American Bible Society v. City of Manila, GR No.

L-9637, April 30, 1957

Facts:

Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly registered

and doing business in the Philippines through its Philippine agency established in Manila in November,
1898. The defendant appellee is a municipal corporation with powers that are to be exercised in
conformity with the provisions of Republic Act No. 409, known as the Revised Charter of the City of
Manila.
During the course of its ministry, plaintiff sold bibles and other religious materials at a very minimal
profit.
On May 29 1953, the acting City Treasurer of the City of Manila informed plaintiff that it was conducting
the business of general merchandise since November, 1945, without providing itself with the necessary
Mayor's permit and municipal license, in violation of Ordinance No. 3000, as amended, and Ordinances
Nos. 2529, 3028 and 3364, and required plaintiff to secure, within three days, the corresponding permit
and license fees, together with compromise covering the period from the 4th quarter of 1945 to the 2nd
quarter of 1953, in the total sum of P5,821.45 (Annex A).
Plaintiff now questions the imposition of such fees.

Issue:

Whether or not the said ordinances are constitutional and valid (contention: it restrains the free exercise
and enjoyment of the religious profession and worship of appellant).

Held:

Section 1, subsection (7) of Article III of the Constitution, provides that:

(7) No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof,
and the free exercise and enjoyment of religious profession and worship, without discrimination or
preference, shall forever be allowed. No religion test shall be required for the exercise of civil or political
rights. The provision aforequoted is a constitutional guaranty of the free exercise and enjoyment of
religious profession and worship, which carries with it the right to disseminate religious information.
It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in
some instances a little bit higher than the actual cost of the same but this cannot mean that appellant
was engaged in the business or occupation of selling said "merchandise" for profit. For this reason. The
Court believe that the provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied
to appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession
and worship as well as its rights of dissemination of religious beliefs.
With respect to Ordinance No. 3000, as amended, the Court do not find that it imposes any charge upon
the enjoyment of a right granted by the Constitution, nor tax the exercise of religious practices.

It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, however
inapplicable to said business, trade or occupation of the plaintiff. As to Ordinance No. 2529 of the City
of Manila, as amended, is also not applicable, so defendant is powerless to license or tax the business of
plaintiff Society.
Lutz vs Araneta
WALTER LUTZ VS. ANTONIO ARANETA
G.R. NO. L-7859
DECEMBER 22, 1955

FACTS: This case was initiated in the Court of First Instance of Negros Occidental to test the
legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar
Adjustment Act.

Promulgated in 1940, the due to the threat to our industry by the imminent imposition of export
taxes upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of its
preferential position in the United States market"; wherefore, the national policy was expressed
"to obtain a readjustment of the benefits derived from the sugar industry by the component
elements thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality of
the loss of its preferential position in the United States market and the imposition of the export
taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section
3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and
ceded to others for a consideration, on lease or otherwise a tax equivalent to the difference
between the money value of the rental or consideration collected and the amount representing
12 per centum of the assessed value of such land.

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40
paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-
1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of
the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax
may be constitutionally levied. The action having been dismissed by the Court of First Instance,
the plaintiffs appealed the case directly to this Court (Judiciary Act, section 17).

ISSUE: Whether or not the CA No. 567 or Sugar Adjustment Act is constitutional and for public
purpose.

HELD: The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and
particularly of section 6, will show that the tax is levied with a regulatory purpose, to provide
means for the rehabilitation and stabilization of the threatened sugar industry. In other words,
the act is primarily an exercise of the police power.

This Court can take judicial notice of the fact that sugar production is one of the great industries
of our nation, sugar occupying a leading position among its export products; that it gives
employment to thousands of laborers in fields and factories; that it is a great source of the state's
wealth, is one of the important sources of foreign exchange needed by our government, and is
thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded that the sugar industry
should be stabilized in turn; and in the wide field of its police power, the lawmaking body could
provide that the distribution of benefits therefrom be readjusted among its components to
enable it to resist the added strain of the increase in taxes that it had to sustain.

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a
matter of public concern, it follows that the Legislature may determine within reasonable bounds
what is necessary for its protection and expedient for its promotion. Here, the legislative
discretion must be allowed fully play, subject only to the test of reasonableness; and it is not
contended that the means provided in section 6 of the law bear no relation to the objective
pursued or are oppressive in character. If objective and methods are alike constitutionally valid,
no reason is seen why the state may not levy taxes to raise funds for their prosecution and
attainment. Taxation may be made the implement of the state's police power.

That the tax to be levied should burden the sugar producers themselves can hardly be a ground
of complaint; indeed, it appears rational that the tax be obtained precisely from those who are
to be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in
the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly
held that "inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation".

From the point of view we have taken it appears of no moment that the funds raised under the
Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry,
since it is that very enterprise that is being protected. It may be that other industries are also in
need of similar protection; that the legislature is not required by the Constitution to adhere to a
policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84
L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied;" and that "the legislative
authority, exerted within its proper field, need not embrace all the evils within its reach".

CIR vs. MARUBENI

11 FEB
GR No. 137377| J. Puno

Facts:

CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985
deficiency income, branch profit remittance and contractor’s taxes from Marubeni Corp after
finding the latter to have properly availed of the tax amnesty under EO 41 & 64, as amended.
Marubeni, a Japanese corporation, engaged in general import and export trading, financing and
construction, is duly registered in the Philippines with Manila branch office. CIR examined the
Manila branch’s books of accounts for fiscal year ending March 1985, and found that respondent
had undeclared income from contracts with NDC and Philphos for construction of a wharf/port
complex and ammonia storage complex respectively.

On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes.
CIR claims that the income respondent derived were income from Philippine sources, hence
subject to internal revenue taxes. On Sept 1986, respondent filed 2 petitions for review with CTA:
the first, questioned the deficiency income, branch profit remittance and contractor’s tax
assessments and second questioned the deficiency commercial broker’s assessment.

On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that
taxpayers who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax
amnesty return on Oct 30, 1986.

On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under Title
3 and business tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15,
1986 and stated those who already availed amnesty under EO 41 should file an amended return
to avail of the new benefits. Marubeni filed a supplemental tax amnesty return on Dec 15, 1986.

CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the
deficiency taxes. CA affirmed on appeal.

Issue:

W/N Marubeni is exempted from paying tax

Held:

Yes.
1. On date of effectivity

CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in
Sec 4b of EO 41:

“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty herein
granted: xxx b) Those with income tax cases already filed in Court as of the effectivity hereof;”

Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a
case had already been filed and was pending before the CTA and Marubeni therefore fell under
the exception. However, the point of reference is the date of effectivity of EO 41 and that the
filing of income tax cases must have been made before and as of its effectivity.
EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA
on Sept 26, 1986. When EO 41 became effective, the case had not yet been filed. Marubeni does
not fall in the exception and is thus, not disqualified from availing of the amnesty under EO 41
for taxes on income and branch profit remittance.

The difficulty herein is with respect to the contractor’s tax assessment (business tax) and
respondent’s availment of the amnesty under EO 64, which expanded EO 41’s coverage. When
EO 64 took effect on Nov 17, 1986, it did not provide for exceptions to the coverage of the
amnesty for business, estate and donor’s taxes. Instead, Section 8 said EO provided that:

“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive Order shall remain in full force and effect.”

Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of
effectivity. The general rule is that an amendatory act operates prospectively. It may not be given
a retroactive effect unless it is so provided expressly or by necessary implication and no vested
right or obligations of contract are thereby impaired.

2. On situs of taxation

Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for
the deficiency tax because the income from the projects came from the “Offshore Portion” as
opposed to “Onshore Portion”. It claims all materials and equipment in the contract under the
“Offshore Portion” were manufactured and completed in Japan, not in the Philippines, and are
therefore not subject to Philippine taxes.

(BG: Marubeni won in the public bidding for projects with government corporations NDC and
Philphos. In the contracts, the prices were broken down into a Japanese Yen Portion (I and II) and
Philippine Pesos Portion and financed either by OECF or by supplier’s credit. The Japanese Yen
Portion I corresponds to the Foreign Offshore Portion, while Japanese Yen Portion II and the
Philippine Pesos Portion correspond to the Philippine Onshore Portion. Marubeni has already
paid the Onshore Portion, a fact that CIR does not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of both materials
and services to the client, they are contracts for a piece of work and are indivisible. The situs of
the two projects is in the Philippines, and the materials provided and services rendered were all
done and completed within the territorial jurisdiction of the Philippines. Accordingly,
respondent’s entire receipts from the contracts, including its receipts from the Offshore Portion,
constitute income from Philippine sources. The total gross receipts covering both labor and
materials should be subjected to contractor’s tax (a tax on the exercise of a privilege of selling
services or labor rather than a sale on products).

Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in
the Philippines because some of them were completed in Japan (and in fact subcontracted) in
accordance with the provisions of the contracts. All services for the design, fabrication,
engineering and manufacture of the materials and equipment under Japanese Yen Portion I were
made and completed in Japan. These services were rendered outside Philippines’ taxing
jurisdiction and are therefore not subject to contractor’s tax. Petition denied.

Herrera v Quezon City Board of Assessment (1961)

FACTS:

In 1952, the Director of the Bureau of Hospitals authorized Jose V. Herrera and Ester Ochangco
Herrera to establish and operate the St. Catherine’s Hospital. In 1953, the Herreras sent a letter
to the Quezon City Assessor requesting exemption from payment of real estate tax on the
hospital, stating that the same was established for charitable and humanitarian purposes and not
for commercial gain. The exemption was granted effective years 1953 to 1955. In 1955, however,
the Assessor reclassified the properties from “exempt” to “taxable” effective 1956, as it was
ascertained that out of the 32 beds in the hospital, 12 of which are for pay-patients. A school of
midwifery is also operated within premises of the hospital.

ISSUE: W/N ST CATHERINE IS EXEMPT FROM REAL PROPERTY TAX

RULING:

Yes. The admission of pay-patients does not detract from the charitable character of a hospital,
if all its funds are devoted exclusively to the maintenance of the institution as a public charity.
The exemption extends to facilities which are incidental to and reasonably necessary for the
accomplishment of said
purpose – a school for training nurses, a nurses’ home, etc.

VERSE 2 . Herrera vs. Quezon City Board of Assessment Appeals

GR L-15270, 30 September 1961

Facts:

In 1952, the Director of the Bureau of Hospitals authorized Jose V. Herrera and Ester Ochangco
Herrera to establish and operate the St. Catherine’s Hospital. In 1953, the Herreras sent a letter
to the Quezon City Assessor requesting exemption from payment of real estate tax on the
hospital, stating that the same was established for charitable and humanitarian purposes and not
for commercial gain. The exemption was granted effective years 1953 to 1955. In 1955, however,
the Assessor reclassified the properties from “exempt” to “taxable” effective 1956, as it was
ascertained that out 32 beds in the hospital, 12 of which are for pay-patients. A school of
midwifery is also operated within the premises of the hospital.
Issue: Whether St. Catherine’s Hospital is exempt from realty tax.

Held: The admission of pay-patients does not detract from the charitable character of a hospital,
if all its funds are devoted exclusively to the maintenance of the institution as a public charity.
The exemption in favor of property used exclusively for charitable or educational purpose is not
limited to property actually indispensable therefore, but extends to facilities which are incidental
to and reasonably necessary for the accomplishment of said purpose, such as in the case of
hospitals -- a school for training nurses; a nurses’ home; property used to provide housing
facilities for interns, resident doctors, superintendents and other members of the hospital staff;
and recreational facilities for student nurses, interns and residents. Within the purview of the
Constitution, St. Catherine’s Hospital is a charitable institution exempt from taxation.

LUNG CENTER OF THE PHILS. VS QC JUNE 29, 2004

G.R. No. 144104, June 29, 2004 [Constitutional Law –
Article VI: Legislative Department; Taxation ]

FACTS:

Petitioner is a non-stock, non-profit entity established by virtue of PD No. 1823, seeks exemption
from real property taxes when the City Assessor issued Tax Declarations for the land and the
hospital building. Petitioner predicted on its claim that it is a charitable institution. The request
was denied, and a petition hereafter filed before the Local Board of Assessment Appeals of
Quezon City (QC-LBAA) for reversal of the resolution of the City Assessor. Petitioner alleged that
as a charitable institution, is exempted from real property taxes under Sec 28(3) Art VI of the
Constitution. QC-LBAA dismissed the petition and the decision was likewise affirmed on appeal
by the Central Board of Assessment Appeals of Quezon City. The Court of Appeals affirmed the
judgment of the CBAA.

ISSUE:

1. Whether or not petitioner is a charitable institution within the context of PD 1823 and the
1973 and 1987 Constitution and Section 234(b) of RA 7160.

2. Whether or not petitioner is exempted from real property taxes.

RULING:
1. Yes. The Court hold that the petitioner is a charitable institution within the context of the 1973
and 1987 Constitution. Under PD 1823, the petitioner is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be administered by the Office of the President
with the Ministry of Health and the Ministry of Human Settlements. The purpose for which it was
created was to render medical services to the public in general including those who are poor and
also the rich, and become a subject of charity. Under PD 1823, petitioner is entitled to receive
donations, even if the gift or donation is in the form of subsidies granted by the government.
2. Partly No. Under PD 1823, the lung center does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon.
The property tax exemption under Sec. 28(3), Art. VI of the Constitution of the property taxes
only. This provision was implanted by Sec.243 (b) of RA 7160.which provides that in order to be
entitled to the exemption, the lung center must be able to prove that: it is a charitable institution
and; its real properties are actually, directly and exclusively used for charitable purpose.
Accordingly, the portions occupied by the hospital used for its patients are exempt from real
property taxes while those leased to private entities are not exempt from such taxes.

ABRA VALLEY COLLEGE, INC vs Aquino

FACTS:

On June 8, 1972 the properties of the Abra Valley Junior College, Inc. was sold at public auction for the
satisfaction of the unpaid real property taxes thereon and the same was sold to Paterno Millare who offered
the highest bid of P6,000.00 and a Certificate of Sale in his favor was issued by the defendant Municipal
Treasurer.

(a) that the school is recognized by the government and is offering Primary, High School and College
Courses, and has a school population of more than one thousand students all in all; (b) that it is located
right in the heart of the town of Bangued, a few meters from the plaza and about 120 meters from the Court
of First Instance building; (c) that the elementary pupils are housed in a two-storey building across the
street; (d) that the high school and college students are housed in the main building; (e) that the Director
with his family is in the second floor of the main building; and (f) that the annual gross income of the school
reaches more than one hundred thousand pesos.

The only issue left for the Court to determine and as agreed by the parties, is whether or not the lot and
building in question are used exclusively for educational purposes.

ISSUE: Whether or not the properties are exclusively for education purposes?

HELD:

Petitioner contends that the primary use of the lot and building for educational purposes, and not the
incidental use thereof, determines and exemption from property taxes under Section 22 (3), Article VI of
the 1935 Constitution. Hence, the seizure and sale of subject college lot and building, which are contrary
thereto as well as to the provision of Commonwealth Act No. 470, otherwise known as the Assessment
Law, are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building in question which were
subjected to seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the
college; (2) as the permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and
his family including the in-laws and grandchildren; and (3) for commercial purposes because the ground
floor of the college building is being used and rented by a commercial establishment, the Northern
Marketing Corporation

The phrase “exclusively used for educational purposes” was further clarified by this Court, thus““Moreover,
the exemption in favor of property used exclusively for charitable or educational purposes is ‘not limited to
property actually indispensable’ therefor, but extends to facilities which are incidental to and reasonably
necessary for the accomplishment of said purposes, such as in the case of hospitals, ‘a school for training
nurses, a nurses’ home, property use to provide housing facilities for interns, resident doctors,
superintendents, and other members of the hospital staff, and recreational facilities for student nurses,
interns, and residents’ (84 CJS 6621), such as ‘athletic fields’ including ‘a firm used for the inmates of the
institution.’ ”

The exemption extends to facilities which are incidental to and reasonably necessary for the
accomplishment of the main purpose the lease of the first floor to the Northern Marketing Corporation
cannot by any stretch of the imagination be considered incidental to the purposes of education; Case at
bar.—It must be stressed however, that while this Court allows a more liberal and non-restrictive
interpretation of the phrase “exclusively used for educational purposes” as provided for in Article VI, Section
22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been made that
exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment
of the main purposes. Otherwise stated, the use of the school building or lot for commercial purposes is
neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the main
building in the case at bar for residential purposes of the Director and his family, may find justification under
the concept of incidental use, which is complimentary to the main or primary pur-pose—educational, the
lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination
be considered incidental to the purposes of education.

Trial Court correct in imposing the tax not because the second floor is being used by the Director and his
family for residential purposes but because the first floor is being used for commercial purposes.—Under
the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as
the lot where it is built, should be taxed, not because the second floor of the same is being used by the
Director and his family for residential purposes, but because the first floor thereof is being used for
commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that
half of the assessed tax be returned to the school involved.

JACINTO-HENARES vs. ST. PAUL'S

FACTS:

On 22 July 2013, petitioner Kim S. Jacinto-Henares, acting in her capacity as then Commissioner
of Internal Revenue (CIR), issued RMO No. 20-2013, "Prescribing the Policies and Guidelines in
the Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit Corporations and
Associations under Section 30 of the National Internal Revenue Code of 1997, as Amended.”

On 29 November 2013, respondent St. Paul College of Makati (SPCM), a non-stock, non-profit
educational institution organized and existing under Philippine laws, filed a Civil Action to Declare
Unconstitutional [Bureau of Internal Revenue] RMO No. 20-2013 with Prayer for Issuance of
Temporary Restraining Order and Writ of Preliminary Injunction before the RTC. SPCM alleged
that "RMO No. 20-2013 imposes as a prerequisite to the enjoyment by non-stock, non-profit
educational institutions of the privilege of tax exemption under Sec. 4(3) of Article XIV of the
Constitution both a registration and approval requirement, i.e., that they submit an application
for tax exemption to the BIR subject to approval by CIR in the form of a Tax Exemption Ruling
(TER) which is valid for a period of [three] years and subject to renewal."
In a Resolution dated 22 January 2014,[9] the RTC granted the writ of preliminary injunction after
finding that RMO No. 20-2013 appears to divest non-stock, non-profit educational institutions of
their tax exemption privilege. Thereafter, the RTC denied the CIR's motion for reconsideration.
On 29 April 2014, SPCM filed a Motion for Judgment on the Pleadings under Rule 34 of the Rules
of Court.
In a Decision dated 25 July 2014, the RTC ruled in favor of SPCM and declared RMO No. 20-2013
unconstitutional. It held that "by imposing the x x x [prerequisites alleged by SPCM,] and if not
complied with by non-stock, non-profit educational institutions, [RMO No. 20-2013 serves] as
diminution of the constitutional privilege, which even Congress cannot diminish by legislation,
and thus more so by the CIR who merely exercises quasi-legislative function.
On 18 September 2014, the CIR issued RMO No. 34-2014,[12] which clarified certain provisions
of RMO No. 20-2013, as amended by RMO No. 28-2013.
Meanwhile, this Court clarifies that the phrase "Revenue Memorandum Order" referred to in the
second sentence of its decision dated July 25, 2014 refers to "issuance/s" of the respondent
which tends to implement RMO 20-2013 for if it is otherwise, said decision would be useless and
would be rendered nugatory.

ISSUES:

1. WHETHER OR NOT the petition to review by the CIR be given merit.

2. WHETHER OR NOT the Revenue Memorandum Order (RMO) No. 20-2013 is unconstitutional.

HELD:

1. NO. Petition is denied on the ground of mootness. On 25 July 2016, the present CIR Caesar R.
Dulay issued RMO No. 44-2016, which provides that: Amending Revenue Memorandum Order
No. 20-2013, as amended (Prescribing the Policies and Guidelines in the Issuance of Tax
Exemption Rulings to Qualified Non-Stock, Non-Profit Corporations and Associations under
Section 30 of the National Internal Revenue Code of 1997, as Amended.
In line with the Bureau's commitment to put in proper context the nature and tax status of non-
profit, non-stock educational institutions, this Order is being issued to exclude non-stock, non-
profit educational institutions from the coverage of Revenue Memorandum Order No. 20-2013,
as amended.

SECTION 1. Nature of Tax Exemption. --- The tax exemption of non-stock, non-profit educational
institutions is directly conferred by paragraph 3, Section 4, Article XIV of the 1987 Constitution:
"All revenues and assets of non-stock, non-profit educational institutions used actually, directly
and exclusively for educational purposes shall be exempt from taxes and duties."

2. YES. It was Amended. It is clear and unmistakable from the aforequoted constitutional
provision that non-stock, non-profit educational institutions are constitutionally exempt from tax
on all revenues derived in pursuance of its purpose as an educational institution and used
actually, directly and exclusively for educational purposes. This constitutional exemption gives
the non-stock, non-profit educational institutions a distinct character. And for the constitutional
exemption to be enjoyed, jurisprudence and tax rulings affirm the doctrinal rule that there are
only two requisites: (1) The school must be non-stock and non-profit; and (2) The income is
actually, directly and exclusively used for educational purposes. There are no other conditions
and limitations as provided by law and is therefore constitutional.

In this light, the constitutional conferral of tax exemption upon non-stock and non-profit
educational institutions should not be implemented or interpreted in such a manner that will
defeat or diminish the intent and language of the Constitution.

CIR V DLSU G.R. 196596 Nov. 9 2016

Facts

In 2004, the Bureau of Internal Revenue (BIR) issued a letter authorizing it’s revenue officers to
examine the book of accounts of and records for the year 2003 De La Salle University (DLSU) and
later on issued a demand letter to demand payment of tax deficiencies for:
1. Income tax on rental earnings from restaurants/canteens and bookstores operating
within the campus;
2. Value-added tax (VAT) on business income; and
3. Documentary stamp tax (DST) on loans and lease contracts for the years 2001,2002, and
2003, amounting to P17,303,001.12.
DLSU protested the assessment that was however not acted upon, and later on filed a petition
for review with the Court of Tax Appeals(CTA). DLSU argues that as a non-stock, non-profit
educational institution, it is exempt from paying taxes according to Article XIV, Section 4 (3) of
the Constitution (All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes and
duties.)
The CTA only granted the removal of assessment on the load transactions. Both CIR and DLSU
moved for reconsideration, the motion of the CIR was denied. The CIR appealed to the CTA en
banc arguing that DLSU’s use of its revenues and assets for non-educational or commercial
purposes removed these items from the exemption, that a tax-exempt organization like DLSU is
exempt only from property tax but not from income tax on the rentals earned from
property. Thus, DLSU’s income from the leases of its real properties is not exempt from taxation
even if the income would be used for educational purposes.
DLSU on the other hand offered supplemental pieces of documentary evidence to prove that its
rental income was used actually, directly and exclusively for educational purposes and no
objection was made by the CIR.
Thereafter, DLSU filed a separate petition for review with the CTA En Banc on the following
grounds:
1. The entire assessment should have been cancelled because it was based on an invalid
LOA;
2. Assuming the LOA was valid, the CTA Division should still have cancelled
the entire assessment because DLSU submitted evidence similar to those submitted by
Ateneo De Manila University (Ateneo) in a separate case where the CTA cancelled
Ateneo’s tax assessment; and
 3. The CTA Division erred in finding that a portion of DLSU’s rental income was not proved
to have been used actually, directly and exclusively for educational purposes.
4. That under RMO No.43-90, LOA should cover only 1 year, the LOA issued by CIR is invalid
for covering the years 2001-2003

The CTA en banc ruled that the case of Ateneo is not applicable because it involved different
parties, factual settings, bases of assessments, sets of evidence, and defenses, it however further
reduced the liability of DLSU to P2,554,825.47
CIR argued that the rental income is taxable regardless of how such income is derived, used or
disposed of. DLSU’s operations of canteens and bookstores within its campus even though
exclusively serving the university community do not negate income tax liability. Article XIV,
Section 4 (3) of the Constitution must be harmonized with Section 30 (H) of the Tax Code, which
states among others, that the income of whatever kind and character of [a non-stock and non-
profit educational institution] from any of [its] properties, real or personal, or from any of (its]
activities conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed by this Code.
that a tax-exempt organization like DLSU is exempt only from property tax but not from income
tax on the rentals earned from property. Thus, DLSU’s income from the leases of its real
properties is not exempt from taxation even if the income would be used for educational
purposes.

DLSU argued that Article XIV, Section 4 (3) of the Constitution is clear that all assets and
revenues of non-stock, non-profit educational institutions used actually, directly and exclusively
for educational purposes are exempt from taxes and duties. Under the doctrine of constitutional
supremacy, which renders any subsequent law that is contrary to the Constitution void and
without any force and effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the
income of whatever kind and character of a non-stock and non-profit educational institution from
any of its properties, real or personal, or from any of its activities conducted for profit regardless
of the disposition made of such income, should be declared without force and effect in view of
the constitutionally granted tax exemption on “all revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and exclusively for educational purposes.“
that it complied with the requirements for the application of Article XIV, Section 4 (3) of the
Constitution.

Issue:
1. Whether DLSU is taxable as a non-stock, non-profit educational institution whose income
have been used actually, directly and exclusively for educational purposes.
2. Whether the entire assessment should be void because of the defective LOA

Held:
1. First issue:
1. A plain reading of the Constitution would show that Article XIV, Section 4 (3) does
not require that the revenues and income must have also been sourced from
educational activities or activities related to the purposes of an educational
 institution. The phrase all revenues is unqualified by any reference to the source
of revenues. Thus, so long as the revenues and income are used actually, directly
and exclusively for educational purposes, then said revenues and income shall be
exempt from taxes and duties.
2. Revenues consist of the amounts earned by a person or entity from the conduct
of business operations. It may refer to the sale of goods, rendition of services, or
the return of an investment. Revenue is a component of the tax base in income
tax, VAT, and local business tax (LBT). Assets, on the other hand, are the tangible
and intangible properties owned by a person or entity. It may refer to real estate,
cash deposit in a bank, investment in the stocks of a corporation, inventory of
goods, or any property from which the person or entity may derive income or use
to generate the same. In Philippine taxation, the fair market value of real property
is a component of the tax base in real property tax (RPT). Also, the landed cost of
imported goods is a component of the tax base in VAT on importation and tariff
duties. Thus, when a non-stock, non-profit educational institution proves that it
uses its revenues actually, directly, and exclusively for educational purposes, it
shall be exempted from income tax, VAT, and LBT. On the other hand, when it also
shows that it uses its assets in the form of real property for educational purposes,
it shall be exempted from RPT.
3. The last paragraph of Section 30 of the Tax Code without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues
of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purpose. We make this declaration in the exercise of
and consistent with our duty to uphold the primacy of the Constitution.

2. Second Issue:
1. No.“A Letter of Authority LOA should cover a taxable period not exceeding one
taxable year. The practice of issuing LOAs covering audit of unverified prior years
is hereby prohibited. If the audit of a taxpayer shall include more than one taxable
period, the other periods or years shall be specifically indicated in the LOA.”
2. The requirement to specify the taxable period covered by the LOA is simply to
inform the taxpayer of the extent of the audit and the scope of the revenue
officer’s authority. Without this rule, a revenue officer can unduly burden the
taxpayer by demanding random accounting records from random unverified
years, which may include documents from as far back as ten years in cases
of fraud audit.
3. The assessment for taxable year 2003 is valid because this taxable period is
specified in the LOA. DLSU was fully apprised that it was being audited for taxable
year 2003. While the assessments for taxable years 2001 and 2002 are void for
having been unspecified on separate LOAs as required under RMO No. 43-90.
VICTORIAS MILLING CO. V PPA
153 SCRA 317; August 27, 1987

FACTS:

This is a petition for review on certiorari of the July 27, 1984 Decision of the Office of the
Presidential Assistant For Legal Affairs dismissing the appeal from the adverse ruling of the
Philippine Ports Authority on the sole ground that the same was filed beyond the reglementary
period.

On April 28, 1981, the Iloilo Port Manager of respondent Philippine Ports Authority (PPA for short)
wrote petitioner Victorias Milling Co., requiring it to have its tugboats and barges undergo harbor
formalities and pay entrance/clearance fees as well as berthing fees effective May 1, 1981. PPA,
likewise, requiring petitioner to secure a permit for cargo handling operations at its Da-an Banua
wharf and remit 10% of its gross income for said operations as the government's share.
Victorias Milling Co. maintained that it is except from paying PPA any fee or charge because: 1.
The wharf and its facilities are built and installed on it’s own land; 2. Repairs and maintenance
are solely paid by it; 3. Maintenance and dredging of the channel are done by the Company
personnel; 4. At not time has the government paid any centavo for such activities.

ISSUE: WON the Victorias Milling Co. claim of exception for PPA fees is meritorious.

HELD:

No, the petitioners claim that there is no basis for the PPA to assess and impose the dues and
charge is devoid of merit.

As correctly stated by the Solicitor General, the fees and charges PPA collects are not for the use
of the wharf that petitioner owns but for the privilege of navigating in public waters, of entering
and leaving public harbours and berthing on public streams or waters.
As to the requirement to remit 10% of the handling charges, Section 6B-(ix) of the Presidential
Decree No. 857 authorized the PPA "To levy dues, rates, or charges for the use of the premises,
works, appliances, facilities, or for services provided by or belonging to the Authority, or any
organization concerned with port operations." This 10% government share of earnings of arrastre
and stevedoring operators is in the nature of contractual compensation to which a person
desiring to operate arrastre service must agree as a condition to the grant of the permit to
operate.