FIRST DIVISION

COMMISSIONER OF G.R. No. 153793

INTERNAL REVENUE,
Petitioner, Present:
Panganiban, C.J. (Chairperson),
- versus - Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ.
JULIANE BAIER-NICKEL, as
represented by Marina Q. Guzman Promulgated:
(Attorney-in-fact)
Respondent. August 29, 2006

x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18,
2002 Decision[1] of the Court of Appeals in CA-G.R. SP No. 59794, which granted
the tax refund of respondent Juliane Baier-Nickel and reversed the June 28, 2000
Decision[2] of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633.Petitioner
also assails the May 8, 2002 Resolution[3] of the Court of Appeals denying its motion
for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen,
is the President of JUBANITEX, Inc., a domestic corporation engaged in
[m]anufacturing, marketing on wholesale only, buying or otherwise acquiring,
holding, importing and exporting, selling and disposing embroidered textile
products.[4] Through JUBANITEXs General Manager, Marina Q. Guzman, the
corporation appointed and engaged the services of respondent as commission
agent. It was agreed that respondent will receive 10% sales commission on all sales
actually concluded and collected through her efforts.[5]

In 1995, respondent received the amount of P1,707,772.64, representing her sales

commission income from which JUBANITEX withheld the corresponding 10%
withholding tax amounting to P170,777.26, and remitted the same to the Bureau of
Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax
return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26.[6]

On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26
alleged to have been mistakenly withheld and remitted by JUBANITEX to the
BIR. Respondent contended that her sales commission income is not taxable in
the Philippines because the same was a compensation for her services rendered
in Germany and therefore considered as income from sources outside
the Philippines.

The next day, April 15, 1998, she filed a petition for review with the CTA
contending that no action was taken by the BIR on her claim for refund.[7] On June
28, 2000, the CTA rendered a decision denying her claim. It held that the
commissions received by respondent were actually her remuneration in the
performance of her duties as President of JUBANITEX and not as a mere sales agent
thereof. The income derived by respondent is therefore an income taxable in
the Philippines because JUBANITEX is a domestic corporation.

On petition with the Court of Appeals, the latter reversed the Decision of the CTA,
holding that respondent received the commissions as sales agent of JUBANITEX
and not as President thereof. And since the source of income means the activity or
service that produce the income, the sales commission received by respondent is not
taxable in the Philippines because it arose from the marketing activities performed
by respondent in Germany. The dispositive portion of the appellate courts Decision,
reads:

WHEREFORE, premises considered, the assailed decision of the Court of

Tax Appeals dated June 28, 2000 is hereby REVERSED and SET ASIDE
and the respondent court is hereby directed to grant petitioner a tax refund
in the amount of Php 170,777.26.
 SO ORDERED.[8]

Petitioner filed a motion for reconsideration but was denied.[9] Hence, the
instant recourse.

Petitioner maintains that the income earned by respondent is taxable in

the Philippines because the source thereof is JUBANITEX, a domestic corporation
located in the City of Makati. It thus implied that source of income means the
physical source where the income came from. It further argued that since respondent
is the President of JUBANITEX, any remuneration she received from said
corporation should be construed as payment of her overall managerial services to the
company and should not be interpreted as a compensation for a distinct and separate
service as a sales commission agent.

Respondent, on the other hand, claims that the income she received was
payment for her marketing services. She contended that income of nonresident aliens
like her is subject to tax only if the source of the income is within
the Philippines. Source, according to respondent is the situs of the activity which
produced the income. And since the source of her income were her marketing
activities in Germany, the income she derived from said activities is not subject to
Philippine income taxation.

The issue here is whether respondents sales commission income is taxable in

the Philippines.

Pertinent portion of the National Internal Revenue Code (NIRC), states:

SEC. 25. Tax on Nonresident Alien Individual.

(A) Nonresident Alien Engaged in Trade or Business Within

the Philippines.

(1) In General. A nonresident alien individual engaged in trade or

business in the Philippines shall be subject to an income tax in the same
manner as an individual citizen and a resident alien individual, on taxable
income received from all sources within the Philippines. A nonresident
 alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a nonresident alien doing business in the
Philippines, Section 22(G) of this Code notwithstanding.

xxxx

(B) Nonresident Alien Individual Not Engaged in Trade or

Business Within the Philippines. There shall be levied, collected and paid
for each taxable year upon the entire income received from all sources
within the Philippines by every nonresident alien individual not engaged
in trade or business within the Philippines x x x a tax equal to twenty-five
percent (25%) of such income. x x x

Pursuant to the foregoing provisions of the NIRC, non-resident aliens,

whether or not engaged in trade or business, are subject to Philippine income
taxation on their income received from all sources within the Philippines. Thus, the
keyword in determining the taxability of non-resident aliens is the incomes
source. In construing the meaning of source in Section 25 of the NIRC, resort must
be had on the origin of the provision.

The first Philippine income tax law enacted by the Philippine Legislature was Act
No. 2833,[10] which took effect on January 1, 1920.[11] Under Section 1 thereof,
nonresident aliens are likewise subject to tax on income from all sources within the
Philippine Islands, thus

SECTION 1. (a) There shall be levied, assessed, collected, and paid

annually upon the entire net income received in the preceding calendar
year from all sources by every individual, a citizen or resident of the
Philippine Islands, a tax of two per centum upon such income; and a like
tax shall be levied, assessed, collected, and paid annually upon the entire
net income received in the preceding calendar year from all sources within
the Philippine Islands by every individual, a nonresident alien, including
interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise.

Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law
of 1916 as amended by U.S. Revenue Law of 1917.[12] Being a law of American
origin, the authoritative decisions of the official charged with enforcing it in
the U.S. have peculiar persuasive force in the Philippines.[13]

The Internal Revenue Code of the U.S. enumerates specific types of income
to be treated as from sources within the U.S. and specifies when similar types of
income are to be treated as from sources outside the U.S.[14] Under the said Code,
compensation for labor and personal services performed in the U.S., is generally
treated as income from U.S. sources; while compensation for said services
performed outside the U.S., is treated as income from sources outside the U.S. [15] A
similar provision is found in Section 42 of our NIRC, thus:

SEC. 42. x x x

(A) Gross Income From Sources Within the Philippines. x x x

xxxx

(3) Services. Compensation for labor or personal services

performed in the Philippines;

xxxx

(C) Gross Income From Sources Without the Philippines. x x x

xxxx

(3) Compensation for labor or personal services performed without

the Philippines;

The following discussions on sourcing of income under the Internal Revenue

Code of the U.S., are instructive:

The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources only: (1)
capital and/or (2) labor; and/or (3) the sale of capital assets. While the
three elements of this attempt at definition need not be accepted as all-
inclusive, they serve as useful guides in any inquiry into whether a
particular item is from sources within the United States and suggest an
 investigation into the nature and location of the activities or property
which produce the income.

If the income is from labor the place where the labor is done should
be decisive; if it is done in this country, the income should be from sources
within the United States. If the income is from capital, the place where the
capital is employed should be decisive; if it is employed in this country,
the income should be from sources within the United States. If the income
is from the sale of capital assets, the place where the sale is made should
be likewise decisive.

Much confusion will be avoided by regarding the term source in

this fundamental light. It is not a place, it is an activity or property. As
such, it has a situs or location, and if that situs or location is within
the United States the resulting income is taxable to nonresident aliens and
foreign corporations.

The intention of Congress in the 1916 and subsequent statutes was

to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the source, or situs of the
activities or property which produce the income. The result is that, on the
one hand, nonresident aliens and nonresident foreign corporations are
prevented from deriving income from the United States free from tax, and,
on the other hand, there is no undue imposition of a tax when the activities
do not take place in, and the property producing income is not employed
in, this country. Thus, if income is to be taxed, the recipient thereof must
be resident within the jurisdiction, or the property or activities out of
which the income issues or is derived must be situated within the
jurisdiction so that the source of the income may be said to have a situs in
this country.

The underlying theory is that the consideration for taxation is

protection of life and property and that the income rightly to be levied
upon to defray the burdens of the United States Government is that income
which is created by activities and property protected by this Government
or obtained by persons enjoying that protection. [16]

The important factor therefore which determines the source of income of

personal services is not the residence of the payor, or the place where the contract
for service is entered into, or the place of payment, but the place where the services
were actually rendered.[17]

In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,[18] the

Court addressed the issue on the applicable source rule relating to reinsurance
premiums paid by a local insurance company to a foreign insurance company in
respect of risks located in the Philippines. It was held therein that the undertaking of
the foreign insurance company to indemnify the local insurance company is the
activity that produced the income. Since the activity took place in the Philippines,
the income derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law
of Federal Income Taxation, the Court emphasized that the technical meaning of
source of income is the property, activity or service that produced the same. Thus:

The source of an income is the property, activity or service that

produced the income. The reinsurance premiums remitted to appellants by
virtue of the reinsurance contracts, accordingly, had for their source the
undertaking to indemnify Commonwealth Insurance Co. against
liability. Said undertaking is the activity that produced the reinsurance
premiums, and the same took place in the Philippines. x x x the reinsured,
the liabilities insured and the risk originally underwritten by
Commonwealth Insurance Co., upon which the reinsurance premiums and
indemnity were based, were all situated in the Philippines. x x x[19]

In Commissioner of Internal Revenue v. British Overseas Airways

Corporation (BOAC),[20] the issue was whether BOAC, a foreign airline company
which does not maintain any flight to and from the Philippines is liable for Philippine
income taxation in respect of sales of air tickets in the Philippines, through a general
sales agent relating to the carriage of passengers and cargo between two points both
outside the Philippines. Ruling in the affirmative, the Court applied the case
of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated
the rule that the source of income is that activity which produced the income. It was
held that the sale of tickets in the Philippines is the activity that produced the income
and therefore BOAC should pay income tax in the Philippines because it undertook
an income producing activity in the country.
 Both the petitioner and respondent cited the case of Commissioner of Internal
Revenue v. British Overseas Airways Corporation in support of their arguments, but
the correct interpretation of the said case favors the theory of respondent that it is
the situs of the activity that determines whether such income is taxable in
the Philippines. The conflict between the majority and the dissenting opinion in the
said case has nothing to do with the underlying principle of the law on sourcing of
income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector
of Internal Revenue. The divergence in opinion centered on whether the sale of
tickets in the Philippines is to be construed as the activity that produced the income,
as viewed by the majority, or merely the physical source of the income, as
ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through
Justice Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets as a
business activity that gave rise to the income of BOAC. Petitioner cannot therefore
invoke said case to support its view that source of income is the physical source of
the money earned. If such was the interpretation of the majority, the Court would
have simply stated that source of income is not the business activity of BOAC but
the place where the person or entity disbursing the income is located or where BOAC
physically received the same. But such was not the import of the ruling of the
Court. It even explained in detail the business activity undertaken by BOAC in
the Philippines to pinpoint the taxable activity and to justify its conclusion that
BOAC is subject to Philippine income taxation. Thus

BOAC, during the periods covered by the subject assessments,

maintained a general sales agent in the Philippines. That general sales
agent, from 1959 to 1971, was engaged in (1) selling and issuing tickets;
(2) breaking down the whole trip into series of trips each trip in the series
corresponding to a different airline company; (3) receiving the fare from
the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered
through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement. Those activities were in
exercise of the functions which are normally incident to, and are in
progressive pursuit of, the purpose and object of its organization as an
international air carrier. In fact, the regular sale of tickets, its main activity,
is the very lifeblood of the airline business, the generation of sales being
the paramount objective. There should be no doubt then that BOAC was
engaged in business in the Philippines through a local agent during the
period covered by the assessments. x x x[21]
 xxxx

The source of an income is the property, activity or service that

produced the income. For the source of income to be considered as coming
from the Philippines, it is sufficient that the income is derived from
activity within the Philippines. In BOAC's case, the sale of tickets in
the Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made here in
Philippine currency. The situs of the source of payments is
the Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should
share the burden of supporting the government.

A transportation ticket is not a mere piece of paper. When issued

by a common carrier, it constitutes the contract between the ticket-holder
and the carrier. It gives rise to the obligation of the purchaser of the ticket
to pay the fare and the corresponding obligation of the carrier to transport
the passenger upon the terms and conditions set forth thereon. The
ordinary ticket issued to members of the traveling public in general
embraces within its terms all the elements to constitute it a valid contract,
binding upon the parties entering into the relationship.[22]

The Court reiterates the rule that source of income relates to the property,
activity or service that produced the income. With respect to rendition of labor or
personal service, as in the instant case, it is the place where the labor or service was
performed that determines the source of the income. There is therefore no merit in
petitioners interpretation which equates source of income in labor or personal service
with the residence of the payor or the place of payment of the income.

Having disposed of the doctrine applicable in this case, we will now determine
whether respondent was able to establish the factual circumstances showing that her
income is exempt from Philippine income taxation.

The decisive factual consideration here is not the capacity in which respondent
received the income, but the sufficiency of evidence to prove that the services she
rendered were performed in Germany. Though not raised as an issue, the Court is
clothed with authority to address the same because the resolution thereof will settle
the vital question posed in this controversy.[23]

The settled rule is that tax refunds are in the nature of tax exemptions and are
to be construed strictissimi juris against the taxpayer.[24] To those therefore, who
claim a refund rest the burden of proving that the transaction subjected to tax is
actually exempt from taxation.

In the instant case, the appointment letter of respondent as agent of

JUBANITEX stipulated that the activity or the service which would entitle her to
10% commission income, are sales actually concluded and collected through [her]
efforts.[25] What she presented as evidence to prove that she performed income
producing activities abroad, were copies of documents she allegedly faxed to
JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be
used in the finished products as well as samples of sales orders purportedly relayed
to her by clients. However, these documents do not show whether the instructions or
orders faxed ripened into concluded or collected sales in Germany. At the very least,
these pieces of evidence show that while respondent was in Germany, she sent
instructions/orders to JUBANITEX.As to whether these instructions/orders gave rise
to consummated sales and whether these sales were truly concluded in Germany,
respondent presented no such evidence. Neither did she establish reasonable
connection between the orders/instructions faxed and the reported monthly sales
purported to have transpired in Germany.

The paucity of respondents evidence was even noted by Atty. Minerva

Pacheco, petitioners counsel at the hearing before the Court of Tax Appeals. She
pointed out that respondent presented no contracts or orders signed by the customers
in Germany to prove the sale transactions therein.[26] Likewise, in her Comment to
the Formal Offer of respondents evidence, she objected to the admission of the faxed
documents bearing instruction/orders marked as Exhibits R,[27] V, W, and X,[28] for
being self serving.[29] The concern raised by petitioners counsel as to the absence of
substantial evidence that would constitute proof that the sale transactions for which
respondent was paid commission actually transpired outside the Philippines, is
relevant because respondent stayed in the Philippines for 89 days in 1995. Except
for the months of July and September 1995, respondent was in the Philippines in the
months of March, May, June, and August 1995,[30]the same months when she earned
commission income for services allegedly performed abroad. Furthermore,
respondent presented no evidence to prove that JUBANITEX does not sell
embroidered products in the Philippines and that her appointment as commission
agent is exclusively for Germany and other European markets.

In sum, we find that the faxed documents presented by respondent did not
constitute substantial evidence, or that relevant evidence that a reasonable mind
might accept as adequate to support the conclusion[31] that it was in Germany where
she performed the income producing service which gave rise to the reported monthly
sales in the months of March and May to September of 1995. She thus failed to
discharge the burden of proving that her income was from sources outside
the Philippines and exempt from the application of our income tax law. Hence, the
claim for tax refund should be denied.

The Court notes that in Commissioner of Internal Revenue v. Baier-

Nickel,[32] a previous case for refund of income withheld from respondents
remunerations for services rendered abroad, the Court in a Minute Resolution
dated February 17, 2003,[33] sustained the ruling of the Court of Appeals that
respondent is entitled to refund the sum withheld from her sales commission income
for the year 1994. This ruling has no bearing in the instant controversy because the
subject matter thereof is the income of respondent for the year 1994 while, the instant
case deals with her income in 1995. Otherwise, stated, res judicata has no
application here. Its elements are: (1) there must be a final judgment or order; (2)
the court that rendered the judgment must have jurisdiction over the subject
matter and the parties; (3) it must be a judgment on the merits; (4) there must be
between the two cases identity of parties, of subject matter, and of causes of
action.[34] The instant case, however, did not satisfy the fourth requisite
because there is no identity as to the subject matter of the previous and present case
of respondent which deals with income earned and activities performed for different
taxable years.

WHEREFORE, the petition is GRANTED and the January 18, 2002

Decision and May 8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No.
59794, are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court
of Tax Appeals in C.T.A. Case No. 5633, which denied respondents claim for refund
of income tax paid for the year 1995 is REINSTATED.

G.R. Nos. 193383-84 January 14, 2015

CBK POWER COMPANY LIMITED, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

x-----------------------x

G.R. Nos. 193407-08

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
CBK POWER COMPANY LIMITED, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in these consolidated petitions for review on certiorari1 are the Decision2 dated March 29,
2010 and the Resolution3 dated August 16, 2010 of the Court ofTax Appeals (CTA) En Bancin C.T.A.
E.B. Nos. 469 and 494, which affirmed the Decision4 dated August 28, 2008, the Amended
Decision5 dated February 12, 2009, and the Resolution6 dated May 7, 2009 of the CTA First Division
in CTA Case Nos. 6699, 6884,and 7166 granting CBK Power Company Limited (CBK Power) a refund
of its excess final withholding tax for the taxable years 2001 to 2003.

The Facts

CBK Power is a limited partnership duly organized and existing under the laws of the Philippines, and
primarily engaged in the development and operation of the Caliraya, Botocan, and Kalayaan hydro
electric power generating plants in Laguna (CBK Project). It is registered with the Board of Investments
(BOI) as engaged in a preferred pioneer area of investment under the Omnibus Investment Code of
1987.7

To finance the CBK Project, CBK Power obtained in August 2000 a syndicated loan from several
foreign banks,8i.e., BNP Paribas, Dai-ichi Kangyo Bank, Limited, Industrial Bank of Japan, Limited,
and Societe General (original lenders), acting through an Inter-Creditor Agent, Dai-ichi Kangyo Bank,
a Japanesebank that subsequently merged with the Industrial Bank of Japan, Limited (Industrial Bank
of Japan) and the Fuji Bank, Limited (Fuji Bank), with the mergedentity being named as Mizuho
Corporate Bank (Mizuho Bank). One of the merged banks, Fuji Bank, had a branch in the Philippines,
which became a branch of Mizuho Bank as a result of the merger. The Industrial Bank of Japan and
Mizuho Bank are residents of Japan for purposes of income taxation, and recognized as such under
the relevant provisions of the income tax treaties between the Philippines and Japan.9
Certain portions of the loan were subsequently assigned by the original lenders to various other banks,
including Fortis Bank (Nederland) N.V. (Fortis-Netherlands) and Raiffesen Zentral Bank Osterreich
AG (Raiffesen Bank). Fortis-Netherlands, in turn, assigned its portion of the loan to Fortis Bank
S.A./N.V. (Fortis-Belgium), a resident of Belgium. Fortis Netherlands and Raiffesen Bank, on the other
hand, are residents of Netherlands and Austria, respectively.10

In February 2001, CBK Power borrowed money from Industrial Bank of Japan, Fortis-Netherlands,
Raiffesen Bank, Fortis-Belgium, and Mizuho Bank for which it remitted interest payments from May
2001 to May 2003.11 It allegedly withheld final taxes from said payments based on the following rates,
and paid the same to the Revenue District Office No. 55 of the Bureau of Internal Revenue (BIR): (a)
fifteen percent (15%) for Fortis-Belgium, Fortis-Netherlands, and Raiffesen Bank; and (b) twenty
percent (20%) for Industrial Bank of Japan and Mizuho Bank.12

However, according to CBK Power, under the relevant tax treaties between the Philippines and the
respective countries in which each of the banks is a resident, the interest income derived by the
aforementioned banks are subject only to a preferential tax rate of 10%, viz.:13
1w phi1

COUNTRY OF PREFERENTIAL RATE

BANK
RESIDENCE UNDER THE RELEVANT TAX TREATY

Fortis Bank S.A./N.V. Belgium 10% (Article 11[1], RP-Belgium

Tax Treaty)

Industrial Bank of Japan 10% (Article 11[3], RP-Japan Tax Treaty)

Japan

Raiffesen Zentral Bank Austria 10% (Article 11[3], RP-Austria Tax Treaty)
Osterreich AG

Mizuho Corporate Bank Japan 10% (Article 11[3], RP-Japan Tax Treaty)

Accordingly, on April 14, 2003, CBK Power filed a claim for refund of its excess final withholding taxes
allegedly erroneously withheld and collected for the years 2001 and 2002 with the BIR Revenue
Region No. 9. The claim for refund of excess final withholding taxes in 2003 was subsequently filed
on March 4, 2005.14

The Commissioner of Internal Revenues (Commissioner) inaction on said claims prompted CBK
Power to file petitions for review before the CTA, viz.:15

(1) CTA Case No. 6699 was filed by CBK Power on June 6, 2003 seeking the refund of excess
final withholding tax in the total amount of P6,393,267.20 covering the year 2001 with respect
to interest income derived by [Fortis-Belgium], Industrial Bank of Japan, and [Raiffesen Bank].
An Answer was filed by the Commissioner on July 25, 2003.

(2) CTA Case No. 6884was filed by CBK Power on March 5, 2004 seeking for the refund of
the amount of 8,136,174.31 covering [the] year 2002 with respect to interest income derived
by [Fortis- Belgium], Industrial Bank of Japan, [Mizuho Bank], and [Raiffesen Bank]. The
Commissioner filed his Answer on May 7, 2004.

xxxx
 (3) CTA Case No. 7166was filed by CBK [Power] on March 9, 2005 seeking for the refund of
[the amount of] P1,143,517.21covering [the] year 2003 with respect to interest income derived
by [Fortis Belgium], and [Raiffesen Bank]. The Commissioner filed his Answer on May 9, 2005.
(Emphases supplied)

CTA Case Nos. 6699 and 6884 were consolidated first on June 18, 2004. Subsequently, however, all
three cases CTA Case Nos. 6699, 6884, and 7166 were consolidated in a Resolution dated August
3, 2005.16

The CTA First Division Rulings

In a Decision17 dated August 28, 2008, the CTA First Division granted the petitions and ordered the
refund of the amount of 15,672,958.42 upon a finding that the relevant tax treaties were applicable to
the case.18 It cited DA-ITAD Ruling No. 099-0319 dated July 16, 2003, issued by the BIR, confirming
CBK Powers claim that the interest payments it made to Industrial Bank of Japan and Raiffesen Bank
were subject to a final withholding tax rate of only 10%of the gross amount of interest, pursuant to
Article 11 of the Republic of the Philippines (RP)-Austria and RP-Japan tax treaties. However, in DA-
ITAD Ruling No. 126-0320 dated August 18, 2003, also issued by the BIR, interest payments to Fortis-
Belgium were likewise subjected to the same rate pursuant to the Protocol Amending the RP-Belgium
Tax Treaty, the provisions of which apply on income derived or which accrued beginning January 1,
2000. With respect to interest payments made to Fortis-Netherlands before it assigned its portion of
the loan to Fortis-Belgium, the CTA First Division likewise granted the preferential rate.21

The CTA First Division categorically declared in the August 28, 2008 Decision that the required
International Tax Affairs Division (ITAD) ruling was not a condition sine qua non for the entitlement of
the tax relief sought by CBK Power,22 however, upon motion for reconsideration23 filed by the
Commissioner, the CTA First Division amendedits earlier decision by reducing the amount of the
refund from P15,672,958.42 to P14,835,720.39 on the ground that CBK Power failed to obtain an
ITAD ruling with respect to its transactions with Fortis-Netherlands.24 In its Amended Decision25 dated
February 12, 2009, the CTA First Division adopted26 the ruling in the case of Mirant (Philippines)
Operations Corporation (formerly: Southern Energy Asia-Pacific Operations [Phils.], Inc.) v.
Commissioner of Internal Revenue (Mirant),27 cited by the Commissioner in his motion for
reconsideration, where the Court categorically pronounced in its Resolution dated February 18, 2008
that an ITAD ruling must be obtained prior to availing a preferential tax rate.

CBK Power moved for the reconsideration28 of the Amended Decision dated February 12, 2009,
arguing in the main that the Mirantcase, which was resolved in a minute resolution, did not establish
a legal precedent. The motion was denied, however, in a Resolution29 dated May 7, 2009 for lack of
merit.

Undaunted, CBK Power elevated the matter to the CTA En Bancon petition for review,30 docketed as
C.T.A E.B. No. 494. The Commissioner likewise filed his own petition for review,31 which was docketed
as C.T.A. E.B. No. 469. Said petitions were subsequently consolidated.32

CBK Power raised the lone issue of whether or not an ITAD ruling is required before it can avail of the
preferential tax rate. On the other hand, the Commissioner claimed that CBK Power failed to exhaust
administrative remedies when it filed its petitions before the CTA First Division, and that said petitions
were not filed within the two-year prescriptive period for initiating judicial claims for refund.33

The CTA En Banc Ruling

In a Decision34 dated March 29, 2010, the CTA En Banc affirmed the ruling of the CTA First Division
that a prior application with the ITAD is indeed required by Revenue Memorandum Order (RMO) 1-
2000,35 which administrative issuance has the force and effect of law and is just as binding as a tax
treaty. The CTA En Banc declared the Mirant case as without any binding effect on CBK Power, having
been resolved by this Court merely through minute resolutions, and relied instead on the mandatory
wording of RMO 1-2000, as follows:36

III. Policies:

xxxx

2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No.
0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction
i.e. payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief. x
x x.

The CTA En Banc further held that CBK Powers petitions for review were filed within the two-year
prescriptive period provided under Section 22937 of the National Internal Revenue Code of
199738 (NIRC), and that it was proper for CBK Power to have filed said petitions without awaiting the
final resolution of its administrative claims for refund before the BIR; otherwise, it would have
completely lost its right to seek judicial recourse if the two-year prescriptive period lapsed with no
judicial claim filed.

CBK Powers motion for partial reconsideration and the Commissioners motion for reconsideration of
the foregoing Decision were both deniedin a Resolution39 dated August 16, 2010 for lack of merit;
hence, the present consolidated petitions.

The Issues Before the Court

In G.R. Nos. 193383-84, CBK Power submits the sole legal issue of whether the BIR may add a
requirement prior application for an ITAD ruling that is not found in the income tax treaties signed
by the Philippines before a taxpayer can avail of preferential tax rates under said treaties.40

On the other hand, in G.R. Nos. 193407-08, the Commissioner maintains that CBK Power is not
entitled to a refund in the amount of P1,143,517.21 for the period covering taxable year 2003 as it
allegedly failed to exhaust administrative remedies before seeking judicial redress.41

The Courts Ruling

The Court resolves the foregoing in seriatim.

A. G.R. Nos. 193383-84

The Philippine Constitution provides for adherence to the general principles of international law as part
of the law of the land. The time honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the agreement.
In this jurisdiction, treaties have the force and effect of law.42 The issue of whether the failure to strictly
comply with RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty was
squarely addressed in the recent case of Deutsche Bank AG Manila Branch v. Commissioner of
Internal Revenue43 (Deutsche Bank), where the Court emphasized that the obligation to comply with a
tax treaty must take precedence over the objective of RMO No. 1-2000, viz.:
We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTAs outright
denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with
the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed
by duly entitled persons or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty
relief as required by RMO No. 1-2000 should not operate to divestentitlement to the reliefas it would
constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the
administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty
relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000. Logically, noncompliance with tax treaties has negative implications on international relations,
and unduly discourages foreign investors. While the consequences sought to be prevented by RMO
No. 1-2000 involve an administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those
who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.44 (Emphases and underscoring supplied)

The objective of RMO No. 1-2000 inrequiring the application for treaty relief with the ITAD before a
partys availment of the preferential rate under a tax treaty is to avert the consequences of any
erroneous interpretation and/or application of treaty provisions, such as claims for refund/credit for
overpayment of taxes, or deficiency tax liabilities for underpayment.45 However, as pointed out in
Deutsche Bank, the underlying principle of prior application with the BIR becomes moot in refund
cases as in the present case where the very basis of the claim is erroneous or there is excessive
payment arising from the non-availment of a tax treaty relief at the first instance.Just as Deutsche
Bank was not faulted by the Court for not complying with RMO No. 1-2000 prior to the transaction,46 so
should CBK Power. In parallel, CBK Power could not have applied for a tax treaty relief 15 days prior
to its payment of the final withholding tax on the interest paid to its lenders precisely because it
erroneously paid said tax on the basis of the regular rate as prescribed by the NIRC, and not on the
preferential tax rate provided under the different treaties. As stressed by the Court, the prior application
requirement under RMO No. 1-2000 then becomes illogical.47

Not only is the requirement illogical, butit is also an imposition that is not found at all in the applicable
tax treaties. In Deutsche Bank, the Court categorically held that the BIR should not impose additional
requirements that would negate the availment of the reliefs provided for under international
agreements, especially since said tax treaties do not provide for any prerequisite at all for the availment
of the benefits under said agreements.48

It bears reiterating that the application for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief.49 Since CBK Power had requested for confirmation
from the ITAD on June 8, 2001 and October 28, 200250 before it filed on April 14, 2003 its administrative
claim for refund of its excess final withholding taxes, the same should be deemed substantial
compliance with RMO No. 1-2000, as in Deutsche Bank. To rule otherwise would defeat the purpose
of Section 229 of the NIRC in providing the taxpayer a remedy for erroneously paid tax solely on the
ground of failure to make prior application for tax treaty relief.51 As the Court exhorted in Republic v.
GST Philippines, Inc.,52 while the taxpayer has an obligation to honestly pay the right taxes, the
government has a corollary duty to implement tax laws in good faith; to discharge its duty to collect
what is due to it; and to justly return what has been erroneously and excessively given to it.53
In view of the foregoing, the Court holds that the CTA En Banc committed reversible error in affirming
the reduction of the amount of refund to CBK Power from 15,672,958.42 to P14,835,720.39 to exclude
its transactions with Fortis-Netherlands for which no ITAD ruling was obtained.54 CBK Powers petition
in G.R. Nos. 193383-84 is therefore granted.

The opposite conclusion is, however, reached with respect to the Commissioners petition in G.R. Nos.
193407-08.

B. G.R. Nos. 193407-08

The Commissioner laments55 that he was deprived of the opportunity to act on the administrative claim
for refund of excess final withholding taxes covering taxable year 2003 which CBK Power filed on
March 4, 2005, a Friday, then the following Wednesday, March 9, 2005, the latter hastily elevated the
case on petition for review before the CTA. He argues56 that the failure on the part of CBK Power to
give him a reasonable timeto act on said claim is violative of the doctrines of exhaustion of
administrative remedies and of primary jurisdiction.

For its part, CBK Power maintains57 that it would be prejudicial to wait for the Commissioners ruling
beforeit files its judicial claim since it only has 2 years from the payment of the tax within which to file
both its administrative and judicial claims.

The Court rules for CBK Power.

Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes.
Section 204 applies to administrative claims for refund, while Section 229 to judicial claims for refund.
In both instances, the taxpayers claim must be filed within two (2) years from the date of payment of
the tax or penalty. However, Section 229 of the NIRC further states the condition that a judicial claim
for refund may not be maintained until a claim for refund or credit has been duly filed with the
Commissioner. These provisions respectively read:

SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. The
Commissioner may -

xxxx

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the purchaser,
and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and
refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2)
years after the payment of the tax or penalty: Provided, however, That a return filed showing an
overpayment shall be considered as a written claim for credit or refund.

xxxx

SEC. 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, of any sum alleged to have been excessively or in any manner wrongfully collected
without authority, or of any sum alleged to have been excessively orin any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest
or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after payment: x
x x. (Emphases and underscoring supplied)

Indubitably, CBK Powers administrative and judicial claims for refund of its excess final withholding
taxes covering taxable year 2003 were filed within the two-year prescriptive period, as shown by the
table below:58

WHEN FINAL WHEN LAST DAY OF WHEN WHEN PETITION

INCOME REMITTANCE THE 2-YEAR ADMINISTRATIVE FOR REVIEW
TAXES WERE RETURN PRESCRIPTIVE CLAIM WAS FILED WAS FILED
WITHHELD FILED PERIOD
February 2003 03/10/03 03/10/05 March 4, 2005 03/09/05
May 2003 06/10/03 06/10/05 March 4, 2005 03/09/05

With respect to the remittance filed on March 10, 2003, the Court agrees with the ratiocination of the
CTA En Banc in debunking the alleged failure to exhaust administrative remedies. Had CBK Power
awaited the action of the Commissioner on its claim for refund prior to taking court action knowing fully
well that the prescriptive period was about to end, it would have lost not only its right to seek judicial
recourse but its right to recover the final withholding taxes it erroneously paid to the government
thereby suffering irreparable damage.59

Also, while it may be argued that, for the remittance filed on June 10, 2003 that was to prescribe on
June 10,2005, CBK Power could have waited for, at the most, three (3) months from the filing of the
administrative claim on March 4, 2005 until the last day of the two-year prescriptive period ending June
10, 2005, that is, if only togive the BIR at the administrative level an opportunity to act on said claim,
the Court cannot, on that basis alone, deny a legitimate claim that was, for all intents and purposes,
timely filed in accordance with Section 229 of the NIRC. There was no violation of Section 229 since
the law, as worded, only requires that an administrative claim be priorly filed.

In the foregoing instances, attention must be drawn to the Courts ruling in P.J. Kiener Co., Ltd. v.
David60(Kiener), wherein it was held that in no wise does the law, i.e., Section 306 of the old Tax Code
(now, Section 229 of the NIRC), imply that the Collector of Internal Revenue first act upon the
taxpayers claim, and that the taxpayer shall not go to court before he is notified of the Collectors
action. In Kiener, the Court went on to say that the claim with the Collector of Internal Revenue was
intended primarily as a notice of warning that unless the tax or penalty alleged to have been collected
erroneously or illegally is refunded, court action will follow, viz.: The controversy centers on the
construction of the aforementioned section of the Tax Code which reads:

SEC. 306. 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 Collector of Internal Revenue; 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. The preceding provisions seem at first blush
conflicting. It will be noticed that, whereas the first sentence requires a claim to be filed with the
Collector of Internal Revenue before any suit is commenced, the last makes imperative the bringing
of such suit within two years from the date of collection. But the conflict is only apparent and the two
provisions easily yield to reconciliation, which it is the office of statutory construction to effectuate,
where possible, to give effect to the entire enactment.

To this end, and bearing in mind that the Legislature is presumed to have understood the language it
used and to have acted with full idea of what it wanted to accomplish, it is fair and reasonable to say
without doing violence to the context or either of the two provisions, that by the first is meant simply
that the Collector of Internal Revenue shall be given an opportunity to consider his mistake, if mistake
has been committed, before he is sued, but not, as the appellant contends that pending consideration
of the claim, the period of two years provided in the last clause shall be deemed interrupted. Nowhere
and in no wise does the law imply that the Collector of Internal Revenue must act upon the claim, or
that the taxpayer shall not go to court before he is notified of the Collectors action. x x x. We
understand the filing of the claim with the Collector of Internal Revenue to be intended primarily as a
notice of warning that unless the tax or penalty alleged to have been collected erroneously or illegally
is refunded, court action will follow. x x x.61 (Emphases supplied)

That being said, the foregoing refund claims of CBK Power should all be granted, and, the petition of
the Commissioner in G.R. Nos. 193407-08 be denied for lack of merit.

WHEREFORE, the petition in G.R. Nos. 193383-84 is GRANTED. The Decision dated March 29, 2010
and the Resolution dated August 16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B.
Nos. 469 and 494 are hereby REVERSED and SET ASIDE and a new one entered REINSTATING
the Decision of the CTA First Division dated August 28, 2008 ordering the refund in favor of CBK
Power Company Limited the amount of PlS,672,958.42 representing its excess final withholding taxes
for the taxable years 2001 to 2003. On the other hand, the petition in G.R. Nos. 193407-08 is DENIED
for lack of merit.

SO ORDERED

THIRD DIVISION

SUPREME TRANSLINER, INC., G.R. No. 165617

MOISES C. ALVAREZ and
PAULITA S. ALVAREZ,
Petitioners,

- versus -

BPI FAMILY SAVINGS BANK, INC.,

 Respondent.

x- - - - - - - - - - - - - - - - - - - - - - - - - -x

BPI FAMILY SAVINGS BANK, INC., G.R. No. 165837

Petitioner,
Present:

BRION, J.,
- versus - Chairperson,
BERSAMIN,
ABAD,
VILLARAMA, JR., and
SERENO, JJ.
SUPREME TRANSLINER,
INC., MOISES C. ALVAREZ Promulgated:
and PAULITA S. ALVAREZ,
Respondents. February 25, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

This case involves the question of the correct redemption price payable to a
mortgagee bank as purchaser of the property in a foreclosure sale.
On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director,
Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the amount
of P9,853,000.00 from BPI Family Savings Bank with a 714-square meter lot
covered by Transfer Certificate of Title No. T-79193 in the name of Moises C.
Alvarez and Paulita S. Alvarez, as collateral.[1]

For non-payment of the loan, the mortgage was extrajudicially foreclosed and the
property was sold to the bank as the highest bidder in the public auction conducted
by the Office of the Provincial Sheriff of LucenaCity. On August 7, 1996, a
Certificate of Sale[2] was issued in favor of the bank and the same was registered
on October 1, 1996.
Before the expiration of the one-year redemption period, the mortgagors notified the
bank of their intention to redeem the property. Accordingly, the following Statement
of Account[3] was prepared by the bank indicating the total amount due under the
mortgage loan agreement:
xxxx

Balance of Principal P 9,551,827.64

Add: Interest Due 1,417,761.24
Late Payment Charges 155,546.25
MRI 0.00
Fire Insurance 0.00
Foreclosure Expenses 155,817.23
Sub-total P 11,280,952.36
Less: Unapplied Payment 908,241.01
Total Amount Due As 10,372,711.35
Of 08/07/96(Auction Date)
Add: Attorneys Fees (15%) 1,555,906.70
Liquidated Damages (15%) 1,555,906.70
Interest on P 10,372,711.35
from 08/07/96 to 04/07/97 (243 days) at
17.25% p.a. 1,207,772.58
xxxx

Asset Acquired Expenses:

Documentary Stamps 155,595.00

Capital Gains Tax 518,635.57
Foreclosure Fee 207,534.23
Registration and Filing Fee 23,718.00
Addl. Registration & Filing Fee 660.00 906,142.79
Interest on P 906,142.79
from 08/07/96 to 04/07/97 (243 days)
at 17.25% p.a. 105,509.00
Cancellation Fee 300.00

Total Amount Due As

Of 04/07/97(Subject to Audit) P 15,704,249.12

xxxx
The mortgagors requested for the elimination of liquidated damages and reduction
of attorneys fees and interest (1% per month) but the bank refused. On May 21,
1997, the mortgagors redeemed the property by paying the sum
of P15,704,249.12. A Certificate of Redemption[4] was issued by the bank on May
27, 1997.

On June 11, 1997, the mortgagors filed a complaint against the bank to recover the
allegedly unlawful and excessive charges totaling P5,331,237.77, with prayer for
damages and attorneys fees, docketed as Civil Case No. 97-72 of
the Regional Trial Court of Lucena City, Branch 57.

In its Answer with Special and Affirmative Defenses and Counterclaim, the bank
asserted that the redemption price reflecting the stipulated interest, charges and/or
expenses, is valid, legal and in accordance with documents duly signed by the
mortgagors. The bank further contended that the claims are deemed waived and the
mortgagors are already estopped from questioning the terms and conditions of their
contract.

On September 30, 1997, the bank filed a motion to set the case for hearing on the
special and affirmative defenses by way of motion to dismiss. The trial court denied
the motion on January 8, 1998 and also denied the banks motion for
reconsideration. The bank elevated the matter to the Court of Appeals (CA-G.R. SP
No. 47588) which dismissed the petition for certiorari on February 26, 1999.

On February 14, 2002, the trial court rendered its decision[5] dismissing the
complaint and the banks counterclaims. The trial court held that plaintiffs-
mortgagors are bound by the terms of the mortgage loan documents which clearly
provided for the payment of the following interest, charges and expenses: 18% p.a.
on the loan, 3% post-default penalty, 15% liquidated damages, 15% attorneys fees
and collection and legal costs. Plaintiffs-mortgagors claim that they paid the
redemption price demanded by the defendant bank under extreme pressure was
rejected by the trial court since there was active negotiation for the final redemption
price between the banks representatives and plaintiffs-mortgagors who at the time
had legal advice from their counsel, together with Orient Development Banking
Corporation which committed to finance the redemption.

According to the trial court, plaintiffs-mortgagors are estopped from questioning the
correctness of the redemption price as they had freely and voluntarily signed the
letter-agreement prepared by the defendant bank, and along with Orient Bank
expressed their conformity to the terms and conditions therein, thus:
May 14, 1997

ORIENT DEVELOPMENT BANKING CORPORATION

7th Floor Ever Gotesco Corporate Center
C.M. Recto Avenue corner Matapang Street
Manila

Attention: MS. AIDA C. DELA ROSA

Senior Vice-President

Gentlemen:

This refers to your undertaking to settle the account of SUPREME TRANS LINER,
INC. and spouses MOISES C. ALVAREZ and PAULITA S. ALVAREZ, covering
the real estate property located in the Poblacion, City of Lucenaunder TCT No. T-
79193 which was foreclosed by BPI FAMILY SAVINGS BANK, INC.

With regard to the proposed refinancing of the account, we interpose no objection

to the annotation of your mortgage lien thereon subject to the following conditions:

1. That all expenses for the registration of the annotation of mortgage and
other incidental registration and cancellation expenses shall be borne by
the borrower.
2. That you will recognize our mortgage liens as first and superior until the
loan with us is fully paid.
3. That you will annotate your mortgage lien and pay us the full amount to
close the loan within five (5) working days from the receipt of the
titles. If within this period, you have not registered the same and paid us
in full, you will immediately and unconditionally return the titles to us
without need of demand, free from liens/encumbrances other than our
lien.
4. That in case of loss of titles, you will undertake and shoulder the cost of
re-issuance of a new owners titles.
5. That we will issue the Certificate of Redemption after full payment of
P15,704,249.12. representing the outstanding balance of the loan as
of May 15, 1997 including interest and other charges thereofwithin
a period of five (5) working days after clearance of the check payment.
 6. That we will release the title and the Certificate of Redemption and other
pertinent papers only to your authorized representative with complete
authorization and identification.
7. That all expenses related to the cancellation of your annotated mortgage
lien should the Bank be not fully paid on the period above indicated
shall be charged to you.
If you find the foregoing conditions acceptable, please indicate your
conformity on the space provided below and return to us the duplicate copy.

Very truly yours,

BPI FAMILY BANK

BY:

(SGD.) LOLITA C. CARRIDO

Manager

CONFORME:

ORIENT DEVELOPMENT BANKING CORPORATION

(SGD.) AIDA C. DELA ROSA

Senior Vice President

CONFORME:

SUPREME TRANS LINER, INC.

(SGD.) MOISES C. ALVAREZ/PAULITA S. ALVAREZ

Mortgagors[6]
(Underscoring in the original; emphasis supplied.)

As to plaintiffs-mortgagors contention that the amounts representing attorneys fees

and liquidated damages were already included in the P10,372,711.35 bid price, the
trial court said this was belied by their own evidence, the Statement of Account
showing the breakdown of the redemption price as computed by the defendant bank.

The mortgagors appealed to the CA (CA-G.R. CV No. 74761) which, by

Decision[7] dated April 6, 2004 reversed the trial court and decreed as follows:
WHEREFORE, foregoing considered, the appealed decision is hereby
REVERSED and SET ASIDE. A new one is hereby entered as follows:
 1. Plaintiffs-appellants complaint for damages against defendant-appellee is
hereby REINSTATED;

2. Defendant-appellee is hereby ORDERED to return to plaintiffs-

appellees (sic) the invalidly collected amount of P3,111,813.40 plus six
(6) percent legal interest from May 21, 1997 until fully returned;

3. Defendant-appellee is hereby ORDERED to pay plaintiffs-

appellees (sic) the amount of P100,000.00 as moral damages,
P100,000.00 as exemplary damages and P100,000.00 as attorneys fees;

4. Costs against defendant-appellee.

SO ORDERED.[8]

The CA ruled that attorneys fees and liquidated damages were already
included in the bid price of P10,372,711.35 as per the recitals in the Certificate of
Sale that said amount was paid to the foreclosing mortgagee to satisfy not only the
principal loan but also interest and penalty charges, cost of publication and expenses
of the foreclosure proceedings. These penalty charges consist of 15% attorneys fees
and 15% liquidated damages which the bank imposes as penalty in cases of violation
of the terms of the mortgage deed. The total redemption price thus should only
be P12,592,435.72 and the bank should return the amount of P3,111,813.40
representing attorneys fees and liquidated damages. The appellate court further
stated that the mortgagors cannot be deemed estopped to question the propriety of
the charges because from the very start they had repeatedly questioned the
imposition of attorneys fees and liquidated damages and were merely constrained to
pay the demanded redemption price for fear that the redemption period will expire
without them redeeming their property.[9]

By Resolution[10] dated October 12, 2004, the CA denied the parties respective
motions for reconsideration.

Hence, these petitions separately filed by the mortgagors and the bank.

In G.R. No. 165617, the petitioners-mortgagors raise the single issue of whether the
foreclosing mortgagee should pay capital gains tax upon execution of the certificate
of sale, and if paid by the mortgagee, whether the same should be shouldered by the
redemptioner. They specifically prayed for the return of all asset-acquired expenses
consisting of documentary stamps tax, capital gains tax, foreclosure fee, registration
and filing fee, and additional registration and filing fee totaling P906,142.79, with
6% interest thereon from May 21, 1997.[11]

On the other hand, the petitioner bank in G.R. No. 165837 assails the CA in holding
that

1. the Certificate of Sale, the bid price of P10,372,711.35 includes penalty

charges and as such for purposes of computing the redemption price petitioner can
no longer impose upon the private respondents the penalty charges in the form of
15% attorneys fees and the 15% liquidated damages in the aggregate amount of
P3,111,813.40, although the evidence presented by the parties show otherwise.

2. private respondents cannot be considered to be under estoppel to question

the propriety of the aforestated penalty charges despite the fact that, as found by the
Honorable Trial Court, there was very active negotiation between the parties in the
computation of the redemption price culminating into the signing freely and
voluntarily by the petitioner, the private respondents and Orient Bank, which
financed the redemption of the foreclosed property, of Exhibit 3, wherein they
mutually agreed that the redemption price is in the sum of P15,704,249.12.

3. petitioner [to] pay private respondents damages in the aggregate amount of

P300,000.00 on the ground that the former acted in bad faith in the imposition upon
them of the aforestated penalty charges, when in truth it is entitled thereto as the
law and the contract expressly provide and that private respondents agreed to pay
the same.[12]

On the correct computation of the redemption price, Section 78 of Republic Act No.
337, otherwise known as the General Banking Act, governs in cases where the
mortgagee is a bank.[13] Said provision reads:
SEC. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of
any mortgage on real estate which is security for any loan granted before the
passage of this Act or under the provisions of this Act, the mortgagor or debtor
whose real property has been sold at public auction, judicially or extrajudicially,
for the full or partial payment of an obligation to any bank, banking or credit
institution, within the purview of this Act shall have the right, within one year after
the sale of the real estate as a result of the foreclosure of the respective mortgage,
to redeem the property by paying the amount fixed by the court in the order of
execution, or the amount due under the mortgage deed, as the case may
be, with interest thereon at the rate specified in the mortgage, and all the costs,
and judicial and other expenses incurred by the bank or institution concerned
by reason of the execution and sale and as a result of the custody of said
property less the income received from the property. x x x x (Emphasis
supplied.)
Under the Mortgage Loan Agreement,[14] petitioners-mortgagors undertook to pay
the attorneys fees and the costs of registration and foreclosure. The following
contract terms would show that the said items are separate and distinct from the bid
price which represents only the outstanding loan balance with stipulated interest
thereon.
23. Application of Proceeds of Foreclosure Sale. The proceeds of sale of
the mortgaged property/ies shall be applied as follows:

a) To the payment of the expenses and cost of foreclosure and sale,

including the attorneys fees as herein provided;

b) To the satisfaction of all interest and charges accruing upon the

obligations herein and hereby secured.

c) To the satisfaction of the principal amount of the obligations herein and

hereby secured.

d) To the satisfaction of all other obligations then owed by the

Borrower/Mortgagor to the Bank or any of its subsidiaries/affiliates such as, but not
limited to BPI Credit Corporation; or to Bank of the Philippine Islands or any of its
subsidiaries/affiliates such as, but not limited to BPI Leasing Corporation, BPI
Express Card Corporation, BPI Securities Corporation and BPI Agricultural
Development Bank; and

e) The balance, if any, to be due to the Borrower/Mortgagor.

xxxx

31. Attorneys Fees: In case the Bank should engage the services of counsel
to enforce its rights under this Agreement, the Borrower/Mortgagor shall pay an
amount equivalent to fifteen (15%) percent of the total amount claimed by the
Bank, which in no case shall be less than P2,000.00, Philippine currency, plus costs,
collection expenses and disbursements allowed by law, all of which shall be secured
by this mortgage.[15]

Additionally, the Disclosure Statement on Loan/Credit Transaction [16] also duly

signed by the petitioners-mortgagors provides:
10. ADDITIONAL CHARGES IN CASE CERTAIN STIPULATIONS ARE NOT
MET BY THE BORROWER

a. Post Default Penalty 3.00% per month

b. Attorneys Services 15% of sum due but not less than P2,000.00
c. Liquidated Damages 15% of sum due but not less than P10,000.00
d. Collection & Legal Cost As provided by the Rules of Court
 e. Others (Specify)

As correctly found by the trial court, that attorneys fees and liquidated damages were
not yet included in the bid price of P10,372,711.35 is clearly shown by the Statement
of Account as of April 4, 1997 prepared by the petitioner bank and given to
petitioners-mortgagors. On the other hand, par. 23 of the Mortgage Loan Agreement
indicated that asset acquired expenses were to be added to the redemption price as
part of costs and other expenses incurred by the mortgagee bank in connection with
the foreclosure sale.

Coming now to the issue of capital gains tax, we find merit in petitioners-mortgagors
argument that there is no legal basis for the inclusion of this charge in the redemption
price. Under Revenue Regulations (RR) No. 13-85 (December 12, 1985), every sale
or exchange or other disposition of real property classified as capital asset under
Section 34(a)[17] of the Tax Code shall be subject to the final capital gains tax. The
term sale includes pacto de retro and other forms of conditional sale. Section 2.2 of
Revenue Memorandum Order (RMO) No. 29-86 (as amended by RMO No. 16-88
and as further amended by RMO Nos. 27-89 and 6-92) states that these conditional
sales necessarily include mortgage foreclosure sales (judicial and extrajudicial
foreclosure sales). Further, for real property foreclosed by a bank on or
after September 3, 1986, the capital gains tax and documentary stamp tax must be
paid before title to the property can be consolidated in favor of the bank.[18]

Under Section 63 of Presidential Decree No. 1529 otherwise known as the Property
Registration Decree, if no right of redemption exists, the certificate of title of the
mortgagor shall be cancelled, and a new certificate issued in the name of the
purchaser. But where the right of redemption exists, the certificate of title of the
mortgagor shall not be cancelled, but the certificate of sale and the order confirming
the sale shall be registered by brief memorandum thereof made by the Register of
Deeds upon the certificate of title. In the event the property is redeemed, the
certificate or deed of redemption shall be filed with the Register of Deeds, and a
brief memorandum thereof shall be made by the Register of Deeds on the certificate
of title.

It is therefore clear that in foreclosure sale, there is no actual transfer of the

mortgaged real property until after the expiration of the one-year redemption period
as provided in Act No. 3135 and title thereto is consolidated in the name of the
mortgagee in case of non-redemption. In the interim, the mortgagor is given the
option whether or not to redeem the real property. The issuance of the Certificate of
Sale does not by itself transfer ownership.[19]

RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92
relative to the payment of Capital Gains Tax and Documentary Stamp Tax on
extrajudicial foreclosure sale of capital assets initiated by banks, finance and
insurance companies.
SEC. 3. CAPITAL GAINS TAX.

(1) In case the mortgagor exercises his right of redemption within one
year from the issuance of the certificate of sale, no capital gains tax shall be
imposed because no capital gains has been derived by the mortgagor and no sale
or transfer of real property was realized. x x x

(2) In case of non-redemption, the capital gains [tax] on the foreclosure sale
imposed under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become
due based on the bid price of the highest bidder but only upon the expiration of the
one-year period of redemption provided for under Sec. 6 of Act No. 3135, as
amended by Act No. 4118, and shall be paid within thirty (30) days from the
expiration of the said one-year redemption period.

SEC. 4. DOCUMENTARY STAMP TAX.

(1) In case the mortgagor exercises his right of redemption, the

transaction shall only be subject to the P15.00 documentary stamp tax imposed
under Sec. 188 of the Tax Code of 1997 because no land or realty was sold or
transferred for a consideration.

(2) In case of non-redemption, the corresponding documentary stamp tax

shall be levied, collected and paid by the person making, signing, issuing,
accepting, or transferring the real property wherever the document is made, signed,
issued, accepted or transferred where the property is situated in the Philippines. x x
x (Emphasis supplied.)

Although the subject foreclosure sale and redemption took place before the
effectivity of RR No. 4-99, its provisions may be given retroactive effect in this case.

Section 246 of the NIRC of 1997 states:

SEC. 246. Non-Retroactivity of Rulings. Any revocation, modification, or
reversal of any of the rules and regulations promulgated in accordance with the
preceding Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
 modification, or reversal will be prejudicial to the taxpayers, except in the
following cases:

(a) where the taxpayer deliberately misstates or omits material facts from
his return or in any document required of him by the Bureau of Internal Revenue;

(b) where the facts subsequently gathered by the Bureau of Internal

Revenue are materially different from the facts on which the ruling is based; or

(c) where the taxpayer acted in bad faith.

In this case, the retroactive application of RR No. 4-99 is more consistent with
the policy of aiding the exercise of the right of redemption. As the Court of Tax
Appeals concluded in one case, RR No. 4-99 has curbed the inequity of imposing a
capital gains tax even before the expiration of the redemption period [since] there is
yet no transfer of title and no profit or gain is realized by the mortgagor at the time
of foreclosure sale but only upon expiration of the redemption period. [20] In his
commentaries, De Leon expressed the view that while revenue regulations as a
general rule have no retroactive effect, if the revocation is due to the fact that the
regulation is erroneous or contrary to law, such revocation shall have retroactive
operation as to affect past transactions, because a wrong construction of the law
cannot give rise to a vested right that can be invoked by a taxpayer.[21]

Considering that herein petitioners-mortgagors exercised their right of redemption

before the expiration of the statutory one-year period, petitioner bank is not liable to
pay the capital gains tax due on the extrajudicial foreclosure sale. There was no
actual transfer of title from the owners-mortgagors to the foreclosing bank.Hence,
the inclusion of the said charge in the total redemption price was unwarranted and
the corresponding amount paid by the petitioners-mortgagors should be returned to
them.

WHEREFORE, premises considered, both petitions are PARTLY GRANTED.

In G.R. No. 165617, BPI Family Savings Bank, Inc. is hereby ordered
to RETURN the amounts representing capital gains and documentary stamp taxes
as reflected in the Statement of Account To Redeem as of April 7, 1997, to
petitioners Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez, and to
retain only the sum provided in RR No. 4-99 as documentary stamps tax due on the
foreclosure sale.
In G.R. No. 165837, petitioner BPI Family Savings Bank, Inc. is hereby declared
entitled to the attorneys fees and liquidated damages included in the total redemption
price paid by Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez. The
sums awarded as moral and exemplary damages, attorneys fees and costs in favor of
Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez are DELETED.

The Decision dated April 6, 2004 of the Court of Appeals in CA-G.R. CV No. 74761
is accordingly MODIFIED.

G.R. No. 172231 February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.

DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision 1 of the
Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the Court of
Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment Notices
for deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue
(BIR) against respondent Isabela Cultural Corporation (ICC).

The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86,
and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the
amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.

The deficiency income tax of P333,196.86, arose from:

(1) The BIRs disallowance of ICCs claimed expense deductions for professional and security
services billed to and paid by ICC in 1986, to wit:

(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December
31, 1985;4

(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985.5
 (c) Expense for security services of El Tigre Security & Investigation Agency for the
months of April and May 1986.6

(2) The alleged understatement of ICCs interest income on the three promissory notes due
from Realty Investment, Inc.

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00
deduction for security services.7

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995,
however, it received a final notice before seizure demanding payment of the amounts stated in the
said notices. Hence, it brought the case to the CTA which held that the petition is premature because
the final notice of assessment cannot be considered as a final decision appealable to the tax court.
This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the
payment of deficiency tax, amounts to a final decision on the protested assessment and may therefore
be questioned before the CTA. This conclusion was sustained by this Court on July 1, 2001, in G.R.
No. 135210.8 The case was thus remanded to the CTA for further proceedings.

On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for professional and security services
were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these professional services were rendered to ICC
in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof
could not be determined at that time.

The CTA also held that ICC did not understate its interest income on the subject promissory notes. It
found that it was the BIR which made an overstatement of said income when it compounded the
interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the
absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance,
like delay in payment or breach of contract, that would justify the application of compounded interest.

Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation receipts it
presented as evidence. The dispositive portion of the CTAs Decision, reads:

WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-
000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges
and interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.

SO ORDERED.9

Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were rendered
to ICC in 1984 and 1985, the cost of the services was not yet determinable at that time, hence, it could
be considered as deductible expenses only in 1986 when ICC received the billing statements for said
services. It further ruled that ICC did not understate its interest income from the promissory notes of
Realty Investment, Inc., and that ICC properly withheld and remitted taxes on the payments for security
services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that
since ICC is using the accrual method of accounting, the expenses for the professional services that
accrued in 1984 and 1985, should have been declared as deductions from income during the said
years and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable
year 1986. As to the alleged deficiency interest income and failure to withhold expanded withholding
tax assessment, petitioner invoked the presumption that the assessment notices issued by the BIR
are valid.

The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the
expenses for professional and security services from ICCs gross income; and (2) held that ICC did
not understate its interest income from the promissory notes of Realty Investment, Inc; and that ICC
withheld the required 1% withholding tax from the deductions for security services.

The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary
and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been
paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.11

The requisite that it must have been paid or incurred during the taxable year is further qualified by
Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided
for in this Title shall be taken for the taxable year in which paid or accrued or paid or incurred,
dependent upon the method of accounting upon the basis of which the net income is computed x x x".

Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions.12 In the instant case, the accounting method used by ICC is the accrual
method.

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred
cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is
authorized to deduct certain expenses and other allowable deductions for the current year but failed
to do so cannot deduct the same for the next year.13

The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them,
in opposition to actual receipt or payment, which characterizes the cash method of accounting.
Amounts of income accrue where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.14

For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires: (1) fixing
of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination
of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the amount
of income or liability be known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation
may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability
does not have to be determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than an exact or
completely accurate amount.[15]

The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable
year.[16] Accrual method of accounting presents largely a question of fact; such that the taxpayer
bears the burden of proof of establishing the accrual of an item of income or deduction.17

Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an
exemption must be able to justify the same by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implications. And since
a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be
strictly construed.18

In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the
expenses of said firm in connection with ICCs tax problems for the year 1984. As testified by the
Treasurer of ICC, the firm has been its counsel since the 1960s.19 From the nature of the claimed
deductions and the span of time during which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable year when they
could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the amount
of their obligation to the firm, especially so that it is using the accrual method of accounting. For
another, it could have reasonably determined the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time legal consultant.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer
bears the burden of establishing the accrual of an expense or income. However, ICC failed to
discharge this burden. As to when the firms performance of its services in connection with the 1984
tax problems were completed, or whether ICC exercised reasonable diligence to inquire about the
amount of its liability, or whether it does or does not possess the information necessary to compute
the amount of said liability with reasonable accuracy, are questions of fact which ICC never
established. It simply relied on the defense of delayed billing by the firm and the company, which under
the circumstances, is not sufficient to exempt it from being charged with knowledge of the reasonable
amount of the expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for
the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed
to present evidence showing that even with only "reasonable accuracy," as the standard to ascertain
its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said
company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit
Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the said
year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred by ICC
in 198620and could therefore be properly claimed as deductions for the said year.

Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one should
have been applied by the BIR. There is indeed no stipulation between the latter and ICC on the
application of compounded interest.21 Under Article 1959 of the Civil Code, unless there is a stipulation
to the contrary, interest due should not further earn interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the BIR is
supported by payment order and confirmation receipts.22 Hence, the Assessment Notice for deficiency
expanded withholding tax was properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency
income tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for
security services. Said Assessment is valid as to the BIRs disallowance of ICCs expenses for
professional services. The Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90-
000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court
of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment Notice
No. FAS-1-86-90-000680, which disallowed the expense deduction of Isabela Cultural Corporation for
professional and security services, is declared valid only insofar as the expenses for the professional
fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson,
are concerned. The decision is affirmed in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under
Assessment Notice No. FAS-1-86-90-000680.

SO ORDERED.

DUMAGUETE CATHEDRAL G.R. No. 182722

CREDIT COOPERATIVE
[DCCCO], Represented by Present:
Felicidad L. Ruiz, its General
Manager, CARPIO, J., Chairperson,
Petitioner, BRION,
DEL CASTILLO,
-versus- ABAD, and
PEREZ, JJ.
COMMISSIONER OF
 INTERNAL REVENUE, Promulgated:
Respondent. January 22, 2010
x-----------------------------------------------------------------
--x

DECISION

DEL CASTILLO, J.:

The clashing interests of the State and the taxpayers are again pitted against each
other. Two basic principles, the States inherent power of taxation and its declared policy of
fostering the creation and growth of cooperatives come into play. However, the one that
embodies the spirit of the law and the true intent of the legislature prevails.

This Petition for Review on Certiorari under Section 11 of Republic Act (RA) No.
[1]
9282, in relation to Rule 45 of the Rules of Court, seeks to set aside the December 18,
2007 Decision[2] of the Court of Tax Appeals (CTA), ordering petitioner to pay deficiency
withholding taxes on interest from savings and time deposits of its members for taxable
years 1999 and 2000, pursuant to Section 24(B)(1) of the National Internal Revenue Code
of 1997 (NIRC), as well as the delinquency interest of 20% per annum under Section
249(C) of the same Code. It also assails the April 11, 2008 Resolution[3] denying
petitioners Motion for Reconsideration.

Factual Antecedents

Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit

cooperative duly registered with and regulated by the Cooperative Development Authority
(CDA).[4] It was established on February 17, 1968[5] with the following objectives and
purposes: (1) to increase the income and purchasing power of the members; (2) to pool the
resources of the members by encouraging savings and promoting thrift to mobilize capital
formation for development activities; and (3) to extend loans to members for provident and
productive purposes.[6] It has the power (1) to draw, make, accept, endorse, guarantee,
execute, and issue promissory notes, mortgages, bills of exchange, drafts, warrants,
certificates and all kinds of obligations and instruments in connection with and in
furtherance of its business operations; and (2) to issue bonds, debentures, and other
obligations; to contract indebtedness; and to secure the same with a mortgage or deed of
trust, or pledge or lien on any or all of its real and personal properties.[7]

On November 27, 2001, the Bureau of Internal Revenue (BIR) Operations Group
Deputy Commissioner, Lilian B. Hefti, issued Letters of Authority Nos. 63222 and 63223,
authorizing BIR Officers Tomas Rambuyon and Tarcisio Cubillan of Revenue Region No.
12, Bacolod City, to examine petitioners books of accounts and other accounting records
for all internal revenue taxes for the taxable years 1999 and 2000.[8]

Proceedings before the BIR Regional Office

On June 26, 2002, petitioner received two Pre-Assessment Notices for deficiency
withholding taxes for taxable years 1999 and 2000 which were protested by petitioner
on July 23, 2002.[9] Thereafter, on October 16, 2002, petitioner received two other Pre-
Assessment Notices for deficiency withholding taxes also for taxable years 1999 and
2000.[10] The deficiency withholding taxes cover the payments of the honorarium of the
Board of Directors, security and janitorial services, legal and professional fees, and interest
on savings and time deposits of its members.

On October 22, 2002, petitioner informed BIR Regional Director Sonia L. Flores
that it would only pay the deficiency withholding taxes corresponding to the honorarium
of the Board of Directors, security and janitorial services, legal and professional fees for
the year 1999 in the amount of P87,977.86, excluding penalties and interest.[11]

In another letter dated November 8, 2002, petitioner also informed the BIR
Assistant Regional Director, Rogelio B. Zambarrano, that it would pay the withholding
taxes due on the honorarium and per diems of the Board of Directors, security and janitorial
services, commissions and legal & professional fees for the year 2000 in the amount
of P119,889.37, excluding penalties and interest, and that it would avail of the Voluntary
Assessment and Abatement Program (VAAP) of the BIR under Revenue Regulations No.
17-2002.[12]
On November 29, 2002, petitioner availed of the VAAP and paid the amounts
of P105,574.62 and P143,867.24[13] corresponding to the withholding taxes on the
payments for the compensation, honorarium of the Board of Directors, security and
janitorial services, and legal and professional services, for the years 1999 and 2000,
respectively.

On April 24, 2003, petitioner received from the BIR Regional Director, Sonia L.
Flores, Letters of Demand Nos. 00027-2003 and 00026-2003, with attached Transcripts of
Assessment and Audit Results/Assessment Notices, ordering petitioner to pay the
deficiency withholding taxes, inclusive of penalties, for the years 1999 and 2000 in the
amounts of P1,489,065.30 and P1,462,644.90, respectively.[14]

Proceedings before the Commissioner of Internal Revenue

On May 9, 2003, petitioner protested the Letters of Demand and Assessment

Notices with the Commissioner of Internal Revenue (CIR).[15] However, the latter failed to
act on the protest within the prescribed 180-day period. Hence, on December 3, 2003,
petitioner filed a Petition for Review before the CTA, docketed as C.T.A. Case No.
6827.[16]

Proceedings before the CTA First Division

The case was raffled to the First Division of the CTA which rendered its Decision
on February 6, 2007, disposing of the case in this wise:

IN VIEW OF ALL THE FOREGOING, the Petition for Review is

hereby PARTIALLY GRANTED. Assessment Notice Nos. 00026-2003 and
00027-2003 are hereby MODIFIED and the assessment for deficiency
withholding taxes on the honorarium and per diems of petitioners Board of
Directors, security and janitorial services, commissions and legal and
professional fees are hereby CANCELLED. However, the assessments for
deficiency withholding taxes on interests are hereby AFFIRMED.

Accordingly, petitioner is ORDERED TO PAY the respondent the

respective amounts of P1,280,145.89 and P1,357,881.14 representing
deficiency withholding taxes on interests from savings and time deposits of its
members for the taxable years 1999 and 2000. In addition, petitioner is ordered
to pay the 20% delinquency interest from May 26, 2003 until the amount of
deficiency withholding taxes are fully paid pursuant to Section 249 (C) of the
Tax Code.
 SO ORDERED.[17]

Dissatisfied, petitioner moved for a partial reconsideration, but it was denied by the
First Division in its Resolution dated May 29, 2007.[18]

Proceedings before the CTA En Banc

On July 3, 2007, petitioner filed a Petition for Review with the CTA En
[19]
Banc, interposing the lone issue of whether or not petitioner is liable to pay the deficiency
withholding taxes on interest from savings and time deposits of its members for taxable
years 1999 and 2000, and the consequent delinquency interest of 20% per annum.[20]

Finding no reversible error in the Decision dated February 6, 2007 and the
Resolution dated May 29, 2007 of the CTA First Division, the CTA En Banc denied the
Petition for Review[21] as well as petitioners Motion for Reconsideration.[22]

The CTA En Banc held that Section 57 of the NIRC requires the withholding of tax
at source. Pursuant thereto, Revenue Regulations No. 2-98 was issued enumerating the
income payments subject to final withholding tax, among which is interest from any peso
bank deposit and yield, or any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements x x x. According to the CTA En Banc, petitioners
business falls under the phrase similar arrangements; as such, it should have withheld the
corresponding 20% final tax on the interest from the deposits of its members.

Issue

Hence, the present recourse, where petitioner raises the issue of whether or not it is
liable to pay the deficiency withholding taxes on interest from savings and time deposits
of its members for the taxable years 1999 and 2000, as well as the delinquency interest of
20% per annum.

Petitioners Arguments

Petitioner argues that Section 24(B)(1) of the NIRC which reads in part, to wit:

SECTION 24. Income Tax Rates.

 xxxx

(B) Rate of Tax on Certain Passive Income:

(1) Interests, Royalties, Prizes, and Other Winnings. A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of interest from any currency
bank deposit and yield or any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements; x x x

applies only to banks and not to cooperatives, since the phrase similar arrangements is
preceded by terms referring to banking transactions that have deposit
peculiarities. Petitioner thus posits that the savings and time deposits of members of
cooperatives are not included in the enumeration, and thus not subject to the 20% final
tax. To bolster its position, petitioner cites BIR Ruling No. 551-888[23] and BIR Ruling
[DA-591-2006][24]where the BIR ruled that interests from deposits maintained by members
of cooperative are not subject to withholding tax under Section 24(B)(1) of the
NIRC. Petitioner further contends that pursuant to Article XII, Section 15 of the
Constitution[25] and Article 2 of Republic Act No. 6938 (RA 6938) or the Cooperative
Code of the Philippines,[26]cooperatives enjoy a preferential tax treatment which exempts
their members from the application of Section 24(B)(1) of the NIRC.

Respondents Arguments

As a counter-argument, respondent invokes the legal maxim Ubi lex non distinguit
nec nos distinguere debemos (where the law does not distinguish, the courts should not
distinguish). Respondent maintains that Section 24(B)(1) of the NIRC applies to
cooperatives as the phrase similar arrangements is not limited to banks, but includes
cooperatives that are depositaries of their members. Regarding the exemption relied upon
by petitioner, respondent adverts to the jurisprudential rule that tax exemptions are highly
disfavored and construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. In this connection, respondent likewise points out that the deficiency tax
assessments were issued against petitioner not as a taxpayer but as a withholding agent.

Our Ruling

The petition has merit.

Petitioners invocation of BIR Ruling No.
551-888, reiterated in BIR Ruling [DA-
591-2006], is proper.

On November 16, 1988, the BIR declared in BIR Ruling No. 551-888 that
cooperatives are not required to withhold taxes on interest from savings and time deposits
of their members. The pertinent BIR Ruling reads:

November 16, 1988

BIR RULING NO. 551-888
24 369-88 551-888

Gentlemen:

This refers to your letter dated September 5, 1988 stating that you are a
corporation established under P.D. No. 175 and duly registered with the Bureau
of Cooperatives Development as full fledged cooperative of good standing with
Certificate of Registration No. FF 563-RR dated August 8, 1985; and that one
of your objectives is to provide and strengthen cooperative endeavor and extend
assistance to members and non-members through credit scheme both in cash
and in kind.

Based on the foregoing representations, you now request in effect a ruling as to

whether or not you are exempt from the following:

1. Payment of sales tax

2. Filing and payment of income tax
3. Withholding taxes from compensation of employees and savings account
and time deposits of members. (Underscoring ours)

In reply, please be informed that Executive Order No. 93 which took effect on
March 10, 1987 withdrew all tax exemptions and preferential privileges e.g.,
income tax and sales tax, granted to cooperatives under P.D. No. 175 which
were previously withdrawn by P.D. No. 1955 effective October 15, 1984 and
restored by P.D. No. 2008 effective January 8, 1986.However, implementation
of said Executive Order insofar as electric, agricultural, irrigation and
waterworks cooperatives are concerned was suspended until June 30,
1987.(Memorandum Order No. 65 dated January 21, 1987 of the
President) Accordingly, your tax exemption privilege expired as of June 30,
1987. Such being the case, you are now subject to income and sales taxes.
 Moreover, under Section 72(a) of the Tax Code, as amended, every employer
making payment of wages shall deduct and withhold upon such wages a tax at
the rates prescribed by Section 21(a) in relation to section 71, Chapter X, Title
II, of the same Code as amended by Batas Pambansa Blg. 135 and implemented
by Revenue Regulations No. 6-82 as amended. Accordingly, as an employer
you are required to withhold the corresponding tax due from the compensation
of your employees.
Furthermore, under Section 50(a) of the Tax Code, as amended, the tax imposed
or prescribed by Section 21(c) of the same Code on specified items of income
shall be withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 51 of the Tax
Code, as amended. Such being the case, and since interest from any Philippine
currency bank deposit and yield or any other monetary benefit from deposit
substitutes are paid by banks, you are not the party required to withhold the
corresponding tax on the aforesaid savings account and time deposits of your
members. (Underscoring ours)

Very truly yours,

(SGD.) BIENVENIDO A. TAN, JR.
Commissioner

The CTA First Division, however, disregarded the above quoted ruling in
determining whether petitioner is liable to pay the deficiency withholding taxes on interest
from the deposits of its members. It ratiocinated in this wise:

This Court does not agree. As correctly pointed out by respondent in his
Memorandum, nothing in the above quoted resolution will give the conclusion
that savings account and time deposits of members of a cooperative are tax-
exempt. What is entirely clear is the opinion of the Commissioner that the proper
party to withhold the corresponding taxes on certain specified items of income
is the payor-corporation and/or person. In the same way, in the case of interests
earned from Philippine currency deposits made in a bank, then it is the bank
which is liable to withhold the corresponding taxes considering that the bank is
the payor-corporation. Thus, the ruling that a cooperative is not the proper party
to withhold the corresponding taxes on the aforementioned accounts is
correct. However, this ruling does not hold true if the savings and time deposits
are being maintained in the cooperative, for in this case, it is the cooperative
which becomes the payor-corporation, a separate entity acting no more than an
agent of the government for the collection of taxes, liable to withhold the
corresponding taxes on the interests earned. [27](Underscoring ours)
 The CTA En Banc affirmed the above-quoted Decision and found petitioners
invocation of BIR Ruling No. 551-88 misplaced. According to the CTA En Banc, the BIR
Ruling was based on the premise that the savings and time deposits were placed by the
members of the cooperative in the bank.[28] Consequently, it ruled that the BIR Ruling does
not apply when the deposits are maintained in the cooperative such as the instant case.

We disagree.
There is nothing in the ruling to suggest that it applies only when deposits are
maintained in a bank. Rather, the ruling clearly states, without any qualification, that since
interest from any Philippine currency bank deposit and yield or any other monetary benefit
from deposit substitutes are paid by banks, cooperatives are not required to withhold the
corresponding tax on the interest from savings and time deposits of their members. This
interpretation was reiterated in BIR Ruling [DA-591-2006] dated October 5, 2006, which
was issued by Assistant Commissioner James H. Roldan upon the request of the
cooperatives for a confirmatory ruling on several issues, among which is the alleged
exemption of interest income on members deposit (over and above the share capital
holdings) from the 20% final withholding tax. In the said ruling, the BIR opined that:

xxxx

3. Exemption of interest income on members deposit (over and above the share capital
holdings) from the 20% Final Withholding Tax.

The National Internal Revenue Code states that a final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest on currency bank deposit
and yield or any other monetary benefit from the deposit substitutes and from trust funds
and similar arrangement x x x for individuals under Section 24(B)(1) and for domestic
corporations under Section 27(D)(1). Considering the members deposits with the
cooperatives are not currency bank deposits nor deposit substitutes, Section 24(B)(1) and
Section 27(D)(1), therefore, do not apply to members of cooperatives and to deposits of
primaries with federations, respectively.

It bears stressing that interpretations of administrative agencies in charge of

enforcing a law are entitled to great weight and consideration by the courts, unless such
interpretations are in a sharp conflict with the governing statute or the Constitution and
other laws.[29] In this case, BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006] are in
perfect harmony with the Constitution and the laws they seek to implement. Accordingly,
the interpretation in BIR Ruling No. 551-888 that cooperatives are not required to withhold
the corresponding tax on the interest from savings and time deposits of their members,
which was reiterated in BIR Ruling [DA-591-2006], applies to the instant case.
Members of cooperatives deserve a
preferential tax treatment pursuant to RA
6938, as amended by RA 9520.

Given that petitioner is a credit cooperative duly registered with the Cooperative
Development Authority (CDA), Section 24(B)(1) of the NIRC must be read together with
RA 6938, as amended by RA 9520.

Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the

State to foster the creation and growth of cooperatives as a practical vehicle for promoting
self-reliance and harnessing people power towards the attainment of economic
development and social justice. Thus, to encourage the formation of cooperatives and to
create an atmosphere conducive to their growth and development, the State extends all
forms of assistance to them, one of which is providing cooperatives a preferential tax
treatment.

The legislative intent to give cooperatives a preferential tax treatment is apparent in

Articles 61 and 62 of RA 6938, which read:
ART. 61. Tax Treatment of Cooperatives. Duly registered cooperatives under this Code
which do not transact any business with non-members or the general public shall not be
subject to any government taxes and fees imposed under the Internal Revenue Laws and
other tax laws. Cooperatives not falling under this article shall be governed by the
succeeding section.

ART. 62. Tax and Other Exemptions. Cooperatives transacting business with both
members and nonmembers shall not be subject to tax on their transactions to
members.Notwithstanding the provision of any law or regulation to the contrary, such
cooperatives dealing with nonmembers shall enjoy the following tax exemptions; x x x.

This exemption extends to members of cooperatives. It must be emphasized that

cooperatives exist for the benefit of their members. In fact, the primary objective of every
cooperative is to provide goods and services to its members to enable them to attain
increased income, savings, investments, and productivity.[30] Therefore, limiting the
application of the tax exemption to cooperatives would go against the very purpose of a
credit cooperative. Extending the exemption to members of cooperatives, on the other
hand, would be consistent with the intent of the legislature. Thus, although the tax
exemption only mentions cooperatives, this should be construed to include the members,
pursuant to Article 126 of RA 6938, which provides:

ART. 126. Interpretation and Construction. In case of doubt as to the meaning of any
provision of this Code or the regulations issued in pursuance thereof, the same shall be
resolved liberally in favor of the cooperatives and their members.

We need not belabor that what is within the spirit is within the law even if it is not
within the letter of the law because the spirit prevails over the letter.[31] Apropos is the ruling
in the case of Alonzo v. Intermediate Appellate Court,[32] to wit:

But as has also been aptly observed, we test a law by its results; and
likewise, we may add, by its purposes. It is a cardinal rule that, in seeking the
meaning of the law, the first concern of the judge should be to discover in its
provisions the intent of the lawmaker. Unquestionably, the law should never be
interpreted in such a way as to cause injustice as this is never within the
legislative intent. An indispensable part of that intent, in fact, for we presume
the good motives of the legislature, is to render justice.

Thus, we interpret and apply the law not independently of but in

consonance with justice. Law and justice are inseparable, and we must keep
them so. To be sure, there are some laws that, while generally valid, may seem
arbitrary when applied in a particular case because of its peculiar circumstances.
In such a situation, we are not bound, because only of our nature and functions,
to apply them just the same, [is] slavish obedience to their language. What we
do instead is find a balance between the word and the will, that justice may be
done even as the law is obeyed.

As judges, we are not automatons. We do not and must not unfeelingly

apply the law as it is worded, yielding like robots to the literal command without
regard to its cause and consequence. Courts are apt to err by sticking too closely
to the words of a law, so we are warned, by Justice Holmes again, where these
words import a policy that goes beyond them. While we admittedly may not
legislate, we nevertheless have the power to interpret the law in such a way as
to reflect the will of the legislature. While we may not read into the law a
purpose that is not there, we nevertheless have the right to read out of it the
reason for its enactment. In doing so, we defer not to the letter that killeth but to
the spirit that vivifieth, to give effect to the lawmakers will.
 The spirit, rather than the letter of a statute determines its
construction, hence, a statute must be read according to its spirit
or intent. For what is within the spirit is within the statute
although it is not within the letter thereof, and that which is within
the letter but not within the spirit is not within the statute. Stated
differently, a thing which is within the intent of the lawmaker is
as much within the statute as if within the letter; and a thing which
is within the letter of the statute is not within the statute unless
within the intent of the lawmakers. (Underscoring ours)

It is also worthy to note that the tax exemption in RA 6938 was retained in RA
9520. The only difference is that Article 61 of RA 9520 (formerly Section 62 of RA 6938)
now expressly states that transactions of members with the cooperatives are not subject to
any taxes and fees. Thus:

ART. 61. Tax and Other Exemptions. Cooperatives transacting business with
both members and non-members shall not be subjected to tax on their
transactions with members. In relation to this, the transactions of members with
the cooperative shall not be subject to any taxes and fees, including but not
limited to final taxes on members deposits and documentary
tax. Notwithstanding the provisions of any law or regulation to the contrary,
such cooperatives dealing with nonmembers shall enjoy the following tax
exemptions: (Underscoring ours)

xxxx

This amendment in Article 61 of RA 9520, specifically providing that members of

cooperatives are not subject to final taxes on their deposits, affirms the interpretation of the
BIR that Section 24(B)(1) of the NIRC does not apply to cooperatives and confirms that
such ruling carries out the legislative intent. Under the principle of legislative approval of
administrative interpretation by reenactment, the reenactment of a statute substantially
unchanged is persuasive indication of the adoption by Congress of a prior executive
construction.[33]
Moreover, no less than our Constitution guarantees the protection of cooperatives. Section
15, Article XII of the Constitution considers cooperatives as instruments for social justice
and economic development. At the same time, Section 10 of Article II of the Constitution
declares that it is a policy of the State to promote social justice in all phases of national
development. In relation thereto, Section 2 of Article XIII of the Constitution states that the
promotion of social justice shall include the commitment to create economic opportunities
based on freedom of initiative and self-reliance. Bearing in mind the foregoing provisions,
we find that an interpretation exempting the members of cooperatives from the imposition
of the final tax under Section 24(B)(1) of the NIRC is more in keeping with the letter and
spirit of our Constitution.
All told, we hold that petitioner is not liable to pay the assessed deficiency
withholding taxes on interest from the savings and time deposits of its members, as well as
the delinquency interest of 20% per annum.
In closing, cooperatives, including their members, deserve a preferential tax
treatment because of the vital role they play in the attainment of economic development
and social justice. Thus, although taxes are the lifeblood of the government, the States
power to tax must give way to foster the creation and growth of cooperatives. To borrow
the words of Justice Isagani A. Cruz: The power of taxation, while indispensable, is not
absolute and may be subordinated to the demands of social justice.[34]

WHEREFORE, the Petition is hereby GRANTED. The assailed December 18,

2007 Decision of the Court of Tax Appeals and the April 11, 2008 Resolution
are REVERSED and SET ASIDE. Accordingly, the assessments for deficiency
withholding taxes on interest from the savings and time deposits of petitioners members
for the taxable years 1999 and 2000 as well as the delinquency interest of 20% per annum
are hereby CANCELLED.

PHILEX MINING G.R. No. 148187

CORPORATION,
Petitioner, Present:
Ynares-Santiago, J. (Chairperson),
- versus - Carpio Morales, *
Chico-Nazario,
Nachura, and,
Reyes, JJ.
COMMISSIONER OF
INTERNAL REVENUE, Promulgated:
Respondent.
April 16, 2008
x ---------------------------------------------------------------------------------------- x

DECISION
YNARES-SANTIAGO, J.:

This is a petition for review on certiorari of the June 30, 2000 Decision[1] of the Court
of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision[2] of the Court
of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April 3,
2001 Resolution[3] denying the motion for reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining),

entered into an agreement[4] with Baguio Gold Mining Company (Baguio Gold) for
the former to manage and operate the latters mining claim, known as the Sto. Nino
mine, located in Atok and Tublay, Benguet Province. The parties agreement was
denominated as Power of Attorney and provided for the following terms:

4. Within three (3) years from date thereof, the PRINCIPAL (Baguio
Gold) shall make available to the MANAGERS (Philex Mining) up to
ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from
time to time may be required by the MANAGERS within the said 3-year
period, for use in the MANAGEMENT of the STO. NINO MINE. The
said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed, for
internal audit purposes, as the owners account in the Sto. Nino PROJECT.
Any part of any income of the PRINCIPAL from the STO. NINO MINE,
which is left with the Sto. Nino PROJECT, shall be added to such owners
account.

5. Whenever the MANAGERS shall deem it necessary and convenient in

connection with the MANAGEMENT of the STO. NINO MINE, they
may transfer their own funds or property to the Sto. Nino PROJECT, in
accordance with the following arrangements:

(a) The properties shall be appraised and, together with the cash, shall be
carried by the Sto. Nino PROJECT as a special fund to be known as the
MANAGERS account.

(b) The total of the MANAGERS account shall not exceed

P11,000,000.00, except with prior approval of the PRINCIPAL; provided,
however, that if the compensation of the MANAGERS as herein provided
cannot be paid in cash from the Sto. Nino PROJECT, the amount not so
paid in cash shall be added to the MANAGERS account.

(c) The cash and property shall not thereafter be withdrawn from the Sto.
Nino PROJECT until termination of this Agency.

(d) The MANAGERS account shall not accrue interest. Since it is the
desire of the PRINCIPAL to extend to the MANAGERS the benefit of
subsequent appreciation of property, upon a projected termination of this
Agency, the ratio which the MANAGERS account has to the owners
account will be determined, and the corresponding proportion of the entire
assets of the STO. NINO MINE, excluding the claims, shall be transferred
to the MANAGERS, except that such transferred assets shall not include
mine development, roads, buildings, and similar property which will be
valueless, or of slight value, to the MANAGERS. The MANAGERS can,
on the other hand, require at their option that property originally
transferred by them to the Sto. Nino PROJECT be re-transferred to them.
Until such assets are transferred to the MANAGERS, this Agency shall
remain subsisting.

xxxx

12. The compensation of the MANAGER shall be fifty per cent (50%) of
the net profit of the Sto. Nino PROJECT before income tax. It is
understood that the MANAGERS shall pay income tax on their
compensation, while the PRINCIPAL shall pay income tax on the net
 profit of the Sto. Nino PROJECT after deduction therefrom of the
MANAGERS compensation.

xxxx

16. The PRINCIPAL has current pecuniary obligation in favor of the

MANAGERS and, in the future, may incur other obligations in favor of
the MANAGERS. This Power of Attorney has been executed as security
for the payment and satisfaction of all such obligations of the PRINCIPAL
in favor of the MANAGERS and as a means to fulfill the same. Therefore,
this Agency shall be irrevocable while any obligation of the PRINCIPAL
in favor of the MANAGERS is outstanding, inclusive of the MANAGERS
account. After all obligations of the PRINCIPAL in favor of the
MANAGERS have been paid and satisfied in full, this Agency shall be
revocable by the PRINCIPAL upon 36-month notice to the MANAGERS.

17. Notwithstanding any agreement or understanding between the

PRINCIPAL and the MANAGERS to the contrary, the MANAGERS may
withdraw from this Agency by giving 6-month notice to the PRINCIPAL.
The MANAGERS shall not in any manner be held liable to the
PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d) hereof
shall be operative in case of the MANAGERS withdrawal.

x x x x[5]

In the course of managing and operating the project, Philex Mining made advances
of cash and property in accordance with paragraph 5 of the agreement. However, the
mine suffered continuing losses over the years which resulted to petitioners
withdrawal as manager of the mine on January 28, 1982 and in the eventual
cessation of mine operations on February 20, 1982.[6]

Thereafter, on September 27, 1982, the parties executed a Compromise with Dation
in Payment[7] wherein Baguio Gold admitted an indebtedness to petitioner in the
amount of P179,394,000.00 and agreed to pay the same in three segments by first
assigning Baguio Golds tangible assets to petitioner, transferring to the latter Baguio
Golds equitable title in its Philodrill assets and finally settling the remaining liability
through properties that Baguio Gold may acquire in the future.
On December 31, 1982, the parties executed an Amendment to Compromise with
Dation in Payment[8] where the parties determined that Baguio Golds indebtedness
to petitioner actually amounted to P259,137,245.00, which sum included liabilities
of Baguio Gold to other creditors that petitioner had assumed as guarantor. These
liabilities pertained to long-term loans amounting to US$11,000,000.00 contracted
by Baguio Gold from the Bank of America NT & SA and Citibank N.A. This time,
Baguio Gold undertook to pay petitioner in two segments by first assigning its
tangible assets for P127,838,051.00 and then transferring its equitable title in its
Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold
had a remaining outstanding indebtedness to petitioner in the amount of
P114,996,768.00.

Subsequently, petitioner wrote off in its 1982 books of account the remaining
outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to
allowances and reserves that were set up in 1981 and P2,860,768.00 to the 1982
operations.

In its 1982 annual income tax return, petitioner deducted from its gross income the
amount of P112,136,000.00 as loss on settlement of receivables from Baguio Gold
against reserves and allowances.[9] However, the Bureau of Internal Revenue (BIR)
disallowed the amount as deduction for bad debt and assessed petitioner a deficiency
income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since
all requisites for a bad debt deduction were satisfied, to wit: (a) there was a valid and
existing debt; (b) the debt was ascertained to be worthless; and (c) it was charged off
within the taxable year when it was determined to be worthless.

Petitioner emphasized that the debt arose out of a valid management contract it
entered into with Baguio Gold. The bad debt deduction represented advances made
by petitioner which, pursuant to the management contract, formed part of Baguio
Golds pecuniary obligations to petitioner. It also included payments made by
petitioner as guarantor of Baguio Golds long-term loans which legally entitled
petitioner to be subrogated to the rights of the original creditor.
 Petitioner also asserted that due to Baguio Golds irreversible losses, it became
evident that it would not be able to recover the advances and payments it had made
in behalf of Baguio Gold. For a debt to be considered worthless, petitioner claimed
that it was neither required to institute a judicial action for collection against the
debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It is enough
that a taxpayer exerted diligent efforts to enforce collection and exhausted all
reasonable means to collect.

On October 28, 1994, the BIR denied petitioners protest for lack of legal and
factual basis. It held that the alleged debt was not ascertained to be worthless since
Baguio Gold remained existing and had not filed a petition for bankruptcy; and that
the deduction did not consist of a valid and subsisting debt considering that, under
the management contract, petitioner was to be paid fifty percent (50%) of the
projects net profit.[10]

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered
judgment, as follows:

WHEREFORE, in view of the foregoing, the instant Petition for

Review is hereby DENIED for lack of merit. The assessment in question,
viz: FAS-1-82-88-003067 for deficiency income tax in the amount of
P62,811,161.39 is hereby AFFIRMED.

ACCORDINGLY, petitioner Philex Mining Corporation is hereby

ORDERED to PAY respondent Commissioner of Internal Revenue the
amount of P62,811,161.39, plus, 20% delinquency interest due computed
from February 10, 1995, which is the date after the 20-day grace period
given by the respondent within which petitioner has to pay the deficiency
amount x x x up to actual date of payment.

SO ORDERED.[11]

The CTA rejected petitioners assertion that the advances it made for the Sto.
Nino mine were in the nature of a loan. It instead characterized the advances as
petitioners investment in a partnership with Baguio Gold for the development and
exploitation of the Sto. Nino mine. The CTA held that the Power of Attorney
executed by petitioner and Baguio Gold was actually a partnership agreement. Since
the advanced amount partook of the nature of an investment, it could not be deducted
as a bad debt from petitioners gross income.

The CTA likewise held that the amount paid by petitioner for the long-term
loan obligations of Baguio Gold could not be allowed as a bad debt deduction. At
the time the payments were made, Baguio Gold was not in default since its loans
were not yet due and demandable. What petitioner did was to pre-pay the loans as
evidenced by the notice sent by Bank of America showing that it was merely
demanding payment of the installment and interests due. Moreover, Citibank
imposed and collected a pre-termination penalty for the pre-payment.

The Court of Appeals affirmed the decision of the CTA.[12] Hence, upon
denial of its motion for reconsideration,[13] petitioner took this recourse under Rule
45 of the Rules of Court, alleging that:

I.
The Court of Appeals erred in construing that the advances made by
Philex in the management of the Sto. Nino Mine pursuant to the Power of
Attorney partook of the nature of an investment rather than a loan.

II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net
profits of the Sto. Nino Mine indicates that Philex is a partner of Baguio
Gold in the development of the Sto. Nino Mine notwithstanding the clear
absence of any intent on the part of Philex and Baguio Gold to form a
partnership.

III.
The Court of Appeals erred in relying only on the Power of Attorney and
in completely disregarding the Compromise Agreement and the Amended
Compromise Agreement when it construed the nature of the advances
made by Philex.

IV.
The Court of Appeals erred in refusing to delve upon the issue of the
propriety of the bad debts write-off.[14]
 Petitioner insists that in determining the nature of its business relationship
with Baguio Gold, we should not only rely on the Power of Attorney, but also on the
subsequent Compromise with Dation in Payment and Amended Compromise with
Dation in Payment that the parties executed in 1982. These documents, allegedly
evinced the parties intent to treat the advances and payments as a loan and establish
a creditor-debtor relationship between them.

The petition lacks merit.

The lower courts correctly held that the Power of Attorney is the instrument
that is material in determining the true nature of the business relationship between
petitioner and Baguio Gold. Before resort may be had to the two compromise
agreements, the parties contractual intent must first be discovered from the expressed
language of the primary contract under which the parties business relations were
founded. It should be noted that the compromise agreements were mere collateral
documents executed by the parties pursuant to the termination of their business
relationship created under the Power of Attorney. On the other hand, it is the latter
which established the juridical relation of the parties and defined the parameters of
their dealings with one another.

The execution of the two compromise agreements can hardly be considered

as a subsequent or contemporaneous act that is reflective of the parties true
intent. The compromise agreements were executed eleven years after the Power of
Attorney and merely laid out a plan or procedure by which petitioner could recover
the advances and payments it made under the Power of Attorney. The parties entered
into the compromise agreements as a consequence of the dissolution of their business
relationship. It did not define that relationship or indicate its real character.

An examination of the Power of Attorney reveals that a partnership or joint

venture was indeed intended by the parties. Under a contract of partnership, two or
more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves. [15]While
a corporation, like petitioner, cannot generally enter into a contract of partnership
unless authorized by law or its charter, it has been held that it may enter into a joint
venture which is akin to a particular partnership:
 The legal concept of a joint venture is of common law origin. It has
no precise legal definition, but it has been generally understood to mean
an organization formed for some temporary purpose. x x x It is in fact
hardly distinguishable from the partnership, since their elements are
similar community of interest in the business, sharing of profits and losses,
and a mutual right of control. x x x The main distinction cited by most
opinions in common law jurisdictions is that the partnership contemplates
a general business with some degree of continuity, while the joint venture
is formed for the execution of a single transaction, and is thus of a
temporary nature. x x x This observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a partnership may be particular
or universal, and a particular partnership may have for its object a specific
undertaking. x x x It would seem therefore that under Philippine law, a
joint venture is a form of partnership and should be governed by the law
of partnerships. The Supreme Court has however recognized a distinction
between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however
engage in a joint venture with others. x x x (Citations omitted) [16]

Perusal of the agreement denominated as the Power of Attorney indicates that

the parties had intended to create a partnership and establish a common fund for the
purpose. They also had a joint interest in the profits of the business as shown by a
50-50 sharing in the income of the mine.

Under the Power of Attorney, petitioner and Baguio Gold undertook to

contribute money, property and industry to the common fund known as the Sto. Nio
mine.[17] In this regard, we note that there is a substantive equivalence in the
respective contributions of the parties to the development and operation of the
mine. Pursuant to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold
were to contribute equally to the joint venture assets under their respective
accounts. Baguio Gold would contribute P11M under its owners account plus any
of its income that is left in the project, in addition to its actual mining
claim. Meanwhile, petitioners contribution would consist of its expertise in the
management and operation of mines, as well as the managers account which is
comprised of P11M in funds and property and petitioners compensation as
manager that cannot be paid in cash.
 However, petitioner asserts that it could not have entered into a partnership
agreement with Baguio Gold because it did not bind itself to contribute money or
property to the project; that under paragraph 5 of the agreement, it was only optional
for petitioner to transfer funds or property to the Sto. Nio project (w)henever the
MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NIO MINE.[18]

The wording of the parties agreement as to petitioners contribution to the

common fund does not detract from the fact that petitioner transferred its funds and
property to the project as specified in paragraph 5, thus rendering effective the other
stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner
from withdrawing the advances until termination of the parties business relations. As
can be seen, petitioner became bound by its contributions once the transfers were
made. The contributions acquired an obligatory nature as soon as petitioner had
chosen to exercise its option under paragraph 5.

There is no merit to petitioners claim that the prohibition in paragraph 5(c)

against withdrawal of advances should not be taken as an indication that it had
entered into a partnership with Baguio Gold; that the stipulation only showed that
what the parties entered into was actually a contract of agency coupled with an
interest which is not revocable at will and not a partnership.

In an agency coupled with interest, it is the agency that cannot be revoked or

withdrawn by the principal due to an interest of a third party that depends upon it,
or the mutual interest of both principal and agent.[19] In this case, the non-revocation
or non-withdrawal under paragraph 5(c) applies to the advances made by petitioner
who is supposedly the agent and not the principal under the contract. Thus, it cannot
be inferred from the stipulation that the parties relation under the agreement is one
of agency coupled with an interest and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the

relationship of the parties was one of agency and not a partnership. Although the
said provision states that this Agency shall be irrevocable while any obligation of
the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the
MANAGERS account, it does not necessarily follow that the parties entered into an
agency contract coupled with an interest that cannot be withdrawn by Baguio Gold.
 It should be stressed that the main object of the Power of Attorney was not to
confer a power in favor of petitioner to contract with third persons on behalf of
Baguio Gold but to create a business relationship between petitioner and Baguio
Gold, in which the former was to manage and operate the latters mine through the
parties mutual contribution of material resources and industry. The essence of an
agency, even one that is coupled with interest, is the agents ability to represent
his principal and bring about business relations between the latter and third
persons.[20]Where representation for and in behalf of the principal is merely
incidental or necessary for the proper discharge of ones paramount undertaking
under a contract, the latter may not necessarily be a contract of agency, but some
other agreement depending on the ultimate undertaking of the parties.[21]

In this case, the totality of the circumstances and the stipulations in the parties
agreement indubitably lead to the conclusion that a partnership was formed between
petitioner and Baguio Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to
return the advances made by petitioner under the agreement. Paragraph 5 (d) thereof
provides that upon termination of the parties business relations, the ratio which the
MANAGERS account has to the owners account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding
the claims shall be transferred to petitioner.[22] As pointed out by the Court of Tax
Appeals, petitioner was merely entitled to a proportionate return of the mines assets
upon dissolution of the parties business relations. There was nothing in the
agreement that would require Baguio Gold to make payments of the advances to
petitioner as would be recognized as an item of obligation or accounts payable for
Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a
distribution of assets of the Sto. Nio mine upon termination, a provision that is more
consistent with a partnership than a creditor-debtor relationship. It should be pointed
out that in a contract of loan, a person who receives a loan or money or any fungible
thing acquires ownership thereof and is bound to pay the creditor an equal amount
of the same kind and quality.[23] In this case, however, there was no stipulation for
Baguio Gold to actually repay petitioner the cash and property that it had advanced,
but only the return of an amount pegged at a ratio which the managers account had
to the owners account.

In this connection, we find no contractual basis for the execution of the two
compromise agreements in which Baguio Gold recognized a debt in favor of
petitioner, which supposedly arose from the termination of their business relations
over the Sto. Nino mine. The Power of Attorney clearly provides that petitioner
would only be entitled to the return of a proportionate share of the mine assets to be
computed at a ratio that the managers account had to the owners account. Except to
provide a basis for claiming the advances as a bad debt deduction, there is no reason
for Baguio Gold to hold itself liable to petitioner under the compromise agreements,
for any amount over and above the proportion agreed upon in the Power of Attorney.

Next, the tax court correctly observed that it was unlikely for a business
corporation to lend hundreds of millions of pesos to another corporation with neither
security, or collateral, nor a specific deed evidencing the terms and conditions of
such loans. The parties also did not provide a specific maturity date for the advances
to become due and demandable, and the manner of payment was unclear. All these
point to the inevitable conclusion that the advances were not loans but capital
contributions to a partnership.

The strongest indication that petitioner was a partner in the Sto Nio mine is
the fact that it would receive 50% of the net profits as compensation under paragraph
12 of the agreement. The entirety of the parties contractual stipulations simply leads
to no other conclusion than that petitioners compensation is actually its share in the
income of the joint venture.

Article 1769 (4) of the Civil Code explicitly provides that the receipt by a
person of a share in the profits of a business is prima facie evidence that he is a
partner in the business. Petitioner asserts, however, that no such inference can be
drawn against it since its share in the profits of the Sto Nio project was in the nature
of compensation or wages of an employee, under the exception provided in Article
1769 (4) (b).[24]

On this score, the tax court correctly noted that petitioner was not an employee
of Baguio Gold who will be paid wages pursuant to an employer-employee
relationship. To begin with, petitioner was the manager of the project and had put
substantial sums into the venture in order to ensure its viability and profitability. By
pegging its compensation to profits, petitioner also stood not to be remunerated in
case the mine had no income. It is hard to believe that petitioner would take the risk
of not being paid at all for its services, if it were truly just an ordinary employee.

Consequently, we find that petitioners compensation under paragraph 12 of

the agreement actually constitutes its share in the net profits of the
partnership. Indeed, petitioner would not be entitled to an equal share in the income
of the mine if it were just an employee of Baguio Gold. [25] It is not surprising that
petitioner was to receive a 50% share in the net profits, considering that the Power
of Attorney also provided for an almost equal contribution of the parties to the St.
Nino mine. The compensation agreed upon only serves to reinforce the notion that
the parties relations were indeed of partners and not employer-employee.

All told, the lower courts did not err in treating petitioners advances as
investments in a partnership known as the Sto. Nino mine. The advances were not
debts of Baguio Gold to petitioner inasmuch as the latter was under no unconditional
obligation to return the same to the former under the Power of Attorney. As for the
amounts that petitioner paid as guarantor to Baguio Golds creditors, we find no
reason to depart from the tax courts factual finding that Baguio Golds debts were not
yet due and demandable at the time that petitioner paid the same. Verily, petitioner
pre-paid Baguio Golds outstanding loans to its bank creditors and this conclusion is
supported by the evidence on record.[26]

In sum, petitioner cannot claim the advances as a bad debt deduction from its
gross income. Deductions for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction claimed. [27] In this case,
petitioner failed to substantiate its assertion that the advances were subsisting debts
of Baguio Gold that could be deducted from its gross income. Consequently, it could
not claim the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in

CA-G.R. SP No. 49385 dated June 30, 2000, which affirmed the decision of the
Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex
Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income
in the amount of P62,811,161.31, with 20% delinquency interest computed
from February 10, 1995, which is the due date given for the payment of the
deficiency income tax, up to the actual date of payment.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF
TAX APPEALS, respondents.

T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION

FELICIANO, J.:p

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975,
private respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared
dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA)
("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21
representing the thirty-five percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal
Revenue a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things,
that pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as amended by
Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not thirty-five
percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed
a petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No.
2883. On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to refund
or grant the tax credit in the amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the decision of the
CTA and held that:
 (a) P&G-USA, and not private respondent P&G-Phil., was the proper
party to claim the refund or tax credit here involved;

(b) there is nothing in Section 902 or other provisions of the US Tax

Code that allows a credit against the US tax due from P&G-USA of
taxes deemed to have been paid in the Philippines equivalent to twenty
percent (20%) which represents the difference between the regular tax
of thirty-five percent (35%) on corporations and the tax of fifteen
percent (15%) on dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions

necessary in order that "the dividends received by its non-resident
parent company in the US (P&G-USA) may be subject to the
preferential tax rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with
them seriatim in this Resolution resolving that Motion.

1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the
present claim for refund or tax credit, which need to be examined. This question was raised for the
first time on appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the
Commissioner of Internal Revenue. The question was not raised by the Commissioner on the
administrative level, and neither was it raised by him before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise
valid claim for refund by raising this question of alleged incapacity for the first time on appeal before
this Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it
succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting
such refund or tax credit to its parent and sole stockholder. It is commonplace that in the absence of
explicit statutory provisions to the contrary, the government must follow the same rules of procedure
which bind private parties. It is, for instance, clear that the government is held to compliance with the
provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to
such compliance, save only in respect of the matter of filing fees from which the Republic of the
Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be
allowed to raise for the first time on appeal questions which had not been litigated either in the lower
court or on the administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at the
administrative level, demanded that P&G-Phil. produce an express authorization from its parent
corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and
produce such authorization before filing the action in the instant case. The action here was
commenced just before expiration of the two (2)-year prescriptive period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions
as well which, as will be seen below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal
Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally
assessed or collected:
 Sec. 306. 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 of Internal Revenue; 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: . . . (Emphasis
supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to

Refund Taxes.The Commissioner may:

xxx xxx xxx

(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of

taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of the
tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil.
a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as
referring to "any person subject to tax imposed by the Title [on Tax on Income]." 2 It thus becomes important
to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made " personally liable
for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount
of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable 3 for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is,
moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to
be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." 4 The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such
a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes
were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a
withholding agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government
agent:

The law sets no condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to withhold the tax under all
circumstances. In effect, the responsibility for the collection of the tax as well as the
payment thereof is concentrated upon the person over whom the Government has
jurisdiction. Thus, the withholding agent is constituted the agent of both the
Government and the taxpayer. With respect to the collection and/or withholding of the
tax, he is the Government's agent. In regard to the filing of the necessary income tax
return and the payment of the tax to the Government, he is the agent of the
taxpayer. The withholding agent, therefore, is no ordinary government agent especially
because under Section 53 (c) he is held personally liable for the tax he is duty bound
 to withhold; whereas the Commissioner and his deputies are not made liable by
law. 6 (Emphasis supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner
of the dividends with respect to the filing of the necessary income tax return and with respect to actual
payment of the tax to the government, such authority may reasonably be held to include the authority
to file a claim for refund and to bring an action for recovery of such claim. This implied authority is
especially warranted where, is in the instant case, the withholding agent is the wholly owned subsidiary
of the parent-stockholder and therefore, at all times, under the effective control of such parent-
stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority
of P&G-Phil. to claim a refund and to commence an action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show
some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or
tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax
obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate.
What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is
directly and personally liable to the Government for the taxes and any deficiency assessments to be
collected, the Government is not legally liable for a refund simply because it did not demand a written
confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government should
act honorably and fairly at all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as
a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for
refund and the suit to recover such claim.

II

1. We turn to the principal substantive question before us: the applicability to the dividend remittances
by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of
Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.

(1) Non-resident corporation. A foreign corporation not engaged in

trade and business in the Philippines, . . ., shall pay a tax equal to 35%
of the gross income receipt during its taxable year from all sources
within the Philippines, as . . . dividends . . . Provided, still further, that
on dividends received from a domestic corporation liable to tax under
this Chapter, the tax shall be 15% of the dividends, which shall be
collected and paid as provided in Section 53 (d) of this Code, subject
to the condition that the country in which the non-resident foreign
corporation, is domiciled shall allow a credit against the tax due from
the non-resident foreign corporation, taxes deemed to have been paid
in the Philippines equivalent to 20% which represents the difference
between the regular tax (35%) on corporations and the tax (15%) on
dividends as provided in this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident
corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country
of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for
"taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country
by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent
(15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes
deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies
that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount
equivalent to twenty (20) percentage points which represents the difference between the regular thirty-
five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed
paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making
applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC
does not require that the US tax law deem the parent-corporation to have paid the twenty (20)
percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall
allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage
points waived by the Philippines.

2. The question arises: Did the US law comply with the above requirement? The relevant provisions
of the US Intemal Revenue Code ("Tax Code") are the following:

Sec. 901 Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. If the taxpayer chooses to have the benefits

of this subpart, the tax imposed by this chapter shall, subject to the
applicable limitation of section 904, be credited with the amounts
provided in the applicable paragraph of subsection (b) plus, in the case
of a corporation, the taxes deemed to have been paid under sections
902 and 960. Such choice for any taxable year may be made or
changed at any time before the expiration of the period prescribed for
making a claim for credit or refund of the tax imposed by this chapter
for such taxable year. The credit shall not be allowed against the tax
imposed by section 531 (relating to the tax on accumulated earnings),
against the additional tax imposed for the taxable year under section
1333 (relating to war loss recoveries) or under section 1351 (relating
to recoveries of foreign expropriation losses), or against the personal
holding company tax imposed by section 541.

(b) Amount allowed. Subject to the applicable limitation of section

904, the following amounts shall be allowed as the credit under
subsection (a):

(a) Citizens and domestic corporations. In the case

of a citizen of the United States and of a domestic
corporation, the amount of any income, war profits, and
excess profits taxes paid or accrued during the taxable
year to any foreign country or to any possession of the
United States; and

xxx xxx xxx

Sec. 902. Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. For purposes

of this subject, a domestic corporation which owns at least 10 percent
 of the voting stock of a foreign corporation from which it receives
dividends in any taxable year shall

xxx xxx xxx

(2) to the extent such dividends are paid by such

foreign corporation out of accumulated profits [as
defined in subsection (c) (1) (b)] of a year for which
such foreign corporation is a less developed country
corporation, be deemed to have paid the same
proportion of any income, war profits, or excess
profits taxes paid or deemed to be paid by such foreign
corporation to any foreign country or to any possession
of the United States on or with respect to such
accumulated profits, which the amount of such
dividends bears to the amount of such accumulated
profits.

xxx xxx xxx

(c) Applicable Rules

(1) Accumulated profits defined. For purposes of this section, the

term "accumulated profits" means with respect to any foreign
corporation,

(A) for purposes of subsections (a) (1) and (b) (1), the
amount of its gains, profits, or income computed
without reduction by the amount of the income, war
profits, and excess profits taxes imposed on or with
respect to such profits or income by any foreign
country. . . .; and

(B) for purposes of subsections (a) (2) and (b) (2), the
amount of its gains, profits, or income in excess of the
income, war profits, and excess profits taxes
imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from
the accumulated profits of what year or years such dividends were
paid, treating dividends paid in the first 20 days of any year as having
been paid from the accumulated profits of the preceding year or years
(unless to his satisfaction shows otherwise), and in other respects
treating dividends as having been paid from the most recently
accumulated gains, profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7 shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for
the amount of the dividend tax actually paid (i.e., withheld) from the
dividend remittances to P&G-USA;
 b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed
paid' tax credit 8 for a proportionate part of the corporate income tax actually paid to the
Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate
income tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-
USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate
income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the
amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate
income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of
carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning
profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but
instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and
(ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid"
by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-
USA. These tax credits are allowed because of the US congressional desire to avoid or reduce double
taxation of the same income stream. 9

In order to determine whether US tax law complies with the requirements for applicability of the
reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is
necessary:

a. to determine the amount of the 20 percentage points dividend tax

waived by the Philippine government under Section 24 (b) (1), NIRC,
and which hence goes to P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US

tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed
by US law is at least equal to the amount of the dividend tax waived by
the Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically
determined in the following manner:

P100.00 Pretax net corporate income earned by P&G-Phil.

x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.

P100.00
-35.00

P65.00 Available for remittance as dividends to P&G-USA

P65.00 Dividends remittable to P&G-USA

x 35% Regular Philippine dividend tax rate under Section 24
 (b) (1), NIRC
P22.75 Regular dividend tax

P65.00 Dividends remittable to P&G-USA

x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00 Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil.
Amount (a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if
P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under
Section 902, Tax Code, may be computed arithmetically as follows:

P65.00 Dividends remittable to P&G-USA

- 9.75 Dividend tax withheld at the reduced (15%) rate

P55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.

to the BIR

Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-
Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for
Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned
subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine
government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code
is identical with the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with
the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner
of Intemal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which
stated:

However, after a restudy of the decision in the American Chicle Company case and
the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit
in your contention that our computation of the credit which the U.S. tax law allows in
such cases is erroneous as the amount of tax "deemed paid" to the Philippine
government for purposes of credit against the U.S. tax by the recipient of dividends
includes a portion of the amount of income tax paid by the corporation declaring the
dividend in addition to the tax withheld from the dividend remitted. In other words, the
U.S. government will allow a credit to the U.S. corporation or recipient of the
dividend, in addition to the amount of tax actually withheld, a portion of the income tax
paid by the corporation declaring the dividend. Thus, if a Philippine corporation wholly
owned by a U.S. corporation has a net income of P100,000, it will pay P25,000
Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The
net income, after income tax, which is P75,000, will then be declared as dividend to
the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the
aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation
receiving the dividend can utilize as credit against its U.S. tax payable on said
dividends the amount of P30,000 composed of:

(1) The tax "deemed paid" or indirectly paid on the

dividend arrived at as follows:

P75,000 x P25,000 = P18,750

100,000 **

(2) The amount of 15% of

P75,000 withheld = 11,250

P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the
dividends received by the U.S. corporation from a Philippine subsidiary is clearly more
than 20% requirement of Presidential Decree No. 369 as 20% of P75,000.00 the
dividends to be remitted under the above example, amounts to P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is
hereby amended in the sense that the dividends to be remitted by your client to its
parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent
provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not
revoked, amended and modified, the effect of which will reduce the percentage of tax
deemed paid and creditable against the U.S. tax on dividends remitted by a foreign
corporation to a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods
Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and
Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as
the case at bar was pending before the CTA and this Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in
Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which
Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United
States) and which, therefore, pay income taxes to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.In computing net

income, there shall be allowed as deductions . . .

(c) Taxes. . . .

xxx xxx xxx

(3) Credits against tax for taxes of foreign countries.

If the taxpayer signifies in his return his desire to have
the benefits of this paragraphs, the tax imposed by this
Title shall be credited with . . .

(a) Citizen and Domestic Corporation. In the case of

a citizen of the Philippines and of domestic corporation,
the amount of net income, war profits or excess
profits, taxes paid or accrued during the taxable year to
any foreign country. (Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation
for taxes actually paid by it to the US governmente.g., for taxes collected by the US government on
dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of
Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as
follows:

(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic
corporation which owns a majority of the voting stock of a foreign corporation from
which it receives dividends in any taxable year shall be deemed to have paid the same
proportion of any income, war-profits, or excess-profits taxes paid by such foreign
corporation to any foreign country, upon or with respect to the accumulated profits of
such foreign corporation from which such dividends were paid, which the amount of
such dividends bears to the amount of such accumulated profits: Provided, That the
amount of tax deemed to have been paid under this subsection shall in no case exceed
the same proportion of the tax against which credit is taken which the amount of such
dividends bears to the amount of the entire net income of the domestic corporation in
which such dividends are included. The term "accumulated profits" when used in this
subsection reference to a foreign corporation, means the amount of its gains, profits,
or income in excess of the income, war-profits, and excess-profits taxes imposed
upon or with respect to such profits or income; and the Commissioner of Internal
Revenue shall have full power to determine from the accumulated profits of what year
or years such dividends were paid; treating dividends paid in the first sixty days of any
 year as having been paid from the accumulated profits of the preceding year or years
(unless to his satisfaction shown otherwise), and in other respects treating dividends
as having been paid from the most recently accumulated gains, profits, or earnings. In
the case of a foreign corporation, the income, war-profits, and excess-profits taxes of
which are determined on the basis of an accounting period of less than one year, the
word "year" as used in this subsection shall be construed to mean such accounting
period. (Emphasis supplied)

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine
parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the
US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate
stockholder is "deemed" under our NIRC to have paid a proportionate part of the US corporate
income tax paid by its US subsidiary, although such US tax was actually paid by the subsidiary
and not by the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US
law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine
corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid"
tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the
"deemed paid" tax credit granted in Section 30 (c) (8), NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case
was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%),
held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax
authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court
from questions of administrative implementation arising after the legal question has been answered.
The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case:
the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of
whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the
required amount, relates to the administrative implementation of the applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit
shall have actually been granted before the applicable dividend tax rate goes down from thirty-five
percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely
requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither
statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant
of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the
preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does
not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a
particular (reduced) tax rate is legally applicable.

In the third place, the position originally taken by the Second Division results in a severe practical
problem of administrative circularity. The Second Division in effect held that the reduced dividend tax
rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required
minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax
credit cannot be given by the US tax authorities unless dividends have actually been remitted to the
US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed
and collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of
particular foreign jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section
24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to
withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for

the applicability, as a matter of law, of a particular tax rate. Upon the other hand, upon the
determination or recognition of the applicability of the reduced tax rate, there is nothing to prevent the
BIR from issuing implementing regulations that would require P&G Phil., or any Philippine corporation
similarly situated, to certify to the BIR the amount of the "deemed paid" tax credit actually subsequently
granted by the US tax authorities to P&G-USA or a US parent corporation for the taxable year involved.
Since the US tax laws can and do change, such implementing regulations could also provide that
failure of P&G-Phil. to submit such certification within a certain period of time, would result in the
imposition of a deficiency assessment for the twenty (20) percentage points differential. The task of
this Court is to settle which tax rate is applicable, considering the state of US law at a given time. We
should leave details relating to administrative implementation where they properly belong with the
BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that
reason alone, necessarily the correct reading of the statute. There are many tax statutes or provisions
which are designed, not to trigger off an instant surge of revenues, but rather to achieve longer-term
and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to the
legislative design and objectives as they are written into the statute even if, as in the case at bar, some
revenues have to be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-
five percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D.
No. 369 which amended Section 24 (b) (1), NIRC, into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a

developing economy foremost of which is the financing of economic development
programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are

taxed on their earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an

appropriate tax need be imposed on dividends received by non-resident foreign
corporations in the same manner as the tax imposed on interest on foreign loans;

xxx xxx xxx

(Emphasis supplied)

More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment
in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor, however, would not benefit from the
reduction of the Philippine dividend tax rate unless its home country gives it some relief from double
taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax" income
to subject to its own taxing power) by allowing the investor additional tax credits which would be
applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC,
requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at
least equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines,
in the assumption that a positive incentive effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00 Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25 Dividends actually remitted to P&G-USA

P55.25
x 46% Maximum US corporate income tax rate

P25.415US corporate tax payable by P&G-USA
without tax credits

P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)

P15.66 US corporate income tax payable after Section 901
tax credit.

P55.25
- 15.66

P39.59 Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.

P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)

- 0 - US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.

P55.25 Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset
the US corporate income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could
be that P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the dividends
remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this
should encourage additional investment or re-investment in the Philippines by P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes
on Income," 15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%)
of the gross amount of dividends paid to US parent corporations:

Art 11. Dividends

 xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on

dividends derived from sources within that Contracting State by a
resident of the other Contracting State shall not exceed

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount

of the dividend if during the part of the paying corporation's taxable
year which precedes the date of payment of the dividend and during
the whole of its prior taxable year (if any), at least 10 percent of the
outstanding shares of the voting stock of the paying corporation was
owned by the recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the United States
that it "shall allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax]
credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine
[subsidiary] .16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above.
Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is
a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of US law (Section 902) with
the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for
Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court
promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the
Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for
Review for lack of merit. No pronouncement as to costs.

Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.

Separate Opinions

CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, the intention of Section 24 (b) of our Tax Code is to attract foreign investors to this
country by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid
tax credit at least equal in amount to the 20% waived by the Philippines. This tax credit would offset
the tax payable by them on their profits to their home state. In effect, both the Philippines and the
home state of the foreign investors reduce their respective tax "take" of those profits and the investors
wind up with more left in their pockets. Under this arrangement, the total taxes to be paid by the foreign
investors may be confined to the 35% corporate income tax and 15% dividend tax only, both payable
to the Philippines, with the US tax liability being offset wholly or substantially by the US "deemed paid"
tax credits.

Without this arrangement, the foreign investors will have to pay to the local state (in addition to the
35% corporate income tax) a 35% dividend tax and another 35% or more to their home state or a total
of 70% or more on the same amount of dividends. In this circumstance, it is not likely that many such
foreign investors, given the onerous burden of the two-tier system, i.e., local state plus home state,
will be encouraged to do business in the local state.

It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible
by the Republic from the foreign investor is considerably reduced. This may appear unacceptable to
the superficial viewer. But this reduction is in fact the price we have to offer to persuade the foreign
company to invest in our country and contribute to our economic development. The benefit to us may
not be immediately available in instant revenues but it will be realized later, and in greater measure,
in terms of a more stable and robust economy.

BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish
to add some observations of my own, since I happen to be the ponente in Commissioner of Internal
Revenue v. Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that
is diametrically opposite to that sought to be reached in the instant Motion for Reconsideration.

1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner
Commissioner of Internal Revenue to raise before the Court of Tax Appeals the issue of who should
be the real party in interest in claiming a refund cannot prejudice the government, as such failure is
merely a procedural defect; and that moreover, the government can never be in estoppel, especially
in matters involving taxes. In a word, the dissenting opinion insists that errors of its agents should not
jeopardize the government's position.

The above rule should not be taken absolutely and literally; if it were, the government would never
lose any litigation which is clearly not true. The issue involved here is not merely one of procedure; it
is also one of fairness: whether the government should be subject to the same stringent conditions
applicable to an ordinary litigant. As the Court had declared in Wander:

. . . To allow a litigant to assume a different posture when he comes before the court
and challenge the position he had accepted at the administrative level, would be to
sanction a procedure whereby the
Court which is supposed to review administrative determinations would not
review, but determine and decide for the first time, a question not raised at the
administrative forum. . . . (160 SCRA at 566-577)
Had petitioner been forthright earlier and required from private respondent proof of authority from its
parent corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent
would doubtless have been able to show proof of such authority. By any account, it would be rank
injustice not at this stage to require petitioner to submit such proof.

2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to
show the actual amount credited by the US government against the income tax due from P & G USA
on the dividends received from private respondent; (2) to present the 1975 income tax return of P & G
USA when the dividends were received; and (3) to submit any duly authenticated document showing
that the US government credited the 20% tax deemed paid in the Philippines.

I agree with the main opinion of my colleague, Feliciano J., specifically in page 23 et seq. thereof,
which, as I understand it, explains that the US tax authorities are unable to determine the amount of
the "deemed paid" credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends
actually remitted by P & G-Phil. to P & G USA, is still unknown. Stated in other words, until dividends
have actually been remitted to the US (which presupposes an actual imposition and collection of the
applicable Philippine dividend tax rate), the US tax authorities cannot determine the "deemed paid"
portion of the tax credit sought by P & G USA. To require private respondent to show documentary
proof of its parent corporation having actually received the "deemed paid" tax credit from the proper
tax authorities, would be like putting the cart before the horse. The only way of cutting through this
(what Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the
effect that the tax laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in
our tax code for applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be
required to submit, within a reasonable period, proof of the amount of "deemed paid" tax credit actually
granted by the foreign tax authority. Imposing such a resolutory condition should resolve the knotty
problem of circularity.

3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature
of tax exemptions, are to be construed strictissimi juris against the person or entity claiming the
exemption; and that refunds cannot be permitted to exist upon "vague implications."

Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must
ascertain and give effect to the legislative intent embodied in a particular provision of law. If a statute
(including a tax statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be
given its ordinary meaning and applied without interpretation. In the instant case, the dissenting
opinion of Paras, J., itself concedes that the basic purpose of Pres. Decree No. 369, when it was
promulgated in 1975 to amend Section 24(b), [11 of the National Internal Revenue Code, was "to
decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced
dividend tax rate "is premised on reciprocity."

4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would
one find reciprocity specified as a condition for the granting of the reduced dividend tax rate in Section
24 (b), [1], NIRC. Upon the other hand, where the law-making authority intended to impose a
requirement of reciprocity as a condition for grant of a privilege, the legislature does
so expressly and clearly. For example, the gross estate of non-citizens and non-residents of the
Philippines normally includes intangible personal property situated in the Philippines, for purposes of
application of the estate tax and donor's tax. However, under Section 98 of the NIRC (as amended by
P.D. 1457), no taxes will be collected by the Philippines in respect of such intangible personal property
if the law or the foreign country of which the decedent was a citizen and resident at the time of his
death allows a similar exemption from transfer or death taxes in respect of intangible personal property
located in such foreign country and owned by Philippine citizens not residing in that foreign country.
There is no statutory requirement of reciprocity imposed as a condition for grant of the reduced
dividend tax rate of 15% Moreover, for the Court to impose such a requirement of reciprocity would be
to contradict the basic policy underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369
was promulgated in the effort to promote the inflow of foreign investment capital into the Philippines.
A requirement of reciprocity, i.e., a requirement that the U.S. grant a similar reduction of U.S. dividend
taxes on remittances by the U.S. subsidiaries of Philippine corporations, would assume a desire on
the part of the U.S. and of the Philippines to attract the flow of Philippine capital into the U.S.. But the
Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had
surplus capital to export, it would not need to import foreign capital into the Philippines. In other words,
to require dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine
corporations to invest outside the Philippines, which would be inconsistent with the notion of attracting
foreign capital into the Philippines in the first place.

5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:

Wander cited as authority a BIR ruling dated May 19, 1977, which requires a
remittance tax of only 15%. The mere fact that in this Procter and Gamble case, the
BIR desires to charge 35% indicates that the BIR ruling cited in Wander has been
obviously discarded today by the BIR. Clearly, there has been a change of mind on
the part of the BIR.

As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before
the Court of Tax Appeals and this Court, the administrative rulings issued by the BIR from 1976 until
as late as 1987, recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax Code.
To date, no contrary ruling has been issued by the BIR.

For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and
I vote accordingly.

PARAS, J., dissenting:

I dissent.

The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue
vs. Procter & Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on
April 15, 1988 is sought to be reviewed in the Motion for Reconsideration filed by private respondent.
Procter & Gamble Philippines (PMC-Phils., for brevity) assails the Court's findings that:

(a) private respondent (PMC-Phils.) is not a proper party to claim the

refund/tax credit;

(b) there is nothing in Section 902 or other provision of the US Tax

Code that allows a credit against the U.S. tax due from PMC-U.S.A. of
taxes deemed to have been paid in the Phils. equivalent to 20% which
represents the difference between the regular tax of 35% on
corporations and the tax of 15% on dividends;

(c) private respondent failed to meet certain conditions necessary in

order that the dividends received by the non-resident parent company
 in the U.S. may be subject to the preferential 15% tax instead of 35%.
(pp. 200-201, Motion for Reconsideration)

Private respondent's position is based principally on the decision rendered by the Third Division of this
Court in the case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of
Tax Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the same issues
as in the case at bar, but held an apparent contrary view. Private respondent advances the theory that
since the Wander decision had already become final and executory it should be a precedent in
deciding similar issues as in this case at hand.

Yet, it must be noted that the Wander decision had become final and executory only by reason of the
failure of the petitioner therein to file its motion for reconsideration in due time. Petitioner received the
notice of judgment on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or
after the decision had already become final and executory on May 9, 1988. Considering that entry of
final judgment had already been made on May 9, 1988, the Third Division resolved to note without
action the said Motion. Apparently therefore, the merits of the motion for reconsideration were not
passed upon by the Court.

The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or
in Division may be modified or reversed by the court en banc. The case is now before this Court en
banc and the decision that will be handed down will put to rest the present controversy.

It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over
to the Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent company).
However, such fact does not necessarily connote that private respondent is the real party in interest
to claim reimbursement of the tax alleged to have been overpaid. Payment of tax is an obligation
physically passed off by law on the withholding agent, if any, but the act of claiming tax refund is a
right that, in a strict sense, belongs to the taxpayer which is private respondent's parent company. The
role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to insure the
collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMC-
U.S.A.," the non-resident foreign corporation not engaged in trade or business in the Philippines, as
"PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of the gross income received
from "PMC-Phils." in the Philippines "as . . . dividends . . ." (Sec. 24 [b], Phil. Tax Code). Being a mere
withholding agent of the government and the real party in interest being the parent company in the
United States, private respondent cannot claim refund of the alleged overpaid taxes. Such right
properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a series of
cases, the action in the Court of Tax Appeals as well as in this Court should have been brought in the
name of the parent company as petitioner and not in the name of the withholding agent. This is
because the action should be brought under the name of the real party in interest. (See Salonga v.
Warner Barnes, & Co., Ltd., 88 Phil. 125; Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo
The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA 113; Gabutas v. Castellanes, L-17323,
June 23, 1965, 14 SCRA 376; Rep. v. PNB, L-16485, January 30, 1945).

Rule 3, Sec. 2 of the Rules of Court provides:

Sec. 2. Parties in interest. Every action must be prosecuted and defended in the
name of the real party in interest. All persons having an interest in the subject of the
action and in obtaining the relief demanded shall be joined as plaintiffs. All persons
who claim an interest in the controversy or the subject thereof adverse to the plaintiff,
or who are necessary to a complete determination or settlement of the questions
involved therein shall be joined as defendants.
It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no
remittance tax is paid, or if what was paid is less than what is due. From this, Justice Feliciano claims
that in case of an overpayment (or claim for refund) the agent must be given the right to sue the
Commissioner by itself (that is, the agent here is also a real party in interest). He further claims that to
deny this right would be unfair. This is not so. While payment of the tax due is an OBLIGATION of the
agent the obtaining of a refund is a RIGHT. While every obligation has a corresponding right (and vice-
versa), the obligation to pay the complete tax has the corresponding right of the government to demand
the deficiency; and the right of the agent to demand a refund corresponds to the government's duty to
refund. Certainly, the obligation of the withholding agent to pay in full does not correspond to its right to
claim for the refund. It is evident therefore that the real party in interest in this claim for reimbursement
is the principal (the mother corporation) and NOT the agent.

This suit therefore for refund must be DISMSSED.

In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax
Appeals the issue relating to the real party in interest to claim the refund cannot, and should not,
prejudice the government. Such is merely a procedural defect. It is axiomatic that the government can
never be in estoppel, particularly in matters involving taxes. Thus, for example, the payment by the
tax-payer of income taxes, pursuant to a BIR assessment does not preclude the government from
making further assessments. The errors or omissions of certain administrative officers should never
be allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co. v. Coll.
of Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue
v. Ellen Wood McGrath, L-12710, L-12721, Feb. 28, 1961; Perez v. Perez, L-14874, Sept, 30, 1960;
Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27, 1963).

As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States
Foreign Tax Credit equivalent to at least 20 percentage paid portion spared or waived as otherwise
deemed waived by the government, We reiterate our ruling that while apparently, a tax-credit is given,
there is actually nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public
Law-87-834 that would justify tax return of the disputed 15% to the private respondent. This is because
the amount of tax credit purportedly being allowed is not fixed or ascertained, hence we do not know
whether or not the tax credit contemplated is within the limits set forth in the law. While the
mathematical computations in Justice Feliciano's separate opinion appear to be correct, the
computations suffer from a basic defect, that is we have no way of knowing or checking the figure
used as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax credit
was really intended. In the interpretation of tax statutes, it is axiomatic that as between the interest of
multinational corporations and the interest of our own government, it would be far better, in the
absence of definitive guidelines, to favor the national interest. As correctly pointed out by the Solicitor
General:

. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being

considered as if paid by the foreign taxing authority, the host country.

In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend
income of PMC-U.S.A. would be reduced to fifteen (15%) percent if & only
if reciprocally PMC-U.S.A's home country, the United States, not only would
allow against PMC-U.SA.'s U.S. income tax liability a foreign tax credit for the fifteen
(15%) percentage-point portion of the thirty five (35%) percent Phil. dividend tax
actually paid or accrued but also would allow a foreign tax "sparing" credit for the
twenty (20%)' percentage-point portion spared, waived, forgiven or otherwise deemed
as if paid by the Phil. govt. by virtue of the "tax credit sparing" proviso of Sec. 24(b),
Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240).
Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S.
corporate taxpayers, whether directly or indirectly. Nowhere under a statute or under a tax treaty, does
the U.S. government recognize much less permit any foreign tax credit for spared or ghost taxes, as
in reality the U.S. foreign-tax credit mechanism under Sections 901-905 of the U.S. Intemal Revenue
Code does not apply to phantom dividend taxes in the form of dividend taxes waived, spared or
otherwise considered "as if" paid by any foreign taxing authority, including that of the Philippine
government.

Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S.
government against the income tax due from PMC-U.S.A. on the dividends received from private
respondent; (2) to present the income tax return of its parent company for 1975 when the dividends
were received; and (3) to submit any duly authenticated document showing that the U.S. government
credited the 20% tax deemed paid in the Philippines.

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. The burden of proof is upon him who claims the exemption in his favor and he must be
able to justify his claim by the clearest grant of organic or statute law . . . and cannot be permitted to
exist upon vague implications. (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil Tobacco
Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias
Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v.
Commissioner of Custom, 44 SCRA 122). Thus, when tax exemption is claimed, it must be shown
indubitably to exist, for every presumption is against it, and a well founded doubt is fatal to the claim
(Farrington v. Tennessee & Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L-29987,
Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).

It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here
in the Philippines was amplified in Presidential Decree No. 369 promulgated in 1975, the purpose of
which was to "encourage more capital investment for large projects." And its ultimate purpose is to
decrease the tax liability of the corporation concerned. But this granting of a preferential right is
premised on reciprocity, without which there is clearly a derogation of our country's financial
sovereignty. No such reciprocity has been proved, nor does it actually exist. At this juncture, it would
be useful to bear in mind the following observations:

The continuing and ever-increasing transnational movement of goods and services, the emergence of
multinational corporations and the rise in foreign investments has brought about tremendous
pressures on the tax system to strengthen its competence and capability to deal effectively with issues
arising from the foregoing phenomena.

International taxation refers to the operationalization of the tax system on an international level. As it
is, international taxation deals with the tax treatment of goods and services transferred on a global
basis, multinational corporations and foreign investments.

Since the guiding philosophy behind international trade is free flow of goods and services, it goes
without saying that the principal objective of international taxation is to see through this ideal by way
of feasible taxation arrangements which recognize each country's sovereignty in the matter of taxation,
the need for revenue and the attainment of certain policy objectives.

The institution of feasible taxation arrangements, however, is hard to come by. To begin with,
international tax subjects are obviously more complicated than their domestic counter-parts. Hence,
the devise of taxation arrangements to deal with such complications requires a welter of information
and data build-up which generally are not readily obtainable and available. Also, caution must be
exercised so that whatever taxation arrangements are set up, the same do not get in the way of free
flow of goods and services, exchange of technology, movement of capital and investment initiatives.

A cardinal principle adhered to in international taxation is the avoidance of double taxation. The
phenomenon of double taxation (i.e., taxing an item more than once) arises because of global
movement of goods and services. Double taxation also occurs because of overlaps in tax jurisdictions
resulting in the taxation of taxable items by the country of source or location (source or situs rule) and
the taxation of the same items by the country of residence or nationality of the
taxpayer (domiciliary or nationality principle).

An item may, therefore, be taxed in full in the country of source because it originated there, and in
another country because the recipient is a resident or citizen of that country. If the taxes in both
countries are substantial and no tax relief is offered, the resulting double taxation would serve as a
discouragement to the activity that gives rise to the taxable item.

As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral convention (but may
be made multilateral) entered into between sovereign states for purposes of eliminating double taxation on income and capital, preventing
fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign residents or nationals. 2

A more general way of mitigating the impact of double taxation is to recognize the foreign tax either
as a tax credit or an item of deduction.

Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings
that would be derived therefrom.

A principal defect of the tax credit system is when low tax rates or special tax concessions are granted
in a country for the obvious reason of encouraging foreign investments. For instance, if the usual tax
rate is 35 percent but a concession rate accrues to the country of the investor rather than to the investor
himself To obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted
or reduced are considered as having been fully paid.

To illustrate:

"X" Foreign Corporation income 100

Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15

1. "X" Foreign Corp. Tax Liability without Tax Sparing

"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55

2. "X" Foreign Corp. Tax Liability with Tax Sparing

"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
 Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35

By way of resume, We may say that the Wander decision of the Third Division cannot, and should not
result in the reversal of the Procter & Gamble decision for the following reasons:

1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was
promulgated on the same day the decision of the Second Division was promulgated, and while Wander
has attained finality this is simply because no motion for reconsideration thereof was filed within a
reasonable period. Thus, said Motion for Reconsideration was theoretically never taken into account
by said Third Division.

2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino
Padilla aptly said: "More pregnant than anything else is that the court shall be right." We hereby cite
settled doctrines from a treatise on Civil Law:

We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta
movere) for reasons of stability in the law. The doctrine, which is really "adherence to
precedents," states that once a case has been decided one way, then another case,
involving exactly the same point at issue, should be decided in the same manner.

Of course, when a case has been decided erroneously such an error must not be
perpetuated by blind obedience to the doctrine of stare decisis. No matter how sound
a doctrine may be, and no matter how long it has been followed thru the years, still if
found to be contrary to law, it must be abandoned. The principle of stare decisis does
not and should not apply when there is a conflict between the precedent and the law
(Tan Chong v. Sec. of Labor, 79 Phil. 249).

While stability in the law is eminently to be desired, idolatrous reverence for precedent,
simply, as precedent, no longer rules. More pregnant than anything else is that the
court shall be right (Phil. Trust Co. v. Mitchell, 59 Phil. 30).

3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we
have a pending tax treaty; our Procter & Gamble case deals with relations between the Philippines
and the United States, a country with which we had no tax treaty, at the time the taxes herein were
collected.

4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only
15%. The mere fact that in this Procter and Gamble case the B.I.R. desires to charge 35% indicates
that the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there
has been a change of mind on the part of the B.I.R.

5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland
exists. It is evident that without reciprocity the desired consequences of the tax credit under P.D. No.
369 would be rendered unattainable.

6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have
not been presented, and therefore even were we inclined to grant the tax credit claimed, we find
ourselves unable to compute the proper amount thereof.
7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the
proper party to bring up the case.

ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for
reconsideration of our own decision should be DENIED.

Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.

# Separate Opinions

CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.

As I understand it, the intention of Section 24(b) of our Tax Code is to attract foreign investors to this
country by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid
tax credit at least equal in amount to the 20% waived by the Philippines. This tax credit would offset
the tax payable by them on their profits to their home state. In effect, both the Philippines and the
home state of the foreign investors reduce their respective tax "take" of those profits and the investors
wind up with more left in their pockets. Under this arrangement, the total taxes to be paid by the foreign
investors may be confined to the 35% corporate income tax and 15% dividend tax only, both payable
to the Philippines, with the US tax hability being offset wholly or substantially by the Us "deemed paid'
tax credits.

Without this arrangement, the foreign investors will have to pay to the local state (in addition to the
35% corporate income tax) a 35% dividend tax and another 35% or more to their home state or a total
of 70% or more on the same amount of dividends. In this circumstance, it is not likely that many such
foreign investors, given the onerous burden of the two-tier system, i.e., local state plus home state,
will be encouraged to do business in the local state.

It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible
by the Republic from the foreign investor is considerably reduced. This may appear unacceptable to
the superficial viewer. But this reduction is in fact the price we have to offer to persuade the foreign
company to invest in our country and contribute to our economic development. The benefit to us may
not be immediately available in instant revenues but it will be realized later, and in greater measure,
in terms of a more stable and robust economy.

BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish
to add some observations of my own, since I happen to be the ponente in Commissioner of Internal
Revenue v. Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that
is diametrically opposite to that sought to be reached in the instant Motion for Reconsideration.
1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner
Commissioner of Internal Revenue to raise before the Court of Tax Appeals the issue of who should
be the real party in interest in claiming a refund cannot prejudice the government, as such failure is
merely a procedural defect; and that moreover, the government can never in estoppel, especially in
matters involving taxes. In a word, the dissenting opinion insists that errors of its agents should not
jeopardize the government's position.

The above rule should not be taken absolutely and literally; if it were, the government would never
lose any litigation which is clearly not true. The issue involved here is not merely one of procedure; it
is also one of fairness: whether the government should be subject to the same stringent conditions
applicable to an ordinary litigant. As the Court had declared in Wander:

. . . To allow a litigant to assume a different posture when he comes before the court
and challenge the position he had accepted at the administrative level, would be to
sanction a procedure whereby the Court which is supposed to review administrative
determinations would not review, but determine and decide for the first time, a
question not raised at the administrative forum. ... (160 SCRA at 566-577)

Had petitioner been forthright earlier and required from private respondent proof of authority from its
parent corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent
would doubtless have been able to show proof of such authority. By any account, it would be rank
injustice not at this stage to require petitioner to submit such proof.

2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to
show the actual amount credited by the US government against the income tax due from P & G USA
on the dividends received from private respondent; (2) to present the 1975 income tax return of P & G
USA when the dividends were received; and (3) to submit any duly authenticated document showing
that the US government credited the 20% tax deemed paid in the Philippines.

I agree with the main opinion of my colleagues, Feliciano J., specifically in page 23 et seq. thereof,
which, as I understand it, explains that the US tax authorities are unable to determine the amount of
the "deemed paid" credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends
actually remitted by P & G-Phil. to P & G USA, is still unknown. Stated in other words, until dividends
have actually been remitted to the US (which presupposes an actual imposition and collection of the
applicable Philippine dividend tax rate), the US tax authorities cannot determine the "deemed paid"
portion of the tax credit sought by P & G USA. To require private respondent to show documentary
proof of its parent corporation having actually received the "deemed paid" tax credit from the proper
tax authorities, would be like putting the cart before the horse. The only way of cutting through this
(what Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the
effect that the tax laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in
our tax code for applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be
required to submit, within a reasonable period, proof of the amount of "deemed paid" tax credit actually
granted by the foreign tax authority. Imposing such a resolutory condition should resolve the knotty
problem of circularity.

3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature
of tax exemptions, are to be construed strictissimi juris against the person or entity claiming the
exemption; and that refunds cannot be permitted to exist upon "vague implications."

Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must
ascertain and give effect to the legislative intent embodied in a particular provision of law. If a statute
(including a tax statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be
given its ordinary meaning and applied without interpretation. In the instant case, the dissenting
opinion of Paras, J., itself concedes that the basic purpose of Pres. Decree No. 369, when it was
promulgated in 1975 to amend Section 24(b), [11 of the National Internal Revenue Code, was "to
decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced
dividend tax rate "is premised on reciprocity."

4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would
one find reciprocity specified as a condition for the granting of the reduced dividend tax rate in Section
24 (b), [1], NIRC. Upon the other hand. where the law-making authority intended to impose a
requirement of reciprocity as a condition for grant of a privilege, the legislature does
so expressly and clearly. For example, the gross estate of non-citizens and non-residents of the
Philippines normally includes intangible personal property situated in the Philippines, for purposes of
application of the estate tax and donor's tax. However, under Section 98 of the NIRC (as amended by
P.D. 1457), no taxes will be collected by the Philippines in respect of such intangible personal property
if the law or the foreign country of which the decedent was a citizen and resident at the time of his
death allows a similar exemption from transfer or death taxes in respect of intangible personal property
located in such foreign country and owned by Philippine citizens not residing in that foreign country.

There is no statutory requirement of reciprocity imposed as condition for grant of the reduced dividend
tax rate of 15% Moreover, for the Court to impose such a requirement of reciprocity would be to
contradict the basic policy underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was
promulgated in the effort to promote the inflow of foreign investment capital into the Philippines. A
requirement of reciprocity, i.e., a requirement that the U.S. grant a similar reduction of U.S. dividend
taxes on remittances by the U.S. subsidiary of Philippine corporations, would assume a desire on the
part of the U.S. and of the Philippines to attract the flow of Philippine capital into the U.S.. But the
Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had
surplus capital to export, it would not need to import foreign capital into the Philippines. In other words,
to require dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine
corporations to invest outside the Philippines, which would be inconsistent with the notion of attracting
foreign capital into the Philippines in the first place.

5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:

Wander cited as authority a BIR ruling dated May 19, 1977, which requires a
remittance tax of only 15%. The mere fact that in this Procter and Gamble case, the
BIR desires to charge 35% indicates that the BIR ruling cited in Wander has been
obviously discarded today by the BIR. Clearly, there has been a change of mind on
the part of the BIR.

As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before
the Court of Tax Appeals and this Court, the administrative rulings issued by the BIR from 1976 until
as late as 1987, recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax Code.
To date, no contrary ruling has been issued by the BIR.

For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and
I vote accordingly.

PARAS, J., dissenting:

I dissent.

The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue
vs. Procter & Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on
April 15,1988 is sought to be reviewed in the Motion for Reconsideration filed by private respondent.
Procter & Gamble Philippines (PMC-Phils., for brevity) assails the Court's findings that:

(a) private respondent (PMC-Phils.) is not a proper party to claim the

refund/tax aredit;

(b) there is nothing in Section 902 or other provision of the US Tax

Code that allows a credit against the U.S. tax due from PMC-U.S.A. of
taxes deemed to have been paid in the Phils. equivalent to 20% which
represents the difference between the regular tax of 35% on
corporations and the tax of 15% on dividends;

(c) private respondent failed to meet certain conditions necessary in

order that the dividends received by the non-resident parent company
in the U.S. may be subject to the preferential 15% tax instead of 35%.
(pp, 200-201, Motion for Reconsideration)

Private respondent's position is based principally on the decision rendered by the Third Division of this
Court in the case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of
Tax Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the same issues
as in the case at bar, but held an apparent contrary view. Private respondent advances the theory that
since the Wander decision had already become final and executory it should be a precedent in
deciding similar issues as in this case at hand.

Yet, it must be noted that the Wander decision had become final and executory only by reason of the
failure of the petitioner therein to file its motion for reconsideration in due time. Petitioner received the
notice of judgment on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or
after the decision had already become final and executory on May 9, 1988. Considering that entry of
final judgment had already been made on May 9, 1988, the Third Division resolved to note without
action the said Motion. Apparently therefore, the merits of the motion for reconsideration were not
passed upon by the Court.

The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc
or in Division may be modified or reversed by the court en banc. The case is now before this Court en
banc and the decision that will be handed down will put to rest the present controversy.

It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over
to the Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent company).
However, such fact does not necessarily connote that private respondent is the real party in interest
to claim reimbursement of the tax alleged to have been overpaid. Payment of tax is an obligation
physically passed off by law on the withholding agent, if any, but the act of claiming tax refund is a
right that, in a strict sense, belongs to the taxpayer which is private respondent's parent company. The
role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to insure the
collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMC-
U.S.A.," the non-resident foreign corporation not engaged in trade or business in the Philippines, as
"PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of the gross income received
from "PMC-Phils." in the Philippines "as ... dividends ..."(Sec. 24[b],Phil. Tax Code). Being a mere
withholding agent of the government and the real party in interest being the parent company in the
United States, private respondent cannot claim refund of the alleged overpaid taxes. Such right
properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a series of
cases, the action in the Court of Tax Appeals as well as in this Court should have been brought in the
name of the parent company as petitioner and not in the name of the withholding agent. This is
because the action should be brought under the name of the real party in interest. (See Salonga v.
Warner Barnes, & Co., Ltd., 88 Phil. 125; Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo
The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA 113; Gabutas v. Castellanes, L-17323,
June 23, 1965, 14 SCRA 376; Rep. v. PNB, I, 16485, January 30, 1945).

Rule 3, Sec. 2 of the Rules of Court provides:

Sec. 2. Parties in interest. Every action must be prosecuted and defended in the
name of the real party in interest. All persons having an interest in the subject of the
action and in obtaining the relief demanded shall be joined as plaintiffs. All persons
who claim an interest in the controversy or the subject thereof adverse to the plaintiff,
or who are necessary to a complete determination or settlement of the questions
involved therein shall be joined as defendants.

It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no
remittance tax is paid, or if what was paid is less than what is due. From this, Justice Feliciano claims
that in case of an overpayment (or claim for refund) the agent must be given the right to sue the
Commissioner by itself (that is, the agent here is also a real party in interest). He further claims that to
deny this right would be unfair. This is not so. While payment of the tax due is an OBLIGATION of the
agent, the obtaining of a refund la a RIGHT. While every obligation has a corresponding right
(and vice-versa), the obligation to pay the complete tax has the corresponding right of the government
to demand the deficiency; and the right of the agent to demand a refund corresponds to the
government's duty to refund. Certainly, the obligation of the withholding agent to pay in full does not
correspond to its right to claim for the refund. It is evident therefore that the real party in interest in this
claim for reimbursement is the principal (the mother corporation) and NOT the agent.

This suit therefore for refund must be DISMSSED.

In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax
Appeals the issue relating to the real party in interest to claim the refund cannot, and should not,
prejudice the government. Such is merely a procedural defect. It is axiomatic that the government can
never be in estoppel, particularly in matters involving taxes. Thus, for example, the payment by the
tax-payer of income taxes, pursuant to a BIR assessment does not preclude the government from
making further assessments. The errors or omissions of certain administrative officers should never
be allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co. v.
Con. of Internal Revenue, 9(, Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal
Revenue v. Ellen Wood McGrath, L-12710, L-12721, Feb. 28,1961; Perez v. Perez, L-14874, Sept.
30,1960; Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb.
27,1963).

As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States
Foreign Tax Credit equivalent to at least 20 percentage paid portion spared or waived as otherwise
deemed waived by the government, We reiterate our ruling that while apparently, a tax-credit is given,
there is actually nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public
Law-87-834 that would justify tax return of the disputed 15% to the private respondent. This is because
the amount of tax credit purportedly being allowed is not fixed or ascertained, hence we do not know
whether or not the tax credit contemplated is within the limits set forth in the law. While the
mathematical computations in Justice Feliciano's separate opinion appear to be correct, the
computations suffer from a basic defect, that is we have no way of knowing or checking the figure
used as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax credit
was really intended. In the interpretation of tax statutes, it is axiomatic that as between the interest of
multinational corporations and the interest of our own government, it would be far better, in the
absence of definitive guidelines, to favor the national interest. As correctly pointed out by the Solicitor
General:

. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being

considered as if paid by the foreign taxing authority, the host country.

In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend
income of PMC-U.S.A. would be reduced to fifteen (15%) percent if & only
if reciprocally PMC-U.S.A's home country, the United States, not only would
allow against PMC-U.SA.'s U.S. income tax liability a foreign tax credit for the fifteen
(15%) percentage-point portion of the thirty five (35%) percent Phil. dividend tax
actually paid or accrued but also would allow a foreign tax 'sparing' credit for the twenty
(20%)' percentage-point portion spared, waived, forgiven or otherwise deemed as if
paid by the Phil. govt. by virtue of . he "tax credit sparing" proviso of Sec. 24(b), Phil.
Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240).

Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S.
corporate taxpayers, whether directly or indirectly. Nowhere under a statute or under a tax treaty, does
the U.S. government recognize much less permit any foreign tax credit for spared or ghost taxes, as
in reality the U.S. foreign-tax credit mechanism under Sections 901-905 of the U.S. Internal Revenue
Code does not apply to phantom dividend taxes in the form of dividend taxes waived, spared or
otherwise considered "as if' paid by any foreign taxing authority, including that of the Philippine
government.

Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S.
government against the income tax due from PMC-U.S.A. on the dividends received from private
respondent; (2) to present the income tax return of its parent company for 1975 when the dividends
were received; and (3) to submit any duly authenticated document showing that the U.S. government
credited the 20% tax deemed paid in the Philippines.

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. The burden of proof is upon him who claims the exemption in his favor and he must be
able to justify, his claim by the clearest grant of organic or statute law... and cannot be permitted to
exist upon vague implications (Asiatic Petroleum Co. v. Llanes. 49 Phil. 466; Northern Phil Tobacco
Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias
Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v.
Commissioner of Custom, 44 SCRA 122' Thus, when tax exemption is claimed. it must be shown
indubitably to exist, for every presumption is against it, and a well founded doubt is fatal to the claim
(Farrington v. Tennessee & Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera. L-29987.
Oct. 22. 1975: Manila Electric Co. v. Vera, L-29987, Oct. 22, 1975; Manila Electric Co. v. Tabios, L-
23847, Oct. 22, 1975, 67 SCRA 451).

It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here
in the Philippines was amplified in Presidential Decree 4 No. 369 promulgated in 1975, the purpose of
which was to "encourage more capital investment for large projects." And its ultimate purpose it to
decrease the tax liability of the corporation concerned. But this granting of a preferential right is
premised on reciprocity, without which there is clearly a derogation of our country's financial
sovereignty. No such reciprocity has been proved, nor does it actually exist. At this juncture, it would
be useful to bear in mind the following observations:

The continuing and ever-increasing transnational movement of goods and services, the emergence of
multinational corporations and the rise in foreign investments has brought about tremendous
pressures on the tax system to strengthen its competence and capability to deal effectively with issues
arising from the foregoing phenomena.

International taxation refers to the operationalization of the tax system on an international level. As it
is, international taxation deals with the tax treatment of goods and services transferred on a global
basis, multinational corporations and foreign investments.

Since the guiding philosophy behind international trade is free flow of goods and services, it goes
without saying that the principal objective of international taxation is to see through this ideal by way
of feasible taxation arrangements which recognize each country's sovereignty in the matter of taxation,
the need for revenue and the attainment of certain policy objectives.

The institution of feasible taxation arrangements, however, is hard to come by. To begin with,
international tax subjects are obviously more complicated than their domestic counter-parts. Hence,
the devise of taxation arrangements to deal with such complications requires a welter of information
and data buildup which generally are not readily obtainable and available. Also, caution must be
exercised so that whatever taxation arrangements are set up, the same do not get in the way of free
flow of goods and services, exchange of technology, movement of capital and investment initiatives.

A cardinal principle adhered to in international taxation is the avoidance of double taxation. The
phenomenon of double taxation (i.e., taxing an item more than once) arises because of global
movement of goods and services. Double taxation also occurs because of overlaps in tax jurisdictions
resulting in the taxation of taxable items by the country of source or location (source or situs rule) and
the taxation of the same items by the country of residence or nationality of the
taxpayer (domiciliary or nationality principle).

An item may, therefore, be taxed in full in the country of source because it originated there, and in
another country because the recipient is a resident or citizen of that country. If the taxes in both
countries are substantial and no tax relief is offered, the resulting double taxation would serve as a
discouragement to the activity that gives rise to the taxable item.

As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral convention (but may
be made multilateral) entered into between sovereign states for purposes of eliminating double taxation on income and capital, preventing
fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign residents or nationals. 2

A more general way of mitigating the impact of double taxation is to recognize the foreign tax either
as a tax credit or an item of deduction.

Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings
that would be derived therefrom.

A principal defect of the tax credit system is when low tax rates or special tax concessions are granted
in a country for the obvious reason of encouraging foreign investments. For instance, if the usual tax
rate is 35 percent but a concession rate accrues to the country of the investor rather than to the investor
himself To obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted
or reduced are considered as having been frilly paid.
To illustrate:

"X" Foreign Corporation income 100

Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15

1. "X" Foreign Corp. Tax Liability without Tax Sparing

"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55

2. "X" Foreign Corp. Tax Liability with Tax Sparing

"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35

By way of resume, We may say that the Wander decision of the Third Division cannot, and should not
result in the reversal of the Procter & Gamble decision for the following reasons:

1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was
promulgated on the same day the decision of the Second Division was promulgated, and while Wander
has attained finality this is simply because no motion for reconsideration thereof was filed within a
reasonable period. Thus, said Motion for Reconsideration was theoretically never taken into account
by said Third Division.

2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino
Padilla aptly said: "More pregnant than anything else is that the court shall be right." We hereby cite
settled doctrines from a treatise on Civil Law:

We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta
movere) for reasons of stability in the law. The doctrine, which is really 'adherence to
precedents,' states that once a case has been decided one way, then another case,
involving exactly the same point at issue, should be decided in the same manner.

Of course, when a case has been decided erroneously such an error must not be
perpetuated by blind obedience to the doctrine of stare decisis. No matter how sound
a doctrine may be, and no matter how long it has been followed thru the years, still if
found to be contrary to law, it must be abandoned. The principle of stare decisis does
not and should not apply when there is a conflict between the precedent and the law
(Tan Chong v. Sec. of Labor, 79 Phil. 249).
 While stability in the law is eminently to be desired, idolatrous reverence for precedent,
simply, as precedent, no longer rules. More pregnant than anything else is that the
court shall be right (Phil. Trust Co. v. Mitchell, 69 Phil. 30).

3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we
have a pending tax treaty; our Procter & Gamble case deals with relations between the Philippines
and the United States, a country with which we had no tax treaty, at the time the taxes herein were
collected.

4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only
15%. The mere fact that in this Procter and Gamble case the B.I.R. desires; to charge 35% indicates
that the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there
has been a change of mind on the part of the B.I.R.

5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland
exists. It is evident that without reciprocity the desired consequences of the tax credit under P.D. No.
369 would be rendered unattainable.

6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have
not been presented, and therefore even were we inclined to grant the tax credit claimed, we find
ourselves unable to compute the proper amount thereof.

7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the
proper party to bring up the case.

ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for
reconsideration of our own decision should be DENIED.

Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.

COMMISSIONER OF INTERNAL G.R. No. 180066

REVENUE,
Petitioner,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
CHICO-NAZARIO,
- versus - VELASCO, JR.,
NACHURA, and
PERALTA, JJ.
 PHILIPPINE AIRLINES, INC., Promulgated:
Respondent.
_____________________

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari, under Rule 45 of the Revised
Rules of Court, seeking the reversal and setting aside of the Decision[1]dated 9
August 2007 and Resolution[2] dated 11 October 2007 of the Court of Tax Appeals
(CTA) en banc in CTA E.B. No. 246. The CTA en banc affirmed the Decision[3] dated
31 July 2006 of the CTA Second Division in C.T.A. Case No. 7010, ordering the
cancellation and withdrawal of Preliminary Assessment Notice (PAN) No. INC FY-3-
31-01-000094 dated 3 September 2003 and Formal Letter of Demand dated 12
January 2004, issued by the Bureau of Internal Revenue (BIR) against respondent
Philippine Airlines, Inc. (PAL), for the payment of Minimum Corporate Income Tax
(MCIT) in the amount of P272,421,886.58.
There is no dispute as to the antecedent facts of this case.

PAL is a domestic corporation organized under the corporate laws of the Republic
of the Philippines; declared the national flag carrier of the country; and the grantee
under Presidential Decree No. 1590[4] of a franchise to establish, operate, and
maintain transport services for the carriage of passengers, mail, and property by
air, in and between any and all points and places throughout the Philippines, and
between the Philippines and other countries.[5]

For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL allegedly incurred zero
taxable income,[6] which left it with unapplied creditable withholding tax[7] in the
amount of P2,334,377.95. PAL did not pay any MCIT for the period.

In a letter dated 12 July 2002, addressed to petitioner Commissioner of Internal

Revenue (CIR), PAL requested for the refund of its unapplied creditable withholding
tax for FY 2000-2001. PAL attached to its letter the following: (1) Schedule of
Creditable Tax Withheld at Source for FY 2000-2001; (2) Certificates of Creditable
Taxes Withheld; and (3) Audited Financial Statements.

Acting on the aforementioned letter of PAL, the Large Taxpayers Audit and
Investigation Division 1 (LTAID 1) of the BIR Large Taxpayers Service (LTS), issued
on 16 August 2002, Tax Verification Notice No. 00201448, authorizing Revenue
Officer Jacinto Cueto, Jr. (Cueto) to verify the supporting documents and pertinent
records relative to the claim of PAL for refund of its unapplied creditable
withholding tax for FY 2000-20001. In a letter dated 19 August 2003, LTAID 1 Chief
Armit S. Linsangan invited PAL to an informal conference at the BIR National Office
in Diliman, Quezon City, on 27 August 2003, at 10:00 a.m., to discuss the results of
the investigation conducted by Revenue Officer Cueto, supervised by Revenue
Officer Madelyn T. Sacluti.
 BIR officers and PAL representatives attended the scheduled informal
conference, during which the former relayed to the latter that the BIR was denying
the claim for refund of PAL and, instead, was assessing PAL for deficiency MCIT for
FY 2000-2001. The PAL representatives argued that PAL was not liable for MCIT
under its franchise. The BIR officers then informed the PAL representatives that the
matter would be referred to the BIR Legal Service for opinion.

The LTAID 1 issued, on 3 September 2003, PAN No. INC FY-3-31-01-000094,

which was received by PAL on 23 October 2003. LTAID 1 assessed PAL
for P262,474,732.54, representing deficiency MCIT for FY 2000-2001, plus interest
and compromise penalty, computed as follows:

Sales/Revenues from Operation P 38,798,721,685.00

Less: Cost of Services 30,316,679,013.00

Gross Income from Operation 8,482,042,672.00

Add: Non-operating income 465,111,368.00

Total Gross Income for MCIT purposes 9,947,154,040.00[8]

Rate of Tax 2%

Tax Due 178,943,080.80

Add: 20% interest (8-16-00 to 10-31-03) 83,506,651.74

Compromise Penalty 25,000.00

Total Amount Due P 262,474,732.54[9]

PAL protested PAN No. INC FY-3-31-01-000094 through a letter dated 4 November
2003 to the BIR LTS.

On 12 January 2004, the LTAID 1 sent PAL a Formal Letter of Demand for deficiency
MCIT for FY 2000-2001 in the amount of P271,421,88658, based on the following
calculation:
 Sales/Revenues from Operation P 38,798,721,685.00

Less: Cost of Services

Direct Costs - P 30,749,761,017.00

Less: Non-deductible

interest expense 433,082,004.00 30,316,679,013.00

Gross Income from Operation P 8,482,042,672.00

Add: Non-operating Income 465,111,368.00

Total Gross Income for MCIT purposes P 9,947,154,040.00

MCIT tax due P 178,943,080.80

Interest 20% per annum 7/16/01 to 02/15/04 92,453,805.78

Compromise Penalty 25,000.00

Total MCIT due and demandable P 271,421,886.58[10]

PAL received the foregoing Formal Letter of Demand on 12 February 2004,

prompting it to file with the BIR LTS a formal written protest dated 13 February
2004.

The BIR LTS rendered on 7 May 2004 its Final Decision on Disputed
Assessment, which was received by PAL on 26 May 2004. Invoking Revenue
Memorandum Circular (RMC) No. 66-2003, the BIR LTS denied with finality the
protest of PAL and reiterated the request that PAL immediately pay its deficiency
MCIT for FY 2000-2001, inclusive of penalties incident to delinquency.

PAL filed a Petition for Review with the CTA, which was docketed as C.T.A. Case No.
7010 and raffled to the CTA Second Division. The CTA Second Division promulgated
its Decision on 31 July 2006, ruling in favor of PAL. The dispositive portion of the
judgment of the CTA Second Division reads:
 WHEREFORE, premises considered, the instant Petition for Review
is hereby GRANTED. Accordingly, Assessment Notice No. INC FY-3-31-01-
000094 and Formal Letter of Demand for the payment of deficiency
Minimum Corporate Income Tax in the amount of P272,421,886.58 are
hereby CANCELLED and WITHDRAWN.[11]

In a Resolution dated 2 January 2007, the CTA Second Division denied the
Motion for Reconsideration of the CIR.
It was then the turn of the CIR to file a Petition for Review with the CTA en banc,
docketed as C.T.A. E.B. No. 246. The CTA en banc found that the cited legal
provisions and jurisprudence are teeming with life with respect to the grant of tax
exemption too vivid to pass unnoticed, and that the Court in Division correctly ruled
in favor of the respondent [PAL] granting its petition for the cancellation of
Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of Demand for
the deficiency MCIT in the amount of P272,421,886.58.[12] Consequently, the
CTA en banc denied the Petition of the CIR for lack of merit. The CTA en
banc likewise denied the Motion for Reconsideration of the CIR in a Resolution
dated 11 October 2007.

Hence, the CIR comes before this Court via the instant Petition for Review
on Certiorari, based on the grounds stated hereunder:

THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW IN ITS

ASSAILED DECISION BECAUSE:

(1) [PAL] CLEARLY OPTED TO BE COVERED BY THE INCOME TAX

PROVISION OF THE NATIONAL INTERNAL REVENUE CODE OF 1997 (NIRC
OF 1997). (sic) AS AMENDED; HENCE, IT IS COVERED BY THE MCIT
PROVISION OF THE SAME CODE.
 (2) THE MCIT DOES NOT BELONG TO THE CATEGORY OF OTHER TAXES
WHICH WOULD ENABLE RESPONDENT TO AVAIL ITSELF OF THE IN LIEU
(sic) OF ALL OTHER TAXES CLAUSE UNDER SECTION 13 OF P.D. NO. 1590
(CHARTER).

(3) THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT AN AMENDMENT

OF [PALS] CHARTER.

(4) PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE BETWEEN WHAT
WILL GIVE IT THE BENEFIT OF A LOWER TAX, BUT ALSO THE
RESPONSIBILITY OF PAYING ITS SHARE OF THE TAX BURDEN, AS IS
EVIDENT IN SECTION 22 OF RA NO. 9337.

(5) A CLAIM FOR EXEMPTION FROM TAXATION IS NEVER PRESUMED;

[PAL] IS LIABLE FOR THE DEFICIENCY MCIT.[13]

There is only one vital issue that the Court must resolve in the Petition at bar, i.e.,
whether PAL is liable for deficiency MCIT for FY 2000-2001.

The Court answers in the negative.

Presidential Decree No. 1590, the franchise of PAL, contains provisions specifically
governing the taxation of said corporation, to wit:

Section 13. In consideration of the franchise and rights hereby

granted, the grantee shall pay to the Philippine Government during the life
of this franchise whichever of subsections (a) and (b) hereunder will
result in a lower tax:
(a) The basic corporate income tax based on the grantee's
annual net taxable income computed in accordance with the provisions
of the National Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues
derived by the grantee from all sources, without distinction as to transport
or nontransport operations; provided, that with respect to international air-
transport service, only the gross passenger, mail, and freight revenues
from its outgoing flights shall be subject to this tax.
The tax paid by the grantee under either of the above alternatives
shall be 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, including but not limited to the following:
1. All taxes, duties, charges, royalties, or fees due on local
purchases by the grantee of aviation gas, fuel, and oil, whether refined or
in crude form, and whether such taxes, duties, charges, royalties, or fees
are directly due from or imposable upon the purchaser or the seller,
producer, manufacturer, or importer of said petroleum products but are
billed or passed on to the grantee either as part of the price or cost thereof
or by mutual agreement or other arrangement; provided, that all such
purchases by, sales or deliveries of aviation gas, fuel, and oil to the grantee
shall be for exclusive use in its transport and nontransport operations and
other activities incidental thereto;
2. All taxes, including compensating taxes, duties, charges,
royalties, or fees due on all importations by the grantee of aircraft, engines,
equipment, machinery, spare parts, accessories, commissary and catering
supplies, aviation gas, fuel, and oil, whether refined or in crude form and
other articles, supplies, or materials; provided, that such articles or
supplies or materials are imported for the use of the grantee in its transport
and nontransport operations and other activities incidental thereto and are
not locally available in reasonable quantity, quality, or price;
3. All taxes on lease rentals, interest, fees, and other charges
payable to lessors, whether foreign or domestic, of aircraft, engines,
equipment, machinery, spare parts, and other property rented, leased, or
chartered by the grantee where the payment of such taxes is assumed by
the grantee;
 4. All taxes on interest, fees, and other charges on foreign loans
obtained and other obligations incurred by the grantee where the payment
of such taxes is assumed by the grantee;
5. All taxes, fees, and other charges on the registration, licensing,
acquisition, and transfer of aircraft, equipment, motor vehicles, and all
other personal and real property of the grantee; and
6. The corporate development tax under Presidential Decree No.
1158-A.
The grantee, shall, however, pay the tax on its real property in
conformity with existing law.
For purposes of computing the basic corporate income tax as
provided herein, the grantee is authorized:

(a) To depreciate its assets to the extent of not more than twice as
fast the normal rate of depreciation; and

(b) To carry over as a deduction from taxable income any net

loss incurred in any year up to five years following the year of such loss.

Section 14. The grantee shall pay either the franchise tax or the
basic corporate income tax on quarterly basis to the Commissioner of
Internal Revenue. Within sixty (60) days after the end of each of the first
three quarters of the taxable calendar or fiscal year, the quarterly franchise
or income-tax return shall be filed and payment of either the franchise or
income tax shall be made by the grantee.

A final or an adjustment return covering the operation of the grantee

for the preceding calendar or fiscal year shall be filed on or before the
fifteenth day of the fourth month following the close of the calendar or
fiscal year. The amount of the final franchise or income tax to be paid by
the grantee shall be the balance of the total franchise or income tax shown
in the final or adjustment return after deducting therefrom the total
quarterly franchise or income taxes already paid during the preceding first
three quarters of the same taxable year.
Any excess of the total quarterly payments over the actual annual
franchise of income tax due as shown in the final or adjustment franchise
or income-tax return shall either be refunded to the grantee or credited
against the grantee's quarterly franchise or income-tax liability for the
succeeding taxable year or years at the option of the grantee.
 The term "gross revenues" is herein defined as the total gross
income earned by the grantee from; (a) transport, nontransport, and other
services; (b) earnings realized from investments in money-market
placements, bank deposits, investments in shares of stock and other
securities, and other investments; (c) total gains net of total losses realized
from the disposition of assets and foreign-exchange transactions; and (d)
gross income from other sources. (Emphases ours.)

According to the afore-quoted provisions, the taxation of PAL, during the lifetime
of its franchise, shall be governed by two fundamental rules, particularly: (1) PAL
shall pay the Government either basic corporate income tax or franchise tax,
whichever is lower; and (2) the tax paid by PAL, under either of these alternatives,
shall be in lieu of all other taxes, duties, royalties, registration, license, and other
fees and charges, except only real property tax.

The basic corporate income tax of PAL shall be based on its annual net taxable
income, computed in accordance with the National Internal Revenue Code
(NIRC).Presidential Decree No. 1590 also explicitly authorizes PAL, in the
computation of its basic corporate income tax, to (1) depreciate its assets twice as
fast the normal rate of depreciation;[14] and (2) carry over as a deduction from taxable
income any net loss incurred in any year up to five years following the year of such
loss.[15]

Franchise tax, on the other hand, shall be two per cent (2%) of the gross revenues
derived by PAL from all sources, whether transport or nontransport
operations.However, with respect to international air-transport service, the
franchise tax shall only be imposed on the gross passenger, mail, and freight
revenues of PAL from its outgoing flights.

In its income tax return for FY 2000-2001, filed with the BIR, PAL reported no net
taxable income for the period, resulting in zero basic corporate income tax, which
would necessarily be lower than any franchise tax due from PAL for the same
period.
The CIR, though, assessed PAL for MCIT for FY 2000-2001. It is the position of the
CIR that the MCIT is income tax for which PAL is liable. The CIR reasons that Section
13(a) of Presidential Decree No. 1590 provides that the corporate income tax of
PAL shall be computed in accordance with the NIRC. And, since the NIRC of 1997
imposes MCIT, and PAL has not applied for relief from the said tax, then PAL is
subject to the same.
The Court is not persuaded. The arguments of the CIR are contrary to the plain
meaning and obvious intent of Presidential Decree No. 1590, the franchise of PAL.
Income tax on domestic corporations is covered by Section 27 of the NIRC of
1997,[16] pertinent provisions of which are reproduced below for easy reference:

SEC. 27. Rates of Income Tax on Domestic Corporations.

(A) In General Except as otherwise provided in this Code, an

income tax of thirty-five percent (35%) is hereby imposed upon
the taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined in
Section 22(B) of this Code and taxable under this Title as a corporation,
organized in, or existing under the laws of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four
percent (34%); effective January 1, 1999, the rate shall be thirty-three
percent (33%); and effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).

xxxx

(E) Minimum Corporate Income Tax on Domestic Corporations.

(1) Imposition of Tax. A minimum corporate income tax of two

percent (2%) of the gross income as of the end of the taxable year, as
 defined herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately following the
year in which such corporation commenced its business operations,
when the minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.

Hence, a domestic corporation must pay whichever is higher of: (1) the income tax
under Section 27(A) of the NIRC of 1997, computed by applying the tax rate therein
to the taxable income of the corporation; or (2) the MCIT under Section 27(E), also
of the NIRC of 1997, equivalent to 2% of the gross income of the
corporation.Although this may be the general rule in determining the income tax
due from a domestic corporation under the NIRC of 1997, it can only be applied to
PAL to the extent allowed by the provisions in the franchise of PAL specifically
governing its taxation.

After a conscientious study of Section 13 of Presidential Decree No. 1590, in

relation to Sections 27(A) and 27(E) of the NIRC of 1997, the Court, like the CTA en
banc and Second Division, concludes that PAL cannot be subjected to MCIT for FY
2000-2001.
First, Section 13(a) of Presidential Decree No. 1590 refers to basic corporate
income tax. In Commissioner of Internal Revenue v. Philippine Airlines, Inc.,[17]the
Court already settled that the basic corporate income tax, under Section 13(a) of
Presidential Decree No. 1590, relates to the general rate of 35% (reduced to 32%
by the year 2000) as stipulated in Section 27(A) of the NIRC of 1997.

Section 13(a) of Presidential Decree No. 1590 requires that the basic corporate
income tax be computed in accordance with the NIRC. This means that PAL shall
compute its basic corporate income tax using the rate and basis prescribed by the
NIRC of 1997 for the said tax. There is nothing in Section 13(a) of Presidential
Decree No. 1590 to support the contention of the CIR that PAL is subject to the
entire Title II of the NIRC of 1997, entitled Tax on Income.
Second, Section 13(a) of Presidential Decree No. 1590 further provides that the
basic corporate income tax of PAL shall be based on its annual net taxable
income. This is consistent with Section 27(A) of the NIRC of 1997, which provides
that the rate of basic corporate income tax, which is 32% beginning 1 January 2000,
shall be imposed on the taxable income of the domestic corporation.

Taxable income is defined under Section 31 of the NIRC of 1997 as the pertinent
items of gross income specified in the said Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such types of income
by the same Code or other special laws. The gross income, referred to in Section
31, is described in Section 32 of the NIRC of 1997 as income from whatever source,
including compensation for services; the conduct of trade or business or the
exercise of profession; dealings in property; interests; rents; royalties; dividends;
annuities; prizes and winnings; pensions; and a partners distributive share in the
net income of a general professional partnership.

Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may
be arrived at by subtracting from gross income deductions authorized, not just by
the NIRC of 1997,[18] but also by special laws. Presidential Decree No. 1590 may be
considered as one of such special laws authorizing PAL, in computing its annual net
taxable income, on which its basic corporate income tax shall be based, to deduct
from its gross income the following: (1) depreciation of assets at twice the normal
rate; and (2) net loss carry-over up to five years following the year of such loss.

In comparison, the 2% MCIT under Section 27(E) of the NIRC of 1997 shall be based
on the gross income of the domestic corporation. The Court notes that gross
income, as the basis for MCIT, is given a special definition under Section 27(E)(4) of
the NIRC of 1997, different from the general one under Section 34 of the same
Code.
According to the last paragraph of Section 27(E)(4) of the NIRC of 1997, gross
income of a domestic corporation engaged in the sale of service means gross
receipts, less sales returns, allowances, discounts and cost of services. Cost of
services refers to all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (a) salaries and employee
benefits of personnel, consultants, and specialists directly rendering the service;
and (b) cost of facilities directly utilized in providing the service, such as
depreciation or rental of equipment used and cost of supplies.[19] Noticeably,
inclusions in and exclusions/deductions from gross income for MCIT purposes are
limited to those directly arising from the conduct of the taxpayers business. It is,
thus, more limited than the gross income used in the computation of basic
corporate income tax.

In light of the foregoing, there is an apparent distinction under the NIRC of 1997
between taxable income, which is the basis for basic corporate income tax under
Section 27(A); and gross income, which is the basis for the MCIT under Section
27(E). The two terms have their respective technical meanings, and cannot be used
interchangeably. The same reasons prevent this Court from declaring that the basic
corporate income tax, for which PAL is liable under Section 13(a) of Presidential
Decree No. 1590, also covers MCIT under Section 27(E) of the NIRC of 1997, since
the basis for the first is the annual net taxable income, while the basis for the
second is gross income.
Third, even if the basic corporate income tax and the MCIT are both income taxes
under Section 27 of the NIRC of 1997, and one is paid in place of the other, the two
are distinct and separate taxes.
The Court again cites Commissioner of Internal Revenue v. Philippine Airlines,
Inc.,[20] wherein it held that income tax on the passive income[21] of a domestic
corporation, under Section 27(D) of the NIRC of 1997, is different from the basic
corporate income tax on the taxable income of a domestic corporation, imposed
by Section 27(A), also of the NIRC of 1997. Section 13 of Presidential Decree No.
1590 gives PAL the option to pay basic corporate income tax or franchise tax,
whichever is lower; and the tax so paid shall be in lieu of all other taxes, except real
property tax. The income tax on the passive income of PAL falls within the category
of all other taxes from which PAL is exempted, and which, if already collected,
should be refunded to PAL.
The Court herein treats MCIT in much the same way. Although both are income
taxes, the MCIT is different from the basic corporate income tax, not just in the
rates, but also in the bases for their computation. Not being covered by Section
13(a) of Presidential Decree No. 1590, which makes PAL liable only for basic
corporate income tax, then MCIT is included in all other taxes from which PAL is
exempted.

That, under general circumstances, the MCIT is paid in place of the basic corporate
income tax, when the former is higher than the latter, does not mean that these
two income taxes are one and the same. The said taxes are merely paid in the
alternative, giving the Government the opportunity to collect the higher amount
between the two. The situation is not much different from Section 13 of
Presidential Decree No. 1590, which reversely allows PAL to pay, whichever is lower
of the basic corporate income tax or the franchise tax. It does not make the basic
corporate income tax indistinguishable from the franchise tax.

Given the fundamental differences between the basic corporate income tax and
the MCIT, presented in the preceding discussion, it is not baseless for this Court to
rule that, pursuant to the franchise of PAL, said corporation is subject to the first
tax, yet exempted from the second.

Fourth, the evident intent of Section 13 of Presidential Decree No. 1520 is to extend
to PAL tax concessions not ordinarily available to other domestic
corporations.Section 13 of Presidential Decree No. 1520 permits PAL to
pay whichever is lowerof the basic corporate income tax or the franchise tax; and
the tax so paid shall be in lieu of all other taxes, except only real property
tax. Hence, under its franchise, PAL is to pay the least amount of tax possible.

Section 13 of Presidential Decree No. 1520 is not unusual. A public utility is granted
special tax treatment (including tax exceptions/exemptions) under its franchise, as
an inducement for the acceptance of the franchise and the rendition of public
service by the said public utility.[22] In this case, in addition to being a public utility
providing air-transport service, PAL is also the official flag carrier of the country.
The imposition of MCIT on PAL, as the CIR insists, would result in a situation that
contravenes the objective of Section 13 of Presidential Decree No. 1590. In effect,
PAL would not just have two, but three tax alternatives, namely, the basic
corporate income tax, MCIT, or franchise tax. More troublesome is the fact that, as
between the basic corporate income tax and the MCIT, PAL shall be made to
pay whichever is higher, irrefragably, in violation of the avowed intention of
Section 13 of Presidential Decree No. 1590 to make PAL pay for the lower amount
of tax.
Fifth, the CIR posits that PAL may not invoke in the instant case the in lieu of all
other taxes clause in Section 13 of Presidential Decree No. 1520, if it did not pay
anything at all as basic corporate income tax or franchise tax. As a result, PAL
should be made liable for other taxes such as MCIT. This line of reasoning has been
dubbed as the Substitution Theory, and this is not the first time the CIR raised the
same. The Court already rejected the Substitution Theory in Commissioner of
Internal Revenue v. Philippine Airlines, Inc.,[23] to wit:

Substitution Theory
of the CIR Untenable

A careful reading of Section 13 rebuts the argument of the CIR

that the in lieu of all other taxes proviso is a mere incentive that applies
only when PAL actually pays something. It is clear that PD 1590 intended
to give respondent the option to avail itself of Subsection (a) or (b) as
consideration for its franchise.Either option excludes the payment of
other taxes and dues imposed or collected by the national or the local
government. PAL has the option to choose the alternative that results in
lower taxes. It is not the fact of tax payment that exempts it, but the
exercise of its option.
 Under Subsection (a), the basis for the tax rate is respondents
annual net taxable income, which (as earlier discussed) is computed by
subtracting allowable deductions and exemptions from gross income. By
basing the tax rate on the annual net taxable income, PD 1590 necessarily
recognized the situation in which taxable income may result in a negative
amount and thus translate into a zero tax liability.

Notably, PAL was owned and operated by the government at the

time the franchise was last amended. It can reasonably be contemplated
that PD 1590 sought to assist the finances of the government corporation
in the form of lower taxes.When respondent operates at a loss (as in the
instant case), no taxes are due; in this instances, it has a lower tax liability
than that provided by Subsection (b).

The fallacy of the CIRs argument is evident from the fact that the
payment of a measly sum of one peso would suffice to exempt PAL from
other taxes, whereas a zero liability arising from its losses would
not. There is no substantial distinction between a zero tax and a one-
peso tax liability.(Emphasis ours.)

Based on the same ratiocination, the Court finds the Substitution Theory
unacceptable in the present Petition.

The CIR alludes as well to Republic Act No. 9337, for reasons similar to those behind
the Substitution Theory. Section 22 of Republic Act No. 9337, more popularly
known as the Expanded Value Added Tax (E-VAT) Law, abolished the franchise tax
imposed by the charters of particularly identified public utilities, including
Presidential Decree No. 1590 of PAL. PAL may no longer exercise its options or
alternatives under Section 13 of Presidential Decree No. 1590, and is now liable for
both corporate income tax and the 12% VAT on its sale of services. The CIR alleges
that Republic Act No. 9337 reveals the intention of the Legislature to make PAL
share the tax burden of other domestic corporations.

The CIR seems to lose sight of the fact that the Petition at bar involves the liability
of PAL for MCIT for the fiscal year ending 31 March 2001. Republic Act No. 9337,
which took effect on 1 July 2005, cannot be applied retroactively[24] and any
amendment introduced by said statute affecting the taxation of PAL is immaterial
in the present case.
And sixth, Presidential Decree No. 1590 explicitly allows PAL, in computing its basic
corporate income tax, to carry over as deduction any net loss incurred in any year,
up to five years following the year of such loss. Therefore, Presidential Decree No.
1590 does not only consider the possibility that, at the end of a taxable period, PAL
shall end up with zero annual net taxable income (when its deductions exactly
equal its gross income), as what happened in the case at bar, but also the likelihood
that PAL shall incur net loss (when its deductions exceed its gross income). If PAL is
subjected to MCIT, the provision in Presidential Decree No. 1590 on net loss carry-
over will be rendered nugatory. Net loss carry-over is material only in computing
the annual net taxable income to be used as basis for the basic corporate income
tax of PAL; but PAL will never be able to avail itself of the basic corporate income
tax option when it is in a net loss position, because it will always then be compelled
to pay the necessarily higher MCIT.
Consequently, the insistence of the CIR to subject PAL to MCIT cannot be done
without contravening Presidential Decree No. 1520.

Between Presidential Decree No. 1520, on one hand, which is a special law
specifically governing the franchise of PAL, issued on 11 June 1978; and the NIRC of
1997, on the other, which is a general law on national internal revenue taxes, that
took effect on 1 January 1998, the former prevails. The rule is that on a specific
matter, the special law shall prevail over the general law, which shall be resorted
to only to supply deficiencies in the former. In addition, where there are two
statutes, the earlier special and the later general the terms of the general broad
enough to include the matter provided for in the special the fact that one is special
and the other is general creates a presumption that the special is to be considered
as remaining an exception to the general, one as a general law of the land, the other
as the law of a particular case. It is a canon of statutory construction that a later
statute, general in its terms and not expressly repealing a prior special statute, will
ordinarily not affect the special provisions of such earlier statute.[25]

Neither can it be said that the NIRC of 1997 repealed or amended Presidential
Decree No. 1590.

While Section 16 of Presidential Decree No. 1590 provides that the franchise is
granted to PAL with the understanding that it shall be subject to amendment,
alteration, or repeal by competent authority when the public interest so requires,
Section 24 of the same Decree also states that the franchise or any portion thereof
may only be modified, amended, or repealed expressly by a special law or
decreethat shall specifically modify, amend, or repeal said franchise or any
portion thereof.No such special law or decree exists herein.
The CIR cannot rely on Section 7(B) of Republic Act No. 8424, which amended the
NIRC in 1997 and reads as follows:

Section 7. Repealing Clauses.

xxxx

(B) The provisions of the National Internal Revenue Code, as

amended, and all other laws, including charters of government-owned
or controlled corporations, decrees, orders, or regulations or parts
thereof, that are inconsistent with this Act are hereby repealed or
amended accordingly.
The CIR reasons that PAL was a government-owned and controlled corporation
when Presidential Decree No. 1590, its franchise or charter, was issued in
1978.Since PAL was still operating under the very same charter when Republic Act
No. 8424 took effect in 1998, then the latter can repeal or amend the former by
virtue of Section 7(B).

The Court disagrees.

A brief recount of the history of PAL is in order. PAL was established as a private
corporation under the general law of the Republic of the Philippines in February
1941. In November 1977, the government, through the Government Service
Insurance System (GSIS), acquired the majority shares in PAL. PAL was privatized
in January 1992 when the local consortium PR Holdings acquired a 67% stake
therein.[26]

It is true that when Presidential Decree No. 1590 was issued on 11 June 1978, PAL
was then a government-owned and controlled corporation; but when Republic Act
No. 8424, amending the NIRC, took effect on 1 January 1998, PAL was already a
private corporation for six years. The repealing clause under Section 7(B) of
Republic Act No. 8424 simply refers to charters of government-owned and
controlled corporations, which would simply and plainly mean corporations under
the ownership and control of the government at the time of effectivity of said
statute. It is already a stretch for the Court to read into said provision charters,
issued to what were then government-owned and controlled corporations that are
now private, but still operating under the same charters.

That the Legislature chose not to amend or repeal Presidential Decree No. 1590,
even after PAL was privatized, reveals the intent of the Legislature to let PAL
continue enjoying, as a private corporation, the very same rights and privileges
under the terms and conditions stated in said charter. From the moment PAL was
privatized, it had to be treated as a private corporation, and its charter became that
of a private corporation. It would be completely illogical to say that PAL is a private
corporation still operating under a charter of a government-owned and controlled
corporation.

The alternative argument of the CIR that the imposition of the MCIT is pursuant to
the amendment of the NIRC, and not of Presidential Decree No. 1590 is just as
specious. As has already been settled by this Court, the basic corporate income tax
under Section 13(a) of Presidential Decree No. 1590 relates to the general tax rate
under Section 27(A) of the NIRC of 1997, which is 32% by the year 2000, imposed
on taxable income. Thus, only provisions of the NIRC of 1997 necessary for the
computation of the basic corporate income tax apply to PAL. And even though
Republic Act No. 8424 amended the NIRC by introducing the MCIT, in what is now
Section 27(E) of the said Code, this amendment is actually irrelevant and should
not affect the taxation of PAL, since the MCIT is clearly distinct from the basic
corporate income tax referred to in Section 13(a) of Presidential Decree No. 1590,
and from which PAL is consequently exempt under the in lieu of all other taxes
clause of its charter.

The CIR calls the attention of the Court to RMC No. 66-2003, on Clarifying the
Taxability of Philippine Airlines (PAL) for Income Tax Purposes As Well As Other
Franchise Grantees Similarly Situated. According to RMC No. 66-2003:

Section 27(E) of the Code, as implemented by Revenue

Regulations No. 9-98, provides that MCIT of two percent (2%) of the gross
income as of the end of the taxable year (whether calendar or fiscal year,
depending on the accounting period employed) is imposed upon any
domestic corporation beginning the 4th taxable year immediately
following the taxable year in which such corporation commenced its
business operations. The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the
amount of MCIT is greater than the normal income tax due from such
corporation.
 With the advent of such provision beginning January 1, 1998, it is
certain that domestic corporations subject to normal income tax as well
as those choose to be subject thereto, such as PAL, are bound to pay
income tax regardless of whether they are operating at a profit or loss.

Thus, in case of operating loss, PAL may either opt to subject itself
to minimum corporate income tax or to the 2% franchise tax, whichever
is lower. On the other hand, if PAL is operating at a profit, the income tax
liability shall be the lower amount between:

(1) normal income tax or MCIT whichever is higher; and

(2) 2% franchise tax.

The CIR attempts to sway this Court to adopt RMC No. 66-2003 since the
[c]onstruction by an executive branch of government of a particular law although
not binding upon the courts must be given weight as the construction comes from
the branch of the government called upon to implement the law.[27]

But the Court is unconvinced.

It is significant to note that RMC No. 66-2003 was issued only on 14 October 2003,
more than two years after FY 2000-2001 of PAL ended on 31 March 2001. This
violates the well-entrenched principle that statutes, including administrative rules
and regulations, operate prospectively only, unless the legislative intent to the
contrary is manifest by express terms or by necessary implication.[28]
Moreover, despite the claims of the CIR that RMC No. 66-2003 is just a clarificatory
and internal issuance, the Court observes that RMC No. 66-2003 does more than
just clarify a previous regulation and goes beyond mere internal administration. It
effectively increases the tax burden of PAL and other taxpayers who are similarly
situated, making them liable for a tax for which they were not liable
before.Therefore, RMC No. 66-2003 cannot be given effect without previous notice
or publication to those who will be affected thereby. In Commissioner of Internal
Revenue v. Court of Appeals,[29] the Court ratiocinated that:

It should be understandable that when an administrative rule is

merely interpretative in nature, its applicability needs nothing further
than its bare issuance for it gives no real consequence more than what
the law itself has already prescribed. When, upon the other hand, the
administrative rule goes beyond merely providing for the means that
can facilitate or render least cumbersome the implementation of the
law but substantially adds to or increases the burden of those
governed, it behooves the agency to accord at least to those directly
affected a chance to be heard, and thereafter to be duly informed,
before that new issuance is given the force and effect of law.

A reading of RMC 37-93, particularly considering the

circumstances under which it has been issued, convinces us that the
circular cannot be viewed simply as a corrective measure (revoking in the
process the previous holdings of past Commissioners) or merely as
construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and
most importantly, been made in order to place "Hope Luxury," "Premium
More" and "Champion" within the classification of locally manufactured
cigarettes bearing foreign brands and to thereby have them covered by
RA 7654. Specifically, the new law would have its amendatory provisions
applied to locally manufactured cigarettes which at the time of its
effectivity were not so classified as bearing foreign brands. Prior to the
issuance of the questioned circular, "Hope Luxury," "Premium More,"
and "Champion" cigarettes were in the category of locally manufactured
cigarettes not bearing foreign brand subject to 45% ad valorem tax.
Hence, without RMC 37-93, the enactment of RA 7654, would have had
no new tax rate consequence on private respondent's products.
Evidently, in order to place "Hope Luxury," "Premium More," and
"Champion" cigarettes within the scope of the amendatory law and
subject them to an increased tax rate, the now disputed RMC 37-93 had
to be issued. In so doing, the BIR not simply interpreted the law; verily,
it legislated under its quasi-legislative authority. The due observance of
the requirements of notice, of hearing, and of publication should not
have been then ignored.

Indeed, the BIR itself, in its RMC 10-86, has observed and
provided:

"RMC NO. 10-86

Effectivity of Internal Revenue Rules and Regulations

"It has been observed that one of the problem areas
bearing on compliance with Internal Revenue Tax rules and
regulations is lack or insufficiency of due notice to the tax
paying public. Unless there is due notice, due compliance
therewith may not be reasonably expected. And most
importantly, their strict enforcement could possibly suffer
from legal infirmity in the light of the constitutional
provision on 'due process of law' and the essence of the Civil
Code provision concerning effectivity of laws, whereby due
notice is a basic requirement (Sec. 1, Art. IV, Constitution;
Art. 2, New Civil Code).

"In order that there shall be a just enforcement of

rules and regulations, in conformity with the basic element
of due process, the following procedures are hereby
prescribed for the drafting, issuance and implementation of
the said Revenue Tax Issuances:
 "(1). This Circular shall apply only to (a) Revenue
Regulations; (b) Revenue Audit Memorandum Orders; and
(c) Revenue Memorandum Circulars and Revenue
Memorandum Orders bearing on internal revenue tax rules
and regulations.

"(2). Except when the law otherwise expressly

provides, the aforesaid internal revenue tax issuances shall
not begin to be operative until after due notice thereof
may be fairly presumed.

"Due notice of the said issuances may be fairly

presumed only after the following procedures have been
taken:

"xxx xxx xxx "(5). Strict compliance with the foregoing

procedures is enjoined.13

Nothing on record could tell us that it was either impossible or

impracticable for the BIR to observe and comply with the above
requirements before giving effect to its questioned circular. (Emphases
ours.)

The Court, however, stops short of ruling on the validity of RMC No. 66-2003, for it
is not among the issues raised in the instant Petition. It only wishes to stress the
requirement of prior notice to PAL before RMC No. 66-2003 could have become
effective. Only after RMC No. 66-2003 was issued on 14 October 2003 could PAL
have been given notice of said circular, and only following such notice to PAL would
RMC No. 66-2003 have taken effect. Given this sequence, it is not possible to say
that RMC No. 66-2003 was already in effect and should have been strictly complied
with by PAL for its fiscal year which ended on 31 March 2001.
Even conceding that the construction of a statute by the CIR is to be given great
weight, the courts, which include the CTA, are not bound thereby if such
construction is erroneous or is clearly shown to be in conflict with the governing
statute or the Constitution or other laws. "It is the role of the Judiciary to refine
and, when necessary, correct constitutional (and/or statutory) interpretation, in
the context of the interactions of the three branches of the government."[30] It is
furthermore the rule of long standing that this Court will not set aside lightly the
conclusions reached by the CTA which, by the very nature of its functions, is
dedicated exclusively to the resolution of tax problems and has, accordingly,
developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority.[31] In the Petition at bar, the CTA en banc and in
division both adjudged that PAL is not liable for MCIT under Presidential Decree No.
1590, and this Court has no sufficient basis to reverse them.

As to the assertions of the CIR that exemption from tax is not presumed, and the
one claiming it must be able to show that it indubitably exists, the Court recalls its
pronouncements in Commissioner of Internal Revenue v. Court of Appeals[32]:
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. x
x x (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.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. (Emphases ours.)

For two decades following the grant of its franchise by Presidential Decree No. 1590
in 1978, PAL was only being held liable for the basic corporate income tax or
franchise tax, whichever was lower; and its payment of either tax was in lieu of all
other taxes, except real property tax, in accordance with the plain language of
Section 13 of the charter of PAL. Therefore, the exemption of PAL from all other
taxes was not just a presumption, but a previously established, accepted, and
respected fact, even for the BIR.

The MCIT was a new tax introduced by Republic Act No. 8424. Under the doctrine
of strict interpretation, the burden is upon the CIR to primarily prove that the new
MCIT provisions of the NIRC of 1997, clearly, expressly, and unambiguously extend
and apply to PAL, despite the latters existing tax exemption. To do this, the CIR
must convince the Court that the MCIT is a basic corporate income tax,[33] and is
not covered by the in lieu of all other taxes clause of Presidential Decree No.
1590. Since the CIR failed in this regard, the Court is left with no choice but to
consider the MCIT as one of all other taxes, from which PAL is exempt under the
explicit provisions of its charter.
Not being liable for MCIT in FY 2000-2001, it necessarily follows that PAL need not
apply for relief from said tax as the CIR maintains.

WHEREFORE, premises considered, the instant Petition for Review is

hereby DENIED, and the Decision dated 9 August 2007 and Resolution dated 11
October 2007 of the Court of Tax Appeals en banc in CTA E.B. No. 246 is
hereby AFFIRMED. No costs.

SO ORDERED.

CYANAMID PHILIPPINES, INC., petitioner, vs. THE COURT OF APPEALS,

THE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

DECISION

QUISUMBING, J.:

Petitioner disputes the decision of the Court of Appeals which affirmed the
[1]

decision of the Court of Tax Appeals, ordering petitioner to pay respondent

[2]

Commissioner of Internal Revenue the amount of three million, seven hundred seventy-
four thousand, eight hundred sixty seven pesos and fifty centavos (P3,774,867.50) as
25% surtax on improper accumulation of profits for 1981, plus 10% surcharge and 20%
annual interest from January 30, 1985 to January 30, 1987, under Sec. 25 of the National
Internal Revenue Code.

The Court of Tax Appeals made the following factual findings:

Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws,

is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is
engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of
imported finished goods, and an importer/indentor.

On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the
payment of deficiency income tax of one hundred nineteen thousand eight hundred
seventeen (P119,817.00) pesos for taxable year 1981, as follows:

"Net income disclosed by

the return as audited 14,575,210.00
 Add: Discrepancies:

Professional
fees/yr.
per 262,877.00
investigation 17018 110,399.37

Total Adjustment 152,477.00

Net income per Investigation 14,727,687.00

Less: Personal and additional exemptions ___________

Amount subject to tax 14,727,687.00

Income tax due thereon .25% Surtax 2,385,231.50 3,237,495.00

Less: Amount already assessed . 5,161,788.00

BALANCE . 75,709.00

_______ monthly interest from ..1,389,636.00 44,108.00

_________ ____________

Compromise penalties ... ___________

TOTAL AMOUNT DUE ..3,774,867.50 119,817.00"[3]

On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax
Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of
P119,817.00; and 1981 Deficiency Percentage Assessment of P8,846.72. Petitioner,
[4]

through its external accountant, Sycip, Gorres, Velayo & Co., claimed, among others,
that the surtax for the undue accumulation of earnings was not proper because the said
profits were retained to increase petitioners working capital and it would be used for
reasonable business needs of the company. Petitioner contended that it availed of the
tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and
criminal prosecution granted by the law.

On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the
cancellation of the assessment notices and rendered its resolution, as follows:

"It appears that your client availed of Executive Order No. 41 under File
No. 32A-F-000455-41B as certified and confirmed by our Tax Amnesty
Implementation Office on October 6, 1987.
 In reply thereto, I have the honor to inform you that the availment of the
tax amnesty under Executive Order No. 41, as amended is sufficient basis,
in appropriate cases, for the cancellation of the assessment issued after
August 21, 1986. (Revenue Memorandum Order No. 4-87) Said availment
does not, therefore, result in cancellation of assessments issued before
August 21, 1986, as in the instant case. In other words, the assessments in
this case issued on January 30, 1985 despite your clients availment of the
tax amnesty under Executive Order No. 41, as amended still subsist.

Such being the case, you are therefore, requested to urge your client to pay
this Office the aforementioned deficiency income tax and surtax on undue
accumulation of surplus in the respective amounts of P119,817.00 and
P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty
(30) days from receipt hereof, otherwise this office will be constrained to
enforce collection thereof thru summary remedies prescribed by law.

This constitutes the final decision of this Office on this matter." [5]

Petitioner appealed to the Court of Tax Appeals. During the pendency of the case,
however, both parties agreed to compromise the 1981 deficiency income tax assessment
of P119,817.00. Petitioner paid a reduced amount --twenty-six thousand, five hundred
seventy-seven pesos (P26,577.00) -- as compromise settlement. However, the surtax on
improperly accumulated profits remained unresolved.

Petitioner claimed that CIRs assessment representing the 25% surtax on its accumulated
earnings for the year 1981 had no legal basis for the following reasons: (a) petitioner
accumulated its earnings and profits for reasonable business requirements to meet
working capital needs and retirement of indebtedness; (b) petitioner is a wholly owned
subsidiary of American Cyanamid Company, a corporation organized under the laws of
the State of Maine, in the United States of America, whose shares of stock are listed
and traded in New York Stock Exchange. This being the case, no individual shareholder
of petitioner could have evaded or prevented the imposition of individual income taxes
by petitioners accumulation of earnings and profits, instead of distribution of the
same.

In denying the petition, the Court of Tax Appeals made the following pronouncements:

"Petitioner contends that it did not declare dividends for the year 1981 in
order to use the accumulated earnings as working capital reserve to meet
its "reasonable business needs". The law permits a stock corporation to set
aside a portion of its retained earnings for specified purposes (citing
Section 43, paragraph 2 of the Corporation Code of the Philippines). In
the case at bar, however, petitioners purpose for accumulating its earnings
does not fall within the ambit of any of these specified purposes.

More compelling is the finding that there was no need for petitioner to set
aside a portion of its retained earnings as working capital reserve as it
claims since it had considerable liquid funds. A thorough review of
petitioners financial statement (particularly the Balance Sheet, p. 127, BIR
Records) reveals that the corporation had considerable liquid funds
consisting of cash accounts receivable, inventory and even its sales for the
period is adequate to meet the normal needs of the business. This can be
determined by computing the current asset to liability ratio of the
company:

current
ratio = current assets / current liabilities

= P 47,052,535.00 / P21,275,544.00

= 2.21: 1

The significance of this ratio is to serve as a primary test of a companys

solvency to meet current obligations from current assets as a going
concern or a measure of adequacy of working capital.

xxx

We further reject petitioners argument that "the accumulated earnings tax

does not apply to a publicly-held corporation" citing American
jurisprudence to support its position. The reference finds no application in
the case at bar because under Section 25 of the NIRC as amended by
Section 5 of P.D. No. 1379 [1739] (dated September 17, 1980), the
exceptions to the accumulated earnings tax are expressly enumerated, to
wit: Bank, non-bank financial intermediaries, corporations organized
primarily, and authorized by the Central Bank of the Philippines to hold
shares of stock of banks, insurance companies, or personal holding
companies, whether domestic or foreign. The law on the matter is clear
and specific. Hence, there is no need to resort to applicable cases decided
by the American Federal Courts for guidance and enlightenment as to
whether the provision of Section 25 of the NIRC should apply to
petitioner.
 Equally clear and specific are the provisions of E.O. 41 particularly with
respect to its effectivity and coverage...

... Said availment does not result in cancellation of assessments issued

before August 21, 1986 as petitioner seeks to do in the case at bar.
Therefore, the assessments in this case, issued on January 30, 1985 despite
petitioners availment of the tax amnesty under E.O. 41 as amended, still
subsist."

xxx

WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay

respondent Commissioner of Internal Revenue the sum of P3,774,867.50
representing 25% surtax on improper accumulation of profits for 1981,
plus 10% surcharge and 20% annual interest from January 30, 1985 to
January 30, 1987." [6]

Petitioner appealed the Court of Tax Appeals decision to the Court of Appeals.
Affirming the CTA decision, the appellate court said:

"In reviewing the instant petition and the arguments raised herein, We find
no compelling reason to reverse the findings of the respondent Court. The
respondent Courts decision is supported by evidence, such as petitioner
corporations financial statement and balance sheets (p. 127, BIR Records).
On the other hand the petitioner corporation could only come up with an
alternative formula lifted from a decision rendered by a foreign court
(Bardahl Mfg. Corp. vs. Commissioner, 24 T.C.M. [CCH] 1030).
Applying said formula to its particular financial position, the petitioner
corporation attempts to justify its accumulated surplus earnings. To Our
mind, the petitioner corporations alternative formula cannot overturn the
persuasive findings and conclusion of the respondent Court based, as it is,
on the applicable laws and jurisprudence, as well as standards in the
computation of taxes and penalties practiced in this jurisdiction.

WHEREFORE, in view of the foregoing, the instant petition is hereby

DISMISSED and the decision of the Court of Tax Appeals dated August
6, 1992 in C.T.A. Case No. 4250 is AFFIRMED in toto." [7]

Hence, petitioner now comes before us and assigns as sole issue:

 WHETHER THE RESPONDENT COURT ERRED IN HOLDING
THAT THE PETITIONER IS LIABLE FOR THE ACCUMULATED
EARNINGS TAX FOR THE YEAR 1981. [8]

Section 25 of the old National Internal Revenue Code of 1977 states:

[9]

"Sec. 25. Additional tax on corporation improperly accumulating profits

or surplus -

"(a) Imposition of tax. -- If any corporation is formed or availed of for the

purpose of preventing the imposition of the tax upon its shareholders or
members or the shareholders or members of another corporation, through
the medium of permitting its gains and profits to accumulate instead of
being divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five per-
centum of the undistributed portion of its accumulated profits or surplus
which shall be in addition to the tax imposed by section twenty-four, and
shall be computed, collected and paid in the same manner and subject to
the same provisions of law, including penalties, as that tax.

"(b) Prima facie evidence. -- The fact that any corporation is mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon
its shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than
fifty per centum in value of its outstanding stock is owned, directly or
indirectly, by one person.

"(c) Evidence determinative of purpose. -- The fact that the earnings or

profits of a corporation are permitted to accumulate beyond the reasonable
needs of the business shall be determinative of the purpose to avoid the
tax upon its shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary.

"(d) Exception -- The provisions of this sections shall not apply to banks,
non-bank financial intermediaries, corporation organized primarily, and
authorized by the Central Bank of the Philippines to hold shares of stock
of banks, insurance companies, whether domestic or foreign.

The provision discouraged tax avoidance through corporate surplus accumulation.

When corporations do not declare dividends, income taxes are not paid on the
undeclared dividends received by the shareholders. The tax on improper accumulation
of surplus is essentially a penalty tax designed to compel corporations to distribute
earnings so that the said earnings by shareholders could, in turn, be taxed.

Relying on decisions of the American Federal Courts, petitioner stresses that the
accumulated earnings tax does not apply to Cyanamid, a wholly owned subsidiary of a
publicly owned company. Specifically, petitioner cites Golconda Mining Corp. vs.
[10]

Commissioner, 507 F.2d 594, whereby the U.S. Ninth Circuit Court of Appeals had
taken the position that the accumulated earnings tax could only apply to a closely held
corporation.

A review of American taxation history on accumulated earnings tax will show that the
application of the accumulated earnings tax to publicly held corporations has been
problematic. Initially, the Tax Court and the Court of Claims held that the accumulated
earnings tax applies to publicly held corporations. Then, the Ninth Circuit Court of
Appeals ruled in Golconda that the accumulated earnings tax could only apply to
closely held corporations. Despite Golconda, the Internal Revenue Service asserted that
the tax could be imposed on widely held corporations including those not controlled by
a few shareholders or groups of shareholders. The Service indicated it would not follow
the Ninth Circuit regarding publicly held corporations. In 1984, American legislation
[11]

nullified the Ninth Circuits Golconda ruling and made it clear that the accumulated
earnings tax is not limited to closely held corporations. Clearly, Golconda is no longer
[12]

a reliable precedent.

The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739,
enumerated the corporations exempt from the imposition of improperly accumulated
tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and (d)
corporations organized primarily and authorized by the Central Bank of the Philippines
to hold shares of stocks of banks. Petitioner does not fall among those exempt classes.
Besides, the rule on enumeration is that the express mention of one person, thing, act,
or consequence is construed to exclude all others. Laws granting exemption from tax
[13]

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
[14] [15]

upon the party claiming exemption to prove that it is, in fact, covered by the exemption
so claimed, a burden which petitioner here has failed to discharge.
[16]

Another point raised by the petitioner in objecting to the assessment, is that increase of
working capital by a corporation justifies accumulating income. Petitioner asserts that
respondent court erred in concluding that Cyanamid need not infuse additional working
capital reserve because it had considerable liquid funds based on the 2.21:1 ratio of
current assets to current liabilities. Petitioner relies on the so-called "Bardahl" formula,
which allowed retention, as working capital reserve, sufficient amounts of liquid assets
to carry the company through one operating cycle. The "Bardahl" formula was[17]
developed to measure corporate liquidity. The formula requires an examination of
whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and
any extraordinary expenses reasonably anticipated, plus enough to operate the
business during one operating cycle. Operating cycle is the period of time it takes to
convert cash into raw materials, raw materials into inventory, and inventory into sales,
including the time it takes to collect payment for the sales. [18]

Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00

pesos as working capital. As of 1981, its liquid asset was only P25,776,991.00. Thus,
petitioner asserts that Cyanamid had a working capital deficit of
P7,986,633.00. Therefore, the P9,540,926.00 accumulated income as of 1981 may be
[19]

validly accumulated to increase the petitioners working capital for the succeeding year.

We note, however, that the companies where the "Bardahl" formula was applied, had
operating cycles much shorter than that of petitioner. In Atlas Tool Co., Inc. vs.
CIR, the companys operating cycle was only 3.33 months or 27.75% of the year.
[20]

In Cataphote Corp. of Mississippi vs. United States, the corporations operating cycle
[21]

was only 56.87 days, or 15.58% of the year. In the case of Cyanamid, the operating
cycle was 288.35 days, or 78.55% of a year, reflecting that petitioner will need
sufficient liquid funds, of at least three quarters of the year, to cover the operating costs
of the business. There are variations in the application of the "Bardahl" formula, such
as average operating cycle or peak operating cycle. In times when there is no recurrence
of a business cycle, the working capital needs cannot be predicted with accuracy. As
stressed by American authorities, although the "Bardahl" formula is well-established
and routinely applied by the courts, it is not a precise rule. It is used only for
administrative convenience. Petitioners application of the "Bardahl" formula merely
[22]

creates a false illusion of exactitude.

Other formulas are also used, e.g. the ratio of current assets to current liabilities and the
adoption of the industry standard. The ratio of current assets to current liabilities is
[23]

used to determine the sufficiency of working capital. Ideally, the working capital should
equal the current liabilities and there must be 2 units of current assets for every unit of
current liability, hence the so-called "2 to 1" rule.[24]

As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice
its current liabilities. That current ratio of Cyanamid, therefore, projects adequacy in
working capital. Said working capital was expected to increase further when more funds
were generated from the succeeding years sales. Available income covered expenses or
indebtedness for that year, and there appeared no reason to expect an impending
working capital deficit which could have necessitated an increase in working capital, as
rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue, we held that:
[25]

"...[T]here is no need to have such a large amount at the beginning of the

following year because during the year, current assets are converted into
cash and with the income realized from the business as the year goes, these
expenses may well be taken care of. [citation omitted]. Thus, it is
erroneous to say that the taxpayer is entitled to retain enough liquid net
assets in amounts approximately equal to current operating needs for the
year to cover cost of goods sold and operating expenses: for it excludes
proper consideration of funds generated by the collection of notes
receivable as trade accounts during the course of the year." [26]

If the CIR determined that the corporation avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the taxpayer contested such a determination, the
burden of proving the determination wrong, together with the corresponding burden of
first going forward with evidence, is on the taxpayer. This applies even if the
corporation is not a mere holding or investment company and does not have an
unreasonable accumulation of earnings or profits. [27]

In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon shareholders, it must be shown that the controlling
intention of the taxpayer is manifested at the time of accumulation, not intentions
declared subsequently, which are mere afterthoughts. Furthermore, the accumulated
[28]

profits must be used within a reasonable time after the close of the taxable year. In the
instant case, petitioner did not establish, by clear and convincing evidence, that such
accumulation of profit was for the immediate needs of the business.

In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, we [29]

ruled:

"To determine the reasonable needs of the business in order to justify an

accumulation of earnings, the Courts of the United States have invented
the so-called Immediacy Test which construed the words reasonable needs
of the business to mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an immediate need for
the accumulation of the earnings and profits, the accumulation was not for
the reasonable needs of the business, and the penalty tax would apply.
(Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 103). [30]

In the present case, the Tax Court opted to determine the working capital sufficiency
by using the ratio between current assets to current liabilities. The working capital needs
of a business depend upon the nature of the business, its credit policies, the amount of
inventories, the rate of turnover, the amount of accounts receivable, the collection rate,
the availability of credit to the business, and similar factors. Petitioner, by adhering to
the "Bardahl" formula, failed to impress the tax court with the required definiteness
envisioned by the statute. We agree with the tax court that the burden of proof to
establish that the profits accumulated were not beyond the reasonable needs of the
company, remained on the taxpayer. This Court will not set aside lightly the conclusion
reached by the Court of Tax Appeals which, by the very nature of its function, is
dedicated exclusively to the consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident
exercise of authority. Unless rebutted, all presumptions generally are indulged in
[31]

favor of the correctness of the CIRs assessment against the taxpayer. With petitioners
failure to prove the CIR incorrect, clearly and conclusively, this Court is constrained to
uphold the correctness of tax courts ruling as affirmed by the Court of Appeals.

WHEREFORE, the instant petition is DENIED, and the decision of the Court of
Appeals, sustaining that of the Court of Tax Appeals, is hereby AFFIRMED. Costs
against petitioner.

SO ORDERED.

G.R. No. 123206 March 22, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P. PAJONAR, as
Administratrix of the Estate of Pedro P. Pajonar, respondents.

RESOLUTION

GONZAGA-REYES, J.:

Assailed in this petition for review on certiorari is the December 21, 1995 Decision1 of the Court of
Appeals2 in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of the Court of Tax Appeals
in CTA Case No. 4381 granting private respondent Josefina P. Pajonar, as administratrix of the estate
of Pedro P. Pajonar, a tax refund in the amount of P76,502.42, representing erroneously paid estate
taxes for the year 1988.

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War,
was a part of the infamous Death March by reason of which he suffered shock and became insane.
His sister Josefina Pajonar became the guardian over his person, while his property was placed under
the guardianship of the Philippine National Bank (PNB) by the Regional Trial Court of Dumaguete City,
Branch 31, in Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his
two brothers Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio
Jandog and Mario Jandog and niece Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued
at P3,037,672.09 in Special Proceedings No. 1254. However, the PNB did not file an estate tax return,
instead it advised Pedro Pajonar's heirs to execute an extrajudicial settlement and to pay the taxes on
his estate. On April 5, 1988, pursuant to the assessment by the Bureau of Internal Revenue (BIR), the
estate of Pedro Pajonar paid taxes in the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City for
the issuance in her favor of letters of administration of the estate of her brother. The case was docketed
as Special Proceedings No. 2399. On July 18, 1988, the trial court appointed Josefina Pajonar as the
regular administratrix of Pedro Pajonar's estate.

On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the
estate of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her
capacity as administratrix and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989 with
the BIR praying that the estate tax payment in the amount of P1,527,790.98, or at least some portion
of it, be returned to the heirs. 3

However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina
Pajonar filed a petition for review with the Court of Tax Appeals (CTA), praying for the refund of
P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid estate tax. 4 The case was
docketed as CTA Case No. 4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar
the amount of P252,585.59, representing erroneously paid estate tax for the year 1988.5 Among the
deductions from the gross estate allowed by the CTA were the amounts of P60,753 representing the
notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the attorney's fees in Special
Proceedings No. 1254 for guardianship.6

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration 7 of the
CTA's May 6, 1993 decision asserting, among others, that the notarial fee for the Extrajudicial
Settlement and the attorney's fees in the guardianship proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution8 ordering the Commissioner of Internal
Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of
P76,502.42 representing erroneously paid estate tax for the year 1988. Also, the CTA upheld the
validity of the deduction of the notarial fee for the Extrajudicial Settlement and the attorney's fees in
the guardianship proceedings.

On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition for
review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the validity of
the abovementioned deductions. On December 21, 1995, the Court of Appeals denied the
Commissioner's petition.9

Hence, the present appeal by the Commissioner of Internal Revenue.

The sole issue in this case involves the construction of section 79 10 of the National Internal Revenue
Code 11(Tax Code) which provides for the allowable deductions from the gross estate of the decedent.
More particularly, the question is whether the notarial fee paid for the extrajudicial settlement in the
amount of P60,753 and the attorney's fees in the guardianship proceedings in the amount of P50,000
may be allowed as deductions from the gross estate of decedent in order to arrive at the value of the
net estate.

We answer this question in the affirmative, thereby upholding the decisions of the appellate courts.

In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:

Respondent maintains that only judicial expenses of the testamentary or intestate proceedings
are allowed as a deduction to the gross estate. The amount of P60,753.00 is quite
extraordinary for a mere notarial fee.

This Court adopts the view under American jurisprudence that expenses incurred in the
extrajudicial settlement of the estate should be allowed as a deduction from the gross estate.
"There is no requirement of formal administration. It is sufficient that the expense be a
necessary contribution toward the settlement of the case." [ 34 Am. Jur. 2d, p. 765; Nolledo,
Bar Reviewer in Taxation, 10th Ed. (1990), p. 481]

xxx xxx xxx

The attorney's fees of P50,000.00, which were already incurred but not yet paid, refers to the
guardianship proceeding filed by PNB, as guardian over the ward of Pedro Pajonar, docketed
as Special Proceeding No. 1254 in the RTC (Branch XXXI) of Dumaguete City. . . .

xxx xxx xxx

The guardianship proceeding had been terminated upon delivery of the residuary estate to the
heirs entitled thereto. Thereafter, PNB was discharged of any further responsibility.

Attorney's fees in order to be deductible from the gross estate must be essential to the
collection of assets, payment of debts or the distribution of the property to the persons entitled
to it. The services for which the fees are charged must relate to the proper settlement of the
estate. [34 Am. Jur. 2d 767.] In this case, the guardianship proceeding was necessary for the
distribution of the property of the late Pedro Pajonar to his rightful heirs.

xxx xxx xxx

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the
time of his death, was incompetent by reason of insanity. The expenses incurred in the
guardianship proceeding was but a necessary expense in the settlement of the decedent's
estate. Therefore, the attorney's fee incurred in the guardianship proceedings amounting to
P50,000.00 is a reasonable and necessary business expense deductible from the gross estate
of the decedent. 12

Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of Tax
Appeals modified its previous ruling by reducing the refundable amount to P76,502.43 since it found
that a deficiency interest should be imposed and the compromise penalty excluded. 13 However, the
tax court upheld its previous ruling regarding the legality of the deductions

It is significant to note that the inclusion of the estate tax law in the codification of all our national
internal revenue laws with the enactment of the National Internal Revenue Code in 1939 were copied
from the Federal Law of the United States. [ UMALI, Reviewer in Taxation (1985), p. 285 ] The 1977
Tax Code, promulgated by Presidential Decree No. 1158, effective June 3, 1977, reenacted
substantially all the provisions of the old law on estate and gift taxes, except the sections relating to
the meaning of gross estate and gift. [ Ibid, p. 286. ]

In the United States, [a]dministrative expenses, executor's commissions and attorney's fees are
considered allowable deductions from the Gross Estate. Administrative expenses are limited to such
expenses as are actually and necessarily incurred in the administration of a decedent's estate.
[PRENTICE-HALL, Federal Taxes Estate and Gift Taxes (1936), p. 120, 533.] Necessary expenses
of administration are such expenses as are entailed for the preservation and productivity of the estate
and for its management for purposes of liquidation, payment of debts and distribution of the residue
among the persons entitled thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They must be
incurred for the settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where there were
no substantial community debts and it was unnecessary to convert community property to cash, the
only practical purpose of administration being the payment of estate taxes, full deduction was allowed
for attorney's fees and miscellaneous expenses charged wholly to decedent's estate. [Ibid., citing
Estate of Helis, 26 T.C. 143 (A).]

Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the PNB, which was
still the guardian of the estate, (Annex "Z"), did not file an estate tax return; however, it advised the
heirs to execute an extrajudicial settlement, to pay taxes and to post a bond equal to the value of the
estate, for which the state paid P59,341.40 for the premiums. (See Annex "K")." [p. 17, CTA record.]
Therefore, it would appear from the records of the case that the only practical purpose of settling the
estate by means of an extrajudicial settlement pursuant to Section 1 of Rule 74 of the Rules of Court
was for the payment of taxes and the distribution of the estate to the heirs. A fortiori, since our estate
tax laws are of American origin, the interpretation adopted by American Courts has some persuasive
effect on the interpretation of our own estate tax laws on the subject.

Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship
proceeding should not be deducted from the Gross Estate, We consider the same unmeritorious.
Attorneys' and guardians' fees incurred in a trustee's accounting of a taxable inter vivos trust
attributable to the usual issues involved in such an accounting was held to be proper deductions
because these are expenses incurred in terminating an inter vivos trust that was includible in the
decedent's estate. [Prentice Hall, Federal Taxes on Estate and Gift, p. 120, 861] Attorney's fees are
allowable deductions if incurred for the settlement of the estate. It is noteworthy to point that PNB was
appointed the guardian over the assets of the deceased. Necessarily the assets of the deceased
formed part of his gross estate. Accordingly, all expenses incurred in relation to the estate of the
deceased will be deductible for estate tax purposes provided these are necessary and ordinary
expenses for administration of the settlement of the estate. 14

In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held that:

2. Although the Tax Code specifies "judicial expenses of the testamentary or intestate proceedings,"
there is no reason why expenses incurred in the administration and settlement of an estate in
extrajudicial proceedings should not be allowed. However, deduction is limited to such administration
expenses as are actually and necessarily incurred in the collection of the assets of the estate, payment
of the debts, and distribution of the remainder among those entitled thereto. Such expenses may
include executor's or administrator's fees, attorney's fees, court fees and charges, appraiser's fees,
clerk hire, costs of preserving and distributing the estate and storing or maintaining it, brokerage fees
or commissions for selling or disposing of the estate, and the like. Deductible attorney's fees are those
incurred by the executor or administrator in the settlement of the estate or in defending or prosecuting
claims against or due the estate. (Estate and Gift Taxation in the Philippines, T. P. Matic, Jr., 1981
Edition, p. 176).

xxx xxx xxx

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and the
distribution of the estate to the heirs. The execution of the extrajudicial settlement necessitated the
notarization of the same. Hence the Contract of Legal Services of March 28, 1988 entered into
between respondent Josefina Pajonar and counsel was presented in evidence for the purpose of
showing that the amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It
follows then that the notarial fee of P60,753.00 was incurred primarily to settle the estate of the
deceased Pedro Pajonar. Said amount should then be considered an administration expenses actually
and necessarily incurred in the collection of the assets of the estate, payment of debts and distribution
of the remainder among those entitled thereto. Thus, the notarial fee of P60,753 incurred for the
Extrajudicial Settlement should be allowed as a deduction from the gross estate.

3. Attorney's fees, on the other hand, in order to be deductible from the gross estate must be essential
to the settlement of the estate.

The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec.
Proc. No. 1254. Petitioner contends that said amount are not expenses of the testamentary or intestate
proceedings as the guardianship proceeding was instituted during the lifetime of the decedent when
there was yet no estate to be settled.

Again, this contention must fail.

The guardianship proceeding in this case was necessary for the distribution of the property of the
deceased Pedro Pajonar. As correctly pointed out by respondent CTA, the PNB was appointed
guardian over the assets of the deceased, and that necessarily the assets of the deceased formed
part of his gross estate. . . .

xxx xxx xxx

It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec. Proc. No.
1254 were essential to the distribution of the property to the persons entitled thereto. Hence, the
attorney's fees incurred in the guardianship proceedings in the amount of P50,000.00 should be
allowed as a deduction from the gross estate of the decedent. 15

The deductions from the gross estate permitted under section 79 of the Tax Code basically reproduced
the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise known as the National
Internal Revenue Code of 1939, 16 and which was the first codification of Philippine tax laws. Section
89 (a) (1) (B) of CA 466 also provided for the deduction of the "judicial expenses of the testamentary
or intestate proceedings" for purposes of determining the value of the net estate. Philippine tax laws
were, in turn, based on the federal tax laws of the United States. 17 In accord with established rules of
statutory construction, the decisions of American courts construing the federal tax code are entitled to
great weight in the interpretation of our own tax laws. 18

Judicial expenses are expenses of administration. 19 Administration expenses, as an allowable

deduction from the gross estate of the decedent for purposes of arriving at the value of the net estate,
have been construed by the federal and state courts of the United States to include all expenses
"essential to the collection of the assets, payment of debts or the distribution of the property to the
persons entitled to it." 20 In other words, the expenses must be essential to the proper settlement of
the estate. Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not
deductible. 21 This distinction has been carried over to our jurisdiction. Thus, in Lorenzo
v. Posadas 22 the Court construed the phrase "judicial expenses of the testamentary or intestate
proceedings" as not including the compensation paid to a trustee of the decedent's estate when it
appeared that such trustee was appointed for the purpose of managing the decedent's real estate for
the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid on the
bond filed by the administrator as an expense of administration since the giving of a bond is in the
nature of a qualification for the office, and not necessary in the settlement of the estate. 23 Neither may
attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be claimed
as a deduction from the gross estate. 24 1wphi1

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible
expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs.
Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property during
his lifetime should also be considered as a deductible administration expense. PNB provided a detailed
accounting of decedent's property and gave advice as to the proper settlement of the latter's estate,
acts which contributed towards the collection of decedent's assets and the subsequent settlement of
the estate.

We find that the Court of Appeals did not commit reversible error in affirming the questioned resolution
of the Court of Tax Appeals.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial
fee for the extrajudicial settlement and the attorney's fees in the guardianship proceedings are
allowable deductions from the gross estate of Pedro Pajonar. 1wphi1.nt

SO ORDERED.

Melo, Vitug, Panganiban and Purisima, JJ., concur.

G.R. No. 120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner,

vs.
COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and
HERMINIA D. DE GUZMAN, respondents.
TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and
unfair, suffering the basic and oftly implored requisites of due process of law. Specifically, the petition
assails the Decision 1 of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where
the said court held:

In view of all the foregoing, we rule that the deficiency income tax assessments and
estate tax assessment, are already final and (u)nappealable-and-the subsequent levy
of real properties is a tax remedy resorted to by the government, sanctioned by Section
213 and 218 of the National Internal Revenue Code. This summary tax remedy is
distinct and separate from the other tax remedies (such as Judicial Civil actions and
Criminal actions), and is not affected or precluded by the pendency of any other tax
remedies instituted by the government.

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the

petition for certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to costs.

SO ORDERED.

More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the
Republic of the Philippines, the matter of the settlement of his estate, and its dues to the government
in estate taxes, are still unresolved, the latter issue being now before this Court for resolution.
Specifically, petitioner Ferdinand R. Marcos II, the eldest son of the decedent, questions the actuations
of the respondent Commissioner of Internal Revenue in assessing, and collecting through the
summary remedy of Levy on Real Properties, estate and income tax delinquencies upon the estate
and properties of his father, despite the pendency of the proceedings on probate of the will of the late
president, which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.

Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with
an application for writ of preliminary injunction and/or temporary restraining order on June 28, 1993,
seeking to

I. Annul and set aside the Notices of Levy on real property dated February 22, 1993
and May 20, 1993, issued by respondent Commissioner of Internal Revenue;

II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from
proceeding with the Auction of the real properties covered by Notices of Sale.

After the parties had pleaded their case, the Court of Appeals rendered its Decision 2 on November 29,
1994, ruling that the deficiency assessments for estate and income tax made upon the petitioner and the
estate of the deceased President Marcos have already become final and unappealable, and may thus be
enforced by the summary remedy of levying upon the properties of the late President, as was done by the
respondent Commissioner of Internal Revenue.
 WHEREFORE, premises considered judgment is hereby rendered DISMISSING the
petition for Certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to cost.

SO ORDERED.

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision,
assigning the following as errors:

A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY

TAX REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED
AND PRECLUDED BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE
ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY,
THIS PROBATE PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH
FORM PART OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE
PROBATE COURT TO THE EXCLUSION OF ALL OTHER COURTS AND
ADMINISTRATIVE AGENCIES.

B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING

THAT SINCE THE TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD
ALREADY BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED TO GO
INTO THE MERITS OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT
OF WHETHER THE TAX ASSESSMENTS HAD ALREADY BECOME FINAL,
HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL
MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE
ENFORCED BY RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS,
RESPONDENT COURT SHOULD HAVE FAVORABLY CONSIDERED THE MERITS
OF THE FOLLOWING GROUNDS IN THE PETITION:

(1) The Notices of Levy on Real Property were issued beyond the
period provided in the Revenue Memorandum Circular No. 38-68.

(2) [a] The numerous pending court cases questioning the late
President's ownership or interests in several properties (both personal
and real) make the total value of his estate, and the consequent estate
tax due, incapable of exact pecuniary determination at this time. Thus,
respondents' assessment of the estate tax and their issuance of the
Notices of Levy and Sale are premature, confiscatory and oppressive.

[b] Petitioner, as one of the late President's compulsory heirs, was

never notified, much less served with copies of the Notices of Levy,
contrary to the mandate of Section 213 of the NIRC. As such, petitioner
was never given an opportunity to contest the Notices in violation of
his right to due process of law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT

COURT MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT
INJUNCTIVE RELIEF TO PETITIONER. SECTION 219 OF THE NIRC
NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A WRIT OF
PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS COMMISSIONER'S
 AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED
DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.

The facts as found by the appellate court are undisputed, and are hereby adopted:

On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii,
USA.

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations
and examinations of the tax liabilities and obligations of the late president, as well as
that of his family, associates and "cronies". Said audit team concluded its investigation
with a Memorandum dated July 26, 1991. The investigation disclosed that the
Marcoses failed to file a written notice of the death of the decedent, an estate tax
returns [sic], as well as several income tax returns covering the years 1982 to 1986,
all in violation of the National Internal Revenue Code (NIRC).

Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the
Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has penalized
under Sections 253 and 254 in relation to Section 252 a & b) of the National Internal
Revenue Code (NIRC).

The Commissioner of Internal Revenue thereby caused the preparation and filing of
the Estate Tax Return for the estate of the late president, the Income Tax Returns of
the Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of
petitioner Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.

On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment
no. FAC-2-89-91-002464 (against the estate of the late president Ferdinand Marcos in
the amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment no.
FAC-1-85-91-002452 and Deficiency income tax assessment no. FAC-1-86-91-
002451 (against the Spouses Ferdinand and Imelda Marcos in the amounts of
P149,551.70 and P184,009,737.40 representing deficiency income tax for the years
1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-82-91-002460 to
FAC-1-85-91-002463 (against petitioner Ferdinand "Bongbong" Marcos II in the
amounts of P258.70 pesos; P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60 Pesos
representing his deficiency income taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate and
income tax assessments were all personally and constructively served on August 26,
1991 and September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr.
Martinez) at her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes
"D" and "E" of the Petition). Likewise, copies of the deficiency tax assessments issued
against petitioner Ferdinand "Bongbong" Marcos II were also personally and
constructively served upon him (through his caretaker) on September 12, 1991, at his
last known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M.
(Annexes "J" and "J-1" of the Petition). Thereafter, Formal Assessment notices were
served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at his office, House of
Representatives, Batasan Pambansa, Quezon City. Moreover, a notice to Taxpayer
inviting Mrs. Marcos (or her duly authorized representative or counsel), to a
conference, was furnished the counsel of Mrs. Marcos, Dean Antonio Coronel but
to no avail.
 The deficiency tax assessments were not protested administratively, by Mrs. Marcos
and the other heirs of the late president, within 30 days from service of said
assessments.

On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on
real property against certain parcels of land owned by the Marcoses to satisfy the
alleged estate tax and deficiency income taxes of Spouses Marcos.

On May 20, 1993, four more Notices of Levy on real property were issued for the
purpose of satisfying the deficiency income taxes.

On May 26, 1993, additional four (4) notices of Levy on real property were again
issued. The foregoing tax remedies were resorted to pursuant to Sections 205 and 213
of the National Internal Revenue Code (NIRC).

In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein
petitioner) calling the attention of the BIR and requesting that they be duly notified of
any action taken by the BIR affecting the interest of their client Ferdinand "Bongbong"
Marcos II, as well as the interest of the late president copies of the aforesaid notices
were, served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the
petitioner, and their counsel of record, "De Borja, Medialdea, Ata, Bello, Guevarra and
Serapio Law Office".

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City
Hall of Tacloban City. The public auction for the sale of the eleven (11) parcels of land
took place on July 5, 1993. There being no bidder, the lots were declared forfeited in
favor of the government.

On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant petition
for certiorari and prohibition under Rule 65 of the Rules of Court, with prayer for
temporary restraining order and/or writ of preliminary injunction.

It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the
collection of taxes, is of paramount importance for the sustenance of government. Taxes are the
lifeblood of the government and should be collected without unnecessary hindrance. However, 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. 3

Whether or not the proper avenues of assessment and collection of the said tax obligations were taken
by the respondent Bureau is now the subject of the Court's inquiry.

Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late
President Marcos effected by the BIR are null and void for disregarding the established procedure for
the enforcement of taxes due upon the estate of the deceased. The case of Domingo vs. Garlitos 4 is
specifically cited to bolster the argument that "the ordinary procedure by which to settle claims of
indebtedness against the estate of a deceased, person, as in an inheritance (estate) tax, is for the claimant
to present a claim before the probate court so that said court may order the administrator to pay the amount
therefor." This remedy is allegedly, exclusive, and cannot be effected through any other means.
Petitioner goes further, submitting that the probate court is not precluded from denying a request by
the government for the immediate payment of taxes, and should order the payment of the same only
within the period fixed by the probate court for the payment of all the debts of the decedent. In this
regard, petitioner cites the case of Collector of Internal Revenue vs. The Administratrix of the Estate
of Echarri (67 Phil 502), where it was held that:

The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal
Revenue (52 Phil 803), relied upon by the petitioner-appellant is good authority on the
proposition that the court having control over the administration proceedings has
jurisdiction to entertain the claim presented by the government for taxes due and to
order the administrator to pay the tax should it find that the assessment was proper,
and that the tax was legal, due and collectible. And the rule laid down in that case must
be understood in relation to the case of Collector of Customs vs. Haygood, supra., as
to the procedure to be followed in a given case by the government to effectuate the
collection of the tax. Categorically stated, where during the pendency of judicial
administration over the estate of a deceased person a claim for taxes is presented by
the government, the court has the authority to order payment by the administrator; but,
in the same way that it has authority to order payment or satisfaction, it also has the
negative authority to deny the same. While there are cases where courts are required
to perform certain duties mandatory and ministerial in character, the function of the
court in a case of the present character is not one of them; and here, the court cannot
be an organism endowed with latitude of judgment in one direction, and converted into
a mere mechanical contrivance in another direction.

On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes
is paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not
preclude the assessment and collection, through summary remedies, of estate taxes over the same.
According to the respondent, claims for payment of estate and income taxes due and assessed after
the death of the decedent need not be presented in the form of a claim against the estate. These can
and should be paid immediately. The probate court is not the government agency to decide whether
an estate is liable for payment of estate of income taxes. Well-settled is the rule that the probate court
is a court with special and limited jurisdiction.

Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a
probate court over estate of deceased individual, is not a trifling thing. The court's jurisdiction, once
invoked, and made effective, cannot be treated with indifference nor should it be ignored with impunity
by the very parties invoking its authority.

In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the
sale of properties of a deceased person by his prospective heirs before final adjudication; 5 to
determine who are the heirs of the decedent; 6 the recognition of a natural child; 7 the status of a woman
claiming to be the legal wife of the decedent; 8 the legality of disinheritance of an heir by the testator; 9 and
to pass upon the validity of a waiver of hereditary rights. 10

The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal
Revenue to collect by the summary remedy of levying upon, and sale of real properties of the
decedent, estate tax deficiencies, without the cognition and authority of the court sitting in probate
over the supposed will of the deceased.

The nature of the process of estate tax collection has been described as follows:
 Strictly speaking, the assessment of an inheritance tax does not directly involve the
administration of a decedent's estate, although it may be viewed as an incident to the
complete settlement of an estate, and, under some statutes, it is made the duty of the
probate court to make the amount of the inheritance tax a part of the final decree of
distribution of the estate. It is not against the property of decedent, nor is it a claim
against the estate as such, but it is against the interest or property right which the heir,
legatee, devisee, etc., has in the property formerly held by decedent. Further, under
some statutes, it has been held that it is not a suit or controversy between the parties,
nor is it an adversary proceeding between the state and the person who owes the tax
on the inheritance. However, under other statutes it has been held that the hearing
and determination of the cash value of the assets and the determination of the tax are
adversary proceedings. The proceeding has been held to be necessarily a
proceeding in rem. 11

In the Philippine experience, the enforcement and collection of estate tax, is executive in character,
as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of the
National Internal Revenue Code attests to this:

Sec. 3. Powers and duties of the Bureau. The powers and duties of the Bureau of
Internal Revenue shall comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges, and the enforcement of all forfeitures,
penalties, and fines connected therewith, including the execution of judgments in all
cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said
Bureau shall also give effect to and administer the supervisory and police power
conferred to it by this Code or other laws.

Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal treatment of claims for taxes
charged against the estate of the decedent. Such taxes, we said, were exempted from the application of
the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the
maxim that taxes are the lifeblood of the government. Vectigalia nervi sunt rei publicae taxes are the
sinews of the state.

Taxes assessed against the estate of a deceased person, after administration is

opened, need not be submitted to the committee on claims in the ordinary course of
administration. In the exercise of its control over the administrator, the court may direct
the payment of such taxes upon motion showing that the taxes have been assessed
against the estate.

Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to
allowing the enforcement of tax obligations against the heirs of the decedent, even after distribution of
the estate's properties.

Claims for taxes, whether assessed before or after the death of the deceased, can be
collected from the heirs even after the distribution of the properties of the decedent.
They are exempted from the application of the statute of non-claims. The heirs shall
be liable therefor, in proportion to their share in the inheritance. 13

Thus, the Government has two ways of collecting the taxes in question. One, by going after
all the heirs and collecting from each one of them the amount of the tax proportionate to
the inheritance received. Another remedy, pursuant to the lien created by Section 315 of
the Tax Code upon all property and rights to property belong to the taxpayer for unpaid
income tax, is by subjecting said property of the estate which is in the hands of an heir or
 transferee to the payment of the tax due the estate. (Commissioner of Internal Revenue
vs. Pineda, 21 SCRA 105, September 15, 1967.)

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement
tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot
therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of the properties
allegedly owned by the late President, on the ground that it was required to seek first the probate
court's sanction. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the
necessity of the probate or estate settlement court's approval of the state's claim for estate taxes,
before the same can be enforced and collected.

On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden
not to authorize the executor or judicial administrator of the decedent's estate to deliver any distributive
share to any party interested in the estate, unless it is shown a Certification by the Commissioner of
Internal Revenue that the estate taxes have been paid. This provision disproves the petitioner's
contention that it is the probate court which approves the assessment and collection of the estate tax.

If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have
been pursued through the proper administrative and judicial avenues provided for by law.

Section 229 of the NIRC tells us how:

Sec. 229. Protesting of assessment. When the Commissioner of Internal Revenue

or his duly authorized representative finds that proper taxes should be assessed, he
shall first notify the taxpayer of his findings. Within a period to be prescribed by
implementing regulations, the taxpayer shall be required to respond to said notice. If
the taxpayer fails to respond, the Commissioner shall issue an assessment based on
his findings.

Such assessment may be protested administratively by filing a request for

reconsideration or reinvestigation in such form and manner as may be prescribed by
implementing regulations within (30) days from receipt of the assessment; otherwise,
the assessment shall become final and unappealable.

If the protest is denied in whole or in part, the individual, association or corporation

adversely affected by the decision on the protest may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of said decision; otherwise, the decision
shall become final, executory and demandable. (As inserted by P.D. 1773)

Apart from failing to file the required estate tax return within the time required for the filing of the same,
petitioner, and the other heirs never questioned the assessments served upon them, allowing the
same to lapse into finality, and prompting the BIR to collect the said taxes by levying upon the
properties left by President Marcos.

Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken
by the Government, collection thereof may have been done in violation of the law. Thus, the manner
and method in which the latter is enforced may be questioned separately, and irrespective of the finality
of the former, because the Government does not have the unbridled discretion to enforce collection
without regard to the clear provision of law." 14
Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing
Sections 318 and 324 of the old tax code (Republic Act 5203), the BIR's Notices of Levy on the Marcos
properties, were issued beyond the allowed period, and are therefore null and void:

. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this Petition)

in satisfaction of said assessments were still issued by respondents well beyond the
period mandated in Revenue Memorandum Circular No. 38-68. These Notices of Levy
were issued only on 22 February 1993 and 20 May 1993 when at least seventeen (17)
months had already lapsed from the last service of tax assessment on 12 September
1991. As no notices of distraint of personal property were first issued by respondents,
the latter should have complied with Revenue Memorandum Circular No. 38-68 and
issued these Notices of Levy not earlier than three (3) months nor later than six (6)
months from 12 September 1991. In accordance with the Circular, respondents only
had until 12 March 1992 (the last day of the sixth month) within which to issue these
Notices of Levy. The Notices of Levy, having been issued beyond the period allowed
by law, are thus void and of no effect. 15

We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period
and in accordance with the provisions of the present Tax Code. The deficiency tax assessment, having
already become final, executory, and demandable, the same can now be collected through the
summary remedy of distraint or levy pursuant to Section 205 of the NIRC.

The applicable provision in regard to the prescriptive period for the assessment and collection of tax
deficiency in this instance is Article 223 of the NIRC, which pertinently provides:

Sec. 223. Exceptions as to a 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 a failure
to file a return, the tax may be assessed, or a proceeding in court for the collection of
such tax may be begun without assessment, at any time within ten (10) 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 the collection thereof.

xxx xxx xxx

(c) Any internal revenue tax which has been assessed within the period of limitation
above prescribed, may be collected by distraint or levy or by a proceeding in court
within three years following the assessment of the tax.

xxx xxx xxx

The omission to file an estate tax return, and the subsequent failure to contest or appeal the
assessment made by the BIR is fatal to the petitioner's cause, as under the above-cited provision, in
case of failure to file a return, the tax may be assessed at any time within ten years after the omission,
and any tax so assessed may be collected by levy upon real property within three years following the
assessment of the tax. Since the estate tax assessment had become final and unappealable by the
petitioner's default as regards protesting the validity of the said assessment, there is now no reason
why the BIR cannot continue with the collection of the said tax. Any objection against the assessment
should have been pursued following the avenue paved in Section 229 of the NIRC on protests on
assessments of internal revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning the late president's
ownership or interests in several properties (both real and personal) make the total value of his estate,
and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus,
respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale are
premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034
and 0141, which were filed by the government to question the ownership and interests of the late
President in real and personal properties located within and outside the Philippines. Petitioner,
however, omits to allege whether the properties levied upon by the BIR in the collection of estate taxes
upon the decedent's estate were among those involved in the said cases pending in the
Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at
issue. The mere fact that the decedent has pending cases involving ill-gotten wealth does not affect
the enforcement of tax assessments over the properties indubitably included in his estate.

Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of
P23,292,607,638.00, stating that this amount deviates from the findings of the Department of Justice's
Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear evidence of
the uncertainty on the part of the Government as to the total value of the estate of the late President.

This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had
already become final and unappealable.

It is not the Department of Justice which is the government agency tasked to determine the amount of
taxes due upon the subject estate, but the Bureau of Internal Revenue, 16 whose determinations and
assessments are presumed correct and made in good faith. 17 The taxpayer has the duty of proving
otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment
will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does
not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining
party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment
will justify the judicial affirmance of said assessment. 18 In this instance, petitioner has not pointed out one
single provision in the Memorandum of the Special Audit Team which gave rise to the questioned
assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the assessment bears mainly
on the alleged improbable and unconscionable amount of the taxes charged. But mere rhetoric cannot
supply the basis for the charge of impropriety of the assessments made.

Moreover, these objections to the assessments should have been raised, considering the ample
remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court
of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the
pretext of grave abuse of discretion. The course of action taken by the petitioner reflects his disregard
or even repugnance of the established institutions for governance in the scheme of a well-ordered
society. The subject tax assessments having become final, executory and enforceable, the same can
no longer be contested by means of a disguised protest. In the main, Certiorari may not be used as a
substitute for a lost appeal or remedy. 19 This judicial policy becomes more pronounced in view of the
absence of sufficient attack against the actuations of government.

On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the
respondent appellate court's pronouncements sound and resilient to petitioner's attacks.

Anent grounds 3(b) and (B) both alleging/claiming lack of notice We find, after
considering the facts and circumstances, as well as evidences, that there was
sufficient, constructive and/or actual notice of assessments, levy and sale, sent to
herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda
Marcos.
 Even if we are to rule out the notices of assessments personally given to the caretaker
of Mrs. Marcos at the latter's last known address, on August 26, 1991 and September
12, 1991, as well as the notices of assessment personally given to the caretaker of
petitioner also at his last known address on September 12, 1991 the subsequent
notices given thereafter could no longer be ignored as they were sent at a time when
petitioner was already here in the Philippines, and at a place where said notices would
surely be called to petitioner's attention, and received by responsible persons of
sufficient age and discretion.

Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos
c/o the petitioner, at his office, House of Representatives, Batasan Pambansa, Q.C.
(Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210, Comment/Memorandum of OSG).
Moreover, a notice to taxpayer dated October 8, 1992 inviting Mrs. Marcos to a
conference relative to her tax liabilities, was furnished the counsel of Mrs. Marcos
Dean Antonio Coronel (Annex "B", p. 211, ibid). Thereafter, copies of Notices were
also served upon Mrs. Imelda Marcos, the petitioner and their counsel "De Borja,
Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7, 1993 and June
10, 1993. Despite all of these Notices, petitioner never lifted a finger to protest the
assessments, (upon which the Levy and sale of properties were based), nor appealed
the same to the Court of Tax Appeals.

There being sufficient service of Notices to herein petitioner (and his mother) and it
appearing that petitioner continuously ignored said Notices despite several
opportunities given him to file a protest and to thereafter appeal to the Court of Tax
Appeals, the tax assessments subject of this case, upon which the levy and sale of
properties were based, could no longer be contested (directly or indirectly) via this
instant petition for certiorari. 20

Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been
issued without validly serving copies thereof to the petitioner. As a mandatory heir of the decedent,
petitioner avers that he has an interest in the subject estate, and notices of levy upon its properties
should have been served upon him.

We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the
delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner
as heir of the deceased. In the same vein, in the matter of income tax delinquency of the late president
and his spouse, petitioner is not the taxpayer liable. Thus, it follows that service of notices of levy in
satisfaction of these tax delinquencies upon the petitioner is not required by law, as under Section 213
of the NIRC, which pertinently states:

xxx xxx xxx

. . . Levy shall be effected by writing upon said certificate a description of the property
upon which levy is made. At the same time, written notice of the levy shall be mailed
to or served upon the Register of Deeds of the province or city where the property is
located and upon the delinquent taxpayer, or if he be absent from the Philippines, to
his agent or the manager of the business in respect to which the liability arose, or if
there be none, to the occupant of the property in question.

xxx xxx xxx

The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale
were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself
on April 12, 1993 at his office at the Batasang Pambansa. 21 We cannot therefore, countenance
petitioner's insistence that he was denied due process. Where there was an opportunity to raise objections
to government action, and such opportunity was disregarded, for no justifiable reason, the party claiming
oppression then becomes the oppressor of the orderly functions of government. He who comes to court
must come with clean hands. Otherwise, he not only taints his name, but ridicules the very structure of
established authority.

IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court
of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

SO ORDERED.

Regalado, Romero, Puno and Mendoza, JJ., concur.

RAFAEL ARSENIO S. DIZON, in his capacity as G.R. No. 140944

the Judicial Administrator of the Estate of
the deceased JOSE P. FERNANDEZ,
Present:
Petitioner,

YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
COURT OF TAX APPEALS REYES, JJ.
and COMMISSIONER OF INTERNAL
REVENUE,
Respondents. Promulgated:
 April 30, 2008

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules
of Civil Procedure seeking the reversal of the Court of Appeals (CA)
Decision[2] dated April 30, 1999 which affirmed the Decision[3] of the Court of Tax
Appeals (CTA) dated June 17, 1997.[4]

The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the
probate of his will[5] was filed with Branch 51 of the Regional Trial Court (RTC)
of Manila (probate court).[6] The probate court then appointed retired Supreme
Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P.
Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of
the Estate of Jose (Estate). In a letter[7] dated October 13, 1988, Justice
Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR)
of the special proceedings for the Estate.

Petitioner alleged that several requests for extension of the period to file the
required estate tax return were granted by the BIR since the assets of the estate,
as well as the claims against it, had yet to be collated, determined and identified.
Thus, in a letter[8] dated March 14, 1990, Justice Dizon authorized Atty. Jesus M.
Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate
tax return and to represent the same in securing a Certificate of Tax Clearance.
Eventually, on April 17, 1990, Atty. Gonzales wrote a letter[9] addressed to the BIR
Regional Director for San Pablo City and filed the estate tax return[10]with the same
BIR Regional Office, showing therein a NIL estate tax liability, computed as follows:

COMPUTATION OF TAX

Conjugal Real Property (Sch. 1) P10,855,020.00

Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL
Less: Share of Surviving Spouse NIL .
 Net Share in Conjugal Estate NIL
xxx
Net Taxable Estate NIL .
Estate Tax Due NIL .[11]

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G.
Umali issued Certification Nos. 2052[12] and 2053[13] stating that the taxes due on
the transfer of real and personal properties[14] of Jose had been fully paid and said
properties may be transferred to his heirs. Sometime in August 1990, Justice Dizon
passed away. Thus, on October 22, 1990, the probate court appointed petitioner
as the administrator of the Estate.[15]

Petitioner requested the probate court's authority to sell several properties

forming part of the Estate, for the purpose of paying its creditors, namely: Equitable
Banking Corporation (P19,756,428.31), Banque de L'Indochine et. de Suez
(US$4,828,905.90 as of January 31, 1988), Manila Banking Corporation
(P84,199,160.46 as of February 28, 1989) and State Investment House, Inc.
(P6,280,006.21). Petitioner manifested that Manila Bank, a major creditor of
the Estate was not included, as it did not file a claim with the probate court since it
had security over several real estate properties forming part of the Estate.[16]

However, on November 26, 1991, the Assistant Commissioner for Collection

of the BIR, Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-
E-87-91-003269,[17] demanding the payment of P66,973,985.40 as deficiency
estate tax, itemized as follows:
 Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

25% surcharge- late filing 7,967,103.62
late payment 7,967,103.62
Interest 19,121,048.68
Compromise-non filing 25,000.00
non payment 25,000.00
no notice of death 15.00
no CPA Certificate 300.00

Total amount due & collectible P66,973,985.40[18]

In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the
reconsideration of the said estate tax assessment. However, in her
letter[20] dated April 12, 1994, the BIR Commissioner denied the request and
reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency
estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2,
1994, petitioner filed a petition for review[21] before respondent CTA. Trial on the
merits ensued.

As found by the CTA, the respective parties presented the following pieces of
evidence, to wit:
In the hearings conducted, petitioner did not present testimonial
evidence but merely documentary evidence consisting of the following:

Nature of Document (sic) Exhibits

1. Letter dated October 13, 1988

from Arsenio P. Dizon addressed
to the Commissioner of Internal
Revenue informing the latter of
the special proceedings for the
settlement of the estate (p. 126,
BIR records); "A"

2. Petition for the probate of the

will and issuance of letter of
administration filed with the
Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc.
No. 87-42980 (pp. 107-108, BIR
records); "B" & "B-1

3. Pleading entitled "Compliance"

filed with the probate Court
submitting the final inventory
of all the properties of the
deceased (p. 106, BIR records); "C"

4. Attachment to Exh. "C" which

is the detailed and complete
listing of the properties of
the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17"

5. Claims against the estate filed

by Equitable Banking Corp. with
the probate Court in the amount
of P19,756,428.31 as of March 31,
1988, together with the Annexes
to the claim (pp. 64-88, BIR records); "D" to "D-24"

6. Claim filed by Banque de L'

Indochine et de Suez with the
probate Court in the amount of
US $4,828,905.90 as of January 31,
1988 (pp. 262-265, BIR records); "E" to "E-3"

7. Claim of the Manila Banking

Corporation (MBC) which as of
November 7, 1987 amounts to
P65,158,023.54, but recomputed
as of February 28, 1989 at a
total amount of P84,199,160.46;
together with the demand letter
from MBC's lawyer (pp. 194-197,
BIR records); "F" to "F-3"

8. Demand letter of Manila Banking

Corporation prepared by Asedillo,
Ramos and Associates Law Offices
addressed to Fernandez Hermanos,
Inc., represented by Jose P.
Fernandez, as mortgagors, in the
total amount of P240,479,693.17
as of February 28, 1989
(pp. 186-187, BIR records); "G" & "G-1"

9. Claim of State Investment

House, Inc. filed with the
RTC, Branch VII of Manila,
docketed as Civil Case No.
86-38599 entitled "State
Investment House, Inc.,
Plaintiff, versus Maritime
Company Overseas, Inc. and/or
Jose P. Fernandez, Defendants,"
(pp. 200-215, BIR records); "H" to "H-16"
10. Letter dated March 14, 1990
of Arsenio P. Dizon addressed
to Atty. Jesus M. Gonzales,
(p. 184, BIR records); "I"

11. Letter dated April 17, 1990

from J.M. Gonzales addressed
to the Regional Director of
BIR in San Pablo City
(p. 183, BIR records); "J"

12. Estate Tax Return filed by

the estate of the late Jose P.
Fernandez through its authorized
representative, Atty. Jesus M.
Gonzales, for Arsenio P. Dizon,
with attachments (pp. 177-182,
BIR records); "K" to "K-5"

13. Certified true copy of the

Letter of Administration
issued by RTC Manila, Branch
51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S.
Dizon as Judicial Administrator
of the estate of Jose P.
Fernandez; (p. 102, CTA records)
and "L"

14. Certification of Payment of

estate taxes Nos. 2052 and
2053, both dated April 27, 1990,
issued by the Office of the
Regional Director, Revenue
Region No. 4-C, San Pablo
City, with attachments
(pp. 103-104, CTA records.). "M" to "M-5"

Respondent's [BIR] counsel presented on June 26, 1995 one witness in

the person of Alberto Enriquez, who was one of the revenue examiners
who conducted the investigation on the estate tax case of the late Jose
P. Fernandez. In the course of the direct examination of the witness, he
identified the following:

Documents/
Signatures BIR Record

1. Estate Tax Return prepared by

the BIR; p. 138
2. Signatures of Ma. Anabella
Abuloc and Alberto Enriquez,
Jr. appearing at the lower
Portion of Exh. "1"; -do-

3. Memorandum for the Commissioner,

dated July 19, 1991, prepared by
revenue examiners, Ma. Anabella A.
Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed by
Maximino V. Tagle pp. 143-144

4. Signature of Alberto S.
Enriquez appearing at the
lower portion on p. 2 of Exh. "2"; -do-

5. Signature of Ma. Anabella A.

Abuloc appearing at the
lower portion on p. 2 of Exh. "2"; -do-

6. Signature of Raymund S.
Gallardo appearing at the
Lower portion on p. 2 of Exh. "2"; -do-

7. Signature of Maximino V.
Tagle also appearing on
p. 2 of Exh. "2"; -do-

8. Summary of revenue
Enforcement Officers Audit
Report, dated July 19, 1991; p. 139

9. Signature of Alberto
Enriquez at the lower
portion of Exh. "3"; -do-

10. Signature of Ma. Anabella A.

Abuloc at the lower
portion of Exh. "3"; -do-

11. Signature of Raymond S.

Gallardo at the lower
portion of Exh. "3"; -do-

12. Signature of Maximino

V. Tagle at the lower
portion of Exh. "3"; -do-

13. Demand letter (FAS-E-87-91-00),

signed by the Asst. Commissioner
 for Collection for the Commissioner
of Internal Revenue, demanding
payment of the amount of
P66,973,985.40; and p. 169

14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's
ruling in Vda. de Oate v. Court of Appeals,[23] the CTA opined that the
aforementioned pieces of evidence introduced by the BIR were admissible in
evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered as
evidence for respondent, considering that respondent has been declared
to have waived the presentation thereof during the hearing on March 20,
1996, still they could be considered as evidence for respondent since
they were properly identified during the presentation of respondent's
witness, whose testimony was duly recorded as part of the records of this
case. Besides, the documents marked as respondent's exhibits formed
part of the BIR records of the case.[24]

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it
came up with its own computation of the deficiency estate tax, to wit:
Conjugal Real Property P 5,062,016.00
Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties P44,652,813.66
Less: Capital/Paraphernal
Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
=============

exclusive of 20% interest from due date of its payment until full payment
thereof
[Sec. 283 (b), Tax Code of 1987].[25]
Thus, the CTA disposed of the case in this wise:

WHEREFORE, viewed from all the foregoing, the Court finds the petition
unmeritorious and denies the same. Petitioner and/or the heirs of Jose
P. Fernandez are hereby ordered to pay to respondent the amount
of P37,419,493.71 plus 20% interest from the due date of its payment
until full payment thereof as estate tax liability of the estate of Jose P.
Fernandez who died on November 7, 1987.

SO ORDERED.[26]

Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.[27]

The CA's Ruling

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's
findings, the CA ruled that the petitioner's act of filing an estate tax return with the
BIR and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the
BIR Commissioner of her authority to re-examine or re-assess the said return filed
on behalf of the Estate.[28]
On May 31, 1999, petitioner filed a Motion for Reconsideration[29] which the CA
denied in its Resolution[30] dated November 3, 1999.

Hence, the instant Petition raising the following issues:

1. Whether or not the admission of evidence which were not formally

offered by the respondent BIR by the Court of Tax Appeals which was
subsequently upheld by the Court of Appeals is contrary to the Rules
of Court and rulings of this Honorable Court;

2. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in recognizing/considering the estate tax return prepared and
filed by respondent BIR knowing that the probate court appointed
administrator of the estate of Jose P. Fernandez had previously filed
one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had been
issued in the estate's favor;

3. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in disallowing the valid and enforceable claims of creditors
against the estate, as lawful deductions despite clear and convincing
evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in validating erroneous double imputation of values on the very
same estate properties in the estate tax return it prepared and filed
which effectively bloated the estate's assets.[31]

The petitioner claims that in as much as the valid claims of creditors against the
Estate are in excess of the gross estate, no estate tax was due; that the lack of a
formal offer of evidence is fatal to BIR's cause; that the doctrine laid down in Vda.
de Oate has already been abandoned in a long line of cases in which the Court held
that evidence not formally offered is without any weight or value; that Section 34
of Rule 132 of the Rules on Evidence requiring a formal offer of evidence is
mandatory in character; that, while BIR's witness Alberto Enriquez (Alberto) in his
testimony before the CTA identified the pieces of evidence aforementioned such
that the same were marked, BIR's failure to formally offer said pieces of evidence
and depriving petitioner the opportunity to cross-examine Alberto, render the
same inadmissible in evidence; that assuming arguendo that the ruling in Vda. de
Oate is still applicable, BIR failed to comply with the doctrine's requisites because
the documents herein remained simply part of the BIR records and were not duly
incorporated in the court records; that the BIR failed to consider that although the
actual payments made to the Estate creditors were lower than their respective
claims, such were compromise agreements reached long after the Estate's liability
had been settled by the filing of its estate tax return and the issuance of
BIR Certification Nos. 2052 and 2053; and that the reckoning date of the claims
against the Estate and the settlement of the estate tax due should be at the time
the estate tax return was filed by the judicial administrator and the issuance of said
BIR Certifications and not at the time the aforementioned Compromise
Agreements were entered into with the Estate's creditors.[32]

On the other hand, respondent counters that the documents, being part of the
records of the case and duly identified in a duly recorded testimony are considered
evidence even if the same were not formally offered; that the filing of the estate
tax return by the Estate and the issuance of BIR Certification Nos. 2052 and 2053
did not deprive the BIR of its authority to examine the return and assess the estate
tax; and that the factual findings of the CTA as affirmed by the CA may no longer
be reviewed by this Court via a petition for review.[33]

The Issues
There are two ultimate issues which require resolution in this case:

First. Whether or not the CTA and the CA gravely erred in allowing the admission
of the pieces of evidence which were not formally offered by the BIR; and

Second. Whether or not the CA erred in affirming the CTA in the latter's
determination of the deficiency estate tax imposed against the Estate.

The Courts Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described as a court of record.

As cases filed before it are litigated de novo, party-litigants shall prove every minute
aspect of their cases. Indubitably, no evidentiary value can be given the pieces of
evidence submitted by the BIR, as the rules on documentary evidence require that
these documents must be formally offered before the CTA.[34] Pertinent is Section
34, Rule 132 of the Revised Rules on Evidence which reads:

SEC. 34. Offer of evidence. The court shall consider no evidence which has
not been formally offered. The purpose for which the evidence is offered
must be specified.

The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated
this Court's previous rulings in People v. Napat-a[35] and People v. Mate[36] on the
admission and consideration of exhibits which were not formally offered during the
trial. Although in a long line of cases many of which were decided after Vda.
de Oate, we held that courts cannot consider evidence which has not been formally
offered,[37] nevertheless, petitioner cannot validly assume that the doctrine laid
down in Vda. de Oate has already been abandoned. Recently, in Ramos v.
Dizon,[38] this Court, applying the said doctrine, ruled that the trial court judge
therein committed no error when he admitted and considered the respondents'
exhibits in the resolution of the case, notwithstanding the fact that the same
were not formally offered. Likewise, in Far East Bank & Trust Company v.
Commissioner of Internal Revenue,[39] the Court made reference to said doctrine in
resolving the issues therein. Indubitably, the doctrine laid down in Vda. De
Oate still subsists in this jurisdiction. In Vda. de Oate, we held that:

From the foregoing provision, it is clear that for evidence to be

considered, the same must be formally offered. Corollarily, the mere fact
that a particular document is identified and marked as an exhibit does
not mean that it has already been offered as part of the evidence of a
party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the
occasion to make a distinction between identification of documentary
evidence and its formal offer as an exhibit. We said that the first is done
in the course of the trial and is accompanied by the marking of the
evidence as an exhibit while the second is done only when the party rests
its case and not before. A party, therefore, may opt to formally offer his
evidence if he believes that it will advance his cause or not to do so at all.
In the event he chooses to do the latter, the trial court is not authorized
by the Rules to consider the same.

However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103
SCRA 484], we relaxed the foregoing rule and allowed evidence not
formally offered to be admitted and considered by the trial court
provided the following requirements are present, viz.: first, the same
must have been duly identified by testimony duly recorded and,
second, the same must have been incorporated in the records of the
case.[40]
 From the foregoing declaration, however, it is clear that Vda. de Oate is
merely an exception to the general rule. Being an exception, it may be applied only
when there is strict compliance with the requisites mentioned therein; otherwise,
the general rule in Section 34 of Rule 132 of the Rules of Court should prevail.

In this case, we find that these requirements have not been satisfied. The assailed
pieces of evidence were presented and marked during the trial particularly when
Alberto took the witness stand. Alberto identified these pieces of evidence in his
direct testimony.[41] He was also subjected to cross-examination and re-cross
examination by petitioner.[42] But Albertos account and the exchanges between
Alberto and petitioner did not sufficiently describe the contents of the said pieces
of evidence presented by the BIR. In fact, petitioner sought that the lead examiner,
one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto was
incompetent to answer questions relative to the working papers.[43] The lead
examiner never testified. Moreover, while Alberto's testimony identifying the BIR's
evidence was duly recorded, the BIR documents themselves were not incorporated
in the records of the case.

A common fact threads through Vda. de Oate and Ramos that does not exist at all
in the instant case. In the aforementioned cases, the exhibits were marked at the
pre-trial proceedings to warrant the pronouncement that the same were duly
incorporated in the records of the case. Thus, we held in Ramos:

In this case, we find and so rule that these requirements have been
satisfied. The exhibits in question were presented and marked during
the pre-trial of the case thus, they have been incorporated into the
records.Further, Elpidio himself explained the contents of these exhibits
when he was interrogated by respondents' counsel...
 xxxx

But what further defeats petitioner's cause on this issue is that

respondents' exhibits were marked and admitted during the pre-trial
stage as shown by the Pre-Trial Order quoted earlier.[44]

While the CTA is not governed strictly by technical rules of evidence,[45] as rules of
procedure are not ends in themselves and are primarily intended as tools in the
administration of justice, the presentation of the BIR's evidence is not a mere
procedural technicality which may be disregarded considering that it is the only
means by which the CTA may ascertain and verify the truth of BIR's claims against
the Estate.[46] The BIR's failure to formally offer these pieces of evidence, despite
CTA's directives, is fatal to its cause.[47] Such failure is aggravated by the fact that
not even a single reason was advanced by the BIR to justify such fatal omission.
This, we take against the BIR.

Per the records of this case, the BIR was directed to present its evidence[48] in the
hearing of February 21, 1996, but BIR's counsel failed to appear.[49] The CTA denied
petitioner's motion to consider BIR's presentation of evidence as waived, with a
warning to BIR that such presentation would be considered waived if BIR's evidence
would not be presented at the next hearing. Again, in the hearing of March 20,
1996, BIR's counsel failed to appear.[50] Thus, in its Resolution[51] dated March 21,
1996, the CTA considered the BIR to have waived presentation of its evidence. In
the same Resolution, the parties were directed to file their respective
memorandum. Petitioner complied but BIR failed to do so.[52] In all of these
proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply
our ruling in Heirs of Pedro Pasag v. Parocha:[53]
A formal offer is necessary because judges are mandated to rest
their findings of facts and their judgment only and strictly upon the
 evidence offered by the parties at the trial. Its function is to enable the
trial judge to know the purpose or purposes for which the proponent is
presenting the evidence. On the other hand, this allows opposing parties
to examine the evidence and object to its admissibility. Moreover, it
facilitates review as the appellate court will not be required to review
documents not previously scrutinized by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court
in Constantino v. Court of Appeals ruled that the formal offer of one's
evidence is deemed waived after failing to submit it within a
considerable period of time. It explained that the court cannot admit
an offer of evidence made after a lapse of three (3) months because to
do so would "condone an inexcusable laxity if not non-compliance with
a court order which, in effect, would encourage needless delays and
derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial
court had reasonable ground to consider that petitioners had waived
their right to make a formal offer of documentary or object evidence.
Despite several extensions of time to make their formal offer, petitioners
failed to comply with their commitment and allowed almost five months
to lapse before finally submitting it. Petitioners' failure to comply with
the rule on admissibility of evidence is anathema to the efficient,
effective, and expeditious dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the

merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the
highest respect and will not be disturbed on appeal unless it is shown that the lower
courts committed gross error in the appreciation of facts.[54] In this case, however,
we find the decision of the CA affirming that of the CTA tainted with palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been
condoned. As a mode of extinguishing an obligation,[55] condonation or remission
of debt[56] is defined as:

an act of liberality, by virtue of which, without receiving any equivalent,

the creditor renounces the enforcement of the obligation, which is
extinguished in its entirety or in that part or aspect of the same to which
the remission refers. It is an essential characteristic of remission that it
be gratuitous, that there is no equivalent received for the benefit given;
once such equivalent exists, the nature of the act changes. It may
become dation in payment when the creditor receives a thing different
from that stipulated; or novation, when the object or principal conditions
of the obligation should be changed; or compromise, when the matter
renounced is in litigation or dispute and in exchange of some concession
which the creditor receives.[57]

Verily, the second issue in this case involves the construction of Section 79[58] of the
National Internal Revenue Code[59] (Tax Code) which provides for the allowable
deductions from the gross estate of the decedent. The specific question is whether
the actual claims of the aforementioned creditors may be fully allowed as
deductions from the gross estate of Jose despite the fact that the said claims were
reduced or condoned through compromise agreements entered into by the Estate
with its creditors.

Claims against the estate, as allowable deductions from the gross estate under
Section 79 of the Tax Code, are basically a reproduction of the deductions allowed
under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466),
otherwise known as the National Internal Revenue Code of 1939, and which was
the first codification of Philippine tax laws. Philippine tax laws were, in turn, based
on the federal tax laws of the United States. Thus, pursuant to established rules of
statutory construction, the decisions of American courts construing the federal tax
code are entitled to great weight in the interpretation of our own tax laws.[60]

It is noteworthy that even in the United States, there is some dispute as to whether
the deductible amount for a claim against the estate is fixed as of the decedent's
death which is the general rule, or the same should be adjusted to reflect post-
death developments, such as where a settlement between the parties results in the
reduction of the amount actually paid.[61] On one hand, the U.S. court ruled that
the appropriate deduction is the value that the claim had at the date of the
decedent's death.[62] Also, as held in Propstra v. U.S., [63]where a lien claimed
against the estate was certain and enforceable on the date of the decedent's death,
the fact that the claimant subsequently settled for lesser amount did not preclude
the estate from deducting the entire amount of the claim for estate tax
purposes. These pronouncements essentially confirm the general principle that
post-death developments are not material in determining the amount of the
deduction.

On the other hand, the Internal Revenue Service (Service) opines that post-
death settlement should be taken into consideration and the claim should be
allowed as a deduction only to the extent of the amount actually
paid.[64] Recognizing the dispute, the Service released Proposed Regulations in 2007
mandating that the deduction would be limited to the actual amount paid.[65]

In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of
Appeals held:

We are persuaded that the Ninth Circuit's decision...in Propstra correctly

apply the Ithaca Trust date-of-death valuation principle to enforceable
claims against the estate. As we interpret Ithaca Trust, when the
 Supreme Court announced the date-of-death valuation principle, it was
making a judgment about the nature of the federal estate tax specifically,
that it is a tax imposed on the act of transferring property by will or
intestacy and, because the act on which the tax is levied occurs at a
discrete time, i.e., the instance of death, the net value of the property
transferred should be ascertained, as nearly as possible, as of that time.
This analysis supports broad application of the date-of-death valuation
rule.[67]

We express our agreement with the date-of-death valuation rule, made pursuant
to the ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United
States.[68] First. There is no law, nor do we discern any legislative intent in our tax
laws, which disregards the date-of-death valuation principle and particularly
provides that post-death developments must be considered in determining the net
value of the estate. It bears emphasis that tax burdens are not to be imposed, nor
presumed to be imposed, beyond what the statute expressly and clearly imports,
tax statutes being construed strictissimi juris against the government.[69] Any doubt
on whether a person, article or activity is taxable is generally resolved against
taxation.[70] Second. Such construction finds relevance and consistency in our Rules
on Special Proceedings wherein the term "claims" required to be presented against
a decedent's estate is generally construed to mean debts or demands of a
pecuniary nature which could have been enforced against the deceased in his
lifetime, or liability contracted by the deceased before his death.[71] Therefore, the
claims existing at the time of death are significant to, and should be made the basis
of, the determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision

dated April 30, 1999 and the Resolution dated November 3, 1999 of the Court of
Appeals in CA-G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of
Internal Revenue's deficiency estate tax assessment against the Estate of Jose P.
Fernandez is hereby NULLIFIED. No costs.
 SO ORDERED.

SECOND DIVISION

COMMISSIONER OF G.R. No. 178697

INTERNAL REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

LEONARDO-DE CASTRO,
PERALTA,
- versus - ABAD, and
MENDOZA, JJ.

SONY PHILIPPINES, INC., Promulgated:

Respondent. November 17, 2010

X ---------------------------------------------------------------------------------------X

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007
Decision and the July 5, 2007 Resolution of the Court of Tax Appeals En
Banc[1] (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision of
the CTA-First Division[2] which, in turn, partially granted the petition for review of
respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision
cancelled the deficiency assessment issued by petitioner Commissioner of Internal
Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency
assessment for expanded withholding tax (EWT) in the amount of P1,035,879.70
and the penalties for late remittance of internal revenue taxes in the amount
of P1,269, 593.90.[3]

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No.

000019734 (LOA 19734) authorizing certain revenue officers to examine Sonys
books of accounts and other accounting records regarding revenue taxes for the
period 1997 and unverified prior years. On December 6, 1999, a preliminary
assessment for 1997 deficiency taxes and penalties was issued by the CIR which
Sony protested. Thereafter, acting on the protest, the CIR issued final assessment
notices, the formal letter of demand and the details of discrepancies.[4] Said details
of the deficiency taxes and penalties for late remittance of internal revenue taxes are
as follows:
DEFICIENCY VALUE -ADDED TAX (VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72
DEFICIENCY OF VAT ON ROYALTY PAYMENTS
(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.65[5]

 Sony sought re-evaluation of the aforementioned assessment by filing a
protest on February 2, 2000. Sony submitted relevant documents in support of its
protest on the 16th of that same month.[6]

On October 24, 2000, within 30 days after the lapse of 180 days from
submission of the said supporting documents to the CIR, Sony filed a petition for
review before the CTA.[7]

After trial, the CTA-First Division disallowed the deficiency VAT assessment
because the subsidized advertising expense paid by Sony which was duly covered
by a VAT invoice resulted in an input VAT credit. As regards the EWT, the CTA-
First Division maintained the deficiency EWT assessment on Sonys motor vehicles
and on professional fees paid to general professional partnerships. It also assessed
the amounts paid to sales agents as commissions with five percent (5%) EWT
pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division,
however, disallowed the EWT assessment on rental expense since it found that the
total rental deposit of P10,523,821.99 was incurred from January to March 1998
which was again beyond the coverage of LOA 19734. Except for the compromise
penalties, the CTA-First Division also upheld the penalties for the late payment of
VAT on royalties, for late remittance of final withholding tax on royalty as of
December 1997 and for the late remittance of EWT by some of Sonys branches.[8] In
sum, the CTA-First Division partly granted Sonys petition by cancelling the
deficiency VAT assessment but upheld a modified deficiency EWT assessment as
well as the penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY

GRANTED. Respondent is ORDERED to CANCEL and
WITHDRAW the deficiency assessment for value-added tax for
1997 for lack of merit. However, the deficiency assessments for
expanded withholding tax and penalties for late remittance of
internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent
the deficiency expanded withholding tax in the amount
 of P1,035,879.70 and the following penalties for late remittance of
internal revenue taxes in the sum of P1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioners Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully
paid pursuant to Section 249(C)(3) of the 1997 Tax Code.

SO ORDERED.[9]

The CIR sought a reconsideration of the above decision and submitted the
following grounds in support thereof:

A. The Honorable Court committed reversible error in holding

that petitioner is not liable for the deficiency VAT in the
amount of P11,141,014.41;

B. The Honorable court committed reversible error in holding

that the commission expense in the amount of P2,894,797.00
should be subjected to 5% withholding tax instead of the 10%
tax rate;

C. The Honorable Court committed a reversible error in

holding that the withholding tax assessment with respect to
the 5% withholding tax on rental deposit in the amount
of P10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding

that the remittance of final withholding tax on royalties
covering the period January to March 1998 was filed on
time.[10]

On April 28, 2005, the CTA-First Division denied the motion for
reconsideration. Unfazed, the CIR filed a petition for review with the CTA-EB
raising identical issues:
 1. Whether or not respondent (Sony) is liable for the deficiency
VAT in the amount of P11,141,014.41;

2. Whether or not the commission expense in the amount

of P2,894,797.00 should be subjected to 10% withholding tax
instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the

5% withholding tax on rental deposit in the amount
of P10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on

royalties covering the period January to March 1998 was filed
outside of time.[11]

Finding no cogent reason to reverse the decision of the CTA-First Division,

the CTA-EB dismissed CIRs petition on May 17, 2007. CIRs motion for
reconsideration was denied by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the
very same grounds it raised before the CTA-First Division and the CTA-EB. The
said grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE

PETITION

THE CTA EN BANC ERRED IN RULING THAT

RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN THE
AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENTS DEFICIENCY EXPANDED

WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE

COMMISSION EXPENSE IN THE AMOUNT OF
PHP2,894,797.00 SHOULD BE SUBJECTED TO A
 WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX
RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE

ASSESSMENT WITH RESPECT TO THE 5% WITHHOLDING
TAX ON RENTAL DEPOSIT IN THE AMOUNT OF
PHP10,523,821.99 IS NOT PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE

FINAL WITHHOLDING TAX ON ROYALTIES COVERING THE
PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.[12]

Upon filing of Sonys comment, the Court ordered the CIR to file its reply
thereto. The CIR subsequently filed a manifestation informing the Court that it
would no longer file a reply. Thus, on December 3, 2008, the Court resolved to give
due course to the petition and to decide the case on the basis of the pleadings filed.[13]
The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states the period 1997 and
unverified prior years, should be understood to mean the fiscal year ending in March
31, 1998.[14] The Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the

authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to examine the books of
account and other accounting records of a taxpayer for the purpose of collecting the
correct amount of tax.[15] The very provision of the Tax Code that the CIR relies on
is unequivocal with regard to its power to grant authority to examine and assess a
taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments

and Prescribe Additional Requirements for Tax Administration and
Enforcement.

(A)Examination of Returns and Determination of tax Due.

After a return has been filed as required under the provisions of this
 Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the
correct amount of tax: Provided, however, That failure to file a
return shall not prevent the Commissioner from authorizing the
examination of any taxpayer. x x x [Emphases supplied]

Clearly, there must be a grant of authority before any revenue officer can
conduct an examination or assessment. Equally important is that the revenue officer
so authorized must not go beyond the authority given. In the absence of such an
authority, the assessment or examination is a nullity.

As earlier stated, LOA 19734 covered the period 1997 and unverified prior
years. For said reason, the CIR acting through its revenue officers went beyond the
scope of their authority because the deficiency VAT assessment they arrived at was
based on records from January to March 1998 or using the fiscal year which ended
in March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005
Resolution, the CIR knew which period should be covered by the investigation.
Thus, if CIR wanted or intended the investigation to include the year 1998, it should
have done so by including it in the LOA or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734,
particularly the phrase and unverified prior years, violated Section C of Revenue
Memorandum Order No. 43-90 dated September 20, 1990, the pertinent portion of
which reads:

3. A Letter of Authority should cover a taxable period not

exceeding one taxable year. The practice of issuing L/As covering
audit of unverified prior years is hereby prohibited. If the audit
of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the
L/A.[16] [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been
disallowed. Be that as it may, the CIRs argument, that Sonys advertising expense
could not be considered as an input VAT credit because the same was eventually
reimbursed by Sony International Singapore (SIS), is also erroneous.
 The CIR contends that since Sonys advertising expense was reimbursed by
SIS, the former never incurred any advertising expense. As a result, Sony is not
entitled to a tax credit. At most, the CIR continues, the said advertising expense
should be for the account of SIS, and not Sony.[17]

The Court is not persuaded. As aptly found by the CTA-First Division and
later affirmed by the CTA-EB, Sonys deficiency VAT assessment stemmed from the
CIRs disallowance of the input VAT credits that should have been realized from the
advertising expense of the latter.[18] It is evident under Section 110[19] of the 1997
Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate
business expense. This is confirmed by no less than CIRs own witness, Revenue
Officer Antonio Aluquin.[20] There is also no denying that Sony incurred advertising
expense. Aluquin testified that advertising companies issued invoices in the name of
Sony and the latter paid for the same.[21]Indubitably, Sony incurred and paid for
advertising expense/ services. Where the money came from is another matter all
together but will definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement from
SIS was income and, thus, taxable. In support of this, the CIR cited a portion of
Sonys protest filed before it:

The fact that due to adverse economic conditions, Sony-

Singapore has granted to our client a subsidy equivalent to the
latters advertising expenses will not affect the validity of the input
taxes from such expenses. Thus, at the most, this is an additional
income of our client subject to income tax. We submit further that
our client is not subject to VAT on the subsidy income as this was
not derived from the sale of goods or services.[22]

Insofar as the above-mentioned subsidy may be considered as income and,

therefore, subject to income tax, the Court agrees. However, the Court does not agree
that the same subsidy should be subject to the 10% VAT. To begin with, the said
subsidy termed by the CIR as reimbursement was not even exclusively earmarked
for Sonys advertising expense for it was but an assistance or aid in view of Sonys
dire or adverse economic conditions, and was only equivalent to the latters (Sonys)
advertising expenses.
 Section 106 of the Tax Code explains when VAT may be imposed or exacted.
Thus:

SEC. 106. Value-added Tax on Sale of Goods or

Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
value-added tax equivalent to ten percent (10%) of the gross selling
price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or
transferor.

Thus, there must be a sale, barter or exchange of goods or properties before

any VAT may be levied. Certainly, there was no such sale, barter or exchange in the
subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment for
goods or properties sold, bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to
rule that services rendered for a fee even on reimbursement-on-cost basis only and
without realizing profit are also subject to VAT. The case, however, is not applicable
to the present case. In that case, COMASERCO rendered service to its affiliates and,
in turn, the affiliates paid the former reimbursement-on-cost which means that it was
paid the cost or expense that it incurred although without profit. This is not true in
the present case. Sony did not render any service to SIS at all. The services rendered
by the advertising companies, paid for by Sony using SIS dole-out, were for Sony
and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latters
advertising expense but never received any goods, properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sonys

commission expense, the CIR insists that said deficiency EWT assessment is subject
to the ten percent (10%) rate instead of the five percent (5%) citing Revenue
Regulation No. 2-98 dated April 17, 1998.[24]The said revenue regulation provides
that the 10% rate is applied when the recipient of the commission income is a natural
person. According to the CIR, Sonys schedule of Selling, General and
Administrative expenses shows the commission expense as commission/dealer
salesman incentive, emphasizing the word salesman.
 On the other hand, the application of the five percent (5%) rate by the CTA-
First Division is based on Section 1(g) of Revenue Regulations No. 6-85 which
provides:

(g) Amounts paid to certain Brokers and Agents. On gross

payments to customs, insurance, real estate and commercial
brokers and agents of professional entertainers five per centum
(5%).[25]

In denying the very same argument of the CIR in its motion for
reconsideration, the CTA-First Division, held:

x x x, commission expense is indeed subject to 10%

withholding tax but payments made to broker is subject to 5%
withholding tax pursuant to Section 1(g) of Revenue Regulations
No. 6-85. While the commission expense in the schedule of Selling,
General and Administrative expenses submitted by petitioner (SPI)
to the BIR is captioned as commission/dealer salesman incentive
the same does not justify the automatic imposition of flat 10% rate.
As itemized by petitioner, such expense is composed of
Commission Expense in the amount of P10,200.00 and Broker
Dealer of P2,894,797.00.[26]

The Court agrees with the CTA-EB when it affirmed the CTA-First Division
decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as amended
by Revenue Regulations No. 12-94, which was the applicable rule during the subject
period of examination and assessment as specified in the LOA. Revenue Regulations
No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot
be applied in the present case. Besides, the withholding tax on brokers and agents
was only increased to 10% much later or by the end of July 2001 under Revenue
Regulations No. 6-2001.[27] Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the
CTA-EB on the deficiency EWT assessment on the rental deposit. According to their
findings, Sony incurred the subject rental deposit in the amount of P10,523,821.99
only from January to March 1998. As stated earlier, in the absence of the appropriate
LOA specifying the coverage, the CIRs deficiency EWT assessment from January
to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated
remittance of its FWT on royalties (i) as of December 1997; and (ii) for the period
from January to March 1998. Again, the Court agrees with the CTA-First Division
when it upheld the CIR with respect to the royalties for December 1997 but cancelled
that from January to March 1998.

The CIR insists that under Section 3[28] of Revenue Regulations No. 5-82 and
Sections 2.57.4 and 2.58(A)(2)(a)[29] of Revenue Regulations No. 2-98, Sony should
also be made liable for the FWT on royalties from January to March of 1998. At the
same time, it downplays the relevance of the Manufacturing License Agreement
(MLA) between Sony and Sony-Japan, particularly in the payment of royalties.

The above revenue regulations provide the manner of withholding remittance

as well as the payment of final tax on royalty. Based on the same, Sony is required
to deduct and withhold final taxes on royalty payments when the royalty is paid or
is payable. After which, the corresponding return and remittance must be made
within 10 days after the end of each month. The question now is when does the
royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following
terms of royalty payments were agreed upon:
(5)Within two (2) months following each semi-annual period
ending June 30 and December 31, the LICENSEE shall furnish to
the LICENSOR a statement, certified by an officer of the
LICENSEE, showing quantities of the MODELS sold, leased or
otherwise disposed of by the LICENSEE during such respective
semi-annual period and amount of royalty due pursuant this
ARTICLE X therefore, and the LICENSEE shall pay the royalty
hereunder to the LICENSOR concurrently with the furnishing of
the above statement.[30]
 Withal, Sony was to pay Sony-Japan royalty within two (2) months after every
semi-annual period which ends in June 30 and December 31. However, the CTA-
First Division found that there was accrual of royalty by the end of December 1997
as well as by the end of June 1998. Given this, the FWTs should have been paid or
remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was
correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the
royalty from January to March 1998 was seasonably filed. Although the royalty from
January to March 1998 was well within the semi-annual period ending June 30,
which meant that the royalty may be payable until August 1998 pursuant to the
MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or 10 days
from its accrual at the end of June 1998. Thus, when Sony remitted the same on July
8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of
the CTA-EB.

WHEREFORE, the petition is DENIED.

TERESA, MARIA CHRISTINA, G.R. No. 149909

GENARO III, MARIA LUISA, CRISPIN
JR., VINCENT and RASCHEL, all Present:
surnamed GABRIEL,
Petitioners, YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
HON. COURT OF APPEALS, EMMA,
CORAZON and RAMONA, all surnamed Promulgated:
RONQUILLO,
Respondents. October 11, 2007

x------------------------------------------------------------------------------------x
DECISION

NACHURA, J.:

Before the Court is a petition for review on certiorari,[1] questioning

Resolutions[2] dated May 25, 2001 and September 11, 2001 of the Court of Appeals
(CA) in CA-G.R. SP No. 64127, entitled TERESA, MARIA CHRISTINA, GENARO
III, MARIA LUISA, CRISPIN JR., VINCENT and RASCHEL, all surnamed
GABRIEL v. HON. REGIONAL TRIAL COURT OF PASIG CITY, EMMA,
CORAZON and RAMONA, all surnamed RONQUILLO.

Petitioners are the heirs of the late Atty. Crispin F. Gabriel (Atty. Gabriel), who was
designated as the sole executor of the last will and testament of the deceased Genaro
G. Ronquillo (Ronquillo) whose will was probated in 1978 before
the Regional Trial Court of Pasig City in Sp. Proc. No. 8857.[3] On the other hand,
respondents are the heirs of the testator Ronquillo.

On July 26, 1993, the probate court issued an Order[4] fixing the amount of
compensation of Atty. Gabriel as executor in the amount of Php426,000.00 as of
December 1992, plus Php3,000.00 a month thereafter until the final liquidation of
the estate. At the time of the filing of the present petition, there has been no final
liquidation of the Ronquillo estate. Upon the death of Atty. Gabriel on March 19,
1998, his uncollected compensation reached Php648,000.00.[5]

While still acting as executor, Atty. Gabriel, with prior approval of the probate court,
sold three parcels of land situated at Quiapo, Manila to William Lee for
Php18,000,000.00.[6] Due to certain disagreements between Atty. Gabriel and the
respondents, a portion of the proceeds in the amount of Php1,422,000.00 was
deposited with the probate court. The said sum included the compensation of Atty.
Gabriel. Allegedly, to prevent the release of the compensation, respondents filed a
notice with the probate court that there was a pending tax investigation with the
Bureau of Internal Revenue concerning unpaid taxes of the estate from the sale of
the land.[7]

On April 3, 2001, petitioners filed a Petition for Certiorari, Prohibition and

Mandamus with Preliminary Injunction and Prayer for Temporary Restraining Order
in the CA.[8] Petitioners questioned the twin orders of the probate court, particularly
(1) the courts refusal to order the release of the amount of Php648,000.00
representing the compensation of Atty. Gabriel as the executor of the last will and
testament; and (2) the courts insistence to hear respondents allegation of non-
payment of taxes resulting from the sale of the properties located at Quiapo, Manila,
for which reason the compensation of Atty. Gabriel should not be released until
resolution by the probate court on this matter.[9]

In the meantime, the parties came to an agreement to divide the amount deposited in
court. Petitioners received Php284,400.00, and thus, there still remained a balance
of Php363,600.00.[10]

On May 25, 2001, the first questioned Resolution[11] was rendered by the CA, the
pertinent portion of which reads:

An examination of the instant petition for certiorari, prohibition and

mandamus reveals that:

1. The verification and certification of non-forum

shopping was signed by only one (Teresa S. Gabriel)
of the seven petitioners, and there is no showing or
proof that she was duly authorized to sign on behalf
of her co-petitioners; and

2. There is no written explanation why copies of the petition

had to be furnished the respondents by way of
registered mail rather than through the preferred
personal service.

WHEREFORE, premises considered, for being insufficient in form and

substance pursuant to Section 1, 2 & 3, par. 2, Rule 65, in relation to
Section 3 pars. 3 & 5, Rule 46 and Section 11, Rule 13 both of the 1997
Rules of Civil Procedure, the petition for certiorari, prohibition and
 mandamus is hereby DENIED DUE COURSE and
accordingly DISMISSED.

SO ORDERED.[12]

On September 11, 2001, the second assailed Resolution[13] was issued by the CA,
the relevant portion of which reads:

For failure of petitioners to cure the defects that resulted in the dismissal
of their petition, per Resolution dated May 25, 2001, the Motion for
Reconsideration of the Resolution dated June 6, 2001, is
hereby DENIED for lack of merit.

SO ORDERED.

Petitioners presented the following issues in their Memorandum: 1) whether there

was substantial compliance with the certification of non-forum shopping before the
CA; 2) whether the written explanation of why personal service was not done is a
mandatory requirement in pleadings filed before the CA; 3) whether the remaining
balance of compensation of Atty. Gabriel should be released; and 4) whether the
probate court can take cognizance of the tax controversies.[14]

The petition is devoid of merit. The CA committed no reversible error in issuing the
assailed Resolutions.

On the first issue regarding the certification against forum shopping, the Rules of
Court provides that the plaintiff or the principal party shall certify under oath in the
complaint or other initiatory pleading the requirements as mandated under Section
5, Rule 7.[15] The said requirements are mandatory, and therefore, strict compliance
thereof is necessary for the proper administration of justice.

In the petition filed by the petitioners in the CA, the verification and the certification
against forum shopping were signed by Teresa Gabriel alone, albeit there were seven
petitioners therein.[16] In their Memorandum,[17] petitioners proffer the view that the
signature of Teresa, being the mother of the rest of the petitioners, should be
considered as substantial compliance, for she was willing to take the risk of contempt
and perjury should she be found lying. According to petitioners, what is fatal is the
utter lack of signatory in the certification.[18]

In numerous decisions,[19] this Court has been consistent in stringently enforcing the
requirement of verification[20] and certification of non-forum shopping. When there
is more than one petitioner, a petition signed solely by one of them is defective,
unless he was authorized by his co-parties to represent them and to sign the
certification. The attestation contained in the certification of non-forum shopping
requires personal knowledge by the party who executed the same.[21]

In the instant case, the records are bereft of anything that would show that Teresa
was authorized by the other petitioners to file the petition. In the certification against
forum shopping, the principal party is required to certify under oath as to the matters
contained therein and failure to comply with the requirements shall not be curable
by amendment but shall be a ground for the dismissal of the case. Personal
knowledge of the party executing the same is important and a similar requirement
applies to the verification. Thus, the verification and certification signed only by
Teresa are utterly defective, and it is within the prerogative of the court to dismiss
the petition.

As aptly stated in Ortiz v. CA,[22] substantial compliance will not suffice in a matter
involving strict observance. The attestation contained in the certification of non-
forum shopping requires personal knowledge by the party who executed the same.
To deserve the Court's consideration, petitioners must show reasonable cause for
failure to personally sign the certification. They must convince the Court that the
outright dismissal of the petition would defeat the administration of justice. In this
case, the petitioners did not give any explanation to warrant their exemption from
the strict application of the rule. Downright disregard of the rules cannot justly be
rationalized by harking on the policy of liberal construction.[23]

On the second issue, the written explanation why another mode of service was
resorted to is a mandatory and indispensable requirement in pleadings or papers filed
before all the courts of the land. Parties must exert their best to effect personal
service. The Rules of Court[24] provides that personal service of petitions and other
pleadings is the general rule, while a resort to other modes of service and filing is
the exception.[25]Strictest compliance with Section 11 of Rule 13 is mandated by the
Court,[26] and noncompliance therewith is a ground for the denial of the petition or
the expulsion of the pleading from the records.

This Court will no longer dwell on the third issue because it is a matter that should
be ventilated before the probate court.

As to the fourth issue, the probate court can rightfully take cognizance of the unpaid
taxes of the estate of the deceased; if the estate is found liable, the probate court has
the discretion to order the payment of the said taxes.[27]

Finally, petitioners should bear in mind that the right to appeal is not a natural right
or a part of due process. It is merely a statutory privilege, and may be exercised only
in the manner and in accordance with the provisions of the law. The party who seeks
to avail of the remedy of appeal must comply with the requirements of the rules;
otherwise, the appeal is lost. Rules of procedure are required to be followed, except
only when, for the most persuasive of reasons, they may be relaxed to relieve the
litigant of an injustice not commensurate with the degree of his thoughtlessness in
not complying with the procedure prescribed.[28]

WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit.
The Resolutions of the Court of Appeals dated May 25, 2001and September 11,
2001 are hereby AFFIRMED. Costs against petitioners.

G.R. No. 146984 July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, respondents.

DECISION

TINGA, J.:
The issue in this present petition is whether the sale by the National Development Company (NDC) of
five (5) of its vessels to the private respondents is subject to value-added tax (VAT) under the National
Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The Court of Tax
Appeals (CTA) and the Court of Appeals commonly ruled that the sale is not subject to VAT. We affirm,
though on a more unequivocal rationale than that utilized by the rulings under review. The fact that the
sale was not in the course of the trade or business of NDC is sufficient in itself to declare the sale as
outside the coverage of VAT.

The facts are culled primarily from the ruling of the CTA.

Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its
shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to
sell in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker,
"Kloeckner" type vessels.1 The vessels were constructed for the NDC between 1981 and 1984, then
initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the
vessels were transferred and leased, on a bareboat basis, to the NMC.2

The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on
the value of the vessels."3On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay
Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid was made by
Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong (collectively, private
respondents).4 The bid was approved by the Committee on Privatization, and a Notice of Award dated
1 July 1988 was issued to Magsaysay Lines.

On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand,
and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the
contract stipulated that "[v]alue-added tax, if any, shall be for the account of the PURCHASER."5 Per
arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted
by NDC as security for the payment of VAT, if any. By this time, a formal request for a ruling on whether
or not the sale of the vessels was subject to VAT had already been filed with the Bureau of Internal
Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf of
private respondents. Thus, the parties agreed that should no favorable ruling be received from the
BIR, NDC was authorized to draw on the Letter of Credit upon written demand the amount needed for
the payment of the VAT on the stipulated due date, 20 December 1988.6

In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14
December 1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The
ruling cited the fact that NDC was a VAT-registered enterprise, and thus its "transactions incident to
its normal VAT registered activity of leasing out personal property including sale of its own assets that
are movable, tangible objects which are appropriable or transferable are subject to the 10% [VAT]."7

Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling
No. 395-88 (dated 18 August 1988), which made a similar ruling on the sale of the same vessels in
response to an inquiry from the Chairman of the Senate Blue Ribbon Committee. Their motion was
denied when the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier
VAT rulings. At this point, NDC drew on the Letter of Credit to pay for the VAT, and the amount
of P15,120,000.00 in taxes was paid on 16 March 1989.

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed
by a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings
No. 395-88, 568-88 and 007-89, as well as the refund of the VAT payment made amounting
to P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed the petition, first arguing
that private respondents were not the real parties in interest as they were not the transferors or sellers
as contemplated in Sections 99 and 100 of the then Tax Code. The CIR also squarely defended the
VAT rulings holding the sale of the vessels liable for VAT, especially citing Section 3 of Revenue
Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is imposed on any sale or transactions
deemed sale of taxable goods (including capital goods, irrespective of the date of acquisition)." The
CIR argued that the sale of the vessels were among those transactions "deemed sale," as enumerated
in Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the
Regulation, which classified "change of ownership of business" as a circumstance that gave rise to a
transaction "deemed sale."

In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the petition.9 The
CTA ruled that the sale of a vessel was an "isolated transaction," not done in the ordinary course of
NDCs business, and was thus not subject to VAT, which under Section 99 of the Tax Code, was
applied only to sales in the course of trade or business. The CTA further held that the sale of the
vessels could not be "deemed sale," and thus subject to VAT, as the transaction did not fall under the
enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or Section
4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should be resolved in favor of private
respondents since Section 99 of the Tax Code which implemented VAT is not an exemption provision,
but a classification provision which warranted the resolution of doubts in favor of the taxpayer.

The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997, rendered a
Decision reversing the CTA.11 While the appellate court agreed that the sale was an isolated
transaction, not made in the course of NDCs regular trade or business, it nonetheless found that the
transaction fell within the classification of those "deemed sale" under R.R. No. 5-87, since the sale of
the vessels together with the NMC shares brought about a change of ownership in NMC. The Court
of Appeals also applied the principle governing tax exemptions that such should be strictly construed
against the taxpayer, and liberally in favor of the government.12

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated
5 February 2001.13 This time, the appellate court ruled that the "change of ownership of business" as
contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or cessation of
business" by the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of
Appeals also agreed with the CTA that the classification of transactions "deemed sale" was a
classification statute, and not an exemption statute, thus warranting the resolution of any doubt in favor
of the taxpayer.14

To the mind of the Court, the arguments raised in the present petition have already been adequately
discussed and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet
the Court finds that Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT
payments, and the subsequent disquisitions by the lower courts on the applicability of Section 100 of
the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a fixed
percentage.15 It is the end user of consumer goods or services which ultimately shoulders the tax, as
the liability therefrom is passed on to the end users by the providers of these goods or services16 who
in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the
final consumer (or output VAT).17 The final purchase by the end consumer represents the final link in
a production chain that itself involves several transactions and several acts of consumption. The VAT
system assures fiscal adequacy through the collection of taxes on every level of consumption,18 yet
assuages the manufacturers or providers of goods and services by enabling them to pass on their
respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire
tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct
relevance to the taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of
the Tax Code and its subsequent incarnations,19 the tax is levied only on the sale, barter or exchange
of goods or services by persons who engage in such activities, in the course of trade or business.
These transactions outside the course of trade or business may invariably contribute to the production
chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not
occur within the course of trade or business, the providers of such goods or services would hardly, if
at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated
VAT collections since the accumulation of output VAT arises in the first place only through the ordinary
course of trade or business.

That the sale of the vessels was not in the ordinary course of trade or business of NDC was
appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first decision
which it eventually reconsidered.20We cite with approval the CTAs explanation on this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil.
992), the term "carrying on business" does not mean the performance of a single disconnected
act, but means conducting, prosecuting and continuing business by performing progressively
all the acts normally incident thereof; while "doing business" conveys the idea of business
being done, not from time to time, but all the time. [J. Aranas, UPDATED NATIONAL
INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of
business" is what is usually done in the management of trade or business. [Idmi v. Weeks &
Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or
"doing business" connotes regularity of activity. In the instant case, the sale was an isolated
transaction. The sale which was involuntary and made pursuant to the declared policy of
Government for privatization could no longer be repeated or carried on with regularity. It should
be emphasized that the normal VAT-registered activity of NDC is leasing personal property.21

This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC
was created for the primary purpose of selling real property.23

The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute
before this Court,24 should have definitively settled the matter. Any sale, barter or exchange of goods
or services not in the course of trade or business is not subject to VAT.

Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied
upon by the CIR, is captioned "Value-added tax on sale of goods," and it expressly states that "[t]here
shall be levied, assessed and collected on every sale, barter or exchange of goods, a value added tax
x x x." Section 100 should be read in light of Section 99, which lays down the general rule on which
persons are liable for VAT in the first place and on what transaction if at all. It may even be noted that
Section 99 is the very first provision in Title IV of the Tax Code, the Title that covers VAT in the law.
Before any portion of Section 100, or the rest of the law for that matter, may be applied in order to
subject a transaction to VAT, it must first be satisfied that the taxpayer and transaction involved is
liable for VAT in the first place under Section 99.
It would have been a different matter if Section 100 purported to define the phrase "in the course of
trade or business" as expressed in Section 99. If that were so, reference to Section 100 would have
been necessary as a means of ascertaining whether the sale of the vessels was "in the course of trade
or business," and thus subject to

VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is
not the meaning of "in the course of trade or business," but instead the identification of the transactions
which may be deemed as sale. It would become necessary to ascertain whether under those two
provisions the transaction may be deemed a sale, only if it is settled that the transaction occurred in
the course of trade or business in the first place. If the transaction transpired outside the course of
trade or business, it would be irrelevant for the purpose of determining VAT liability whether the
transaction may be deemed sale, since it anyway is not subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in question was not
made in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT
pursuant to Section 99 of the Tax Code, no matter how the said sale may hew to those transactions
deemed sale as defined under Section 100.

In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case,
the Court finds the discussions offered on this point by the CTA and the Court of Appeals (in its
subsequent Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among
the transactions deemed sale those involving "change of ownership of business." However, Section
4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such "change of ownership"
is only an attending circumstance to "retirement from or cessation of business[, ] with respect to all
goods on hand [as] of the date of such retirement or cessation."25Indeed, Section 4(E) of R.R. No. 5-
87 expressly characterizes the "change of ownership of business" as only a "circumstance" that
attends those transactions "deemed sale," which are otherwise stated in the same section.26

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.

FORT BONIFACIO DEVELOPMENT G.R. No. 158885

CORPORATION,
Petitioner, Present:
PUNO, C.J.,
QUISUMBING,
YNARES-SANTIAGO,
CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
- versus - CARPIO MORALES,
TINGA,
CHICO-NAZARIO,
VELASCO, JR.,
NACHURA,
LEONARDO DE CASTRO,
BRION, and
COMMISSIONER OF INTERNAL PERALTA, JJ.
REVENUE, REGIONAL DIRECTOR,
REVENUE REGION NO. 8, and
CHIEF, ASSESSMENT DIVISION, Promulgated:
REVENUE REGION NO. 8, BIR,
Respondents. April 2, 2009

x--------------------------------------------------------------------------- x

FORT BONIFACIO DEVELOPMENT G.R. No. 170680

CORPORATION,
Petitioner,

- versus -

COMMISSIONER OF INTERNAL REVENUE

and REVENUE DISTRICT OFFICER,
REVENUE DISTRICT NO. 44, TAGUIG
and PATEROS, BUREAU OF INTERNAL
REVENUE,
Respondents.

x---------------------------------------------------------------------------x
DECISION

TINGA, J.:

The value-added tax (VAT) system was first introduced in the Philippines on 1
January 1988, with the tax imposable on 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.[1] The first VAT law is found in
Executive Order No. 273 (E.O. 273), which amended several provisions of the then
National Internal Revenue Code of 1986 (Old NIRC). E.O. No. 273 likewise
accommodated the potential burdens of the shift to the VAT system by allowing
newly liable VAT-registered persons to avail of a transitional input tax credit, as
provided for in Section 105 of the old NIRC, as amended by E.O. No. 273. Said
Section 105 is quoted, thus:

SEC. 105. Transitional input tax credits. A person who becomes liable to
value-added tax or any person who elects to be a VAT-registered person shall,
subject to the filing of an inventory as prescribed by regulations, be allowed input
tax on his beginning inventory of goods, materials and supplies equivalent to 8% of
the value of such inventory or the actual value-added tax paid on such goods,
materials and supplies, whichever is higher, which shall be creditable against the
output tax.[2]

There are other measures contained in E.O. No. 273 which were similarly
intended to ease the shift to the VAT system. These measures also took the form of
transitional input taxes which can be credited against output tax,[3] and are found in
Section 25 of E.O. No. 273, the section entitled Transitory Provisions. Said
transitory provisions, which were never incorporated in the Old NIRC, read:
 Sec. 25. Transitory provisions. (a) All VAT-registered persons shall
be allowed transitional input taxes which can be credited against output tax
in the same manner as provided in Sections 104 of the National Internal
Revenue Code as follows:
1) The balance of the deferred sales tax credit account as
of December 31, 1987 which are accounted for in accordance with
regulations prescribed therefor;
2) A presumptive input tax equivalent to 8% of the value of the
inventory as of December 31, 1987 of materials and supplies which are
not for sale, the tax on which was not taken up or claimed as deferred
sales tax credit; and

3) A presumptive input tax equivalent to 8% of the value of the

inventory as of December 31, 1987 as goods for sale, the tax on which
was not taken up or claimed as deferred sales tax credit.
Tax credit prescribed in paragraphs (2) and (3) above shall be allowed
only to a VAT-registered person who files an inventory of the goods
referred to in said paragraphs as provided in regulations.
(b) Any unused tax credit certificate issued prior to January 1, 1988 for
excess tax credits which are applicable against advance sales tax shall be
surrendered to, and replaced by the Commissioner with new tax credit
certificates which can be used in payment for value-added tax liabilities.
(c) Any person already engaged in business whose gross sales or
receipts for a 12-month period from September 1, 1986 to August 1, 1987,
exceed the amount of P200,000.00, or any person who has been in business
for less than 12 months as of August 1, 1987 but expects his gross sales or
receipts to exceed P200,000 on or before December 31, 1987, shall apply
for registration on or before October 29, 1987.[4]

On 1 January 1996, Republic Act (Rep. Act) No. 7716 took effect.[5] It
amended provisions of the Old NIRC principally by restructuring the VAT system.
It was under Rep. Act No. 7716 that VAT was imposed for the first time on the sale
of real properties. This was accomplished by amending Section 100 of the NIRC to
include real properties among the goods or properties, the sale, barter or exchange
of which is made subject to VAT. The relevant portions of Section 100, as amended
by Rep. Act No. 7716, thus read:

Sec. 100. Value-added-tax on sale of goods or properties.

(a) Rate and base of tax. There shall be levied, assessed and collected on
every sale, barter or exchange of goods or properties, a value-added tax equivalent
to 10% of the gross selling price or gross value in money of the goods, or properties
sold, bartered or exchanged, such tax to be paid by the seller or transferor.

(1) The term 'goods or properties' shall mean all tangible and intangible
objects which are capable of pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business; xxx[6]

The provisions of Section 105 of the NIRC, on the transitional input tax credit,
had remained intact despite the enactment of Rep. Act No. 7716. Said provisions
would however be amended following the passage of the new National Internal
Revenue Code of 1997 (New NIRC), also officially known as Rep Act No. 8424.
The section on the transitional input tax credit was renumbered from Section 105 of
the Old NIRC to Section 111(A) of the New NIRC. The new amendments on the
transitional input tax credit are relatively minor, hardly material to the case at bar.
They are highlighted below for easy reference:

Section 111. Transitional/Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes liable
to value-added tax or any person who elects to be a VAT-registered person
shall, subject to the filing of an inventory according to rules and
regulations prescribed by the Secretary of finance, upon
recommendation of the Commissioner, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent for eight
percent (8%) of the value of such inventory or the actual value-added tax
 paid on such goods, materials and supplies, whichever is higher, which
shall be creditable against the output tax.[7] (Emphasis supplied).

Rep. Act No. 8424 also made part of the NIRC, for the first time, the concept of
presumptive input tax credits, with Section 111(b) of the New NIRC providing as
follows:
(B) Presumptive Input Tax Credits. -
(1) Persons or firms engaged in the processing of sardines, mackerel
and milk, and in manufacturing refined sugar and cooking oil, shall
be allowed a presumptive input tax, creditable against the output tax,
equivalent to one and one-half percent (1 1/2%) of the gross value
in money of their purchases of primary agricultural products which
are used as inputs to their production.
As used in this Subsection, the term 'processing' shall mean
pasteurization, canning and activities which through physical or
chemical process alter the exterior texture or form or inner substance
of a product in such manner as to prepare it for special use to which
it could not have been put in its original form or condition.

(2) Public works contractors shall be allowed a presumptive input

tax equivalent to one and one-half percent (1 1/2%) of the contract
price with respect to government contracts only in lieu of actual
input taxes therefrom.[8]

What we have explained above are the statutory antecedents that underlie the present
petitions for review. We now turn to the factual antecedents.

I.
Petitioner Fort Bonifacio Development Corporation (FBDC) is engaged in the
development and sale of real property. On 8 February 1995, FBDC acquired by way
of sale from the national government, a vast tract of land that formerly formed part
of the Fort Bonifacio military reservation, located in what is now
the Fort Bonifacio Global City (Global City) in Taguig City.[9] Since the sale was
consummated prior to the enactment of Rep. Act No. 7716, no VAT was paid
thereon. FBDC then proceeded to develop the tract of land, and from October, 1966
onwards it has been selling lots located in the Global City to interested buyers.[10]

Following the effectivity of Rep. Act No. 7716, real estate transactions such
as those regularly engaged in by FBDC have since been made subject to VAT. As
the vendor, FBDC from thereon has become obliged to remit to the Bureau of
Internal Revenue (BIR) output VAT payments it received from the sale of its
properties to the Bureau of Internal Revenue (BIR). FBDC likewise invoked its right
to avail of the transitional input tax credit and accordingly submitted an inventory
list of real properties it owned, with a total book value of P71,227,503,200.00.[11]

On 14 October 1996, FBDC executed in favor of Metro Pacific Corporation

two (2) contracts to sell, separately conveying two (2) parcels of land within
the Global City in consideration of the purchase prices at P1,526,298,949.00
and P785,009,018.00, both payable in installments.[12] For the fourth quarter of
1996, FBDC earned a total of P3,498,888,713.60 from the sale of its lots, on which
the output VAT payable to the BIR was P318,080,792.14. In the context of remitting
its output VAT payments to the BIR, FBDC paid a total of P269,340,469.45 and
utilized (a) P28,413,783.00 representing a portion of its then total
transitional/presumptive input tax credit of P5,698,200,256.00, which petitioner
allocated for the two (2) lots sold to Metro Pacific; and (b) its regular input tax credit
of P20,326,539.69 on the purchase of goods and services.[13]
 Between July and October 1997, FBDC sent two (2) letters to the BIR
requesting appropriate action on whether its use of its presumptive input VAT on its
land inventory, to the extent of P28,413,783.00 in partial payment of its output VAT
for the fourth quarter of 1996, was in order. After investigating the matter, the BIR
recommended that the claimed presumptive input tax credit be
disallowed.[14] Consequently, the BIR issued to FBDC a Pre-Assessment Notice
(PAN) dated 23 December 1997 for deficiency VAT for the 4th quarter of 1996. This
was followed by a letter of respondent Commissioner of Internal Revenue
(CIR),[15] addressed to and received by FBDC on 5 March 1998, disallowing the
presumptive input tax credit arising from the land inventory on the basis of Revenue
Regulation 7-95 (RR 7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96).
Section 4.105-1 of RR 7-95 provided the basis in main for the CIRs opinion, the
section reading, thus:

Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers

who became VAT-registered persons upon effectivity of RA No. 7716 who have
exceeded the minimum turnover of P500,000.00 or who voluntarily register even if
their turnover does not exceed P500,000.00 shall be entitled to a presumptive input
tax on the inventory on hand as of December 31, 1995 on the following: (a) goods
purchased for resale in their present condition; (b) materials purchased for further
processing, but which have not yet undergone processing; (c) goods which have been
manufactured by the taxpayer; (d) goods in process and supplies, all of which are for
sale or for use in the course of the taxpayers trade or business as a VAT-registered
person.

However, in the case of real estate dealers, the basis of the presumptive input
tax shall be the improvements, such as buildings, roads, drainage systems, and other
similar structures, constructed on or after the effectivity of EO 273 (January 1, 1988).

The transitional input tax shall be 8% of the value of the inventory or actual
VAT paid, whichever is higher, which amount may be allowed as tax credit against
the output tax of the VAT-registered person.
 The CIR likewise cited from the Transitory Provisions of RR 7-95,
particularly the following:

(a) Presumptive Input Tax Credits -

xxx

(iii) For real estate dealers, the presumptive input tax of 8% of the book
value of improvements on or after January 1, 1988 (the effectivity of E.O. 273)
shall be allowed.

For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as

of December 31, 1995 of such goods or properties and improvements showing the
quantity, description and amount filed with the RDO not later than Janaury 31,
1996.

xxx

Consequently, FBDC received an Assessment Notice in the amount

of P45,188,708.08, representing deficiency VAT for the 4th quarter of 1996,
including surcharge, interest and penalty. After respondent Regional Director denied
FBDCs motion for reconsideration/protest, FBDC filed a petition for review with
the Court of Tax Appeals (CTA), docketed as C.T.A. Case No. 5665.[16] On 11
August 2000, the CTA rendered a decision affirming the assessment made by the
respondents.[17] FBDC assailed the CTA decision through a petition for review filed
with the Court of Appeals, docketed as CA-G.R. SP No. 60477. On 15 November
2002, the Court of Appeals rendered a decision affirming the CTA decision, but
removing the surcharge, interests and penalties, thus reducing the amount due
to P28,413,783.00.[18] From said decision, FBDC filed a petition for review with this
Court, the first of the two petitions now before us, seeking the reversal of the CTA
decision dated 11 August 2000 and a pronouncement that FBDC is entitled to the
transitional/presumptive input tax credit of P28,413,783.00. This petition has been
docketed as G.R. No. 158885.
 The second petition, which is docketed as G.R. No. 170680, involves the
same parties and legal issues, but concerns the claim of FBDC that it is entitled to
claim a similar transitional/presumptive input tax credit, this time for the third
quarter of 1997. A brief recital of the anteceding facts underlying this second claim
is in order.

For the third quarter of 1997, FBDC derived the total amount
of P3,591,726,328.11 from its sales and lease of lots, on which the output VAT
payable to the BIR was P359,172,632.81.[19] Accordingly, FBDC made cash
payments totaling P347,741,695.74 and utilized its regular input tax credit
of P19,743,565.73 on purchases of goods and services.[20] On 11 May 1999, FBDC
filed with the BIR a claim for refund of the amount of P347,741,695.74 which it had
paid as VAT for the third quarter of 1997.[21] No action was taken on the refund
claim, leading FBDC to file a petition for review with the CTA, docketed as CTA
Case No. 5926. Utilizing the same valuation[22] of 8% of the total book value of its
beginning inventory of real properties (or P71,227,503,200.00) FBDC argued that
its input tax credit was more than enough to offset the VAT paid by it for the third
quarter of 1997.[23]

On 17 October 2000, the CTA promulgated its decision[24] in CTA Case No.
5926, denying the claim for refund. FBDC then filed a petition for review with the
Court of Appeals, docketed as CA-G.R. SP No. 61517. On 3 October 2003, the Court
of Appeals rendered a decision[25] affirming the judgment of the CTA. As a result,
FBDC filed its second petition, docketed as G.R. No. 170680.

II.
 The two petitions were duly consolidated[26] and called for oral argument
on 18 April 2006. During the oral arguments, the parties were directed to discuss the
following issues:

1. In determining the 10% value-added tax in Section 100 of the [Old

NIRC] on the sale of real properties by real estate dealers, is the 8%
transitional input tax credit in Section 105 applied only to the
improvements on the real property or is it applied on the value of the
entire real property?

2. Are Section 4.105.1 and paragraph (a)(III) of the Transitory Provisions

of Revenue Regulations No. 7-95 valid in limiting the 8% transitional
input tax to the improvements on the real property?

While the two issues are linked, the main issue is evidently whether Section
105 of the Old NIRC may be interpreted in such a way as to restrict its application
in the case of real estate dealers only to the improvements on the real property
belonging to their beginning inventory, and not the entire real property itself. There
would be no controversy before us if the Old NIRC had itself supplied that limitation,
yet the law is tellingly silent in that regard. RR 7-95, which imposes such restrictions
on real estate dealers, is discordant with the Old NIRC, so it is alleged.

III.

On its face, there is nothing in Section 105 of the Old NIRC that prohibits the
inclusion of real properties, together with the improvements thereon, in the
beginning inventory of goods, materials and supplies, based on which inventory the
transitional input tax credit is computed. It can be conceded that when it was drafted
Section 105 could not have possibly contemplated concerns specific to real
properties, as real estate transactions were not originally subject to VAT. At the same
time, when transactions on real properties were finally made subject to VAT
beginning with Rep. Act No. 7716, no corresponding amendment was adopted as
regards Section 105 to provide for a differentiated treatment in the application of the
transitional input tax credit with respect to real properties or real estate dealers.

It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made
real estate transactions subject to VAT for the first time. Prior to the amendment,
Section 100 had imposed the VAT on every sale, barter or exchange of goods,
without however specifying the kind of properties that fall within or under the
generic class goods subject to the tax.

Rep. Act No. 7716, which significantly is also known as the Expanded Value-
Added Tax (EVAT) law, expanded the coverage of the VAT by amending Section
100 of the Old NIRC in several respects, some of which we will enumerate. First, it
made every sale, barter or exchange of goods or properties subject to
VAT.[27] Second, it generally defined goods or properties as all tangible and
intangible objects which are capable of pecuniary estimation.[28] Third, it included a
non-exclusive enumeration of various objects that fall under the class goods or
properties subject to VAT, including [r]eal properties held primarily for sale to
customers or held for lease in the ordinary course of trade or business.[29]

From these amendments to Section 100, is there any differentiated VAT

treatment on real properties or real estate dealers that would justify the suggested
limitations on the application of the transitional input tax on them? We see none.

Rep. Act No. 7716 clarifies that it is the real properties held primarily for sale
to customers or held for lease in the ordinary course of trade or business that are
subject to the VAT, and not when the real estate transactions are engaged in by
persons who do not sell or lease properties in the ordinary course of trade or business.
It is clear that those regularly engaged in the real estate business are accorded the
same treatment as the merchants of other goods or properties available in the market.
In the same way that a milliner considers hats as his goods and a rancher considers
cattle as his goods, a real estate dealer holds real property, whether or not it contains
improvements, as his goods.

Had Section 100 itself supplied any differentiation between the treatment of
real properties or real estate dealers and the treatment of the transactions involving
other commercial goods, then such differing treatment would have constituted the
statutory basis for the CIR to engage in such differentiation which said respondent
did seek to accomplish in this case through Section 4.105-1 of RR 7-95. Yet the
amendments introduced by Rep. Act No. 7716 to Section 100, coupled with the fact
that the said law left Section 105 intact, reveal the lack of any legislative intention
to make persons or entities in the real estate business subject to a VAT treatment
different from those engaged in the sale of other goods or properties or in any other
commercial trade or business.

If the plain text of Rep. Act No. 7716 fails to supply any apparent justification
for limiting the beginning inventory of real estate dealers only to the improvements
on their properties, how then were the CIR and the courts a quo able to justify such
a view?

IV.

The fact alone that the denial of FBDCs claims is in accord with Section
4.105-1 of RR 7-95 does not, of course, put this inquiry to rest. If Section 4.105-1 is
itself incongruent to Rep. Act No. 7716, the incongruence cannot by itself justify the
denial of the claims. We need to inquire into the rationale behind Section 4.105-1,
as well as the question whether the interpretation of the law embodied therein is
validated by the law itself.
 The CTA, in its rulings, proceeded from a thesis which is not readily apparent
from the texts of the laws we have cited. The transitional input tax credit is
conditioned on the prior payment of sales taxes or the VAT, so the CTA observed.
The introduction of the VAT through E.O. No. 273 and its subsequent expansion
through Rep. Act No. 7716 subjected various persons to the tax for the very first
time, leaving them unable to claim the input tax credit based on their purchases
before they became subject to the VAT. Hence, the transitional input tax credit was
designed to alleviate that relatively iniquitous loss. Given that rationale, according
to the CTA, it would be improper to allow FBDC, which had acquired its properties
through a tax-free purchase, to claim the transitional input tax credit. The CTA added
that Section 105.4.1 of RR 7-95 is consonant with its perceived rationale behind the
transitional input tax credit since the materials used for the construction of
improvements would have most likely involved the payment of VAT on their
purchase.

Concededly, this theory of the CTA has some sense, extravagantly

extrapolated as it is though from the seeming silence on the part of the provisions of
the law. Yet ultimately, the theory is woefully limited in perspective.

It is correct, as pointed out by the CTA, that upon the shift from sales taxes to
VAT in 1987 newly-VAT registered people would have been prejudiced by the
inability to credit against the output VAT their payments by way of sales tax on their
existing stocks in trade. Yet that inequity was precisely addressed by a transitory
provision in E.O. No. 273 found in Section 25 thereof. The provision authorized
VAT-registered persons to invoke a presumptive input tax equivalent to 8% of the
value of the inventory as of December 31, 1987 of materials and supplies which are
not for sale, the tax on which was not taken up or claimed as deferred sales tax credit,
and a similar presumptive input tax equivalent to 8% of the value of the inventory
as of December 31, 1987 of goods for sale, the tax on which was not taken up or
claimed as deferred sales tax credit.[30]

Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the
CTA as the basis for the introduction of transitional input tax credit in 1987. If the
core purpose of the tax credit is only, as hinted by the CTA, to allow for some mode
of accreditation of previously-paid sales taxes, then Section 25 alone would have
sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing for the
transitional input tax credit under Section 105, thereby assuring that the tax credit
would endure long after the last goods made subject to sales tax have been
consumed.

If indeed the transitional input tax credit is integrally related to previously paid
sales taxes, the purported causal link between those two would have been
nonetheless extinguished long ago. Yet Congress has reenacted the transitional input
tax credit several times; that fact simply belies the absence of any relationship
between such tax credit and the long-abolished sales taxes. Obviously then, the
purpose behind the transitional input tax credit is not confined to the transition from
sales tax to VAT.
There is hardly any constricted definition of "transitional" that will limit its
possible meaning to the shift from the sales tax regime to the VAT regime. Indeed,
it could also allude to the transition one undergoes from not being a VAT-registered
person to becoming a VAT-registered person. Such transition does not take place
merely by operation of law, E.O. No. 273 or Rep. Act No. 7716 in particular. It could
also occur when one decides to start a business. Section 105 states that the
transitional input tax credits become available either to (1) a person who becomes
liable to VAT; or (2) any person who elects to be VAT-registered. The clear
language of the law entitles new trades or businesses to avail of the tax credit once
they become VAT-registered. The transitional input tax credit, whether under the
Old NIRC or the New NIRC, may be claimed by a newly-VAT registered person
such as when a business as it commences operations. If we view the matter from the
perspective of a starting entrepreneur, greater clarity emerges on the continued utility
of the transitional input tax credit.

Following the theory of the CTA, the new enterprise should be able to claim
the transitional input tax credit because it has presumably paid taxes, VAT in
particular, in the purchase of the goods, materials and supplies in its beginning
inventory. Consequently, as the CTA held below, if the new enterprise has not paid
VAT in its purchases of such goods, materials and supplies, then it should not be
able to claim the tax credit. However, it is not always true that the acquisition of
such goods, materials and supplies entail the payment of taxes on the part of the new
business. In fact, this could occur as a matter of course by virtue of the operation of
various provisions of the NIRC, and not only on account of a specially legislated
exemption.

Let us cite a few examples drawn from the New NIRC. If the goods or
properties are not acquired from a person in the course of trade or business, the
transaction would not be subject to VAT under Section 105.[31] The sale would be
subject to capital gains taxes under Section 24(D),[32] but since capital gains is a tax
on passive income it is the seller, not the buyer, who generally would shoulder the
tax.

If the goods or properties are acquired through donation, the acquisition would not
be subject to VAT but to donors tax under Section 98 instead.[33] It is the donor who
would be liable to pay the donors tax,[34] and the donation would be exempt if the
donors total net gifts during the calendar year does not exceed P100,000.00.[35]

If the goods or properties are acquired through testate or intestate succession, the
transfer would not be subject to VAT but liable instead for estate tax under Title III
of the New NIRC.[36] If the net estate does not exceed P200,000.00, no estate tax
would be assessed.[37]

The interpretation proffered by the CTA would exclude goods and properties
which are acquired through sale not in the ordinary course of trade or business,
donation or through succession, from the beginning inventory on which the
transitional input tax credit is based. This prospect all but highlights the ultimate
absurdity of the respondents' position. Again, nothing in the Old NIRC (or even the
New NIRC) speaks of such a possibility or qualifies the previous payment of VAT
or any other taxes on the goods, materials and supplies as a pre-requisite for inclusion
in the beginning inventory.

It is apparent that the transitional input tax credit operates to benefit newly
VAT-registered persons, whether or not they previously paid taxes in the acquisition
of their beginning inventory of goods, materials and supplies. During that period of
transition from non-VAT to VAT status, the transitional input tax credit serves to
alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-
registered taxpayer is obliged to remit a significant portion of the income it derived
from its sales as output VAT. The transitional input tax credit mitigates this initial
diminution of the taxpayers income by affording the opportunity to offset the losses
incurred through the remittance of the output VAT at a stage when the person is yet
unable to credit input VAT payments.

There is another point that weighs against the CTAs interpretation. Under
Section 105 of the Old NIRC, the rate of the transitional input tax credit is 8% of the
value of such inventory or the actual value-added tax paid on such goods, materials
and supplies, whichever is higher.[38] If indeed the transitional input tax credit is
premised on the previous payment of VAT, then it does not make sense to afford the
taxpayer the benefit of such credit based on 8% of the value of such inventory should
the same prove higher than the actual VAT paid. This intent that the CTA alluded to
could have been implemented with ease had the legislature shared such intent by
providing the actual VAT paid as the sole basis for the rate of the transitional input
tax credit.

The CTA harped on the circumstance that FBDC was excused from paying
any tax on the purchase of its properties from the national government, even
claiming that to allow the transitional input tax credit is "tantamount to giving an
undeserved bonus to real estate dealers similarly situated as [FBDC] which the
Government cannot afford to provide." Yet the tax laws in question, and all tax laws
in general, are designed to enforce uniform tax treatment to persons or classes of
persons who share minimum legislated standards. The common standard for the
application of the transitional input tax credit, as enacted by E.O. No. 273 and all
subsequent tax laws which reinforced or reintegrated the tax credit, is simply that
the taxpayer in question has become liable to VAT or has elected to be a VAT-
registered person. E.O. No. 273 and the subsequent tax laws are all decidedly neutral
and accommodating in ascertaining who should be entitled to the tax credit, and it
behooves the CIR and the CTA to adopt a similarly judicious perspective.

IV.

Given the fatal flaws in the theory offered by the CTA as supposedly
underlying the transitional input tax credit, is there any other basis to justify the
limitations imposed by the CIR through RR 7-95? We discern nothing more. As seen
in our discussion, there is no logic that coheres with either E.O. No. 273 or Rep. Act
No. 7716 which supports the restriction imposed on real estate brokers and their
ability to claim the transitional input tax credit based on the value of their real
properties. In addition, the very idea of excluding the real properties itself from the
beginning inventory simply runs counter to what the transitional input tax credit
seeks to accomplish for persons engaged in the sale of goods, whether or not such
goods take the form of real properties or more mundane commodities.

Under Section 105, the beginning inventory of goods forms part of the
valuation of the transitional input tax credit. Goods, as commonly understood in the
business sense, refers to the product which the VAT-registered person offers for sale
to the public. With respect to real estate dealers, it is the real properties themselves
which constitute their goods. Such real properties are the operating assets of the real
estate dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of goods or

properties such real properties held primarily for sale to customers or held for lease
in the ordinary course of trade or business. Said definition was taken from the very
statutory language of Section 100 of the Old NIRC. By limiting the definition of
goods to improvements in Section 4.105-1, the BIR not only contravened the
definition of goods as provided in the Old NIRC, but also the definition which the
same revenue regulation itself has provided.

The Court of Tax Appeals claimed that under Section 105 of the Old NIRC
the basis for the inventory of goods, materials and supplies upon which the
transitional input VAT would be based shall be left to regulation by the appropriate
administrative authority. This is based on the phrase filing of an inventory as
prescribed by regulations found in Section 105. Nonetheless, Section 105 does
include the particular properties to be included in the inventory, namely goods,
materials and supplies. It is questionable whether the CIR has the power to actually
redefine the concept of goods, as she did when she excluded real properties from the
class of goods which real estate companies in the business of selling real properties
may include in their inventory. The authority to prescribe regulations can pertain to
more technical matters, such as how to appraise the value of the inventory or what
papers need to be filed to properly itemize the contents of such inventory. But such
authority cannot go as far as to amend Section 105 itself, which the Commissioner
had unfortunately accomplished in this case.

It is of course axiomatic that a rule or regulation must bear upon, and be

consistent with, the provisions of the enabling statute if such rule or regulation is to
be valid.[39] In case of conflict between a statute and an administrative order, the
former must prevail.[40] Indeed, the CIR has no power to limit the meaning and
coverage of the term goods in Section 105 of the Old NIRC absent statutory authority
or basis to make and justify such limitation. A contrary conclusion would mean the
CIR could very well moot the law or arrogate legislative authority unto himself by
retaining sole discretion to provide the definition and scope of the term goods.

V.
At this juncture, we turn to some of the points raised in the dissent of the esteemed
Justice Antonio T. Carpio.

The dissent adopts the CTAs thesis that the transitional input tax credit applies only
when taxes were previously paid on the properties in the beginning inventory. Had
the dissenting view won, it would have introduced a new requisite to the application
of the transitional input tax credit and required the taxpayer to supply proof that it
had previously paid taxes on the acquisition of goods, materials and supplies
comprising its beginning inventory. We have sufficiently rebutted this thesis, but the
dissent adds a twist to the argument by using the term presumptive input tax credit
to imply that the transitional input tax credit involves a presumption that there was
a previous payment of taxes.
Let us clarify the distinction between the presumptive input tax credit and the
transitional input tax credit. As with the transitional input tax credit, the presumptive
input tax credit is creditable against the output VAT. It necessarily has come into
existence in our tax structure only after the introduction of the VAT. As quoted
earlier,[41] E.O. No. 273 provided for a presumptive input tax credit as one of the
transitory measures in the shift from sales taxes to VAT, but such presumptive input
tax credit was never integrated in the NIRC itself. It was only in 1997, or eleven
years after the VAT was first introduced, that the presumptive input tax credit was
first incorporated in the NIRC, more particularly in Section 111(B) of the New
NIRC. As borne out by the text of the provision,[42] it is plain that the presumptive
input tax credit is highly limited in application as it may be claimed only by persons
or firms engaged in the processing of sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil;[43] and public works contractors.[44]

Clearly, for more than a decade now, the term presumptive input tax credit has
contemplated a particularly idiosyncratic tax credit far divorced from its original
usage in the transitory provisions of E.O. No. 273. There is utterly no sense then in
latching on to the term as having any significant meaning for the purpose of the cases
at bar.

The dissent, in arguing for the effectivity of Section 4.105-1 of RR 7-95,

ratiocinates in this manner: (1) Section 4.105-1 finds basis in Section 105 of the Old
NIRC, which provides that the input tax is allowed on the beginning inventory of
goods, materials and supplies; (2) input taxes must have been paid on such goods,
materials and supplies; (3) unlike real property itself, the improvements thereon were
already subject to VAT even prior to the passage of Rep. Act No. 7716; (4) since no
VAT was paid on the real property prior to the passage of Rep. Act No. 7716, it
could not form part of the beginning inventory of goods, materials and supplies.

This chain of premises have already been debunked. It is apparent that the
dissent believes that only those goods, materials and supplies on which input VAT
was paid could form the basis of valuation of the input tax credit. Thus, if the VAT-
registered person acquired all the goods, materials and supplies of the beginning
inventory through a sale not in the ordinary course of trade or business, or through
succession or donation, said person would be unable to receive a transitional input
tax credit. Yet even RR 7-95, which imposes the restriction only on real estate
dealers permits such other persons who obtained their beginning inventory through
tax-free means to claim the transitional input tax credit. The dissent thus betrays a
view that is even more radical and more misaligned with the language of the law
than that expressed by the CIR.

VI.

A final observation. Section 4.105.1 of RR No. 7-95, insofar as it disallows

real estate dealers from including the value of their real properties in the beginning
inventory of goods, materials and supplies, has in fact already been repealed. The
offending provisions were deleted with the enactment of Revenue Regulation No. 6-
97 (RR 6-97) dated 2 January 1997, which amended RR 7-95.[45] The repeal of the
basis for the present assessments by RR 6-97 only highlights the continuing
absurdity of the position of the BIR towards FBDC.

FBDC points out that while the transactions involved in G.R. No. 158885 took
place during the effectivity of RR 7-95, the transactions involved in G.R. No. 170680
in fact took place after RR No. 6-97 had taken effect. Indeed, the assessments subject
of G.R. No. 170680 were for the third quarter of 1997, or several months after the
effectivity of RR 6-97. That fact provides additional reason to sustain FBDCs claim
for refund of its 1997 Third Quarter VAT payments. Nevertheless, since the assailed
restrictions implemented by RR 7-95 were not sanctioned by law in the first place
there is no longer need to dwell on such fact.

WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court
of Tax Appeals and the Court of Appeals are REVERSED and SET ASIDE.
Respondents are hereby (1) restrained from collecting from petitioner the amount
of P28,413,783.00 representing the transitional input tax credit due it for the fourth
quarter of 1996; and (2) directed to refund to petitioner the amount
of P347,741,695.74 paid as output VAT for the third quarter of 1997 in light of the
persisting transitional input tax credit available to petitioner for the said quarter, or
to issue a tax credit corresponding to such amount. No pronouncement as to costs.

G.R. No. 184823 October 6, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
AICHI FORGING COMPANY OF ASIA, INC., Respondent.

DECISION

DEL CASTILLO, J.:

A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege,
or incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes
erroneously or illegally collected. In both cases, a taxpayer must prove not only his entitlement to a
refund but also his compliance with the procedural due process as non-observance of the prescriptive
periods within which to file the administrative and the judicial claims would result in the denial of his
claim.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the July
30, 2008 Decision1 and the October 6, 2008 Resolution2 of the Court of Tax Appeals (CTA) En Banc.

Factual Antecedents

Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing under the
laws of the Republic of the Philippines, is engaged in the manufacturing, producing, and processing
of steel and its by-products.3 It is registered with the Bureau of Internal Revenue (BIR) as a Value-
Added Tax (VAT) entity4 and its products, "close impression die steel forgings" and "tool and dies,"
are registered with the Board of Investments (BOI) as a pioneer status.5

On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period July 1,
2002 to September 30, 2002 in the total amount of P3,891,123.82 with the petitioner Commissioner
of Internal Revenue (CIR), through the Department of Finance (DOF) One-Stop Shop Inter-Agency
Tax Credit and Duty Drawback Center.6

Proceedings before the Second Division of the CTA

On even date, respondent filed a Petition for Review7 with the CTA for the refund/credit of the same
input VAT. The case was docketed as CTA Case No. 7065 and was raffled to the Second Division of
the CTA.

In the Petition for Review, respondent alleged that for the period July 1, 2002 to September 30, 2002,
it generated and recorded zero-rated sales in the amount of P131,791,399.00,8 which was paid
pursuant to Section 106(A) (2) (a) (1), (2) and (3) of the National Internal Revenue Code of 1997
(NIRC);9 that for the said period, it incurred and paid input VAT amounting to P3,912,088.14 from
purchases and importation attributable to its zero-rated sales;10 and that in its application for
refund/credit filed with the DOF One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center,
it only claimed the amount of P3,891,123.82.11

In response, petitioner filed his Answer12 raising the following special and affirmative defenses, to wit:

4. Petitioners alleged claim for refund is subject to administrative investigation by the Bureau;

5. Petitioner must prove that it paid VAT input taxes for the period in question;

6. Petitioner must prove that its sales are export sales contemplated under Sections 106(A)
(2) (a), and 108(B) (1) of the Tax Code of 1997;

7. Petitioner must prove that the claim was filed within the two (2) year period prescribed in
Section 229 of the Tax Code;

8. In an action for refund, the burden of proof is on the taxpayer to establish its right to refund,
and failure to sustain the burden is fatal to the claim for refund; and

9. Claims for refund are construed strictly against the claimant for the same partake of the
nature of exemption from taxation.13

Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a Decision
partially granting respondents claim for refund/credit. Pertinent portions of the Decision read:

For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section 112 (A) of
the NIRC of 1997, as amended, provides:

SEC. 112. Refunds or Tax Credits of Input Tax.

(A) Zero-rated or Effectively Zero-rated Sales. Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due
or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: x x x

Pursuant to the above provision, petitioner must comply with the following requisites: (1) the taxpayer
is engaged in sales which are zero-rated or effectively zero-rated; (2) the taxpayer is VAT-registered;
(3) the claim must be filed within two years after the close of the taxable quarter when such sales were
made; and (4) the creditable input tax due or paid must be attributable to such sales, except the
transitional input tax, to the extent that such input tax has not been applied against the output tax.

The Court finds that the first three requirements have been complied [with] by petitioner.
With regard to the first requisite, the evidence presented by petitioner, such as the Sales Invoices
(Exhibits "II" to "II-262," "JJ" to "JJ-431," "KK" to "KK-394" and "LL") shows that it is engaged in sales
which are zero-rated.

The second requisite has likewise been complied with. The Certificate of Registration with OCN
1RC0000148499 (Exhibit "C") with the BIR proves that petitioner is a registered VAT taxpayer.

In compliance with the third requisite, petitioner filed its administrative claim for refund on September
30, 2004 (Exhibit "N") and the present Petition for Review on September 30, 2004, both within the two
(2) year prescriptive period from the close of the taxable quarter when the sales were made, which is
from September 30, 2002.

As regards, the fourth requirement, the Court finds that there are some documents and claims of
petitioner that are baseless and have not been satisfactorily substantiated.

xxxx

In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax credit
certificate representing unutilized excess input VAT payments for the period July 1, 2002 to September
30, 2002, which are attributable to its zero-rated sales for the same period, but in the reduced amount
of P3,239,119.25, computed as follows:

Amount of Claimed Input VAT P 3,891,123.82

Less:
Exceptions as found by the ICPA 41,020.37

Net Creditable Input VAT P 3,850,103.45

Less:
Output VAT Due 610,984.20
Excess Creditable Input VAT P 3,239,119.25

WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT
CERTIFICATE in favor of petitioner [in] the reduced amount of THREE MILLION TWO HUNDRED
THIRTY NINE THOUSAND ONE HUNDRED NINETEEN AND 25/100 PESOS (P3,239,119.25),
representing the unutilized input VAT incurred for the months of July to September 2002.

SO ORDERED.14

Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial
Reconsideration,15 insisting that the administrative and the judicial claims were filed beyond the two-
year period to claim a tax refund/credit provided for under Sections 112(A) and 229 of the NIRC. He
reasoned that since the year 2004 was a leap year, the filing of the claim for tax refund/credit on
September 30, 2004 was beyond the two-year period, which expired on September 29, 2004.16 He
cited as basis Article 13 of the Civil Code,17 which provides that when the law speaks of a year, it is
equivalent to 365 days. In addition, petitioner argued that the simultaneous filing of the administrative
and the judicial claims contravenes Sections 112 and 229 of the NIRC.18 According to the petitioner,
a prior filing of an administrative claim is a "condition precedent"19 before a judicial claim can be filed.
He explained that the rationale of such requirement rests not only on the doctrine of exhaustion of
administrative remedies but also on the fact that the CTA is an appellate body which exercises the
power of judicial review over administrative actions of the BIR. 20

The Second Division of the CTA, however, denied petitioners Motion for Partial Reconsideration for
lack of merit. Petitioner thus elevated the matter to the CTA En Banc via a Petition for Review.21

Ruling of the CTA En Banc

On July 30, 2008, the CTA En Banc affirmed the Second Divisions Decision allowing the partial tax
refund/credit in favor of respondent. However, as to the reckoning point for counting the two-year
period, the CTA En Banc ruled:

Petitioner argues that the administrative and judicial claims were filed beyond the period allowed by
law and hence, the honorable Court has no jurisdiction over the same. In addition, petitioner further
contends that respondent's filing of the administrative and judicial [claims] effectively eliminates the
authority of the honorable Court to exercise jurisdiction over the judicial claim.

We are not persuaded.

Section 114 of the 1997 NIRC, and We quote, to wit:

SEC. 114. Return and Payment of Value-added Tax.

(A) In General. Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.

[x x x x ]

Based on the above-stated provision, a taxpayer has twenty five (25) days from the close of each
taxable quarter within which to file a quarterly return of the amount of his gross sales or receipts. In
the case at bar, the taxable quarter involved was for the period of July 1, 2002 to September 30, 2002.
Applying Section 114 of the 1997 NIRC, respondent has until October 25, 2002 within which to file its
quarterly return for its gross sales or receipts [with] which it complied when it filed its VAT Quarterly
Return on October 20, 2002.

In relation to this, the reckoning of the two-year period provided under Section 229 of the 1997 NIRC
should start from the payment of tax subject claim for refund. As stated above, respondent filed its
VAT Return for the taxable third quarter of 2002 on October 20, 2002. Thus, respondent's
administrative and judicial claims for refund filed on September 30, 2004 were filed on time because
AICHI has until October 20, 2004 within which to file its claim for refund.

In addition, We do not agree with the petitioner's contention that the 1997 NIRC requires the previous
filing of an administrative claim for refund prior to the judicial claim. This should not be the case as the
law does not prohibit the simultaneous filing of the administrative and judicial claims for refund. What
is controlling is that both claims for refund must be filed within the two-year prescriptive period.

In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion spelled
out in the assailed January 4, 2008 Decision and March 13, 2008 Resolution of the CTA Second
Division. What the instant petition seeks is for the Court En Banc to view and appreciate the evidence
in their own perspective of things, which unfortunately had already been considered and passed upon.

WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for
lack of merit. Accordingly, the January 4, 2008 Decision and March 13, 2008 Resolution of the CTA
Second Division in CTA Case No. 7065 entitled, "AICHI Forging Company of Asia, Inc. petitioner vs.
Commissioner of Internal Revenue, respondent" are hereby AFFIRMED in toto.

SO ORDERED.22

Petitioner sought reconsideration but the CTA En Banc denied23 his Motion for Reconsideration.

Issue

Hence, the present recourse where petitioner interposes the issue of whether respondents judicial
and administrative claims for tax refund/credit were filed within the two-year prescriptive period
provided in Sections 112(A) and 229 of

the NIRC.24

Petitioners Arguments

Petitioner maintains that respondents administrative and judicial claims for tax refund/credit were filed
in violation of Sections 112(A) and 229 of the NIRC.25 He posits that pursuant to Article 13 of the Civil
Code,26 since the year 2004 was a leap year, the filing of the claim for tax refund/credit on September
30, 2004 was beyond the two-year period, which expired on September 29, 2004.27

Petitioner further argues that the CTA En Banc erred in applying Section 114(A) of the NIRC in
determining the start of the two-year period as the said provision pertains to the compliance
requirements in the payment of VAT.28He asserts that it is Section 112, paragraph (A), of the same
Code that should apply because it specifically provides for the period within which a claim for tax
refund/ credit should be made.29

Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the judicial claim
with the CTA were filed on the same day.30 He opines that the simultaneous filing of the administrative
and the judicial claims contravenes Section 229 of the NIRC, which requires the prior filing of an
administrative claim.31 He insists that such procedural requirement is based on the doctrine of
exhaustion of administrative remedies and the fact that the CTA is an appellate body exercising judicial
review over administrative actions of the CIR.32

Respondents Arguments

For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT for the
period July 1, 2002 to September 30, 2002 as a matter of right because it has substantially complied
with all the requirements provided by law.33 Respondent likewise defends the CTA En Banc in applying
Section 114(A) of the NIRC in computing the prescriptive period for the claim for tax refund/credit.
Respondent believes that Section 112(A) of the NIRC must be read together with Section 114(A) of
the same Code.34

As to the alleged simultaneous filing of its administrative and judicial claims, respondent contends that
it first filed an administrative claim with the One-Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center of the DOF before it filed a judicial claim with the CTA.35 To prove this, respondent
points out that its Claimant Information Sheet No. 4970236 and BIR Form No. 1914 for the third quarter
of 2002,37 which were filed with the DOF, were attached as Annexes "M" and "N," respectively, to the
Petition for Review filed with the CTA.38 Respondent further contends that the non-observance of the
120-day period given to the CIR to act on the claim for tax refund/credit in Section 112(D) is not fatal
because what is important is that both claims are filed within the two-year prescriptive period.39 In
support thereof, respondent cites Commissioner of Internal Revenue v. Victorias Milling Co.,
Inc.40 where it was ruled that "[i]f, however, the [CIR] takes time in deciding the claim, and the period
of two years is about to end, the suit or proceeding must be started in the [CTA] before the end of the
two-year period without awaiting the decision of the [CIR]."41 Lastly, respondent argues that even if the
period had already lapsed, it may be suspended for reasons of equity considering that it is not a
jurisdictional requirement.42

Our Ruling

The petition has merit.

Unutilized input VAT must be claimed within two years after the close of the taxable quarter when the
sales were made

In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the
Second Division of the CTA applied Section 112(A) of the NIRC, which states:

SEC. 112. Refunds or Tax Credits of Input Tax.

(A) Zero-rated or Effectively Zero-rated Sales Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due
or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-
rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or
services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed
to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.
(Emphasis supplied.)

The CTA En Banc, on the other hand, took into consideration Sections 114 and 229 of the NIRC,
which read:

SEC. 114. Return and Payment of Value-Added Tax.

(A) In General. Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236, shall file a return
and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration:
Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of
business or head office and all branches.
xxxx

SEC. 229. Recovery of tax erroneously or illegally collected.

No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue
tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been excessively or
in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty or
sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without 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.)

Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for
refund/credit of unutilized input VAT should start from the date of payment of tax and not from the
close of the taxable quarter when the sales were made.43

The pivotal question of when to reckon the running of the two-year prescriptive period, however, has
already been resolved in Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, 44 where
we ruled that Section 112(A) of the NIRC is the applicable provision in determining the start of the two-
year period for claiming a refund/credit of unutilized input VAT, and that Sections 204(C) and 229 of
the NIRC are inapplicable as "both provisions apply only to instances of erroneous payment or illegal
collection of internal revenue taxes."45 We explained that:

The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms that unutilized
input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be
claimed within two years reckoned from the close of the taxable quarter when the relevant
sales were made pertaining to the input VAT regardless of whether said tax was paid or not. As
the CA aptly puts it, albeit it erroneously applied the aforequoted Sec. 112 (A), "[P]rescriptive period
commences from the close of the taxable quarter when the sales were made and not from the time
the input VAT was paid nor from the time the official receipt was issued." Thus, when a zero-rated
VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only has a year
to file a claim for refund or tax credit of the unutilized creditable input VAT. The reckoning frame would
always be the end of the quarter when the pertinent sales or transaction was made, regardless when
the input VAT was paid. Be that as it may, and given that the last creditable input VAT due for the
period covering the progress billing of September 6, 1996 is the third quarter of 1996 ending on
September 30, 1996, any claim for unutilized creditable input VAT refund or tax credit for said quarter
prescribed two years after September 30, 1996 or, to be precise, on September 30, 1998.
Consequently, MPCs claim for refund or tax credit filed on December 10, 1999 had already prescribed.

Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which,
for the purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the
filing of a claim therefor. Secs. 204(C) and 229 respectively provide:
Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. The
Commissioner may

xxxx

(c) Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the purchaser,
and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and
refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2)
years after the payment of the tax or penalty: Provided, however, That a return filed showing an
overpayment shall be considered as a written claim for credit or refund.

xxxx

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, of any sum alleged to have been excessively or in any manner wrongfully collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest
or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid.

Notably, the above provisions also set a two-year prescriptive period, reckoned from date of payment
of the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions apply
only to instances of erroneous payment or illegal collection of internal revenue taxes.

MPCs creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be
shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or services of the
taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax exempt client, resulting
in a zero-rated or effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of
its right to a refund for any unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful
payment angle does not enter the equation.

xxxx

Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC, providing a two-
year prescriptive period reckoned from the close of the taxable quarter when the relevant sales
or transactions were made pertaining to the creditable input VAT, applies to the instant case,
and not to the other actions which refer to erroneous payment of taxes.46 (Emphasis supplied.)
In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114(A) and 229
of the NIRC in computing the two-year prescriptive period for claiming refund/credit of unutilized input
VAT. To be clear, Section 112 of the NIRC is the pertinent provision for the refund/credit of input VAT.
Thus, the two-year period should be reckoned from the close of the taxable quarter when the sales
were made.

The administrative claim was timely filed

Bearing this in mind, we shall now proceed to determine whether the administrative claim was timely
filed.

Relying on Article 13 of the Civil Code,47 which provides that a year is equivalent to 365 days, and
taking into account the fact that the year 2004 was a leap year, petitioner submits that the two-year
period to file a claim for tax refund/ credit for the period July 1, 2002 to September 30, 2002 expired
on September 29, 2004.48

We do not agree.

In Commissioner of Internal Revenue v. Primetown Property Group, Inc.,49 we said that as between
the Civil Code, which provides that a year is equivalent to 365 days, and the Administrative Code of
1987, which states that a year is composed of 12 calendar months, it is the latter that must prevail
following the legal maxim, Lex posteriori derogat priori.50 Thus:

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of
1987 deal with the same subject matter the computation of legal periods. Under the Civil Code, a
year is equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative
Code of 1987, however, a year is composed of 12 calendar months. Needless to state, under the
Administrative Code of 1987, the number of days is irrelevant.

There obviously exists a manifest incompatibility in the manner of

computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason,
we hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent
law, governs the computation of legal periods. Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the two-year
prescriptive period (reckoned from the time respondent filed its final adjusted return on April 14, 1998)
consisted of 24 calendar months, computed as follows:

Year 1 1st calendar month
2nd calendar month
3rd calendar month
4th calendar month
5th calendar month
6th calendar month
7th calendar month
8th calendar month
April 15, 1998 to May 14, 1998
May 15, 1998 to June 14, 1998
June 15, 1998 to July 14, 1998
July 15, 1998 to August 14, 1998
August 15, 1998 to September 14, 1998
September 15, 1998 to October 14, 1998
October 15, 1998 to November 14, 1998
November 15, 1998 to December 14, 1998
 9th calendar month
10th calendar month
11th calendar month
12th calendar month
Year 2 13th calendar month
14th calendar month
15th calendar month
16th calendar month
17th calendar month
18th calendar month
19th calendar month
20th calendar month
21st calendar month
22nd calendar month
23rd calendar month
24th calendar month
December 15, 1998 to January 14, 1999
January 15, 1999 to February 14, 1999
February 15, 1999 to March 14, 1999
March 15, 1999 to April 14, 1999
April 15, 1999 to May 14, 1999
May 15, 1999 to June 14, 1999
June 15, 1999 to July 14, 1999
July 15, 1999 to August 14, 1999
August 15, 1999 to September 14, 1999
September 15, 1999 to October 14, 1999
October 15, 1999 to November 14, 1999
November 15, 1999 to December 14, 1999
December 15, 1999 to January 14, 2000
January 15, 2000 to February 14, 2000
February 15, 2000 to March 14, 2000
March 15, 2000 to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the
24th calendar month from the day respondent filed its final adjusted return. Hence, it was filed within
the reglementary period.51

Applying this to the present case, the two-year period to file a claim for tax refund/credit for the period
July 1, 2002 to September 30, 2002 expired on September 30, 2004. Hence, respondents
administrative claim was timely filed.

The filing of the judicial claim was premature

However, notwithstanding the timely filing of the administrative claim, we

are constrained to deny respondents claim for tax refund/credit for having been filed in violation of
Section 112(D) of the NIRC, which provides that:

SEC. 112. Refunds or Tax Credits of Input Tax.

xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the
one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals. (Emphasis supplied.)

Section 112(D) of the NIRC clearly provides that the CIR has "120 days, from the date of the
submission of the complete documents in support of the application [for tax refund/credit]," within
which to grant or deny the claim. In case of full or partial denial by the CIR, the taxpayers recourse is
to file an appeal before the CTA within 30 days from receipt of the decision of the CIR. However, if
after the 120-day period the CIR fails to act on the application for tax refund/credit, the remedy of the
taxpayer is to appeal the inaction of the CIR to CTA within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on September 30,
2004. Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period.
For this reason, we find the filing of the judicial claim with the CTA premature.

Respondents assertion that the non-observance of the 120-day period is not fatal to the filing of a
judicial claim as long as both the administrative and the judicial claims are filed within the two-year
prescriptive period52 has no legal basis.

There is nothing in Section 112 of the NIRC to support respondents view. Subsection (A) of the said
provision states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two years after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such
sales." The phrase "within two (2) years x x x apply for the issuance of a tax credit certificate or refund"
refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is
apparent in the first paragraph of subsection (D) of the same provision, which states that the CIR has
"120 days from the submission of complete documents in support of the application filed in accordance
with Subsections (A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of the
NIRC, which already provides for a specific period within which a taxpayer should appeal the decision
or inaction of the CIR. The second paragraph of Section 112(D) of the NIRC envisions two scenarios:
(1) when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no
decision is made after the 120-day period. In both instances, the taxpayer has 30 days within which
to file an appeal with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with
the CTA.

With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc.53 relied upon by
respondent, we find the same inapplicable as the tax provision involved in that case is Section 306,
now Section 229 of the NIRC. And as already discussed, Section 229 does not apply to refunds/credits
of input VAT, such as the instant case.

In fine, the premature filing of respondents claim for refund/credit of input VAT before the CTA
warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA.

WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and the
October 6, 2008 Resolution of the Court of Tax Appeals are hereby REVERSED and SET ASIDE. The
Court of Tax Appeals Second Division is DIRECTED to dismiss CTA Case No. 7065 for having been
prematurely filed.
SO ORDERED.