1. Cebu Portland Cement v.

CTA L-29059, 15 Dec 1987, 158 SCRA 535

FIRST DIVISION
G.R. No. L-29059 December 15, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS, respondents.

CRUZ, J.:
By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on appeal by the
Supreme Court on February 27, 1965, the Commissioner of Internal Revenue was ordered to refund to the Cebu
Portland Cement Company the amount of P 359,408.98, representing overpayments of ad valorem taxes on cement
produced and sold by it after October 1957. 1
On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner and the private
respondent, the latter moved for a writ of execution to enforce the said judgment . 2
The motion was opposed by the petitioner on the ground that the private respondent had an outstanding sales tax
liability to which the judgment debt had already been credited. In fact, it was stressed, there was still a balance owing
on the sales taxes in the amount of P 4,789,279.85 plus 28% surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the alleged sales tax liability of the private respondent
was still being questioned and therefore could not be set-off against the refund.

In his petition to review the said resolution, the Commissioner of Internal Revenue claims that the refund should be
charged against the tax deficiency of the private respondent on the sales of cement under Section 186 of the Tax
Code. His position is that cement is a manufactured and not a mineral product and therefore not exempt from sales
taxes. He adds that enforcement of the said tax deficiency was properly effected through his power of distraint of
personal property under Sections 316 and 318 5 of the said Code and, moreover, the collection of any national

internal revenue tax may not be enjoined under Section 305, 6 subject only to the exception prescribed in
Rep. Act No. 1125. 7 This is not applicable to the instant case. The petitioner also denies that the sales tax
assessments have already prescribed because the prescriptive period should be counted from the filing of
the sales tax returns, which had not yet been done by the private respondent.
For its part, the private respondent disclaims liability for the sales taxes, on the ground that cement is not a
manufactured product but a mineral product. 8 As such, it was exempted from sales taxes under Section 188

of the Tax Code after the effectivity of Rep. Act No. 1299 on June 16, 1955, in accordance with Cebu
Portland Cement Co. v. Collector of Internal Revenue, 9 decided in 1968. Here Justice Eugenio Angeles
declared that "before the effectivity of Rep. Act No. 1299, amending Section 246 of the National Internal
Revenue Code, cement was taxable as a manufactured product under Section 186, in connection with
Section 194(4) of the said Code," thereby implying that it was not considered a manufactured product
afterwards. Also, the alleged sales tax deficiency could not as yet be enforced against it because the tax
assessment was not yet final, the same being still under protest and still to be definitely resolved on the

merits. Besides, the assessment had already prescribed, not having been made within the reglementary
five-year period from the filing of the tax returns. 10
Our ruling is that the sales tax was properly imposed upon the private respondent for the reason that cement has
always been considered a manufactured product and not a mineral product. This matter was extensively discussed
and categorically resolved in Commissioner of Internal Revenue v. Republic Cement Corporation, 11decided on August
10, 1983, where Justice Efren L. Plana, after an exhaustive review of the pertinent cases, declared for a unanimous Court:

From all the foregoing cases, it is clear that cement qua cement was never considered as a mineral
product within the meaning of Section 246 of the Tax Code, notwithstanding that at least 80% of its
components are minerals, for the simple reason that cement is the product of
a manufacturingprocess and is no longer the mineral product contemplated in the Tax Code (i.e.;
minerals subjected to simple treatments) for the purpose of imposing the ad valorem tax.
What has apparently encouraged the herein respondents to maintain their present posture is the
case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, Oct. 29, 1968 (28
SCRA 789) penned by Justice Eugenio Angeles. For some portions of that decision give the
impression that Republic Act No. 1299, which amended Section 246, reclassified cement as a
mineral product that was not subject to sales tax. ...
xxx xxx xxx
After a careful study of the foregoing, we conclude that reliance on the decision penned by Justice
Angeles is misplaced. The said decision is no authority for the proposition that after the enactment
of Republic Act No. 1299 in 1955 (defining mineral product as things with at least 80% mineral
content), cement became a 'mineral product," as distinguished from a "manufactured product," and
therefore ceased to be subject to sales tax. It was not necessary for the Court to so rule. It was
enough for the Court to say in effect that even assuming Republic Act No. 1299 had reclassified
cement was a mineral product, the reclassification could not be given retrospective application (so
as to justify the refund of sales taxes paid before Republic Act 1299 was adopted) because laws
operate prospectively only, unless the legislative intent to the contrary is manifest, which was not so
in the case of Republic Act 1266. [The situation would have been different if the Court instead had
ruled in favor of refund, in which case it would have been absolutely necessary (1) to make an
unconditional ruling that Republic Act 1299 re-classified cement as a mineral product (not subject to
sales tax), and (2) to declare the law retroactive, as a basis for granting refund of sales tax paid
before Republic Act 1299.]
In any event, we overrule the CEPOC decision of October 29, 1968 (G.R. No. L-20563) insofar as
its pronouncements or any implication therefrom conflict with the instant decision.
The above views were reiterated in the resolution 12 denying reconsideration of the said decision, thus:
The nature of cement as a "manufactured product" (rather than a "mineral product") is well-settled.
The issue has repeatedly presented itself as a threshold question for determining the basis for
computing the ad valorem mining tax to be paid by cement Companies. No pronouncement was
made in these cases that as a "manufactured product" cement is subject to sales tax because this
was not at issue.
The decision sought to be reconsidered here referred to the legislative history of Republic Act No.
1299 which introduced a definition of the terms "mineral" and "mineral products" in Sec. 246 of the
Tax Code. Given the legislative intent, the holding in the CEPOC case (G.R. No. L-20563) that
cement was subject to sales tax prior to the effectivity f Republic Act No. 1299 cannot be construed

to mean that, after the law took effect, cement ceased to be so subject to the tax. To erase any and
all misconceptions that may have been spawned by reliance on the case of Cebu Portland Cement
Co. v. Collector of Internal Revenue, L-20563, October 29, 1968 (28 SCRA 789) penned by Justice
Eugenio Angeles, the Court has expressly overruled it insofar as it may conflict with the decision of
August 10, 1983, now subject of these motions for reconsideration.
On the question of prescription, the private respondent claims that the five-year reglementary period for the
assessment of its tax liability started from the time it filed its gross sales returns on June 30, 1962. Hence, the
assessment for sales taxes made on January 16, 1968 and March 4, 1968, were already out of time. We disagree.
This contention must fail for what CEPOC filed was not the sales returns required in Section 183(n) but the ad
valorem tax returns required under Section 245 of the Tax Code. As Justice Irene R. Cortes emphasized in the
aforestated resolution:
In order to avail itself of the benefits of the five-year prescription period under Section 331 of the
Tax Code, the taxpayer should have filed the required return for the tax involved, that is, a sales tax
return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-21516, April 29, 1966, 16 SCRA 277). Thus
CEPOC should have filed sales tax returns of its gross sales for the subject periods. Both parties
admit that returns were made for the ad valorem mining tax. CEPOC argues that said returns
contain the information necessary for the assessment of the sales tax. The Commissioner does not
consider such returns as compliance with the requirement for the filing of tax returns so as to start
the running of the five-year prescriptive period.
We agree with the Commissioner. It has been held in Butuan Sawmill Inc. v. CTA, supra, that the
filing of an income tax return cannot be considered as substantial compliance with the requirement
of filing sales tax returns, in the same way that an income tax return cannot be considered as a
return for compensating tax for the purpose of computing the period of prescription under Sec. 331.
(Citing Bisaya Land Transportation Co., Inc. v. Collector of Internal Revenue, G.R. Nos. L-12100
and L-11812, May 29, 1959). There being no sales tax returns filed by CEPOC, the statute of
stations in Sec. 331 did not begin to run against the government. The assessment made by the
Commissioner in 1968 on CEPOC's cement sales during the period from July 1, 1959 to December
31, 1960 is not barred by the five-year prescriptive period. Absent a return or when the return is
false or fraudulent, the applicable period is ten (10) days from the discovery of the fraud, falsity or
omission. The question in this case is: When was CEPOC's omission to file tha return deemed
discovered by the government, so as to start the running of said period? 13
The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of the
urgency of the need to collect taxes as "the lifeblood of the government." If the payment of taxes could be postponed
by simply questioning their validity, the machinery of the state would grind to a halt and all government functions
would be paralyzed. That is the reason why, save for the exception already noted, the Tax Code provides:
Sec. 291. Injunction not available to restrain collection of tax. No court shall have authority to
grant an injunction to restrain the collection of any national internal revenue tax, fee or charge
imposed by this Code.
It goes without saying that this injunction is available not only when the assessment is already being questioned in a
court of justice but more so if, as in the instant case, the challenge to the assessment is still-and only-on the
administrative level. There is all the more reason to apply the rule here because it appears that even after crediting of
the refund against the tax deficiency, a balance of more than P 4 million is still due from the private respondent.
To require the petitioner to actually refund to the private respondent the amount of the judgment debt, which he will
later have the right to distrain for payment of its sales tax liability is in our view an Idle ritual. We hold that the
respondent Court of Tax Appeals erred in ordering such a charade.

WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case No. 786 is SET ASIDE,
without any pronouncement as to costs.
SO ORDERED.
Teehankee, C.J., Narvasa, Paras and Gancayco, JJ., concur.

Footnotes
1 Rollo, pp. 34-37.
2 Ibid, p. 67.
3 Id, pp. 69-70.
* Judges Roman L. Umali, presiding, Ramon L. Avancena and Estanislao R. Alvarez.
4 Id, pp. 69-71.
5 Now Secs. 302 & 304, National Internal Revenue Code.
6 Now Sec.291,National Internal Revenue Code.
7 Sec. 11. x x x.
No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal Revenue
or the Collector of Customs shall suspend the payment, levy, distraint and/or sale of any property of
the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however,
That when in the opinion of the Court the collection by the Bureau of Internal Revenue or the
Commissioner of Customs may jeopardize the interest of the Government and/or the taxpayer the
Court at any stage of the proceeding may suspend the said collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more than double the amount
with the Court.
8 Rollo, pp. 77-78.
9 25 SCRA 789.
10 Rollo, p. 78.
11 142 SCRA 46.
12 Commissioner of Internal Revenue v. Republic Cement Corp., et al., G.R. Nos. L-35668-72 & L35683, May 7, 1987; Commissioner of Internal Revenue v. CEPOC Industries, Inc., et al., G.R. No.
L-35677, May 7, 1987.
13 Ibid.

2. Mun of Makati vs. CA et al, GR No. 89854, 01 Oct 1990, 190 SCRA 206

THIRD DIVISION

G.R. Nos. 89898-99 October 1, 1990

MUNICIPALITY OF MAKATI, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON. SALVADOR P. DE GUZMAN, JR., as Judge RTC of Makati,
Branch CXLII ADMIRAL FINANCE CREDITORS CONSORTIUM, INC., and SHERIFF SILVINO R.
PASTRANA,respondents.
Defante & Elegado for petitioner.
Roberto B. Lugue for private respondent Admiral Finance Creditors' Consortium, Inc.
RESOLUTION

CORTS, J.:
The present petition for review is an off-shoot of expropriation proceedings initiated by petitioner Municipality of
Makati against private respondent Admiral Finance Creditors Consortium, Inc., Home Building System & Realty
Corporation and one Arceli P. Jo, involving a parcel of land and improvements thereon located at Mayapis St., San
Antonio Village, Makati and registered in the name of Arceli P. Jo under TCT No. S-5499.
It appears that the action for eminent domain was filed on May 20, 1986, docketed as Civil Case No. 13699. Attached
to petitioner's complaint was a certification that a bank account (Account No. S/A 265-537154-3) had been opened
with the PNB Buendia Branch under petitioner's name containing the sum of P417,510.00, made pursuant to the
provisions of Pres. Decree No. 42. After due hearing where the parties presented their respective appraisal reports
regarding the value of the property, respondent RTC judge rendered a decision on June 4, 1987, fixing the appraised
value of the property at P5,291,666.00, and ordering petitioner to pay this amount minus the advanced payment of
P338,160.00 which was earlier released to private respondent.
After this decision became final and executory, private respondent moved for the issuance of a writ of execution. This
motion was granted by respondent RTC judge. After issuance of the writ of execution, a Notice of Garnishment dated
January 14, 1988 was served by respondent sheriff Silvino R. Pastrana upon the manager of the PNB Buendia
Branch. However, respondent sheriff was informed that a "hold code" was placed on the account of petitioner. As a
result of this, private respondent filed a motion dated January 27, 1988 praying that an order be issued directing the
bank to deliver to respondent sheriff the amount equivalent to the unpaid balance due under the RTC decision dated
June 4, 1987.
Petitioner filed a motion to lift the garnishment, on the ground that the manner of payment of the expropriation
amount should be done in installments which the respondent RTC judge failed to state in his decision. Private
respondent filed its opposition to the motion.

Pending resolution of the above motions, petitioner filed on July 20, 1988 a "Manifestation" informing the court that
private respondent was no longer the true and lawful owner of the subject property because a new title over the
property had been registered in the name of Philippine Savings Bank, Inc. (PSB) Respondent RTC judge issued an
order requiring PSB to make available the documents pertaining to its transactions over the subject property, and the
PNB Buendia Branch to reveal the amount in petitioner's account which was garnished by respondent sheriff. In
compliance with this order, PSB filed a manifestation informing the court that it had consolidated its ownership over
the property as mortgagee/purchaser at an extrajudicial foreclosure sale held on April 20, 1987. After several
conferences, PSB and private respondent entered into a compromise agreement whereby they agreed to divide
between themselves the compensation due from the expropriation proceedings.
Respondent trial judge subsequently issued an order dated September 8, 1988 which: (1) approved the compromise
agreement; (2) ordered PNB Buendia Branch to immediately release to PSB the sum of P4,953,506.45 which
corresponds to the balance of the appraised value of the subject property under the RTC decision dated June 4,
1987, from the garnished account of petitioner; and, (3) ordered PSB and private respondent to execute the
necessary deed of conveyance over the subject property in favor of petitioner. Petitioner's motion to lift the
garnishment was denied.
Petitioner filed a motion for reconsideration, which was duly opposed by private respondent. On the other hand, for
failure of the manager of the PNB Buendia Branch to comply with the order dated September 8, 1988, private
respondent filed two succeeding motions to require the bank manager to show cause why he should not be held in
contempt of court. During the hearings conducted for the above motions, the general manager of the PNB Buendia
Branch, a Mr. Antonio Bautista, informed the court that he was still waiting for proper authorization from the PNB head
office enabling him to make a disbursement for the amount so ordered. For its part, petitioner contended that its funds
at the PNB Buendia Branch could neither be garnished nor levied upon execution, for to do so would result in the
disbursement of public funds without the proper appropriation required under the law, citing the case of Republic of
the Philippines v. Palacio [G.R. No. L-20322, May 29, 1968, 23 SCRA 899].
Respondent trial judge issued an order dated December 21, 1988 denying petitioner's motion for reconsideration on
the ground that the doctrine enunciated in Republic v. Palacio did not apply to the case because petitioner's PNB
Account No. S/A 265-537154-3 was an account specifically opened for the expropriation proceedings of the subject
property pursuant to Pres. Decree No. 42. Respondent RTC judge likewise declared Mr. Antonio Bautista guilty of
contempt of court for his inexcusable refusal to obey the order dated September 8, 1988, and thus ordered his arrest
and detention until his compliance with the said order.
Petitioner and the bank manager of PNB Buendia Branch then filed separate petitions for certiorari with the Court of
Appeals, which were eventually consolidated. In a decision promulgated on June 28, 1989, the Court of Appeals
dismissed both petitions for lack of merit, sustained the jurisdiction of respondent RTC judge over the funds contained
in petitioner's PNB Account No. 265-537154-3, and affirmed his authority to levy on such funds.
Its motion for reconsideration having been denied by the Court of Appeals, petitioner now files the present petition for
review with prayer for preliminary injunction.
On November 20, 1989, the Court resolved to issue a temporary restraining order enjoining respondent RTC judge,
respondent sheriff, and their representatives, from enforcing and/or carrying out the RTC order dated December 21,
1988 and the writ of garnishment issued pursuant thereto. Private respondent then filed its comment to the petition,
while petitioner filed its reply.
Petitioner not only reiterates the arguments adduced in its petition before the Court of Appeals, but also alleges for
the first time that it has actually two accounts with the PNB Buendia Branch, to wit:
xxx xxx xxx

(1) Account No. S/A 265-537154-3 exclusively for the expropriation of the subject property, with
an outstanding balance of P99,743.94.
(2) Account No. S/A 263-530850-7 for statutory obligations and other purposes of the municipal
government, with a balance of P170,098,421.72, as of July 12, 1989.
xxx xxx xxx
[Petition, pp. 6-7; Rollo, pp. 11-12.]
Because the petitioner has belatedly alleged only in this Court the existence of two bank accounts, it may fairly be
asked whether the second account was opened only for the purpose of undermining the legal basis of the assailed
orders of respondent RTC judge and the decision of the Court of Appeals, and strengthening its reliance on the
doctrine that public funds are exempted from garnishment or execution as enunciated in Republic v. Palacio [supra.]
At any rate, the Court will give petitioner the benefit of the doubt, and proceed to resolve the principal issues
presented based on the factual circumstances thus alleged by petitioner.
Admitting that its PNB Account No. S/A 265-537154-3 was specifically opened for expropriation proceedings it had
initiated over the subject property, petitioner poses no objection to the garnishment or the levy under execution of the
funds deposited therein amounting to P99,743.94. However, it is petitioner's main contention that inasmuch as the
assailed orders of respondent RTC judge involved the net amount of P4,965,506.45, the funds garnished by
respondent sheriff in excess of P99,743.94, which are public funds earmarked for the municipal government's other
statutory obligations, are exempted from execution without the proper appropriation required under the law.
There is merit in this contention. The funds deposited in the second PNB Account No. S/A 263-530850-7 are public
funds of the municipal government. In this jurisdiction, well-settled is the rule that public funds are not subject to levy
and execution, unless otherwise provided for by statute [Republic v. Palacio, supra.; The Commissioner of Public
Highways v. San Diego, G.R. No. L-30098, February 18, 1970, 31 SCRA 616]. More particularly, the properties of a
municipality, whether real or personal, which are necessary for public use cannot be attached and sold at execution
sale to satisfy a money judgment against the municipality. Municipal revenues derived from taxes, licenses and
market fees, and which are intended primarily and exclusively for the purpose of financing the governmental activities
and functions of the municipality, are exempt from execution [See Viuda De Tan Toco v. The Municipal Council of
Iloilo, 49 Phil. 52 (1926): The Municipality of Paoay, Ilocos Norte v. Manaois, 86 Phil. 629 (1950); Municipality of San
Miguel, Bulacan v. Fernandez, G.R. No. 61744, June 25, 1984, 130 SCRA 56]. The foregoing rule finds application in
the case at bar. Absent a showing that the municipal council of Makati has passed an ordinance appropriating from its
public funds an amount corresponding to the balance due under the RTC decision dated June 4, 1987, less the sum
of P99,743.94 deposited in Account No. S/A 265-537154-3, no levy under execution may be validly effected on the
public funds of petitioner deposited in Account No. S/A 263-530850-7.
Nevertheless, this is not to say that private respondent and PSB are left with no legal recourse. Where a municipality
fails or refuses, without justifiable reason, to effect payment of a final money judgment rendered against it, the
claimant may avail of the remedy of mandamus in order to compel the enactment and approval of the necessary
appropriation ordinance, and the corresponding disbursement of municipal funds therefor [SeeViuda De Tan Toco v.
The Municipal Council of Iloilo, supra; Baldivia v. Lota, 107 Phil. 1099 (1960); Yuviengco v. Gonzales, 108 Phil. 247
(1960)].
In the case at bar, the validity of the RTC decision dated June 4, 1987 is not disputed by petitioner. No appeal was
taken therefrom. For three years now, petitioner has enjoyed possession and use of the subject property
notwithstanding its inexcusable failure to comply with its legal obligation to pay just compensation. Petitioner has
benefited from its possession of the property since the same has been the site of Makati West High School since the
school year 1986-1987. This Court will not condone petitioner's blatant refusal to settle its legal obligation arising from
expropriation proceedings it had in fact initiated. It cannot be over-emphasized that, within the context of the State's
inherent power of eminent domain,

. . . [j]ust compensation means not only the correct determination of the amount to be paid to the
owner of the land but also the payment of the land within a reasonable time from its taking. Without
prompt payment, compensation cannot be considered "just" for the property owner is made to
suffer the consequence of being immediately deprived of his land while being made to wait for a
decade or more before actually receiving the amount necessary to cope with his loss [Cosculluela
v. The Honorable Court of Appeals, G.R. No. 77765, August 15, 1988, 164 SCRA 393,
400. See also Provincial Government of Sorsogon v. Vda. de Villaroya, G.R. No. 64037, August 27,
1987, 153 SCRA 291].
The State's power of eminent domain should be exercised within the bounds of fair play and justice. In the case at
bar, considering that valuable property has been taken, the compensation to be paid fixed and the municipality is in
full possession and utilizing the property for public purpose, for three (3) years, the Court finds that the municipality
has had more than reasonable time to pay full compensation.
WHEREFORE, the Court Resolved to ORDER petitioner Municipality of Makati to immediately pay Philippine Savings
Bank, Inc. and private respondent the amount of P4,953,506.45. Petitioner is hereby required to submit to this Court
a report of its compliance with the foregoing order within a non-extendible period of SIXTY (60) DAYS from the date
of receipt of this resolution.
The order of respondent RTC judge dated December 21, 1988, which was rendered in Civil Case No. 13699, is SET
ASIDE and the temporary restraining order issued by the Court on November 20, 1989 is MADE PERMANENT.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

3. CIR vs. Algue, Inc et al, L-28896, 17 Feb 1988, 158 SCRA 9
FIRST DIVISION
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other
hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The
corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal
Revenue was made on time and in accordance with law.
We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from the petitioner assessing it in the total amount of
P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter

of protest or request for reconsideration, which letter was stamp received on the same day in the office of
the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the
pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara
produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the
warrant. 4 On April 7, 1965, Atty. Guevara was finally 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. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the
Commissioner of Internal Revenue with the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may
be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of

distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9being "tantamount to an outright denial thereof and makes the said request deemed
rejected." 10 But there is a special circumstance in the case at bar that prevents application of this
accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its
letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued;
indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a
copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant
was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and

was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when
it was filed, the reglementary period which started on the date the assessment was received, viz., January
14, 1965. The period started running again only on April 7, 1965, when the private respondent was
definitely informed of the implied rejection of the said protest and the warrant was finally served on it.
Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been
consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with
Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered.
The payment was 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.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal
holding company income 12 but later conformed to the decision of the respondent court rejecting this

assertion.13 In fact, as the said court found, the amount was earned through the joint efforts of the persons
among whom it was distributed It has been established that the Philippine Sugar Estate Development
Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil
manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel
Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment

Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale,
Algue received as agent a commission of P126,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals. 16
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. 17 The Court of Tax Appeals also found, after examining the evidence,

that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of the same family
in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check
or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an
attempt to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara,
and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically
and in different amounts as each payee's need arose. 19 It should be remembered that this was a family

corporation where strict business procedures were not applied and immediate issuance of receipts was
not required. Even so, 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. 20 Admittedly,
everything seemed to be informal. This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission
paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 21After 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. This finding of the respondent court is in
accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions
(a) Expenses:
(1) In general.--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; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business may be included a reasonable allowance for
salaries or other compensation for personal services actually rendered. The test of deductibility in
the case of compensation payments is whether they are reasonable and are, in fact, payments
purely for service. This test and deductibility in the case of compensation payments is whether they
are reasonable and are, in fact, payments purely for service. This test and its practical application
may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, is
not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of
whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or bear a close relationship to the stockholdings
of the officers of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private
respondent 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. This was no mean feat and should be, as it was, sufficiently
recompensed.
It is said that 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. This symbiotic relationship
is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in
the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes
that it 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. For all the awesome power of the tax collector, he may
still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the
petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
Teehankee, C.J., Narvasa, Gancayco and Grio-Aquino, JJ., concur.

Footnotes
1 Rollo, pp. 28-29.
2 Ibid., pp. 29; 42.
3 Id., p. 29.

4 Respondent's Brief, p. 11.

5 Id., p. 29.
6 Id,
7 Sec. 11.
8 Phil. Planters Investment Co. Inc. v. Comm. of Internal Revenue, CTA Case No. 1266, Nov. 11,
1962; Rollo, p. 30.
9 Vicente Hilado v. Comm. of Internal Revenue, CTA Case No. 1266, Oct. 22,1962; Rollo, p. 30.
10 Ibid.
11 Penned by Associate Judge Estanislao R. Alvarez, concurred by Presiding Judge Ramon M.
Umali and Associate Judge Ramon L. Avancea.
12 Rollo, p. 33.
13 Ibid., pp. 7-8; Petition, pp. 2-3. 11 Id., p. 37.
15 Id.
16 Id.
17 Id.
18 Id.
19 Respondents Brief, pp. 25-32.
20 Ibid., pp. 30-32.
21 Rollo, p. 37.
22 Now Sec. 30, (a)(1)-(A.), National Internal Revenue Code.
23 Respondent's Brief, p. 35.

4. BPI Family Savings Bank v. CA et al, 330 SCRA 507, 12 Apr 2000
THIRD DIVISION
G.R. No. 122480

April 12, 2000

BPI-FAMILY SAVINGS BANK, Inc., petitioner,

vs.

COURT OF APPEALS, COURT OF TAX APPEALS and the COMMISSIONER OF INTERNAL

REVENUE,respondents.

PANGANIBAN, J.:
If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same
standard against itself in refunding excess payments. When it is undisputed that a taxpayer is entitled to a refund, the
State should not invoke technicalities to keep money not belonging to it. No one, not even the State, should enrich
oneself at the expense of another.
The Case
Before us is a Petition for Review assailing the March 31, 1995 Decision of the Court of Appeals1 (CA) in CA-GR SP
No. 34240, which affirmed the December 24, 1993 Decision2 of the Court of Tax Appeals (CTA). The CA disposed as
follows:
WHEREFORE, foregoing premises considered, the petition is hereby DISMISSED for lack of merit.3
On the other hand, the dispositive portion of the CTA Decision affirmed by the CA reads as follows:
WHEREFORE, in [view of] all the foregoing, Petitioner's claim for refund is hereby DENIED and this Petition
for Review is DISMISSED for lack of merit.4
Also assailed is the November 8, 1995 CA Resolution5 denying reconsideration.
The Facts
The facts of this case were summarized by the CA in this wise:
This case involves a claim for tax refund in the amount of P112,491.00 representing petitioner's tax withheld
for the year 1989.
In its Corporate Annual Income Tax Return for the year 1989, the following items are reflected:
Income P1,017,931,831.00
Deductions P1,026,218,791.00
Net Income (Loss) (P8,286,960.00)
Taxable Income (Loss) (P8,286,960.00)
Less:
1988 Tax Credit P185,001.00
1989 Tax Credit P112,491.00
TOTAL AMOUNT P297,492.00
REFUNDABLE

It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable amount
of P297,492 inclusive of the P112,491.00 being claimed as tax refund in the present case.
However, petitioner declared in the same 1989 Income Tax Return that the said total refundable
amount of P297,492.00 will be applied as tax credit to the succeeding taxable year.
On October 11, 1990, petitioner filed a written claim for refund in the amount of P112,491.00 with
the respondent Commissioner of Internal Revenue alleging that it did not apply the 1989 refundable
amount of P297,492.00 (including P112,491.00) to its 1990 Annual Income Tax Return or other tax
liabilities due to the alleged business losses it incurred for the same year.
Without waiting for respondent Commissioner of Internal Revenue to act on the claim for refund,
petitioner filed a petition for review with respondent Court of Tax Appeals, seeking the refund of the
amount of P112,491.00.
The respondent Court of Tax Appeals dismissed petitioner's petition on the ground that petitioner
failed to present as evidence its corporate Annual Income Tax Return for 1990 to establish the fact
that petitioner had not yet credited the amount of P297,492.00 (inclusive of the amount
P112,491.00 which is the subject of the present controversy) to its 1990 income tax liability.
Petitioner filed a motion for reconsideration, however, the same was denied by respondent court in
its Resolution dated May 6, 1994.6
As earlier noted, the CA affirmed the CTA. Hence, this Petition.7
Ruling of the Court of Appeals
In affirming the CTA, the Court of Appeals ruled as follows:
It is incumbent upon the petitioner to show proof that it has not credited to its 1990 Annual income
Tax Return, the amount of P297,492.00 (including P112,491.00), so as to refute its previous
declaration in the 1989 Income Tax Return that the said amount will be applied as a tax credit in the
succeeding year of 1990. Having failed to submit such requirement, there is no basis to grant the
claim for refund. . . .
Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity claiming the
exemption. In other words, the burden of proof rests upon the taxpayer to establish by sufficient
and competent evidence its entitlement to the claim for refund.8
Issue
In their Memorandum, respondents identify the issue in this wise:
The sole issue to be resolved is whether or not petitioner is entitled to the refund of P112,491.90,
representing excess creditable withholding tax paid for the taxable year 1989.9
The Court's Ruling
The Petition is meritorious.
Main Issue:
Petitioner Entitled to Refund
It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus entitled to a refund
amounting to P112,491. Pursuant to Section 69 10 of the 1986 Tax Code which states that a corporation entitled to a

refund may opt either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable year, petitioner
indicated in its 1989 Income Tax Return that it would apply the said amount as a tax credit for the succeeding taxable
year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue (BIR) that it would claim the amount as
a tax refund, instead of applying it as a tax credit. When no action from the BIR was forthcoming, petitioner filed its
claim with the Court of Tax Appeals.
The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in its 1989 Income Tax
Return that it would apply the excess withholding tax as a tax credit for the following year, the Tax Court held that
petitioner was presumed to have done so. The CTA and the CA ruled that petitioner failed to overcome this
presumption because it did not present its 1990 Return, which would have shown that the amount in dispute was not
applied as a tax credit. Hence, the CA concluded that petitioner was not entitled to a tax refund.
We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court are binding on this Court.
This rule, however, does not apply where, inter alia, the judgment is premised on a misapprehension of facts, or when
the appellate court failed to notice certain relevant facts which if considered would justify a different conclusion. 11 This
case is one such exception.
In the first place, petitioner presented evidence to prove its claim that it did not apply the amount as a tax credit.
During the trial before the CTA, Ms. Yolanda Esmundo, the manager of petitioner's accounting department, testified to
this fact. It likewise presented its claim for refund and a certification issued by Mr. Gil Lopez, petitioner's vicepresident, stating that the amount of P112,491 "has not been and/or will not be automatically credited/offset against
any succeeding quarters' income tax liabilities for the rest of the calendar year ending December 31, 1990." Also
presented were the quarterly returns for the first two quarters of 1990.
The Bureau of Internal Revenue, for its part, failed to controvert petitioner's claim. In fact, it presented no evidence at
all. Because it ought to know the tax records of all taxpayers, the CIR could have easily disproved petitioner's claim.
To repeat, it did not do so.
More important, a copy of the Final Adjustment Return for 1990 was attached to petitioner's Motion for
Reconsideration filed before the CTA. 12 A final adjustment return shows whether a corporation incurred a loss or
gained a profit during the taxable year. In this case, that Return clearly showed that petitioner incurred P52,480,173
as net loss in 1990. Clearly, it could not have applied the amount in dispute as a tax credit.
Again, the BIR did not controvert the veracity of the said return. It did not even file an opposition to petitioner's Motion
and the 1990 Final Adjustment Return attached thereto. In denying the Motion for Reconsideration, however, the CTA
ignored the said Return. In the same vein, the CA did not pass upon that significant document.
True, strict procedural rules generally frown upon the submission of the Return after the trial. The law creating the
Court of Tax Appeals, however, specifically provides that proceedings before it "shall not be governed strictly by the
technical rules of evidence." 13 The paramount consideration remains the ascertainment of truth. Verily, the quest for
orderly presentation of issues is not an absolute. It should not bar courts from considering undisputed facts to arrive
at a just determination of a controversy.
1wphi1

In the present case, the Return attached to the Motion for Reconsideration clearly showed that petitioner suffered a
net loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied the amount as a tax
credit. In failing to consider the said Return, as well as the other documentary evidence presented during the trial, the
appellate court committed a reversible error.
It should be stressed that the rationale of the rules of procedure is to secure a just determination of every action.
They are tools designed to facilitate the attainment of justice. 14 But there can be no just determination of the present
action if we ignore, on grounds of strict technicality, the Return submitted before the CTA and even before this
Court. 15 To repeat, the undisputed fact is that petitioner suffered a net loss in 1990; accordingly, it incurred no tax
liability to which the tax credit could be applied. Consequently, there is no reason for the BIR and this Court to
withhold the tax refund which rightfully belongs to the petitioner.
Public respondents maintain that what was attached to petitioner's Motion for Reconsideration was not the final
adjustment Return, but petitioner's first two quarterly returns for 1990. 16 This allegation is wrong. An examination of
the records shows that the 1990 Final Adjustment Return was attached to the Motion for Reconsideration. On the
other hand, the two quarterly returns for 1990 mentioned by respondent were in fact attached to the Petition for

Review filed before the CTA. Indeed, to rebut respondents' specific contention, petitioner submitted before us its
Surrejoinder, to which was attached the Motion for Reconsideration and Exhibit "A" thereof, the Final Adjustment
Return for 1990. 17
CTA Case No. 4897
Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision rendered by the Tax
Court in CTA Case No. 4897, involving its claim for refund for the year 1990. In that case, the Tax Court held that
"petitioner suffered a net loss for the taxable year 1990 . . . ." 18 Respondent, however, urges this Court not to take
judicial notice of the said case. 19
As a rule, "courts are not authorized to take judicial notice of the contents of the records of other cases, even when
such cases have been tried or are pending in the same court, and notwithstanding the fact that both cases may have
been heard or are actually pending before the same judge." 20
Be that as it may, Section 2, Rule 129 provides that courts may take judicial notice of matters ought to be known to
judges because of their judicial functions. In this case, the Court notes that a copy of the Decision in CTA Case No.
4897 was attached to the Petition for Review filed before this Court. Significantly, respondents do not claim at all that
the said Decision was fraudulent or nonexistent. Indeed, they do not even dispute the contents of the said Decision,
claiming merely that the Court cannot take judicial notice thereof.
To our mind, respondents' reasoning underscores the weakness of their case. For if they had really believed that
petitioner is not entitled to a tax refund, they could have easily proved that it did not suffer any loss in 1990. Indeed, it
is noteworthy that respondents opted not to assail the fact appearing therein that petitioner suffered a net loss in
1990 in the same way that it refused to controvert the same fact established by petitioner's other documentary
exhibits.
In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioner's case. It is merely one more bit of
information showing the stark truth: petitioner did not use its 1989 refund to pay its taxes for 1990.
Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be construedstrictissimi
juris against the claimant. Under the facts of this case, we hold that petitioner has established its claim. Petitioner
may have failed to strictly comply with the rules of procedure; it may have even been negligent. These circumstances,
however, should not compel the Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in
1990, and that it could not have applied the amount claimed as tax credits.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted,
should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense
of its law-abiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so
must it apply the same standard against itself in refunding excess payments of such taxes. Indeed, the State must
lead by its own example of honor, dignity and uprightness.
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and Resolution of the Court of Appeals
REVERSED and SET ASIDE. The Commissioner of Internal Revenue is ordered to refund to petitioner the amount of
P112,491 as excess creditable taxes paid in 1989. No costs.
1wphi1.nt

SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., abroad on official business.
Footnotes
Fourth Division, composed of JJ. Quirino D. Abad Santos Jr. (ponente), Gloria C. Paras (chairman) and
Delilah Vidallon-Magtolis (member).
1

Written by Associate Judge Ramon O. De Veyra, with the concurrence of Presiding Judge Ernesto A.
Acosta and Associate Judge Manuel K. Gruba. The case was docketed as CTA Case No. 4694.
2

Rollo, p. 30.

Rollo, p. 38.

Rollo, p. 32.

Rollo, pp. 27-28.

The case was deemed submitted for resolution on October 18, 1999, upon receipt by this Court of
respondents' Memorandum, which was signed by Assistant Solicitor General Mariano M. Martinez and
Associate Solicitor Olivia V. Non. Petitioner's Memorandum, which was signed by Atty. Sabino B. Padilla IV
of the Padilla Law Office, was received earlier on August 19, 1999. This case, however, was assigned to the
undersigned ponente for the writing of the Court's Decision during the deliberations of the Court on April 5,
2000 when his erstwhile Dissent was voted as the majority opinion. Subsequently, the
original ponentechanged his mind and now agrees with this Decision.
7

Rollo, p. 29.

Respondents' Memorandum, p. 5.

Sec. 69. Final Adjustment Return. Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not equal to the total due on the entire
taxable net income of that year the corporation shall either:
10

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid,
the refundable amount shown on its final adjustment return may be credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.
National Steel Corporation v. CA, 283 SCRA 45, December 12, 1997; Fuentes Jr. v. Court of Appeals, 253
SCRA 430, 435, February 9, 1996.
11

Exhibit "A," Motion for Reconsideration filed before the CTA. This was attached to Petitioner's Surrejoinder
(Rollo, p. 160).
12

13

Sec. 8, Republic Act No. 1125.

14

See De Guzman v. Sandiganbayan, 256 SCRA 171, April 11, 1996.

15

See Annex "A," Petitioner's Surrejoinder; rollo, p. 160.

16

Respondent's Memorandum, p. 7.

17

Rollo, p. 160.

18

Decision in CTA Case No. 4897, p. 7; rollo, p. 59.

19

Respondents' Memorandum, pp. 9-10.

20

Tabuena v. CA, 196 SCRA 650, May 6, 1991, per Cruz, J.

5. CIR vs. Tokyo Shipping Co, 244 SCRA 332, 26 May 1995
SECOND DIVISION

G.R. No. L-68252 May 26, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF TAX
APPEALS, respondents.

PUNO, J.:
For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit for
amounts representing pre-payment of income and common carrier's taxes under the National Internal Revenue
Code, section 24 (b) (2), as amended. 1
Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies,
Incorporated. It owns and operates tramper vessel M/V Gardenia. In December 1980, NASUTRA 2 chartered M/V

Gardenia to load 16,500 metric tons of raw sugar in the Philippines. 3 On December 23, 1980, Mr.
Edilberto Lising, the operations supervisor of Soriamont Agency, 4 paid the required income and common
carrier's taxes in the respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE
PESOS and SEVENTY-FIVE CENTAVOS (P59,523.75) and FORTY-SEVEN THOUSAND SIX HUNDRED
NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED
FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) based on the expected gross
receipts of the vessel. 5 Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for
loading. On January 10, 1981, NASUTRA and private respondent's agent mutually agreed to have the
vessel sail for Japan without any cargo.
Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from the
charter agreement, private respondent instituted a claim for tax credit or refund of the sum ONE HUNDRED SEVEN
THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before
petitioner Commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim, hence,
on May 14, 1981, private respondent filed a petition for review 6 before public respondent Court of Tax Appeals.
Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that taxes are presumed
to have been collected in accordance with law; that in an action for refund, the burden of proof is upon the taxpayer to
show that taxes are erroneously or illegally collected, and the taxpayer's failure to sustain said burden is fatal to the
action for refund; and that claims for refund are construed strictly against tax claimants. 7
After trial, respondent tax court decided in favor of the private respondent. It held:

It has been shown in this case that 1) the petitioner has complied with the mentioned statutory
requirement by having filed a written claim for refund within the two-year period from date of
payment; 2) the respondent has not issued any deficiency assessment nor disputed the
correctness of the tax returns and the corresponding amounts of prepaid income and percentage
taxes; and 3) the chartered vessel sailed out of the Philippine port with absolutely no cargo laden
on board as cleared and certified by the Customs authorities; nonetheless 4) respondent's
apparent bit of reluctance in validating the legal merit of the claim, by and large, is tacked upon the
"examiner who is investigating petitioner's claim for refund which is the subject matter of this case
has not yet submitted his report. Whether or not respondent will present his evidence will depend
on the said report of the examiner." (Respondent's Manifestation and Motion dated September 7,
1982). Be that as it may the case was submitted for decision by respondent on the basis of the
pleadings and records and by petitioner on the evidence presented by counsel sans the respective
memorandum.
An examination of the records satisfies us that the case presents no dispute as to relatively simple
material facts. The circumstances obtaining amply justify petitioner's righteous indignation to a
more expeditious action. Respondent has offered no reason nor made effort to submit any
controverting documents to bash that patina of legitimacy over the claim. But as might well be,
towards the end of some two and a half years of seeming impotent anguish over the pendency, the
respondent Commissioner of Internal Revenue would furnish the satisfaction of ultimate solution by
manifesting that "it is now his turn to present evidence, however, the Appellate Division of the BIR
has already recommended the approval of petitioner's claim for refund subject matter of this
petition. The examiner who examined this case has also recommended the refund of petitioner's
claim. Without prejudice to withdrawing this case after the final approval of petitioner's claim, the
Court ordered the resetting to September 7, 1983." (Minutes of June 9, 1983 Session of the Court)
We need not fashion any further issue into an apparently settled legal situation as far be it from a
comedy of errors it would be too much of a stretch to hold and deny the refund of the amount of
prepaid income and common carrier's taxes for which petitioner could no longer be made
accountable.
On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence, this petition for review
on certiorari.
Petitioner now contends: (1) private respondent has the burden of proof to support its claim of refund; (2) it failed to
prove that it did not realize any receipt from its charter agreement; and (3) it suppressed evidence when it did not
present its charter agreement.
We find no merit in the petition.
There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal Revenue Code which at
that time provides as follows:
A corporation organized, authorized, or existing under the laws of any foreign country, engaged in
trade or business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income derived in the preceding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of two and one-half per
cent (2 1/2%) on their gross Philippine billings: "Gross Philippine Billings" include gross revenue
realized from uplifts anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger, excess baggage or mail,
provided the cargo or mail originates from the Philippines. The gross revenue realized from the said
cargo or mail include the gross freight charge up to final destination. Gross revenue from chartered
flights originating from the Philippines shall likewise form part of "Gross Philippine Billings"
regardless of the place or payment of the passage documents . . . . .

Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable for taxes
depending on the amount of income it derives from sources within the Philippines. Thus, before such a tax liability
can be enforced the taxpayer must be shown to have earned income sourced from the Philippines.
We agree with petitioner that a claim for refund is in the nature of a claim for exemption 8 and should be construed

in strictissimi juris against the taxpayer. 9 Likewise, there can be no disagreement with petitioner's stance
that private respondent has the burden of proof to establish the factual basis of its claim for tax refund.
The pivotal issue involves a question of fact whether or not the private respondent was able to prove that it derived
no receipts from its charter agreement, and hence is entitled to a refund of the taxes it pre-paid to the government.
The respondent court held that sufficient evidence has been adduced by the private respondent proving that it
derived no receipt from its charter agreement with NASUTRA. This finding of fact rests on a rational basis, and hence
must be sustained. Exhibits "E", "F," and "G" positively show that the tramper vessel M/V "Gardenia" arrived in Iloilo
on January 10, 1981 but found no raw sugar to load and returned to Japan without any cargo laden on board. Exhibit
"E" is the Clearance Vessel to a Foreign Port issued by the District Collector of Customs, Port of Iloilo while Exhibit
"F" is the Certification by the Officer-in-Charge, Export Division of the Bureau of Customs Iloilo. The correctness of
the contents of these documents regularly issued by officials of the Bureau of Customs cannot be doubted as indeed,
they have not been contested by the petitioner. The records also reveal that in the course of the proceedings in the
court a quo, petitioner hedged and hawed when its turn came to present evidence. At one point, its counsel
manifested that the BIR examiner and the appellate division of the BIR have both recommended the approval of
private respondent's claim for refund. The same counsel even represented that the government would withdraw its
opposition to the petition after final approval of private respondents' claim. The case dragged on but petitioner never
withdrew its opposition to the petition even if it did not present evidence at all. The insincerity of petitioner's stance
drew the sharp rebuke of respondent court in its Decision and for good reason. Taxpayers owe honesty to
government just as government owes fairness to taxpayers.
In its last effort to retain the money erroneously prepaid by the private respondent, petitioner contends that private
respondent suppressed evidence when it did not present its charter agreement with NASUTRA. The contention
cannot succeed. It presupposes without any basis that the charter agreement is prejudicial evidence against the
private respondent. 10 Allegedly, it will show that private respondent earned a charter fee with or without

transporting its supposed cargo from Iloilo to Japan. The allegation simply remained an allegation and no
court of justice will regard it as truth. Moreover, the charter agreement could have been presented by
petitioner itself thru the proper use of asubpoena duces tecum. It never did either because of neglect or
because it knew it would be of no help to bolster its position. 11 For whatever reason, the petitioner cannot
take to task the private respondent for not presenting what it mistakenly calls "suppressed evidence."
We cannot but bewail the unyielding stance taken by the government in refusing to refund the sum of ONE
HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS AND SEVENTY FIVE CENTAVOS
(P107,142.75) erroneously prepaid by private respondent. The tax was paid way back in 1980 and despite the clear
showing that it was erroneously paid, the government succeeded in delaying its refund for fifteen (15) years. After
fifteen (15) long years and the expenses of litigation, the money that will be finally refunded to the private respondent
is just worth a damaged nickel. This is not, however, the kind of success the government, especially the BIR, needs
to increase its collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that BIR
should refund without any unreasonable delay what it has erroneously collected. Our ruling inRoxas v. Court of Tax
Appeals 12 is apropos to recall:
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.

IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated September 15, 1983, is
AFFIRMED in toto. No costs.
SO ORDERED.
Narvasa, C.J., Regalado and Mendoza, JJ., concur.

Footnotes
1 This appeal was brought pursuant to Republic Act No. 1125 (June 16, 1954), as amended. Under
Batas Blg. 129, decisions of the Court of Tax Appeals are appealable to the Court of Appeals,
amending the procedure prescribed by the Act. The change has been held to be merely procedural.
(First Lepanto Ceramics, Inc. vs. Court of Appeals, G.R. No. 110571, March 10, 1994, 231 SCRA
30).
2 TSN of May 10, 1982, p. 7.
3 Annex "C."
4 TSN of May 10, 1982, p. 3.
5 Annex "A."
6 Docketed C.T.A. Case No. 3260.
7 Petition, pp. 6-9; Rollo, pp. 18-21.
8 Resins, Inc. v. Auditor General, L-17888, October 29, 1968, 25 SCRA 754.
9 Province of Tarlac v. Alcantara, G.R. No. 65230, December 23, 1992, 216 SCRA 790.
10 See Nicolas v. Nicolas, 52 Phil. 265 [1928].
11 See Ang Seng Quiem v. Te Chico, 7 Phil 541 [1907].
12 No. L-25043, April 26, 1968,23 SCRA 276.

6. CIR vs. Mitsubishi Corp, 181 SCRA 214, Jan 22, 1990
ECOND DIVISION

G.R. No. L-54908 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION
and the COURT OF TAX APPEALS, respondents.
G.R. No. 80041 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION
and the COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for respondents.

REGALADO, J.:
These cases, involving the same issue being contested by the same parties and having originated from the same
factual antecedents generating the claims for tax credit of private respondents, the same were consolidated by
resolution of this Court dated May 31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation (hereinafter,
Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese
corporation licensed to engage in business in the Philippines, for purposes of the projected expansion of the
productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to
Atlas 'in the amount of $20,000,000.00, United States currency, for the installation of a new concentrator for copper
production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a
period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used for the purchase of
the concentrator machinery from Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for
purposes of its obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of
4,320,000,000.00, at about the same time as the approval of its loan for 2,880,000,000.00 from a consortium of
Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United States currency at the then
prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval of the loan by
Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and as a
consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of
loan by September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter
totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of
P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue
Code, as amended by Presidential Decree No. 131, and duly remitted to the Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be
applied against their existing and future tax liabilities. Parenthetically, it was later noted by respondent Court of Tax
Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in the
claim for tax credit in favor of
Atlas. 4

The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a petition for
review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was grounded on the claim

that Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, controlled and
financed by the Japanese Government. Such governmental status of Eximbank, if it may be so called, is
the basis for private repondents' claim for exemption from paying the tax on the interest payments on the
loan as earlier stated. It was further claimed that the interest payments on the loan from the consortium of
Japanese banks were likewise exempt because said loan supposedly came from or were financed by
Eximbank. The provision of the National Internal Revenue Code relied upon is Section 29 (b) (7)
(A), 6 which excludes from gross income:
(A) Income received from their investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign
governments, (2) financing institutions owned, controlled, or enjoying refinancing from them, and
(3) international or regional financing institutions established by governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later reset upon
manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was still being reviewed by
the Appellate Division of the Bureau of Internal Revenue. The records show that on November 16, 1976, the said
division recommended to petitioner the approval of private respondent's claim. However, before action could be taken
thereon, respondent court scheduled the case for hearing on September 30, 1977, during which trial private
respondents presented their evidence while petitioner submitted his case on the basis of the records of the Bureau of
Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in favor of Atlas
in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the material averments of
private respondents when he supposedly prayed "for judgment on the pleadings without off-spring proof as to the
truth of his allegations." 8 Furthermore, the court declared that all papers and documents pertaining to the

loan of 4,320,000,000.00 obtained by Mitsubishi from Eximbank show that this was the same amount
given to Atlas. It also observed that the money for the loans from the consortium of private Japanese
banks in the sum of 2,880,000,000.00 "originated" from Eximbank. From these, respondent court
concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or
conduit through which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas
Consolidated Mining & Development Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to this Court,
docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount of
P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and remitted to the
Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as CTA
Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private respondents dated
November 12, 1979, denied said claim for tax credit for lack of factual or legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment ordering
the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed on March 10, 1981,
was denied by respondent court in a resolution dated September 7, 1987. A notice of appeal was filed on September
22, 1987 by petitioner with respondent court and a petition for review was filed with this Court on December 19, 1987.
Said later case is now before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.

The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas by
Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and, therefore,
exempt from withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is a mere conduit of
Eximbank which will then be considered as the creditor whose investments in the Philippines on loans are exempt
from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner should be
deemed to have admitted the allegations of the private respondents when it submitted the case on the basis of the
pleadings and records of the bureau. There is nothing to indicate such admission on the part of petitioner nor can we
accept respondent court's pronouncement that petitioner did not offer to prove the truth of its allegations. The records
of the Bureau of Internal Revenue relevant to the case were duly submitted and admitted as petitioner's supporting
evidence. Additionally, a hearing was conducted, with presentation of evidence, and the findings of respondent court
were based not only on the pleadings but on the evidence adduced by the parties. There could, therefore, not have
been a judgment on the pleadings, with the theorized admissions imputed to petitioner, as mistakenly held by
respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest respect and
can only be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross
error or abuse on the part of the tax court. 11 Thus, ordinarily, we could give due consideration to the holding of

respondent court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and
proven in these cases, however, warrant a departure from said general rule since we are convinced that
there is a misapprehension of facts on the part of the tax court to the extent that its conclusions are
speculative in nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to
Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas as
the seller of the copper concentrates. From the categorical language used in the document, one prestation was in
consideration of the other. The specific terms and the reciprocal nature of their obligations make it implausible, if not
vacuous to give credit to the cavalier assertion that Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its loan
application with the former was that the amount being procured would be used as a loan to and in consideration for
importing copper concentrates from Atlas. 12 Such an innocuous statement of purpose could not have been

intended for, nor could it legally constitute, a contract of agency. If that had been the purpose as
respondent court believes, said corporations would have specifically so stated, especially considering
their experience and expertise in financial transactions, not to speak of the amount involved and its
purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the following
arguments of petitioner:
The nature of the above contract shows that the same is not just a simple contract of loan. It is not
a mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and
MITSUBISHI where the latter shall provide the funds in the installation of a new concentrator at the
former's Toledo mines in Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI,
for a term of 15 years, the entire copper concentrate that will be produced by the installed
concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was
the consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in order to
fulfill its part of the contract, had to obtain funds. Hence, it had to secure a loan or loans from other
sources. And from what sources, it is immaterial as far as ATLAS in concerned. In this case,

MITSUBISHI obtained the $20 million from the EXIMBANK, of Japan and the consortium of
Japanese banks financed through the EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a
private entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK of
Japan. While the loans were secured by MITSUBISHI primarily "as a loan to and in consideration
for importing copper concentrates from ATLAS," the fact remains that it was a loan by EXIMBANK
of Japan to MITSUBISHI and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate
contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter contract, it is not
EXIMBANK, that was intended to be benefited. It is MITSUBISHI which stood to profit. Besides, the
Loan and Sales Contract cannot be any clearer. The only signatories to the same were
MITSUBISHI and ATLAS. Nowhere in the contract can it be inferred that MITSUBISHI acted for and
in behalf of EXIMBANK, of Japan nor of any entity, private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a
contract of loan is completed, the money ceases to be the property of the former owner and
becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of Japan,
said amount ceased to be the property of the bank and became the property of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS,
the former being the owner of the $20 million upon completion of its loan contract with EXIMBANK
of Japan.
The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different from
the interest income paid by MITSUBISHI to EXIMBANK, of Japan. What was the subject of the
15% withholding tax is not the interest income paid by MITSUBISHI to EXIMBANK, but the interest
income earned by MITSUBISHI from the loan to ATLAS. . . . 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not appear
to be suppletory or collateral to another contract and is, therefore, not to be distorted by other considerations aliunde.
The application for the loan was approved on May 20, 1970, or more than a month after the contract between
Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the contract of loan with Eximbank,
Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas,
but all that this proves is the justification for the loan as represented by Mitsubishi, a standard banking practice for
evaluating the prospects of due repayment. There is nothing wrong with such stipulation as the parties in a contract
are free to agree on such lawful terms and conditions as they see fit. Limiting the disbursement of the amount
borrowed to a certain person or to a certain purpose is not unusual, especially in the case of Eximbank which, aside
from protecting its financial exposure, must see to it that the same are in line with the provisions and objectives of its
charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from making loans
except to Japanese individuals and corporations. We are not impressed. Not only is there a failure to establish such
submission by adequate evidence but it posits the unfair and unexplained imputation that, for reasons subject only of
surmise, said financing institution would deliberately circumvent its own charter to accommodate an alien borrower
through a manipulated subterfuge, but with it as a principal and the real obligee.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the truth
thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit. Furthermore, the

remittance of the interest payments may also be logically viewed as an arrangement in paying Mitsubishi's obligation
to Eximbank. Whatever arrangement was agreed upon by Eximbank and Mitsubishi as to the manner or procedure
for the payment of the latter's obligation is their own concern. It should also be noted that Eximbank's loan to
Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis contract with Atlas merely states that the
"interest on the amount of the loan shall be the actual cost beginning from and including other dates of releases
against loan." 14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption from
tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule
and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact
covered by the exemption so claimed, which onus petitioners have failed to discharge. Significantly, private
respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to
exemption and which should indispensably be the party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic
analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution of
much needed funds. Nor can we close this discussion without taking cognizance of petitioner's warning, of pervasive
relevance at this time, that while international comity is invoked in this case on the nebulous representation that the
funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the
floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a Philippine corporation enter into
a contract for loans or other domestic securities with private foreign entities, which in turn will negotiate independently
with their governments, could be availed of to take advantage of the tax exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18, 1980
and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.

Footnotes
1 Rollo, G.R. No. 54908, 21; G.R. No. 80041, 14.
2 Ibid., G.R. No. 80041, 15, 49.
3 Ibid., G.R. No. 54908, 45-46.
4 Ibid., id., 33-39,
5 Ibid., id., 48.
6 Now, Sec. 28 (b) (8)(A).
7 Rollo, G.R. No. 54908, 41-42.
8 Ibid., id., 42.
9 Ibid., id., 51-52.

10 Ibid., G.R. No. 80041, 17.

11 Nasiad, et al. vs. Court of Tax Appeals, 61 SCRA 238 (1974); Raymundo vs. de Joya, et al., 101
SCRA 495 (1980); Commissioner of Internal Revenue vs. Arnoldus Carpentry Shop, Inc., et al., 159
SCRA 199 (1988).
12 Rollo, G.R. 80041, 15.
13 Ibid., G.R. No. 54908, 23-25.
14 Ibid., G.R. No. 80041, 15, 27.

7. Phil Bank of Communications v CIR et al, 302 SCRA 241, 28 Jan 1999
SECOND DIVISION

G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS,respondent.

QUISUMBING, J.:
This petition for review assails the Resolution 1 of the Court of Appeals dated September 22,

1993 affirming the Decision 2 and a Resolution 3 of the Court Of Tax Appeals which denied the claims of
the petitioner for tax refund and tax credits, and disposing as follows:
IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due course. The
Decision of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993,
are hereby AFFIRMED in toto.
SO ORDERED. 4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the
amount of P5,299,749.95 is hereby denied for having been filed beyond the reglementary period.
The 1986 claim for refund amounting to P234,077.69 is likewise denied since petitioner has opted
and in all likelihood automatically credited the same to the succeeding year. The petition for review
is dismissed for lack of merit.
SO ORDERED. 5
The facts on record show the antecedent circumstances pertinent to this case.

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under
Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and
paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos and
accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for
P3,401,701.00 and P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the yearended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax
payable for the year.
But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted
to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of
P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from
property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for
Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No.
4309 entitled: "Philippine Bank of Communications vs. Commissioner of Internal Revenue."
The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for 1985 and 1986,
filed before the Court of Tax Appeals, are as follows:
1985 1986

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax.
Payments Made 5,016,954.00
Tax Withheld at Source 282,795.50 234,077.69

Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five
centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a
tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year
reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was
likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the
succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was denied due
course for lack of merit. 6
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals.
However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1993.
Hence this petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom which relied in good faith on the formal
assurances of BIR in RMC No. 7-85 and did not immediately file with the CTA a
petition for review asking for the refund/tax credit of its 1985-86 excess quarterly
income tax payments can be prejudiced by the subsequent BIR rejection,
applied retroactivity, of its assurances in RMC No. 7-85 that the prescriptive
period for the refund/tax credit of excess quarterly income tax payments is not
two years but ten (10). 7

II. Whether the Court of Appeals seriously erred in affirming the CTA
decision which denied PBCom's claim for the refund of P234,077.69
income tax overpaid in 1986 on the mere speculation, without proof, that
there were taxes due in 1987 and that PBCom availed of tax-crediting
that year. 8
Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or
tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive
period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability
of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid income taxes
are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax
credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The
pertinent portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF
EXCESS CORPORATE INCOME TAX RESULTING FROM
THE FILING OF THE FINAL ADJUSTMENT RETURN.
TO: All Internal Revenue Officers and Others Concerned.
Sec. 85 And 86 Of the National Internal Revenue Code provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which
provide;
xxx xxx xxx
It has been observed, however, that because of the excess tax payments, corporations file claims
for recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from
the date of payment, in accordance with sections 292 and 295 of the National Internal Revenue
Code. It is obvious that the filing of the case in court is to preserve the judicial right of the
corporation to claim the refund or tax credit.

It should he noted, however, that this is not a case of erroneously or illegally paid tax under the
provisions of Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the refund of the overpaid
income tax or claim for automatic tax credit. To insure prompt action on corporate annual income
tax returns showing refundable amounts arising from overpaid quarterly income taxes, this Office
has promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the
procedure in processing said returns. Under these procedures, the returns are merely pre-audited
which consist mainly of checking mathematical accuracy of the figures of the return. After which,
the refund or tax credit is granted, and, this procedure was adopted to facilitate immediate action
on cases like this.
In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in
order to preserve the right to claim refund or tax credit the two year period. As already stated,
actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax
returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income tax
paid under the provisions of Section 86 of the Tax Code within 10 years from the date of payment
considering that it is an obligation created by law (Article 1144 of the Civil Code). 9 (Emphasis

supplied.)
Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would
result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax Appeals 10petitioner

claims that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive
effect if it would be prejudicial to taxpayers, In ABS-CBN case, the Court held that the government is
precluded from adopting a position inconsistent with one previously taken where injustice would result
therefrom or where there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows:
Sec. 246 Non-retroactivity of rulings Any revocation, modification or reversal of any of the rules
and regulations promulgated in accordance with the preceding section or any of the rulings or
circulars promulgated by the Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the taxpayers except in the following
cases:
a). where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the
Bureau of Internal Revenue;
b). where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on
which the ruling is based;
c). where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year prescriptive
period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing
the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As
precedents, respondent Commissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp.
vs. Court of Appeals, et al., 11 and Commissioner of Internal Revenue vs. TMX Sales, Inc., et

al.. 12Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the
petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until
April 15, 1988 to seek relief from the court. Further, respondent Commissioner stresses that when the
petitioner filed the case before the CTA on November 18, 1988, the same was filed beyond the time fixed
by law, and such failure is fatal to petitioner's cause of action.

After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the
petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the twoyear prescriptive period set by law.
Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the
State to finance the needs of the citizenry and to advance the common weal. 13 Due process of law under the

Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is
upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of
utmost importance that the modes adopted to enforce the collection of taxes levied should be summary
and interfered with as little as possible. 14
From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because
the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or
hampered by incidental matters.
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the
prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but
such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.
In any case, no such suit or proceedings shall begun after the expiration of two years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after
payment;Provided however, That the Commissioner may, even without a written claim therefor,
refund or credit any tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid. (Emphasis supplied)
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue,
within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period
provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15 this Court explained the

application of Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run only from the time that the
refund is ascertained, which can only be determined after a final adjustment return is
accomplished. In the present case, this date is April 16, 1984, and two years from this date would
be April 16, 1986. . . . As we have earlier said in the TMX Sales case, Sections 68. 16 69, 17 and

70 18 on Quarterly Corporate Income Tax Payment and Section 321 should be considered
in conjunction with it 19
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years
to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more
specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of
Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose
duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and
will be ignored if judicially found to be erroneous. 20 Thus, courts will not countenance administrative issuances

that override, instead of remaining consistent and in harmony with the law they seek to apply and
implement. 21
In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative officials to

implement a law cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with
but is contrary to the provisions and spirit of Act. No 4003 as amended, because whereas the
prohibition prescribed in said Fisheries Act was for any single period of time not exceeding five
years duration, FAO No 37-1 fixed no period, that is to say, it establishes an absolute ban for all
time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an oversight
on the part of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy,
the basic Act prevails, for the reason that the regulation or rule issued to implement a law cannot go
beyond the terms and provisions of the
latter. . . . In this connection, the attention of the technical men in the offices of Department Heads
who draft rules and regulation is called to the importance and necessity of closely following the
terms and provisions of the law which they intended to implement, this to avoid any possible
misunderstanding or confusion as in the present case. 23
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or
agents. 24 As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting

Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec.
230 of 1977 NIRC. for being contrary to the express provision of a statute. Hence, his interpretation could
not be given weight for to do so would, in effect, amend the statute.
It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85,
is estopped by the principle of non-retroactively of BIR rulings. Again We do not agree. The
Memorandum Circular, stating that a taxpayer may recover the excess income tax paid within 10
years from date of payment because this is an obligation created by law, was issued by the Acting
Commissioner of Internal Revenue. On the other hand, the decision, stating that the taxpayer
should still file a claim for a refund or tax credit and corresponding petition fro review within the
two-year prescription period, and that the lengthening of the period of limitation on refund from two
to ten years would be adverse to public policy and run counter to the positive mandate of Sec. 230,
NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no
application in the case at bar because it was not the Commissioner of Internal Revenue who
denied petitioner's claim of refund or tax credit. Rather, it was the Court of Tax Appeals who denied
(albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner
of Internal Revenue is an administrative interpretation which is out of harmony with or contrary to
the express provision of a statute (specifically Sec. 230, NIRC), hence, cannot be given weight for
to do so would in effect amend the statute. 25
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as part of the legal

system of the country. But administrative decisions do not enjoy that level of recognition. A memorandumcircular of a bureau head could not operate to vest a taxpayer with shield against judicial action. For there
are no vested rights to speak of respecting a wrong construction of the law by the administrative officials
and such wrong interpretation could not place the Government in estoppel to correct or overrule the
same. 27 Moreover, the non-retroactivity of rulings by the Commissioner of Internal Revenue is not
applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not
by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court,
a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi
juris against the taxpayer. 28
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision
denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that
PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly

payments over the actual income tax computed in the adjustment or final corporate income tax return,
shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly
income tax liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR
form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year.
To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the
other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 the Court of Tax Appeals, after
examining the adjusted final corporate annual income tax return for taxable year 1986, found out
that petitioner opted to apply for automatic tax credit. This was the basis used (vis-avis the fact that
the 1987 annual corporate tax return was not offered by the petitioner as evidence) by the CTA in
concluding that petitioner had indeed availed of and applied the automatic tax credit to the
succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and
tax credit are alternative. 30
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its
1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual
corporate tax return of the petitioner was not offered as evidence to contovert said fact. Thus, we are bound by the
findings of fact by respondent courts, there being no showing of gross error or abuse on their part to disturb our
reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is AFFIRMED,
with COSTS against the petitioner.
1wphi1.nt

SO ORDERED.
Bellosillo, Puno, Mendoza, and Buena, JJ., concur.

Footnotes
1. Penned by Associate Justices Isaali S. Isnami and concurred in by Associate Justice Nathanael
P. De Pano, Jr. and Associate Justice Corona Ibay Somera; rollo. 101-104.
2. Penned by Ernesto D. Acosta, Presiding Judge, concurred in by Associate Judge Manuel K.
Gruba and Associate Judge Ramon O. De Veyra; rollo, pp. 33-47.
3. Rollo, pp. 70-73.
4. Supra, see note 1, at p. 103.
5. Supra, see note 2. at p. 46.
6. Supra, see note 3, at 73.
7. Memorandum of petitioner, rollo, pp. 179-198, at p. 183.
8. Ibid., at p. 194.
9. Supra, See note 2, pp. 37-38.

10. 108 SCRA 142 (1981).

11. 204 SCRA 957 (1991).
12. 205 SCRA 184 (1992).
13. Napocor vs. Province of Albay, 186 SCRA 198 (1990), at p. 207.
14. Teodoro and de Leon, Law on Income Taxation, 1993 ed., at 485.
15. 244 SCRA 446 (1995).
16. Declaration of Corporate Quarterly Income Tax (now Sec. 75, 1997 NIRC).
17. Final Adjustment Return (now Sec. 76. 1997 NIRC).
18. Place of Filing (now Sec.77. 1997 NIRC).
19. Supra, see note 15, at p. 453.
20. People vs. Hernandez, 59 Phil. 272 (1933) at p. 276; Molina vs. Rafferty, 37 Phil. 545 (1918) at
p. 555.
21. Commissioner of Internal Revenue vs. Court of Appeals, 240 SCRA 368 (1993) at p. 372.
22 108 Phil. 1091 (1960).
23. Ibid., at pp. 1093-1094.
24. Republic vs. Intermediate Appellate Court, 209 SCRA 90 (1992); DBP vs. Commission on Audit,
231 SCRA 202 (1994); Sharp International Marketing vs. CA, 201 SCRA 299 (1991) GSIS vs. CA,
218 SCRA 233 (1990 citing Beronilla vs. GSIS, 36 SCRA 44, 55 (1970); Republic vs. PLDT, 26
SCRA 620 (1969); Pineda vs. CFI of Tayabas, 52 Phil. 803 (1929); Beguet Consolidated Mining Co.
vs. Pineda 98 Phil. 711 (1956); Repulic vs. Philippine Rabbit Bus Lines, Inc., 32 SCRA 211(1970);
People vs. Castaeda, 165 SCRA 327 (1988).
25. Supra, see note 1, p. 102.
26. Sec. 8. Judicial decisions applying or interpreting the laws or the Constitution shall form a part
of the legal system of the Philippines.
27. Tan Guan vs. Court of Tax Appeals, 19 SCRA 903 (1967) at p. 907; Compania General de
Tabacos de Filipinas vs. City of Manila, 8 SCRA, 367 (1963) at p. 372.
28. Commissioner of Internal Revenue vs. Tokyo shipping Co., Ltd., 244 SCRA 332, Province of
Tarlac vs. Alcantara, 216 SCRA 790, Philippine Petroluem Corp. vs. Municipality of Pililia Rizal, 198
SCRA 82, Commissioner of Internal Revenue vs. Mitsubishi Metal Corp., 181 SCRA 214.
29. Sec. 69. Final Adjustment Return Every corporation liable to tax under Section 24 shall file a
final adjustment return covering the total net income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable year is not equal to the total tax
due on the entire taxable net income of that year the corporation shall either:
a) Pay the excess tax still due; or

b) Be refunded the excess amount paid as tile case may be.

In case the corporation is entitled to a refund of the excess estimated
quarterly income taxes paid, the refundable amount shown on its final
adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable
year.
30. Supra, see note 1. at p. 103.
31. Philippine Refining Company vs. Court of Appeals, 256 SCRA 667 (1996) at p. 676, citing: the
Coca-Cola Export Corporation vs. Commissioner of Internal Revenue , et al., L-23604, March 15,
1974, 56 SCRA 5; Nasiad, et, al., vs. Court of Appeals, L-29318, November 29, 1974, 61 SCRA
236.

8. Sison v. Ancheta, GR 59431, 25 Jul 1984, 130 SCRA 654

EN BANC
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy
Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal
Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit,
and CESAR E. A. VIRATA, Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.

FERNANDO, C.J.:
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 3as 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-vis those 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,
1982.8 The 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.
Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente and Cuevas, JJ.,
concur.
Teehankee, J., concurs in the result.
Plana, J., took no part.

Separate Opinions

AQUINO, J., concurring:

I concur in the result. The petitioner has no cause of action for prohibition.
ABAD SANTOS, J., dissenting:
This is a frivolous suit. While the tax rates for compensation income are lower than those for net income such
circumtance does not necessarily result in lower tax payments for these receiving compensation income. In fact, the
reverse will most likely be the case; those who file returns on the basis of net income will pay less taxes because they
claim all sort of deduction justified or not I vote for dismissal.

Separate Opinions
AQUINO, J., concurring:
I concur in the result. The petitioner has no cause of action for prohibition.
ABAD SANTOS, J., dissenting:
This is a frivolous suit. While the tax rates for compensation income are lower than those for net income such
circumtance does not necessarily result in lower tax payments for these receiving compensation income. In fact, the
reverse will most likely be the case; those who file returns on the basis of net income will pay less taxes because they
claim all sort of deduction justified or not I vote for dismissal.
Footnotes
1 Petitioner must have realized that a suit for declaratory relief must be filed with Regional Trial
Courts.
2 Batas Pambansa Blg. 135, Section 21 (1981).
3 The respondents are Ruben B. Ancheta, Acting Commissioner, Bureau of Internal Revenue;
Romulo Villa, Deputy Commissioner, Bureau of Internal Revenue; Tomas Toledo, Deputy
Commissioner, Bureau of Internal Revenue; Manuel Alba, Minister of Budget; Francisco Tantuico,
Chairman, Commissioner on Audit; and Cesar E. A. Virata, Minister of Finance.
4 Petition, Parties, par. 1. The challenge is thus aimed at paragraphs (a) and (b) of Section 1
further Amending Section 21 of the National Internal Revenue Code of 1977. Par. (a) reads: "(a) On
taxable compensation income. A tax is hereby imposed upon the taxable compensation income
as determined in Section 28 (a) received during each taxable year from all sources by every
individual, whether a citizen of the Philippines, determined in accordance with the following
schedule:

Not over P2,500

0%

Over P 2,500 but not over P 5,000

1%

Over P 5,000 but not over 10,000

P 25 + 3% of excess over P 5,000

Over P 10,000 but not over P 20,000

P 175 + 7 % of excess over P 10,000

Over P 20,000 but not over P 40,000

P 875 + 11%, of excess over P 20,000

Over P 40.000 but not over P 60,000

P 3,075 + I 15% of excess over P 40,000

Over P 60,000 but not over

P100,000

P 6,075 + 19% of excess over P 60,000

Over P100,000 but not over

P250,000

P 13,675 + 24% excess over P100,000

Over P250,000 but not over

P500,000

P 49,675 + 29% of excess over P250,000

Over P500,000

P 122,175 + 35% of excess over P500,000

Par. (b) reads: "(b) On taxable net income. A tax is hereby imposed upon the taxable net income
as determined in Section 29 (a) received during each taxable year from all sources by every
individual, whether a citizen of the Philippines, or an alien residing in the Philippines determined in
accordance with the following schedule:

Not over P10,000

5%

Over P 10,000 but not over P 30,000

P 500 + 15% of excess over P 10,000

Over P 30,000 but not over P150,000

P 3,500 + 30% of excess over P 30,000

Over P150,000 but not over P500,000

P 39,500 + 45% of excess over P150,000

Over P500,000

P197,000 + 601% of excess over P500,000

5 Ibid Statement, par. 4.

6 Article IV, Section 1 of the Constitution reads: "No person shall be deprived of life, liberty or
property without due process of law, nor shall any person be denied the equal protection of the
laws."
7 Article VII, Section 7. par. (1) of the Constitution reads: "The rule of taxation shall be uniform and
equitable. The Batasang Pambansa shall evolve a progressive system of taxation."
8 It was filed by Solicitor General Estelito P. Mendoza. He was assisted by Assistant Solicitor
General Eduardo D. Montenegro and Solicitor Erlinda B, Masakayan.
9 Answer, pars. 1-6.
10 Ibid, par. 6.
11 Agricultural Credit and Cooperative Financing Administration v. Consideration of Unions in
Government Corporation and Offices, L-21484, November 29, 1969, 30 SCRA 649, 662.
12 Cf, Vera v. Fernandez, L-31364, March 30, 1979, 89 SCRA 199, per Castro, J.
13 Sarasola v. Trinidad, 40 Phil. 252, 262 (1919).
14 McColloch v. Maryland 4 Wheaton 316,
15 306 US 466 ( 938).
16 Ibid, 489
17 Ibid. 490.
18 Cf. Ermita-Malate Hotel and Motel Operator S Association v. Hon. City Mayor, 127 Phil. 306, 315
( 1967); U.S. v. Salaveria, 39 Phil. 102,111 (1918) and Ebona v. Daet, 85 Phil, 369 (1950). Likewise
referred to is O'Gorman and Young v. Hartford Fire Insurance Co 282 US 251, 328 (1931).

19 Cf. Manila Gas Co. v. Collector of Internal Revenue, 62 Phil. 895 (1936); Wells Fargo Bank and
Union Trust Co. v. Collector, 70 Phil. 325 (1940); Republic v. Oasan Vda. de Fernandez, 99 Phil.
934 (1956).
20 The excerpt is from the opinion in J.M. Tuason and Co. v. The Land Tenure Administration, L21064, February 18, 1970, 31 SCRA 413, 435 and reiterated in Bautista v. Juinio, G.R. No. 50908,
January 31, 1984, 127 SCRA 329, 339. The former deals with an eminent domain proceeding and
the latter with a suit contesting the validity of a police power measure.
21 Tigner v. Texas, 310 US 141, 147 (1940).
22 98 Phil. 148 (1955).
23 Ibid, 153.
24 Article VIII, Section 17, par. 1, first sentence of the Constitution
25 69 Phil. 420 (1940).
26 Ibid, 426.
27 Ibid, 424.
28 Eastern Theatrical Co. v. Alfonso, 83 Phil. 852, 862 (1949).
29 Manila Race Horse Trainers Asso. v. De la Fuente, 88 Phil. 60,65 (1951).
30 Uy Matias v. City of Cebu, 93 Phil. 300 (1953).
31 While petitioner cited figures to sustain in his assertion, public respondents refuted with other
figures that argue against his submission. One reason for requiring declaratory relief proceedings
to start in regional trial courts is precisely to enable petitioner to prove his allegation, absent an
admission in the answer.

9. Tolentino v Sec of Finance & CIR, GR 11545, 65 SCAD 352, 235 SCRA 630
EN BANC

G.R. No. 115455 October 30, 1995

ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 115525 October 30, 1995

JUAN T. DAVID, petitioner,

vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance;
LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR
REPRESENTATIVES, respondents.
G.R. No. 115543 October 30, 1995
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE BUREAU OF
INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.
G.R. No. 115544 October 30, 1995
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING
CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON. TEOFISTO T.
GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity
as Secretary of Finance, respondents.
G.R. No. 115754 October 30, 1995
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 115781 October 30, 1995
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR.,
JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L.
GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL,
MOVEMENT OF ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"),
FREEDOM FROM DEBT COALITION, INC., and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO
TAADA,petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL
REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.
G.R. No. 115852 October 30, 1995
PHILIPPINE AIRLINES, INC., petitioner,
vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 115873 October 30, 1995
COOPERATIVE UNION OF THE PHILIPPINES, petitioner,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T.

GUINGONA, JR., in his capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity
as Secretary of Finance, respondents.
G.R. No. 115931 October 30, 1995
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF PHILIPPINE BOOK
SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the
Commissioner of Internal Revenue; and HON. GUILLERMO PARAYNO, JR., in his capacity as the
Commissioner of Customs, respondents.
RESOLUTION

MENDOZA, J.:
These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for the
declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law. The
motions, of which there are 10 in all, have been filed by the several petitioners in these cases, with the exception of
the Philippine Educational Publishers Association, Inc. and the Association of Philippine Booksellers, petitioners in
G.R. No. 115931.
The Solicitor General, representing the respondents, filed a consolidated comment, to which the Philippine Airlines,
Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc., petitioner in G.R. No. 115544, and Juan T.
David, petitioner in G.R. No. 115525, each filed a reply. In turn the Solicitor General filed on June 1, 1995 a rejoinder
to the PPI's reply.
On June 27, 1995 the matter was submitted for resolution.
I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners (Tolentino, Kilosbayan, Inc.,
Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders Association (CREBA)) reiterate previous
claims made by them that R.A. No. 7716 did not "originate exclusively" in the House of Representatives as required
by Art. VI, 24 of the Constitution. Although they admit that H. No. 11197 was filed in the House of Representatives
where it passed three readings and that afterward it was sent to the Senate where after first reading it was referred to
the Senate Ways and Means Committee, they complain that the Senate did not pass it on second and third readings.
Instead what the Senate did was to pass its own version (S. No. 1630) which it approved on May 24, 1994. Petitioner
Tolentino adds that what the Senate committee should have done was to amend H. No. 11197 by striking out the text
of the bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a House bill and the
Senate version just becomes the text (only the text) of the House bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment to a House
revenue bill by enacting its own version of a revenue bill. On at least two occasions during the Eighth Congress, the
Senate passed its own version of revenue bills, which, in consolidation with House bills earlier passed, became the
enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY EXTENDING FROM FIVE
(5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL
EQUIPMENT) which was approved by the President on April 10, 1992. This Act is actually a consolidation of H. No.

34254, which was approved by the House on January 29, 1992, and S. No. 1920, which was approved by the Senate
on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD TO ANY FILIPINO
ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by the President on May 22, 1992. This
Act is a consolidation of H. No. 22232, which was approved by the House of Representatives on August 2, 1989, and
S. No. 807, which was approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result of the consolidation of House
and Senate bills. These are the following, with indications of the dates on which the laws were approved by the
President and dates the separate bills of the two chambers of Congress were respectively passed:
1. R.A. NO. 7642
AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS PURPOSE
THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28,
1992).
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE THE
PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL
GOVERNMENT UNITS TO SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE
CERTAIN SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3. R.A. NO. 7646
AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE THE
PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING
FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED (February 24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS,
INSTRUMENTALITIES OR AGENCIES INCLUDING GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT
THE RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF

GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED BY
CONTRACTORS (April 6, 1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5. R.A. NO. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO
DECLARE DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL GOVERNMENT,
AND FOR OTHER PURPOSES (November 9, 1993)
House Bill No. 11024, November 3, 1993
Senate Bill No. 1168, November 3, 1993
6. R.A. NO. 7660
AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF THE
DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FOR
SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF STOCK
LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL
PUBLIC OFFERING, AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, BY INSERTING A NEW SECTION AND REPEALING CERTAIN
SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of its power to
propose amendments to bills required to originate in the House, passed its own version of a House revenue measure.
It is noteworthy that, in the particular case of S. No. 1630, petitioners Tolentino and Roco, as members of the Senate,
voted to approve it on second and third readings.
On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino, concerns a mere matter
of form. Petitioner has not shown what substantial difference it would make if, as the Senate actually did in this case,
a separate bill like S. No. 1630 is instead enacted as a substitute measure, "taking into
Consideration . . . H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:

RULE XXIX
AMENDMENTS
xxx xxx xxx
68. Not more than one amendment to the original amendment shall be considered.
No amendment by substitution shall be entertained unless the text thereof is submitted in writing.
Any of said amendments may be withdrawn before a vote is taken thereon.
69. No amendment which seeks the inclusion of a legislative provision foreign to the subject
matter of a bill (rider) shall be entertained.
xxx xxx xxx
70-A. A bill or resolution shall not be amended by substituting it with another which covers a
subject distinct from that proposed in the original bill or resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate possesses less
power than the U.S. Senate because of textual differences between constitutional provisions giving them the power to
propose or concur with amendments.
Art. I, 7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may
propose or concur with amendments as on other Bills.
Art. VI, 24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the phrase "as on other
Bills" in the American version, according to petitioners, shows the intention of the framers of our Constitution to
restrict the Senate's power to propose amendments to revenue bills. Petitioner Tolentino contends that the word
"exclusively" was inserted to modify "originate" and "the words 'as in any other bills' (sic) were eliminated so as to
show that these bills were not to be like other bills but must be treated as a special kind."
The history of this provision does not support this contention. The supposed indicia of constitutional intent are nothing
but the relics of an unsuccessful attempt to limit the power of the Senate. It will be recalled that the 1935 Constitution
originally provided for a unicameral National Assembly. When it was decided in 1939 to change to a bicameral
legislature, it became necessary to provide for the procedure for lawmaking by the Senate and the House of
Representatives. The work of proposing amendments to the Constitution was done by the National Assembly, acting
as a constituent assembly, some of whose members, jealous of preserving the Assembly's lawmaking powers, sought
to curtail the powers of the proposed Senate. Accordingly they proposed the following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local application, and private bills
shall originate exclusively in the Assembly, but the Senate may propose or concur with

amendments. In case of disapproval by the Senate of any such bills, the Assembly may repass the
same by a two-thirds vote of all its members, and thereupon, the bill so repassed shall be deemed
enacted and may be submitted to the President for corresponding action. In the event that the
Senate should fail to finally act on any such bills, the Assembly may, after thirty days from the
opening of the next regular session of the same legislative term, reapprove the same with a vote of
two-thirds of all the members of the Assembly. And upon such reapproval, the bill shall be deemed
enacted and may be submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National Assembly vetoed the proposal. It deleted
everything after the first sentence. As rewritten, the proposal was approved by the National Assembly and embodied
in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66
(1950)). The proposed amendment was submitted to the people and ratified by them in the elections held on June 18,
1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of the present Constitution was
derived. It explains why the word "exclusively" was added to the American text from which the framers of the
Philippine Constitution borrowed and why the phrase "as on other Bills" was not copied. Considering the defeat of the
proposal, the power of the Senate to propose amendments must be understood to be full, plenary and complete "as
on other Bills." Thus, because revenue bills are required to originate exclusively in the House of Representatives, the
Senate cannot enact revenue measures of its own without such bills. After a revenue bill is passed and sent over to it
by the House, however, the Senate certainly can pass its own version on the same subject matter. This follows from
the coequality of the two chambers of Congress.
That this is also the understanding of book authors of the scope of the Senate's power to concur is clear from the
following commentaries:
The power of the Senate to propose or concur with amendments is apparently without restriction. It
would seem that by virtue of this power, the Senate can practically re-write a bill required to come
from the House and leave only a trace of the original bill. For example, a general revenue bill
passed by the lower house of the United States Congress contained provisions for the imposition of
an inheritance tax . This was changed by the Senate into a corporation tax. The amending authority
of the Senate was declared by the United States Supreme Court to be sufficiently broad to enable it
to make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55 L. ed. 389].
(L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 (1961))
The above-mentioned bills are supposed to be initiated by the House of Representatives because it
is more numerous in membership and therefore also more representative of the people. Moreover,
its members are presumed to be more familiar with the needs of the country in regard to the
enactment of the legislation involved.
The Senate is, however, allowed much leeway in the exercise of its power to propose or concur
with amendments to the bills initiated by the House of Representatives. Thus, in one case, a bill
introduced in the U.S. House of Representatives was changed by the Senate to make a proposed
inheritance tax a corporation tax. It is also accepted practice for the Senate to introduce what is
known as an amendment by substitution, which may entirely replace the bill initiated in the House
of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills authorizing increase of the public
debt, bills of local application, and private bills must "originate exclusively in the House of Representatives," it also

adds, "but the Senate may propose or concur with amendments." In the exercise of this power, the Senate may
propose an entirely new bill as a substitute measure. As petitioner Tolentino states in a high school text, a committee
to which a bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the bill omitting or adding sections
or altering its language; (3) to make and endorse an entirely new bill as a substitute, in which case
it will be known as a committee bill; or (4) to make no report at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))
To except from this procedure the amendment of bills which are required to originate in the House by prescribing that
the number of the House bill and its other parts up to the enacting clause must be preserved although the text of the
Senate amendment may be incorporated in place of the original body of the bill is to insist on a mere technicality. At
any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is therefore as much an
amendment of H. No. 11197 as any which the Senate could have made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that S. No. 1630 is
an independent and distinct bill. Hence their repeated references to its certification that it was passed by the Senate
"in substitution of S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197," implying that there
is something substantially different between the reference to S. No. 1129 and the reference to H. No. 11197. From
this premise, they conclude that R.A. No. 7716 originated both in the House and in the Senate and that it is the
product of two "half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both houses of
Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere amendments of the
corresponding provisions of H. No. 11197. The very tabular comparison of the provisions of H. No. 11197 and S. No.
1630 attached as Supplement A to the basic petition of petitioner Tolentino, while showing differences between the
two bills, at the same time indicates that the provisions of the Senate bill were precisely intended to be amendments
to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was a mere
amendment of the House bill, H. No. 11197 in its original form did not have to pass the Senate on second and three
readings. It was enough that after it was passed on first reading it was referred to the Senate Committee on Ways
and Means. Neither was it required that S. No. 1630 be passed by the House of Representatives before the two bills
could be referred to the Conference Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When the House bill
and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank deposits), were referred to a
conference committee, the question was raised whether the two bills could be the subject of such conference,
considering that the bill from one house had not been passed by the other and vice versa. As Congressman Duran
put the question:
MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is passed by
the House but not passed by the Senate, and a Senate bill of a similar nature is passed in the
Senate but never passed in the House, can the two bills be the subject of a conference, and can a
law be enacted from these two bills? I understand that the Senate bill in this particular instance
does not refer to investments in government securities, whereas the bill in the House, which was
introduced by the Speaker, covers two subject matters: not only investigation of deposits in banks
but also investigation of investments in government securities. Now, since the two bills differ in their
subject matter, I believe that no law can be enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:

THE SPEAKER. The report of the conference committee is in order. It is precisely in cases like this
where a conference should be had. If the House bill had been approved by the Senate, there would
have been no need of a conference; but precisely because the Senate passed another bill on the
same subject matter, the conference committee had to be created, and we are now considering the
report of that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct and unrelated
measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that because the President
separately certified to the need for the immediate enactment of these measures, his certification was ineffectual and
void. The certification had to be made of the version of the same revenue bill which at the momentwas being
considered. Otherwise, to follow petitioners' theory, it would be necessary for the President to certify as many bills as
are presented in a house of Congress even though the bills are merely versions of the bill he has already certified. It
is enough that he certifies the bill which, at the time he makes the certification, is under consideration. Since on
March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had to be certified. For that matter on
June 1, 1993 the President had earlier certified H. No. 9210 for immediate enactment because it was the one which
at that time was being considered by the House. This bill was later substituted, together with other bills, by H. No.
11197.
As to what Presidential certification can accomplish, we have already explained in the main decision that the phrase
"except when the President certifies to the necessity of its immediate enactment, etc." in Art. VI, 26 (2) qualifies not
only the requirement that "printed copies [of a bill] in its final form [must be] distributed to the members three days
before its passage" but also the requirement that before a bill can become a law it must have passed "three readings
on separate days." There is not only textual support for such construction but historical basis as well.
Art. VI, 21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall have been printed and copies thereof in
its final form furnished its Members at least three calendar days prior to its passage, except when
the President shall have certified to the necessity of its immediate enactment. Upon the last reading
of a bill, no amendment thereof shall be allowed and the question upon its passage shall be taken
immediately thereafter, and the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):
(2) No bill shall become a law unless it has passed three readings on separate days, and printed
copies thereof in its final form have been distributed to the Members three days before its passage,
except when the Prime Minister certifies to the necessity of its immediate enactment to meet a
public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be
allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered
in the Journal.
This provision of the 1973 document, with slight modification, was adopted in Art. VI, 26 (2) of the present
Constitution, thus:
(2) No bill passed by either House shall become a law unless it has passed three readings on
separate days, and printed copies thereof in its final form have been distributed to its Members
three days before its passage, except when the President certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment
thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and
the yeasand nays entered in the Journal.

The exception is based on the prudential consideration that if in all cases three readings on separate days are
required and a bill has to be printed in final form before it can be passed, the need for a law may be rendered
academic by the occurrence of the very emergency or public calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a country like the
Philippines where budget deficit is a chronic condition. Even if this were the case, an enormous budget deficit does
not make the need for R.A. No. 7716 any less urgent or the situation calling for its enactment any less an emergency.
Apparently, the members of the Senate (including some of the petitioners in these cases) believed that there was an
urgent need for consideration of S. No. 1630, because they responded to the call of the President by voting on the bill
on second and third readings on the same day. While the judicial department is not bound by the Senate's
acceptance of the President's certification, the respect due coequal departments of the government in matters
committed to them by the Constitution and the absence of a clear showing of grave abuse of discretion caution a stay
of the judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it was discussed
for six days. Only its distribution in advance in its final printed form was actually dispensed with by holding the voting
on second and third readings on the same day (March 24, 1994). Otherwise, sufficient time between the submission
of the bill on February 8, 1994 on second reading and its approval on March 24, 1994 elapsed before it was finally
voted on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-fold: (1) to inform the members
of Congress of what they must vote on and (2) to give them notice that a measure is progressing through the
enacting process, thus enabling them and others interested in the measure to prepare their positions with reference
to it. (1 J. G. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION 10.04, p. 282 (1972)). These
purposes were substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the Movement of Attorneys
for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of the constitutional policy of full public
disclosure and the people's right to know (Art. II, 28 and Art. III, 7) the Conference Committee met for two days in
executive session with only the conferees present.
As pointed out in our main decision, even in the United States it was customary to hold such sessions with only the
conferees and their staffs in attendance and it was only in 1975 when a new rule was adopted requiring open
sessions. Unlike its American counterpart, the Philippine Congress has not adopted a rule prescribing open hearings
for conference committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least staff members
were present. These were staff members of the Senators and Congressmen, however, who may be presumed to be
their confidential men, not stenographers as in this case who on the last two days of the conference were excluded.
There is no showing that the conferees themselves did not take notes of their proceedings so as to give petitioner
Kilosbayan basis for claiming that even in secret diplomatic negotiations involving state interests, conferees keep
notes of their meetings. Above all, the public's right to know was fully served because the Conference Committee in
this case submitted a report showing the changes made on the differing versions of the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee reports must contain "a detailed,
sufficiently explicit statement of the changes in or other amendments." These changes are shown in the bill attached
to the Conference Committee Report. The members of both houses could thus ascertain what changes had been
made in the original bills without the need of a statement detailing the changes.
The same question now presented was raised when the bill which became R.A. No. 1400 (Land Reform Act of 1955)
was reported by the Conference Committee. Congressman Bengzon raised a point of order. He said:

MR. BENGZON. My point of order is that it is out of order to consider the report of the conference
committee regarding House Bill No. 2557 by reason of the provision of Section 11, Article XII, of the
Rules of this House which provides specifically that the conference report must be accompanied by
a detailed statement of the effects of the amendment on the bill of the House. This conference
committee report is not accompanied by that detailed statement, Mr. Speaker. Therefore it is out of
order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the point of
order raised by the gentleman from Pangasinan.
There is no question about the provision of the Rule cited by the gentleman from Pangasinan,
butthis provision applies to those cases where only portions of the bill have been amended. In this
case before us an entire bill is presented; therefore, it can be easily seen from the reading of the
bill what the provisions are. Besides, this procedure has been an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the provisions
of the Rules, and the reason for the requirement in the provision cited by the gentleman from
Pangasinan is when there are only certain words or phrases inserted in or deleted from the
provisions of the bill included in the conference report, and we cannot understand what those
words and phrases mean and their relation to the bill. In that case, it is necessary to make a
detailed statement on how those words and phrases will affect the bill as a whole; but when the
entire bill itself is copied verbatim in the conference report, that is not necessary. So when the
reason for the Rule does not exist, the Rule does not exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
Congressman Tolentino was sustained by the chair. The record shows that when the ruling was appealed, it was
upheld by viva voce and when a division of the House was called, it was sustained by a vote of 48 to 5. (Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to insert new provisions as long as these are
germane to the subject of the conference. As this Court held in Philippine Judges Association v. Prado, 227 SCRA
703 (1993), in an opinion written by then Justice Cruz, the jurisdiction of the conference committee is not limited to
resolving differences between the Senate and the House. It may propose an entirely new provision. What is important
is that its report is subsequently approved by the respective houses of Congress. This Court ruled that it would not
entertain allegations that, because new provisions had been added by the conference committee, there was thereby
a violation of the constitutional injunction that "upon the last reading of a bill, no amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the petitioners' charges that an amendment
was made upon the last reading of the bill that eventually became R.A. No. 7354 and
that copiesthereof in its final form were not distributed among the members of each House. Both
the enrolled bill and the legislative journals certify that the measure was duly enacted i.e., in
accordance with Article VI, Sec. 26 (2) of the Constitution. We are bound by such official
assurances from a coordinate department of the government, to which we owe, at the very least, a
becoming courtesy.
(Id. at 710. (emphasis added))

It is interesting to note the following description of conference committees in the Philippines in a 1979 study:
Conference committees may be of two types: free or instructed. These committees may be given
instructions by their parent bodies or they may be left without instructions. Normally the conference
committees are without instructions, and this is why they are often critically referred to as "the little
legislatures." Once bills have been sent to them, the conferees have almost unlimited authority to
change the clauses of the bills and in fact sometimes introduce new measures that were not in the
original legislation. No minutes are kept, and members' activities on conference committees are
difficult to determine. One congressman known for his idealism put it this way: "I killed a bill on
export incentives for my interest group [copra] in the conference committee but I could not have
done so anywhere else." The conference committee submits a report to both houses, and usually it
is accepted. If the report is not accepted, then the committee is discharged and new members are
appointed.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND LEGISLATURES: A
COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).
In citing this study, we pass no judgment on the methods of conference committees. We cite it only to say that
conference committees here are no different from their counterparts in the United States whose vast powers we
noted in Philippine Judges Association v. Prado, supra. At all events, under Art. VI, 16(3) each house has the power
"to determine the rules of its proceedings," including those of its committees. Any meaningful change in the method
and procedures of Congress or its committees must therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, 26 (1) of the
Constitution which provides that "Every bill passed by Congress shall embrace only one subject which shall be
expressed in the title thereof." PAL contends that the amendment of its franchise by the withdrawal of its exemption
from the VAT is not expressed in the title of the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all other taxes,
duties, royalties, registration, license and other fees and charges of any kind, nature, or description, imposed, levied,
established, assessed or collected by any municipal, city, provincial or national authority or government agency, now
or in the future."
PAL was exempted from the payment of the VAT along with other entities by 103 of the National Internal Revenue
Code, which provides as follows:
103. Exempt transactions. The following shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws or international agreements to which the
Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending 103, as follows:
103. Exempt transactions. The following shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws, except those granted under Presidential
Decree Nos. 66, 529, 972, 1491, 1590. . . .

The amendment of 103 is expressed in the title of R.A. No. 7716 which reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE
AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED, AND FOR OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT) SYSTEM [BY]
WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING
AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED
AND FOR OTHER PURPOSES," Congress thereby clearly expresses its intention to amend any provision of the
NIRC which stands in the way of accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific reference to P.D.
No. 1590. It is unnecessary to do this in order to comply with the constitutional requirement, since it is already stated
in the title that the law seeks to amend the pertinent provisions of the NIRC, among which is 103(q), in order to
widen the base of the VAT. Actually, it is the bill which becomes a law that is required to express in its title the subject
of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically referred to 103 of the NIRC as among
the provisions sought to be amended. We are satisfied that sufficient notice had been given of the pendency of these
bills in Congress before they were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was rejected. R.A. No.
7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION, DEFINING ITS POWERS,
FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR OTHER
PURPOSES CONNECTED THEREWITH. It contained a provision repealing all franking privileges. It was contended
that the withdrawal of franking privileges was not expressed in the title of the law. In holding that there was sufficient
description of the subject of the law in its title, including the repeal of franking privileges, this Court held:
To require every end and means necessary for the accomplishment of the general objectives of the
statute to be expressed in its title would not only be unreasonable but would actually render
legislation impossible. [Cooley, Constitutional Limitations, 8th Ed., p. 297] As has been correctly
explained:
The details of a legislative act need not be specifically stated in its title, but
matter germane to the subject as expressed in the title, and adopted to the
accomplishment of the object in view, may properly be included in the act. Thus,
it is proper to create in the same act the machinery by which the act is to be
enforced, to prescribe the penalties for its infraction, and to remove obstacles in
the way of its execution. If such matters are properly connected with the subject
as expressed in the title, it is unnecessary that they should also have special
mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed. 725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the press is not exempt
from the taxing power of the State and that what the constitutional guarantee of free press prohibits are laws which
single out the press or target a group belonging to the press for special treatment or which in any way discriminate
against the press on the basis of the content of the publication, and R.A. No. 7716 is none of these.

Now it is contended by the PPI that by removing the exemption of the press from the VAT while maintaining those
granted to others, the law discriminates against the press. At any rate, it is averred, "even nondiscriminatory taxation
of constitutionally guaranteed freedom is unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the press a privilege, the law
could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting
exemptions, the State does not forever waive the exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other
businesses have long ago been subject. It is thus different from the tax involved in the cases invoked by the PPI. The
license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be discriminatory
because it was laid on the gross advertising receipts only of newspapers whose weekly circulation was over 20,000,
with the result that the tax applied only to 13 out of 124 publishers in Louisiana. These large papers were critical of
Senator Huey Long who controlled the state legislature which enacted the license tax. The censorial motivation for
the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 75 L. Ed. 2d
295 (1983), the tax was found to be discriminatory because although it could have been made liable for the sales tax
or, in lieu thereof, for the use tax on the privilege of using, storing or consuming tangible goods, the press was not.
Instead, the press was exempted from both taxes. It was, however, later made to pay a specialuse tax on the cost of
paper and ink which made these items "the only items subject to the use tax that were component of goods to be sold
at retail." The U.S. Supreme Court held that the differential treatment of the press "suggests that the goal of
regulation is not related to suppression of expression, and such goal is presumptively unconstitutional." It would
therefore appear that even a law that favors the press is constitutionally suspect. (See the dissent of Rehnquist, J. in
that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely and
unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously granted to PAL, petroleum
concessionaires, enterprises registered with the Export Processing Zone Authority, and many more are likewise
totally withdrawn, in addition to exemptions which are partially withdrawn, in an effort to broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that transactions, which are profit
oriented, continue to enjoy exemption under R.A. No. 7716. An enumeration of some of these transactions will suffice
to show that by and large this is not so and that the exemptions are granted for a purpose. As the Solicitor General
says, such exemptions are granted, in some cases, to encourage agricultural production and, in other cases, for the
personal benefit of the end-user rather than for profit. The exempt transactions are:
(a) Goods for consumption or use which are in their original state (agricultural, marine and forest
products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn,
sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture
of feeds).
(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) or for professional use, like professional instruments and implements,
by persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services rendered
under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does not discriminate against the press because "even
nondiscriminatory taxation on constitutionally guaranteed freedom is unconstitutional." PPI cites in support of this
assertion the following statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded by the First
Amendment is not so restricted. A license tax certainly does not acquire constitutional validity
because it classifies the privileges protected by the First Amendment along with the wares and
merchandise of hucksters and peddlers and treats them all alike. Such equality in treatment does
not save the ordinance. Freedom of press, freedom of speech, freedom of religion are in preferred
position.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. Hence, although
its application to others, such those selling goods, is valid, its application to the press or to religious groups, such as
the Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets, is unconstitutional. As
the U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of a preacher. It is quite another
thing to exact a tax on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386 (1957) which
invalidated a city ordinance requiring a business license fee on those engaged in the sale of general merchandise. It
was held that the tax could not be imposed on the sale of bibles by the American Bible Society without restraining the
free exercise of its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a
constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange
of services and the lease of properties purely for revenue purposes. To subject the press to its payment is not to
burden the exercise of its right any more than to make the press pay income tax or subject it to general regulation is
not to violate its freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the sales
are used to subsidize the cost of printing copies which are given free to those who cannot afford to pay so that to tax
the sales would be to increase the price, while reducing the volume of sale. Granting that to be the case, the resulting
burden on the exercise of religious freedom is so incidental as to make it difficult to differentiate it from any other
economic imposition that might make the right to disseminate religious doctrines costly. Otherwise, to follow the
petitioner's argument, to increase the tax on the sale of vestments would be to lay an impermissible burden on the
right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as amended by 7 of R.A. No.
7716, although fixed in amount, is really just to pay for the expenses of registration and enforcement of provisions
such as those relating to accounting in 108 of the NIRC. That the PBS distributes free bibles and therefore is not
liable to pay the VAT does not excuse it from the payment of this fee because it also sells some copies. At any rate

whether the PBS is liable for the VAT must be decided in concrete cases, in the event it is assessed this tax by the
Commissioner of Internal Revenue.
VII. Alleged violations of the due process, equal protection and contract clauses and the rule on taxation. CREBA
asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt
without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that Congress shall
"evolve a progressive system of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing contracts of the sale of real
property by installment or on deferred payment basis would result in substantial increases in the monthly
amortizations to be paid because of the 10% VAT. The additional amount, it is pointed out, is something that the buyer
did not anticipate at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities from numerous sources are cited
by the plaintiffs, but none of them show that a lawful tax on a new subject, or an increased tax on an old one,
interferes with a contract or impairs its obligation, within the meaning of the Constitution. Even though such taxation
may affect particular contracts, as it may increase the debt of one person and lessen the security of another, or may
impose additional burdens upon one class and release the burdens of another, still the tax must be paid unless
prohibited by the Constitution, nor can it be said that it impairs the obligation of any existing contract in its true legal
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not only existing
laws but also "the reservation of the essential attributes of sovereignty, is . . . read into contracts as a postulate of the
legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must be
understood as having been made in reference to the possible exercise of the rightful authority of the government and
no obligation of contract can extend to the defeat of that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885
(1935)).
It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the sale of agricultural products,
food items, petroleum, and medical and veterinary services, it grants no exemption on the sale of real property which
is equally essential. The sale of real property for socialized and low-cost housing is exempted from the tax, but
CREBA claims that real estate transactions of "the less poor," i.e., the middle class, who are equally homeless,
should likewise be exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods and services was
already exempt under 103, pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716. Petitioner is in error
in claiming that R.A. No. 7716 granted exemption to these transactions, while subjecting those of petitioner to the
payment of the VAT. Moreover, there is a difference between the "homeless poor" and the "homeless less poor" in the
example given by petitioner, because the second group or middle class can afford to rent houses in the meantime
that they cannot yet buy their own homes. The two social classes are thus differently situated in life. "It is inherent in
the power to tax that the 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.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison,
Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan,
163 SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, 28(1) which provides
that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of
taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be taxed at
the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of
taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all persons, forms and
corporations placed in similar situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)

Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A. No. 7716 merely
expands the base of the tax. The validity of the original VAT Law was questioned in Kapatiran ng Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on grounds similar to those made in these cases,
namely, that the law was "oppressive, discriminatory, unjust and regressive in violation of Art. VI, 28(1) of the
Constitution." (At 382) Rejecting the challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public,
which are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by
persons engaged in business with an aggregate gross annual sales exceeding P200,000.00. Small
corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax
are sales of farm and marine products, so that the costs of basic food and other necessities, spared
as they are from the incidence of the VAT, are expected to be relatively lower and within the reach
of the general public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of the Philippines,
Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the mandate of Congress to provide for a
progressive system of taxation because the law imposes a flat rate of 10% and thus places the tax burden on all
taxpayers without regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it
simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has
been interpreted to mean simply that "direct taxes are . . . to be preferred [and] as much as possible, indirect taxes
should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)).
Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes,
which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII,
17(1) of the 1973 Constitution from which the present Art. VI, 28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid
them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the
regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, 3, amending
102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4, amending 103 of the
NIRC).
Thus, the following transactions involving basic and essential goods and services are exempted from the VAT:
(a) Goods for consumption or use which are in their original state (agricultural, marine and forest
products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn
sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture
of feeds).
(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) and or professional use, like professional instruments and implements,
by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services rendered
under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to the VAT are those which involve goods and services which
are used or availed of mainly by higher income groups. These include real properties held primarily for sale to
customers or for lease in the ordinary course of trade or business, the right or privilege to use patent, copyright, and
other similar property or right, the right or privilege to use industrial, commercial or scientific equipment, motion
picture films, tapes and discs, radio, television, satellite transmission and cable television time, hotels, restaurants
and similar places, securities, lending investments, taxicabs, utility cars for rent, tourist buses, and other common
carriers, services of franchise grantees of telephone and telegraph.
The problem with CREBA's petition is that it presents broad claims of constitutional violations by tendering issues not
at retail but at wholesale and in the abstract. There is no fully developed record which can impart to adjudication the
impact of actuality. There is no factual foundation to show in the concrete the application of the law to actual
contracts and exemplify its effect on property rights. For the fact is that petitioner's members have not even been
assessed the VAT. Petitioner's case is not made concrete by a series of hypothetical questions asked which are no
different from those dealt with in advisory opinions.
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 on its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that where the due process
and equal protection clauses are invoked, considering that they are not fixed rules but rather broad
standards, there is a need for proof of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development of a concrete case. It may be that postponement of
adjudication would result in a multiplicity of suits. This need not be the case, however. Enforcement of the law may
give rise to such a case. A test case, provided it is an actual case and not an abstract or hypothetical one, may thus
be presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues. Otherwise, adjudication
would be no different from the giving of advisory opinion that does not really settle legal issues.
We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made that "there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the
government." This duty can only arise if an actual case or controversy is before us. Under Art . VIII, 5 our jurisdiction

is defined in terms of "cases" and all that Art. VIII, 1, 2 can plausibly mean is that in the exercise of
that jurisdiction we have the judicial power to determine questions of grave abuse of discretion by any branch or
instrumentality of the government.
Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the power of a court to hear and
decide cases pending between parties who have the right to sue and be sued in the courts of law and equity" (Lamb
v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from legislative and executive power. This power cannot be
directly appropriated until it is apportioned among several courts either by the Constitution, as in the case of Art. VIII,
5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of
1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's "jurisdiction," defined as "the power
conferred by law upon a court or judge to take cognizance of a case, to the exclusion of all others." (United States v.
Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its jurisdiction, this Court cannot inquire into any
allegation of grave abuse of discretion by the other departments of the government.
VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of the Philippines
(CUP), after briefly surveying the course of legislation, argues that it was to adopt a definite policy of granting tax
exemption to cooperatives that the present Constitution embodies provisions on cooperatives. To subject
cooperatives to the VAT would therefore be to infringe a constitutional policy. Petitioner claims that in 1973, P.D. No.
175 was promulgated exempting cooperatives from the payment of income taxes and sales taxes but in 1984,
because of the crisis which menaced the national economy, this exemption was withdrawn by P.D. No. 1955; that in
1986, P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until December 31, 1991,
but, in the same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the framers of the Constitution
"repudiated the previous actions of the government adverse to the interests of the cooperatives, that is, the repeated
revocation of the tax exemption to cooperatives and instead upheld the policy of strengthening the cooperatives by
way of the grant of tax exemptions," by providing the following in Art. XII:
1. The goals of the national economy are a more equitable distribution of opportunities, income,
and wealth; a sustained increase in the amount of goods and services produced by the nation for
the benefit of the people; and an expanding productivity as the key to raising the quality of life for
all, especially the underprivileged.
The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of human and
natural resources, and which are competitive in both domestic and foreign markets. However, the
State shall protect Filipino enterprises against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given
optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and
similar collective organizations, shall be encouraged to broaden the base of their ownership.
15. The Congress shall create an agency to promote the viability and growth of cooperatives as
instruments for social justice and economic development.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out cooperatives by
withdrawing their exemption from income and sales taxes under P.D. No. 175, 5. What P.D. No. 1955, 1 did was to
withdraw the exemptions and preferential treatments theretofore granted to private business enterprises in general, in
view of the economic crisis which then beset the nation. It is true that after P.D. No. 2008, 2 had restored the tax
exemptions of cooperatives in 1986, the exemption was again repealed by E.O. No. 93, 1, but then again
cooperatives were not the only ones whose exemptions were withdrawn. The withdrawal of tax incentives applied to
all, including government and private entities. In the second place, the Constitution does not really require that
cooperatives be granted tax exemptions in order to promote their growth and viability. Hence, there is no basis for
petitioner's assertion that the government's policy toward cooperatives had been one of vacillation, as far as the grant
of tax privileges was concerned, and that it was to put an end to this indecision that the constitutional provisions cited

were adopted. Perhaps as a matter of policy cooperatives should be granted tax exemptions, but that is left to the
discretion of Congress. If Congress does not grant exemption and there is no discrimination to cooperatives, no
violation of any constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt from taxation.
Such theory is contrary to the Constitution under which only the following are exempt from taxation: charitable
institutions, churches and parsonages, by reason of Art. VI, 28 (3), and non-stock, non-profit educational institutions
by reason of Art. XIV, 4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the equal protection
of the law because electric cooperatives are exempted from the VAT. The classification between electric and other
cooperatives (farmers cooperatives, producers cooperatives, marketing cooperatives, etc.) apparently rests on a
congressional determination that there is greater need to provide cheaper electric power to as many people as
possible, especially those living in the rural areas, than there is to provide them with other necessities in life. We
cannot say that such classification is unreasonable.
We have carefully read the various arguments raised against the constitutional validity of R.A. No. 7716. We have in
fact taken the extraordinary step of enjoining its enforcement pending resolution of these cases. We have now come
to the conclusion that the law suffers from none of the infirmities attributed to it by petitioners and that its enactment
by the other branches of the government does not constitute a grave abuse of discretion. Any question as to its
necessity, desirability or expediency must be addressed to Congress as the body which is electorally responsible,
remembering that, as Justice Holmes has said, "legislators are the ultimate guardians of the liberties and welfare of
the people in quite as great a degree as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S. 267,
270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in arguing that we should
enforce the public accountability of legislators, that those who took part in passing the law in question by voting for it
in Congress should later thrust to the courts the burden of reviewing measures in the flush of enactment. This Court
does not sit as a third branch of the legislature, much less exercise a veto power over legislation.
WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining order previously
issued is hereby lifted.
SO ORDERED.
Narvasa, C.J., Feliciano, Melo, Kapunan, Francisco and Hermosisima, Jr., JJ., concur.
Padilla and Vitug, JJ., maintained their separate opinion.
Regalado, Davide, Jr., Romero, Bellosillo and Puno, JJ, maintained their dissenting opinion.
Panganiban, J., took no part.

10. ABAKADA Guro v Exex Secretary, 469 SCRA 1, etc., Sep 1, 2005 & Oct 18, 2005
(see separate file)

11. Maceda vs. Macaraeg 223 SCRA 217(10)

EN BANC

G.R. No. 88291 June 8, 1993

ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President, HON.
VICENTE JAYME, ETC., ET AL., respondents.
Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex.

NOCON, J.:
Just like lightning which does strike the same place twice in some instances, this matter of indirect tax exemption of
the private respondent National Power Corporation (NPC) is brought to this Court a second time. Unfazed by the
Decision We promulgated on May 31, 1991 1 petitioner Ernesto Maceda asks this Court to reconsider said

Decision. Lest We be criticized for denying due process to the petitioner. We have decided to take a
second look at the issues. In the process, a hearing was held on July 9, 1992 where all parties presented
their respective arguments. Etched in this Court's mind are the paradoxical claims by both petitioner and
private respondents that their respective positions are for the benefit of the Filipino people.
I
A Chronological review of the relevant NPC laws, specially with respect to its tax exemption provisions, at the risk of
being repetitious is, therefore, in order.
On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power Corporation, a public
corporation, mainly to develop hydraulic power from all water sources in the Philippines. 2 The sum of P250,000.00

was appropriated out of the funds in the Philippine Treasury for the purpose of organizing the NPC and
conducting its preliminary work. 3 The main source of funds for the NPC was the flotation of bonds in the
capital markets 4and these bonds
. . . issued under the authority of this Act shall be exempt from the payment of all taxes by the
Commonwealth of the Philippines, or by any authority, branch, division or political subdivision
thereof and subject to the provisions of the Act of Congress, approved March 24, 1934, otherwise
known as the Tydings McDuffle Law, which facts shall be stated upon the face of said bonds. . . . . 5
On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the initial operations of
the NPC and reiterating the provision of the flotation of bonds as soon as the first construction of any hydraulic power
project was to be decided by the NPC Board. 6 The provision on tax exemption in relation to the issuance of

the NPC bonds was neither amended nor deleted.

On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the bond's principal
and interest in "gold coins" but adding that payment could be made in United States dollars. 7 The provision on tax

exemption in relation to the issuance of the NPC bonds was neither amended nor deleted.

On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines to guarantee,
absolutely and unconditionally, as primary obligor, the payment of any and all NPC loans. 8 He was also authorized

to contract on behalf of the NPC with the International Bank for Reconstruction and Development (IBRD)
for NPC loans for the accomplishment of NPC's corporate objectives 9 and for the reconstruction and
development of the economy of the country. 10 It was expressly stated that:
Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges, contributions
and restrictions of the Republic of the Philippines, its provinces, cities and municipalities. 11
On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to incur other types of
indebtedness, aside from indebtedness incurred by flotation of bonds. 12 As to the pertinent tax exemption

provision, the law stated as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all
taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its
provinces, cities and municipalities. 13
On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD, the President of
the Philippines was authorized to negotiate, contract and guarantee loans with the Export-Import Bank of of
Washigton, D.C., U.S.A., or any other international financial institution. 14 The tax provision for repayment of

these loans, as stated in R.A. No. 357, was not amended.

On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real estate taxes. As
enacted, the law states as follows:
To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all
taxes, except real property tax, and from all duties, fees, imposts, charges, and restrictions of the
Republic of the Philippines, its provinces, cities, and municipalities. 15
On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded by the increased
indebtedness 16 should bear the National Economic Council's stamp of approval. The tax exemption

provision related to the payment of this total indebtedness was not amended nor deleted.
On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC was authorized to
incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No. 357. 17 The tax provision related to the

repayment of these loans was not amended nor deleted.

All laws or
provisions of laws and executive orders contrary to said R.A. No. 2058 were expressly repealed. 19
On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31, 2000.

18

On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into a stock corporation
with an authorized capital stock of P100,000,000.00 divided into 1,000.000 shares having a par value of P100.00
each, with said capital stock wholly subscribed to by the Government. 20 No tax exemption was incorporated in

said Act.
On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital stock to
P250,000,000.00 with the increase to be wholly subscribed by the Government. 21 No tax provision was

incorporated in said Act.

On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to P300,000,000.00, the
increase to be wholly subscribed by the Government. No tax provision was incorporated in said Act. 22
On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No. 120, as amended.
Declared as primary objectives of the nation were:
Declaration of Policy. Congress hereby declares that (1) the comprehensive development,
utilization and conservation of Philippine water resources for all beneficial uses, including power
generation, and (2) the total electrification of the Philippines through the development of power
from all sources to meet the needs of industrial development and dispersal and the needs of rural
electrification are primary objectives of the nation which shall be pursued coordinately and
supported by all instrumentalities and agencies of the government, including the financial
institutions. 23
Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority to incur Domestic
Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans).
As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:
The bonds issued under the authority of this subsection shall be exempt from the payment of all
taxes by the Republic of the Philippines, or by any authority, branch, division or political subdivision
thereof which facts shall be stated upon the face of said bonds. . . . 24
As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states as follows:
The loans, credits and indebtedness contracted under this subsection and the payment of the
principal, interest and other charges thereon, as well as the importation of machinery, equipment,
materials and supplies by the Corporation, paid from the proceeds of any loan, credit or
indebtedeness incurred under this Act, shall also be exempt from all taxes, fees, imposts, other
charges and restrictions, including import restrictions, by the Republic of the Philippines, or any of
its agencies and political subdivisions. 25
A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares the non-profit
character and tax exemptions of NPC as follows:
The Corporation shall be non-profit and shall devote all its returns from its capital investment, as
well as excess revenues from its operation, for expansion. To enable the Corporation to pay its
indebtedness and obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation is hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges costs and service fees in any
court or administrative proceedings in which it may be a party, restrictions and duties to the
Republic of the Philippines, its provinces, cities, and municipalities and other government agencies
and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government,
its provinces, cities, municipalities and other government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on
import of foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities, municipalities
and other government agencies and instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale of electric power. 26

On November 7, 1972, Presidential Decree No. 40 was issued declaring that the
electrification of the entire country was one of the primary concerns of the country. And in
connection with this, it was specifically stated that:
The setting up of transmission line grids and the construction of associated generation facilities in
Luzon, Mindanao and major islands of the country, including the Visayas, shall be the responsibility
of the National Power Corporation (NPC) as the authorized implementing agency of the State. 27

xxx xxx xxx

It is the ultimate objective of the State for the NPC to own and operate as a single integrated
system all generating facilities supplying electric power to the entire area embraced by any grid set
up by the NPC. 28
On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill its role under
aforesaid P.D. No. 40. Its authorized capital stock was raised to P2,000,000,000.00, 29 its total domestic

indebtedness was pegged at a maximum of P3,000,000,000.00 at any one time,

authorized to borrow a total of US$1,000,000,000.00 31 in foreign loans.

30

and the NPC was

The relevant tax exemption provision for these foreign loans states as follows:
The loans, credits and indebtedness contracted under this subsection and the payment of the
principal, interest and other charges thereon, as well as the importation of machinery, equipment,
materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or
indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees,
imposts, other charges and restrictions, including import restrictions previously and presently
imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political
subdivisions. 32 (Emphasis supplied)
Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:
(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to the Republic of
the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities including the taxes, duties, fees, imposts and other charges provided for under the
Tariff and Customs Code of the Philippines, Republic Act Numbered Nineteen Hundred ThirtySeven, as amended, and as further amended by Presidential Decree No. 34 dated October 27,
1972, and Presidential Decree No. 69, dated November 24, 1972, and costs and service fees in
any court or administrative proceedings in which it may be a party;
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the
Republic of the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization and sale of electric power. 33 (Emphasis supplied)

On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of electricity to its
different customers. 34 No tax exemption provision was amended, deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated annually to cover
the unpaid subscription of the Government in the NPC authorized capital stock, which amount would be taken from
taxes accruing to the General Funds of the Government, proceeds from loans, issuance of bonds, treasury bills or
notes to be issued by the Secretary of Finance for this particular purpose. 35
On May 27, 1976 P.D. No. 938 was issued
(I)n view of the accelerated expansion programs for generation and transmission facilities which
includes nuclear power generation, the present capitalization of National Power Corporation (NPC)
and the ceilings for domestic and foreign borrowings are deemed insufficient; 36

xxx xxx xxx

(I)n the application of the tax exemption provisions of the Revised Charter, the non-profit character
of NPC has not been fully utilized because of restrictive interpretation of the taxing agencies of the
government on said provisions; 37

xxx xxx xxx

(I)n order to effect the accelerated expansion program and attain the declared objective of total
electrification of the country, further amendments of certain sections of Republic Act No. 6395, as
amended by Presidential Decrees Nos. 380, 395 and 758, have become imperative; 38
Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic indebtedness ceiling was

increased to P12,000,000,000.00, 40 the total foreign loan ceiling was raised to

US$4,000,000,000.00 41 and Section 13 of R.A. No. 6395, was amended to read as follows:
The Corporation shall be non-profit and shall devote all its returns from its capital investment as
well as excess revenues from its operation, for expansion. To enable the Corporation to pay to its
indebtedness and obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby declared
exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service
fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings. 42
II
On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177, 1931 and Executive
Order No. 93 (S'86).
On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to imports as
follows:
WHEREAS, importations by certain government agencies, including government-owned or
controlled corporation, are exempt from the payment of customs duties and compensating tax; and
WHEREAS, in order to reduce foreign exchange spending and to protect domestic industries, it is
necessary to restrict and regulate such tax-free importations.

NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the

powers vested in me by the Constitution, and do hereby decree and order the following:
Sec. 1. All importations of any government agency, including government-owned or controlled
corporations which are exempt from the payment of customs duties and internal revenue taxes,
shall be subject to the prior approval of an Inter-Agency Committee which shall insure compliance
with the following conditions:
(a) That no such article of local manufacture are available in sufficient quantity and comparable
quality at reasonable prices;
(b) That the articles to be imported are directly and actually needed and will be used exclusively by
the grantee of the exemption for its operations and projects or in the conduct of its functions; and
(c) The shipping documents covering the importation are in the name of the grantee to whom the
goods shall be delivered directly by customs authorities.
xxx xxx xxx
Sec. 3. The Committee shall have the power to regulate and control the tax-free importation of
government agencies in accordance with the conditions set forth in Section 1 hereof and the
regulations to be promulgated to implement the provisions of this Decree. Provided, however, That
any government agency or government-owned or controlled corporation, or any local manufacturer
or business firm adversely affected by any decision or ruling of the Inter-Agency Committee may
file an appeal with the Office of the President within ten days from the date of notice thereof. . . . .
xxx xxx xxx
Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of all general and
special laws and decrees are hereby amended accordingly.
xxx xxx xxx
On July 30, 1977, P.D. 1177 was issued as it was
. . . declared the policy of the State to formulate and implement a National Budget that is an
instrument of national development, reflective of national objectives, strategies and plans. The
budget shall be supportive of and consistent with the socio-economic development plan and shall
be oriented towards the achievement of explicit objectives and expected results, to ensure that
funds are utilized and operations are conducted effectively, economically and efficiently. The
national budget shall be formulated within a context of a regionalized government structure and of
the totality of revenues and other receipts, expenditures and borrowings of all levels of governmentowned or controlled corporations. The budget shall likewise be prepared within the context of the
national long-term plan and of a long-term budget program. 43
In line with such policy, the law decreed that
All units of government, including government-owned or controlled corporations, shall pay income taxes, customs
duties and other taxes and fees are imposed under revenues laws: provided, that organizations otherwise exempted
by law from the payment of such taxes/duties may ask for a subsidy from the General Fund in the exact amount of
taxes/duties due: provided, further, that a procedure shall be established by the Secretary of Finance and the

Commissioner of the Budget, whereby such subsidies shall automatically be considered as both revenue and
expenditure of the General Fund. 44
The law also declared that
[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which are inconsistent
with the provisions of the Decree are hereby repealed and/or modified accordingly. 45
On July 11, 1984, most likely due to the economic morass the Government found itself in after the Aquino
assassination, P.D. No. 1931 was issued to reiterate that:
WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant of tax
privileges to any government-owned or controlled corporation and all other units of government;

46

and since there was a

. . . need for government-owned or controlled corporations and all other units of government
enjoying tax privileges to share in the requirements of development, fiscal or otherwise, by paying
the duties, taxes and other charges due from them. 47
it was decreed that:
Sec. 1. The provisions of special on general law to the contrary notwithstanding, all exemptions
from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of
government-owned or controlled corporations including their subsidiaries, are hereby withdrawn.
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation
of the Fiscal Incentives Review Board created under Presidential Decree No. 776, is hereby
empowered to restore, partially or totally, the exemptions withdrawn by Section 1 above, any
applicable tax and duty, taking into account, among others, any or all of the following:
1) The effect on the relative price levels;
2) The relative contribution of the corporation to the revenue generation effort;
3) The nature of the activity in which the corporation is engaged in; or
4) In general the greater national interest to be served.
xxx xxx xxx
Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws, decrees, executive
orders, administrative orders, rules, regulations or parts thereof which are inconsistent with this
Decree are hereby repealed, amended or modified accordingly.
On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential restoration or grant of tax
exemption to other government and private entities without benefit of review by the Fiscal Incentives Review Board,
to wit:
WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and October 14,
1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax

treatment, of government and private entities with certain exceptions, in order that the requirements
of national economic development, in terms of fiscals and other resources, may be met more
adequately;
xxx xxx xxx
WHEREAS, in addition to those tax and duty exemption privileges were restored by the Fiscal
Incentives Review Board (FIRB), a number of affected entities, government and private, had their
tax and duty exemption privileges restored or granted by Presidential action without benefit or
review by the Fiscal Incentives Review Board (FIRB);
xxx xxx xxx
Since it was decided that:
[A]ssistance to government and private entities may be better provided where necessary by explicit
subsidy and budgetary support rather than tax and duty exemption privileges if only to improve the
fiscal monitoring aspects of government operations.
It was thus ordered that:
Sec. 1. The Provisions of any general or special law to the contrary notwithstanding, all tax and
duty incentives granted to government and private entities are hereby withdrawn, except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective internation agreement to which the Government of the Republic of
the Philippines is a signatory;
c) those enjoyed by enterprises registered with:
(i) the Board of Investment pursuant to Presidential Decree No. 1789, as
amended;
(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66
as amended;
(iii) the Philippine Veterans Investment Development Corporation Industrial
Authority pursuant to Presidential Decree No. 538, was amended.
d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instructions
No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the Fiscal
Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as
amended, is hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax and/or duty exemption that may be restored;
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date of period of effectivity of the restoration of tax and/or duty exemption;
e) formulate and submit to the President for approval, a complete system for the grant of subsidies
to deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty
exemptions or preferential treatment in taxation, indicating the source of funding therefor, eligible
beneficiaries and the terms and conditions for the grant thereof taking into consideration the
international commitment of the Philippines and the necessary precautions such that the grant of
subsidies does not become the basis for countervailing action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take
into account any or all of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue generation effort;
c) nature of the activity the beneficiary is engaged; and
d) in general, the greater national interest to be served.
xxx xxx xxx
Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent with this
Executive Order are hereby repealed or modified accordingly.
E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules and regulations, to be

issued by the Ministry of Finance. 49 Said rules and regulations were promulgated and published in the
Official Gazette
on February 23, 1987. These became effective on the 15th day after promulgation 50 in the Official
Gasetter, 51 which 15th day was March 10, 1987.
III
Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn in their TAXATION I
course, which fro convenient reference, is as follows:

Classifications or kinds of Taxes:

According to Persons who pay or who bear the burden:
a. Direct Tax the where the person supposed to pay the tax really pays it. WITHOUT transferring
the burden to someone else.
Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax),
residence tax, immigration tax
b. Indirect Tax that where the tax is imposed upon goods BEFORE reaching the consumer who
ultimately pays for it, not as a tax, but as a part of the purchase price.
Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the tariff
and customs indirect taxes (import duties, special import tax and other dues) 52
IV
To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced to the following:
(1) What kind of tax exemption privileges did NPC have?
(2) For what periods in time were these privileges being enjoyed?
(3) If there are taxes to be paid, who shall pay for these taxes?
V
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all forms of taxes
etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not expressly include
"indirect taxes."
His point is not well-taken.
A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to be
completely tax exempt from all forms of taxes direct and indirect.
NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations upon its creation
by virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained were to be
completely tax exempt.
After the NPC was authorized to borrow from other sources of funds aside issuance of bonds it was again
specifically exempted from all types of taxes "to facilitate payment of its indebtedness." Even when the ceilings for
domestic and foreign borrowings were periodically increased, the tax exemption privileges of the NPC were
maintained.
NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No. 987, as above
stated. The exemption was, however, restored by R.A. No. 6395.

Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions allowed NPC. Its
section 13(d) is the starting point of this bone of contention among the parties. For easy reference, it is reproduced as
follows:
[T]he Corporation is hereby declared exempt:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts and all other charges imposed by the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power.
P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as follows:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the
Republic of the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization and sale of electric power. (Emphasis supplied)
Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple paragraph as follows:
The Corporation shall be non-profit and shall devote all its returns from its capital investment as
well as excess revenues from its operation, for expansion. To enable the Corporation to pay its
indebtedness and obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby declared
exempt from the payment of ALL FORMS OF taxes, duties, fees, imposts as well as costs and
service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings. (Emphasis supplied)
Petitioner reminds Us that:
[I]t must be borne in mind that Presidential Decree Nos. 380
and 938 were issued by one man, acting as such the Executive and Legislative. 53

xxx xxx xxx

[S]ince both presidential decrees were made by the same person, it would have been very easy for
him to retain the same or similar language used in P.D. No. 380 P.D. No. 938 if his intention were to
preserve the indirect tax exemption of NPC. 54
Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his fault were. It should
be noted that section 13, R.A. No. 6395, provided for tax exemptions for the following items:
13(a) : court or administrative proceedings;
13(b) : income, franchise, realty taxes;
13(c) : import of foreign goods required for its operations and projects;

13(d) : petroleum products used in generation of electric power.

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.,", included 13(a)
under the "as well as" clause and added PNOC subsidiaries as qualified for tax exemptions.
This is the only conclusion one can arrive at if he has read all the NPC laws in the order of enactment or issuance as
narrated above in part I hereof. President Marcos must have considered all the NPC statutes from C.A. No. 120 up to
its latest amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came up 55 with a very simple Section

13, R.A. No. 6395, as amended by P.D. No. 938.

which, as of P.D.
No. 938, was P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total foreign
loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be
achieved.
One common theme in all these laws is that the NPC must be enable to pay its indebtedness

56

By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered that to pay the
government share in its capital stock P.D. No. 758 was issued mandating that P200 Million would be appropriated
annually to cover the said unpaid subscription of the Government in NPC's authorized capital stock. And significantly
one of the sources of this annual appropriation of P200 million is TAX MONEY accruing to the General Fund of the
Government. It does not stand to reason then that former President Marcos would order P200 Million to be taken
partially or totally from tax money to be used to pay the Government subscription in the NPC, on one hand, and then
order the NPC to pay all its indirect taxes, on the other.
The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into the phrase "All
FORMS OF" is supported by the fact that he did not do the same for the tax exemption provision for the foreign loans
to be incurred.
The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:
The loans, credits and indebtedness contracted under this subsection and the payment of the
principal, interest and other charges thereon, as well as the importation of machinery, equipment,
materials and supplies by the Corporation, paid from the proceeds of any loan, credit or
indebtedness incurred under this Act, shall also be exempt from all taxes, fees, imposts, other
charges and restrictions, including import restrictions, by the Republic of the Philippines, or any of
its agencies and political subdivisions. 57
The same was amended by P.D. No. 380 as follows:
The loans, credits and indebtedness contracted this subsection and the payment of the principal,
interest and other charges thereon, as well as the importation of machinery, equipment, materials,
supplies and services, by the Corporation, paid from the proceeds of any loan, credit or
indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees,
imposts, other charges and restrictions, including import restrictions previously and presently
imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political
subdivisions. 58(Emphasis supplied)
P.D. No. 938 did not amend the same 59 and so the tax exemption provision in Section 8 (b), R.A. No. 6395,

as amended by P.D. No. 380, still stands. Since the subject matter of this particular Section 8 (b) had to
do only with loans and machinery imported, paid for from the proceeds of these foreign loans, THERE
WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax exemption stood as is
with the express mention of "direct

and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to "taxes,
fees, imposts, other charges . . . to be imposed" in the future surely, an indication that the lawmakers
wanted the NPC to be exempt from ALL FORMS of taxes direct and indirect.
It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and indirect taxes
under P.D. No. 938.
VI
Five (5) years on into the now discredited New Society, the Government decided to rationalize government receipts
and expenditures by formulating and implementing a National Budget. 60 The NPC, being a government owned

and controlled corporation had to be shed off its tax exemption status privileges under P.D. No. 1177. It
was, however, allowed to ask for a subsidy from the General Fund in the exact amount of taxes/duties
due.
Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges. It allowed, however,
NPC to appeal said repeal with the Office of the President and to avail of tax-free importation privileges under its
Section 1, subject to the prior approval of an Inter-Agency Committed created by virtue of said P.D. No. 882. It is
presumed that the NPC, being the special creation of the State, was allowed to continue its tax-free importations.
This Court notes that petitioner brought to the attention of this Court, the matter of the abolition of NPC's tax
exemption privileges by P.D. No. 1177 61 only in his Common Reply/Comment to private Respondents'

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

In his memorandum filed July 16, 1992, petitioner submits:

[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty and tax
exemptions, whether direct or indirect. And so there was nothing to be withdrawn or to be restored
under P.D. No. 1931, issued on June 11, 1984. This is evident from sections 1 and 2 of said P.D.
No. 1931, which reads:
"Section 1. The provisions of special or general law to the contrary
notwithstanding, all exemptions from the payment of duties, taxes, fees, imports
and other charges heretofore granted in favor of government-owned or controlled
corporations including their subsidiaries are hereby withdrawn."
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under P.D. No.
776, is hereby empowered to restore partially or totally, the exemptions
withdrawn by section 1 above. . . .
Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it had already
lost all its tax exemptions privilege with the issuance of P.D. No. 1177 seven (7) years earlier or on
July 30, 1977, there were no tax exemptions to be withdrawn by section 1 which could later be
restored by the Minister of Finance upon the recommendation of the FIRB under Section 2 of P.D.
No. 1931. Consequently, FIRB resolutions No. 10-85, and 1-86, were all illegally and validly issued
since FIRB acted beyond their statutory authority by creating and not merely restoring the tax
exempt status of NPC. The same is true for FIRB Res. No. 17-87 which restored NPC's tax
exemption under E.O. No. 93 which likewise abolished all duties and tax exemptions but allowed
the President upon recommendation of the FIRB to restore those abolished.
The Court disagrees.
Applying by analogy the weight of authority that:
When a revised and consolidated act re-enacts in the same or substantially the same terms the
provisions of the act or acts so revised and consolidated, the revision and consolidation shall be
taken to be a continuation of the former act or acts, although the former act or acts may be
expressly repealed by the revised and consolidated act; and all rights
and liabilities under the former act or acts are preserved and may be enforced. 66
the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section 23, P.D. No. 1177,
on withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D. No. 1931 was deemed to be a
continuation of the first half of Section 23, P.D. No. 1177, although the second half of Section 23, P.D. No. 177, on the
subsidy scheme for former tax exempt GOCCs had been expressly repealed by Section 2 with its institution of the
FIRB recommendation of partial/total restoration of tax exemption privileges.
The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC tax exemption
privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a subsidy for the taxes it had to pay. It
could, however, under P.D. No. 1931, ask for a total restoration of its tax exemption privileges, which, it did, and the
same were granted under FIRB Resolutions Nos. 10-85 67 and 1-86 68 as approved by the Minister of Finance.
Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were both legally and
validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's tax exemption status but merely
restored it. 69

Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the now rather infamous
Amendment No. 6 70 as there was no showing that President Marcos' encroachment on legislative

prerogatives was justified under the then prevailing condition that he could legislate "only if the Batasang
Pambansa 'failed or was unable to act inadequately on any matter that in his judgment required
immediate action' to meet the 'exigency'. 71
Actually under said Amendment No. 6, then President Marcos could issue decrees not only when the Interim
Batasang Pambansa failed or was unable to act adequately on any matter for any reason that in his (Marcos')
judgment required immediate action, but also when there existed a grave emergency or a threat or thereof. It must be
remembered that said Presidential Decree was issued only around nine (9) months after the Philippines unilaterally
declared a moratorium on its foreign debt payments 72 as a result of the economic crisis triggered by loss of

confidence in the government brought about by the Aquino assassination. The Philippines was then trying
to reschedule its debt payments. 73 One of the big borrowers was the NPC 74 which had a US$ 2.1 billion
white elephant of a Bataan Nuclear Power Plant on its back. 75 From all indications, it must have been this
grave emergency of a debt rescheduling which compelled Marcos to issue P.D. No. 1931, under his
Amendment 6 power. 76
The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be passed without the
concurrence of a majority of all the members of the Batasang Pambansa" 77 does not apply as said P.D. No. 1931

was not passed by the Interim Batasang Pambansa but by then President Marcos under His Amendment
No. 6 power.
P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No. 6 authority.
Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time, President Aquino. Its
section 2 allowed the NPC to apply for the restoration of its tax exemption privileges. The same was granted under
FIRB Resolution No. 17-87 78 dated June 24, 1987 which restored NPC's tax exemption privileges effective,

starting March 10, 1987, the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is no indication, however,

from the records of the case whether or not similar approvals were given by then President Marcos for
FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to believe that a "travesty of justice"
might have occurred when the Minister of Finance approved his own recommendation as Chairman of the
Fiscal Incentives Review Board as what happened in Zambales Chromate vs. Court of Appeals 80 when
the Secretary of Agriculture and Natural Resources approved a decision earlier rendered by him when he
was the Director of Mines, 81 and in Anzaldo vs. Clave 82 where Presidential Executive Assistant Clave
affirmed, on appeal to Malacaang, his own decision as Chairman of the Civil Service Commission. 83
Upon deeper analysis, the question arises as to whether one can talk about "due process" being violated when FIRB
Resolutions Nos. 10-85 and 1-86 were approved by the Minister of Finance when the same were recommended by
him in his capacity as Chairman of the Fiscal Incentives Review Board. 84
In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and scientist-doctors,
respectively. Thus, there was a need for procedural due process to be followed.
In the case of the tax exemption restoration of NPC, there is no other comparable entity not even a single public or
private corporation whose rights would be violated if NPC's tax exemption privileges were to be restored. While
there might have been a MERALCO before Martial Law, it is of public knowledge that the MERALCO generating
plants were sold to the NPC in line with the State policy that NPC was to be the State implementing arm for the
electrification of the entire country. Besides, MERALCO was limited to Manila and its environs. And as of 1984, there

was no more MERALCO as a producer of electricity which could have objected to the restoration of NPC's tax
exemption privileges.
It should be noted that NPC was not asking to be granted tax exemption privileges for the first time. It was just asking
that its tax exemption privileges be restored. It is for these reasons that, at least in NPC's case, the recommendation
and approval of NPC's tax exemption privileges under FIRB Resolution Nos. 10-85 and 1-86, done by the same
person acting in his dual capacities as Chairman of the Fiscal Incentives Review Board and Minister of Finance,
respectively, do not violate procedural due process.
While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on October 5, 1987, the
view has been expressed that President Aquino, at least with regard to E.O. 93 (S'86), had no authority to subdelegate to the FIRB, which was allegedly not a delegate of the legislature, the power delegated to her thereunder.
A misconception must be cleared up.
When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and Legislative powers. Thus,
there was no power delegated to her, rather it was she who was delegating her power. She delegated it to the FIRB,
which, for purposes of E.O No. 93 (S'86), is a delegate of the legislature. Clearly, she was not sub-delegating her
power.
And E.O. No. 93 (S'86), as a delegating law, was complete in itself it set forth the policy to be carried out

fixed the standard to which the delegate had to conform in the performance of his functions,
qualities having been enunciated by this Court in Pelaez vs. Auditor General. 87

86

85

and it

both

Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from June 11, 1984 up
to the present.
VII
The next question that projects itself is who pays the tax?
The answer to the question could be gleamed from the manner by which the Commissaries of the Armed Forces of
the Philippines sell their goods.
By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their defendants but

groceries and other goods free of all taxes and duties if bought from any AFP Commissaries.
In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad valorem and other taxes on
the goods earmarked for AFP Commissaries as an added cost of operation and distribute it over the total units of
goods sold as it would any other cost. Thus, even the ordinary supermarket buyer probably pays for the specific, ad
valorem and other taxes which theses suppliers do not charge the AFP Commissaries. 89
IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to absorb the taxes they add
to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders an
opinion, 90wherein he stated and We quote:
xxx xxx xxx

Republic Act No. 358 exempts the National Power Corporation from "all taxes, duties, fees,
imposts, charges, and restrictions of the Republic of the Philippines and its provinces, cities, and
municipalities." This exemption is broad enough to include all taxes, whether direct or indirect,
which the National Power Corporation may be required to pay, such as the specific tax on
petroleum products. That it is indirect or is of no amount [should be of no moment], for it is the
corporation that ultimately pays it. The view which refuses to accord the exemption because the tax
is first paid by the seller disregards realities and gives more importance to form than to substance.
Equity and law always exalt substance over from.
xxx xxx xxx
Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as knowledge that
many impositions taxpayers have to pay are in the nature of indirect taxes. To limit the exemption
granted the National Power Corporation to direct taxes notwithstanding the general and broad
language of the statue will be to thwrat the legislative intention in giving exemption from all forms of
taxes and impositions without distinguishing between those that are direct and those that are not.
(Emphasis supplied)
In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel oil to NPC
have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the
economic burden of such taxation is expected to be passed on through the channels of commerce to the user or
consumer of the goods sold. Because, however, the NPC has been exempted from both direct and indirect taxation,
the NPC must beheld exempted from absorbing the economic burden of indirect taxation. This means, on the one
hand, that the oil companies which wish to sell to NPC absorb all or part of the economic burden of the taxes
previously paid to BIR, which could they shift to NPC if NPC did not enjoy exemption from indirect taxes. This means
also, on the other hand, that the NPC may refuse to pay the part of the "normal" purchase price of bunker fuel oil
which represents all or part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless purchases
such oil from the oil companies because to do so may be more convenient and ultimately less costly for NPC than
NPC itself importing and hauling and storing the oil from overseas NPC is entitled to be reimbursed by the BIR for
that part of the buying price of NPC which verifiably represents the tax already paid by the oil company-vendor to the
BIR.
It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes HAS BEEN
RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue of which the ad valorem tax rate
on bunker fuel oil was reduced to ZERO (0%) PER CENTUM. Said E.O. no. 195 reads as follows:
EXECUTIVE ORDER NO. 195
AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF CERTAIN PETROLEUM
PRODUCTS.
xxx xxx xxx
Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as amended, is
hereby amended to read as follows:
Par. (b) For products subject to ad valorem tax only:
PRODUCT AD VALOREM TAX RATE
1. . . .

2. . . .
3. . . .
4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or less the same
generating power 0%
xxx xxx xxx
Sec. 3. This Executive Order shall take effect immediately.
Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen hundred and
eighty-seven. (Emphasis supplied)
The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is going to bear the
economic burden of the ad valorem taxes. What this Court will now dispose of are petitioner's complaints that some
indirect tax money has been illegally refunded by the Bureau of Internal Revenue to the NPC and that more claims for
refunds by the NPC are being processed for payment by the BIR.
A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the NPC last July 7, 1986
for P58.020.110.79 which were for "erroneously paid specific and ad valorem taxes during the period from October
31, 1984 to April 27, 1985. 91 Petitioner asks Us to declare this Tax Credit Memo illegal as the PNC did not

have indirect tax exemptions with the enactment of P.D. No. 938. As We have already ruled otherwise, the
only questions left are whether NPC Is entitled to a tax refund for the tax component of the price of the
bunker fuel oil purchased from Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properly
refunded the amount to NPC.
After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs NPC included, it was only on May 8, 1985 when the BIR issues its letter authority to
the NPC authorizing it to withdraw tax-free bunker fuel oil from the oil companies pursuant to FIRB Resolution No. 1085. 92 Since the tax exemption restoration was retroactive to June 11, 1984 there was a need. therefore, to

recover said amount as Caltex (PhiIs.) Inc. had already paid the BIR the specific and ad valorem taxes on
the bunker oil it sold NPC during the period above indicated and had billed NPC correspondingly. 93 It
should be noted that the NPC, in its letter-claim dated September 11, 1985 to the Commissioner of the
Bureau of Internal Revenue DID NOT CATEGORICALLY AND UNEQUIVOCALLY STATE that itself paid
the P58.020,110.79 as part of the bunker fuel oil price it purchased from Caltex (Phils) Inc. 94
The law governing recovery of erroneously or illegally, collected taxes is section 230 of the National Internal Revenue
Code of 1977, as amended which reads as follows:
Sec. 230. Recover of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive or in any Manner
wrongfully collected. until a claim for refund or credit has been duly filed with the Commissioner; but
such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration of two years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment; Provided, however, That the Commissioner may, even without a written claim therefor,

refund or credit any tax, where on the face of the return upon which payment was made, such
payment appears clearly, to have been erroneously paid.
xxx xxx xxx
Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, 95 the Commissioner correctly

issued the Tax Credit Memo in view of NPC's indirect tax exemption.
Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claim for P410.580,000.00
which represents specific and ad valorem taxes paid by the oil companies to the BIR from June 11, 1984 to the early
part of 1986. 96
A careful examination of petitioner's pleadings and annexes attached thereto does not reveal when the alleged claim
for a P410,580,000.00 tax refund was filed. It is only stated In paragraph No. 2 of the Deed of
Assignment97 executed by and between NPC and Caltex (Phils.) Inc., as follows:
That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of Internal Revenue
amounting to P442,887,716.16. P58.020,110.79 of which is due to Assignor's oil purchases from
the Assignee (Caltex [Phils.] Inc.)
Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain the BIR from refunding
said amount because of Our ruling that NPC has both direct and indirect tax exemption privileges. Neither can We
order the BIR to refund said amount to NPC as there is no pending petition for review on certiorariof a suit for its
collection before Us. At any rate, at this point in time, NPC can no longer file any suit to collect said amount EVEN IF
lt has previously filed a claim with the BIR because it is time-barred under Section 230 of the National Internal
Revenue Code of 1977. as amended, which states:
In any case, no such suit or proceeding shall be begun after the expiration of two years from the
date of payment of the tax or penalty REGARDLESS of any supervening cause that may arise
afterpayment. . . . (Emphasis supplied)
The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that payment by NPC for the
amount of P410,580,000.00 had been made on said date. it is clear that more than two (2) years had already elapsed
from said date. At the same time, We should note that there is no legal obstacle to the BIR granting, even without a
suit by NPC, the tax credit or refund claimed by NPC, assuming that NPC's claim had been made seasonably, and
assuming the amounts covered had actually been paid previously by the oil companies to the BIR.
WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is hereby DENIED for lack of
merit and the decision of this Court promulgated on May 31, 1991 is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., Feliciano, Bidin, Regalado, Romero, Bellosillo and Melo, JJ., concur.
Padilla and Quiason, JJ. took no part.

# Footnotes

1 Penned by Justice Gancayo, concurred in by Justices Narvasa, Melencio-Herrera, Feliciano,

Bidin, Medialdea, and Regalado; separate dissenting opinions by Justices Cruz, Paras, and
Sarmiento, with justices Grio-Aquino and Davide joining in the dissent of Justice Sarmiento while
Justice Gutierrez joined in the dissents. Chief Justice Gutierrez joined in the dissents. Chief Justice
Fernan and Justice Padilla took no part.
2 Com. Act No. 120, secs. 1, & 2 (g).
3 Com. Act No. 120, sec. 11.
4 Com. Act No. 120, sec. 2(k).
5 Com. Act No. 120, sec. 4, par. 3.
6 Com. Act No. 344, sec. 1.
7 Com. Act No. 495, sec. 1.
8 Rep. Act No. 357, sec. 3.
9 Rep. Act No. 357, sec. 1.
10 Rep. Act No. 357, sec. 2.
11 Rep. Act No. 357, sec. 8.
12 Rep. Act No. 358, sec. 1.
13 Rep. Act No. 358, sec. 2.
14 Rep. Act No. 813, sec. 1.
15 Rep. Act No. 987, sec. 2.
16 Increased to P500,000,000.00 from P170,500,000.00 in Rep. Act No. 358 (Rep. Act No. 1397,
sec. 1).
17 Rep Act No. 2055, secs. 1 and 2.
18 Rep Act No. 2058, sec. 1.
19 Rep Act No. 2058, sec. 2.
20 Rep Act No. 2641, sec. 1.
21 Rep Act No. 3043, sec. 1.
22 Rep Act No. 4897, sec. 1.
23 Rep Act No. 6395, sec. 2.

24 Rep Act No. 6395, sec. 8(a).

25 Rep Act No. 6395, sec. 8(b).
26 Rep Act No. 6395, sec. 13.
27 Pres. Dec. No. 40, par. 2.
28 Pres. Dec. No. 40, par. 5.
29 Pres. Dec. No. 380, sec. 5.
30 Pres. Dec. No. 380, sec. 8.
31 Pres. Dec. No. 380, sec. 9, par. 1.
32 Pres. Dec. No. 380, sec. 9, par. 4.
33 Pres. Dec. No. 380, sec. 10.
34 Pres. Dec. No. 395, par. 1.
35 Pres. Dec. No. 758, sec. 1.
36 Pres. Dec. No. 938, 1st Whereas clause.
37 Pres. Dec. No. 938, 4th Whereas clause.
38 Pres. Dec. No. 938, 6th Whereas clause.
39 Pres. Dec. No. 938, sec. 5.
40 Pres. Dec. No. 938, sec. 6.
41 Pres. Dec. No. 938, sec. 8.
42 Pres. Dec. No. 938, sec. 10.
43 Pres. Dec. No. 1177, sec. 4.
44 Pres. Dec. No. 1177, sec. 23.
45 Pres. Dec. No. 1177, sec. 90.
46 Pres. Dec. No. 1931, Fourth Whereas clause.
47 Pres. Dec. No. 1931, Fifth Whereas clause.
48 Exec. Order No. 93 (S'86). sec. 6.

49 Exec. Order No. 93, sec. 4.

50 Rule V, Rules and Regulations to Implement Exec. Order No. 93.
51 83 O.G. 8, pp. 722-725.
52 PARAS, TAXATION FUNDAMENTALS, 24-25 (1966)
53 Rollo, p. 687; Motion for Reconsideration, p. 12.
54 Rollo, p. 688; Motion for Reconsideration, p. 13.
55 "Statutes are considered to be in pari materia to pertain to the same subject matter when
they relate to the same person or thing, or to the same class of persons of things, or have the same
purpose or object. They may be independent or amendatory in form; they may be complete
enactments dealing with a single, limited subject matter or sections of code or revision; or they may
be combination of these. (2 Sutherland Statutory Construction, 2nd Ed., sec. 5202, p. 535)
xxx xxx xxx
Statutes in pari materia, although some may be special and some general, in the event one of them
is ambiguous or uncertain, are to be construed together, even if the various statutes have not been
enacted simultaneously, and do not refer to each other expressly, and although some of them have
been repealed or have expired, or held unconstitutional, or invalid. (Crawford, Statutory
Construction, sec. 231, p. 431.)
xxx xxx xxx
The reasons which support this rule are twofold. In the first place, all the enactments of the same
legislature on the general subject-matter are to be regarded as parts of one uniform system. Later
statutes are considered as supplementary or complementary to the earlier enactments. In the
passage of each act, the legislative body must be supposed to have had in mind and in
contemplation the existing legislation on the same subject, and to have shaped its new enactment
with reference thereto. Secondly, the rule derives support from the principle which requires the
interpretation of a statute shall be such, if possible, as to avoid any repugnancy or inconsistency
between different enactments of the same legislature. To achieve this result, it is necessary to
consider all previous acts relating to the same matters, and to construe the act in hand so as to
avoid, as far as it may be possible, any conflict between them. Hence for example, when the
legislature has used a word in a statute in one sense and with one meaning, and subsequently
uses the same word in legislating on the same subject matter, it will be understood as using the
word in the same sense, unless there is something in the context or in the nature of things to
indicate that it intended a different meaning thereby. (Black on Interpretation of Laws, 2nd Ed., pp.
232-234) FRANCISCO, STATUTORY CONSTRUCTION, 287-288 (1986).
56 The NPC is the implementing arm of the State in its policy of electrification of the entire country.
Its authorized capital stock and total local and foreign debt ceiling have, therefore, been regularly
raised to provide NPC with massive fund flows to achieve said policy.
57 Rep. Act No. 6395. sec. 8 (b), par. 5.
58 Rep. Act No. 6395, sec. 8 (b), par. 5. was deleted and paragraph 5, sec. 8(b) became paragraph
4, Section 8(b), as amended by Pres. Dec. 380.

59 "Sec. 8. The first paragraph of Section 8(b) of the same Act is hereby further amended and a
new paragraph shall be inserted between the third and fourth paragraph of said section which shall
both read as follows: . . .."
60 See Pres. Dec. No. 1177, sec. 4.
61 Rollo, p. 783.
62 T.S.N., July 9, 1992, pp. 19-21.
63 Rollo, pp. 53-119. In the report submitted to the Senate Blue Ribbon Committee, the discussion
centered on NPC's tax exemption privileges being abolished by Pres. Dec. No. 1931 in paragraphs
11, 37, 81, 83.1 and F.1 Pres. Dec. No. 1177 was mentioned in paragraph C(2) in the
Recommendation portion but only by way of its state policy being made a model for a future bill to
be filled by the Senators involved in the investigation.
64 117 SCRA 16 (1980).
65 In this case, Judge Magno Pulido of then CFI of Alaminos, Pangasinan, Branch XIII,
promulgated a decision on May 17, 1974 in Criminal Case No. 266-A entitled "People vs.
Bantolino." Bantolino filed a complaint against the judge charging him with ignorance of the law
because his sentence was "with subsidiary imprisonment." The case dismissed after respondent
judge therein state that he had corrected "with" to "without" but Bantolino's lawyer, Atty. Pulido,
refused to return his (Atty. Pulido) copy for a corrected copy.
Later, Atty. Pulido filed another charge against Judge Pablo, this time, for falsifying a Court of
Appeals' decision (re Bantolino's appeal with the Com. Act No.) and minutes of court hearings as
well as insertions in the record of a false commitment order. Respondent judge pleaded, among
others,res adjudicata.
The Court made a distinction between the two administrative complaints and concluded that there
was no res adjudicata. On the procedural aspect involved, the Court stated:
"Furthermore, the defense of res adjudicata was not seasonably invoked.
"It may be noted that respondent Judge initially raised the defense of res adjudicata only in the
motion for reconsideration dated November 8, 1981. Atty. Pulido filed this complaint on April 6,
1978. Respondent failed to set up the defense of res adjudicata when he filed his comment dated
June 19, 1974 in compliance with the first indorsement dated June 3, 1974 of the then Assistant to
the Judicial Consultant, now Deputy Court Administrator Arturo B. Buena. Such failure to interpose
the defense ofres adjudicata at the earliest opportunity is fatal as it deemed waived."
66 73 Am Jur 2d 518, sec. 410, citing United States v. Grainger 346 US 235, 97 L Ed 1575, 73 S Ct
1069; State v Bean 159 Me 455, 195 A2d 68; States v. Holland, 202 Or 656, 277 P2d 386.
For example, State vs. Bean was an action by the State ton recover for goods and services
rendered an inmate of a state hospital.
The defendant was committed to the Augusta State Hospital on September 21, 1949 by order of
court after he had been found not guilty of the commission of a crime by reason of insanity.

The defendant was confined when the prevailing laws were R.S. Ch. 27, Sec. 121 which provided
that the person so committed shall be there supported at his own expense, if he has sufficient
means; otherwise at the expense of the State,' and R.S. Ch. 27 Sec. 139 which provided that "The
state may recover from the insane, if able, or from persons legally liable for his support, the
reasonable expenses of his support in either insane hospital.' R.S. Ch. 27, Sec 121, was expressly
repealed by P.L. 1961, Ch. 304, Sec 17 while R.S. Ch. 27, Sec. 139 was expressly repealed by P.L.
1961, Ch. 304, Sec. 26.
However, by P.L. 1961, Ch. 304, Secs. 4 and 5, the legislature simultaneously enacted
amendments which in the case of Sec. 4 thereof charged the Department of Mental Health and
Corrections with the duty of determining the ability of the patient to pay for his support and of
establishing rates and fees therefor, and in the case of sec. 5, it provided that "such fees charges
shall be a debt of the patient or any person legally liable for his support."
It was only on January 20,1960 that the hospital billed the defendant for his stay from September
21, 1949 in the amount of $6651.72. Plaintiff filed on October 26, 1962 a case to recover said
amount. Defendant disclaimed liability by arguing that the enactment of P.L. 1961, Ch. 304 was to
terminate his liability for board and care furnished prior to its enactment.
The State of Maine's Supreme Judicial Court rebuffed the defendant and held that:
"[I]n the instant case P.L. 1961, Ch. 304 was intended to be a revision and condensation of the
statutes relating to the Department of Mental Health and Corrections by which the substance of the
right of the State of Maine to reimbursement for care and support from the criminally insane in
accordance with "means" or "ability" to pay remained undisturbed. We are satisfied that it was the
intention of the Legislature that there should be no moment when the right to such reimbursement
did not exist. We think, the governing principle was well stated in 50 Am. Jur. 559, Sec. 555;
"It is a general rule of law that where a statute is repealed and all or some of its provisions are not
the same time re-enacted, the re-enactment is considered a reaffirmance of the old law, and a
neutralization of the repeal, so that the provisions of the repealed act which are thus re-enacted
continue in force without interruption, and all rights and liabilities incurred thereunder are preserved
and may be enforced. Similarly, the rule of construction applicable to acts which revise and
consolidate other acts is, that when the revised and consolidated act re-enacts in the same or
substantially the same terms the provisions of the act or acts so revised and consolidated, the
revision and consolidation shall be taken to be a continuation of the former act or acts, although the
former act or acts may be expressly repealed by the revised and consolidated act; and all rights
and liabilities under the former act or acts are preserved and may be enforced." (State vs. Bean,
195 A2d 68, 71, 72; Emphasis supplied)
67 BE IT RESOLVED, AS IT HEREBY RESOLVED, That:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power
Corporation under Com. Act No. No. 120 as amended are restored up to June 30, 1985.
2. Provided, That this restoration does not apply to the following:
a. importations of fuel oil (crude equivalent) and coal as per FIRB Resolutions No. 1-84;
b. commercially-funded importations; and
c. interest income derived from any investment source.

3. Provided further, That in the case of importations funded by international financing agreements,
the NPC is hereby required to furnish the FIRB on a periodic basis the particulars of items received
or to be received through such arrangements, for purposes of tax and duty exemption privileges.
(SGD.)
ALFRED
O PIO
DE
RODA,
JR.
Acting
Minister
of
Finance
Acting
Chairma
n, FIRB
SUBJECT: National Power Corporation (NPC)"
68 BE IT RESOLVED, AS IT IS HEREBY RESOLVED: That
1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the National Power
Corporation (NPC) under Commonwealth Act No. 120, as amended, are restored; Provided, That
importations of fuel oil (crude oil equivalent) and coal of the herein grantee shall be subject to the
basic and additional imports duties; Provided, further, That the following shall remain fully taxable:
a. Commercially funded importations; and
b. Interest income derived by said grantee from bank deposits and yield or any other monetary
benefits from deposits substitutes, trust funds and other similar arrangements.
2. The NPC as a government corporation is exempt from the real property tax on land and
improvements owned by it provided that the beneficial use of the property is not transferred to
another pursuant to the provisions of Sec. 10(a) of the Real Property Tax Code, as amended.

(SGD.) CESAR E.A

VIRATA

Minister of Finance
Chairman, FIRB
SUBJECT: National Power Corporation."
69 Note should be taken that FIRB Resolution No. 10-85 covered the period from June 11, 1984 up
to June 30, 1985 while FIRB Resolution No. 1-86 covered the period from July 1, 1985 up to March
10, 1987.

70 "Whenever in the judgment of the President, there exists a grave emergency or a threat or
imminence thereof, or whenever the interim Batasang Pambansa or the regular National Assembly
fails or is unable to act adequately on any matter for any reason that in his judgment requires
immediate action, he may in order to meet the exigency, issued the necessary decrees, orders, or
letters of instruction, which shall form part of the law of the land."
71 Rollo, p. 652.
72 "The Philippines and International Monetary Fund (IMF) have failed in talks here to finalize an
agreement on a $630 million standby credit badly needed by the Philippines, informed sources
close to the talks told Reuters yesterday.
xxx xxx xxx
"Talks on the credit began in October when the Philippines declared a moratorium on repayments
on its $26-billion foreign debt and asked creditor banks to reschedule some of the debt." (Times
Journal, June 21, 1984)
73 The Philippines will not default in the payment of its $25-billion foreign debt because it could be
branded as an outlaw in the international community, President Marcos said yesterday." (Times
Journal, June 18, 1984)
74 WASHINGTON, D.C. The Philippines and a consortium of international banks have signed in
New York an agreement restructuring $2.9 billion in maturing short and medium terms loans of the
Central Bank and six other government corporations.
"The amount restructed represents 90 percent of the public sector loans to be restructured with
international banks.
Included in the restructuring were the loans of the Philippine National Bank (PNB), National
Investment Development Corp. (NIDC), Development Bank of the Philippines (DBP), Philippine
National Oil Corp. (PNOC), National Power Corporation (NAPOCOR) and Philippine Airlines
(PAL)." (Express, January 12, 1986)
75 "The $2.1-billion BNPP, nestled on a plateau hugging the South China Sea, is planned to
generate 620 megawatts for the Luzon grid. The 'people power' revolt in 1986, however, toppled
the plant's proponent, then President Marcos, from power.
"So many technical defects were said to have been discovered in the plant, and this "most
prodigious" project of the government-owned National Power Corp. was mothballed and has
remained so up to the present. It is a "white elephant" and the country continues to pay a huge
interests to its builder, Westinghouse, every month." (Manila Bulletin, July 15, 1992)
76 President Marcos issued for decrees yesterday, among them Decree No. 1934 (should be 1939
amending Rep. Act No. 4850 (should be Rep. Act No. 4850 (should be Rep. Act. No. 4860) to allow
an increase in the ceiling on direct foreign borrowings of the government from $5 billion to $10
billion.
"It would allow him to exclude specific categories of external debt from the debt service limitation
whenever necessary in connection with the general rescheduling or refinancing of foreign credits.

"The decree also increases the ceiling on the government's guarantee from the present $2.5 billion
to $7.5 billion.
"It authorizes the government's guarantee of external debts of government corporations.
"He also issued:
1. Decree No. 1932 (should be No. 1937) amending the Central Bank Charter to allow it greater
flexibility in administering the monetary, banking and credit system and to give a policy direction in
the areas of money, banking and credit.
2. Decree No 1933 (should be no. 1938) clothing the government with expanded authority to
guarantee foreign loans of the Central Bank.
3. Decree no. 1936 (should be No. 1939) authorizing the Credit Information Bureau, to secure
credit information on individuals and institutions in the possession of government and private
entities.
(Manila Bulletin, June 29, 1984)
77 "Section 17(4), Article VIII, 1973 Constitution.
78 "BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges
of the National Power Corporation, including those pertaining to its domestic purchases of
petroleum and petroleum products, granted under the terms and conditions of Commonwealth Act
No. 120 (Creating the National Power Corporation, defining its powers, objectives and functions,
and for other purposes), as amended, are restored effective March 10, 1987, subject to the
following conditions:
1. The restoration of the tax and duty exemption privileges does not apply to the following:
1.1. Importations of fuel oil (crude equivalent) and coal;
1.2. Commercially-funded importations (i.e., importations which include but are not limited to those
financed by the NPC's own internal funds, domestic borrowings from any source whatsoever,
borrowings from foreign-based private financial institutions, etc.); and
1.3. Interest income derived from any source.
2. The NPC shall submit to the FIRB a report of its expansion of relieved program, including details
of disposition of relieved tax and duty payments for such expansion on an annual basis or as often
as the FIRB may require it to do so. This report shall be in addition to the usual FIRB reporting
requirements on incentive availment.
(SGD.)
ALFRED
O PIO
DE
RODA,
JR.

Acting
Secretar
y of
Finance
Chairma
n, FIRB"
79 Rollo, p. 233; Annex "M" of the Petition.
80 94 SCRA 261 (1974).
81 In order that the review of the decision of a subordinate officer might not turn out to be a farce,
the reviewing officer must perforce be other than the officer whose decision is under review;
otherwise, there could be no different view or there would be no real view of the case. The decision
of the reviewing officer would be biased view; inevitably, it would be the same view since being
human, he would not admit that he was mistaken in his first view of the case." (Ibid., p. 267)
82 119 SCRA 353 (1982).
83 "Due process of law means fundamental fairness It is not fair to Doctor Anzaldo that Presidential
Executive Assistant Clave should decide whether his own recommendation as Chairman of the
Civil Service Commission, as to who between Doctor Anzaldo and Doctor Venzon should be
appointed Science Research Supervisor II, should be adopted by the President of the Philippines."
(Ibid. p. 357).
84 "A Fiscal Incentive Review Board is hereby created for the purpose of determining what
subsidies and tax exemptions should be modified, withdrawn, revoked and suspended, which shall
be composed of the following officials:
Chairman Secretary of Finance
Members Secretary of Industry
Director General of the National
Economic and Development Authority
Commissioner of Internal Revenue
Commissioner of Customs
"The Board may recommend to the President of the Philippines and for reasons of compatibility
with the declared economic policy, the withdrawal, modification revocation or suspension of the
enforceability of any of the above-cited statutory or tax exemption grants, except those granted by
the Constitution. To attain its objectives, the Board may require the assistance of any appropriate
government agency or entity. The Board shall meet once a month, or oftener at the call of
Secretary of Finance." (Sec. 2, Pres. Dec. No. 776)

85 WITHDRAWING ALL TAX AND DUTY INCENTIVES, SUBJECT TO CERTAIN EXCEPTIONS,

EXPANDING THE POWERS OF THE FISCAL INCENTIVES REVIEW BOARD AND FOR OTHER
PURPOSES."
86 In the discharge of its authority hereunder the Fiscal Incentives Review Board shall take into
account or any of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue
generation effort;
c) nature of the activity the beneficiary is engaged; and
d) in general, the greater national interest to be served."
87 15 SCRA 569 (1965).
88 "WHEREAS, pursuant to Proclamation No. 1081, dated September 21, 1972, martial law is in
effect throughout the land;
"WHEREAS, in order to extend further assistance to the Veterans of the Philippines in World War II,
and their windows and orphans, as well as to the members of the Armed Forces of the Philippines
(who are now carrying the greater part of the burden of suppressing the activities of groups of men
actively engaged in a criminal conspiracy to seize political and state powers in the Philippines and
of eradicating lawlessness, anarchy, disorder and wanton destruction of lives and property) and
their dependents, I ordered the Philippine Veterans Bank to set aside the sum of five million pesos
(P5,000,000.00) in Letter of Instruction No. 31, October 23, 1972, as amended, for the operation
and maintenance of commissary and PX facilities for the aforementioned veterans, their widows
and orphans, and the members of the Armed Forces of the Philippines and their dependents;
"WHEREAS, to better realize the objectives of the aforementioned Leter Instructions and in order to
render fuller meaning to said objectives, it is necessary that certain commodities which are to be
sold by the commissary from local producers, manufacturers or suppliers be free of all taxes, duties
and/or charges imposed by the Government;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the
powers in me vested by the Constitution as Commander-in-Chief of all the Armed Forces of the
Philippines, and pursuant to the Letter of Instruction cited above, do hereby promulgate and decree
as part of the law of the land that all purchases from local sources, manufacturers, suppliers and
producers of commodities or items decided by the AFP Exchange and Commissary Service to be
sold to persons entitled to commissary and PX privileges under Letter of Instruction No. 31, dated
October 23, 1972, as amended, shall be free of all taxes, duties and other charges prescribed for
similar commodities or items under existing revenue and other laws and regulations.
The Chief of Staff, AFP, with approval of December, in the year of Our Lord, nineteen hundred and
seventy-two." (Emphasis Supplied)
89 Footnote No. 15 Philippine Acetylene Co., Inc. vs. Commissioner of Internal Revenue, 20 SCRA
1056, at 1064: "In the long run a sales tax is probably shifted to the consumer, but during the period
when supply is being adjusted to changes in demand it must be in part absorbed. In practice the
business man will treat the levy as an added cost of operation and distribute it over his sales as he

would any other cost, increasing by more than the amount of tax prices of goods demand for which
will be least affected and leaving other prices unchanged." [47 Harv. Ld. Rev. 860, 869 (1934)].
90 Opinion No. 106, S'54.
91 Rollo, p. 212; Petition, Annex "F".
92 Rollo, p. 124 Petition, Annex "D" of Annex "A".
93 Rollo, p. 156; Petition, Annex "N-1" of Annex "A".
94 Rollo, p. 128; Petition, Annex "G" of Annex "A".
95 Ibid.
96 Rollo, p. 12.
97 Rollo, p. 213, Petition, Annex "G".

12. Procter & Gamble vs. Mun. Of Jagna, 94 SCRA 894

FIRST DIVISION
G.R. No. L-24265 December 28, 1979
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION, plaintiff-appellant,
vs.
THE MUNICIPALITY OF JAGNA, PROVINCE OF BOHOL, defendant-appellee.
Picazo, Agcaoili, Santayana, Reyes & Tayao for appellant.
Joel P. Tiangco and Jesus N. Borromeo for appellee.

MELENCIO-HERRERA, J.:
A direct appeal by plaintiff company from the judgment of the Court of First Instance of Manila, Branch VI, upholding
the validity of Ordinance No. 4, Series of 1957, enacted by defendant Municipality, which imposed "storage fees on all
exportable copra deposited in the bodega within the jurisdiction of the Municipality of Jagna Bohol.
Plaintiff-appellant is a domestic corporation with principal offices in Manila. lt is a consolidated corporation of Procter
& Gamble Trading Company and Philippine Manufacturing Company, which later became Procter & Gamble Trading
Company, Philippines. It is engaged in the manufacture of soap, edible oil, margarine and other similar products, and
for this purpose maintains a "bodega" in defendant Municipality where it stores copra purchased in the municipality
and therefrom ships the same for its manufacturing and other operations.
On December 13, 1957, the Municipal Council of Jagna enacted Municipal Ordinance No. 4, Series of 1957, quoted
hereinbelow:

AN ORDINANCE IMPOSING STORAGE FEES OF ALL EXPORTABLE COPRA DEPOSITED IN

THE BODEGA WITHIN THE JURISDlCTI0N OF THE MUNICIPALITY OF JAGNA BOHOL.
Be it ordained by the Municipal Council of Jagna Bohol, that:
SECTION 1. Any person, firm or corporation having a deposit of exportable copra in the bodega,
within the jurisdiction of the Municipality of Jagna Bohol, shall pay to the Municipal Treasury a
storage fee of TEN (P0.10) CENTAVOS FOR EVERY HUNDRED (100) kilos;
SECTION 2. All exportable copra deposited in the bodega within the Municipality of Jagna Bohol, is
part of the surveillance and lookout of the Municipal Authorities;
SECTION 3. Any person, firm or corporation found violating the provision of the preceding section
of this Ordinance shall be punished by a fine of not less than TWO HUNDRED (P 200.00) PESOS,
nor more than FOUR HUNDRED (P400.00) PESOS, or an imprisonment of hot less than ONE
MONTH, nor more than THREE MONTHS, or both fines and imprisonment at the discretion of the
court.
SECTION 4. This Ordinance shall take effect on January 1, 1958.
APPROVED December 13,1957.
(Sgd.) TEODORO B. GALACAR Municipal Mayor 1
For a period of six years, from 1958 to 1963, plaintiff paid defendant Municipality, allegedly under protest, storage
fees in the total sum of 1142,265.13, broken down as follows:
Procter & Gamble Trading Co. Procter & Gamble Philippine Manufacturing Corp.

19

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On March 3, 1964, plaintiff filed this suit in the Court of First Instance of Manila, Branch VI, wherein it prayed that 1)
Ordinance No. 4 be declared inapplicable to it, or in the alter. native, that it be pronounced ultra-vires and void for
being beyond the power of the Municipality to enact; and 2) that defendant Municipality be ordered to refund to it the
amount of P42,265.13 which it had paid under protest; and costs.
For its part, defendant Municipality upheld its power to enact the Ordinance in question; questioned the jurisdiction of
the trial Court to take cognizance of the action under section 44(h) of the Judiciary Act in that it seeks to enjoin the
enforcement of a Municipal Ordinance; and pleaded prescription and laches for plaintiff's failure to timely question the
validity of the said Ordinance.
After the parties had agreed to submit the case for judgment on the pleadings, the trial Court upheld its jurisdiction as
well as defendant Municipality's power to enact the Ordinance in question under section 2238 of the Revised
Administrative Code, otherwise known as the general welfare clause, and declared that plaintiff's right of action had
prescribed under the 5-year period provided for by Article 1149 of the Civil Code.
In this appeal, plaintiff interposes the following Assignments of Error:
I
THE TRIAL COURT ERRED IN HOLDING THAT ORDINANCE NO. 4, SERIES OF 1957,
ENACTED BY THE DEFENDANT MUNICIPALITY OF JAGNA BOHOL, IS A VALID, LEGAL AND
ENFORCEABLE ORDINANCE AGAINST THE PLAINTIFF.
II
THE TRIAL COURT ERRED IN HOLDING THAT PAYMENT OF THE TAX UNDER ORDINANCE
NO. 4, SERIES OF 1957 WAS NOT DONE UNDER PROTEST.
III
THE TRIAL COURT ERRED IN HOLDING THAT THE ACTION OF THE PLAINTIFF TO ANNUL
AND TO DECLARE ORDINANCE NO. 4, SERIES OF 1957 OF THE DEFENDANT HAS ALREADY
PRESCRIBED.
IV
AND, FINALLY, THE TRIAL COURT ERRED IN NOT HOLDING ORDINANCE NO. 4. SERIES OF
1957 ULTRA-VIRES AND VOID AND IN NOT ORDERING THE REFUND OF TAXES PAID
THEREUNDER. 3
It is plaintiff's submission that the subject Ordinance is inapplicable to it as it is not engaged in the business or trade
of storing copra for others for compensation or profit and that the only copra it stores is for its exclusive use in
connection with its business as manufacturer of soap, edible oil, margarine and other similar products; that the levy is
intended as an "export tax" as it is collected on "exportable copra' , and, therefore, beyond the power of the

Municipality to enact; and that the fee of P0.10 for every 100 kilos of copra stored in the bodega is excessive,
unreasonable and oppressive and is imposed more for revenue than as a regulatory fee.
The main question to determine is whether defendant Municipality was authorized to impose and collect the storage
fee provided for in the challenged Ordinance under the laws then prevailing.
The validity of the Ordinance must be upheld pursuant to the broad authority conferred upon municipalities by
Commonwealth Act No. 472, approved on June 16, 1939, which was the prevailing law when the Ordinance was
enacted (Procter & Gamble Trading Co. vs. Municipality of Medina, 43 SCRA 130 11972]). Section 1 thereof reads:
Section 1. A municipal council or municipal district council shall have the authority to impose
municipal license taxes upon persons engaged in any occupation or business, or exercising
privileges in the municipality or municipal district, by requiring them to secure licenses at rates fixed
by the municipal council, or municipal district council, and to collect fees and charges for services
rendered by the municipality or municipal district and shall otherwise have power to levy for public
local purposes, and for school purposes, including teachers' salaries, just and uniform taxes other
than percentage taxes and taxes on specified articles.
Under the foregoing provision, a municipality is authorized to impose three kinds of licenses: (1) a license for
regulation of useful occupation or enterprises; (2) license for restriction or regulation of non-useful occupations or
enterprises; and (3) license for revenue. 4 It is thus unnecessary, as plaintiff would have us do, to determine

whether the subject storage fee is a tax for revenue purposes or a license fee to reimburse defendant
Municipality for service of supervision because defendant Municipality is authorized not only to impose a
license fee but also to tax for revenue purposes.
The storage fee imposed under the question Ordinance is actually a municipal license tax or fee on persons, firms
and corporations, like plaintiff, exercising the privilege of storing copra in a bodega within the Municipality's territorial
jurisdiction. For the term "license tax" has not acquired a fixed meaning. It is often used indiseriminately to designate
impositions exacted for the exercise of various privileges. In many instances, it refers to revenue-raising exactions on
privileges or activities. 5
Not only is the imposition of the storage fee authorized by the general grant of authority under section 1 of CA No.
472. Neither is the storage fee in question prohibited nor beyond the power of the municipal councils and municipal
district councils to impose, as listed in section 3 of said CA No. 472. 6
Moreover, the business of buying and selling and storing copra is property the subject of regulation within the police
power granted to municipalities under section 2238 of the Revised Administrative Code or the "general welfare
clause", which we quote hereunder:
Section 2238. General power of council to enact ordinances and make regulations. The
municipal council shall enact such ordinances and make such regulations, not repugnant to law, as
may be necessary to carry into effect and discharge the powers and duties conferred upon it by law
and such as shall seem necessary and proper to provide for the health and safety, promote the
prosperity, improve the morals, peace, good order, comfort, and convenience of the municipality
and the inhabitants thereof, and for the protection of property therein.
For it has been held that a warehouse used for keeping or storing copra is an establishment likely to endanger the
public safety or likely to give rise to conflagration because the oil content of the copra when ignited is difficult to put
under control by water and the use of chemicals is necessary to put out the fire. 7 And as the Ordinance itself

states, all exportable copra deposited within the municipality is "part of the surveillance and lookout of
municipal authorities.
Plaintiff's argument that the imposition of P0.10 per 100 kilos of copra stored in a bodega within defendant's territory
is beyond the cost of regulation and surveillance is not well taken. As enunciated in the case of Victorias Milling Co.
vs. Municipality of Victorias, supra.

The cost of regulation cannot be taken as a gauge, if the municipality really intended to enact a
revenue ordinance. For, 'if the charge exceeds the expense of issuance of a license and costs of
regulation, it is a tax'. And if it is, and it is validly imposed, 'the rule that license fees for regulation
must bear a reasonable relation to the expense of the regulation has no application'.
Municipal corporations are allowed wide discretion in determining the rates of imposable license fees even in cases
of purely police power measures. In the absence of proof as to municipal conditions and the nature of the business
being taxed as well as other factors relevant to the issue of arbitrariness or unreasonableness of the questioned
rates, Courts will go slow in writing off an Ordinance. 8 In the case at bar, appellant has not sufficiently shown

that the rate imposed by the questioned Ordinance is oppressive, excessive and prohibitive.
Plaintiff's averment that the Ordinance, even if presumed valid, is inapplicable to it because it is not engaged in the
business or occupation of buying or selling of copra but is only storing copra in connection with its main business of
manufacturing soap and other similar products, and that to be compelled to pay the storage fees would amount to
double taxation, does not inspire assent. The question of whether appellant is engaged in that business or not is
irrelevant because the storage fee, as previously mentioned, is an imposition on the privilege of storing copra in a
bodega within defendant municipality by persons, firms or corporations. Section 1 of the Ordinance in question does
not state that said persons, firms or corporations should be engaged in the business or occupation of buying or
selling copra. Moreover, by plaintiff's own admission that it is a consolidated corporation with its trading company, it
will be hard to segregate the copra it uses for trading from that it utilizes for manufacturing.
Thus, it can be said that plaintiff's payment of storage fees imposed by the Ordinance in question does not amount to
double taxation. For double taxation to exist, the same property must be taxed twice, when it should be taxed but
once. Double taxation has also been defined as taxing the same person twice by the same jurisdiction for the same
thing. 9 Surely, a tax on plaintiff's products is different from a tax on the privilege of storing copra in a

bodega situated within the territorial boundary of defendant municipality.

Plaintiff's further contention that the storage fee imposed by the Ordinance is actually intended to be an export tax,
which is expressly prohibited by section 2287 of the Revised Administrative Code, is without merit. Said provision
reads as follows:
Section 2287 ...
It shall not be in the power of the municipal council to impose a tax in any form whatever upon
goods and merchandise carried into the municipality, or out of the same, and any attempt to impose
an import or export tax upon such goods in the guise of an unreasonable charge for wharfage use
of bridges or otherwise, shall be void.
xxx xxx xxx
We have held that only where there is a clear showing that what is being taxed is an export to any foreign country
would the prohibition come into play. 10 When the Ordinance itself speaks of "exportable" copra, the meaning

conveyed is not exclusively export to a foreign country but shipment out of the municipality. The storage
fee impugned is not a tax on export because it is imposed not only upon copra to be exported but also
upon copra sold and to be used for domestic purposes if stored in any warehouse in the Municipality and
the weight thereof is 100 kilos or more. 11
Thus finding the Ordinance in question to be valid, legal and enforceable, we find it unnecessary to discuss the
ascribed error that the Court a quo erred in declaring that appellant had not paid the taxes under protest.
However, we find merit in plaintiff's contention that the lower Court erred in ruling that its action has prescribed under
Article 1149 of the Civil Code, which provides for a period of five years for all actions whose periods are not fixed in
that Code. The case of Municipality of Opon vs. Caltex Phil., 12 is authority for the view that the period for

prescription of actions to recover municipal license taxes is six years under Article 1145(2) of the Civil
Code. Thus, plaintiff's action brought within six years from the time the right of action first accrued in 1958
has not yet prescribed.

WHEREFORE, affirming the judgment appealed, from, we sustain the validity of Ordinance No. 4, Series of 1957, of
defendant Municipality of Jagna Bohol, under the laws then prevailing.
Costs against plaintiff-appellant.
SO ORDERED.
Teehankee (Chairman), Makasiar, Fernandez, Guerrero and De Castro, JJ., concur.

#Footnotes
1 Pp. 7-8, Annex "A", Record on Appeal.
2 P. 4, Record on Appeal.
3 Pp. 3-4, Brief for Plaintiff-Appellant.
4 Victorias Milling Co., Inc. vs. The Municipality of Victorias, Province of Negros Occidental, 25
SCRA 192 (1968), citing Cu Unjieng vs. Patstone, 42 Phil. 818 (1922).
5 Victorias Milling Co., Inc. vs. Municipality of Victorias, Negros Occidental, supra.
6 Uy Matiao & Co., Inc. vs. The City of Cebu, et al., 93 Phil. 300 (1953).
7 Uy Matiao & Co., Inc. vs. The City of Cebu, et al., supra.
8 Northern Phil. Tobacco Co. vs. Municipality of Agoo, 31 SCRA 304, (1970); Victorias Milling Co.
vs. Municipality of Victorias, supra; San Miguel Brewery Inc. vs. City of Cebu. 43 SCRA 275.
(1972).
9 Victorias Milling Co. vs. Municipality of Victorias, supra .
10 Procter & Gamble Trading Co. vs. Municipality of Medina, supra.
11 Uy Matiao & Co., Inc. vs. The City of Cebu, et al., supra.
12 SCRA 755 (1968), citing Puyat vs. The City of Manila, 7 SCRA 970 (1963).

13. CIR v. CA, CTA and Ateneo de Manila, GR 115349, 18Apr 1997, 271 SCRA 605
(24)
THIRD DIVISION

G.R. No. 115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.

THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA
UNIVERSITY,respondents.

PANGANIBAN, J.:
In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine Culture,
is the Ateneo de Manila University performing the work of an independent contractor and thus taxable within the
purview of then Section 205 of the National Internal Revenue Code levying a three percent contractor's tax? This
question is answer by the Court in the negative as it resolves this petition assailing the Decision 1 of the

Respondent Court of Appeals 2 in CA-G.R. SP No. 31790 promulgated on April 27, 1994 affirming that of
the Court of Tax Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed
by the parties.
Private respondent is a non-stock, non-profit educational institution with auxiliary units and
branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC),
which has no legal personality separate and distinct from that of private respondent. The IPC is a
Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it
accepts sponsorships for its research activities from international organizations, private foundations
and government agencies.
On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a
demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for
alleged deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of
P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, 1978.
Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently filed
with the latter a memorandum contesting the validity of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency
income tax but modifying the assessment for deficiency contractor's tax by increasing the amount
due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or
reinvestigation of the modified assessment. At the same time, it filed in the respondent court a
petition for review of the said letter-decision of the petitioner. While the petition was pending before
the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of surcharge
and interest.
On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads:
WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE.
The deficiency contractor's tax assessment in the amount of P46,516.41
exclusive of surcharge and interest for the fiscal year ended March 31, 1978 is
hereby CANCELED. No pronouncement as to cost.
SO ORDERED.

Not in accord with said decision, petitioner has come to this Court via the present petition for review raising
the following issues:
1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE
PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205
OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:
Sec. 205. Contractor, proprietors or operators of dockyards, and others. A contractor's tax of
threeper centum of the gross receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors except persons,
associations and corporations under contract for embroidery and apparel for
export, as well as their agents and contractors and except gross receipts of or
from a pioneer industry registered with the Board of Investments under Republic
Act No. 5186:
xxx xxx xxx
The term "independent contractors" include persons (juridical or natural) not
enumerated above (but not including individuals subject to the occupation tax
under Section 12 of the Local Tax Code) whose activity consists essentially of the
sale of all kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in holding that private respondent is not an
"independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the term
"independent contractor", as defined by the Code, encompasses all kinds of services rendered for
a fee and that the only exceptions are the following:
a. Persons, association and corporations under contract for embroidery and apparel for export and
gross receipts of or from pioneer industry registered with the Board of Investment under R.A. No.
5186;
b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b]
of the Tax Code); and
c. Regional or area headquarters established in the Philippines by multinational corporations,
including their alien executives, and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communication and coordinating centers for their
affiliates, subsidiaries or branches in the Asia Pacific Region (Section 205 of the Tax Code).

Petitioner thus submits that since private respondent falls under the definition of an "independent
contractor" and is not among the aforementioned exceptions, private respondent is therefore
subject to the 3% contractor's tax imposed under the same Code. 4
The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed
decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for
review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the purview of independent contractor pursuant to
Section 205 of the Tax Code.
2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax
Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch
the Institute of Philippine Culture performing the work of an independent contractor and, thus, subject to the three
percent contractor's tax levied by then Section 205 of the National Internal Revenue Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:
Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of
three per centum of the gross receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors, except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer industry registered with the Board of
Investments under the provisions of Republic Act No. 5186;
xxx xxx xxx
The term "independent contractors" include persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code)
whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether
or not the performance of the service calls for the exercise or use of the physical or mental faculties
of such contractors or their employees.
The term "independent contractor" shall not include regional or area headquarters established in
the Philippines by multinational corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and which act as supervisory,

communications and coordinating centers for their affiliates, subsidiaries or branches in the AsiaPacific Region.
The term "gross receipts" means all amounts received by the prime or principal contractor as the
total contract price, undiminished by amount paid to the subcontractor, shall be excluded from the
taxable gross receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls
within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is
properly a subject of the three percent contractor's tax levied by the foregoing provision of law. 6 Petitioner states

that the "term 'independent contractor' is not specifically defined so as to delimit the scope thereof, so
much so that any person who . . . renders physical and mental service for a fee, is now indubitably
considered an independent contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo has
the burden of proof to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without
first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and
impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The
Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its
exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws
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." 8 Parenthetically, 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." 9
To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent
contractor be engaged in the business of selling its services. Hence, to impose the three percent contractor's tax on
Ateneo's Institute of Philippine Culture, it should be sufficiently proven that the private respondent is indeed selling its
services for a fee in pursuit of an independent business. And it is only after private respondent has been found clearly
to be subject to the provisions of Sec. 205 that the question of exemption therefrom would arise. Only after such
coverage is shown does the rule of construction that tax exemptions are to be strictly construed against the
taxpayer come into play, contrary to petitioner's position. This is the main line of reasoning of the Court of Tax
Appeals in its decision, 10 which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its
services for a fee to anyone or was ever engaged in a business apart from and independently of the academic
purposes of the university.
Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner Commissioner of
Internal Revenue contends that "the tax is due on its activity of conducting researches for a fee. The tax is due on the
gross receipts made in favor of IPC pursuant to the contracts the latter entered to conduct researches for the benefit
primarily of its clients. The tax is imposed on the exercise of a taxable activity. . . . [T]he sale of services of private
respondent is made under a contract and the various contracts entered into between private respondent and its
clients are almost of the same terms, showing, among others, the compensation and terms of
payment."11 (Emphasis supplied.)

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that Ateneo's IPC
in fact contracted to sell its research services for a fee. Clearly then, as found by the Court of Appeals and the Court
of Tax Appeals, petitioner's theory is inapplicable to the established factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed, contracts for sale
of services were ever entered into by the private respondent. As appropriately pointed out by the latter:
An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax
Appeals shows that only the following documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiner's Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.
None of the foregoing evidence even comes close to purport to be contracts between private
respondent and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the Ateneo de
Manila University are technically not a fee. They may however fall as gifts or donations which are tax-exempt" as
shown by private respondent's compliance with the requirement of Section 123 of the National Internal Revenue
Code providing for the exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
To our mind, private respondent hardly fits into the definition of an "independent contractor".
For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in
business. Undisputedly, private respondent is mandated by law to undertake research activities to
maintain its university status. In fact, the research activities being carried out by the IPC is focused
not on business or profit but on social sciences studies of Philippine society and culture. Since it
can only finance a limited number of IPC's research projects, private respondent occasionally
accepts sponsorship for unfunded IPC research projects from international organizations, private
foundations and governmental agencies. However, such sponsorships are subject to private
respondent's terms and conditions, among which are, that the research is confined to topics
consistent with the private respondent's academic agenda; that no proprietary or commercial
purpose research is done; and that private respondent retains not only the absolute right to publish
but also the ownership of the results of the research conducted by the IPC. Quite clearly, the
aforementioned terms and conditions belie the allegation that private respondent is a contractor or
is engaged in business.
For another, it bears stressing that private respondent is a non-stock, non-profit educational
corporation. The fact that it accepted sponsorship for IPC's unfunded projects is merely incidental.
For, the main function of the IPC is to undertake research projects under the academic agenda of
the private respondent. Moreover the records do not show that in accepting sponsorship of
research work, IPC realized profits from such work. On the contrary, the evidence shows that for
about 30 years, IPC had continuously operated at a loss, which means that sponsored funds are
less than actual expenses for its research projects. That IPC has been operating at a loss loudly

bespeaks of the fact that education and not profit is the motive for undertaking the research
projects.
Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact
still remains that there is no proof that part of such earnings or profits was ever distributed as
dividends to any stockholder, as in fact none was so distributed because they accrued to the
benefit of the private respondent which is a non-profit educational institution. 14
Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of
a fee or price in exchange for the performance of a service or delivery of an object. Rather, the amounts are in the
nature of an endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the
research with no strings attached. As found by the two courts below, such sponsorships are subject to IPC's terms
and conditions. No proprietary or commercial research is done, and IPC retains the ownership of the results of the
research, including the absolute right to publish the same. The copyrights over the results of the research are owned
by
Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15 The amounts given to

IPC, therefore, may not be deemed, it bears stressing as fees or gross receipts that can be subjected to
the three percent contractor's tax.
It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed
either as a contract of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties
obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price
certain in money or its equivalent." 16 By its very nature, a contract of sale requires a transfer of ownership.

Thus, Article 1458 of the Civil Code "expressly makes the obligation to transfer ownership as an essential
element of the contract of sale, following modern codes, such as the German and the Swiss. Even in the
absence of this express requirement, however, most writers, including Sanchez Roman, Gayoso,
Valverde, Ruggiero, Colin and Capitant, have considered such transfer of ownership as the primary
purpose of sale. Perez and Alguer follow the same view, stating that the delivery of the thing does not
mean a mere physical transfer, but is a means of transmitting ownership. Transfer of title or an agreement
to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the case of a contract for
a piece of work, "the contractor binds himself to execute a piece of work for the employer, in consideration
of a certain price or compensation. . . . If the contractor agrees to produce the work from materials
furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the
thing, . . ." 18 Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of
ownership is involved and a party necessarily walks away with an object. 19 In the case at bench, it is clear
from the evidence on record that there was no sale either of objects or services because, as adverted to
earlier, there was no transfer of ownership over the research data obtained or the results of research
projects undertaken by the Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of
maintaining Ateneo's university status and not in the course of an independent business of selling such research with
profit in mind. This is clear from a reading of the regulations governing universities:
31. In addition to the legal requisites an institution must meet, among others, the following
requirements before an application for university status shall be considered:
xxx xxx xxx
(e) The institution must undertake research and operate with a competent qualified staff at least
three graduate departments in accordance with the rules and standards for graduate education.
One of the departments shall be science and technology. The competence of the staff shall be

judged by their effective teaching, scholarly publications and research activities published in its
school journalas well as their leadership activities in the profession.
(f) The institution must show evidence of adequate and stable financial resources and support, a
reasonable portion of which should be devoted to institutional development and research.
(emphasis supplied)
xxx xxx xxx
32. University status may be withdrawn, after due notice and hearing, for failure to maintain
satisfactorily the standards and requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently
erroneous because the former is not an independent juridical entity that is separate and distinct form the latter.
Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally
Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for the purpose
of reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether" 21 Ateneo

de Manila University may be deemed a subject of the three percent contractor's tax "through the evidence
presented before it." Consequently, "as a matter of principle, this Court will not set aside the conclusion
reached by . . . the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively
to the study and consideration of tax problems and has necessarily developed an expertise on the subject
unless there has been an abuse or improvident exercise of authority . . ." 22 This point becomes more
evident in the case before us where the findings and conclusions of both the Court of Tax Appeals and the
Court of Appeals appear untainted by any abuse of authority, much less grave abuse of discretion. Thus,
we find the decision of the latter affirming that of the former free from any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it was

Ateneo de Manila University itself that had funded the research projects of the institute, and it was only
when Ateneo could no longer produce the needed funds that the institute sought funding from outside.
The testimony of Ateneo's Director for Accounting Services, Ms. Leonor Wijangco, provides significant
insight on the academic and nonprofit nature of the institute's research activities done in furtherance of
the university's purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of
Philippine Culture) that as far as grants from sponsored research it is possible that the grant
sometimes is less than the actual cost. Will you please tell us in this case when the actual cost is a
lot less than the grant who shoulders the additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a university, because a university has to have its
own research institute. 24

So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine Culture when
it undisputedly loses not an insignificant amount in the process? The plain and simple answer is that private
respondent is not a contractor selling its services for a fee but an academic institution conducting these researches
pursuant to its commitments to education and, ultimately, to public service. For the institute to have tenaciously
continued operating for so long despite its accumulation of significant losses, we can only agree with both the Court
of Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive for undertaking the research
projects." 25
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is
hereby AFFIRMED in full.
SO ORDERED.
Narvasa, C.J., Davide, Jr., Melo and Francisco JJ., concur.
Footnotes
1 Rollo, pp. 37-42.
2 Penned by J. Cancio C. Garcia and concurred in by JJ. Pedro A. Ramirez, Chairman, and Hector
L. Hofilea.
3 In CTA Case No. 4280, penned by Associate Judge Ramon O. de Veyra and concurred in by
Presiding Judge Ernesto D. Acosta and Associate Judge Manuel K. Gruba; rollo, pp. 43-55.
4 CA Decision, pp. 1-4; rollo, pp. 37-40.
5 Petition, p. 8; rollo, p 13.
6 Petitioner's Reply, pp. 1-2; rollo, pp. 79-80.
7 Petition, pp. 11-12; rollo, pp. 16-17.
8 Marinduque Iron Mines Agents, Inc. vs. Municipal Council of the Municipality of Hinabangan,
Samar, 11 SCRA 416, 420, June 30 1964, citing 82 C.J.S. 956, 30 Am. Jur. 153, and McQuillin on
Municipal Corp., Vol. 16, p. 267. See also Benjamin B. Aban, Law of Basic Taxation in the
Philippines, p. 93, First Edition, (1994).
9 Commissioner of Internal Revenue vs. Fireman's Fund Ins. Co., 148 SCRA 315, 324, March 9,
1987; citing Manila Railroad Co. vs. Collector of Customs, 52 Phil. 950, (1929).
10 Rollo, pp. 49-50.
11 Petition, pp. 20-22; rollo, pp. 25-27.
12 Comment, p. 10; rollo, p. 71.
13 Rollo, p. 54
14 Ibid., p, 41.

15 Comment, pp. 6-7; rollo, pp. 67-68.

16 Paragraph 1, Article 1458, Civil Code of the Philippines.
17 Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines,
Volume V, pp. 1-2, (1992); citing 3 Castan 12-13, Kerr & Co. vs. Lingad, 38 SCRA 524, April 30,
1971, and Schmid & Oberly vs. RJL Martinez Fishing Corp., 166 SCRA 493, October 18, 1988.
18 Articles 1713 and 1714 of the Civil Code of the Philippines.
19 Villanueva, Cesar L., Philippine Law on Sales, pp. 7-9. (1995); citing Celestino Co. vs. Collector
of Internal Revenue, 99 Phil. 841 (1956).
20 The Manual for Private Schools (adopted pursuant to the provisions of Act No. 2706, as
amended by Act No. 3075 and Commonwealth Act No. 180), cited in private respondent's
comment, pp. 4-5;rollo, pp. 65-66.
21 Philippine Refining Company vs. Court of Appeals, Court of Tax Appeals and Commissioner of
Internal Revenue, 256 SCRA 667, 675-676, May 8, 1996; citing Commissioner of Internal Revenue
vs. Wander Philippines, Inc., et al., 160 SCRA 573, April 15, 1988.
22 Commissioner of Internal Revenue vs. Wander Philippines, Inc., et al., supra; citing Reyes vs.
Commissioner of Internal Revenue, 24 SCRA 198, July 29, 1968.
23 Comment, p. 7; rollo, p. 68.
24 Ibid., p. 8; citing TSN, pp. 12-13, August 25, 1989.
25 Court of Tax Appeals Decision, p. 10, and Court of Appeals Decision, p. 5 (quoted above); Rollo,
pp. 52 and 41.

14. Hydro Resources v. CA, L-80276, 21 Dec 1990, 192 SCRA 604
SECOND DIVISION
[G.R. No. 80276 : December 21, 1990.]
192 SCRA 604
HYDRO RESOURCES CONTRACTORS CORPORATION, Petitioner, vs. THE COURT OF
TAX APPEALS and THE HON. DEPUTY MINISTER OF FINANCE, ALFREDO PIO DE
RODA, Respondents.
DECISION
PARAS, J.:

This is a special civil action of Certiorari instituted by petitioner Hydro Resources Contractors
Corporation against respondents Court of Tax Appeals and Deputy Minister of Finance which
seeks to set aside the decisions of both public respondents holding petitioner liable for a 3%
ad valorem duty in the amount of P281,591.00.
It appears that the National Irrigation Administration (referred to hereinafter as NIA for
brevity) a government owned and controlled corporation, entered into an agreement,
sometime in August 1978, with petitioner Hydro Resources Contractors Corporation (Hydro
for short), for the construction of the Magat River Multipurpose Project in Isabela.
Under the aforesaid contract, designated as Contract No. MPI-C-1, petitioner was allowed to
procure new construction equipment, spare parts and tools from abroad, the payment for
which was advanced by NIA under a financing plan embodied in the contract, as follows:
a) Procurement Petitioner is required to submit to NIA for approval a list of new
construction equipment, spare parts and tools which it intends to acquire from abroad.
Petitioner shall procure these items as an agent of NIA as all invoices shall be in the name of
said government agency. NIA undertakes to pay all import taxes, duties and all fees,
imposts and other charges that may be due on said importations.
: nad

b) Ownership and delivery The equipment and spare parts imported from abroad shall be
owned by NIA and delivered to its construction site in Isabela.
c) Repayment Petitioner shall repay NIA the costs of the above procurement and the
manner of repayment shall be through deductions from each monthly or periodic progress
payment due to petitioner.
d) Transfer of Ownership Ownership shall be transferred to petitioner only upon complete
payment of the costs above mentioned.
The equipment imported by NIA in 1978 and 1979 for Hydro's use are
DESCRIPTION OF EQUIPMENT NET BOOK VALUE
1 Tamrock Hyd. Jumbo Drill
Ser. #18153 P1,566,116.55
3 units Cat Drill Toyo TYPR 120 278,264.25
1 unit Tamrock Hyd. Drill
16 units Air Leg Drills Toyo 1,493,834.29
1 unit Toyo Reinforcing Bar 12,000.92
3 units Toyo TYCD 10 CY Cralwer 265,421.35
2 units Scheele K-60 Pump 624,772.80
2 units New Reed Gun Mdl. IAS 67,349.90
1 unit Prota Tunnel Profile 43,340.26
2 units Wild Theodolite Surveying
Equipment 28,545.93
1 unit Toyo Mud Sub Pump 201,108.01
2 units Aichi Skymaster Truck
mounted Boom 93,622.78
2 units Grindex Sub Type Pump 140,518.35

6 units K/Worth C500 Truck Mixer 1,690,054.60

1 unit Putamesitor 201,863.77
6 units Sullair Air Comp. 588,940.53
2 units Well Air Driven Grout 20,582.40
10 units Stancom VHF Radio Tran. 32,537.70
4 units Cummins 1,055,209.20
By the terms of the contract (quoted earlier) NIA undertakes payment of all the import
duties and taxes incident to the importations deductible from the proceeds of the contract
price. HYDRO shall repay NIA in full the value of the construction equipment out of the same
proceeds before eventual transfer or taking ownership of subject construction equipment
upon termination of the contract.
NIA reneged and failed in the compliance of its tax obligations. In the meantime, HYDRO
had fully repaid the value of the construction equipment in the amount of P14,537,783.63
(US$1,991,477.21) so much so that on December 6, 1982 and March 24, 1983, NIA
executed deeds of sale covering the same and transferring the ownership thereof in favor of
petitioner.
Upon the transfer of the ownership of the said equipment HYDRO was assessed by the
Bureau of Customs the corresponding customs duty and compensating tax, respectively, as
follows:
Customs Duty

P1,214,010.00

Compensating Tax 1,089,368.63

P2,303,378.63
=========
This amount was paid by HYDRO to the Bureau of Customs.
In addition, HYDRO was assessed additional 3% ad valorem duty in the amount of
P281,591.00 prescribed in Executive Order 860. HYDRO also paid this amount but this time
under protest.
:-cralaw

The Collector of Customs acted favorably on petitioner's protest and ordered the refund of
the amount paid for the ad valorem duty in the form of tax credit, ruling that
"The foregoing scheme entered into between NIA and HYDRO had generated a contract and
it will be unfair to involve new proposal as in the imposition of 3% additional duty ad
valorem which was not obtaining at the time of the agreement nor at the time of arrival and
release of the shipment from the piers. For one thing, the scheme may be viewed in the
same light as sales of commodities to be delivered at some future date, whose price or
prices at the time of delivery may be way above or below the sale price or prices. For
another thing, HYDRO may not be deprived of rights vested before the promulgation of
Executive Order 860 prescribing 3% additional duty ad valorem." (p. 22, Rollo)
The Acting Commissioner of Customs affirmed the ruling of the Collector of Customs. In his
2nd Indorsement dated June 25, 1984, (p. 25, Rollo) Acting Commissioner Ramon Farolan
stated
"This Office shares the view of the Collector of Customs to the effect that the various
equipment and parts in question which the National Irrigation Administration imported in

1978 and 1979 and subsequently sold to Hydro Resources Construction Corporation by
virtue of a previous agreement, are subject to duties and taxes but not the additional 3% ad
valorem duty under Executive Order No. 860 which took effect only on December 21, 1982.
Moreover, the Deputy Minister of Finance, in his 1st Indorsement to the Central Bank dated
March 26, 1983, which was then reproduced by the Central Bank Governor in a circular
letter to all authorized agent banks, clarified to all authorized agent banks, clarified that
Letters of Credit opened prior to the effectivity of P.D. 1853 and E.O. 860 are not subject to
the provisions thereof even if they are amended after the effectivity thereof.
(p. 15, Rollo).
These findings of the Collector of Customs as well as the Acting Customs Commissioner
were reversed by the Deputy Minister of Finance.
Petitioner appealed to the Court of Tax Appeals but in its Decision dated May 22, 1987, the
said court (with a dissenting opinion) affirmed the ruling of the Deputy Minister of Finance
denying petitioner's claim for refund.
Hence, the present recourse, after petitioner's motion for reconsideration was denied.
In this petition, Hydro presents the following issues
I
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION
OR WITH GRAVE ABUSE OF DISCRETION IN REFUSING TO CONSIDER THE FACT THAT THE
SALE OF THE NIA-FINANCED EQUIPMENT TOOK PLACE IN 1978.
II
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION
OR WITH GRAVE ABUSE OF DISCRETION IN APPLYING EXECUTIVE ORDER NO. 860
RETROACTIVELY.
III
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OF IN EXCESS OF ITS JURISDICTION
OR WITH GRAVE ABUSE OF DISCRETION IN FAILING TO CONSIDER THAT THE IMPOSITION
OF THE 3% AD VALOREM TAX ON IMPORTATIONS MADE PRIOR TO ITS ISSUANCE IS
VIOLATIVE OF THE CONSTITUTION.
IV
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OF IN EXCESS OF ITS JURISDICTION
OR WITH GRAVE ABUSE OF DISCRETION IN IMPOSING THE AD VALOREM TAX SANS
STATUTORY AND LEGAL BASIS.
The petition is meritorious.
Executive Order No. 860 which was the basis for the imposition of the 3% ad valorem duty
upon the said importations, took effect on December 21, 1982. The importations were
effected in 1978 and 1979 by NIA. Nonetheless, respondent Court of Tax Appeals denied
petitioner's claim for refund because
"When NIA transferred the equipment in question supposedly 'after its (HYDRO's) use for a
number of years', it cannot be doubted that these equipment were sold and transferred
presumably 'several years' after the equipment's importation in 1978 and 1979. It is
obvious therefore that the sale or transfer of the ownership of the equipment to petitioner
HYDRO were unquestionably made after the effectivity of PD 882 on January 20, 1976,

undisputably said sale or transfer thereof was (sic) governed by Section 4 of PD 882 and
was correctly applied by respondent. We take particular note of the fact that we cannot
pinpoint with definiteness or exactitude from the evidence, when or what years after the
years 1978 and 1979 importations were the equipment sold or transferred by NIA to
petitioner HYDRO so that we can determine outright whether the sale or transfers are
covered by the mandatory provision of Executive Order 860 effective on December 21, 1982
imposing 3% additional ad valorem duty on such importations. Such that if the sale or
transfer of the ownership of the equipment were effected to petitioner HYDRO after
December 21, 1982, the effective date of Executive Order No. 860, the 3% ad valorem duty
is imposable as said Executive Order 860 was applied prospectively and rightly. If the sale or
transfer of the ownership of the equipment to HYDRO were (sic) prior to the effectivity of
Executive Order No. 860, then said Executive Order 860 is inapplicable, and petitioner is not
liable to pay the 3% ad valorem duty of P281,591.00 and is entitled to the refund thereof.
As a rule and principle, it was incumbent upon petitioner-taxpayer HYDRO to have shown
that the sale or transfer of said equipment to it were made before December 21, 1982,
when the Executive Order No. 860 was effective in order that it shall not be subject to the
imposition of 3% additional ad valorem duty. Failing thus, its claim for refund in the amount
of P281,591.00 unquestionably fails." (pp. 37-38; Rollo).
:- nad

The foregoing conclusion is erroneous. The subsequent executions of the Deeds of Sale of
the equipment in question on December 6, 1982 and March 24, 1983 are not relevant and
material in the consideration of the application of Executive Order No. 860 because said
Deeds of Sale were mere formalities in the implementation of Contract No. MPI-C-1
executed on August 1978, which should be reckoned and construed as the actual date of
sale. This must be so because the contract of purchase and sale of the NIA-financed/owned
equipment to Hydro took place in 1978 when Contract No. MPI-C-1 was signed by NIA and
HYDRO wherein the contracting parties provided for their financing, procurement, delivery,
repayment, transfer of possession and ownership. The said scheme contemplated a Contract
of Sale within the purview of Art. 1458 of the Civil Code which provides
"Art. 1458. By the contract of sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay thereafter
a price certain in money or its equivalent.
"A contract of sale may be absolute or conditional." (p. 11, Rollo)
This view is shared by the Collector of Customs in his decision when he declared that there
being a meeting of the minds between NIA and HYDRO upon the object of the contract of
sale and upon the price, the contract of sale of the equipment between them was perfected
in 1978. It is a perfected contract of sale subject to a suspensive condition, the full payment
by HYDRO of the consideration for the subject of the contract is the operative act to compel
NIA to effect the transfer of absolute ownership thereof to HYDRO. And under Art. 1187 of
the Civil Code, the effectivity of said contract reverts back to the constitution of the
contract, in this case August 1978.
"ART. 1187. The effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation." (p. 12, Rollo)
It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is
provided. (Art. 4, Civil Code) Except for a statement providing for its immediate execution,
Executive Order No. 860 does not provide for its retroactivity. Moreover, the Deputy Minister
of Finance in his 1st Indorsement to the Central Bank dated March 26, 1983 which was
reproduced by the Central Bank Governor in a circular letter to all authorized agent banks,
clarified that letters of credit opened prior to the effectivity of E.O. 860 are not subject to
the provisions thereof. Consequently, the importations in question which arrived in 1977 and

1978 are not subject to the 3% additional ad valorem duty, the same being imposed only on
those whose letter of credit were opened after the promulgation of Executive Order 860. In
this regard Judge Alex Reyes in his dissenting opinion correctly observed
"Let it suffice that the procurement of the equipment, as earlier stated, was not on a tax
exempt basis as the import liabilities thereon have been secured to be paid under the terms
of the financial scheme in the contract. The formality of vesting of title over the equipment
was not an unwarranted expectation but a matter of an implementation of a pre-existing
agreement, hence, the imported articles can only be subject to the rates of import
duties/taxes prevailing at the time of entry or withdrawal from customs' custody (Sec. 205,
TCC) in 1978 and 1979, thus foreclosing any retroactive application of the 1982 Executive
Order.
:-cralaw

"Taken in the above light, it would be unfair and incongruous to hold petitioner to an
additional levy sans any statutory basis. The majority could have fumbled into a precipitate
action in taking an adverse position on petitioner's right to a refund." (pp. 44-45, Rollo)
IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is GRANTED; the assailed
Decisions of respondents Court of Tax Appeals and Deputy Minister of Finance are SET
ASIDE and another one rendered ordering the refund of the amount of P281,591.00
representing 3% additional ad valorem duty to petitioner Hydro Resources Contractors
Corporation in the form of tax credit.
SO ORDERED.
Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

15. Benguet Corp, 463 SCRA 28 (2005)

ECOND DIVISION
G.R. Nos. 134587 & 134588 July 8, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioners,
vs.
BENGUET CORPORATION, Respondent.
DECISION
Tinga, J.:
This is a petition for the review of a consolidated Decision of the Former Fourteenth Division of the Court of
Appeals1 ordering the Commissioner of Internal Revenue to award tax credits to Benguet Corporation in the amount
corresponding to the input value added taxes that the latter had incurred in relation to its sale of gold to the Central
Bank during the period of 01 August 1989 to 31 July 1991.
Petitioner is the Commissioner of Internal Revenue ("petitioner") acting in his official capacity as head of the Bureau
of Internal Revenue (BIR), an attached agency of the Department of Finance,2 with the authority, inter alia, to
determine claims for refunds or tax credits as provided by law.3
Respondent Benguet Corporation ("respondent") is a domestic corporation organized and existing by virtue of
Philippine laws, engaged in the exploration, development and operation of mineral resources, and the sale or
marketing thereof to various entities.4 Respondent is a value added tax (VAT) registered enterprise.5

The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of the National
Internal Revenue Code (NIRC),6 as amended by Executive Order (E.O.) No. 273 s. 1987, then in effect, any person
who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar
transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0% ("zero-rated")
depending on the classification of the transaction under Sec. 100 of the NIRC. Persons registered under the VAT
system7 are allowed to recognize input VAT, or the VAT due from or paid by it in the course of its trade or business on
importation of goods or local purchases of goods or service, including lease or use of properties, from a VATregistered person.8
In January of 1988, respondent applied for and was granted by the BIR zero-rated status on its sale of gold to Central
Bank.9 On 28 August 1988, Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No.
3788-88, which declared that "[t]he sale of gold to Central Bank is considered as export sale subject to zero-rate
pursuant to Section 100[10] of the Tax Code, as amended by Executive Order No. 273." The BIR came out with at
least six (6) other issuances11 reiterating the zero-rating of sale of gold to the Central Bank, the latest of which is VAT
Ruling No. 036-90 dated 14 February 1990.12
Relying on its zero-rated status and the above issuances, respondent sold gold to the Central Bank during the period
of 1 August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT incurred in relation to the
subject sales of gold. It then filed applications for tax refunds/credits corresponding to input VAT for the
amounts13 of P46,177,861.12,14
P19,218,738.44,15 and P84,909,247.96.16 Respondents applications were either unacted upon or expressly
disallowed by petitioner.17 In addition, petitioner issued a deficiency assessment against respondent when, after
applying respondents creditable input VAT costs against the retroactive 10% VAT levy, there resulted a balance of
excess output VAT.18
The express disallowance of respondents application for refunds/credits and the issuance of deficiency assessments
against it were based on a BIR ruling-BIR VAT Ruling No. 008-92 dated 23 January 1992-that was issued subsequent
to the consummation of the subject sales of gold to the Central Bank which provides that sales of gold to the Central
Bank shall not be considered as export sales and thus, shall be subject to 10% VAT. In addition, BIR VAT Ruling No.
008-92 withdrew, modified, and superseded all inconsistent BIR issuances. The relevant portions of the ruling
provides, thus:
1. In general, for purposes of the term "export sales" only direct export sales and foreign currency denominated
sales, shall be qualified for zero-rating.
....
4. Local sales of goods, which by fiction of law are considered export sales (e.g., the Export Duty Law considerssales
of gold to the Central Bank of the Philippines, as export sale). This transaction shall not be considered as export sale
for VAT purposes.
....
[A]ll Orders and Memoranda issued by this Office inconsistent herewith are considered withdrawn, modified or
superseded." (Emphasis supplied)
The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and Revenue Memorandum Order No. 22-92 which
decreed that the revocation of VAT Ruling No. 3788-88 by VAT Ruling No. 008-92 would not unduly prejudice mining
companies and, thus, could be applied retroactively.19
Respondent filed three separate petitions for review with the Court of Tax Appeals (CTA), docketed as CTA Case No.
4945, CTA Case No. 4627, and the consolidated cases of CTA Case Nos. 4686 and 4829.
In the three cases, respondent argued that a retroactive application of BIR VAT Ruling No. 008-92 would violate Sec.
246 of the NIRC, which mandates the non-retroactivity of rulings or circulars issued by the Commissioner of Internal
Revenue that would operate to prejudice the taxpayer. Respondent then discussed in detail the manner and extent by
which it was prejudiced by this retroactive application.20 Petitioner on the other hand, maintained that BIR VAT Ruling
No. 008-92 is, firstly, not void and entitled to great respect, having been issued by the body charged with the duty of

administering the VAT law, and secondly, it may validly be given retroactive effect since it was not prejudicial to
respondent.
In three separate decisions,21 the CTA dismissed respondents respective petitions. It held, with Presiding Judge
Ernesto D. Acosta dissenting, that no prejudice had befallen respondent by virtue of the retroactive application of BIR
VAT Ruling No. 008-92, and that, consequently, the application did not violate Sec. 246 of the NIRC.22
The CTA decisions were appealed by respondent to the Court of Appeals. The cases were docketed therein as CAG.R. SP Nos. 37205, 38958, and 39435, and thereafter consolidated. The Court of Appeals, after evaluating the
arguments of the parties, rendered the questioned Decision reversing the Court of Tax Appeals insofar as the latter
had ruled that BIR VAT Ruling No. 008-92 did not prejudice the respondent and that the same could be given
retroactive effect.
In its Decision, the appellate court held that respondent suffered financial damage equivalent to the sum of the
disapproved claims. It stated that had respondent known that such sales were subject to 10% VAT, which rate was
not the prevailing rate at the time of the transactions, respondent would have passed on the cost of the input taxes to
the Central Bank. It also ruled that the remedies which the CTA supposed would eliminate any resultant prejudice to
respondent were not sufficient palliatives as the monetary values provided in the supposed remedies do not
approximate the monetary values of the tax credits that respondent lost after the implementation of the VAT ruling in
question. It cited
Manila Mining Corporation v. Commissioner of Internal Revenue,23 in which the Court of Appeals held24 that BIR VAT
Ruling No. 008-92 cannot be given retroactive effect. Lastly, the Court of Appeals observed that R.A. 7716, the "The
New Expanded VAT Law," reveals the intent of the lawmakers with regard to the treatment of sale of gold to the
Central Bank since the amended version therein of Sec. 100 of the NIRC expressly provides that the sale of gold to
the Bangko Sentral ng Pilipinas is an export sale subject to 0% VAT rate. The appellate court thus allowed
respondents claims, decreeing in its dispositive portion, viz:
WHEREFORE, the appealed decision is hereby REVERSED. The respondent Commissioner of Internal Revenue is
ordered to award the following tax credits to petitioner.
1) In CA-G.R. SP No. 37209 P49,611,914.00
2) in CA-G.R. SP No. 38958 - P19,218,738.44
3) in CA-G.R. SP No. 39435 - P84,909,247.9625
Dissatisfied with the above ruling, petitioner filed the instant Petition for Review questioning the determination of the
Court of Appeals that the retroactive application of the subject issuance was prejudicial to respondent and could not
be applied retroactively.
Apart from the central issue on the validity of the retroactive application of VAT Ruling No. 008-92, the question of the
validity of the issuance itself has been touched upon in the pleadings, including a reference made by respondent to a
Court of Appeals Decision holding that the VAT Ruling had no legal basis.26 For its part, as the party that raised this
issue, petitioner spiritedly defends the validity of the issuance.27 Effectively, however, the question is a non-issue and
delving into it would be a needless exercise for, as respondent emphatically pointed out in its Comment, "unlike
petitioners formulation of the issues, the only real issue in this case is whether VAT Ruling No. 008-92 which revoked
previous rulings of the petitioner which respondent heavily relied upon . . . may be legally applied retroactively to
respondent."28 This Court need not invalidate the BIR issuances, which have the force and effect of law, unless the
issue of validity is so crucially at the heart of the controversy that the Court cannot resolve the case without having to
strike down the issuances. Clearly, whether the subject VAT ruling may validly be given retrospective effect is the lis
mota in the case. Put in another but specific fashion, the sole issue to be addressed is whether respondents sale of
gold to the Central Bank during the period when such was classified by BIR issuances as zero-rated could be taxed
validly at a 10% rate after the consummation of the transactions involved.
In a long line of cases,29 this Court has affirmed that the rulings, circular, rules and regulations promulgated by the
Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to
the taxpayers. In fact, both petitioner30 and respondent31 agree that the retroactive application of VAT Ruling No. 008-

92 is valid only if such application would not be prejudicial to the respondent pursuant to the explicit mandate under
Sec. 246 of the NIRC, thus:
Sec. 246. Non-retroactivity of rulings.- Any revocation, modification or reversal of any of the rules and
regulationspromulgated in accordance with the preceding Section or any of the rulings or circulars promulgated by
the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be
prejudicial to the taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits
material facts from his return on any document required of him by the Bureau of Internal Revenue; (b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different form the facts on which the ruling is
based; or (c) where the taxpayer acted in bad faith. (Emphasis supplied)
In that regard, petitioner submits that respondent would not be prejudiced by a retroactive application; respondent
maintains the contrary. Consequently, the determination of the issue of retroactivity hinges on whether respondent
would suffer prejudice from the retroactive application of VAT Ruling No. 008-92.
We agree with the Court of Appeals and the respondent.
To begin with, the determination of whether respondent had suffered prejudice is a factual issue. It is an established
rule that in the exercise of its power of review, the Supreme Court is not a trier of facts. Moreover, in the exercise of
the Supreme Courts power of review, the findings of facts of the Court of Appeals are conclusive and binding on the
Supreme Court.32 An exception to this rule is when the findings of fact a quo are conflicting,33as is in this case.
VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, exchange or lease of
goods or properties and rendition of services in the course of trade or business, or the importation of goods.34It is an
indirect tax, which may be shifted to the buyer, transferee, or lessee of the goods, properties, or services.35 However,
the party directly liable for the payment of the tax is the seller.36
In transactions taxed at a 10% rate, when at the end of any given taxable quarter the output VAT exceeds the input
VAT, the excess shall be paid to the government; when the input VAT exceeds the output VAT, the excess would be
carried over to VAT liabilities for the succeeding quarter or quarters.37 On the other hand, transactions which are taxed
at zero-rate do not result in any output tax. Input VAT attributable to zero-rated sales could be refunded or credited
against other internal revenue taxes at the option of the taxpayer.38
To illustrate, in a zero-rated transaction, when a VAT-registered person ("taxpayer") purchases materials from his
supplier at P80.00, P7.3039 of which was passed on to him by his supplier as the latters 10% output VAT, the taxpayer
is allowed to recover P7.30 from the BIR, in addition to other input VAT he had incurred in relation to the zero-rated
transaction, through tax credits or refunds. When the taxpayer sells his finished product in a zero-rated transaction,
say, for P110.00, he is not required to pay any output VAT thereon. In the case of a transaction subject to 10% VAT,
the taxpayer is allowed to recover both the input VAT of P7.30 which he paid to his supplier and his output VAT
of P2.70 (10% the P30.00 value he has added to the P80.00 material) by passing on both costs to the buyer. Thus,
the buyer pays the total 10% VAT cost, in this case P10.00 on the product.
In both situations, the taxpayer has the option not to carry any VAT cost because in the zero-rated transaction, the
taxpayer is allowed to recover input tax from the BIR without need to pay output tax, while in 10% rated VAT, the
taxpayer is allowed to pass on both input and output VAT to the buyer. Thus, there is an elemental similarity between
the two types of VAT ratings in that the taxpayer has the option not to take on any VAT payment for his transactions
by simply exercising his right to pass on the VAT costs in the manner discussed above.
Proceeding from the foregoing, there appears to be no upfront economic difference in changing the sale of gold to the
Central Bank from a 0% to 10% VAT rate provided that respondent would be allowed the choice to pass on its VAT
costs to the Central Bank. In the instant case, the retroactive application of VAT Ruling No. 008-92 unilaterally
forfeited or withdrew this option of respondent. The adverse effect is that respondent became the unexpected and
unwilling debtor to the BIR of the amount equivalent to the total VAT cost of its product, a liability it previously could
have recovered from the BIR in a zero-rated scenario or at least passed on to the Central Bank had it known it would
have been taxed at a 10% rate. Thus, it is clear that respondent suffered economic prejudice when its consummated
sales of gold to the Central Bank were taken out of the zero-rated category. The change in the VAT rating of
respondents transactions with the Central Bank resulted in the twin loss of its exemption from payment of output VAT
and its opportunity to recover input VAT, and at the same time subjected it to the 10% VAT sans the option to pass on

this cost to the Central Bank, with the total prejudice in money terms being equivalent to the 10% VAT levied on its
sales of gold to the Central Bank.
Petitioner had made its position hopelessly untenable by arguing that "the deficiency 10% that may be assessable
will only be equal to 1/11th of the amount billed to the [Central Bank] rather than 10% thereof. In short, [respondent]
may only be charged based on the tax amount actually and technically passed on to the [Central Bank] as part of the
invoiced price."40 To the Court, the aforequoted statement is a clear recognition that respondent would suffer prejudice
in the "amount actually and technically passed on to the [Central Bank] as part of the invoiced price." In determining
the prejudice suffered by respondent, it matters little how the amount charged against respondent is computed,41 the
point is that the amount (equal to 1/11th of the amount billed to the Central Bank) was charged against respondent,
resulting in damage to the latter.
Petitioner posits that the retroactive application of BIR VAT Ruling No. 008-92 is stripped of any prejudicial effect
when viewed in relation to several available options to recoup whatever liabilities respondent may have incurred,i.e.,
respondents input VAT may still be used (1) to offset its output VAT on the sales of gold to the Central Bank or on its
output VAT on other sales subject to 10% VAT, and (2) as deductions on its income tax under Sec. 29 of the Tax
Code.42
On petitioners first suggested recoupment modality, respondent counters that its other sales subject to 10% VAT are
so minimal that this mode is of little value. Indeed, what use would a credit be where there is nothing to set it off
against? Moreover, respondent points out that after having been imposed with 10% VAT sans the opportunity to pass
on the same to the Central Bank, it was issued a deficiency tax assessment because its input VAT tax credits were
not enough to offset the retroactive 10% output VAT. The prejudice then experienced by respondent lies in the fact
that the tax refunds/credits that it expected to receive had effectively disappeared by virtue of its newfound output
VAT liability against which petitioner had offset the expected refund/credit. Additionally, the prejudice to respondent
would not simply disappear, as petitioner claims, when a liability (which liability was not there to begin with) is
imposed concurrently with an opportunity to reduce, not totally eradicate, the newfound liability. In sum, contrary to
petitioners suggestion, respondents net income still decreased corresponding to the amount it expected as its
refunds/credits and the deficiency assessments against it, which when summed up would be the total cost of the 10%
retroactive VAT levied on respondent.
Respondent claims to have incurred further prejudice. In computing its income taxes for the relevant years, the input
VAT cost that respondent had paid to its suppliers was not treated by respondent as part of its cost of goods sold,
which is deductible from gross income for income tax purposes, but as an asset which could be refunded or applied
as payment for other internal revenue taxes. In fact, Revenue Regulation No. 5-87 (VAT Implementing Guidelines),
requires input VAT to be recorded not as part of the cost of materials or inventory purchased but as a separate entry
called "input taxes," which may then be applied against output VAT, other internal revenue taxes, or refunded as the
case may be.43 In being denied the opportunity to deduct the input VAT from its gross income, respondents net
income was overstated by the amount of its input VAT. This overstatement was assessed tax at the 32% corporate
income tax rate, resulting in respondents overpayment of income taxes in the corresponding amount. Thus,
respondent not only lost its right to refund/ credit its input VAT and became liable for deficiency VAT, it also overpaid
its income tax in the amount of 32% of its input VAT.
This leads us to the second recourse that petitioner has suggested to offset any resulting prejudice to respondent as
a consequence of giving retroactive effect to BIR VAT Ruling No. 008-92. Petitioner submits that granting that
respondent has no other sale subject to 10% VAT against which its input taxes may be used in payment, then
respondent is constituted as the final entity against which the costs of the tax passes-on shall legally stop; hence, the
input taxes may be converted as costs available as deduction for income tax purposes.44
Even assuming that the right to recover respondents excess payment of income tax has not yet prescribed, this relief
would only address respondents overpayment of income tax but not the other burdens discussed above. Verily, this
remedy is not a feasible option for respondent because the very reason why it was issued a deficiency tax
assessment is that its input VAT was not enough to offset its retroactive output VAT. Indeed, the burden of having to
go through an unnecessary and cumbersome refund process is prejudice enough. Moreover, there is in fact nothing
left to claim as a deduction from income taxes.
From the foregoing it is clear that petitioners suggested options by which prejudice would be eliminated from a
retroactive application of VAT Ruling No. 008-92 are either simply inadequate or grossly unrealistic.

At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by
respondent ordained that gold sales to the Central Bank were zero-rated. The BIR interpreted Sec. 100 of the NIRC
in relation to Sec. 2 of E.O. No. 581 s. 1980 which prescribed that gold sold to the Central Bank shall be considered
export and therefore shall be subject to the export and premium duties. In coming out with this interpretation, the BIR
also considered Sec. 169 of Central Bank Circular No. 960 which states that all sales of gold to the Central Bank are
considered
constructive exports.45 Respondent should not be faulted for relying on the BIRs interpretation of the said laws and
regulations.46 While it is true, as petitioner alleges, that government is not estopped from collecting taxes which
remain unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested right
arising from an erroneous interpretation of law, these principles must give way to exceptions based on and in keeping
with the interest of justice and fairplay, as has been done in the instant matter. For, it is primordial that every person
must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.47
The case of ABS-CBN Broadcasting Corporation v. Court of Tax Appeals48 involved a similar factual milieu. There the
Commissioner of Internal Revenue issued Memorandum Circular No. 4-71 revoking an earlier circular for being
"erroneous for lack of legal basis." When the prior circular was still in effect, petitioner therein relied on it and
consummated its transactions on the basis thereof. We held, thus:
. . . .Petitioner was no longer in a position to withhold taxes due from foreign corporations because it had already
remitted all film rentals and no longer had any control over them when the new Circular was issued. . . .
....
This Court is not unaware of the well-entrenched principle that the [g]overnment is never estopped from collecting
taxes because of mistakes or errors on the part of its agents. But, like other principles of law, this also admits of
exceptions in the interest of justice and fairplay. . . .In fact, in the United States, . . . it has been held that the
Commissioner [of Internal Revenue] is precluded from adopting a position inconsistent with one previously taken
where injustice would result therefrom or where there has been a misrepresentation to the taxpayer.49
Respondent, in this case, has similarly been put on the receiving end of a grossly unfair deal. Before respondent was
entitled to tax refunds or credits based on petitioners own issuances. Then suddenly, it found itself instead being
made to pay deficiency taxes with petitioners retroactive change in the VAT categorization of respondents
transactions with the Central Bank. This is the sort of unjust treatment of a taxpayer which the law in Sec. 246 of the
NIRC abhors and forbids.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
DANTE O. TINGA Associate Justice
WE CONCUR:
REYNATO S. PUNO
Associate Justice
Chairman

MA. ALICIA AUSTRIA-MARTINEZ

ROMEO J. CALLEJO, SR.

Associate Justice

Associate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.
REYNATO S. PUNO
Associate Justice
Chairman, Second Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairmans Attestation, it is hereby certified
that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.
HILARIO G. DAVIDE, JR.
Chief Justice

Footnotes
Resolving CA-G.R. SP Nos. 37205, 38958, and 39435, promulgated on 10 July 1998; penned by Justice
Buenaventura J. Guerrero, concurred in by Justice Portia Alio-Hormachuelos and Justice Renato C.
Dacudao of the Former Fourteenth Division. Rollo in G.R. No. 134588, pp. 38-52. N.B.: The two docket
numbers assigned to this single petition were the result of petitioners filing of two motions for extension of
time to file petition for review on certiorari, the first, for CA-G.R. No. 38598 by Assistant Solicitor General
Azucena Balanon-Corpuz and Associate Solicitor Sarah Jane T. Fernandez docketed herein as G.R. No.
134587, the second for CA-GR No. 37205 by Assistant Solicitor General Ramon G. del Rosario and Solicitor
Ma. Theresa G. San Juan, docketed as G.R. No. 134588. There is only one petition, however, since the
subject cases of the two motions for extension of time were consolidated at the level of the Court of Appeals
and subject of the assailed Decision.
1

See E.O. 292 s. 1987, Book IV Title II, Chapter 4, Sec. 16.

Rollo in G.R. No. 134588, pp. 7-8.

Id. at 190.

With VAT Registration No. 311-9-000027 issued on 1 January 1988, id. at 39.

P.D. No. 1158, s. 1977, prior to its amendment by R.A. No. 7716 (1994) and the enactment of R.A. No. 8284
(1997).
6

Sec. 107 of the NIRC, as amended by E.O. No. 273 s. 1987.

Sec. 104 of the NIRC, as amended by E.O. No. 273 s. 1987.

Rollo in G.R. No. 134588, p. 39.

Section 100. . . . . [T]he following sales by VAT-registered persons shall be subject to 0%: (1) export sales;
and (2) sales to persons or entities whose exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such sales to zero rate.
10

"Export sales" means the sale and shipment or exportation of goods in the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may influence or determine the
transfer of ownership of the goods so exported, or foreign currency denominated sales. . . .
Memorandum Circular No. 59-88 dated 14 December 1988; VAT Ruling No. 074-88 dated 24 March 1988;
VAT Ruling No. 075-88 dated 29 March 1988; VAT Ruling No. 379-88 dated 28 August 1988; and VAT Ruling
No. 239-89 dated 20 September 1989. Per respondents Comment, Rollo in G.R. No. 134588, pp. 192-193.
11

12

Rollo in G.R. No. 134588, p. 192.

13

Other amounts not related to the instant petition are no longer discussed.

For the periods of 1 February 1991 to 30 April 1991 and 1 May 1991 to 31 July 1991, subjects of CTA Case
No. 4945, and, on appeal, of CA-G.R. SP No. 37209.
14

For the periods of 1 August 1989 to 31 October 1989 and 1 November 1989 to 31 January 1990, subject of
CTA Case No. 4627, and, on appeal, of CA-G.R. SP No. 38958.
15

For the periods of 1 February 1991 to 30 April 1991; 1 May 1991 to 31 July 1991; 1 February 1990 to 30
April 1990; 1 May 1990 to 31 July 1990; 1 August 1990 to 31 October 1990; 1 November 1991 to 31 January
1991 subjects of CTA Case No. 4686 and CTA Case No. 4829, consolidated on appeal of CA-G.R. SP No.
39435.
16

17

Rollo in G.R. No. 134588, pp. 39-44.

Totaling P555,486,073.38 for the period of 1988 to 1991, per respondents Comment, Rollo, p. 194.
Although it is uncertain whether the deficiency assessments specified therein correspond to the particular
transactions subject of the present petition.
18

Rollo in G.R. No. 134588, p. 195. Petitioner relies heavily on VAT Ruling No. 059-92 which contains a
discourse on why the retroactive application of VAT Ruling No. 3788-88 is not prejudicial to mining
companies.
19

20

CA Decision, Rollo in G.R. No. 134588, pp. 44-45.

The Decision in CTA Case No. 4945, promulgated on 26 January 1995, was penned by Associate Judge
Ramon O. De Vera, concurred in by Associate Judge Manuel K. Gruba with Dissenting and Concurring
Opinion by Presiding Judge Ernesto D. Acosta. The Decision in CTA Case No. 4627, promulgated on 23
June 1995, was penned by Associate Judge Ramon O. De Vera and concurred in by Associate Judge
Manuel K. Gruba and Presiding Judge Ernesto D. Acosta. (N.B.: The issue in this case was on
substantiation of tax credits. Consequently, this case was not decided on the issue of retroactive application
of VAT Ruling No. 008-92.) The Decision in the consolidated cases of CTA Case Nos. 4686 and 4829,
21

promulgated on 27 September 1992, was penned by Associate Judge Ramon O. De Vera, concurred in by
Associate Judge Manuel K. Gruba with Dissenting Opinion by Presiding Judge Ernesto D. Acosta.
22

Other matters unrelated to the matter subject of the petition are no longer discussed.

23

CA-G.R. SP No. 38287.

Promulgated by the Special Fifth Division composed of Justice Pedro Ramirez, Justice Maximo Asuncion,
and ponente Justice Eduardo Montenegro.
24

25

Rollo in G.R. No. 134588, p. 52.

26

Respondents Memorandum, Rollo in G.R. No. 134587, p. 41.

27

Rollo in G.R. No. 134588, pp. 18-25.

28

Id. at 199.

Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 117982, 06 February 1997, 267
SCRA 557, 564, citing Commissioner of Internal Revenue v. Telefunken Semiconductor Philippines, Inc.,
G.R. No. 103915, 23 October 1995, 249 SCRA 401; Bank of America v. Court of Appeals, G.R. No. 103092,
21 July 1994, 234 SCRA 302; Commissioner of Internal Revenue v. CTA, G.R. No. L-44007, 20 March 1991,
195 SCRA 444; Commissioner of Internal Revenue v. Mega General Merchandising Corp., G.R. No. 69136,
30 September 1988, 166 SCRA 166; Commissioner of Internal Revenue v. Burroughs, G.R. No. 66653, 19
June 1986, 142 SCRA 324; ABS-CBN v. CTA, G.R. No. 52306, 12 October 1981, 108 SCRA 142.
29

30

Rollo in G.R. No. 134588, p. 21.

31

Id. at 197.

The Philippine American Life and General Insurance Co. v. Gramaje, G.R. No. 156963, 11 November
2004 citing Pestao v. Sumayang, G.R. No. 139875, 04 December 2000, 346 SCRA 870, 879.
32

33

Ibid.

34

H. De Leon, The Law On Transfer and Business Taxation (2000 ed.), p. 135.

35

Sec. 4.99-2, Revenue Regulation No. 7-95 (1995).

36

Supra note 34 at 143.

37

Sec. 112 (B) of the NIRC, as amended.

38

Sec. 112 (B) of the NIRC, as amended.

39

Rounded off to the first decimal for purposes of simplicity.

40

Rollo, p. 29.

Whether it is at 10% of invoice price for instances when VAT is billed separately in the invoice or 1/11 of the
invoice price for instances when the VAT is not billed by the seller separately in the invoice, in which case
the invoice price is deemed to have included the VAT.
41

42

Rollo in G.R. No. 134588, p. 26.

Thus, per the illustration in Revenue Regulation No. 5-87, where "A" sold on account to "B" 100 pieces of
merchandise "X" for P1,000.00 plus VAT of P100.00, B should record in his subsidiary purchase book the
purchases in the amount of P1,000.00 and input taxes amounting to P100.00. The journal entry should be:
43

Dr. Purchase P1,000.00

Input Taxes P 100.00
Cr. Accounts payable P1,100.00
44

Rollo in G.R. No. 134588, p. 28.

45

Circular No. 960 dated January 30, 1984.

"Sec. 169. Privilege of export oriented firms. Gold producers shall qualify as export-oriented firms even if
their entire output is sold to the Central Bank.
"Circular No. 1301 Series of 1991 dated August 7, 1991
With reference to Section 169 of Central Bank Circular No. 960 dated October 21, 1983, it is hereby stated,
for clarification purposes, that all sales of gold to the Central Bank are considered constructive exports."
Section 107(c), C.B. Circular No. 1318 dated January 3, 1992
"All gold sold to Central Bank by primary and secondary gold producers and small scale miners are
considered constructive when appropriate."
In his dissenting opinion in CTA Cases Nos. 4686 & 4829, Presiding Judge (now Justice) Ernesto D.
Acosta elucidated on the rationale underlying the CB Circulars, thus:
46

The policy of the Central Bank is to conserve this metal (gold) through purchase at competitive prices, giving
incentives to producers and its prudent use through regulations (Section 162, CB Circular No. 960). Towards
this end, certain gold producers are required to sell their entire production of gold to the Central Bank
(Section 171, CB Circular No. 960) and no person shall export or bring out, or attempt to export or bring out
of the Philippines, gold and/or gold-bearing materials, in any shape, form and quantity without prior approval
from the CB Export Department. (Section 107, CB Circular No. 1318). It is also in line with aforementioned
policy that gold producers are given incentives such as considering their sales to CB as exports.
47

Article 19, Civil Code.

48

195 Phil. 33 (1981).

49

Id. at 41, 43-44.

16. CIR v. Bursmeitars & Wain Scandinavian, GR 153205 Jan 2007

SECOND DIVISION
G.R. No. 153205

January 22, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.

DECISION
CARPIO, J.:
The Case
This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the Court of Appeals in CA-G.R. SP No.
66341 affirming the 8 August 2001 Decision3 of the Court of Tax Appeals (CTA). The CTA ordered the Commissioner
of Internal Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in favor of Burmeister and Wain
Scandinavian Contractor Mindanao, Inc. (respondent).
The Antecedents
The CTA summarized the facts, which the Court of Appeals adopted, as follows:
[Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines
with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City.
It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor A/S (BWSCDenmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the
National Power Corporation (NAPOCOR) for the operation and maintenance of [NAPOCORs] two power barges. The
Consortium appointed BWSC-Denmark as its coordination manager.
BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of
NAPOCORs two power barges as well as the performance of other duties and acts which necessarily have to be
done in the Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and Peso). The
freely convertible non-Peso component is deposited directly to the Consortiums bank accounts in Denmark and
Japan, while the Peso-denominated component is deposited in a separate and special designated bank account in
the Philippines. On the other hand, the Consortium pays [respondent] in foreign currency inwardly remitted to the
Philippines through the banking system.
In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from the BIR which
responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if [respondent] chooses to
register as a VAT person and the consideration for its services is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services
shall be subject to VAT at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration bearing RDO
Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among others, a
total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as follows:
Qtr.

Exh.

Date Filed

1st

04-18-96

P 33,019,651.07

P608,953.48

2nd

07-16-96

37,108,863.33

756,802.66

3rd

10-14-96

34,196,372.35

930,279.14

4th

01-20-97

42,992,302.87

1,065,138.86

Totals

Zero-Rated Sales

VAT Input Tax

P147,317,189.62

P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It allegedly
misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case. Revenue
Regulations No. 5-96 provides in part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read as
follows:
Section 4.102-2(b)(2) "Services other than processing, manufacturing or repacking for other persons doing
business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a
non-resident foreign client such as project studies, information services, engineering and architectural designs and
other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP."
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to the Consortium
to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996 sales since said
Revenue Regulations No. 5-96 became effective only on April 1996. The sum of P43,893,951.07, representing
January to March 1996 sales was subjected to zero rate. Consequently, [respondent] filed its 1996 amended VAT
return consolidating therein the VAT output and input taxes for the four calendar quarters of 1996. It paid the amount
of P6,994,659.67 through BIRs collecting agent, PCIBank, as its output tax liability for the year 1996, computed as
follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review Committee which
reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being rendered by BWSCMI is subject to VAT
at zero percent (0%)."
On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the issuance of a tax
credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that it erroneously paid the output
VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP) of the BIR.4
On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of the two-year
prescriptive period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for P6,994,659.67 in favor of
respondent. The CTAs ruling stated:
[Respondents] sale of services to the Consortium [was] paid for in acceptable foreign currency inwardly remitted to
the Philippines and accounted for in accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These
were established by various BPI Credit Memos showing remittances in Danish Kroner (DKK) and US dollars (US$) as
payments for the specific invoices billed by [respondent] to the consortium. These remittances were further certified

by the Branch Manager x x x of BPI-Davao Lanang Branch to represent payments for sub-contract fees that came
from Den Danske Aktieselskab Bank-Denmark for the account of [respondent]. Clearly, [respondents] sale of
services to the Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondents] sale of services to the Consortium was even confirmed by the [petitioner] in BIR
Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to VAT at zero
percent, it follows that it mistakenly availed of the Voluntary Assessment Program by paying output tax for its sale of
services. x x x
x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by mistake, the
[petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x x5
Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of merit and
affirmed the CTA decision.6
Hence, this petition.
The Court of Appeals Ruling
In affirming the CTA, the Court of Appeals rejected petitioners view that since respondents services are not destined
for consumption abroad, they are not of the same nature as project studies, information services, engineering and
architectural designs, and other similar services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5967 as subject to 0% VAT. Thus, according to petitioner, respondents services cannot legally qualify for 0% VAT but
are subject to the regular 10% VAT.8
The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040-98, respondents
services should be destined for consumption abroad to enjoy zero-rating. Contrary to petitioners interpretation, there
are two kinds of transactions or services subject to zero percent VAT under VAT Ruling No. 040-98. These are (a)
services other than repacking goods for other persons doing business outside the Philippines which goods are
subsequently exported; and (b) services by a resident to a non-resident foreign client, such as project studies,
information services, engineering and architectural designs and other similar services, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of
theBangko Sentral ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first classification is required by the provision to be consumed abroad in
order to be taxed at zero rate. In x x x the absence of such express or implied stipulation in the statute, the second
classification need not be consumed abroad."10
The Court of Appeals further held that assuming petitioners interpretation of Section 4.102-2(b)(2) of Revenue
Regulations No. 5-96 is correct, such administrative provision is void being an amendment to the Tax Code. Petitioner
went beyond merely providing the implementing details by adding another requirement to zero-rating. "This is
indicated by the additional phrase as well as services by a resident to a non-resident foreign client, such as project
studies, information services and engineering and architectural designs and other similar services. In effect, this
phrase adds not just one but two requisites: (a) services must be rendered by a resident to a non-resident; and (b)
these must be in the nature of project studies, information services, etc."11
The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,12 for services which were performed in
the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit: (1) payment in acceptable
foreign currency and (2) accounted for in accordance with the rules of the BSP. Section 108(b)(2) of the Tax Code
does not provide that services must be "destined for consumption abroad" in order to be VAT zero-rated.13
The Court of Appeals disagreed with petitioners argument that our VAT law generally follows the destination principle
(i.e., exports exempt, imports taxable).14 The Court of Appeals stated that "if indeed the destination principle
underlies and is the basis of the VAT laws, then petitioners proper remedy would be to recommend an amendment of

Section 108(b)(2) to Congress. Without such amendment, however, petitioner should apply the terms of the basic law.
Petitioner could not resort to administrative legislation, as what [he] had done in this case."15
The Issue
The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as erroneously paid
output VAT for the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant petition is not on the ground that respondents services
are subject to 0% VAT. Rather, it is based on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 0239517 and VAT Ruling No. 003-99,18 which held that respondents services are subject to 0% VAT and which respondent
invoked in applying for refund of the output VAT.
Section 102(b) of the Tax Code,19 the applicable provision in 1996 when respondent rendered the services and paid
the VAT in question, enumerates which services are zero-rated, thus:
(b) Transactions subject to zero-rate. The following services performed in the Philippines by VAT-registered
persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas(BSP);
(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
rate;
(4) Services rendered to vessels engaged exclusively in international shipping; and
(5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing
goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.
(Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims that it complied with the requirements of the Tax
Code for zero rating under the second paragraph of Section 102(b). Respondent asserts that (1) the payment of its
service fees was in acceptable foreign currency, (2) there was inward remittance of the foreign currency into the
Philippines, and (3) accounting of such remittance was in accordance with BSP rules. Moreover, respondent
contends that its services which "constitute the actual operation and management of two (2) power barges in
Mindanao" are not "even remotely similar to project studies, information services and engineering and architectural
designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96." As such, respondents services need not be
"destined to be consumed abroad in order to be VAT zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be other than "processing, manufacturing or repacking of goods"
and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules.
Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such
services is doing business outside the Philippines. While this requirement is not expressly stated in the second

paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services
must be "for other persons doing business outside the Philippines." The phrase "for other persons doing business
outside the Philippines" not only refers to the services enumerated in the first paragraph of Section 102(b), but also
pertains to the general term "services" appearing in the second paragraph of Section 102(b). In short, services other
than processing, manufacturing, or repacking of goods must likewise be performed for persons doing business
outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the "other services" are
both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the
regular VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment in foreign currency
inwardly remitted by the recipient of services. To interpret Section 102(b)(2) to apply to a payer-recipient of services
doing business in the Philippines is to make the payment of the regular VAT under Section 102(a) dependent on the
generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating
payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a) as
a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a
voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law clearly
envisions the payer-recipient of services to be doing business outside the Philippines. Only those not doing business
in the Philippines can be required under BSP rules20 to pay in acceptable foreign currency for their purchase of goods
or services from the Philippines. In a domestic transaction, where the provider and recipient of services are both
doing business in the Philippines, the BSP cannot require any party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-recipient of services
is doing business outside the Philippines. Under BSP rules,21 the proceeds of export sales must be reported to the
Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of services under Section 102(b) (1) and (2)
to account for the foreign currency proceeds to the BSP. The same rationale does not apply if the provider and
recipient of the services are both doing business in the Philippines since their transaction is not in the nature of an
export sale even if payment is denominated in foreign currency.
Further, when the provider and recipient of services are both doing business in the Philippines, their transaction falls
squarely under Section 102(a) governing domestic sale or exchange of services. Indeed, this is a purely local sale or
exchange of services subject to the regular VAT, unless of course the transaction falls under the other provisions of
Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the preceding
subparagraph," the legislative intent is that only the services are different between subparagraphs 1 and 2. The
requirements for zero-rating, including the essential condition that the recipient of services is doing business outside
the Philippines, remain the same under both subparagraphs.
Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the present Tax Code clarifies this
legislative intent. Expressly included among the transactions subject to 0% VAT are "[s]ervices other than those
mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in business conducted outside
the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services
are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP."
In this case, the payer-recipient of respondents services is the Consortium which is a joint-venture doing business in
the Philippines. While the Consortiums principal members are non-resident foreign corporations, the Consortium
itself is doing business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which states that the
contract between the Consortium and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a contract
between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering &
Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to hereinafter as the "Consortium", and the
National Power Corporation ("NAPOCOR") for the operation and maintenance of two 100-Megawatt power
barges ("Power Barges") acquired by NAPOCOR for a 15-year term.23 (Emphasis supplied)

Considering this length of time, the Consortiums operation and maintenance of NAPOCORs power barges cannot
be classified as a single or isolated transaction. The Consortium does not fall under Section 102(b)(2) which requires
that the recipient of the services must be a person doing business outside the Philippines. Therefore, respondents
services to the Consortium, not being supplied to a person doing business outside the Philippines, cannot legally
qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power barges in the
Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly
remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted for in
accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As the Court held in
Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch),24 the place of payment
is immaterial, much less is the place where the output of the service is ultimately used. An essential condition for
entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient of the services is a person doing business
outside the Philippines. In this case, the recipient of the services is the Consortium, which is doing business not
outside, but within the Philippines because it has a 15-year contract to operate and maintain NAPOCORs two 100megawatt power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows the "destination principle" (exports are zero-rated
whereas imports are taxed). However, as the Court stated in American Express, there is an exception to this
rule.25 This exception refers to the 0% VAT on services enumerated in Section 102 and performed in the Philippines.
For services covered by Section 102(b)(1) and (2), the recipient of the services must be a person doing business
outside the Philippines. Thus, to be exempt from the destination principle under Section 102(b)(1) and (2), the
services must be (a) performed in the Philippines; (b) for a person doing business outside the Philippines; and (c)
paid in acceptable foreign currency accounted for in accordance with BSP rules.
Respondents reliance on the ruling in American Express26 is misplaced. That case involved a recipient of services,
specifically American Express International, Inc. (Hongkong Branch), doing business outside the Philippines. There,
the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the
collection and payment of receivables belonging to its non-resident foreign client [American Express International,
Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in
accordance with BSP rules and regulations. x x x x27 (Emphasis supplied)
In contrast, this case involves a recipient of services the Consortium which is doing business in the Philippines.
Hence, American Express services were subject to 0% VAT, while respondents services should be subject to 10%
VAT.
Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-99,28 which
reconfirmed BIR Ruling No. 023-9529 "insofar as it held that the services being rendered by BWSCMI is subject to VAT
at zero percent (0%)." Respondents reliance on these BIR rulings binds petitioner.
Petitioners filing of his Answer before the CTA challenging respondents claim for refund effectively serves as a
revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such revocation cannot be given
retroactive effect since it will prejudice respondent. Changing respondents status will deprive respondent of a refund
of a substantial amount representing excess output tax.30 Section 246 of the Tax Code provides that any revocation of
a ruling by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation will
prejudice the taxpayer. Further, there is no showing of the existence of any of the exceptions enumerated in Section
246 of the Tax Code for the retroactive application of such revocation.
However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA contesting respondents claim for
refund, respondents services shall be subject to the regular 10% VAT.31 Such filing is deemed a revocation of VAT
Ruling No. 003-99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.

ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
CONCHITA CARPIO MORALES
Associate Justice

DANTE O. TINGA
Asscociate Justice

PRESBITERO J. VELASCO, JR.

Associate Justice
AT T E S TAT I O N
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Courts Division.
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, I certify that the
conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice

Footnotes
1

Under Rule 45 of the Rules of Court.

Penned by Associate Justice Bernardo P. Abesamis, with the concurrence of Associate Justices Eubulo G.
Verzola and Perlita J. Tria Tirona. Rollo, pp. 22-37.
2

Penned by Presiding Judge Ernesto D. Acosta, with the concurrence of Associate Judge Amancio Q. Saga.
Id. at 38-47.
3

Id. at 38-41.

Id. at 43-46.

Id. at 37.

This provision reads:

(2) Services other than processing, manufacturing or repacking for other persons doing business
outside the Philippines for goods which are subsequently exported, as well as services by a
resident to a non-resident foreign client such as project studies, information services, engineering
and architectural designs and other similar services, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP.
8

Rollo, p. 28.

Id. at 29-30.

10

Id. at 30.

11

Id. at 33, 35.

Refers to Republic Act No. 8424 otherwise known as the Tax Reform Act of 1997 which took effect on 1
January 1998.
12

13

Rollo, p. 34.

14

Id. at 35.

15

Id. at 36.

16

Id. at 12.

17

Issued by then Commissioner Liwayway Vinzons-Chato.

18

Issued by then Commissioner of Internal Revenue Beethoven L. Rualo.

In this case, the applicable Tax Code refers to the National Internal Revenue Code (NIRC) of 1986 as
amended by Executive Order No. 273 and Republic Act No. 7716 dated 25 July 1987 and 5 May 1994,
respectively. At the time respondent secured BIR Ruling No. 023-95 dated 14 February 1995, Section 108 of
the Tax Code was numbered Section 102. The renumbering took effect on 1 January 1998 pursuant to
Republic Act No. 8424, otherwise known as the Tax Reform Act of 1997.
19

See Chapter II (B) on Export Trade Transactions, BSP Circular No. 1389 dated 13 April 1993, otherwise
known as the Consolidated Foreign Exchange Rules and Regulations.
20

21

Id.

As amended by Republic Act No. 9337 (AN ACT AMENDING SECTIONS 27, 28, 34, 106, 107, 108, 109,
110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 AND 288 OF THE NATIONAL INTERNAL
REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES) which took effect on 1 July
2005.
22

23

Rollo, p. 92.

24

G.R. No. 152609, 29 June 2005, 462 SCRA 197.

25

Id.

Id. Respondent relied on the ruling of the Court of Appeals in the American Express case since at the time
there was yet no Supreme Court ruling on the case.
26

27

Id. at 208.

28

Rollo, pp. 95-96.

29

Id. at 92-94.

See Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), supra
note 24.
30

The Tax Code, as amended by Republic Act No. 9337 which took effect on 1 July 2005, increased the rate
of the VAT from 10% to 12%. The relevant provisions of Republic Act No. 9337 (AN ACT AMENDING
SECTIONS 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237
AND 288 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER
PURPOSES) state:
31

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
"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 valueadded tax equivalent to ten percent (10%) of gross receipts derived from the sale or
exchange of services, including the use or lease of properties: Provided, That the
President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any
of the following conditions has been satisfied:
"(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%); or
"(ii) National government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).
x x x x (Emphasis supplied)

17. Pepsi Cola vs Tanauan 69 SCRA 460(31)

EN BANC
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant Solicitor General
Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

MARTIN, J.:

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which was
certified to Us by the Court of Appeals on October 6, 1969, as involving only pure questions of law, challenging the
power of taxation delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended,
June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a
complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare Section 2 of
Republic Act No. 2264. 1 otherwise known as the Local Autonomy Act, unconstitutional as an undue

delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the
municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state that, first, both
Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates imposed therein
are practically the same, and second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as
per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce
compliance by the latter of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and collects
"from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink
corked." 2 For the purpose of computing the taxes due, the person, firm, company or corporation producing

soft drinks shall submit to the Municipal Treasurer a monthly report, of the total number of bottles
produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and collects "on
soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes

due, the person, fun company, partnership, corporation or plant producing soft drinks shall submit to the
Municipal Treasurer a monthly report of the total number of gallons produced or manufactured during the
month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and upholding
the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and
constitutional; ordering the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in turn,
elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and
oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific
taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every
independent government, without being expressly conferred by the people. 6 It is a power that is purely legislative

and which the central legislative body cannot delegate either to the executive or judicial department of the
government without infringing upon the theory of separation of powers. The exception, however, lies in
the case of municipal corporations, to which, said theory does not apply. Legislative powers may be
delegated to local governments in respect of matters of local concern. 7 This is sanctioned by immemorial
practice. 8 By necessary implication, the legislative power to create political corporations for purposes of

local self-government carries with it the power to confer on such local governmental agencies the power
to tax. 9 Under the New Constitution, local governments are granted the autonomous authority to create
their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local government
unit shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as
may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from
beyond the sphere of the legislative power to enact and vest in local governments the power of local
taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to
invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact
measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities
and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the
legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public
policy the State has not deemed wise to tax for more general purposes. 10 This is not to say though that the

constitutional injunction against deprivation of property without due process of law may be passed over
under the guise of the taxing power, except when the taking of the property is in the lawful exercise of the
taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed;
(3) either the person or property taxed is within the jurisdiction of the government levying the tax; and (4)
in the assessment and collection of certain kinds of taxes notice and opportunity for hearing are
provided. 11 Due process is usually violated where the tax imposed is for a private as distinguished from a
public purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary
or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due
process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury
rather than a benefit to such taxpayer. Due process does not require that the property subject to the tax or
the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the
amount of the tax and the manner in which it shall be apportioned are generally not necessary to due
process of law. 12
There is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory of
double taxation. It must be observed that the delegating authority specifies the limitations and enumerates the taxes
over which local taxation may not be exercised. 13 The reason is that the State has exclusively reserved the

same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental
law, since We have not adopted as part thereof the injunction against double taxation found in the
Constitution of the United States and some states of the Union. 14 Double taxation becomes obnoxious
only where the taxpayer is taxed twice for the benefit of the same governmental entity 15 or by the same
jurisdiction for the same purpose, 16 but not in a case where one tax is imposed by the State and the other
by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because these two
ordinances cover the same subject matter and impose practically the same tax rate. The thesis proceeds from its
assumption that both ordinances are valid and legally enforceable. This is not so. As earlier quoted, Ordinance No.
23, which was approved on September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax
of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of the bottle used.
When it was discovered that the producer or manufacturer could increase the volume contents of the bottle and still
pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962,
imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference
between the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of
a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces,
U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus
clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even
without words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are only

seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the fact that
the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant
of the provisions of said Ordinance No. 27, series of 1962. The aforementioned admission shows that
only Ordinance No. 27, series of 1962 is being enforced by defendants-appellees. Even the Provincial
Fiscal, counsel for defendants-appellees admits in his brief "that Section 7 of Ordinance No. 27, series of

1962 clearly repeals Ordinance No. 23 as the provisions of the latter are inconsistent with the provisions
of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a specific tax.
Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic Act No. 2264, is broad
enough as to extend to almost "everything, accepting those which are mentioned therein." As long as the text levied
under the authority of a city or municipal ordinance is not within the exceptions and limitations in the law, the same
comes within the ambit of the general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in
cabisus non excepti 19 The limitation applies, particularly, to the prohibition against municipalities and

municipal districts to impose "any percentage tax or other taxes in any form based thereon nor impose
taxes on articles subject to specific tax except gasoline, under the provisions of the National Internal
Revenue Code." For purposes of this particular limitation, a municipal ordinance which prescribes a set
ratio between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and is null
and void for being outside the power of the municipality to enact. 20But, the imposition of "a tax of one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks produced or
manufactured under Ordinance No. 27 does not partake of the nature of a percentage tax on sales, or
other taxes in any form based thereon. The tax is levied on the produce (whether sold or not) and not on
the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is not set ratio between the volume of
sales and the amount of the tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such as
distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches firecrackers,
manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards,
saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all softdrinks, produced or
manufactured, or an equivalent of 1- centavos per case, 23 cannot be considered unjust and unfair. 24 an

increase in the tax alone would not support the claim that the tax is oppressive, unjust and confiscatory.
Municipal corporations are allowed much discretion in determining the reates of imposable taxes. 25 This
is in line with the constutional policy of according the widest possible autonomy to local governments in
matters of local taxation, an aspect that is given expression in the Local Tax Code (PD No. 231, July 1,
1973). 26 Unless the amount is so excessive as to be prohibitive, courts will go slow in writing off an
ordinance as unreasonable. 27 Reluctance should not deter compliance with an ordinance such as
Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten crowners or
P2,000.00 with ten but not more than twenty crowners imposed on manufacturers, producers, importers and dealers
of soft drinks and/or mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance No. 41,
series of 1968, of defendant Municipality, 29 appears not to affect the resolution of the validity of Ordinance No.

27. Municipalities are empowered to impose, not only municipal license taxes upon persons engaged in
any business or occupation but also to levy for public purposes, just and uniform taxes. The ordinance in
question (Ordinance No. 27) comes within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy
Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of
1962, re-pealing Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect. Costs against
petitioner-appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muoz Palma, Aquino and Concepcion, Jr., JJ.,
concur.

Separate Opinions

FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive character.
Insofar as it shows adherence to tried and tested concepts of the law of municipal taxation, I am only in agreement. If
I limit myself to concurrence in the result, it is primarily because with the article on Local Autonomy found in the
present Constitution, I feel a sense of reluctance in restating doctrines that arose from a different basic premise as to
the scope of such power in accordance with the 1935 Charter. Nonetheless it is well-nigh unavoidable that I do so as
I am unable to share fully what for me are the nuances and implications that could arise from the approach taken by
my brethren. Likewise as to the constitutional aspect of the thorny question of double taxation, I would limit myself to
what has been set forth in City of Baguio v. De Leon. 1
1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal corporations. It is
therein specifically provided: "Each local government unit shall have the power to create its own sources of revenue
and to levy taxes subject to such limitations as may be provided by law. 2 That was not the case under the 1935

Charter. The only limitation then on the authority, plenary in character of the national government, was
that while the President of the Philippines was vested with the power of control over all executive
departments, bureaus, or offices, he could only . It exercise general supervision over all local
governments as may be provided by law ... 3 As far as legislative power over local government was
concerned, no restriction whatsoever was placed on the Congress of the Philippines. It would appear
therefore that the extent of the taxing power was solely for the legislative body to decide. It is true that in
1939, there was a statute that enlarged the scope of the municipal taxing power. 4 Thereafter, in 1959
such competence was further expanded in the Local Autonomy Act. 5 Nevertheless, as late as December
of 1964, five years after its enactment of the Local Autonomy Act, this Court, through Justice Dizon,
in Golden Ribbon Lumber Co. v. City of Butuan, 6reaffirmed the traditional concept in these words: "The
rule is well-settled that municipal corporations, unlike sovereign states, after clothed with no power of
taxation; that its charter or a statute must clearly show an intent to confer that power or the municipal
corporation cannot assume and exercise it, and that any such power granted must be construed strictly,
any doubt or ambiguity arising from the terms of the grant to be resolved against the municipality." 7
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao, 8 "is an attribute of

sovereignty which municipal corporations do not enjoy." 9 That case left no doubt either as to weakness of
a claim "based merely by inferences, implications and deductions, [as they have no place in the
interpretation of the power to tax of a municipal corporation." 10 As the conclusion reached by the Court
finds support in such grant of the municipal taxing power, I concur in the result. 2. As to any possible
infirmity based on an alleged double taxation, I would prefer to rely on the doctrine announced by this
Court in City of Baguio v. De Leon. 11 Thus: "As to why double taxation is not violative of due process,
Justice Holmes made clear in this language: 'The objection to the taxation as double may be laid down on
one side. ... The 14th Amendment [the due process clause) no more forbids double taxation than it does
doubling the amount of a tax, short of (confiscation or proceedings unconstitutional on other grouse With
that decision rendered at a time when American sovereignty in the Philippines was recognized, it
possesses more than just a persuasive effect. To some, it delivered the coup justice to the bogey of
double taxation as a constitutional bar to the exercise of the taxing power. It would seem though that in
the United States, as with us, its ghost, as noted by an eminent critic, still stalks the juridical stage. 'In a
1947 decision, however, we quoted with approval this excerpt from a leading American decision: 'Where,
as here, Congress has clearly expressed its intention, the statute must be sustained even though double
taxation results. 12
So I would view the issues in this suit and accordingly concur in the result.

Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive character.
Insofar as it shows adherence to tried and tested concepts of the law of municipal taxation, I am only in agreement. If
I limit myself to concurrence in the result, it is primarily because with the article on Local Autonomy found in the
present Constitution, I feel a sense of reluctance in restating doctrines that arose from a different basic premise as to
the scope of such power in accordance with the 1935 Charter. Nonetheless it is well-nigh unavoidable that I do so as
I am unable to share fully what for me are the nuances and implications that could arise from the approach taken by
my brethren. Likewise as to the constitutional aspect of the thorny question of double taxation, I would limit myself to
what has been set forth in City of Baguio v. De Leon. 1
1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal corporations. It is
therein specifically provided: "Each local government unit shall have the power to create its own sources of revenue
and to levy taxes subject to such limitations as may be provided by law. 2 That was not the case under the 1935

Charter. The only limitation then on the authority, plenary in character of the national government, was
that while the President of the Philippines was vested with the power of control over all executive
departments, bureaus, or offices, he could only . It exercise general supervision over all local
governments as may be provided by law ... 3 As far as legislative power over local government was
concerned, no restriction whatsoever was placed on the Congress of the Philippines. It would appear
therefore that the extent of the taxing power was solely for the legislative body to decide. It is true that in
1939, there was a statute that enlarged the scope of the municipal taxing power. 4 Thereafter, in 1959
such competence was further expanded in the Local Autonomy Act. 5 Nevertheless, as late as December
of 1964, five years after its enactment of the Local Autonomy Act, this Court, through Justice Dizon,
in Golden Ribbon Lumber Co. v. City of Butuan, 6reaffirmed the traditional concept in these words: "The
rule is well-settled that municipal corporations, unlike sovereign states, after clothed with no power of
taxation; that its charter or a statute must clearly show an intent to confer that power or the municipal
corporation cannot assume and exercise it, and that any such power granted must be construed strictly,
any doubt or ambiguity arising from the terms of the grant to be resolved against the municipality." 7
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao, 8 "is an attribute of

sovereignty which municipal corporations do not enjoy." 9 That case left no doubt either as to weakness of
a claim "based merely by inferences, implications and deductions, [as they have no place in the
interpretation of the power to tax of a municipal corporation." 10 As the conclusion reached by the Court
finds support in such grant of the municipal taxing power, I concur in the result. 2. As to any possible
infirmity based on an alleged double taxation, I would prefer to rely on the doctrine announced by this
Court in City of Baguio v. De Leon. 11 Thus: "As to why double taxation is not violative of due process,
Justice Holmes made clear in this language: 'The objection to the taxation as double may be laid down on
one side. ... The 14th Amendment [the due process clause) no more forbids double taxation than it does
doubling the amount of a tax, short of (confiscation or proceedings unconstitutional on other grouse With
that decision rendered at a time when American sovereignty in the Philippines was recognized, it
possesses more than just a persuasive effect. To some, it delivered the coup justice to the bogey of
double taxation as a constitutional bar to the exercise of the taxing power. It would seem though that in
the United States, as with us, its ghost, as noted by an eminent critic, still stalks the juridical stage. 'In a
1947 decision, however, we quoted with approval this excerpt from a leading American decision: 'Where,
as here, Congress has clearly expressed its intention, the statute must be sustained even though double
taxation results. 12
So I would view the issues in this suit and accordingly concur in the result.

Footnotes

1 "Sec. 2. Taxation. Any provision of law to the contrary notwithstanding, all chartered cities,
municipalities and municipal districts shall have authority to impose municipal license taxes or fees
upon persons engaged in any occupation or business, or exercising private in chartered cities,
municipalities and municipal districts by requiring them to secure licenses at rates fixed by the
municipal board or city council of the city, the municipal council of the municipality, or the municipal
district council of the municipal district to collect fees and charges for service rendered by the city,
municipality or municipal district; to regulate and impose reasonable for services rendered in
connection with any business, profession occupation being conducted within the city, municipality
or municipal district and otherwise to levy for public purposes, just and uniform taxes, licenses or
fees: Provided, That municipalities and municipal districts shall, in no case, impose any percentage
tax on sales or other taxes in any form based thereon nor impose taxes on articles subject to
specific tax, except gasoline, under the provisions of the National Internal Revenue Code:
Provided, however, That no city, municipality or municipal district may levy or impose any of the
following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of any newspaper engaged in the printing and publication of any
newspaper, magazine, review or bulletin appearing at regular interval and having fixed prices for
subscription and sale, and which is not published primarily for the purpose of publishing
advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public utilities except electric light,
heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of licenses
or permits for the driving thereof;
(i) Customs duties registration, wharfage on wharves owned by the national government, tonnage
and all other kinds of customs fees, charges and dues;
(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax:
(k) Taxes on premiums paid by owners of property who obtain insurance directly with foreign
insurance companies; and
(i) Taxes, fees or levies, of any kind, which in effect impose a burden on exports of Philippine
finished, manufactured or processed products and products of Philippine cottage industries.
2 Section 2.
3 Section 3.
4 Section 2.
5 Section 3.
6 Cooley, The Law of Taxation, Vol. 1, Fourth Edition, 149-150.

7 Pepsi-Cola Bottling Co. of the Phil., Inc. vs. City of Butuan, L-22814, August 28, 1968, 24 SCRA
793-96.
8 Rubi v. Prov. Brd. of Mindoro, 39 Phil. 702 (1919).
9 Cooley, ante at 190.
10 Idem at 198-200.
11 Malcolm, Philippine Constitutional Law, 513-14.
12 Cooley ante at 334.
13 See footnote 1.
14 Pepsi-Cola Bottling Co. of the Phil. Inc. vs. City of Butuan, 1, 2S 1 4, August 28, 1968, 24 SCRA
793-96. See Sec. 22, Art. VI, 1935
Constitution and Sec. 17 (1), Art. VIII, 1973 Constitution.
15 Commissioner of Internal Revenue v. Lednicky L- 18169, July 31, 1964, 11 SCRA 609.
16 SMB, Inc. v. City of Cebu, L-20312, February 26, 1972, 43 SCRA 280.
17 Punzalan v. Mun. Bd of City of Manila, 50 O.G. 2485; manufacturers Life Ins. Co. v. Meer, 89
Phil. 351 (1951).
18 McQuillin. Municipal Corporations, 3rd. Ed., Vol. 6, at 206.-210.
19 Villanueva v. City of Iloilo, L-26521, December 28, 1968, 26 SCRA 585-86; Nin Bay Mining Co.
v. Mun. of Roxas, Palawan, L-20125, July 20, 1965, 14 SCRA 663-64.
20 Arabay, Inc. v. CFI of Zamboanga del Norte, et al., L-27684, September 10, 1975.
21 SMB, Inc. v. City of Cebu, ante, Footnote 16.
22 Shell Co. of P.I. Ltd. v. Vao, 94 Phil. 394-95 (1954); Sections 123-148, NIRC; RA No. 953,
Narcotic Drugs Law, June 20, 1953.
23 Brief, defendants-appellees, at 14. A regular bottle of Pepsi-Cola soft drinks contains 8 oz., or
192 oz. per case of 24 bottles; a family-size contains 26 oz., or 312 oz. per case of 12 bottles.
24 See Pepsi-Cola Bottling Co. of the Phil., Inc. v. City of Butuan, ante, Footnote 14, where the tax
rate is P.10 per case of 24 bottles; City of Bacolod v. Gruet, L-18290, January 31, 1963, 7 SCRA
168-69, where the tax is P.03 on every case of bottled Coca-Coal.
25 Northern Philippines Tobacco Corp. v. Mun. of Agoo, La Union, L-26447, January 30, 1971, 31
SCRA 308.
26 William Lines, Inc. v. City of Ozamis, L-350048, April 23, 1974, 56 SCRA 593, Second Division,
per Fernando, J.
27 Victorias Milling Co. v. Mun. of Victorias, L-21183, September 27, 1968, 25 SCRa 205.

28 Procter & Gamble Trading Co. v. Mun. of Medina, Misamis Oriental, L-29125, January 31, 1973,
43 SCRA 133-34.
29 Subject of plaintiff-appellant's Motion for Admission and consideration of Essential Newly
Dissevered Evidence, dated April 30, 1969.
FERNANDO, J.
1 L-24756, October 31, 1968, 25 SCRA 938.
2 Article XI, Section 5 of the present Constitution.
3 Article VII, Section 10 of the 1935 Constitution.
4 Commonwealth Act 472 entitled: "An Act Revising the General Authority of Municipal Councils
and Municipal District Councils to Levy Taxes, Subject to Certain Limitations."
5 Republic Act No. 2264.
6 L-18534, December 24,1964,12 SCRA 611.
7 Ibid, 619. Cf. Cuunjieng v. Potspone, 42 Phil. 818 (1922); De Linan v. Municipal Council of Daet,
44 Phil. 792 (1923); Arquiza Luta v. Municipality of Zamboanga, 50 Phil. 748 (1927; Hercules
Lumber Co. v. Zamboanga, 55 Phil. 653 (1931); Yeo Loby v. Zamboanga, 55 Phil. 656 (1931);
People v. Carreon, 65 Phil. 588 (1939); Yap Tak Wing v. Municipal Board, 68 Phil. 511 (1939);
Eastern Theatrical Co. v. Alfonso 83 Phil. 852 (1949); De la Rosa v. City of Baguio, 91 Phil. 720
(I!)52); Medina v. City of Baguio, 91 Phil. 854 (1952); Standard-Vacuum Oil Co. v. Antigua, 96 Phil.
909 (1955); Municipal Government of Pagsanjan v. Reyes, 98 Phil. 654 (1956), We Wa Yu v. City of
Lipa, Phil. 975 (1956); Municipality of Cotabato v. Santos, 105 Phil. 963 (1959).
8 L-14264, April 30, 1963, 7 SCRA 887.
9 Ibid, 892.
10 Ibid.
11 L-24756, October 31, 1968, 25 SCRA 938.
12 Ibid, 943-944.

18. CIR v SC Johnson & Sons 309 SCRA 87 (1999)(32)

THIRD DIVISION

G.R. No. 127105 June 25, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the decision of the
Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals
in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
[Respondent], a domestic corporation organized and operating under the Philippine laws, entered
into a license agreement with SC Johnson and Son, United States of America (USA), a nonresident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted
the right to use the trademark, patents and technology owned by the latter including the right to
manufacture, package and distribute the products covered by the Agreement and secure
assistance in management, marketing and production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology Transfer Board of the Bureau
of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh.
"A").
For the use of the 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 (Exhs. "B" to "L" and submarkings).
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 [respondent's] case fall squarely within the same circumstances under which
said MacGeorge and Gillete rulings were issued. Since the agreement was approved by the
Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We
therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only
subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty
[Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]"
(Petition for Review [filed with the Court of Appeals], par. 12). [Respondent's] claim for there fund of
P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance

July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491

Jan 1993 602,451 170,630 68,245 102,368

February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461

P6,421,770 P1,605,443 P642,177 P963,266 1
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Johnson)
then filed a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as CTA Case No.
5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the
Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00 representing
overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. 2
The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals 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. 3
This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS
ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS
PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX
TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most favored
nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the
United States from sources within the Philippines only if the circumstances of the resident of the United States are
similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit" provision
as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Even
assuming that the phrase "paid under similar circumstances" refers to the payment of royalties, and not taxes, as held
by the Court of Appeals, still, the "most favored nation" clause cannot be invoked for the reason that when a tax treaty
contemplates circumstances attendant to the payment of a tax, or royalty remittances for that matter, these must
necessarily refer to circumstances that are tax-related. Finally, petitioner argues that since S.C. Johnson's invocation
of the "most favored nation" clause is in the nature of a claim for exemption from the application of the regular tax rate
of 25% for royalties, the provisions of the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1) because it
contains a defective certification against forum shopping as required under SC Circular No. 28-91, that is, the
certification was not executed by the petitioner herself but by her counsel; and (2) that the "most favored nation"
clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to
tax in other treaties; that the phrase "paid under similar circumstances" does not refer to payment of the tax but to the
subject matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the taxpayer
in one state to avail of more liberal provisions contained in another tax treaty wherein the country of residence of such
taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax
treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty

speaks of "royalties of the same kind paid under similar circumstances". S.C. Johnson also contends that the
Commissioner is estopped from insisting on her interpretation that the phrase "paid under similar circumstances"
refers to the manner in which the tax is paid, for the reason that said interpretation is embodied in Revenue
Memorandum Circular ("RMC") 39-92 which was already abandoned by the Commissioner's predecessor in 1993;
and was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are
subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West
Germany Tax Treaty. Said ruling should be given retroactive effect except if such is prejudicial to the taxpayer
pursuant to Section 246 of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by petitioner's
counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91 applies only to original
actions and not to appeals, as in the instant case. Moreover, the requirement that the certification should be signed
by petitioner and not by counsel does not apply to petitioner who has only the Office of the Solicitor General as
statutory counsel. Petitioner reiterates that even if the phrase "paid under similar circumstances" embodied in the
most favored nation clause of the RP-US Tax Treaty refers to the payment of royalties and not taxes, still the
presence or absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute a material
circumstance to such payment and would be determinative of the said clause's application.
1wphi1.nt

We address first the objection raised by private respondent that the certification against forum shopping was not
executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through one of its
Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR
PETITIONS FILED WITH THE SUPREME
COURT AND THE COURT OF APPEALS TO
PREVENT FORUM SHOPPING OR
MULTIPLE FILING OF PETITIONS AND
COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and complaints involving
the same issues in the Supreme Court, the Court of Appeals or other tribunals or agencies, with the
result that said courts, tribunals or agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals,
the petitioner aside from complying with pertinent provisions of the Rules of Court and existing
circulars, must certify under oath to all of the following facts or undertakings: (a) he has not
theretofore commenced any other action or proceeding involving the same issues in the Supreme
Court, the Court of Appeals, or any tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for
the summary dismissal of the multiple petitions or complaints; . . .
The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed before
this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies only to original actions and
not to appeals as in the instant case is not supported by the text nor by the obvious intent of the Circular which is to
prevent multiple petitions that will result in the same issue being resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any other
action involving the same issues in this Court or the Court of Appeals or any other tribunal or agency, we are inclined
to accept petitioner's submission that since the OSG is the only lawyer for the petitioner, which is a government
agency mandated under Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code 4 to be

represented only by the Solicitor General, the certification executed by the OSG in this case constitutes
substantial compliance with Circular No. 28-91.

With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article 13
(2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon royalties received
by a non-resident foreign corporation. The provision states insofar as pertinent
that
1) Royalties derived by a resident of one of the Contracting States from sources
within the other Contracting State may be taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall not exceed.
a) In the case of the United States, 15 percent of the gross
amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the
royalties;
(ii) 15 percent of the gross amount of the
royalties, where the royalties are paid by a
corporation registered with the Philippine
Board of Investments and engaged in
preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may
be imposed on royalties of the same kind
paid under similar circumstances to a
resident of a third State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the
concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which
provides:
(2) However, such royalties may also be taxed in the Contracting State in which
they arise, and according to the law of that State, but the tax so charged shall not
exceed:
xxx xxx xxx
b) 10 percent of the gross amount of royalties arising from the
use of, or the right to use, any patent, trademark, design or
model, plan, secret formula or process, or from the use of or
the right to use, industrial, commercial, or scientific equipment,
or for information concerning industrial, commercial or scientific
experience.
For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation
of the tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the
Philippines, only apply if the contract giving rise to such royalties has been approved by the
Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of
such royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties

where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty states

1) Tax shall be determined in the case of a resident of the Federal Republic of

Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law regarding credit
for foreign tax, there shall be allowed as a credit against
German income and corporation tax payable in respect of the
following items of income arising in the Republic of the
Philippines, the tax paid under the laws of the Philippines in
accordance with this Agreement on:
xxx xxx xxx
dd) royalties, as defined in paragraph 3 of
Article 12;
xxx xxx xxx
c) For the purpose of the credit referred in subparagraph; b)
the Philippine tax shall be deemed to be
xxx xxx xxx
cc) in the case of royalties for which the tax
is reduced to 10 or 15 per cent according to
paragraph 2 of Article 12, 20 percent of the
gross amount of such royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances
similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in the
former convention and private respondent cannot invoke the concessional tax rate on the strength of the most
favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on
income from sources within the Philippines is allowed as a credit against German income and
corporation tax on the same income. In the case of royalties for which the tax is reduced to 10 or 15
percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall
be 20% of the gross amount of such royalty. To illustrate, the royalty income of a German resident
from sources within the Philippines arising from the use of, or the right to use, any patent, trade
mark, design or model, plan, secret formula or process, is taxed at 10% of the gross amount of said
royalty under certain conditions. The rate of 10% is imposed if credit against the German income
and corporation tax on said royalty is allowed in favor of the German resident. That means the rate
of 10% is granted to the German taxpayer if he is similarly granted a credit against the income and
corporation tax of West Germany. The clear intent of the "matching credit" is to soften the impact of
double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West
Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under
similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the "most
favored nation" clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the
provisions of the RP-US Tax Treaty. 5

The petition is meritorious.

We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of Appeals, that the
phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted to
refer to payment of royalty, and not to the payment of the tax, for the reason that the phrase "paid under similar
circumstances" is followed by the phrase "to a resident of a third state". The respondent court held that "Words are to
be understood in the context in which they are used", and since what is paid to a resident of a third state is not a tax
but a royalty "logic instructs" that the treaty provision in question should refer to royalties of the same kind paid under
similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to take into account the purpose
animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent to the payment of
royalties, and none has been brought to our attention, which provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the circumstances of payment thereof are the same for all the
recipients of such royalties and there is no disparity based on nationality in the circumstances of such payment. 6 On

the other hand, a cursory reading of the various tax treaties will show that there is no similarity in the
provisions on relief from or avoidance of double taxation 7 as this is a matter of negotiation between the
contracting parties.8 As will be shown later, this dissimilarity is true particularly in the treaties between the
Philippines and the United States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the
avoidance of double taxation. 9 The purpose of these international agreements is to reconcile the national

fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in
two different jurisdictions.10 More precisely, the tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical
periods. 11 The apparent rationale for doing away with double taxation is of encourage the free flow of
goods and services and the movement of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies. 12 Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection against double taxation is
crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a contracting state and derives income from, or
owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate
double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an
exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both
states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. 14
The second method for the elimination of double taxation applies whenever the state of source is given a full or
limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of
residence to allow relief in order to avoid double taxation. There are two methods of relief the exemption method
and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs
is exempted in the state of residence, although in some instances it may be taken into account in determining the rate
of tax applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method, although the
income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the
former is credited against the tax levied in the latter. The basic difference between the two methods is that in the
exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of
the tax in the expectation that the tax given up for this particular investment is not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances"

in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that
are tax-related".
In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or
rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The United States is the state of

residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax
Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a
restraint on the tax that may be collected by the state of source. 18 Furthermore, the method employed to
give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States
(in an appropriate amount based upon the taxes paid or accrued to the Philippines) against the United
States tax, but such amount shall not exceed the limitations provided by United States law for the taxable
year. 19 Under Article 13 thereof, the Philippines may impose one of three rates 25 percent of the gross
amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the
Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of
Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a
resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax
rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in
the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This would mean that
private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in
respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their
German counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of
the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20% of
the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax
Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the law of
the United States (as it may be amended from time to time without changing the
general principle thereof), the United States shall allow to a citizen or resident of
the United States as a credit against the United States tax the appropriate
amount of taxes paid or accrued to the Philippines and, in the case of a United
States corporation owning at least 10 percent of the voting stock of a Philippine
corporation from which it receives dividends in any taxable year, shall allow credit
for the appropriate amount of taxes paid or accrued to the Philippines by the
Philippine corporation paying such dividends with respect to the profits out of
which such dividends are paid. Such appropriate amount shall be based upon
the amount of tax paid or accrued to the Philippines, but the credit shall not
exceed the limitations (for the purpose of limiting the credit to the United States
tax on income from sources within the Philippines or on income from sources
outside the United States) provided by United States law for the taxable year. . . .
The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b) (iii) of the RP-US
Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the fundamental purpose
of such treaty which is to grant an incentive to the foreign investor by lowering the tax and at the same time crediting
against the domestic tax abroad a figure higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be achieved
and that the general purpose is a more important aid to the meaning of a law than any rule which grammar may lay
down. 20 It is the duty of the courts to look to the object to be accomplished, the evils to be remedied, or the

purpose to be subserved, and should give the law a reasonable or liberal construction which will best
effectuate its purpose. 21 The Vienna Convention on the Law of Treaties states that a treaty shall be
interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in

their context and in the light of its object and

purpose. 22
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the
Philippines a crucial economic goal for developing countries. 23 The goal of double taxation conventions would

be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate,
the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the
state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of
the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or
exemption. 24 Otherwise, the tax which could have been collected by the Philippine government will simply
be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the
investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the
investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable
tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better
to impose the regular rate rather than lose much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the two tax
treaties in question should be considered in light of the purpose behind the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that
which has been or may be granted to the "most favored" among other countries. 25 The most favored nation

clause is intended to establish the principle of equality of international treatment by providing that the
citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those
of the most favored nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of
more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is
also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in
the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2)
(b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of
trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a
matching credit (20% for royalties) would derogate from the design behind the most grant equality of
international treatment since the tax burden laid upon the income of the investor is not the same in the
two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of
most favored nation treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20
percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private
respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there
is no payment of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. 27The

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. 28 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 Tax Treaty is paid under similar circumstances as the tax on royalties under
the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of
Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE.
SO ORDERED.
Vitug, Panganiban and Purisima, JJ., concur.
Romero, J., abroad, on official business leave.

Footnotes
1 Petition, pp. 3-5; Rollo, pp. 10-12.
2 Rollo, p. 67.
3 Penned by Justice Hilarion L. Aquino, concurred in by Justices Jainal D. Rasul, Chairman, and Hector L.
Hofilea.
4 Reiterated under Memorandum Circular No. 152 dated May 17, 1992.
5 Petition, pp. 10-11; Rollo, pp. 17-18.
6 See E. A. E. Ortuoste, Tax Treaty Rates: A Summary, Phil. Revenue Journal, vol. 34, No.2 March-April
1997.
7 Art. 24 RP-Australia, Article 23 RP-Belgium, Article 23 RP-Brazil, Article 22 RP-Canada, Article 23 RPDenmark, Article 22, RP-Finland, Article 23 RP-France, Article 24, RP-Germany, Article 24, RP-India,
Section 31 RP-Indonesia, Article 22 RP-Italy, Article 23 RP-Japan, Article 23 RP-South Korea, Article 22 RPMalaysia, Article 22 RP Netherlands, Article 23 RP-New Zealand, Article 23 RP-Pakistan, Section 29 RPSingapore, Article 23 RP-Spain, Article 18 RP-Sweden, Article 23 RP-Thailand, Article 21 RP-United
Kingdom, Article 23 RP-US.
8 See Toledo, International Aspects of Taxation, Proceedings of the Eleventh Annual Institute on Tax Law
(1976) @ p. 19.
9 As of June 29, 1997, the following countries have entered into tax treaties with the Philippines for the
avoidance of double taxation: Denmark, Singapore, Canada, France, United Kingdom, Pakistan, Australia,
Japan, Belgium, New Zealand, Finland, Indonesia, Austria, United States of America, Thailand, Germany,
Malaysia, Korea, Sweden, Italy, Netherlands, Brazil, Spain, India, and Israel.
10 P. Baker, Double Taxation Conventions and International Tax Law (1994), 6.
11 Ibid., 11, citing the Committee on Fiscal Affairs of the Organization for Economic Co-operation and
Development (OECD).
12 Ibid.
13 Ibid.
14 Ibid., 70.
15 Ibid., 70-72.
16 T. Toledo, Ibid., @ p. 18-19.
Take the case of a hundred pesos dividend to be remitted to, let us say a stockholder of United States of
America. The hundred peso dividend, if you apply the withholding tax assuming that there is no sparing
credit, we taxed 35%. So, out of P100.00, you are taxed P35.00. The Philippines under this law is willing to
tax him only at P15.00 so his net dividends is P85.00. If the United States will tax the full P85.00, there is no
reason why we should reduce our tax. If we collected from him P35.00 tax out of the P100.00 dividend, then
his net dividend is only P65.00. So, instead of transferring the collections from the Philippines Treasury to
the U.S. Treasury, we might just as well retainer tax because we need these revenues.
This is always true when it comes to a developing country such as ours entering into a treaty with developed
country like U. S, what do we do in tax treaties? One or two things. First, we give consideration to

investments especially where the investor controls either 10% of the voting shares of the company in the
Philippines or 25% of its capital. When the investment exceeds this proportion I've just mentioned, we
reduce the rate of tax from 15 to 10% on condition that on the tax credit provision in the same treaty we
asked the developed country to credit this investor with the tax actually at a higher rate and was paid in the
Philippines. In other words, there would be some incentives on the part of the foreigners to invest in the
Philippines because the rates of tax are lowered and at the same time they are credited against the
domestic tax abroad a figure higher than what was collected in the Philippines. . . .
17 Under Article 4 (3) of the RP-US Tax Treaty, royalties for the use of, or the right to use, property or rights
shall be treated as income from sources within a Contracting State only to the extent that such royalties are
for the use of, or the right use, such property or rights within that Contracting State.
1wphi1.nt

18 RP-US Tax Treaty, Article 13.

19 Id, Article 23.
20 Litex Employees Association vs. Eduvala, 79 SCRA 88, September 22, 1977.
21 Paras, vs. Commission on Elections, G. R. No. 123169, November 4, 1996; San Miguel Corporation
Employees Union-PTGWO vs. Confesor, G. R. No. 111262, September 19, 1996; Agujitas vs. Court of
Appeals, G. R. No. 106560, August 23, 1996; Sajonas vs. Court of Appeals, G. R. No. 102377, July 5, 1996;
Escribano vs. Avila, 85 SCRA 245, September 12, 1978; Homes Ins. Co. vs. Eastern Shipping Lines, 123
SCRA 424, July 20, 1983.
22 Vienna Convention on the Law of Treaties, Article 31.
23 Toledo, supra, at p. 17.
24 Ibid., 19.
25 Salonga, Yap, Public International Law, 255.
26 Black's Law Dictionary 5th ed., 913.
27 Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd., 244 SCRA 332; Province of Tarlac vs.
Alcantara, 216 SCRA 790; Magsaysay Lines, Inc. vs. Court of Appeals, 260 SCRA 513.
28 Wonder Mechanical Engineering Corporation vs. CTA, 64 SCRA 555.

19.Delpher Trades Corp vs. IAC 157 SCRA 349

THIRD DIVISION
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's
contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to
Delpher Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right
of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters
of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now
Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of
Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components International Inc. the
same property and providing that during the existence or after the term of this lease the lessor
should he decide to sell the property leased shall first offer the same to the lessee and the letter
has the priority to buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed
conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were annotated at he back of the title, as
per stipulation of the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia
Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter the
leased property (TCT No.T-4240) together with another parcel of land also located in Malinta
Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant
corporation with a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease
agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095
in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia
Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision
reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs
preferential right to acquire the subject property (right of first refusal) and ordering the defendants
and all persons deriving rights therefrom to convey the said property to plaintiff who may offer to
acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose area is
27,169 square meters only. Without pronouncement as to attorney's fees and costs. (Appendix I;
Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition
and gave it due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a
parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after the
Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366,
although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or
transfer of actual ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests, private
respondent will acquire the land not under "similar conditions" by which it was transferred to
petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked by
private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the
Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale
which, in effect, prejudiced the private respondent's right of first refusal over the leased property included in the "deed
of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades
Corporation is a family corporation; that the corporation was organized by the children of the two spouses (spouses
Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common
the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the
corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095
which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was
transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties,
Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in
the corporation because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all
about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration,
they refer to this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject
parcel of land since the Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that
the beneficial ownership and control of petitioner corporation remained in the hands of the original co-owners, there
was no transfer of actual ownership interests over the land when the same was transferred to petitioner corporation in
exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in
substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity
of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they
exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or
even spirit of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent
(Art. 1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing
(Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and
distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's
same alter ego or conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a

separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be
disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the
same was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from
the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton
[1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and
pay for original unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is
significant that the Pachecos took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest in the capital
stock measured by value, but only an aliquot part of the whole number of such shares of the
issuing corporation. The holder of no-par shares may see from the certificate itself that he is only
an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not
hidden beneath a false appearance of a given sum in money, as in the case of par value shares.
The capital stock of a corporation issuing only no-par value shares is not set forth by a stated
amount of money, but instead is expressed to be divided into a stated number of shares, such as,
1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the
assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10.
Thus, by removing the par value of shares, the attention of persons interested in the financial
condition of a corporation is focused upon the value of assets and the amount of its debts.
(Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III,
1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a
square meter was turned over to the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the
corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family
group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest
their properties and change the nature of their ownership from unincorporated to incorporated form by organizing
Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses
Hernandez and Pacheco in connection with their execution of a deed of
exchange on the properties for no par value shares of the defendant corporation?
A Yes, sir.

COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of
exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the
spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits, and other inherent
benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of
taxation in entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free
exchange of property, they were able to execute the deed of exchange free from
income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-subpar. (2) Exceptions regarding the provision which I quote: "No gain or loss shall
also be recognized if a person exchanges his property for stock in a corporation
of which as a result of such exchange said person alone or together with others
not exceeding four persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed
of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par value
share in the defendant corporation was for the purpose of flexibility. Can you
explain flexibility in connection with the ownership of the property in question?
A There is flexibility in using no par value shares as the value is determined by
the board of directors in increasing capitalization. The board can fix the value of
the shares equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the
corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to the property
indefinitely for a period of at least 50 years. On the other hand, if the property is
held by the spouse the property will be tied up in succession proceedings and the
consequential payments of estate and inheritance taxes when an owner dies.

Q Now what advantage is this continuity in relation to ownership by a particular

person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does
not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the
Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal
Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco
family merely changed their ownership from one form to another. The ownership remained in the same hands.
Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then
Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-V-79 of
the then Court of First Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.
Fernan (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.

20. CIR vs Benigno Toda, 438 SCRA 290(2004)

FIRST DIVISION
G.R. No. 147188

September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and
Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation
constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No.
57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,3 which held

that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance
Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside
of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for
deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an
amount of not less than P90 million.4
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the
same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced
by Deeds of Absolute Sale notarized on the same day by the same notary public.5
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6
On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring, among other things,
its gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes ofP254,497.00,
it paid P26,341,2078 for its net taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a
Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and demand letter to the CIC
for deficiency income tax for the year 1989 in the amount of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and
not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken
to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.11
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and
Mario Luza Bautista, received a Notice of Assessment12 dated 9 January 1995 from the Commissioner of Internal
Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return

P75,987,725.00

Add: Additional gain on sale of real property taxable under

ordinary corporate income but were substituted with individual
capital gains(P200M 100M)

100,000,000.00

Total Net Taxable Income per investigation

P175,987,725.00

Tax Due thereof at 35%

P 61,595,703.75

Less: Payment already made

1. Per return
2. Thru Capital Gains Tax made
by R.A. Altonaga

P26,595,704.00
10,000,000.00

36,595,704.00 Balance of tax due

P 24,999,999.75

Add: 50% Surcharge

25% Surcharge

12,499,999.88
6,249,999.94

Total

P 43,749,999.57

Add: Interest 20% from

4/16/90-4/30/94 (.808)
TOTAL AMT. DUE & COLLECTIBLE

35,349,999.65
P 79,099,999.22
==============

The Estate thereafter filed a letter of protest.13

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was
deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100
million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and
the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the Commissioner erred in
holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed.
In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a
single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the
seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated
sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5%
purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income
tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity
or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within
the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides
that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with
fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the
99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of
the individual directors of CIC, should be held liable for the deficiency income tax, especially because the gains
realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already
dead, his estate shall answer for his liability.
In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to
deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by
CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction,
the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three
years after the last day prescribed by law for the filing of the return. Thus, the governments right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also
ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for
piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency
income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner
on 9 January 1995.
In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the
result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy,
and a close business associate of the former, having held his office in a property owned by CIC and derived his
salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA
denied20 the motion for reconsideration, prompting the Commissioner to file a petition for review21 with the Court of
Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that
the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better
situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda
Estate."22
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the
following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH
INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE
CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS
RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles
property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She
further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done
simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was
notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of
Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No.92, Page 20,
Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI,
and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in
Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration of cash
dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to
prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer
in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and
when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.23
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an
accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not
accidental"; and (3) a course of action or failure of action which is unlawful.24
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from
RMI,25 and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance26 as "other inv.

Cibeles Bldg." Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs trial balance as "other
inv. Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary
Altonaga.
lavvphi1.net

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many
trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of
CIC and an old timer in the company.27 But Mr. Prieto did not testify on this matter, hence, that information remains to
be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of
Altonaga was unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the
tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate
declared:
Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred
percent. But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a
lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock,
changing the structure of the property and the tax to be paid. As long as it is done legally, changing the
structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be
faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC
to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted
with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage
to another, or by which an undue and unconscionable advantage is taken of another."30
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that
the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35%
corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same
day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and
burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic
substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of
reducing the consequent income tax liability.
lavvphi1.net

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of
tax liabilities than for legitimate business purposes constitutes one of tax evasion.31
Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.32 The
incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a
sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the
transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation
of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using
the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere
formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity
when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale
to Altonaga should be disregarded for income tax purposes.34 The two sale transactions should be treated as a single
direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of
the Tax Reform Act of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, and partnerships, no matter how created or organized but not
including general professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not exceed one
hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred
thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains
tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of
1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a
false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a
proceeding in court after the collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a
return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the
case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax
consequence of the two sale transactions.36 Thus, the BIR was amply informed of the transactions even prior to the
execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the
execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate
the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even
assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was
false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was
done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the
discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been
discovered only on 8 March 1991.37 The assessment for the 1989 deficiency income tax of CIC was issued on 9
January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the
prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the
owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and
vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of
cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation
may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing
its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other
persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.38
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily
held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989.
Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those reported
in its audited financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part
hereof. The business of Cibeles has at all times been conducted in full compliance with all applicable laws,
rules and regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any
and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989. 39[Underscoring
Supplied].
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of
Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of
31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered
ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles
Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
Item No. 135
Agenda OF 13 September 2004
FIRST DIVISION
FOR

CONCURRENCE

G.R. No. 147188

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and
Mario Luza Bautista, respondents.
X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X
COUNSEL FOR THE PETITIONER:

ATTY. ALBERT C. ARPON

Bureau of Internal Revenue
Rms. 703, BIR Bldg.
1104 Diliman, Quezon City
COURT OF TAX APPEALS
Quezon Avenue
1100 Quezon City
COUNSEL FOR THE RESPONDENTS:
ATTY. JOSE MARIO C. BUAG
BUAG & ASSOCIATES
Suite 17-E, 17th Flr., Strata 100 Bldg.
Emerald Ave., Ortigas Center
1605 Pasig City
X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X
Court of Appeals - Decision of 31 January 2001
Per Associate Justice Rodrigo V. Cosico,
with Associate Justices Ramon A.
Barcelona and Alicia J. Santos
concurring.
X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X
(Please return to the Office of Chief Justice HILARIO G. DAVIDE, JR.)
Footnotes
Rollo, 22-31. Per Associate Justice Rodrigo V. Cosico, with Associate Justices Ramon A. Barcelona and
Alicia J. Santos concurring.
1

Id., 32-41; CTA Records, 524-533. Per Presiding Judge Ernesto D. Acosta, with Associate Judges Ramon
O. De Veyra and Amancio Q. Saga concurring.
2

Entitled "The Estate of Benigno P. Toda, Jr., represented by Special Co-Administrators Lorna PatajoKapunan and Mario Luza Bautista versus Commissioner of Internal Revenue."
3

CA Rollo, 73.

CA Rollo, 74-78; 88-92.

Exh. "E," CTA Records, 306.

Exh. "L," CTA Records, 340.

Exh. "M," "M-1," "N" and "N-1," CTA Records, 316-317.

Exh. "P," CTA Records, 357-365.

10

BIR Records, 448-449.

11

Id., 446-447.

12

Id., 474-475.

13

Exh. "H," CTA Records, 314-315.

14

Exh. "G," CTA Records, 311-312.

15

CTA Records, 1-15.

16

CTA Records, 104-111.

17

Id., 121-128.

18

CTA Records 535-540.

19

Id., 534, 539.

20

Id., 550; CA Rollo, 32.

21

CA Rollo, 7-20.

22

Rollo, 30.

23

Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence 44 (2nd ed., 2000) (hereafter Vitug).

De Leon, Fundamentals of Taxation 53 (1988 ed.), citing Batter, Fraud under Federal Tax Law 15 (1953
ed.).
24

25

Exh. "3," CTA Records, 476.

26

Exh. "6," CTA Records, 470.

27

Exh. "1," CTA Records, 461.

28

CTA Records, 466.

29

Respondents Memorandum, 4-5; Rollo, 78-79.

30

Commissioner of Internal Revenue v. Court of Appeals, 327 Phil. 1, 33 (1996).

See Commissioner of Internal Revenue v. Norton Harrison Co., 120 Phil. 684, 691 (1964); Commissioner
of Internal Revenue v. Rufino, G.R. No. L-33665-68, 27 February 1987, 148 SCRA 42.
31

32

Vitug, 138.

33

Commissioner v. Court Holding Co., 324 U.S. 334 (1945) .

See Gregory v. Helvering, 293 U.S. 465 (1935); Frank Lyon Co. v. United States, 435 U.S. 561 (1978);
Commissioner of Internal Revenue v. Court of Appeals, 361 Phil. 103, 126 (1999) citing Asmussen v. CIR,
36 B.T.A. (F) 878; See also Neff v. U.S., 301 F2d 330; Cohen v. U.S., 192 F Supp 216; Herman v. Comm.,
283 F2d 227; Kessner v. Comm., 248 F2d 943; Comm. V. Pope, 239 F2d 881; U.S. v. Fewel, 255 F2d 396.
34

35

Sec. 34. Capital gains and loses.

...

(h) The provisions of paragraph (b) of this section to the contrary notwithstanding, sales,
exchanges or other dispositions of real property classified as capital assets, including pacto-deretro sales and other forms of conditional sale, by individuals, including estates and trusts, shall be
taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the
time of sale, whichever is higher.
36

Exh. "A," CTA Records, 296.

37

Exh. "2," CTA Records, 464.

Atrium Management Corporation v. Court of Appeals, G.R. Nos. 109491 and 121794, 28 February 2001,
353 SCRA 23, 31, citing FCY Construction Group Inc. v. Court of Appeals, G.R. No. 123358, 1 February
2000, 324 SCRA 270.
38

39

CTA Records, 200-201.