Vous êtes sur la page 1sur 40

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FORTUNE TOBACCO CORPORATION, Respondent.

Simple and uncomplicated is the central issue involved, yet whopping is the amount at stake in this case.

After much wrangling in the Court of Tax Appeals (CTA) and the Court of Appeals, Fortune Tobacco Corporation (Fortune Tobacco) was
granted a tax refund or tax credit representing specific taxes erroneously collected from its tobacco products. The tax refund is being
re-claimed by the Commissioner of Internal Revenue (Commissioner) in this petition.

The following undisputed facts, summarized by the Court of Appeals, are quoted in the assailed Decision1 dated 28 September 2004:

CAG.R. SP No. 80675

xxxx

Petitioner2 is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with
principal address at Fortune Avenue, Parang, Marikina City.

Petitioner is the manufacturer/producer of, among others, the following cigarette brands, with tax rate classification based on net retail
price prescribed by Annex "D" to R.A. No. 4280, to wit:

Brand Tax Rate

Champion M 100 ₱1.00

Salem M 100 ₱1.00

Salem M King ₱1.00

Camel F King ₱1.00

Camel Lights Box 20’s ₱1.00

Camel Filters Box 20’s ₱1.00

Winston F Kings ₱5.00

Winston Lights ₱5.00

Immediately prior to January 1, 1997, the above-mentioned cigarette brands were subject to ad valorem tax pursuant to then Section
142 of the Tax Code of 1977, as amended. However, on January 1, 1997, R.A. No. 8240 took effect whereby a shift from the ad valorem
tax (AVT) system to the specific tax system was made and subjecting the aforesaid cigarette brands to specific tax under [S]ection 142
thereof, now renumbered as Sec. 145 of the Tax Code of 1997, pertinent provisions of which are quoted thus:

Section 145. Cigars and Cigarettes-

(A) Cigars. – There shall be levied, assessed and collected on cigars a tax of One peso (₱1.00) per cigar.

"(B) Cigarettes packed by hand. – There shall be levied, assessesed and collected on cigarettes packed by hand a tax of Forty
centavos (P0.40) per pack.

(C) Cigarettes packed by machine. – There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates
prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (₱10.00) per pack, the tax shall be
Twelve (₱12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos and Fifty centavos (₱6.50) but does not
exceed Ten pesos (₱10.00) per pack, the tax shall be Eight Pesos (₱8.00) per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (₱5.00) but does not exceed Six Pesos and fifty
centavos (₱6.50) per pack, the tax shall be Five pesos (₱5.00) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (₱5.00) per pack, the tax shall be One
peso (₱1.00) per pack;

"Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of R.A. No. 8240 shall be
taxed under the highest classification of any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than
the tax, which is due from each brand on October 1, 1996. Provided, however, that in cases were (sic) the excise tax rate imposed in
paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than seventy percent (70%), for a brand of
cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be packed in twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be increased by twelve percent (12%)
on January 1, 2000. (Emphasis supplied)

New brands shall be classified according to their current net retail price.

For the above purpose, ‘net retail price’ shall mean the price at which the cigarette is sold on retail in twenty (20) major supermarkets
in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax and
value-added tax. For brands which are marketed only outside Metro [M]anila, the ‘net retail price’ shall mean the price at which the
cigarette is sold in five (5) major supermarkets in the region excluding the amount intended to cover the applicable excise tax and the
value-added tax.

The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex "D," shall
remain in force until revised by Congress.

Variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand and/or a
different brand which carries the same logo or design of the existing brand.

To implement the provisions for a twelve percent (12%) increase of excise tax on, among others, cigars and cigarettes packed by
machines by January 1, 2000, the Secretary of Finance, upon recommendation of the respondent Commissioner of Internal Revenue,
issued Revenue Regulations No. 17-99, dated December 16, 1999, which provides the increase on the applicable tax rates on cigar and
cigarettes as follows:

PRESENT
NEW SPECIFIC
SPECIFIC TAX
TAX RATE
SECTION ARTICLES RATE PRIOR
EFFECTIVE JAN.
TO JAN. 1,
1, 2000
2000
145 (A) P1.00/cigar ₱1.12/cigar
(B)Cigarettes
packed by
machine
(1) Net retail
price
₱12.00/pack ₱13.44/ pack
(excluding
VAT and
excise)
exceeds
₱10.00 per
pack
(2) Exceeds
₱10.00 per ₱8.00/pack ₱8.96/pack
pack
(3) Net retail
price
(excluding
VAT and
₱5.00/pack ₱5.60/pack
excise) is
₱5.00 to
₱6.50 per
pack
(4) Net Retail
Price
(excluding
VAT and ₱1.00/pack ₱1.12/pack
excise) is
below ₱5.00
per pack

Revenue Regulations No. 17-99 likewise provides in the last paragraph of Section 1 thereof, "(t)hat the new specific tax rate for any
existing brand of cigars, cigarettes packed by machine, distilled spirits, wines and fermented liquor shall not be lower than the excise
tax that is actually being paid prior to January 1, 2000."

For the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all brands manufactured and removed in the total
amounts of ₱585,705,250.00.

On February 7, 2000, petitioner filed with respondent’s Appellate Division a claim for refund or tax credit of its purportedly overpaid
excise tax for the month of January 2000 in the amount of ₱35,651,410.00

On June 21, 2001, petitioner filed with respondent’s Legal Service a letter dated June 20, 2001 reiterating all the claims for refund/tax
credit of its overpaid excise taxes filed on various dates, including the present claim for the month of January 2000 in the amount of
₱35,651,410.00.

As there was no action on the part of the respondent, petitioner filed the instant petition for review with this Court on December 11,
2001, in order to comply with the two-year period for filing a claim for refund.

In his answer filed on January 16, 2002, respondent raised the following Special and Affirmative Defenses;

4. Petitioner’s alleged claim for refund is subject to administrative routinary investigation/examination by the Bureau;

5. The amount of ₱35,651,410 being claimed by petitioner as alleged overpaid excise tax for the month of January 2000 was not
properly documented.

6. In an action for tax refund, the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is
fatal to its claim for refund/credit.

7. Petitioner must show that it has complied with the provisions of Section 204(C) in relation [to] Section 229 of the Tax Code on the
prescriptive period for claiming tax refund/credit;

8. Claims for refund are construed strictly against the claimant for the same partake of tax exemption from taxation; and
9. The last paragraph of Section 1 of Revenue Regulation[s] [No.]17-99 is a valid implementing regulation which has the force and effect
of law."

CA G.R. SP No. 83165

The petition contains essentially similar facts, except that the said case questions the CTA’s December 4, 2003 decision in CTA Case No.
6612 granting respondent’s3 claim for refund of the amount of ₱355,385,920.00 representing erroneously or illegally collected specific
taxes covering the period January 1, 2002 to December 31, 2002, as well as its March 17, 2004 Resolution denying a reconsideration
thereof.

xxxx

In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of Tax Appeals reduced the issues to be resolved into two as stipulated
by the parties, to wit: (1) Whether or not the last paragraph of Section 1 of Revenue Regulation[s] [No.] 17-99 is in accordance with the
pertinent provisions of Republic Act [No.] 8240, now incorporated in Section 145 of the Tax Code of 1997; and (2) Whether or not
petitioner is entitled to a refund of ₱35,651,410.00 as alleged overpaid excise tax for the month of January 2000.

xxxx

Hence, the respondent CTA in its assailed October 21, 2002 [twin] Decisions[s] disposed in CTA Case Nos. 6365 & 6383:

WHEREFORE, in view of the foregoing, the court finds the instant petition meritorious and in accordance with law. Accordingly,
respondent is hereby ORDERED to REFUND to petitioner the amount of ₱35,651.410.00 representing erroneously paid excise taxes for
the period January 1 to January 31, 2000.

SO ORDERED.

Herein petitioner sought reconsideration of the above-quoted decision. In [twin] resolution[s] [both] dated July 15, 2003, the Tax Court,
in an apparent change of heart, granted the petitioner’s consolidated motions for reconsideration, thereby denying the respondent’s
claim for refund.

However, on consolidated motions for reconsideration filed by the respondent in CTA Case Nos. 6363 and 6383, the July 15, 2002
resolution was set aside, and the Tax Court ruled, this time with a semblance of finality, that the respondent is entitled to the refund
claimed. Hence, in a resolution dated November 4, 2003, the tax court reinstated its December 21, 2002 Decision and disposed as
follows:

WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are hereby REINSTATED. Accordingly, respondent is hereby ORDERED to
REFUND petitioner the total amount of ₱680,387,025.00 representing erroneously paid excise taxes for the period January 1, 2000 to
January 31, 2000 and February 1, 2000 to December 31, 2001.

SO ORDERED.

Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered decision in CTA Case No. 6612 granting the prayer for the refund
of the amount of ₱355,385,920.00 representing overpaid excise tax for the period covering January 1, 2002 to December 31, 2002. The
tax court disposed of the case as follows:

IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED. Accordingly, respondent is hereby ORDERED to REFUND to petitioner
the amount of ₱355,385,920.00 representing overpaid excise tax for the period covering January 1, 2002 to December 31, 2002.

SO ORDERED.

Petitioner sought reconsideration of the decision, but the same was denied in a Resolution dated March 17, 2004.4(Emphasis supplied)
(Citations omitted)

The Commissioner appealed the aforesaid decisions of the CTA. The petition questioning the grant of refund in the amount of
₱680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas that assailing the grant of refund in the amount of ₱355,385,920.00
was docketed as CA-G.R. SP No. 83165. The petitions were consolidated and eventually denied by the Court of Appeals. The appellate
court also denied reconsideration in its Resolution5 dated 1 March 2005.

In its Memorandum6 22 dated November 2006, filed on behalf of the Commissioner, the Office of the Solicitor General (OSG) seeks to
convince the Court that the literal interpretation given by the CTA and the Court of Appeals of Section 145 of the Tax Code of 1997 (Tax
Code) would lead to a lower tax imposable on 1 January 2000 than that imposable during the transition period. Instead of an increase
of 12% in the tax rate effective on 1 January 2000 as allegedly mandated by the Tax Code, the appellate court’s ruling would result in a
significant decrease in the tax rate by as much as 66%.

The OSG argues that Section 145 of the Tax Code admits of several interpretations, such as:

1. That by January 1, 2000, the excise tax on cigarettes should be the higher tax imposed under the specific tax system and the tax
imposed under the ad valorem tax system plus the 12% increase imposed by par. 5, Sec. 145 of the Tax Code;

2. The increase of 12% starting on January 1, 2000 does not apply to the brands of cigarettes listed under Annex "D" referred to in par.
8, Sec. 145 of the Tax Code;

3. The 12% increment shall be computed based on the net retail price as indicated in par. C, sub-par. (1)-(4), Sec. 145 of the Tax Code
even if the resulting figure will be lower than the amount already being paid at the end of the transition period. This is the
interpretation followed by both the CTA and the Court of Appeals.7

This being so, the interpretation which will give life to the legislative intent to raise revenue should govern, the OSG stresses.

Finally, the OSG asserts that a tax refund is in the nature of a tax exemption and must, therefore, be construed strictly against the
taxpayer, such as Fortune Tobacco.

In its Memorandum8 dated 10 November 2006, Fortune Tobacco argues that the CTA and the Court of Appeals merely followed the
letter of the law when they ruled that the basis for the 12% increase in the tax rate should be the net retail price of the cigarettes in the
market as outlined in paragraph C, sub paragraphs (1)-(4), Section 145 of the Tax Code. The Commissioner allegedly has gone beyond
his delegated rule-making power when he promulgated, enforced and implemented Revenue Regulation No. 17-99, which effectively
created a separate classification for cigarettes based on the excise tax "actually being paid prior to January 1, 2000."9

It should be mentioned at the outset that there is no dispute between the fact of payment of the taxes sought to be refunded and the
receipt thereof by the Bureau of Internal Revenue (BIR). There is also no question about the mathematical accuracy of Fortune
Tobacco’s claim since the documentary evidence in support of the refund has not been controverted by the revenue agency. Likewise,
the claims have been made and the actions have been filed within the two (2)-year prescriptive period provided under Section 229 of
the Tax Code.

The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the
people who are taxed, and the grant must be made by the immediate representatives of the people; and where the people have laid
the power, there it must remain and be exercised.10

This entire controversy revolves around the interplay between Section 145 of the Tax Code and Revenue Regulation 17-99. The main
issue is an inquiry into whether the revenue regulation has exceeded the allowable limits of legislative delegation.

For ease of reference, Section 145 of the Tax Code is again reproduced in full as follows:

Section 145. Cigars and Cigarettes-

(A) Cigars.—There shall be levied, assessed and collected on cigars a tax of One peso (₱1.00) per cigar.

(B). Cigarettes packed by hand.—There shall be levied, assessed and collected on cigarettes packed by hand a tax of Forty centavos
(₱0.40) per pack.

(C) Cigarettes packed by machine.—There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates
prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (₱10.00) per pack, the tax shall be
Twelve pesos (₱12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos and Fifty centavos (₱6.50) but does not
exceed Ten pesos (₱10.00) per pack, the tax shall be Eight Pesos (₱8.00) per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (₱5.00) but does not exceed Six Pesos and fifty
centavos (₱6.50) per pack, the tax shall be Five pesos (₱5.00) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (₱5.00) per pack, the tax shall be One
peso (₱1.00) per pack;

Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of R.A. No. 8240 shall be
taxed under the highest classification of any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than
the tax, which is due from each brand on October 1, 1996. Provided, however, That in cases where the excise tax rates imposed in
paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than seventy percent (70%), for a brand of
cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be packed in twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be increased by twelve percent (12%)
on January 1, 2000.

New brands shall be classified according to their current net retail price.

For the above purpose, ‘net retail price’ shall mean the price at which the cigarette is sold on retail in twenty (20) major supermarkets
in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax and
value-added tax. For brands which are marketed only outside Metro Manila, the ‘net retail price’ shall mean the price at which the
cigarette is sold in five (5) major intended to cover the applicable excise tax and the value-added tax.

The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex "D," shall
remain in force until revised by Congress.

Variant of a brand’ shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand and/or a
different brand which carries the same logo or design of the existing brand.11 (Emphasis supplied)

Revenue Regulation 17-99, which was issued pursuant to the unquestioned authority of the Secretary of Finance to promulgate rules
and regulations for the effective implementation of the Tax Code,12 interprets the above-quoted provision and reflects the 12%
increase in excise taxes in the following manner:

PRESENT SPECIFIC TAX RATES PRIOR TO


SECTION DESCRIPTION OF ARTICLES NEW SPECIFIC TAX RATE Effective Jan.. 1, 2000
JAN. 1, 2000

145 (A) P1.00/cigar ₱1.12/cigar

(B)Cigarettes packed by Machine

(1) Net Retail Price (excluding VAT and


₱12.00/pack ₱13.44/pack
Excise) exceeds ₱10.00 per pack

(2) Net Retail Price (excluding VAT and


₱8.00/pack ₱8.96/pack
Excise) is ₱6.51 up to ₱10.00 per pack

(3) Net Retail Price (excluding VAT and


₱5.00/pack ₱5.60/pack
excise) is ₱5.00 to ₱6.50 per pack

(4) Net Retail Price (excluding VAT and


₱1.00/pack ₱1.12/pack
excise) is below ₱5.00 per pack)
This table reflects Section 145 of the Tax Code insofar as it mandates a 12% increase effective on 1 January 2000 based on the taxes
indicated under paragraph C, sub-paragraph (1)-(4). However, Revenue Regulation No. 17-99 went further and added that "[T]he new
specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits, wines and fermented liquor shall not be
lower than the excise tax that is actually being paid prior to January 1, 2000."13

Parenthetically, Section 145 states that during the transition period, i.e., within the next three (3) years from the effectivity of the Tax
Code, the excise tax from any brand of cigarettes shall not be lower than the tax due from each brand on 1 October 1996. This
qualification, however, is conspicuously absent as regards the 12% increase which is to be applied on cigars and cigarettes packed by
machine, among others, effective on 1 January 2000. Clearly and unmistakably, Section 145 mandates a new rate of excise tax for
cigarettes packed by machine due to the 12% increase effective on 1 January 2000 without regard to whether the revenue collection
starting from this period may turn out to be lower than that collected prior to this date.

By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax actually paid prior
to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher amount between the ad valorem tax
being paid at the end of the three (3)-year transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased
by 12%—a situation not supported by the plain wording of Section 145 of the Tax Code.

This is not the first time that national revenue officials had ventured in the area of unauthorized administrative legislation.

In Commissioner of Internal Revenue v. Reyes,14 respondent was not informed in writing of the law and the facts on which the
assessment of estate taxes was made pursuant to Section 228 of the 1997 Tax Code, as amended by Republic Act (R.A.) No. 8424. She
was merely notified of the findings by the Commissioner, who had simply relied upon the old provisions of the law and Revenue
Regulation No. 12-85 which was based on the old provision of the law. The Court held that in case of discrepancy between the law as
amended and the implementing regulation based on the old law, the former necessarily prevails. The law must still be followed, even
though the existing tax regulation at that time provided for a different procedure.15

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,16 the tax authorities gave the term "tax credit" in Sections 2(i)
and 4 of Revenue Regulation 2-94 a meaning utterly disparate from what R.A. No. 7432 provides. Their interpretation muddled up the
intent of Congress to grant a mere discount privilege and not a sales discount. The Court, striking down the revenue regulation, held
that an administrative agency issuing regulations may not enlarge, alter or restrict the provisions of the law it administers, and it cannot
engraft additional requirements not contemplated by the legislature. The Court emphasized that tax administrators are not allowed to
expand or contract the legislative mandate and that the "plain meaning rule" or verba legis in statutory construction should be applied
such that where the words of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied without
attempted interpretation.

As we have previously declared, rule-making power must be confined to details for regulating the mode or proceedings in order to
carry into effect the law as it has been enacted, and it cannot be extended to amend or expand the statutory requirements or to
embrace matters not covered by the statute. Administrative regulations must always be in harmony with the provisions of the law
because any resulting discrepancy between the two will always be resolved in favor of the basic law.17

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,18 Commissioner Jose Ong issued Revenue Memorandum
Order (RMO) No. 15-91, as well as the clarificatory Revenue Memorandum Circular (RMC) 43-91, imposing a 5% lending investor’s tax
under the 1977 Tax Code, as amended by Executive Order (E.O.) No. 273, on pawnshops. The Commissioner anchored the imposition
on the definition of lending investors provided in the 1977 Tax Code which, according to him, was broad enough to include pawnshop
operators. However, the Court noted that pawnshops and lending investors were subjected to different tax treatments under the Tax
Code prior to its amendment by the executive order; that Congress never intended to treat pawnshops in the same way as lending
investors; and that the particularly involved section of the Tax Code explicitly subjected lending investors and dealers in securities only
to percentage tax. And so the Court affirmed the invalidity of the challenged circulars, stressing that "administrative issuances must not
override, supplant or modify the law, but must remain consistent with the law they intend to carry out."19

In Philippine Bank of Communications v. Commissioner of Internal Revenue,20 the then acting Commissioner issued RMC 7-85, changing
the prescriptive period of two years to ten years for claims of excess quarterly income tax payments, thereby creating a clear
inconsistency with the provision of Section 230 of the 1977 Tax Code. The Court nullified the circular, ruling that the BIR did not simply
interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. The Court held:

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less
general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted
that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the
courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to apply
and implement.21

In Commissioner of Internal Revenue v. CA, et al.,22 the central issue was the validity of RMO 4-87 which had construed the amnesty
coverage under E.O. No. 41 (1986) to include only assessments issued by the BIR after the promulgation of the executive order on 22
August 1986 and not assessments made to that date. Resolving the issue in the negative, the Court held:

x x x all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and implement.
Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law.23

xxx

If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax liabilities already assessed
(administratively) prior to 22 August 1986, the law could have simply so provided in its exclusionary clauses. It did not. The conclusion is
unavoidable, and it is that the executive order has been designed to be in the nature of a general grant of tax amnesty subject only to
the cases specifically excepted by it.24

In the case at bar, the OSG’s argument that by 1 January 2000, the excise tax on cigarettes should be the higher tax imposed under the
specific tax system and the tax imposed under the ad valorem tax system plus the 12% increase imposed by paragraph 5, Section 145
of the Tax Code, is an unsuccessful attempt to justify what is clearly an impermissible incursion into the limits of administrative
legislation. Such an interpretation is not supported by the clear language of the law and is obviously only meant to validate the OSG’s
thesis that Section 145 of the Tax Code is ambiguous and admits of several interpretations.

The contention that the increase of 12% starting on 1 January 2000 does not apply to the brands of cigarettes listed under Annex "D" is
likewise unmeritorious, absurd even. Paragraph 8, Section 145 of the Tax Code simply states that, "[T]he classification of each brand of
cigarettes based on its average net retail price as of October 1, 1996, as set forth in Annex ‘D’, shall remain in force until revised by
Congress." This declaration certainly does not lend itself to the interpretation given to it by the OSG. As plainly worded, the average net
retail prices of the listed brands under Annex "D," which classify cigarettes according to their net retail price into low, medium or high,
obviously remain the bases for the application of the increase in excise tax rates effective on 1 January 2000.

The foregoing leads us to conclude that Revenue Regulation No. 17-99 is indeed indefensibly flawed. The Commissioner cannot seek
refuge in his claim that the purpose behind the passage of the Tax Code is to generate additional revenues for the government.
Revenue generation has undoubtedly been a major consideration in the passage of the Tax Code. However, as borne by the legislative
record,25 the shift from the ad valorem system to the specific tax system is likewise meant to promote fair competition among the
players in the industries concerned, to ensure an equitable distribution of the tax burden and to simplify tax administration by
classifying cigarettes, among others, into high, medium and low-priced based on their net retail price and accordingly graduating tax
rates.

At any rate, this advertence to the legislative record is merely gratuitous because, as we have held, the meaning of the law is clear on
its face and free from the ambiguities that the Commissioner imputes. We simply cannot disregard the letter of the law on the pretext
of pursuing its spirit.26

Finally, the Commissioner’s contention that a tax refund partakes the nature of a tax exemption does not apply to the tax refund to
which Fortune Tobacco is entitled. There is parity between tax refund and tax exemption only when the former is based either on a tax
exemption statute or a tax refund statute. Obviously, that is not the situation here. Quite the contrary, Fortune Tobaccos claim for
refund is premised on its erroneous payment of the tax, or better still the government’s exaction in the absence of a law.

Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation must justify his claim by
showing that the legislature intended to exempt him by words too plain to be mistaken.27 The rule is that tax exemptions must be
strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention.28

A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule of strict interpretation
against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a legislative grace, which cannot be
allowed unless granted in the most explicit and categorical language. The taxpayer must show that the legislature intended to exempt
him from the tax by words too plain to be mistaken.29
Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal principle which
underlies all quasi-contracts abhorring a person’s unjust enrichment at the expense of another.30The dynamic of erroneous payment of
tax fits to a tee the prototypic quasi-contract, solutio indebiti, which covers not only mistake in fact but also mistake in law.31

The Government is not exempt from the application of solutio indebiti.32 Indeed, the taxpayer expects fair dealing from the
Government, and the latter has the duty to refund without any unreasonable delay what it has erroneously collected.33 If the State
expects its taxpayers to observe fairness and honesty in paying their taxes, it must hold itself against the same standard in refunding
excess (or erroneous) payments of such taxes. It should not unjustly enrich itself at the expense of taxpayers.34 And so, given its
essence, a claim for tax refund necessitates only preponderance of evidence for its approbation like in any other ordinary civil case.

Under the Tax Code itself, apparently in recognition of the pervasive quasi-contract principle, a claim for tax refund may be based on
the following: (a) erroneously or illegally assessed or collected internal revenue taxes; (b) penalties imposed without authority; and (c)
any sum alleged to have been excessive or in any manner wrongfully collected.35

What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar doctrine as
applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. 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. In answering the question of who is subject to tax statutes, it is basic that in case
of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.36 As burdens, taxes
should not be unduly exacted nor assumed beyond the plain meaning of the tax laws.37

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA G.R. SP No. 80675, dated 28 September 2004, and its
Resolution, dated 1 March 2005, are AFFIRMED. No pronouncement as to costs.

SO ORDERED.
Commissioner of Internal Revenue vs. Central Luzon Drug Corporation
Facts:
Respondents operated six drugstores under the business name Mercury Drug. From January to December 1996 respondent granted
20% sales discount to qualified senior citizens on their purchases of medicines pursuant to RA 7432 for a total of ₱ 904,769.

On April 15, 1997, respondent filed its annual Income Tax Return for taxable year 1996 declaring therein net losses. On Jan. 16, 1998
respondent filed with petitioner a claim for tax refund/credit of ₱ 904,769.00 allegedly arising from the 20% sales discount. Unable to
obtain affirmative response from petitioner, respondent elevated its claim to the Court of Tax Appeals. The court dismissed the same
but upon reconsideration, the latter reversed its earlier ruling and ordered petitioner to issue a Tax Credit Certificate in favor of
respondent citing CA GR SP No. 60057 (May 31, 2001, Central Luzon Drug Corp. vs. CIR) citing that Sec. 229 of RA 7432 deals exclusively
with illegally collected or erroneously paid taxes but that there are other situations which may warrant a tax credit/refund.

CA affirmed Court of Tax Appeal's decision reasoning that RA 7432 required neither a tax liability nor a payment of taxes by private
establishments prior to the availment of a tax credit. Moreover, such credit is not tantamount to an unintended benefit from the law,
but rather a just compensation for the taking of private property for public use.

Issue:
Whether or not respondent, despite incurring a net loss, may still claim the 20% sales discount as a tax credit.

Ruling:
Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of obtaining a 20% discount on their purchase of medicine
from any private establishment in the country. The latter may then claim the cost of the discount as a tax credit. Such credit can be
claimed even if the establishment operates at a loss.

A tax credit generally refers to an amount that is “subtracted directly from one’s total tax liability.” It is an “allowance against the tax
itself” or “a deduction from what is owed” by a taxpayer to the government.
A tax credit should be understood in relation to other tax concepts. One of these is tax deduction – which is subtraction “from income
for tax purposes,” or an amount that is “allowed by law to reduce income prior to the application of the tax rate to compute the
amount of tax which is due.” In other words, whereas a tax credit reduces the tax due, tax deduction reduces the income subject to tax
in order to arrive at the taxable income.

A tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax credit can be applied. Without
that liability, any tax credit application will be useless. There will be no reason for deducting the latter when there is, to begin with, no
existing obligation to the government. However, as will be presented shortly, the existence of a tax credit or its grant by law is not the
same as the availment or use of such credit. While the grant is mandatory, the availment or use is not. If a net loss is reported by, and
no other taxes are currently due from, a business establishment, there will obviously be no tax liability against which any tax credit can
be applied. For the establishment to choose the immediate availment of a tax credit will be premature and impracticable.
SOUTHERN CROSS CEMENT CORP VS CEMENT MANUFACTURERS ASSOC OF THE PHIL CASE DIGEST

Facts:

Republic Act No. 8800, the Safeguard Measures Act (SMA), which was one of the laws enacted by Congress soon after the Philippines
ratified the General Agreement on Tariff and Trade (GATT) and the World Trade Organization (WTO) Agreement.[3] The SMA provides
the structure and mechanics for the imposition of emergency measures, including tariffs, to protect domestic industries and producers
from increased imports which inflict or could inflict serious injury on them.

Petitioner Southern Cross Cement Corporation (Southern Cross) is a domestic corporation engaged in the business of cement
manufacturing, production, importation and exportation. Its principal stockholders are Taiheiyo Cement Corporation and Tokuyama
Corporation, purportedly the largest cement manufacturers in Japan.[5]

Private respondent Philippine Cement Manufacturers Corporation[6] (Philcemcor) is an association of domestic cement manufacturers.
It has eighteen (18) members,[7] per Record. While Philcemcor heralds itself to be an association of domestic cement manufacturers, it
appears that considerable equity holdings, if not controlling interests in at least twelve (12) of its member-corporations, were acquired
by the three largest cement manufacturers in the world, namely Financiere Lafarge S.A. of France, Cemex S.A. de C.V. of Mexico, and
Holcim Ltd. of Switzerland (formerly Holderbank Financiere Glaris, Ltd., then Holderfin B.V.).

the DTIs disagreement with the conclusions of the Tariff Commission, but at the same time, ultimately denying Philcemcors application
for safeguard measures on the ground that the he was bound to do so in light of the Tariff Commissions negative findings.

Philcemcor challenged this Decision of the DTI Secretary by filing with the Court of Appeals a Petition for Certiorari, Prohibition and
Mandamus[11] seeking to set aside the DTI Decision, as well as the Tariff Commissions Report. The Court of Appeals Twelfth Division, in
a Decision[13] penned by Court of Appeals Associate Justice Elvi John Asuncion,[14] partially granted Philcemcors petition.

On 23 June 2003, Southern Cross filed the present petition, arguing that the Court of Appeals has no jurisdiction over Philcemcors
petition, as the proper remedy is a petition for review with the CTA conformably with the SMA, and; that the factual findings of the
Tariff Commission on the existence or non-existence of conditions warranting the imposition of general safeguard measures are binding
upon the DTI Secretary.

Despite the fact that the Court of Appeals Decision had not yet become final, its binding force was cited by the DTI Secretary when he
issued a new Decision on 25 June 2003, wherein he ruled that that in light of the appellate courts Decision, there was no longer any
legal impediment to his deciding Philcemcors application for definitive safeguard measures.

The Court of Appeals had held that based on the foregoing premises, petitioner’s prayer to set aside the findings of the Tariff
Commission in its assailed Report dated March 13, 2002 is DENIED. On the other hand, the assailed April 5, 2002 Decision of the
Secretary of the Department of Trade and Industry is hereby SET ASIDE. Consequently, the case is REMANDED to the public respondent
Secretary of Department of Trade and Industry for a final decision in accordance with RA 8800 and its Implementing Rules and
Regulations. Hence, the appeal.

Yet on 25 June 2003, the DTI Secretary issued a new Decision, ruling this time that that in light of the appellate courts Decision there
was no longer any legal impediment to his deciding Philcemcors application for definitive safeguard measures.[41] He made a
determination that, contrary to the findings of the Tariff Commission, the local cement industry had suffered serious injury as a result
of the import surges.[42] Accordingly, he imposed a definitive safeguard measure on the importation of gray Portland cement, in the
form of a definitive safeguard duty in the amount of P20.60/40 kg. bag for three years on imported gray Portland Cement. Hence, the
appeal.

Issue:

Whether or not the decision of DTI Secretary, to impose safeguard measures is valid.

Held:
NO, due to the nature of this case, the Court found that the DTI should follow the regulations prescribed by SMA. The Court held that
he assailed Decision of the Court of Appeals is DECLARED NULL AND VOID and SET ASIDE. The Decision of the DTI Secretary dated 25
June 2003 is also DECLARED NULL AND VOID and SET ASIDE. No Costs.

Yet on 25 June 2003, the DTI Secretary issued a new Decision, ruling this time that that in light of the appellate courts Decision there
was no longer any legal impediment to his deciding Philcemcors application for definitive safeguard measures.[41] He made a
determination that, contrary to the findings of the Tariff Commission, the local cement industry had suffered serious injury as a result
of the import surges.[42] Accordingly, he imposed a definitive safeguard measure on the importation of gray Portland cement, in the
form of a definitive safeguard duty in the amount of P20.60/40 kg. bag for three years on imported gray Portland Cement

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


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

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

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act (RA) No. 9282,4 seeks to set aside
the April 30, 2008 Decision5 and the June 24, 2008 Resolution6 of the Court of Tax Appeals (CTA).

Factual Antecedents

Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation (First Asia) are domestic corporations
duly organized and existing under the laws of the Republic of the Philippines. Both are engaged in the business of operating cinema
houses, among others.7

CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary Assessment Notice (PAN) for value added
tax (VAT) deficiency on cinema ticket sales in the amount of ₱119,276,047.40 for taxable year 2000.8 In response, SM Prime filed a
letter-protest dated December 15, 2003.9

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

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT deficiency for taxable year 2000 in
the amount of ₱124,035,874.12.11

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case No. 7079.12

CTA Case No. 7085

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount of ₱35,823,680.93.13 First Asia protested the PAN in a letter dated July 9,
2002.14

Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was protested by First Asia in a letter
dated December 12, 2002.15

On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to pay the amount of ₱35,823,680.93
for VAT deficiency for taxable year 1999.16

Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No. 7085.17

CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for taxable year 2000 in the amount of
₱35,840,895.78. First Asia protested the PAN through a letter dated April 22, 2004.18

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.19 First Asia protested the same in a letter dated July 9,
2004.20

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in the amount of ₱35,840,895.78 for
taxable year 2000.21

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

CTA Case No. 7272

Re: Assessment Notice No. 008-02

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of ₱32,802,912.21 was issued against
First Asia by the BIR. In response, First Asia filed a protest-letter dated November 11, 2004. The BIR then sent a Formal Letter of
Demand, which was protested by First Asia on December 14, 2004.23

Re: Assessment Notice No. 003-03

A PAN for VAT deficiency on cinema ticket sales in the total amount of ₱28,196,376.46 for the taxable year 2003 was issued by the BIR
against First Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A Formal Letter of Demand was thereafter issued
by the BIR to First Asia, which the latter protested through a letter dated November 11, 2004. 24

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the amounts of ₱33,610,202.91 and
₱28,590,826.50 for VAT deficiency for taxable years 2002 and 2003, respectively.25

Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No. 7272.26

Consolidated Petitions

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

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

Upon submission of the parties’ respective memoranda, the consolidated cases were submitted for decision on the sole issue of
whether gross receipts derived from admission tickets by cinema/theater operators or proprietors are subject to VAT.29

Ruling of the CTA First Division


On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for Review. Resorting to the language
used and the legislative history of the law, it ruled that the activity of showing cinematographic films is not a service covered by VAT
under the National Internal Revenue Code (NIRC) of 1997, as amended, but an activity subject to amusement tax under RA 7160,
otherwise known as the Local Government Code (LGC) of 1991. Citing House Joint Resolution No. 13, entitled "Joint Resolution
Expressing the True Intent of Congress with Respect to the Prevailing Tax Regime in the Theater and Local Film Industry Consistent with
the State’s Policy to Have a Viable, Sustainable and Competitive Theater and Film Industry as One of its Partners in National
Development,"30 the CTA First Division held that the House of Representatives resolved that there should only be one business tax
applicable to theaters and movie houses, which is the 30% amusement tax imposed by cities and provinces under the LGC of 1991.
Further, it held that consistent with the State’s policy to have a viable, sustainable and competitive theater and film industry, the
national government should be precluded from imposing its own business tax in addition to that already imposed and collected by local
government units. The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT
on gross receipts from admission to cinema houses, cannot be given force and effect because it failed to comply with the procedural
due process for tax issuances under RMC No. 20-86.31 Thus, it disposed of the case as follows:

IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review. Respondent’s Decisions denying petitioners’
protests against deficiency value-added taxes are hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098,
VT-99-000057, VT-00-000122, 003-03 and 008-02 are ORDERED cancelled and set aside.

SO ORDERED.32

Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its Resolution dated December 14, 2006.33

Ruling of the CTA En Banc

Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB No. 244.35 The CTA En Banc however denied36 the
Petition for Review and dismissed37 as well petitioner’s Motion for Reconsideration.

The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what services are intended to be
subject to VAT. And since the showing or exhibition of motion pictures, films or movies by cinema operators or proprietors is not
among the enumerated activities contemplated in the phrase "sale or exchange of services," then gross receipts derived by cinema/
theater operators or proprietors from admission tickets in showing motion pictures, film or movie are not subject to VAT. It reiterated
that the exhibition or showing of motion pictures, films, or movies is instead subject to amusement tax under the LGC of 1991. As
regards the validity of RMC No. 28-2001, the CTA En Banc agreed with its First Division that the same cannot be given force and effect
for failure to comply with RMC No. 20-86.

Issue

Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:

(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses from admission
tickets [are] subject to the 10% VAT because:

(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A SALE OF SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY SUBJECT TO VAT UNDER SECTION 108 OF THE
NIRC OF 1997;

(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE APPLICATION OF RULES OF
STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED;

(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE APPLICABLE HEREIN, STILL THE
HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND PROMULGATED DANGEROUS PRECEDENTS;

(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING RESPONDENTS’ SERVICES FROM THE VAT IMPOSED
UNDER SECTION 108 OF THE NIRC OF 1997;

(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE TRIED BY THE HONORABLE COURT; and
(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF THE NIRC.

(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage;

(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely subject to the
amusement tax imposed by the Local Government Code; and

(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38

Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors of cinema/theater houses from
admission tickets are subject to VAT.

Petitioner’s Arguments

Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not exhaustive because it covers all sales
of services unless exempted by law. He claims that the CTA erred in applying the rules on statutory construction and in using extrinsic
aids in interpreting Section 108 because the provision is clear and unambiguous. Thus, he maintains that the exhibition of movies by
cinema operators or proprietors to the paying public, being a sale of service, is subject to VAT.

Respondents’ Arguments

Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997 shows that the gross receipts of
proprietors or operators of cinemas/theaters derived from public admission are not among the services subject to VAT. Respondents
insist that gross receipts from cinema/theater admission tickets were never intended to be subject to any tax imposed by the national
government. According to them, the absence of gross receipts from cinema/theater admission tickets from the list of services which are
subject to the national amusement tax under Section 125 of the NIRC of 1997 reinforces this legislative intent. Respondents also
highlight the fact that RMC No. 28-2001 on which the deficiency assessments were based is an unpublished administrative ruling.

Our Ruling

The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive

Section 108 of the NIRC of the 1997 reads:

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

(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross
receipts derived from the sale or exchange of services, including the use or lease of properties.

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

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

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.

x x x x (Emphasis supplied)

A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or exchange of services" subject to VAT is
not exhaustive. The words, "including," "similar services," and "shall likewise include," indicate that the enumeration is by way of
example only.39

Among those included in the enumeration is the "lease of motion picture films, films, tapes and discs." This, however, is not the same
as the showing or exhibition of motion pictures or films. As pointed out by the CTA En Banc:

"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To produce anything in public so that it may be taken into
possession" (6th ed., p. 573). While the word "lease" is defined as "a contract by which one owning such property grants to another the
right to possess, use and enjoy it on specified period of time in exchange for periodic payment of a stipulated price, referred to as rent
(Black’s Law Dictionary, 6th ed., p. 889). x x x40

Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors is not included in the
enumeration, it is incumbent upon the court to the determine whether such activity falls under the phrase "similar services." The intent
of the legislature must therefore be ascertained.

The legislature never intended operators

or proprietors of cinema/theater houses to be covered by VAT

Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors, lessees, or operators of theaters,
cinematographs, concert halls, circuses, boxing exhibitions, and other places of amusement, including cockpits, race tracks, and
cabaret.42 In the case of theaters or cinematographs, the taxes were first deducted, withheld, and paid by the proprietors, lessees, or
operators of such theaters or cinematographs before the gross receipts were divided between the proprietors, lessees, or operators of
the theaters or cinematographs and the distributors of the cinematographic films. Section 1143 of the Local Tax Code,44 however,
amended this provision by transferring the power to impose amusement tax45 on admission from theaters, cinematographs, concert
halls, circuses and other places of amusements exclusively to the local government. Thus, when the NIRC of 197746 was enacted, the
national government imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and
race tracks.47

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

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

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

xxxx
"Gross receipts" means the total amount of money or its equivalent representing the contract price, compensation or service fee,
including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively
received during the taxable quarter for the service performed or to be performed for another person, excluding value-added tax.

(b) Determination of the tax. — (1) Tax billed as a separate item in the invoice. — If the tax is billed as a separate item in the invoice,
the tax shall be based on the gross receipts, excluding the tax.

(2) Tax not billed separately or is billed erroneously in the invoice. — If the tax is not billed separately or is billed erroneously in the
invoice, the tax shall be determined by multiplying the gross receipts (including the amount intended to cover the tax or the tax billed
erroneously) by 1/11. (Emphasis supplied)

Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted from the coverage of VAT.49

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified that the power to impose amusement
tax on gross receipts derived from admission tickets was exclusive with the local government units and that only the gross receipts of
amusement places derived from sources other than from admission tickets were subject to amusement tax under the NIRC of 1977, as
amended. Pertinent portions of RMC 8-88 read:

Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross receipts arising from admission to
places of amusement has been transferred to the local governments to the exclusion of the national government.

xxxx

Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the amendatory laws which amended the
National Internal Revenue Code, including the value added tax law under Executive Order No. 273, has amended the provisions of
Section 11 of the Local Tax Code. Accordingly, the sole jurisdiction for collection of amusement tax on admission receipts in places of
amusement rests exclusively on the local government, to the exclusion of the national government. Since the Bureau of Internal
Revenue is an agency of the national government, then it follows that it has no legal mandate to levy amusement tax on admission
receipts in the said places of amusement.

Considering the foregoing legal background, the provisions under Section 123 of the National Internal Revenue Code as renumbered by
Executive Order No. 273 (Sec. 228, old NIRC) pertaining to amusement taxes on places of amusement shall be implemented in
accordance with BIR RULING, dated December 4, 1973 and BIR RULING NO. 231-86 dated November 5, 1986 to wit:

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

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

In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its administration. Three years later, RA 7716
was amended by RA 8241. Shortly thereafter, the NIRC of 199751 was signed into law. Several amendments52 were made to expand the
coverage of VAT. However, none pertain to cinema/theater operators or proprietors. At present, only lessors or distributors of
cinematographic films are subject to VAT. While persons subject to amusement tax53 under the NIRC of 1997 are exempt from the
coverage of VAT.54

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

(1) Historically, the activity of showing motion pictures, films or movies by cinema/theater operators or proprietors has always been
considered as a form of entertainment subject to amusement tax.
(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national government.

(3) When the Local Tax Code was enacted, amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses
and other places of amusements were transferred to the local government.

(4) Under the NIRC of 1977, the national government imposed amusement tax only on proprietors, lessees or operators of cabarets,
day and night clubs, Jai-Alai and race tracks.

(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and percentage tax on certain services.

(6) When the VAT law was implemented, it exempted persons subject to amusement tax under the NIRC from the coverage of
VAT.1auuphil

(7) When the Local Tax Code was repealed by the LGC of 1991, the local government continued to impose amusement tax on admission
tickets from theaters, cinematographs, concert halls, circuses and other places of amusements.

(8) Amendments to the VAT law have been consistent in exempting persons subject to amusement tax under the NIRC from the
coverage of VAT.

(9) Only lessors or distributors of cinematographic films are included in the coverage of VAT.

These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax. This holds true even in the
case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was intended to replace the percentage
tax on certain services. The mere fact that they are taxed by the local government unit and not by the national government is
immaterial. The Local Tax Code, in transferring the power to tax gross receipts derived by cinema/theater operators or proprietor from
admission tickets to the local government, did not intend to treat cinema/theater houses as a separate class. No distinction must,
therefore, be made between the places of amusement taxed by the national government and those taxed by the local government.

To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors, who would be paying an
additional 10%55 VAT on top of the 30% amusement tax imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such
imposition would result in injustice, as persons taxed under the NIRC of 1997 would be in a better position than those taxed under the
LGC of 1991. We need not belabor that a literal application of a law must be rejected if it will operate unjustly or lead to absurd
results.56 Thus, we are convinced that the legislature never intended to include cinema/theater operators or proprietors in the
coverage of VAT.

On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,57 to wit:

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

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT

Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that:

Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax under Section 260 of
Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code of 1939, computed on the amount paid for
admission. With the enactment of the Local Tax Code under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of
imposing taxes on gross receipts from admission of persons to cinema/theater and other places of amusement had, thereafter, been
transferred to the provincial government, to the exclusion of the national or municipal government (Sections 11 & 13, Local Tax Code).
However, the said provision containing the exclusive power of the provincial government to impose amusement tax, had also been
repealed and/or deleted by Republic Act (RA) No. 7160, otherwise known as the Local Government Code of 1991, enacted into law on
October 10, 1991. Accordingly, the enactment of RA No. 7160, thus, eliminating the statutory prohibition on the national government
to impose business tax on gross receipts from admission of persons to places of amusement, led the way to the valid imposition of the
VAT pursuant to Section 102 (now Section 108) of the old Tax Code, as amended by the Expanded VAT Law (RA No. 7716) and which
was implemented beginning January 1, 1996.58(Emphasis supplied)
We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the gross receipts of
cinema/theater operators or proprietors derived from admission tickets. The removal of the prohibition under the Local Tax Code did
not grant nor restore to the national government the power to impose amusement tax on cinema/theater operators or proprietors.
Neither did it expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it
be extended by implication. A law will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously.59 As it
is, the power to impose amusement tax on cinema/theater operators or proprietors remains with the local government.

Revenue Memorandum Circular No. 28-2001 is invalid

Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater operators or proprietors derived
from admission tickets, RMC No. 28-2001 which imposes VAT on the gross receipts from admission to cinema houses must be struck
down. We cannot overemphasize that RMCs must not override, supplant, or modify the law, but must remain consistent and in
harmony with, the law they seek to apply and implement.60

In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the procedural due process for tax
issuances as prescribed under RMC No. 20-86.

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption from the coverage of VAT.
The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to the
tax being levied against him.61 The reason is obvious: it is both illogical and impractical to determine who are exempted without first
determining who are covered by the provision.62 Thus, unless a statute imposes a tax clearly, expressly and unambiguously, what
applies is the equally well-settled rule that the imposition of a tax cannot be presumed.63 In fact, in case of doubt, tax laws must be
construed strictly against the government and in favor of the taxpayer.64

WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of Tax Appeals En Banc holding that gross
receipts derived by respondents from admission tickets in showing motion pictures, films or movies are not subject to value-added tax
under Section 108 of the National Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution denying the motion for
reconsideration are AFFIRMED.

SO ORDERED.
REYES v. ALMANZOR

FACTS: Petitioners JBL Reyes et al. owned a parcel of land in Tondo which are leased and occupied as dwelling
units by tenants who were paying monthly rentals of not exceeding P300. Sometimes in 1971 the Rental
Freezing Law was passed prohibiting for one year from its effectivity, an increase in monthly rentals of dwelling
units where rentals do not exceed three hundred pesos (P300.00), so that the Reyeses were precluded from
raising the rents and from ejecting the tenants. In 1973, respondent City Assessor of Manila re-classified and
reassessed the value of the subject properties based on the schedule of market values, which entailed an
increase in the corresponding tax rates prompting petitioners to file a Memorandum of Disagreement averring
that the reassessments made were "excessive, unwarranted, inequitable, confiscatory and unconstitutional"
considering that the taxes imposed upon them greatly exceeded the annual income derived from their
properties. They argued that the income approach should have been used in determining the land values instead
of the comparable sales approach which the City Assessor adopted.

ISSUE: Is the approach on tax assessment used by the City Assessor reasonable?

HELD: No. The taxing power has the authority to make a reasonable and natural classification for purposes of
taxation but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination
that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under
similar circumstances or that all persons must be treated in the same manner, the conditions not being different
both in the privileges conferred and the liabilities imposed.
聽 Consequently, it stands to reason that petitioners who are burdened by the government by its Rental Freezing
Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be penalized by the
same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the
forfeiture of their properties.
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA,

The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity of Section I of Batas
Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section 21 of the
National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation income, (b)
taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit
from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits
of taxable partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly
discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-visthose
which are imposed upon fixed income or salaried individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to
class legislation, oppressive and capricious in character 5 For petitioner, therefore, there is a transgression of both the equal protection
and due process clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such an answer, after
two extensions were granted the Office of the Solicitor General, was filed on May 28, 1982. 8The facts as alleged were admitted but not
the allegations which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them]
being those stated [in their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Big. 135 is a valid exercise
of the State's power to tax. The authorities and cases cited while correctly quoted or paraghraph do not support petitioner's
stand." 10 The prayer is for the dismissal of the petition for lack of merit.

This Court finds such a plea more than justified. The petition must be dismissed.

1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forth by retired Chief
Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and which the government was called upon
to enter optionally, and only 'because it was better equipped to administer for the public welfare than is any private individual or group
of individuals,' continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake
in its sovereign capacity if it is to meet the increasing social challenges of the times." 11 Hence the need for more revenues. The power
to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of
public funds. To praphrase a recent decision, taxes being the lifeblood of the government, their prompt and certain availability is of the
essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of of
government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The
Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due process and equal protection clauses
inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise, there would
-be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion
in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric
[attributable to] the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that it is riot
and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from
Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy
while this Court sits." 17 So it is in the Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive, act that runs
counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision — as petitioner here alleges
— fails to abide by its command, then this Court must so declare and adjudge it null. The injury thus is centered on the question of
whether the imposition of a higher tax rate on taxable net income derived from business or profession than on compensation is
constitutionally infirm.

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not suffice. There
must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void or
its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that were the due process and equal
protection clauses are invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. 18

5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the
Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of
power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred.
That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the
jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to
attack on due process grounds. 19

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate whether
the assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated that the governmental act
assailed, far from being inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the very least,
discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the conditions not being different, both in the privileges
conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal protection
and security shall be given to every person under circumtances which if not Identical are analogous. If law be looked upon in terms of
burden or charges, those that fall within a class should be treated in the same fashion, whatever restrictions cast on some in the group
equally binding on the rest." 20 That same formulation applies as well to taxation measures. The equal protection clause is, of course,
inspired by the noble concept of approximating the Ideal of the laws benefits being available to all and the affairs of men being
governed by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however, wisdom, as well as
realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality.
The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do not relate to
abstract units A, B and C, but are expressions of policy arising out of specific difficulties, address to the attainment of specific ends by
the use of specific remedies. The Constitution does not require things which are different in fact or opinion to be treated in law as
though they were the same." 21 Hence the constant reiteration of the view that classification if rational in character is allowable. As a
matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is
inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities
which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shag be uniform
and equitable." 24 This requirement is met according to Justice Laurel in Philippine Trust Company v. Yatco,25 decided in 1940, when the
tax "operates with the same force and effect in every place where the subject may be found. " 26 He likewise added: "The rule of
uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem of classification did
not present itself in that case. It did not arise until nine years later, when the Supreme Court held: "Equality and uniformity in taxation
means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority
to make reasonable and natural classifications for purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation"
complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is
therefore uniform." 29 There is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies
equally to all persons, firms and corporations placed in similar situation."30

8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax rate
and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same
time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in
Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules
removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them.
Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these
taxpayers are e not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the
other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses
necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the Batasang
Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation
as regards professional and business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation to show the
arbitrary character of the assailed provision; 31 (2) the force of controlling doctrines on due process, equal protection, and uniformity in
taxation and (3) the reasonableness of the distinction between compensation and taxable net income of professionals and
businessman certainly not a suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner.


Commissioner of Internal Revenue vs. Algue Inc.
GR No. L-28896 | Feb. 17, 1988

Facts:
 Algue Inc. is a domestic corp engaged in engineering, construction and other allied activities
 On Jan. 14, 1965, the corp received a letter from the CIR regarding its delinquency income taxes from 1958-1959, amtg to
P83,183.85
 A letter of protest or reconsideration was filed by Algue Inc on Jan 18
 On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its counsel, Atty. Guevara, who refused to receive
it on the ground of the pending protest
 Since the protest was not found on the records, a file copy from the corp was produced and given to BIR Agent Reyes, who
deferred service of the warrant
 On April 7, Atty. Guevara was informed that the BIR was not taking any action on the protest and it was only then that he
accepted the warrant of distraint and levy earlier sought to be served
 On April 23, Algue filed a petition for review of the decision of the CIR with the Court of Tax Appeals
 CIR contentions:
- the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary
business expense
- payments are fictitious because most of the payees are members of the same family in control of Algue and that there is
not enough substantiation of such payments
 CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered in the form of promotional fees. These were
collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate Development Company.

Issue: W/N the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by Algue as legitimate business
expenses in its income tax returns

Ruling:
 Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance, made in accordance with
law.
 RA 1125: the appeal may be made within thirty days after receipt of the decision or ruling challenged
 During the intervening period, the warrant was premature and could therefore not be served.
 Originally, CIR claimed that the 75K promotional fees to be personal holding company income, but later on conformed to the
decision of CTA
 There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the
corresponding taxes thereon. CTA also found, after examining the evidence, that no distribution of dividends was involved
 CIR suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction
 Algue Inc. was a family corporation where strict business procedures were not applied and immediate issuance of receipts was
not required. at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received
by him or her, to make up the total of P75,000.00. This arrangement was understandable in view of the close relationship among
the persons in the family corporation
 The amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development
Co. to Algue Inc. was P125K. After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was
the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase
by it of the Sugar Estate properties.
 Sec. 30 of the Tax Code: allowed deductions in the net income – Expenses - All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered xxx
 the burden is on the taxpayer to prove the validity of the claimed deduction
 In this case, Algue Inc. has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted
by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves
in a new business requiring millions of pesos.
 Taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to
activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is
expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their
moral and material values
 Taxation must be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right
to complain and the courts will then come to his succor

Algue Inc.’s appeal from the decision of the CIR was filed on time with the CTA in accordance with Rep. Act No. 1125. And we also find
that the claimed deduction by Algue Inc. was permitted under the Internal Revenue Code and should therefore not have been
disallowed by the CIR

PBCom. vs. CIR(GR 112024. Jan. 28, 1999)


Posted by taxcasesdigest on Tuesday, July 7, 2009
Labels: 2-year, administrative issuance, reglementary period, tax credit, tax refund
FACTS:

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed
its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of
P5,016,954.00 by applying PBCom's tax credit memos for P3,401,701.00 and P1,615,253.00, respectively. Subsequently, however,
PBCom suffered net loss of P25,317,228.00, thereby showing no income tax liability in its Annual Income Tax Returns for the
year-ended December 31, 1985. For the succeeding year, ending December 31, 1986, the petitioner likewise reported a net loss of
P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR
withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. On August 7, 1987, petitioner requested the
Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first
and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in
1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on
November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank
of Communications vs. Commissioner of Internal Revenue."
The CTA decided in favor of the BIR on the ground that the Petition was filed out of time as the same was filed beyond the two-year
reglementary period. A motion for Reconsideration was denied and the appeal to Court of Appeals was likewise denied. Thus, this
appeal to Supreme Court.

Issues:

a) Whether or not Revenue Regulations No. 7-85 which alters the reglementary period from two (2) years to ten (10) years is valid.
b) Whether or not the petition for tax refund had already prescribed.

Ruling:

RR 7-85 altering the 2-year prescriptive period imposed by law to 10-year prescriptive period is invalid.

Administrative issuances are merely interpretations and not expansions of the provisions of law, thus, in case of inconsistency, the law
prevails over them. Administrative agencies have no legislative power.

“When the Acting Commissioner of Internal Revenue issued RMC 7-85,


changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a
clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.”

“It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less
general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted
that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the
courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to apply
and implement.”
“Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. As pointed
out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an
administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC, for being contrary to the express provision of a
statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.”

By implication of the above, claim for refund had already prescribed.

Since the petition had been filed beyond the prescriptive period, the same has already prescribed. The fact that the final adjusted
return show an excess tax credit does not automatically entitle taxpayer claim for refund without any express intent.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals appealed from is AFFIRMED, with COSTS against the
petitioner.
NATIONAL POWER CORPORATION, petitioner,
vs.
CITY OF CABANATUAN, respondent.

FACTS: Petitioner is a government-owned and controlled corporation created under Commonwealth Act No. 120, as amended.

For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a gross income of P107,814,187.96 in
1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the respondent assessed the petitioner a franchise tax amounting to
P808,606.41, representing 75% of 1% of the latter’s gross receipts for the preceding year.

Petitioner refused to pay the tax assessment arguing that the respondent has no authority to impose tax on government entities.
Petitioner also contended that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or
fees in accordance with sec. 13 of Rep. Act No. 6395, as amended.

The respondent filed a collection suit in the RTC, demanding that petitioner pay the assessed tax due, plus surcharge. Respondent
alleged that petitioner’s exemption from local taxes has been repealed by section 193 of the LGC, which reads as follows:

“Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical, including government owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code.”

RTC upheld NPC’s tax exemption. On appeal the CA reversed the trial court’s Order on the ground that section 193, in relation to
sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the petitioner.

ISSUE: W/N the respondent city government has the authority to issue Ordinance No. 165-92 and impose an annual tax on “businesses
enjoying a franchise

HELD: YES. Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal
attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with
its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from
necessity;32 without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.

Section 137 of the LGC clearly states that the LGUs can impose franchise tax “notwithstanding any exemption granted by any law or
other special law.” This particular provision of the LGC does not admit any exception. In City Government of San Pablo, Laguna v.
Reyes,74 MERALCO’s exemption from the payment of franchise taxes was brought as an issue before this Court. The same issue was
involved in the subsequent case of Manila Electric Company v. Province of Laguna.75 Ruling in favor of the local government in both
instances, we ruled that the franchise tax in question is imposable despite any exemption enjoyed by MERALCO under special laws, viz:

“It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to support their position that MERALCO’s
tax exemption has been withdrawn. The explicit language of section 137 which authorizes the province to impose franchise tax
‘notwithstanding any exemption granted by any law or other special law’ is all-encompassing and clear. The franchise tax is imposable
despite any exemption enjoyed under special laws.

Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless otherwise provided in this Code, tax
exemptions or incentives granted to or presently enjoyed by all persons, whether natural or juridical, including government-owned or
controlled corporations except (1) local water districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit
hospitals and educational institutions, are withdrawn upon the effectivity of this code, the obvious import is to limit the exemptions to
the three enumerated entities. It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius. In the absence of any provision
of the Code to the contrary, and we find no other provision in point, any existing tax exemption or incentive enjoyed by MERALCO
under existing law was clearly intended to be withdrawn.

Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local government unit may now impose a local
tax at a rate not exceeding 50% of 1% of the gross annual receipts for the preceding calendar based on the incoming receipts realized
within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law or charter is clearly
manifested by the language used on (sic) Sections 137 and 193 categorically withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical to attempt to enumerate all the existing statutes providing for special
tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more
unequivocal language could have been used.”76 (emphases supplied)

Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of the
local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people. As this Court observed in the Mactan case, “the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises.” With the added
burden of devolution, it is even more imperative for government entities to share in the requirements of development, fiscal or
otherwise, by paying taxes or other charges due from them.
Planters Product v. Fertiphil Corp.
G.R. No. 166006 March 14, 2008
REYES, R.T., J.

Lessons Applicable: Bet. private and public suit, easier to file public suit, Apply real party in interest test for private suit and direct
injury test for public suit, Validity test varies depending on which inherent power

Laws Applicable:

FACTS:
 President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided, among others, for the
imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers which resulted in having Fertiphil
paying P 10/bag sold to the Fertilizer and Perticide Authority (FPA).
 FPA remits its collection to Far East Bank and Trust Company who applies to the payment of corporate debts of Planters
Products Inc. (PPI)
 After the Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. Upon return of democracy, Fertiphil
demanded a refund but PPI refused. Fertiphil filed a complaint for collection and damages against FPA and PPI with the RTC on
the ground that LOI No. 1465 is unjust, unreaonable oppressive, invalid and unlawful resulting to denial of due process of law.
 FPA answered that it is a valid exercise of the police power of the state in ensuring the stability of the fertilizing industry in the
country and that Fertiphil did NOT sustain damages since the burden imposed fell on the ultimate consumers.
 RTC and CA favored Fertiphil holding that it is an exercise of the power of taxation ad is as such because it is NOT for public
purpose as PPI is a private corporation.
ISSUE:
1. W/N Fertiphil has locus standi
2. W/N LOI No. 1465 is an invalid exercise of the power of taxation rather the police power

Held:
1. Yes. In private suits, locus standi requires a litigant to be a "real party in interest" or party who stands to be benefited or injured by
the judgment in the suit. In public suits, there is the right of the ordinary citizen to petition the courts to be freed from unlawful
government intrusion and illegal official action subject to the direct injury test or where there must be personal and substantial
interest in the case such that he has sustained or will sustain direct injury as a result. Being a mere procedural technicality, it has also
been held that locus standi may be waived in the public interest such as cases of transcendental importance or with far-reaching
implications whether private or public suit, Fertiphil has locus standi.

2. As a seller, it bore the ultimate burden of paying the levy which made its products more expensive and harm its business. It is also
of paramount public importance since it involves the constitutionality of a tax law and use of taxes for public purpose.

3. Yes. Police power and the power of taxation are inherent powers of the state but distinct and have different tests for validity. Police
power is the power of the state to enact the legislation that may interfere with personal liberty on property in order to promote
general welfare. While, the power of taxation is the power to levy taxes as to be used for public purpose. The main purpose of police
power is the regulation of a behavior or conduct, while taxation is revenue generation. The lawful subjects and lawful means tests are
used to determine the validity of a law enacted under the police power. The power of taxation, on the other hand, is circumscribed by
inherent and constitutional limitations.

In this case, it is for purpose of revenue. But it is a robbery for the State to tax the citizen and use the funds generation for a private
purpose. Public purpose does NOT only pertain to those purpose which are traditionally viewed as essentially governmental function
such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public
money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.
Labels: 2008, direct injury test, G.R. No. 166006 March 14, planters product v. fertiphil corp, private suit, public suit, real party in
interest, tax case digest
Bagatsing v Ramirez
GR No L-41631, December 17, 1976

FACTS:
In 1974, the Municipal Board of Manila enacted Ordinance 7522, regulating the operation of public markets and prescribing fees for the
rentals of stalls and providing penalties for violation thereof. The Federation of Manila Market Vendors Inc. assailed the validity of the
ordinance, alleging among others the noncompliance to the publication requirement under the Revised Charter of the City of Manila.
CFI-Manila declared the ordinance void. Thus, the present petition.

ISSUE:

1. What law should govern the publication of a tax ordinance, the Revised City Charter, which requires publication of the
ordinance before its enactment and after its approval, or the Local Tax Code, which only demands publication after
approval?
2. Is the ordinance valid?

RULING:

1. The Local Tax Code prevails. There is no question that the Revised Charter of the City of Manila is a special act since it relates
only to the City of Manila whereas the Local Tax Code is a general law because it applies universally to all local governments.
The fact that one is special and the other general creates a presumption that the special is to be considered as remaining an
exception of the general, one as a general law of the land, the other as the law of a particular case. However, the rule readily
yields to a situation where the special statute refers to a subject in general, which the general statute treats in particular. The
Revised Charter of the City prescribes a rule for the publication of “ordinance” in general, while the Local Tax Code establishes
a rule for the publication of “ordinance levying or imposing taxes fees or other charges” in particular.

2. The ordinance is valid.


CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC. VS. ROMULO, ET AL- MINIMUM CORPORATE INCOME

Congress has the power to condition, limit or deny deductions from gross income in order to arrive at the net that it chooses to tax. This
is because deductions are a matter of legislative grace. The assignment of gross income, instead of net income, as the tax base of the
MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

FACTS:

Chamber of Real Estate and Builders' Associations, Inc. (CHAMBER) is questioning the constitutionality of Sec 27 (E) of RA 8424 and the
revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable
withholding taxes (CWT). [CWT issues will not be discussed]

CHAMBER assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable withholding
tax (CWT) on sales of real properties classified as ordinary assets. Chamber argues that the MCIT violates the due process clause
because it levies income tax even if there is no realized gain.

MCIT scheme: (Section 27 (E). [MCIT] on Domestic Corporations.)


A corporation, beginning on its fourth year of operation, is assessed an MCIT
of 2% of its gross income when such MCIT is greater than the normal
corporate income tax imposed under Section 27(A) (Applying the 30% tax
rate to net income).

If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT.

Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three
immediately succeeding taxable years.

The Secretary of Finance is hereby authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

The term ‘gross income’ shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold"
shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

CHAMBER claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without due process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross income, were not taken into account. Thus, pegging the tax base of the
MCIT to a corporation’s gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not
"realized gain."

ISSUE:

1. WON the imposition of the MCIT on domestic corporations is unconstitutional

2. WON RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed and collected even when
there is actually a loss, or a zero or negative taxable income

HELD:

1. NO. MCIT is not violative of due process. The MCIT is not a tax on capital. The MCIT is imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales.
Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal
income tax is suspiciously low.

The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporation’s gross income.

CHAMBER failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory. It does not cite any
actual, specific and concrete negative experiences of its members nor does it present empirical data to show that the implementation
of the MCIT resulted in the confiscation of their property.

Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. The party alleging the law’s
unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.

2. NO. RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income, merely
defines the coverage of Section 27(E).

This means that even if a corporation incurs a net loss in its business operations or reports zero income after deducting its expenses, it
is still subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on gross income
notwithstanding the amount of the net income.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
FORTUNE TOBACCO CORPORATION, Respondent.

Before the Court is a petition for review on certiorari filed under Rule 45 of the Rules of Court by petitioner Commissioner of Internal
Revenue (CIR), assailing the decision dated July 12, 20071 and the resolution dated October 4, 2007,2 both issued by the Court of Tax
Appeals (CTA) en banc in CTA E.B. No. 228.

BACKGROUND FACTS

Under our tax laws, manufacturers of cigarettes are subject to pay excise taxes on their products. Prior to January 1, 1997, the excises
taxes on these products were in the form of ad valorem taxes, pursuant to Section 142 of the 1977 National Internal Revenue Code
(1977 Tax Code).

Beginning January 1, 1997, Republic Act No. (RA) 82403 took effect and a shift from ad valorem to specific taxes was made. Section
142(c) of the 1977 Tax Code, as amended by RA 8240, reads in part:

Sec. 142. Cigars and cigarettes. — x x x.

(c) Cigarettes packed by machine. — There shall be levied, assessed and collected on cigarettes packed by machine a
tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (₱10.00) per pack, the
tax shall be Twelve pesos (₱12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty centavos (₱6.50)
but does not exceed Ten pesos (₱10.00) per pack, the tax shall be Eight pesos (₱8.00) per pack;

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (₱5.00) but does not exceed
Six pesos and fifty centavos (₱6.50) per pack, the tax shall be Five pesos (₱5.00) per pack;

(4) If the net retail price (excluding the excise tax and the [value]-added tax) is below Five pesos (₱5.00) per pack, the
tax shall be One peso (₱1.00) per pack.

xxxx

The specific tax from any brand of cigarettes within the next three (3) years of effectivity of this Act shall not be lower than the tax
[which] is due from each brand on October 1, 1996: Provided, however, That in cases where the specific tax rates imposed in
paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than seventy percent (70%), for a brand of
cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.

xxxx

The rates of specific tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4) hereof, shall be increased by twelve percent (12%)
on January 1, 2000. [emphases ours]

To implement RA 8240 and pursuant to its rule-making powers, the CIR issued Revenue Regulation No. (RR) 1-97 whose Section 3(c)
and (d) echoed the above-quoted portion of Section 142 of the 1977 Tax Code, as amended.4

The 1977 Tax Code was later repealed by RA 8424, or the National Internal Revenue Code of 1997 (1997 Tax Code), and Section 142, as
amended by RA 8240, was renumbered as Section 145.

This time, to implement the 12% increase in specific taxes mandated under Section 145 of the 1997 Tax Code and again pursuant to its
rule-making powers, the CIR issued RR 17-99, which reads:
Section 1. New Rates of Specific Tax. The specific tax rates imposed under the following sections are hereby increased by twelve
percent (12%) and the new rates to be levied, assessed, and collected are as follows:

Present Specific Tax New Specific Tax Rates


Section Description of Articles Rates (Prior to (Effective January 1,
January 1, 2000) 2000)

145 CIGARS and CIGARETTES

B) Cigarettes Packed by
Machine

(1) Net Retail Price


(excluding VAT & Excise) ₱12.00/pack ₱13.44/pack
exceeds ₱10.00 per pack

(2) Net Retail Price


(excluding VAT & Excise) is
₱8.00/pack ₱8.96/pack
₱6.51 up to ₱10.00 per
pack

(3) Net Retail Price


(excluding VAT & Excise) is ₱5.00/pack ₱5.60/pack
₱5.00 to ₱6.50 per pack

(4) Net Retail Price


(excluding VAT & Excise) is ₱1.00/pack ₱1.12/pack
below ₱5.00 per pack

Provided, however, that the new specific tax rate for any existing brand of cigars [and] cigarettes packed by machine, distilled spirits,
wines and fermented liquors shall not be lower than the excise tax that is actually being paid prior to January 1, 2000. [emphasis ours]

THE FACTS OF THE CASE

Pursuant to these laws, respondent Fortune Tobacco Corporation (Fortune Tobacco) paid in advance excise taxes for the year 2003 in
the amount of ₱11.15 billion, and for the period covering January 1 to May 31, 2004 in the amount of ₱4.90 billion.5

In June 2004, Fortune Tobacco filed an administrative claim for tax refund with the CIR for erroneously and/or illegally collected taxes in
the amount of ₱491 million.6 Without waiting for the CIR’s action on its claim, Fortune Tobacco filed with the CTA a judicial claim for
tax refund.7

In its decision dated May 26, 2006, the CTA First Division ruled in favor of Fortune Tobacco and granted its claim for refund.8 The CTA
First Division’s ruling was upheld on appeal by the CTA en banc in its decision dated July 12, 2007.9 The CIR’s motion for reconsideration
of the CTA en banc’s decision was denied in a resolution dated October 4, 2007.10

THE ISSUE

Fortune Tobacco’s claim for refund of overpaid excise taxes is based primarily on what it considers as an "unauthorized administrative
legislation" on the part of the CIR. Specifically, it assails the proviso in Section 1 of RR 17-99 that requires the payment of the "excise tax
actually being paid prior to January 1, 2000" if this amount is higher than the new specific tax rate, i.e., the rates of specific taxes
imposed in 1997 for each category of cigarette, plus 12%. It claimed that by including the proviso, the CIR went beyond the language of
the law and usurped Congress’ power. As mentioned, the CTA sided with Fortune Tobacco and allowed the latter to claim the refund.

The CIR disagrees with the CTA’s ruling and assails it before this Court through the present petition for review on certiorari. The CIR
posits that the inclusion of the proviso in Section 1 of RR 17-99 was made to carry into effect the law’s intent and is well within the
scope of his delegated legislative authority.11 He claims that the CTA’s strict interpretation of the law ignored Congress’ intent "to
increase the collection of excise taxes by increasing specific tax rates on ‘sin’ products."12 He cites portions of the Senate’s deliberation
on House Bill No. 7198 (the precursor of RA 8240) that conveyed the legislative intent to increase the excise taxes being paid.13
The CIR points out that Section 145(c) of the 1997 Tax Code categorically declares that "[t]he excise tax from any brand of cigarettes
within the [three-year transition period from January 1, 1997 to December 31, 1999] shall not be lower than the tax, which is due from
each brand on October 1, 1996." He posits that there is no plausible reason why the new specific tax rates due beginning January 1,
2000 should not be subject to the same rule as those due during the transition period. To the CIR, the adoption of the "higher tax rule"
during the transition period unmistakably shows the intent of Congress not to lessen the excise tax collection. Thus, the CTA should
have construed the ambiguity or omission in Section 145(c) in a manner that would uphold the law’s policy and intent.

Fortune Tobacco argues otherwise. To it, Section 145(c) of the 1997 Tax Code read and interpreted as it is written; it imposes a 12%
increase on the rates of excise taxes provided under sub-paragraphs (1), (2), (3), and (4) only; it does not say that the tax due during the
transition period shall continue to be collected if the amount is higher than the new specific tax rates. It contends that the "higher tax
rule" applies only to the three-year transition period to offset the burden caused by the shift from ad valorem to specific taxes.

THE COURT’S RULING

Except for the tax period and the amounts involved,14 the case at bar presents the same issue that the Court already resolved in 2008 in
CIR v. Fortune Tobacco Corporation.15 In the 2008 Fortune Tobacco case, the Court upheld the tax refund claims of Fortune Tobacco
after finding invalid the proviso in Section 1 of RR 17-99. We ruled:

Section 145 states that during the transition period, i.e., within the next three (3) years from the effectivity of the Tax Code, the excise
tax from any brand of cigarettes shall not be lower than the tax due from each brand on 1 October 1996. This qualification, however, is
conspicuously absent as regards the 12% increase which is to be applied on cigars and cigarettes packed by machine, among others,
effective on 1 January 2000. Clearly and unmistakably, Section 145 mandates a new rate of excise tax for cigarettes packed by machine
due to the 12% increase effective on 1 January 2000 without regard to whether the revenue collection starting from this period may
turn out to be lower than that collected prior to this date.

By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax actually paid prior
to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher amount between the ad valorem tax
being paid at the end of the three (3)-year transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased
by 12% – a situation not supported by the plain wording of Section 145 of the Tax Code.16

Following the principle of stare decisis,17 our ruling in the present case should no longer come as a surprise. The proviso in Section 1 of
RR 17-99 clearly went beyond the terms of the law it was supposed to implement, and therefore entitles Fortune Tobacco to claim a
refund of the overpaid excise taxes collected pursuant to this provision.

The amount involved in the present case and the CIR’s firm insistence of its arguments nonetheless compel us to take a second look at
the issue, but our findings ultimately lead us to the same conclusion. Indeed, we find more reasons to disagree with the CIR’s
construction of the law than those stated in our 2008 Fortune Tobacco ruling, which was largely based on the application of the rules of
statutory construction.

Raising government revenue is not the sole objective of RA 8240

That RA 8240 (incorporated as Section 145 of the 1997 Tax Code) was enacted to raise government revenues is a given fact, but this is
not the sole and only objective of the law.18 Congressional deliberations show that the shift from ad valorem to specific taxes
introduced by the law was also intended to curb the corruption that became endemic to the imposition of ad valorem taxes.19 Since ad
valorem taxes were based on the value of the goods, the prices of the goods were often manipulated to yield lesser taxes. The
imposition of specific taxes, which are based on the volume of goods produced, would prevent price manipulation and also cure the
unequal tax treatment created by the skewed valuation of similar goods.

Rule of uniformity of taxation violated by the proviso in Section 1, RR 17-99

The Constitution requires that taxation should be uniform and equitable.20 Uniformity in taxation requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in privileges and liabilities.21 This requirement, however, is unwittingly violated
when the proviso in Section 1 of RR 17-99 is applied in certain cases. To illustrate this point, we consider three brands of cigarettes, all
classified as lower-priced cigarettes under Section 145(c)(4) of the 1997 Tax Code, since their net retail price is below ₱5.00 per pack:

Net (A) (B) (C) (D) (E)


Brand22
Retail Ad Valorem Specific Tax Specific Tax New Specific Tax New Specific
Price per Tax Due prior under Section Due Jan imposing 12% Tax Due by
pack to Jan 1997 145(C)(4) 1997 to Dec increase by Jan Jan 2000
1999 2000 per RR 17-99
Camel KS 4.71 5.50 1.00/pack 5.50 1.12/pack 5.50
Champion
4.56 3.30 1.00/pack 3.30 1.12/pack 3.30
M 100
Union
American 4.64 1.09 1.00/pack 1.09 1.12/pack 1.12
Blend

Although the brands all belong to the same category, the proviso in Section 1, RR 17-99 authorized the imposition of different (and
grossly disproportionate) tax rates (see column [D]). It effectively extended the qualification stated in the third paragraph of Section
145(c) of the 1997 Tax Code that was supposed to apply only during the transition period:

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than
the tax, which is due from each brand on October 1, 1996[.]

In the process, the CIR also perpetuated the unequal tax treatment of similar goods that was supposed to be cured by the shift from ad
valorem to specific taxes.

The omission in the law in fact reveals the legislative intent not to adopt the "higher tax rule"

The CIR claims that the proviso in Section 1 of RR 17-99 was patterned after the third paragraph of Section 145(c) of the 1997 Tax Code.
Since the law’s intent was to increase revenue, it found no reason not to apply the same "higher tax rule" to excise taxes due after the
transition period despite the absence of a similar text in the wording of Section 145(c). What the CIR misses in his argument is that he
applied the rule not only for cigarettes, but also for cigars, distilled spirits, wines and fermented liquors:

Provided, however, that the new specific tax rate for any existing brand of cigars [and] cigarettes packed by machine, distilled spirits,
wines and fermented liquors shall not be lower than the excise tax that is actually being paid prior to January 1, 2000.

When the pertinent provisions of the 1997 Tax Code imposing excise taxes on these products are read, however, there is nothing
similar to the third paragraph of Section 145(c) that can be found in the provisions imposing excise taxes on distilled spirits (Section
14123 ) and wines (Section 14224 ). In fact, the rule will also not apply to cigars as these products fall under Section 145(a).25

Evidently, the 1997 Tax Code’s provisions on excise taxes have omitted the adoption of certain tax measures. To our mind, these
omissions are telling indications of the intent of Congress not to adopt the omitted tax measures; they are not simply unintended
lapses in the law’s wording that, as the CIR claims, are nevertheless covered by the spirit of the law. Had the intention of Congress been
solely to increase revenue collection, a provision similar to the third paragraph of Section 145(c) would have been incorporated in
Sections 141 and 142 of the 1997 Tax Code. This, however, is not the case.

We note that Congress was not unaware that the "higher tax rule" is a proviso that should ideally apply to the increase after the
transition period (as the CIR embodied in the proviso in Section 1 of RR 17-99). During the deliberations for the law amending Section
145 of the 1997 Tax Code (RA 9334), Rep. Jesli Lapuz adverted to the "higher tax rule" after December 31, 1999 when he stated:

This bill serves as a catch-up measure as government attempts to collect additional revenues due it since 2001. Modifications are
necessary indeed to capture the loss proceeds and prevent further erosion in revenue base. x x x. As it is, it plugs a major loophole in
the ambiguity of the law as evidenced by recent disputes resulting in the government being ordered by the courts to refund
taxpayers.1âwphi1 This bill clarifies that the excise tax due on the products shall not be lower than the tax due as of the date
immediately prior to the effectivity of the act or the excise tax due as of December 31, 1999.26

This remark notwithstanding, the final version of the bill that became RA 9334 contained no provision similar to the proviso in Section 1
of RR 17-99 that imposed the tax due as of December 31, 1999 if this tax is higher than the new specific tax rates. Thus, it appears that
despite its awareness of the need to protect the increase of excise taxes to increase government revenue, Congress ultimately decided
against adopting the "higher tax rule.
WHEREFORE, in view of the foregoing, the petition is DENIED. The decision dated July 12, 2007 and the resolution dated October 4,
2007 of the Court of Tax Appeals in CTA E.B. No. 228 are AFFIRMED. No pronouncement as to costs.

SO ORDERED.
Villanueva v City v Iloilo
GR No L-26521, December 28, 1968

FACTS:
On September 30, 1946, the Municipal Board of Iloilo City enacted Ordinance 86 imposing license tax fees upon
tenement houses. The validity of such ordinance was challenged by Eusebio and Remedios Villanueva, owners of four tenement houses
containing 34 apartments. The Supreme Court held the ordinance to be ultra views. On January 15, 1960, however, the municipal board,
believing that it acquired authority to enact an ordinance of the same nature pursuant to the Local Autonomy Act, enacted Ordinance
11, Eusebio and Remedios Villanueva assailed the ordinance anew.

ISSUE:
Does Ordinance 11 violate the rule of uniformity of taxation?

RULING:
No. The Court has ruled the tenement houses constitute a distinct class of property and that taxes are uniform and equal when
imposed upon all property of the same class or character within the taxing authority.
The fact that the owners of the other classes of buildings in Iloilo are not imposed upon by the ordinance, or that tenement taxes are
imposed in other cities do not violate the rule of equality and uniformity. The rule does not require that taxes for the same purpose
should be imposed in different territorial subdivisions at the same time. So long as the burden of tax falls equally and impartially on all
owners or operators of tenement houses similarly classified or situated, equality and uniformity is accomplished. The presumption that
tax statutes are intended to operate uniformly and equally was not overthrown therein.

CIR V SC JOHNSON INC. June 25, 1999


Monday, January 26, 2009 Posted by Coffeeholic Writes
Labels: Case Digests, Taxation

Facts: Respondent is a domestic corporation organized and operating under the Philippine Laws, entered into a
licensed agreement with the SC Johnson and Son, USA, a non-resident foreign corporation based in the USA pursuant to which the
respondent was granted the right to use the trademark, patents and technology owned by the later including the right to manufacture,
package and distribute the products covered by theAgreement and secure assistance in management, marketing and production from
SC Johnson and Son USA.

For the use of trademark or technology, respondent was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net
sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992 to
May 1993 in the total amount of P1,603,443.00.

On October 29, 1993, respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid
withholding tax on royalties arguing that, the antecedent facts attending respondents case fall squarely within the same circumstances
under which said MacGeorge and Gillette rulings were issued. Since the agreement was approved by the Technology Transfer Board,
the preferential tax rate of 10% shouldapply to the respondent. So, royalties paid by the respondent to SC Johnson and Son, USA is only
subject to 10% withholding tax.

The Commissioner did not act on said claim for refund. Private respondent SC Johnson & Son, Inc. then filed a petition for review
before the CTA, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.

On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and ordered the CIR to issue a tax credit certificate in the amount
of P163,266.00 representing overpaid withholding tax on royalty payments beginning July 1992 to May 1993.
The CIR thus filed a petition for review with the CA which rendered the decision subject of this appeal on November 7, 1996 finding no
merit in the petition and affirming in toto the CTA ruling.

Issue: Whether or not tax refunds are considered as tax exemptions.

Held: It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in derogation of
sovereignauthority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is
upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law.
Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however there is nothing on record to
support a claim that the tax on royalties under the RP-US Treaty is paid under similar circumstances as the tax on royalties under the
RP-West Germany Tax Treaty.
CIR v. RAUL M. GONZALEZ, GR No. 177279, 2010-10-13
Facts:
conducted a fraud investigation for all internal revenue taxes to ascertain/determine the tax liabilities of respondent L. M. Camus
Engineering Corporation (LMCEC) for the... taxable years 1997, 1998 and 1999.
a criminal complaint was instituted by the Bureau of Internal Revenue (BIR) against LMCEC on January 19, 2001
Based on data obtained from an "informer" and various clients of LMCEC... it was discovered that LMCEC filed fraudulent tax returns
with substantial underdeclarations of taxable income for the years 1997, 1998 and 1999.
Petitioner thus assessed the... company of total deficiency taxes
The Preliminary Assessment Notice (PAN) was received by LMCEC on February 22, 2001.
In view of the above findings, assessment notices together with a formal letter of demand dated August 7, 2002 were sent to LMCEC
through personal service on October 1, 2002
On May 21, 2003, petitioner,... referred to the Secretary of Justice for preliminary investigation its complaint against LMCEC... it was
alleged that despite the receipt of the final assessment notice and formal demand letter on
October 1, 2002, LMCEC failed and refused to pay the deficiency tax assessment... which had become final and executory as a result of
the said taxpayer's failure to file a protest thereon within the thirty (30)-day... reglementary period... contending that LMCEC cannot be
held liable whatsoever for the alleged tax deficiency which had become due and demandable
They also assail as invalid the assessment notices which bear no serial numbers... petitioner disagreed with the contention of LMCEC
that the complaint filed is not criminal in nature, pointing out that LMCEC and its officers Camus and Mendoza were being charged for
the criminal offenses... defined and penalized under Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Pay Tax)
of the NIRC.
On the lack of control number in the assessment notice, petitioner explained that such is a mere office requirement in the Assessment
Service for the purpose of internal control and monitoring; hence, the unnumbered assessment notices should not be interpreted as
irregular or... anomalous
On September 22, 2003, the Chief State Prosecutor issued a Resolution[27] finding no sufficient evidence to establish probable cause
against respondents LMCEC, Camus and Mendoza.
On... the required prior determination of fraud... ruled that (1) there was no prior determination of fraud
Petitioner appealed to respondent Secretary of Justice but the latter denied its petition for review
On the allegation of fraud, respondent Secretary ruled that petitioner failed to establish the existence of the following circumstances
indicating fraud in the settlement of LMCEC's tax liabilities: (1) there must be intentional and substantial understatement of tax liability
by... the taxpayer; (2) there must be intentional and substantial overstatement of deductions or exemptions; and (3) recurrence of the
foregoing circumstances.
second, the claim... that the tax fraud investigation was precipitated by an alleged "informant" has not been corroborated nor was it
clearly established, hence there is no other conclusion but that the Bureau engaged in a "fishing expedition"
Petitioner filed the criminal complaint against the private respondents for violation of the following provisions of the NIRC,...
Respondent Secretary concurred with the Chief State Prosecutor's conclusion that there is insufficient evidence to establish probable
cause to charge private respondents... the assessment notices... are unnumbered, hence irregular and suspect
Issues:
whether LMCEC and its corporate officers may be prosecuted for violation of Sections 254 (Attempt to Evade or Defeat Tax) and 255
(Willful Failure to Supply Correct and Accurate Information and Pay Tax).
Ruling:
a preliminary investigation should first be conducted to determine if a... prima facie case for tax fraud exists
[t]he crime is complete when the [taxpayer] has x x x knowingly and willfully filed [a] fraudulent [return] with intent to evade and
defeat x x x the tax." Thus, respondent
Secretary erred in holding that petitioner committed forum shopping when it filed the... present criminal complaint during the
pendency of its appeal from the City Prosecutor's dismissal of I.S. No. 00-956 involving the act of disobedience to the summons in the
course of the... preliminary investigation on LMCEC's correct tax liabilities for taxable years 1997, 1998 and 1999.
Respondent Secretary, however, fully concurred with private respondents' contention that the assessment notices were invalid for
being unnumbered and the tax liabilities therein stated have already been settled and/or terminated.
As it is, the formality of a control number in the assessment notice is not a requirement for its validity but rather the contents thereof
which should inform the taxpayer of the declaration of deficiency tax against said taxpayer. Both the formal letter of demand and the
notice... of assessment shall be void if the former failed to state the fact, the law, rules and regulations or jurisprudence on which the
assessment is based, which is a mandatory requirement under Section 228 of the NIRC.
Principles:
The rationale for dismissing the complaint on the ground of lack of control number in the assessment... notice likewise betrays a lack of
awareness of tax laws and jurisprudence, such circumstance not being an element of the offense.