes
the authority of the courts to determine in an appropriate action
the validity of the acts of the political departments. Judicial power
includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and
enforceable, and to determin whether or not there has been a
grave abuse of dicretion amounting to lack or execss of
jurisdiction on the part of any branch or instrumentality of the
Government.
In Drilon v. Lim, it was held:
We stress at the outset that the lower court had jurisdiction to
consider the constitutionality of Section 187, this authority being
embraced in the general definition of the judicial power to
determine what are the valid and binding laws by the criterion of
their conformity to the fundamental law. Specifically, B.P. 129
vests in the regional trial courts jurisdiction over all civil cases in
which the subject of the litigation is incapable of pecuniary
estimation, even as the accused in a criminal action has the right
to question in his defense the constitutionality of a law he is
charged with violating and of the proceedings taken against him,
particularly as they contravene the Bill of Rights. Moreover,
Article X, Section 5(2), of the Constitution vests in the Supreme
Court appellate jurisdiction over final judgments and orders of
lower courts in all cases in which the constitutionality or validity of
any treaty, international or executive agreement, law, presidential
decree, proclamation, order, instruction, ordinance, or regulation
is in question.
The petition for injunction filed by petitioner before the RTC is a
direct attack on the constitutionality of Section 145(C) of the
NIRC, as amended, and the validity of its implementing rules and
regulations. In fact, the RTC limited the resolution of the subject
case to the issue of the constitutionality of the assailed
provisions. The determination of whether the assailed law and its
implementing rules and regulations contravene the Constitution is
within the jurisdiction of regular courts. The Constitution vests the
power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts, including the
regional trial courts. Petitioner, therefore, properly filed the
subject case before the RTC. 52(Citations omitted)
British American Tobacco involved the validity of: (1) Section 145
of Republic Act No. 8424; (2) Republic Act No. 9334, which
further amended Section 145 of the National Internal Revenue
Code on January 1, 2005; (3) Revenue Regulations Nos. 1-97, 9-
2003, and 22-2003; and (4) RMO No. 6- 2003.53
A similar ruling was made in Commissioner of Customs v.
Hypermix Feeds Corporation. 54 Central to the case was Customs
Memorandum Order (CMO) No. 27-2003 issued by the
Commissioner of Customs. This issuance provided for the
classification of wheat for tariff purposes. In anticipation of the
implementation of the CMO, Hypermix filed a Petition for
Declaratory Relief before the Regional Trial Court. Hypermix
claimed that said CMO was issued without observing the
provisions of the Revised Administrative Code; was confiscatory;
and violated the equal protection clause of the 1987
Constitution. 55 The Commissioner of Customs moved to dismiss
on the ground of lack of jurisdiction. 56On the issue regarding
declaratory relief, this Court ruled that the petition filed by
Hypermix had complied with all the requisites for an action of
declaratory relief to prosper. Moreover:
Indeed, the Constitution vests the power of judicial review or the
power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts. This is
within the scope of judicial power, which includes the authority of
the courts to determine in an appropriate action the validity of the
acts of the political departments. 57
We revert to the earlier rulings in Rodriguez, Leal, and Asia
International Auctioneers, Inc.The Court of Tax Appeals has
exclusive jurisdiction to determine the constitutionality or validity
of tax laws, rules and regulations, and other administrative
issuances of the Commissioner of Internal Revenue.
Article VIII, Section 1 of the 1987 Constitution provides the
general definition of judicial power:
ARTICLE VIII
JUDICIAL DEPARTMENT
Section 1. The judicial power shall be vested in one Supreme
Court and in such lower courts as may be established by law.
Judicial power includes the duty of the courts of justice to settle
actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not
there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or instrumentality
of the Government. (Emphasis supplied)
Based on this constitutional provision, this Court recognized, for
the first time, in The City of Manila v. Hon. Grecia-Cuerdo,58 the
Court of Tax Appeals' jurisdiction over petitions
for certiorari assailing interlocutory orders issued by the Regional
Trial Court in a local tax case. Thus:
[W]hile there is no express grant of such power, with respect to
the CTA, Section 1, Article VIII of the 1987 Constitution provides,
nonetheless, that judicial power shall be vested in one Supreme
Court and in such lower courts as may be established by law and
that judicial power includes the duty of the courts of justice to
settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not
there has been a grave abuse of discretion amounting to lack
or excess of jurisdiction on the part of any branch or
instrumentality of the Government.
On the strength of the above constitutional provisions, it can be
fairly interpreted that the power of the CTA includes that of
determining whether or not there has been grave abuse of
discretion amounting to lack or excess of jurisdiction on the part
of the RTC in issuing an interlocutory order in cases falling within
the exclusive appellate jurisdiction of the tax court. It, thus,
fo1lows that the CTA, by constitutional mandate, is vested with
jurisdiction to issue writs of certiorari in these cases. 59 (Emphasis
in the original)
This Court further explained that the Court of Tax Appeals'
authority to issue writs of certiorari is inherent in the exercise of
its appellate jurisdiction.
A grant of appellate jurisdiction implies that there is included in it
the power necessary to exercise it effectively, to make all orders
that will preserve the subject of the action, and to give effect to
the final determination of the appeal. It carries with it the power to
protect that jurisdiction and to make the decisions of the court
thereunder effective. The court, in aid of its appellate jurisdiction,
has authority to control all auxiliary and incidental matters
necessary to the efficient and proper exercise of that jurisdiction.
For this purpose, it may, when necessary, prohibit or restrain the
performance of any act which might interfere with the proper
exercise of its rightful jurisdiction in cases pending before it.
Lastly, it would not be amiss to point out that a court which is
endowed with a particular jurisdiction should have powers which
are necessary to enable it to act effectively within such
jurisdiction. These should be regarded as powers which are
inherent in its jurisdiction and the court must possess them in
order to enforce its rules of practice and to suppress any abuses
of its process and to defeat any attempted thwarting of such
process.
In this regard, Section 1 of RA 9282 states that the CTA shall be
of the same level as the CA and shall possess all the inherent
powers of a court of justice.
Indeed, courts possess certain inherent powers which may be
said to be implied from a general grant of jurisdiction, in addition
to those expressly conferred on them. These inherent powers are
such powers as are necessary for the ordinary and efficient
exercise of jurisdiction; or are essential to the existence, dignity
and functions of the courts, as well as to the due administration of
justice; or are directly appropriate, convenient and suitable to the
execution of their granted powers; and include the power to
maintain the court's jurisdiction and render it effective in behalf of
the litigants.
Thus, this Court has held that "while a court may be expressly
granted the incidental powers necessary to effectuate its
jurisdiction, a grant of jurisdiction, in the absence of prohibitive
legislation, implies the necessary and usual incidental powers
essential to effectuate it, and, subject to existing laws and
constitutional provisions, every regularly constituted court has
power to do all things that are reasonably necessary for the
administration of justice within the scope of its jurisdiction and for
the enforcement of its judgments and mandates." Hence,
demands, matters or questions ancillary or incidental to, or
growing out of, the main action, and coming within the above
principles, may be taken cognizance of by the court and
determined, since such jurisdiction is in aid of its authority over
the principal matter, even though the court may thus be called on
to consider and decide matters which, as original causes of
action, would not be within its cognizance.60(Citations omitted)
Judicial power likewise authorizes lower courts to determine the
constitutionality or validity of a law or regulation in the first
instance.61 This is contemplated in the Constitution when it speaks
of appellate review of final judgments of inferior courts in cases
where such constitutionality is in issue.62
On, June 16, 1954, Republic Act No. 1125 created the Court of
Tax Appeals not as another superior administrative agency as
was its predecessor-the former Board of Tax Appeals-but as a
part of the judicial system63 with exclusive jurisdiction to act on
appeals from:
(1) Decisions of the Collector of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the
Bureau of Internal Revenue;
(2) Decisions of the Commissioner of Customs in cases involving
liability for customs duties, fees or other money charges; seizure,
detention or release of property affected fines, forfeitures or other
penalties imposed in relation thereto; or other matters arising
under the Customs Law or other law or part of law administered
by the Bureau of Customs; and
(3) Decisions of provincial or city Boards of Assessment Appeals
in cases involving the assessment and taxation of real property or
other matters arising under the Assessment Law, including rules
and regulations relative thereto.
Republic Act No. 1125 transferred to the Court of Tax Appeals
jurisdiction over all matters involving assessments that were
previously cognizable by the Regional Trial Courts (then courts of
first instance).64
In 2004, Republic Act No. 9282 was enacted. It expanded the
jurisdiction of the Court of Tax Appeals and elevated its rank to
the level of a collegiate court with special jurisdiction. Section 1
specifically provides that the Court of Tax Appeals is of the same
level as the Court of Appeals and possesses "all the inherent
powers of a Court of Justice."65
Section 7, as amended, grants the Court of Tax Appeals the
exclusive jurisdiction to resolve all tax-related issues:
Section 7. Jurisdiction - The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein
provided:
1) Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue;
2) Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue,
where the National Internal Revenue Code provides a specific
period of action, in which case the inaction shall be deemed a
denial;
3) Decisions, orders or resolutions of the Regional Trial Courts in
local tax cases originally decided or resolved by them in the
exercise of their original or appellate jurisdiction;
4) Decisions of the Commissioner of Customs in cases involving
liability for customs duties, fees or other money charges, seizure,
detention or release of property affected, fines, forfeitures or other
penalties in relation thereto, or other matters arising under the
Customs Law or other laws administered by the Bureau of
Customs;
5) Decisions of the Central Board of Assessment Appeals in the
exercise of its appellate jurisdiction over cases involving the
assessment and taxation of real property originally decided by the
provincial or city board of assessment appeals;
6) Decisions of the Secretary of Finance on customs cases
elevated to him automatically for review from decisions of the
Commissioner of Customs which are adverse to the Government
under Section 2315 of the Tariff and Customs Code;
7) Decisions of the Secretary of Trade and Industry, in the case of
nonagricultural product, commodity or article, and the Secretary
of Agriculture in the case of agricultural product, commodity or
article, involving dumping and countervailing duties under Section
301 and 302, respectively, of the Tariff and Customs Code, and
safeguard measures under Republic Act No. 8800, where either
party may appeal the decision to impose or not to impose said
duties.
The Court of Tax Appeals has undoubted jurisdiction to pass
upon the constitutionality or validity of a tax law or regulation
when raised by the taxpayer as a defense in disputing or
contesting an assessment or claiming a refund. It is only in the
lawful exercise of its power to pass upon all matters brought
before it, as sanctioned by Section 7 of Republic Act No. 1125, as
amended.
This Court, however, declares that the Court of Tax Appeals may
likewise take cognizance of cases directly challenging the
constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue memorandum
circulars, rulings).
Section 7 of Republic Act No. 1125, as amended, is explicit that,
except for local taxes, appeals from the decisions of quasi-judicial
agencies66 (Commissioner of Internal Revenue, Commissioner of
Customs, Secretary of Finance, Central Board of Assessment
Appeals, Secretary of Trade and Industry) on tax-related
problems must be brought exclusively to the Court of Tax
Appeals.
In other words, within the judicial system, the law intends the
Court of Tax Appeals to have exclusive jurisdiction to resolve all
tax problems. Petitions for writs of certiorari against the acts and
omissions of the said quasi-judicial agencies should, thus, be filed
before the Court of Tax Appeals. 67
Republic Act No. 9282, a special and later law than Batas
Pambansa Blg. 12968 provides an exception to the original
jurisdiction of the Regional Trial Courts over actions questioning
the constitutionality or validity of tax laws or regulations. Except
for local tax cases, actions directly challenging the
constitutionality or validity of a tax law or regulation or
administrative issuance may be filed directly before the Court of
Tax Appeals.
Furthermore, with respect to administrative issuances (revenue
orders, revenue memorandum circulars, or rulings), these are
issued by the Commissioner under its power to make rulings or
opinions in connection
with the implementation of the provisions of internal revenue
laws. Tax rulings, on the other hand, are official positions of the
Bureau on inquiries of taxpayers who request clarification on
certain provisions of the National Internal Revenue Code, other
tax laws, or their implementing regulations.69 Hence, the
determination of the validity of these issuances clearly falls within
the exclusive appellate jurisdiction of the Court of Tax Appeals
under Section 7(1) of Republic Act No. 1125, as amended,
subject to prior review by the Secretary of Finance, as required
under Republic Act No. 8424.70
We now proceed to the substantive aspects.
II
Respondents contend that the 20-lender rule should not strictly
apply to issuances of government debt instruments, which by
nature, are borrowings from the public. 71 Applying the rule
otherwise leads to an absurd result.72 They point out that in BIR
Ruling No. 007-0473 dated July 16, 2004 (the precursor of BIR
Ruling Nos. 370-2011 and DA 378-2011), the Bureau of
Treasury's admitted intent to make the government securities
freely tradable to an unlimited number of lenders/investors in the
secondary market was considered in place of an actual head
count of lenders/investors due to the limitations brought about by
the absolute confidentiality of investments in government bonds
under Section 2 of Republic Act No. 1405, otherwise known as
the Bank Secrecy Law. 74
Considering that the PEACe Bonds were intended to be freely
tradable in the secondary market to 20 or more lenders/investors,
respondents contend. that they, like other similarly situated
government securities-awarded to 19 or less GSEDs in the
primary market but freely tradable to 20 or more lenders/investors
in the secondary market-should be treated as deposit substitutes
subject to the 20% final withholding tax. 75
Petitioners and petitioners-intervenors RCBC and RCBC Capital
counter that Section 22(Y) of the National Internal Revenue Code
applies to all types of securities, including those issued by
government. They add that under this provision, it is the actual
number of lenders at any one time that is material in determining
whether an issuance is to be considered a deposit substitute and
not the intended distribution plan of the issuer.
Moreover, petitioners and petitioners-intervenors RCBC and
RCBC Capital argue that the real intent behind the issuance of
the PEACe Bonds, as reflected by the representations and
assurances of government in various issuances and rulings, was
to limit the issuance to 19 lenders and below. Hence, they
contend that government cannot now take an inconsistent
position.
We find respondents' proposition to consider the intended public
distribution of government securities-in this case, the PEACe
Bonds-in place of an actual head count to be untenable.
The general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication. 76
The definition of deposit substitutes in Section 22(Y) specifically
defined "public" to mean "twenty (20) or more individual or
corporate lenders at any one time."77 The qualifying phrase for
public introduced78by the National Internal Revenue Code shows
that a change in the meaning of the provision was intended, and
this Court should construe the provision as to give effect to the
amendment.79 Hence, in light of Section 22(Y), the reckoning of
whether there are 20 or more individuals or corporate lenders is
crucial in determining the tax treatment of the yield from the debt
instrument. In other words, if there are 20 or more lenders, the
debt instrument is considered a deposit substitute and subject to
20% final withholding tax.
II.A
The definition of deposit substitutes under the National Internal
Revenue Code was lifted from Section 95 of Republic Act No.
7653, otherwise known as the New Central Bank Act:
SEC. 95. Definition of Deposit Substitutes. The term "deposit
substitutes" is defined as an alternative form of obtaining funds
from the public. other than deposits. through the issuance.
endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose ofrelending or
purchasing of receivables and other obligations.These
instruments may include, but need not be limited to, bankers'
acceptances, promissory notes, participations, certificates of
assignment and similar instruments with recourse, and
repurchase agreements. The Monetary Board shall determine
what specific instruments shall be considered as deposit
substitutes for the purposes of Section 94 of this Act: Provided,
however, That deposit substitutes of commercial, industrial and
other nonfinancial companies issued for the limited purpose of
financing their own needs or the needs of their agents or dealers
shall not be covered by the provisions of Section 94 of this Act.
(Emphasis supplied)
Banks are entities engaged in the lending of funds obtained from
the public in the form of deposits. 80Deposits of money in banks
and similar institutions are considered simple loans. 81 Hence, the
relationship between a depositor and a bank is that of creditor
and debtor. The ownership of the amount deposited is transmitted
to the bank upon the perfection of the contract and it can make
use of the amount deposited for its own transactions and other
banking operations. Although the bank has the obligation to
return the amount deposited, it has no obligation to return or
deliver the same money that was deposited.82
The definition of deposit substitutes in the banking laws was
brought about by an observation that banks and non-bank
financial intermediaries have increasingly resorted to issuing a
variety of debt instruments, other than bank deposits, to obtain
funds from the public. The definition also laid down the
groundwork for the supervision by the Central Bank of quasi-
banking functions.83
As defined in the banking sector, the term "public" refers to 20 or
more lenders. 84 "What controls is the actual number of persons or
entities to whom the products or instruments are issued. If there
are at least twenty (20) lenders or creditors, then the funds are
considered obtained from the public."85
If a bank or non-bank financial intermediary sells debt instruments
to 20 or more lenders/placers at any one time, irrespective of
outstanding amounts, for the purpose of releI].ding or purchasing
of receivables or obligations, it is considered to be performing a
quasi-banking function and consequently subject to the
appropriate regulations of the Bangko Sentral ng Pilipinas (BSP).
11.B
Under the National Internal Revenue Code, however, deposit
substitutes include not only the issuances and sales of banks and
quasi-banks for relending or purchasing receivables and other
similar obligations, but also debt instruments issued by
commercial, industrial, and other nonfinancial companies to
finance their own needs or the needs of their agents or dealers.
This can be deduced from a reading together of Section 22(X)
and (Y):
Section 22. Definitions - When used in this Title:
....
(X) The term 'quasi-banking activities' means borrowing
funds from twenty (20) or more personal or corporate lenders at
any one time, through the issuance, endorsement, or acceptance
of debt instruments of any kind other than deposits for the
borrower's own account, or through the issuance of certificates of
assignment or similar instruments, with recourse, or of
repurchase agreements for purposes of re-lending or purchasing
receivables and other similar obligations: Provided, however,
That commerciali industrial and other non-financial companies,
which borrow funds through any of these means for the limited
purpose of financing their own needs or the needs of their agents
or dealers, shall not be considered as performing quasi-banking
functions.
(Y) The term 'deposit substitutes' shall mean an alternative form
of
obtaining funds from the public (the term 'public' means
borrowing from twenty (20) or more individual or corporate
lenders at any one time), other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose of relending or
purchasing of receivables and other obligations, or financing
their own needs or the needs of their agent or dealer.
(Emphasis supplied)
For internal re.venue tax purposes, therefore, even debt
instruments issued and sold to 20 or more lenders/investors by
commercial or industrial companies to finance their own needs
are considered deposit substitutes, taxable as such.
11.C
The interest income on bank deposits was subjected for the first
time to the withholding tax system under Presidential Decree No.
1156,86 which was promulgated in 1977. The whereas clauses
spell the reasons for the law:
[I]nterest on bank deposit is one of the items includible in gross
income .... [M]any bank depositors fail to declare interest income
in their income tax returns. . . . [I]n order to maximize the
collection of the income tax on interest on bank deposits, it is
necessary to apply the withholdings system on this type of fixed
or determinable income.
In the same year, Presidential Decree No. 115487 was also
promulgated. It imposed a 35% transaction tax (final tax) on
interest income from every commercial paper issued in the
primary market, regardless of whether they are issued to the
public or not. 88 Commercial paper was defined as "an instrument
evidencing indebtedness of any person or entity, including banks
and non-banks performing quasi-banking functions, which is
issued, endorsed, sold, transferred or in any manner conveyed to
another person or entity, either with or without recourse and
irrespective of maturity." The imposition of a final tax on
commercial papers was "aimed primarily to improve the
administrative provisions of the National Internal Revenue Code
to ensure the collection on the tax on interest on commercial
papers used as principal instruments issued in the primary
market."89 It was reported that "the [Bureau of Internal Revenue
had] no means of enforcing strictly the taxation on interest income
earned in the money market transactions. " 90
These presidential decrees, as well as other new internal revenue
laws and various laws and decrees that have so far amended the
provisions of the 1939 National Internal Revenue Code were
consolidated and codified into the 1977 National Internal
Revenue Code.91
In 1980, Presidential Decree No. 173992 was promulgated, which
further amended certain provisions of the 1977 National Internal
Revenue Code and repealed Section 210 (the provision
embodying the percentage tax on commercial paper
transactions). The Decree imposed a final tax of 20% on interests
from yields on deposit substitutes issued to the public.93 The tax
was required to be withheld by banks and non-bank financial
intermediaries and paid to the Bureau of Internal Revenue in
accordance with Section 54 of the 1977 National Internal
Revenue Code. Presidential Decree No. 1739, as amended by
Presidential Decree No. 1959 in 1984 (which added the definition
of deposit substitutes) was subsequently incorporated in the
National Internal Revenue Code.
These developments in the National Internal Revenue Code
reflect the rationale for the application of the withholding system
to yield from deposit substitutes, which is essentially to maximize
and expedite the collection of income taxes by requiring its
payment at the source, 94 as with the case of the interest on bank
deposits. When banks sell deposit substitutes to the public, the
final withholding tax is imposed on the interest income because it
would be difficult to collect from the public. Thus, the incipient
scheme in the final withholding tax is to achieve an effective
administration in capturing the interest-income windfall from
deposit substitutes as a source of revenue.
It must be emphasized, however, that withholding tax is merely a
method of collecting income tax in advance. The perceived tax is
collected at the source of income payment to ensure collection.
Consequently, those subjected to the final withholding tax are no
longer subject to the regular income tax.
III
Respondents maintain that the phrase "at any one time" must be
given its ordinary meaning, i.e. "at any given time" or "during any
particular point or moment in the day."95 They submit that the
correct interpretation of Section 22(Y) does .not look at any
specific transaction concerning the security; instead, it considers
the existing number of lenders/investors of such security at any
moment in time, whether in the primary or secondary
market.96 Hence, when during the lifetime of the security, there
was any one instance where twenty or more individual or
corporate lenders held the security, the borrowing becomes
"public" in character and is ipso facto subject to 20% final
withholding tax.97
Respondents further submit that Section 10.1(k) of the Securities
Regulation Code and its Implementing Rules and Regulations
may be applied by analogy, such that if at any time, (a) the
lenders/investors number 20 or more; or (b) should the issuer
merely offer the securities publicly or to 20 or more
lenders/investors, these securities should be deemed deposit
substitutes.98
On the other hand, petitioners-intervenors RCBC and RCBC
Capital insist that the phrase "at any one time" only refers to
transactions made in the primary market. According to them, the
1âw phi 1
PEACe Bonds are not deposit substitutes since CODE-NGO,
through petitioner-intervenor RCBC, is the sole lender in the
primary market, and all subsequent transactions in the secondary
market merely pertain to a sale and/or assignment of credit and
not borrowings from the public.99
Similarly, petitioners contend that for a government security, such
as the PEACe Bonds, to be considered as deposit substitutes, it
is an indispensable requirement that there is "borrowing" between
the issuer and the lender/investor in the primary market and
between the transferee and the transferor in the secondary
market. Petitioners submit that in the secondary market, the
transferee/buyer must have recourse to the selling investor as
required by Section 22(Y) of the National Internal Revenue Code
so that a borrowing "for the borrower's (transferor's) own account"
is created between the buyer and the seller. Should the
transferees in the secondary market who have recourse to the
transferor reach 20 or more, the transaction will be subjected to
a-final withholding tax. 100
Petitioners and petitioners-intervenors RCBC and RCBC Capital
contend that respondents' proposed application of Section 10.l(k)
of the Securities Regulation Code and its Implementing Rules is
misplaced because: (1) the National Internal Revenue Code
clearly provides the conditions when a security issuance should
qualify as a deposit substitute subject to the 20% final withholding
tax; and (2) the two laws govern different matters.
III.A
Generally, a corporation may obtain funds for capital
expenditures by floating either shares of stock (equity) or bonds
(debt) in the capital market. Shares of stock or equity securities
represent ownership, interest, or participation in the issuer-
corporation. On the other hand, bonds or debt securities are
evidences of indebtedness of the issuer-corporation.
New securities are issued and sold to the investing public for the
first time in the primary market. Transactions in the primary
market involve an actual transfer of funds from the investor to the
issuer of the new security. The transfer of funds is evidenced by a
security, which becomes a financial asset in the hands of the
buyer/investor.
New issues are usually sold through a registered underwriter,
which may be an investment house or bank registered as an
underwriter of securities.101 An underwriter helps the issuer find
buyers for its securities. In some cases, the underwriter buys the
whole issue from the issuer and resells this to other security
dealers and the public. 102 When a group of underwriters pool
together their resources to underwrite an issue, they are called
the "underwriting syndicate."103
On the other hand, secondary markets refer to the trading of
outstanding or already-issued securities. In any secondary market
trade, the cash proceeds normal_ly go to the selling investor
rather than to the issuer.
To illustrate: A decides to issue bonds to raise capital funds. X
buys and is issued A bonds. The proceeds of the sale go to A, the
issuer. The sale between A and Xis a primary market transaction.
Before maturity, X trades its A bonds to Y. The A bonds sold by X
are not X's indebtedness. The cash paid for the bonds no longer
go to A, but remains with X, the s_elling investor/holder. The
transfer of A bonds from X to Y is considered a secondary market
transaction. Any difference between the purchase price of the
assets (A bonds) and the sale price is a trading gain subject to a
different tax treatment, as will be explained later.
When Y trades its A bonds to Z, the sale is still considered a
secondary market transaction. In other words, the trades from X
to Y, Y to Z, and Z to subsequent holders/investors are
considered secondary market transactions. If Z holds on to the
bonds and the bonds mature, Z will receive from A the face value
of the bonds.
A bond is similar to a bank deposit in the sense that the investor
lends money to the issuer and the issuer pays interest on the
invested amount. However, unlike bank deposits, bonds are
marketable securities. The market mechanism provides quick
mobility of money and securities. 104 Thus, bondholders can sell
their bonds before they mature to other investors, in tum
converting their· financial assets to cash. In contrast, deposits, in
the form of savings accounts for instance, can only be redeemed
by the issuing bank.
111.B
An investor in bonds may derive two (2) types of income:
First, the interest or the amount paid by the borrower to the
lender/investor for the use of the lender’s money.105 For interest-
bearing bonds, interest is normally earned at the coupon date. In
zero-coupon bonds, the discount is an interest amortized up to
maturity.
Second, the gain, if any, that is earned when the bonds are
traded before maturity date or when redeemed at maturity.
The 20% final withholding tax imposed on interest income or yield
from deposit substitute does not apply to the gains derived from
trading, retirement, or redemption of the instrument.
It must be stressed that interest income, derived by individuals
from long-term deposits or placements made with banks in the
form of deposit substitutes, is exempt from income tax.
Consequently, it is likewise exempt from the final withholding tax
under Sections 24(B)(l) and 25(A)(2) of the National Internal
Revenue Code. However, when it is pre-terminated by the
individual investor, graduated rates of 5%, 12%, or 20%,
depending on the remaining maturity of the instrument, will apply
on the entire income, to be deducted and withheld by the
depository bank.
With respect to gains derived from long-term debt instruments,
Section 32(B)(7)(g) of the National Internal Revenue Code
provides:
Sec. 32. Gross Income. –
....
(B) Exclusions from Gross Income. - The following items shall not
be included in gross income and shall be exempt from taxation
under this title:
....
(7) Miscellaneous Items. -
....
(g) Gains from the Sale of Bonds, Debentures or other Certificate
of Indebtedness. - Gains realized from the sale or exchange or
retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5) years.
Thus, trading gains, or gains realized from the sale or transfer of
bonds (i.e., those with a maturity of more than five years) in the
secondary market, are exempt from income tax. These "gains"
refer to the difference between the selling price of the bonds in
the secondary market and the price at which the bonds were
purchased by the seller. For discounted instruments such as the
zero-coupon bonds, the trading gain is the excess of the selling
price over the book value or accreted value (original issue price
plus accumulated discount from the time of purchase up to the
time of sale) of the instruments.106
Section 32(B)(7)(g) also includes gains realized by the last holder
of the bonds when the bonds are redeemed at maturity, which is
the difference between the proceeds from the retirement of the
bonds and the price at which the last holder acquired the bonds.
On the other hand, gains realized from the trading of short-term
bonds (i.e., those with a maturity of less than five years) in the
secondary market are subject to regular income tax rates
(ranging from 5% to 32% for individuals, and 30% for
corporations) under Section 32107 of the National Internal Revenue
Code.
111.C
The Secretary of Finance, through the Bureau of Treasury, 108 is
authorized under Section 1 of Republic Act No. 245, as amended,
to issue evidences of indebtedness such as treasury bills and
bonds to meet public expenditures or to provide for the purchase,
redemption, or refunding of any obligations.
These treasury bills and bonds are issued and sold by the Bureau
of Treasury to lenders/investors through a network of licensed
dealers (called Government Securities Eligible Dealers or GSEDs
). 109GSEDs are classified into primary and ordinary dealers. 110 A
primary dealer enjoys certain privileges such as eligibility to
participate in the competitive bidding of regular issues, eligibility
to participate in the issuance of special issues such as zero-
coupon treasury bonds, and access to tap facility window. 111 On
the other hand, ordinary dealers are only allowed to participate in
the noncompetitive bidding. 112Moreover, primary dealers are
required to meet the following obligations:
a. Must submit at least one competitive bid in each scheduled
auction.
b. Must have total awards of at least 2% of the total amount of
bills or bonds awarded within a particular quarter. This
requirement does not cover special issues.
c. Must be active in the trading of GS [government securities] in
the secondary market. 113
A primary dealer who fails to comply with its obligations will be
dropped from the roster of primary dealers and classified as an
ordinary dealer.
The auction method is the main channel used for originating
government securities. 114 Under this method, the Bureau of
Treasury issues a public notice offering treasury bills and bonds
for sale and inviting tenders. 115 The GSEDs tender their bids
electronically; 116 after the cut-off time, the Auction Committee
deliberates on the bids and decide on the award. 117
The Auction Committee then downloads the awarded securities to
the winning bidders' Principal Securities Account in the Registry
of Scrip less Securities (RoSS). The RoSS, an electronic book-
entry system established by the Bureau of Treasury, is the official
Registry of ownership of or interest in government
securities. 118 All government securities floated/originated by the
National Government under its scripless policy, as well as
subsequent transfers of the same in the secondary market, are
recorded in the RoSS in the Principal Securities Account of the
GSED. 119
A GSED is required to open and maintain Client Securities
Accounts in the name of its respective clients for segregating
government securities acquired by such clients from the GSED' s
own securities holdings. A GSED may also lump all government
securities sold to clients in one account, provided ·that the GSED
maintains complete records of ownership/other titles of its clients
in the GSED's own books. 120
Thus, primary issues of treasury bills and bonds are supposed to
be issued only to GSEDs. By participating in auctions, the GSED
acts as a channel between the Bureau of Treasury and investors
in the primary market. The winning GSED bidder acquires the
privilege to on-sell government securities to other financial
institutions or final investors who need not be GSEDs. 121 Further,
nothing in the law or the rules of the Bureau of Treasury prevents
the GSED from entering into contract with another entity to further
distribute government securities.
In effecting a sale or distribution of government securities, a
GSED acts in a certain sense as the "agent" of the Bureau of
Treasury. In Doles v. Angeles, 122 the basis of an agency is
representation. 123The question of whether an agency has been
created may be established by direct or circumstantial
evidence. 124 For an agency to arise, it is not necessary that the
princi~al personally encounter the third person with whom the
agent interacts. 125 The law contemplates impersonal dealings
where the principal need not personally know or meet the third
person with whom the agent transacts: precisely, the purpose of
agency is to extend the personality of the principal through the
facility of the agent. 126 It was also stressed that the manner in
which the parties designate the relationship is not controlling. 127 If
an act done by one person on behalf of another is in its essential
nature one of agency, the former is the agent of the latter,
notwithstanding he or she is not caled.128
Through the use of GSEDs, particularly primary dealers,
government is able to ensure the absorption of newly issued
securities and promote activity in the government securities
market. The primary dealer system allows government to access
potential investors in the market by taking advantage of the
GSEDs' distribution capacity. The sale transactions executed by
the GSED are indirectly for the benefit of the issuer. An investor
who purchases bonds from the GSED becomes an indirect lender
to government. The financial asset in the hand of the investor
represents a claim to future cash, which the borrower-government
must pay at maturity date. 129
Accordingly, the existence of 20 or more lenders should be
reckoned at the time when the successful GSED-bidder
distributes (either by itself or through an underwriter) the
government securities to final holders. When the GSED sells the ·
government securities to 20 or more investors, the government
securities are deemed to be in the nature of a deposit substitute,
taxable as such.
On the other hand, trading of bonds between two (2) investors in
the secondary market involves a purchase or sale transaction.
The transferee of the bonds becomes the new owner, who is
entitled to recover the face value of the bonds from the issuer at
maturity date. Any profit realized from the purchase or sale
transaction is in the nature of a trading gain subject to a different
tax treatment, as explained above.
Respondents contend that the literal application of the "20 or
more lenders at any one time" to government securities would
lead to: (1) impossibility of tax enforcement due to limitations
imposed by the Bank Secrecy Law; (2) possible uncertainties130;
and (3) loopholes.131These concerns, however, are not sufficient
justification for us to deviate from the text of the
law.132 Determining the wisdom, policy, or expediency of a statute
is outside the realm of judicial power.133 These are matters that
should be addressed to the legislature. Any other interpretation
looking into the purported effects of the law would be tantamount
to judicial legislation.
IV
Section 57 prescribes the withholding tax on interest or yield on
deposit substitutes, among others, and the person obligated to
withhold the same. Section 57 reads:
Section 57. Withholding of Tax at Source. -
(A) Withholding of Final Tax on Certain Incomes. - Subject to
rules and regulations, the Secretary of Finance may promulgate,
upon the recommendation of the Commissioner, requiring the
filing of income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(l), 24(B)(2), 24(C),
24(D)(l); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(l),
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)(l), 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 the 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.
Likewise, Section 2.57 of Revenue Regulations No. 2-98
(implementing the National Internal Revenue Code relative to the
Withholding on Income subject to the Expanded Withholding Tax
and Final Withholding Tax) states that the liability for payment of
the tax rests primarily on the payor as a withholding agent.
Section 2.57 reads:
Sec. 2.57. WITHHOLDING OF TAX AT SOURCE. -
(A) Final Withholding Tax - Under the final withholding tax
system the amount of income tax withheld by the withholding
agent is constituted as a full and final payment of the income tax
due from the payee of said income. The liability for payment of
the tax rests primarily on the payor as a withholding agent. Thus,
in case of his failure to withhold the tax or in case of under
withhp;ding the deficiency tax shall be collected from the
payor/witholding agent[.] (Emphasis supplied)
From these provisions, it is the payor-borrower who primarily has
the duty to withhold and remit the 20% final tax on interest
income or yield from deposit substitutes.
This does not mean, however, that only the payor-borrower can
be constituted as withholding agent. Under Section 59 of the
National Internal Revenue Code, any person who has control,
receipt, custody, or disposal of the income may be constituted as
withholding agent:
SEC. 59. Tax on Profits Collectible from Owner or Other
Persons. - The tax imposed under this Title upon gains, profits,
and income not falling under the foregoing and not returned and
paid by virtue of the foregoing or as otherwise provided by law
shall be assessed by personal return under rules and regulations
to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. The intent and purpose of
the Title is that all gains, profits and income of a taxable class, as
defined in this Title, shall be charged and assessed with the
corresponding tax prescribed by this Title, and said tax shall be
paid by the owners of such gains, profits and income, or the
proper person having the receipt, custody, control or disposal of
the same. For purposes of this Title, ownership of such gains,
profits and income or liability to pay the tax shall be determined
as of the year for which a return is required to be rendered.
(Emphasis supplied)
The intent and purpose of the National Internal Revenue Code
provisions on withholding taxes is also explicitly stated, i.e., that
all gains, profits, and income "re charged and assessed with the
corresponding tax" 134 and said tax paid by "the owners of such
gains, profits and income, or the proper person having the
receipt, custody, control or disposal of the same." 135
The obligation to deduct and withhold tax at source arises at the
time an income subject to withholding is paid or payable,
whichever comes first. 136 In interest-bearing bonds, the interest is
taxed at every instance that interest is paid (and income is
earned) on the bond. However, in a zerocoupon bond, it is
expected that no periodic interest payments will be made. Rather,
the investor will be paid the principal and interest (discount)
together when the bond reaches maturity.
As explained by respondents, "the discount is the imputed
interest earned on the security, and since paymnet is made at
maturity, there is an accreted interest that causes the price of a
zero coupon instrument to accordingly increase with time, all
things being constant." 137
In a 10-year zero-coupon bond, for instance, the discount (or
interest) is not earned in the first period, i.e., the value of the
instrument does not equal par at the end of the first period. The
total discount is earned over the life of the instrument.
Nonetheless, the total discount is considered earned on the year
of sale based on current value. 138
In view of this, the successful GSED-bidder, as agent of the
Bureau of Treasury, has the primary responsibility to withhold the
20% final withholding tax on the interest valued at present value,
when its sale and distribution of the government securities
constitutes a deposit substitute transaction. The 20% final tax is
deducted by the buyer from the discount of the bonds and
included in the remittance of the purchase price.
The final tax withheld by the withholding agent is considered as a
"full and final payment of the income tax due from the payee on
the said income [and the] payee is not required to file an income
tax return for the particular income." 139 Section 10 of Department
of Finance Department Order No. 020-10140 in relation to the
National Internal Revenue Code also provides that no other tax
shall be collected on subsequent trading of the securities that
have been subjected to the final tax.
V
In this case, the PEACe Bonds were awarded to
petitionersintervenors RCBC/CODE-NGO as the winning bidder
in the primary auction. At the same time, CODE-NGO got RCBC
Capital as underwriter, to distribute and sell the bonds to the
public.
The Underwriting Agreement141 and RCBC Term Sheet142 for the
sale of the PEACe bonds show that the settlement dates for the
issuance by the Bureau of Treasury of the Bonds to petitioners-
intervenors RCBC/CODENGO and the distribution by petitioner-
intervenor RCBC Capital of the PEA Ce Bonds to various
investors fall on the same day, October 18, 2001.
This implies that petitioner-intervenor RCBC Capital was
authorized to perform a book-building process, 143 a customary
method of initial distribution of securities by underwriters, where it
could collate orders for the securities ahead of the auction or
before the securities were actually issued. Through this activity,
the underwriter obtains information about market conditions and
preferences ahead of the auction of the government securities.
The reckoning of the phrase "20 or more lenders" should be at
the time when petitioner-intervenor RCBC Capital sold the
PEACe bonds to investors. Should the number of investors to
whom petitioner-intervenor RCBC Capital distributed the PEACe
bonds, therefore, be found to be 20 or more, the PEACe Bonds
are considered deposit substitutes subject to the 20% final
withholding tax. Petitioner-intervenors RCBC/CODE-NGO and
RCBC Capital, as well as the final bondholders who have
recourse to government upon maturity, are liable to pay the 20%
final withholding tax.
We note that although the originally intended negotiated sale of
the bonds by government to CODE-NGO did not materialize,
CODE-NGO, a private entity-still through the participation of
petitioners-intervenors RCBC and RCBC Capital-ended up as the
winning bidder for the government securities and was able to use
for its projects the profit earned from the sale of the government
securities to final investors.
Giving unwarranted benefits, advantage, or preference to a party
and causing undue injury to government expose the perpetrators
or responsible parties to liability under Section 3(e) of Republic
Act No. 3019. Nonetheless, this is not the proper venue to
determine and settle any such liability.
VI
Petitioners-intervenors RCBC and RCBC Capital contend that
they cannot be held liable for the 20% final withholding should
have been made, their obligation was not clear since BIR Ruling
Nos. 370-2011 and DA 378-2011 stated that the 20% final
withholding tax does not apply to PEACe Bonds. 144Second, to
punish them under the circumstances (i.e., when they secured
the PEACe Bonds from the Bureau of Treasury and sold the
Bonds to the lenders/investors, they had no obligation to remit the
20% final withholding tax) would violate due process of law and
the constitutional proscription on ex facto law.145
Petitioner-intervenor RCBC Capital further posits that it cannot be
held liable for the 20% final withholding tax even as a taxpayer
because it never earned interest income from the PEACe Bonds,
and any income earned is deemed in the nature of an
underwriting fee. 146 Petitionersintervenors RCBC and RCBC
Capital instead argue that the liability falls on the Bureau of
Treasury and CODE-NGO, as withholding agent and taxpayer,
respectively, considering their explicit representation that the
PEACe Bonds are exempt from the final withholding tax. 147
Petitioners-intervenors RCBC and RCBC Capital add that the
Bureau of Internal Revenue is barred from assessing and
collecting the 20% final withholding tax, assuming it was due, on
the ground of prescription. 148 They contend that the three (3)-year
prescriptive period under Section 203, rather than the 10-year
assessment period under Section 222, is applicable because they
were compliant with the requirement of filing monthly returns that
reflect the final withholding taxes due or remitted for the relevant
period. No false or fraudulent return was made because they
relied on the 2001 BIR Rulings and on the representations made
by the Bureau of Treasury and CODE-NGO that the PEACe
Bonds were not subject to the 20% final withholding tax. 149
Finally, petitioners-intervenors RCBC and RCBC Capital argue
that this Court's interpretation of the phrase "at any one time"
cannot be applied to the PEACe Bonds and should be given
prospective application only because it would cause prejudice to
them, among others. They cite Section 246 of the National
Internal Revenue Code on non-retroactivity of rulings, as well
as Commissioner of Internal Revenue v. San Roque Power
Corporation, 150 which held that taxpayers may rely upon a rule or
ruling issued by the Commissioner from the time it was issued up
to its reversal by the Commissioner or the court. According to
them, the retroactive application of the court's decision would
impair their vested rights, violate the constitutional prohibition on
non-impairment of contracts, and constitute a substantial breach
of obligation on the part of govemment. 151 In addition, the
imposition of the 20% final withholding tax on the PEA Ce Bonds
would allegedly have pernicious effects on the integrity of existing
securities that is I contrary to the state policies of stabilizing the
financial system and of developing the capital markets. 152
CODE-NGO likewise contends that it merely relied in good faith
on the 2001 BIR Rulings confirming that the PEA Ce Bonds were
not subject to the 20% final withholding tax. 153 Therefore, it should
not be prejudiced if the BIR Rulings are found to be erroneous
and reversed by the Commissioner or this court.154 CODE-NGO
argues that this Court's Decision construing the phrase "at any
one time" to determine the phrase "20 or more lenders" to include
both the primary and secondary market should be applied
prospectively. 155
Assuming it is liable for the 20% final withholding tax, CODE-
NGO argues that the collection of the final tax was barred by
prescription.156 CODE-NGO points out that under Section 203 of
the National Internal Revenue Code, internal revenue taxes such
as the final tax, should be assessed within three (3) years after
the last day prescribed by law for the filing of the return. 157 It
further argues that Section 222(a) on exceptions to the prescribed
period. for tax assessment and collection does not apply. 158 It
claims that there is no fraud or intent to evade taxes as it relied in
good faith on the assurances of the Bureau of Internal Revenue
and Bureau of Treasury the PEACe Bonds are not subject to the
20% final withholding tax. 159 We find merit on the claim of
petitioners-intervenors RCBC, RCBC Capital, and CODE-NGO
for prospective application of our Decision.
The phrase "at any one time" is ambiguous in the context of the
financial market. Hence, petitioner-intervenor RCBC and the rest
of the investors relied on the opinions of the Bureau of Internal
Revenue in BIR Ruling Nos. 020-2001, 035-2001 160 dated August
16, 2001, and DA-175- 01161 dated September 29, 2001 to vested
their rights in the exemption from the final withholding tax. In sum,
these rulings pronounced that to determine whether the financial
assets, i.e., debt instruments and securities, are deposit
substitutes, the "20 or more individual or corporate lenders" rule
must apply. Moreover, the determination of the phrase "at any
one time" to determine the "20 or more lenders" is to be
determined at the time of the original issuance. This being the
case, the PEACe Bonds were not to be treated as deposit
substitutes.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,162 the
Commissioner demanded from petitioner deficiency withholding
income tax on film rentals remitted to foreign corporations for the
years 1965 to 1968. The assessment was made under Revised
Memo Circular No. 4-71 issued in 1971, which used gross income
as tax basis for the required withholding tax, instead of one-half of
the film rentals as provided under General Circular No. V-334. In
setting aside the assessment, this Court ruled that in the interest
of justice and fair play, rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive
application where applying them would prove prejudicial to
taxpayers who relied in good faith on previous issuances of the
Commissioner. This Court further held that Section 24(b) of then
National Internal Revenue Code sought to be implemented by
General Circular No. V-334 was neither too plain nor simple to
understand and was capable of different interpretations. Thus:
The rationale behind General Circular No. V-334 was clearly
stated therein, however: "It ha[ d] been determined that the tax is
still imposed on income derived from capital, or labor, or both
combined, in accordance with the basic principle of income
taxation ... and that a mere return of capital or investment is not
income .... " "A part of the receipts of a non-resident foreign film
distributor derived from said film represents, therefore, a return of
investment." The circular thus fixed the return of capital at 50% to
simplify the administrative chore of determining the portion of the
rentals covering the return of capital.
Were the "gross income" base clear from Sec. 24(b),
perhaps, the ratiocination of the Tax Court could be upheld.
It should be noted, however, that said Section was not too
plain and simple to understand. The fact that the issuance of
the General Circular in question was rendered necessary
leads to no other conclusion than that it was not easy of
comprehension and could be subjected to different
interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which
was the basis of General Circular No. V-334, was just one in a
series of enactments regarding Sec. 24(b) of the Tax Code.
Republic Act No. 3825 came next on June 22, 1963 without
changing the basis but merely adding a proviso (in bold letters).
(b) Tax on foreign corporation. - (1) Non-resident corporations. -
There shall be levied, collected, and paid for each taxable year, in
lieu of the tax imposed by the preceding paragraph, upon the
amount received by every foreign corporation not engaged in
trade or business within the Philippines, from all sources within
the Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical
gains, profits and income, a tax equal to thirty per centum of such
amount: PROVIDED, HOWEVER, THAT PREMIUMS SHALL
NOT INCLUDE REINSURANCE PREMIUMS." (double emphasis
ours)
Republic Act No. 3841, dated likewise on June 22, 1963, followed
after, omitting the proviso and inserting some words (also in bold
letters).
"(b) Tax on foreign corporations. - (1) Nonresident corporations. -
There shall be levied, collected and paid for each taxable year, in
lieu of the tax imposed by the preceding paragraph, upon the
amount received by every foreign corporation not engaged in
trade or business within the Philippines, from all sources within
the Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical
OR CASUAL gains, profits and income, AND CAP IT AL GAINS,
a tax equal to thirty per centum of such amount."
The principle of legislative approval of administrative
interpretation by re-enactment clearly obtains in this case. It
provides that "the re-enactment of a statute substantially
unchanged is persuasive indication of the adoption by Congress
of a prior executive construction." Note should be taken of the
fact that this case involves not a mere opinion of the
Commissioner or ruling rendered on a mere query, but a Circular
formally issued to "all internal revenue officials" by the then
Commissioner of Internal Revenue.
It was only on June 27, 1968 under Republic Act No. 5431, supra,
which became the basis of Revenue Memorandum Circular No.
4-71, that Sec. 24(b2 was amended to refer specifically to 35% of
the "gross income."163 (Emphasis supplied)
San Roque has held that the 120-day and the 30-day periods
under Section 112 of the National Internal Revenue Code are
mandatory and jurisdictional. Nevertheless, San Roque provided
an exception to the rule, such that judicial claims filed by
taxpayers who relied on BIR Ruling No. DA-489-03-from its
issuance on December 10, 2003 until its reversal by this Court
in Commissioner of Internal Revenue v. Aichi Forging Company
of Asia, Inc. 164 on October 6, 2010-are shielded from the vice of
prematurity. The BIR Ruling declared that the "taxpayer-claimant
need not wait for the lapse of the 120-day period before it could
seek judicial relief with the C[ourt] [of] T[ax] A[ppeals] by way of
Petition for Review." The Court reasoned that:
Taxpayers should not be prejudiced by an erroneous
interpretation by the Commissioner, particularly on a difficult
question of law. The abandonment of the Atlas doctrine by Mirant
and Aichi is proof that the reckoning of the prescriptive periods for
input VAT tax refund or credit is a difficult question of law. The
abandonment of the Atlas doctrine did not result in Atlas, or other
taxpayers similarly situated, being made to return the tax refund
or credit they received or could have received under Atlas prior to
its abandonment. This Court is applying Mirant and Aichi
prospectively. Absent fraud, bad faith or misrepresentation, the
reversal by this Court of a general interpretative rule issued by
the Commissioner, like the reversal of a specific BIR ruling under
Section 246, should also apply prospectively ....
....
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a
general interpretative rule applicable to all taxpayers or a specific
ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule
because it was a response to a query made, not by a particular
taxpayer, but by a government agency tasked with processing tax
refunds and credits, that is, the One Stop Shop Inter-Agency Tax
Credit and Drawback Center of the Department of Finance. This
government agency is also the addressee, or the entity
responded to, in BIR Ruling No. DA-489-03. Thus, while this
government agency mentions in its query to the Commissioner
the administrative claim of Lazi Bay Resources Development,
Inc., the agency was in fact asking the Commissioner what to do
in cases like the tax claim of Lazi Bay Resources Development,
Inc., where the taxpayer did not wait for the lapse of the 120-day
period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule.
Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from
the time of its issuance on 10 December 2003 up to its reversal
by this Court in Aichi on 6 October 2010, where this Court held
that the 120+30 day periods are mandatory and
jurisdictional.165 (Emphasis supplied)
The previous interpretations given to an ambiguous law by the
Commissioner of Internal Revenue, who is charged to carry out
its provisions, are entitled to great weight, and taxpayers who
relied on the same should not be prejudiced in their
rights. 166 Hence, this Court's construction should be prospective;
otherwise, there will be a violation of due process for failure to
accord persons, especially the parties affected by it, fair notice of
the special burdens imposed on them.
VII
Urgent Reiterative Motion [to Direct Respondents to Comply with
the
Temporary Restraining Order]
Petitioners Banco de Oro, et al. allege that the temporary
restraining order issued by this Court on October 18, 2011
continues to be effective under Rule 58, Section 5 of the Rules of
Court and the Decision dated January 13, 2015. Thus,
considering respondents' refusal to comply with their obligation
under the temporary restraining order, petitioners ask this Court
to issue a resolution directing respondents, particularly the
Bureau of Treasury, "to comply with its order by immediately
releasing to the petitioners during the pendency of the case the
20% final withholding tax" so that the monies may be placed in
escrow pending resolution of the case.167
We recall that in its previous pleadings, respondents remain firm
in its stance that the October 18, 2011 temporary restraining
order could no longer be implemented because the acts sought to
be enjoined were already fait accompli. 168 They allege that the
amount withheld was already remitted by the Bureau of Treasury
to the Bureau of Internal Revenue. Hence, it became part of the
General Fund, which required legislative appropriation before it
could validly be disbursed. 169 Moreover, they argue that since the
amount in question pertains to taxes alleged to be erroneously
withheld and collected by government, the proper recourse was
for the taxpayers to file an application for tax refund before the
Commissioner of Internal Revenue under Section 204 of the
National Internal Revenue Code. 170
Bureau of Internal Revenue will then record the amount of taxes
reflected in the TRA as tax collection in the Journal of Tax
Remittance by government agencies based on its copies of the
TRA. Respondents did not submit any withholding tax return or
TRA to prove that the 20% final withholding tax was indeed
remitted by the Bureau of Treasury to the Bureau oflnternal
Revenue on October 18, 2011.
Respondent Bureau of Treasury's Journal Entry Voucher No. 11-
10- 10395 dated October 18, 2011 submitted to this court shows:

In our January 13, 2015 Decision, we rejected respondents'

defense of fait accompli. We held that the amount withheld were
yet to be remitted to the Bureau of Internal Revenue, and the
evidence Gournal entry voucher) submitted by respondents was
insufficient to prove the fact of remittance. Thus:

The temporary restraining order enjoins the entire implementation

of the 2011 BIR Ruling that constitutes both the withholding and
remittance of the 20% final withholding tax to the Bureau of
Internal Revenue. Even though the Bureau of Treasury had
already withheld the 20% final withholding tax when they received
the temporary restraining order, it had yet to remit the monies it
withheld to the Bureau of Internal Revenue, a remittance
which"was due only on November 10, 2011. The act enjoined by
the temporary restraining order had not yet been fully satisfied
and was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A dated July 31, 2001
which prescribes to national government agencies such as the
Bureau of Treasury the procedure for the remittance of all taxes
they withheld to the Bureau of Internal Revenue, a national
agency shall file before the Bureau of Internal Revenue a Tax
Remittance Advice (TRA) supported by withholding tax returns on
or before the 1 oth day of the following month after the said taxes
had been withheld. The Bureau of Internal Revenue shall transmit
an original copy of the TRA to the Bureau of Treasury, which shall
be the basis in recording the remittance of the tax collection. The
The foregoing journal entry, however, does not prove that the
amount of P4,966,207, 796.41, representing the 20% final
withholding tax on the PEACe Bonds, was disbursed by it and
remitted to the Bureau of Internal Revenue on October 18, 2011.
The entries merely show that the monies corresponding to 20%
final withholding tax was set aside for remittance to the Bureau of
Internal Revenue. 171
Respondents did not submit any withholding tax return or tax
remittance advice to prove that the 20% final withholding tax was,
indeed, remitted by the Bureau of Treasury to the Bureau of
Internal Revenue on October 18, 2011, and consequently
became part of the general fund of the government. The
corresponding journal entry in the books of both the Bureau of
Treasury and Bureau of Internal Revenue showing the transfer of
the withheld funds to the Bureau of Internal Revenue was
likewise not submitted to this Court. The burden of proof lies on
them to show their claim of remittance. Until now, respondents
have failed to submit sufficient supporting evidence to prove their
claim.
In Commissioner of Internal Revenue v. Procter & Gamble
Philippine Manufacturing Corporation, 172 this Court upheld the
right of a withholding agent to file a claim for refund of the
withheld taxes of its foreign parent company. This Court, citing
Philippine Guaranty Company, Inc. v. Commissioner of Internal
Revenue, 173 ruled that inasmuch as it is an agent of government
for the withholding of the proper amount of tax, it is also an agent
of its foreign parent company with respect to the filing of the
necessary income tax return and with respect to actual payment
of the tax to the government. Thus:
The term "taxpayer" is defined in our NIRC as referring to "any
person subject to tax imposed by the Title [on Tax on Income]." It
thus becomes important to note that under Section 53(c) of the
NIRC, the withholding agent who is "required to deduct and
withhold any tax" is made "personally liable for such tax" and
indeed is indemnified against any claims and demands which the
stockholder might wish to make in
questioning the amount of payments effected by the withholding
agent in accordance with the provisions of the NIRC. The
withholding agent, P&G-Phil., is directly and independently liable
for the correct amount of the tax that should be withheld from the
dividend remittances. The withholding agent is, moreover, subject
to and liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld be finally found to
be less than the amount that should have been withheld under
law.
A "person liable for tax" has been held to be a "person subject to
tax" and properly considered a "taxpayer." The terms "liable for
tax" and "subject to tax" both connote legal obligation or duty to
pay a tax. It is very difficult, indeed conceptually impossible, to
consider a person who is statutorily made "liable for tax" as not
"subject to tax." By any reasonable standard, such a person
should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he
believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal
Revenue, this Court pointed out that a withholding agent is in fact
the agent both of the government and of the taxpayer, and that
the withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the
withholding agent to attach. The reason is to compel the
withholding agent to withhold the tax under all circumstances. In
effect, the responsibility for the collection of the tax as well as the
payment thereof is concentrated upon the person over whom the
Government has jurisdiction. Thus, the withholding agent is
constituted the agent of both the Government and the taxpayer.
With respect to the collection and/or withholding of the tax, he is
the Government's agent. In regard to the filing of the necessary
income tax return and the payment of the tax to the Government,
he is the agent of the taxpayer. The withholding agent, therefore,
is no ordinary government agent especially because under
Section 53 (c) he is held personally liable for the tax he is duty
bound to withhold; whereas the Commissioner and his deputies
are not made liable by law.
If, as pointed out in Philippine Guaranty, the withholding agent is
also an agent of the beneficial owner of the dividends with
respect to the filing of the necessary income tax return and with
respect to actual payment of the tax to the government, such
authority may reasonably be held to include the authority to file a
claim for refund and to bring an action for recovery of such claim.
This implied authority is especially warranted where, as in the
instant case, the withholding agent is the wholly owned subsidiary
of the parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the circumstances
of this case, it seems particularly unreal to deny the implied
authority of P&G-Phil. to claim a refund and to commence an
action for such refund.
....
We believe and so hold that, under the circumstances of this
case, P&G-Phil. is properly regarded as a "taxpayer" within the
meaning of Section 309, NIRC, and as impliedly authorized to file
the claim for refund and the suit to recover such
claim.174 (Emphasis supplied, citations omitted)
In Commissioner of Internal Revenue v. Smart Communication,
Inc.;175
[W]hile the withholding agent has the right to recover the taxes
erroneously or illegally collected, he nevertheless has the
obligation to remit the same to the principal taxpayer. As an agent
of the taxpayer, it is his duty to return what he has recovered;
otherwise, he would be unjustly enriching himself at the expense
of the principal taxpayer from whom the taxes were withheld, and
from whom he derives his legal right to file a claim for refund. 176
Since respondents have not sufficiently shown the actual
remittance of the 20% final withholding taxes withheld from the
proceeds of the PEACe bonds to the Bureau of Internal Revenue,
there was no legal impediment for the Bureau of Treasury (as
agent of petitioners) to release the monies to petitioners to be
placed in escrow, pending resolution of the motions for
reconsideration filed in this case by respondents and petitioners-
intervenors RCBC and RCBC Capital.
Moreover, Sections 204 and 229 of the National Internal Revenue
Code are not applicable since the Bureau of Treasury's act of
withholding the 20% final withholding tax was done after the
Petition was filed.
Petitioners also urge177 us to hold respondents liable for 6% legal
interest reckoned from October 19, 2011 until they fully pay the
amount corresponding to the 20% final withholding tax. This
Court has previously granted interest in cases where patent
arbitrariness on the part of the revenue authorities has been
shown, or where the collection of tax was illegal.178
In Philex Mining Corp. v. Commissioner of Internal Revenue: 179
[T]he rule is that no interest on refund of tax can be awarded
unless authorized by law or the collection of the tax was attended
by arbitrariness. An action is not arbitrary when exercised
honestly and upon due consideration where there is room for two
opinions, however much it may be believed that an erroneous
conclusion was reached. Arbitrariness presupposes inexcusable
or obstinate disregard of legal provisions.180 (Emphasis supplied,
citations omitted)
Here, the Bureau of Treasury made no effort to release the
amount of ₱4,966,207,796.41, corresponding to the 20% final
withholding tax, when it could have done so.
In the Court's temporary restraining order dated October 18,
2011,181 which respondent received on October 19, 2011, we
"enjoin[ed] the implementation of BIR Ruling No. 370-2011
against the [PEACe Bonds,] ... subject to the condition that the
20% final withholding tax on interest income there.from shall be
withheld by the petitioner banks and placed in escrow pending
resolution of [the} petition." 182
Subsequently, in our November 15, 2011 Resolution, we directed
respondents to "show cause why they failed to comply with the
[temporary restraining order]; and [to] comply with the [temporary
restraining order] in order that petitioners may place the
corresponding funds in escrow pending resolution of the
petition."183
Respondent did not heed our orders.
In our Decision dated January 13, 2015, we reprimanded the
Bureau of Treasury for its continued retention of the amount
corresponding to the 20% final withholding tax, in wanton
disregard of the orders of this Court.
WHEREFORE, respondents' Motion for Reconsideration and
Clarification is DENIED, and petitioners-intervenors RCBC and
RCBC Capital Corporation's Motion for Clarification and/or Partial
Reconsideration is PARTLY GRANTED.
Respondent Bureau of Treasury is hereby ORDERED to
immediately release and pay the bondholders the amount of
P4,966,207, 796.41, representing the 20% final withholding tax
on the PEACe Bonds, with legal interest of 6% per annum from
October 19, 2011 until full payment.
SO ORDERED.

We further ordered the Bureau of Treasury to immediately

release and pay the bondholders the amount corresponding to
the 20% final withholding tax that it withheld on October 18, 2011.

However, respondent remained obstinate in its refusal to release

the monies and exhibited.utter disregard and defiance of this
Court.

As early as October 19, 2011, petitioners could have deposited

the amount of ₱4,966,207, 796.41 in escrow and earned interest,
had respondent Bureau of Treasury complied with the temporary
restraining order and

released the funds. It was inequitable for the Bureau of Treasury

to have withheld the potential earnings of the funds in escrow
from petitioners.

Due to the Bureau of Treasury's unjustified refusal to release the

funds to be deposited in escrow, in utter disregard of the orders of
the Court, it is held liable to pay legal interest of 6% per
annum 184 on the amount of ₱4,966,207, 796.41 representing
the 20% final withholding tax on the PEACe Bonds.
6. Appeal of Rulings – RTC or CTA?
a. Banco De Oro vs Republic January 13, 2015 (see I-4-a
case) and Resolution dated August 16, 2016 (see 1-5-g case)
b. Confederation for Unity case (see I-4-c case)
FIRST DIVISION
G.R. No. 207843 July 15, 2015
COMMISSION OF INTERNAL REVENUE, Petitioner,
vs.
COURT OF TAX APPEALS (SECOND DIVISION) and PETRON
CORPORATION,* Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for certiorari1 are the Resolutions dated
February 13, 20132 and May 8, 20133 of the Court of Tax Appeals,
Second Division (CTA) in CTA Case No. 8544 reversing and
setting aside the earlier dismissal of the petition for review filed by
private respondent Petron Corporation (Petron) in the said case
on the bases of prematurity and lack of jurisdiction.
The Facts
Petron, which is engaged in the manufacture and marketing of
petroleum products, imports alkylate as a raw material or
blending component for the manufacture of ethanol-blended
motor gasoline.4 For the period January 2009 to August 2011, as
well as for the month of April 2012, Petron transacted an
aggregate of 22 separate importations for which petitioner the
Commissioner of Internal Revenue (CIR) issued Authorities to
Release Imported Goods (ATRIGs), categorically stating that
Petron's importation of alkylate is exempt from the payment of the
excise tax because it was not among those articles enumerated
as subject to excise tax under Title VI of Republic Act No. (RA)
8424,5 as amended, or the 1997 National Internal Revenue Code
(NIRC). With respect, however, to Petron's alkylate importations
covering the period September 2011 to June 2012 (excluding
April 2012), the CIR inserted, without prior notice, a reservation
for all ATRIGs issued,6 stating that:
This is without prejudice to the collection of the corresponding
excise taxes, penalties and interest depending on the final
resolution of the Office of the Commissioner on the issue of
whether this item is subject to the excise taxes under the National
Internal Revenue Code of 1997, as amended.7
In June 2012, Petron imported 12,802,660 liters of alkylate and
paid value-added tax (VAT) in the total amount of ?41,657,533.00
as evidenced by Import Entry and Internal Revenue Declaration
(IEIRD) No. SN 122406532. Based on the Final Computation,
said importation was subjected by the Collector of Customs of
Port Limay, Bataan, upon instructions of the Commissioner of
Customs (COC), to excise taxes of ₱4.35 per liter, or in the
aggregate amount of ₱55,691,571.00, and consequently, to an
additional VAT of 12% on the imposed excise tax in the amount
of ₱6,682,989.00.8 The imposition of the excise tax was
supposedly premised on Customs Memorandum Circular (CMC)
No. 164-2012 dated July 18, 2012, implementing the Letter dated
June 29, 2012 issued by the CIR, which states that:
[A]lkylate which is a product of distillation similar to that of naphta,
is subject to excise tax under Section 148( e) of the National
Internal Revenue Code (NIRC) of 1997. 9
In view of the CIR's assessment, Petron filed before the CTA a
petition for review,10 docketed as CTA Case No. 8544, raising the
issue of whether its importation of alkylate as a blending
component is subject to excise tax as contemplated under
Section 148 (e) of the NIRC.
On October 5, 2012, the CIR filed a motion to dismiss on the
grounds of lack of jurisdiction and prematurity.11
Initially, in a Resolution12 dated November 15, 2012, the CTA
granted the CIR's motion and dismissed the case. However, on
Petron's motion for reconsideration,13 it reversed its earlier
disposition in a Resolution14 dated February 13, 2013, and
eventually denied the CIR's motion for reconsideration15 therefrom
in a Resolution16 dated May 8, 2013. In effect, the CTA gave due
course to Petron's petition, finding that: (a) the controversy was
not essentially for the determination of the constitutionality,
legality or validity of a law, rule or regulation but a question on the
propriety or soundness of the CIR's interpretation of Section 148
(e) of the NIRC which falls within the exclusive jurisdiction of the
CTA under Section 4 thereof, particularly under the phrase "other
matters arising under [the NIRC]";17 and (b) there are attending
circumstances that exempt the case from the rule on non-
exhaustion of administrative remedies, such as the great
irreparable damage that may be suffered by Petron from the
CIR's final assessment of excise tax on its importation.18
Aggrieved, the CIR sought immediate recourse to the Court,
through the instant petition, alleging that the CTA committed
grave abuse of discretion when it assumed authority to take
cognizance of the case despite its lack of jurisdiction to do so.19
The Issue Before the Court
The core issue to be resolved is whether or not the CTA properly
assumed jurisdiction over the petition assailing the imposition of
excise tax on Petron's importation of alkylate based on Section
148 (e) of the NIRC.
The Court's Ruling
The petition is meritorious.
The CIR asserts that the interpretation of the subject tax
provision, i.e., Section 148 (e) of the NIRC, embodied in CMC No.
164-2012, is an exercise of her quasi-legislative function which is
reviewable by the Secretary of Finance, whose decision, in turn,
is appealable to the Office of
the President and, ultimately, to the regular courts, and that only
her quasi-judicial functions or the authority to decide disputed
assessments, refunds, penalties and the like are subject to the
exclusive appellate jurisdiction of the CTA.20 She likewise
contends that the petition suffers from prematurity due to Petron
's failure to exhaust all available remedies within the
administrative level in accordance with the Tariff and Customs
Code (TCC).21
The CIR's position is well-grounded.
Section 4 of the NIRC confers upon the CIR both: (a) the power
to interpret tax laws in the exercise of her quasi-legislative
function; and (b) the power to decide tax cases in the exercise of
her quasi-judicial function. It also delineates the jurisdictional
authority to review the validity of the CIR's exercise of the said
powers, thus:
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases. - The power to interpret the provisions of this
Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the
Secretary of Finance.
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal
Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals. (Emphases and
underscoring supplied)
The CTA is a court of special jurisdiction, with power to review by
appeal decisions involving tax disputes rendered by either the
CIR or the COC. Conversely, it has no jurisdiction to determine
1âwphi 1
the validity of a ruling issued by the CIR or the COC in the
exercise of their quasi-legislative powers to interpret tax laws.
These observations may be deduced from a reading of Section 7
of RA 1125,22 as amended by RA 9282,23 entitled "An Act Creating
the Court of Tax Appeals," enumerating the cases over which the
CT A may exercise its jurisdiction:
Sec. 7. Jurisdiction. -The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as
herein provided:
1. Decisions of the Commissioner of Internal
Revenue in cases involving disputed
assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation
thereto, or other matters arising under the
National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal
Revenue in cases involving disputed
assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relations
thereto, or other matters arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue,
where the National Internal Revenue Code
provides a specific period of action, in which case
the inaction shall be deemed a denial;
3. Decisions, orders or resolutions of the Regional
Trial Comis in local tax cases originally decided or
resolved by them in the exercise of their original
or appellate jurisdiction;
4. Decisions of the Commissioner of Customs in
cases involving liability for customs duties, fees or
other money charges, seizure, detention or
release of property affected, fines, forfeitures or
other penalties in relation thereto, or other matters
arising under the Customs Law or other laws
administered by the Bureau of Customs;
5. Decisions of the Central Board of Assessment
Appeals in the exercise of its appellate jurisdiction
over cases involving the assessment and taxation
of real property originally decided by the provincial
or city board of assessment appeals;
6. Decisions of the Secretary of Finance on
customs cases elevated to him automatically for
review from decisions of the Commissioner of
Customs which are adverse to the Government
under Section 2315 of the Tariff and Customs
Code;
7. Decisions of the Secretary of Trade and
Industry, in the case of nonagricultural product,
commodity or article, and the Secretary of
Agriculture in the case of agricultural product,
commodity or article, involving dumping and
countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and
safeguard measures under Republic Act No.
8800, where either party may appeal the decision
to impose or not to impose said duties.
b. Jurisdiction over cases involving criminal offenses as
herein provided:
1. Exclusive original jurisdiction over all criminal
offenses arising from violations of the National
Internal Revenue Code or Tariff and Customs
Code and other laws administered by the Bureau
of Internal Revenue or the Bureau of Customs:
Provided, however, That offenses or felonies
mentioned in this paragraph where the principal
amount of taxes and fees, exclusive of charges
and penalties, claimed is less than One million
pesos (₱1,000,000.00) or where there is no
specified amount claimed shall be tried by the
regular Courts and the jurisdiction of the CTA
shall be appellate. Any provision of law or the
Rules of Court to the contrary notwithstanding, the
criminal action and the corresponding civil action
for the recovery of civil liability for taxes and
penalties shall at all times be simultaneously
instituted with, and jointly determined in the same
proceeding by the CT A, the filing of the criminal
action being deemed to necessarily carry with it
the filing of the civil action, and no right to reserve
the filling of such civil action separately from the
criminal action will be recognized.
Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in their
respective jurisdiction.
c. Jurisdiction over tax collection cases as
herein provided:
1. Exclusive original jurisdiction in tax collection cases
involving final and executory assessments for taxes, fees,
charges and penalties: Provided, however, That collection
cases where the principal amount of taxes and fees,
exclusive of charges and penalties, claimed is less than
One million pesos (₱1,000,000.00) shall be tried by the
proper Municipal Trial Court, Metropolitan Trial Court and
Regional Trial Court.
2. Exclusive appellate jurisdiction in tax collection cases:
a. Over appeals from the judgments, resolutions
or orders of the Regional Trial Courts in tax
collection cases originally decided by them, in
their respective territorial jurisdiction.

2. Exclusive appellate jurisdiction in criminal b. Over petitions for review of the judgments,
offenses: resolutions or orders of the Regional Trial Courts
in the exercise of their appellate jurisdiction over
tax collection cases originally decided by the
a. Over appeals from the judgments,
Metropolitan Trial Courts, Municipal Trial Courts
resolutions or orders of the Regional Trial
and Municipal Circuit Trial Courts, in their
Courts in tax cases originally decided by
respective jurisdiction. (Emphasis supplied)
them, in their respective territorial
jurisdiction.
In this case, Petron's tax liability was premised on the COC's
issuance of CMC No. 164-2012, which gave effect to the CIR's
b. Over petitions for review of the
June 29, 2012 Letter interpreting Section 148 (e) of the NIRC as
judgments, resolutions or orders of the
to include alkyl ate among the articles subject to customs duties,
Regional Trial Courts in the exercise of
hence, Petron's petition before the CTA ultimately challenging the
their appellate jurisdiction over tax cases
legality and constitutionality of the CIR's aforesaid interpretation
originally decided by the Metropolitan Trial
of a tax provision. In line with the foregoing discussion, however,
the CIR correctly argues that the CT A had no jurisdiction to take
cognizance of the petition as its resolution would necessarily
involve a declaration of the validity or constitutionality of the CIR's
interpretation of Section 148 (e) of the NIRC, which is subject to
the exclusive review by the Secretary of Finance and ultimately
by the regular courts. In British American Tobacco v.
Camacho,24 the Court ruled that the CTA's jurisdiction to resolve
tax disputes excludes the power to rule on the constitutionality or
validity of a law, rule or regulation, to wit:
While the above statute confers on the CTA jurisdiction to resolve
tax disputes in general, this does not include cases where the
constitutionality of a law or rule is challenged. Where what is
assailed is the validity or constitutionality of a law, or a rule or
regulation issued by the administrative agency in the performance
of its quasi-legislative function, the regular courts have jurisdiction
to pass upon the same. x x x.25
In asserting its jurisdiction over the present case, the CTA
explained that Petron's petition filed before it "simply puts in
question" the propriety or soundness of the CIR's interpretation
and application of Section 148 (e) of the NIRC (as embodied in
CMC No. 164-2012) "in relation to" the imposition of excise tax on
Petron's importation of alkylate; thus, the CTA posits that the
case should be regarded as "other matters arising under [the
NIRC]" under the second paragraph of Section 4 of the NIRC,
therefore falling within the CTA's jurisdiction:26
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases. - The power to interpret the provisions of this
Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the
Secretary of Finance.
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal
Revenue is vested in the commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals. (Emphases and
underscoring supplied)
The Court disagrees.
As the CIR aptly pointed out, the phrase "other matters arising
under this Code," as stated in the second paragraph of Section 4
of the NIRC, should be understood as pertaining to those matters
directly related to the preceding phrase "disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto" and must therefore not be taken in
isolation to invoke the jurisdiction of the CTA.27 In other words, the
subject phrase should be used only in reference to cases that
are, to begin with, subject to the exclusive appellate jurisdiction of
the CTA, i.e., those controversies over which the CIR had
exercised her quasi-judicial functions or her power to decide
disputed assessments, refunds or internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, not to those
that involved the CIR's exercise of quasi-legislative powers.
In Enrile v. Court of Appeals,28 the Court, applying the statutory
construction principle of ejusdem generis,29explained the import of
using the general clause "other matters arising under the
Customs Law or other law or part of law administered by the
Bureau of Customs" in the enumeration of cases subject to the
exclusive appellate jurisdiction of the CTA, saying that: [T]he
'other matters' that may come under the general clause should be
of the same nature as those that have preceded them applying
the rule of construction known as ejusdem generis.30(Emphasis
and underscoring supplied)
Hence, as the CIR's interpretation of a tax provision involves an
exercise of her quasi-legislative functions, the proper recourse
against the subject tax ruling expressed in CMC No. 164-2012 is
a review by the Secretary of Finance and ultimately the regular
courts. In Commissioner of Customs v. Hypermix Feeds
Corporation,31 the Court has held that:
The determination of whether a specific rule or set of rules issued
by an administrative agency contravenes the law or the
constitution is within the jurisdiction of the regular courts. Indeed,
the Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation in
the courts, including the regional trial courts. This is within the
scope of judicial power, which includes the authority of the courts
to determine in an appropriate action the validity of the acts of the
political departments. x x x.32
Besides, Petron prematurely invoked the jurisdiction of the CT A.
Under Section 7 of RA 1125, as amended by RA 9282, what is
appealable to the CT A is the decision of the COC over a
customs collector's adverse ruling on a taxpayer's protest:
SEC. 7. Jurisdiction. -The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein
provided:
1. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
xxxx
4. Decisions of the Commissioner of Customs in cases involving
liability for customs duties, fees or other money charges, seizure,
detention or release of property affected, fines, forfeitures or other
penalties in relation thereto, or other matters arising under the
Customs Law or other laws administered by the Bureau of
Customs;
xxxx
Section 11 of the same law is no less categorical in stating that
what may be the subject of an appeal to the CT A is a decision,
ruling or inaction of the CIR or the COC, among others:
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. –
Any party adversely affected by a decision, ruling or inaction of
the Commissioner of Internal Revenue, the Commissioner of
Customs, the Secretary of Finance, the Secretary of Trade and
Industry or the Secretary of Agriculture or the Central Board of
Assessment Appeals or the Regional Trial Courts may file an
appeal with the CTA within thirty (30) days after the receipt of
such decision or ruling or after the expiration of the period fixed
by law for action as referred to in Section 7(a)(2) herein.
xxxx
In this case, there was even no tax assessment to speak of.
While customs collector Federico Bulanhagui himself admitted
during the CTA's November 8, 2012 hearing that the computation
he had written at the back page of the IEIRD served as the final
assessment imposing excise tax on Petron's importation of
alkylate,33 the Court concurs with the CIR's stance that the subject
IEIRD was not yet the customs collector's final assessment that
could be the proper subject of review. And even if it were, the
same should have been brought first for review before the COC
and not directly to the CTA. It should be stressed that the CTA
has no jurisdiction to review by appeal, decisions of the customs
collector.34 The TCC prescribes that a party adversely affected by
a ruling or decision of the customs collector may protest such
ruling or decision upon payment of the amount due35 and, if
aggrieved by the action of the customs collector on the matter
under protest, may have the same reviewed by the COC.36 It is
only after the COC shall have made an adverse ruling on the SO ORDERED.
matter may the aggrieved party file an

appeal to the CT A.37

Notably, Petron admitted to not having filed a protest of the

assessment before the customs collector and elevating a possible
adverse ruling therein to the COC, reasoning that such a
procedure would be costly and impractical, and would unjustly
delay the resolution of the issues which, being purely legal in
nature anyway, were also beyond the authority of the customs
collector to resolve with finality.38 This admission is at once
decisive of the issue of the CTA's jurisdiction over the petition.
There being no protest ruling by the customs collector that was
appealed to the COC, the filing of the petition before the CTA was
premature as there was nothing yet to review.39

Verily, the fact that there is no decision by the COC to appeal

from highlights Petron's failure to exhaust administrative
remedies prescribed by law. Before a party is allowed to seek the
intervention of the courts, it is a pre-condition that he avail of all
administrative processes afforded him, such that if a remedy
within the administrative machinery can be resorted to by giving
the administrative officer every opportunity to decide on a matter
that comes within his jurisdiction, then such remedy must be
exhausted first before the court's power of judicial review can be
sought, otherwise, the premature resort to the court is fatal to
one's cause of action.40 While there are exceptions to the principle
of exhaustion of administrative remedies, it has not been
sufficiently shown that the present case falls under any of the
exceptions.

WHEREFORE, the petition is GRANTED. The Resolutions dated

February 13, 2013 and May 8, 2013 of the Court of Tax Appeals
(CTA), Second Division in CTA Case No. 8544 are hereby
REVERSED and SET ASIDE. The petition for review filed by
private respondent Petron Corporation before the CTA is
DISMISSED for lack of jurisdiction and prematurity.