G.R. No.

172909 March 5, 2014

SPOUSES SILVESTRE O. PLAZA AND ELENA Y. PLAZA, Petitioners,

vs.
GUILLERMO LUSTIVA, ELEODORA VDA. DE MARTINEZ AND VICKY SAYSON
GOLOSENO, Respondents.

DECISION

BRION, J.:

Through a petition for review on certiorari,1 filed under Rule 45 of the Rules of Court, the
petitioners, spouses Silvestre O. Plaza and Elena Y. Plaza, seek the reversal of the
decision2 dated October 24, 2005 and the Resolution3 dated April 6, 2006 of the Court of
Appeals (CA) in CA-G.R. SP No. 59859.

THE FACTS

On August 28, 1997, the CA4 ruled that among the Plaza siblings, namely: Aureliano, Emiliana,
Vidal, Marciano, and Barbara, Barbara was the owner of the subject agricultural land. The
decision became final and executory and Barbara's successors, respondents Guillermo Lustiva,
Eleodora Vda. de Martinez and Vicky Sayson Goloseno, have continued occupying the
property.

On September 14, 1999, Vidal’s son and daughter-in-law, the petitioners, filed a Complaint for
Injunction, Damages, Attorney’s Fees with Prayer for the Issuance of the Writ of Preliminary
Injunction and/or Temporary Restraining Order against the respondents and the City
Government of Butuan. They prayed that the respondents be enjoined from unlawfully and
illegally threatening to take possession of the subject property. According to the petitioners, they
acquired the land from Virginia Tuazon in 1997; Tuazon was the sole bidder and winner in a tax
delinquency sale conducted by the City of Butuan on December 27, 1996.

In their answer, the respondents pointed out that they were never delinquent in paying the land
taxes and were in fact not aware that their property had been offered for public auction.
Moreover, Tuazon, being a government employee, was disqualified to bid in the public auction,
as stated in Section 89 of the Local Government Code of 1991.5 As Tuazon’s participation in the
sale was void, she could have not transferred ownership to the petitioners. Equally important,
the petitioners merely falsified the property tax declaration by inserting the name of the
petitioners’ father, making him appear as a co-owner of the auctioned land. Armed with the
falsified tax declaration, the petitioners, as heirs of their father, fraudulently redeemed the land
from Tuazon. Nonetheless, there was nothing to redeem as the land was not sold. For these
irregularities, the petitioners had no right to the Writ of Preliminary Injunction and/or Temporary
Restraining Order prayed for against them.

THE RTC’S RULING

In its December 14, 1999 order,6 the Regional Trial Court (RTC) of Butuan City, Branch 5,
reconsidered its earlier order,7 denied the prayer for a Writ of Preliminary Injunction, and
ordered that the possession and occupation of the land be returned to the respondents. The
RTC found that the auction sale was tainted with irregularity as the bidder was a government
employee disqualified in accordance with Section 89 of the Local Government Code of 1991.
The petitioners are not buyers in good faith either. On the contrary, they were in bad faith for
having falsified the tax declaration they redeemed the property with.

THE CA’S RULING

Through a petition for review on certiorari under Rule 65, the petitioners challenged the RTC’s
order before the CA.

While the petition for review on certiorari was pending before the CA, the petitioners filed an
action for specific performance8 against the City Government of Butuan. According to the
petitioners, they acquired possession and ownership over the auctioned property when they
redeemed it from Tuazon. The City Government of Butuan must therefore issue them a
certificate of sale.9

In its October 24, 2005 decision,10 the CA affirmed the RTC’s ruling, found the petitioners guilty
of forum shopping, dismissed the case, and referred the case to the Court and to the Integrated
Bar of the Philippines for investigation and institution of the appropriate administrative
action.11 The CA, after legal analysis, similarly concluded that for being disqualified to bid under
Section 89 of the Local Government Code of 1991, Tuazon never obtained ownership over the
property; much less transmit any proprietary rights to the petitioners. Clearly, the petitioners
failed to establish any clear and unmistakable right enforceable by the injunctive relief.

On April 6, 2006, the CA rejected the petitioners’ motion for reconsideration.

THE PARTIES’ ARGUMENTS

The petitioners filed the present petition for review on certiorari with this Court to challenge the
CA rulings. The petitioners maintain that they did not falsify the tax declaration in acquiring the
auctioned property. Moreover, assuming that Tuazon, the sole bidder, was indeed disqualified
from participating in the public auction, Section 18112of the Local Government Code of 1991
finds application. Applying the law, it is as if there was no bidder, for which the City Government
of Butuan was to be considered the purchaser of the land in auction. Therefore, when the
petitioners bought the land, they bought it directly from the purchaser - City Government of
Butuan - and not from Tuazon, as redeemers.

Also, the respondents may not question the validity of the public auction for failing to deposit
with the court the amount required by Section 26713 of the Local Government Code of 1991.

Finally, the petitioners argue that they did not commit forum shopping, as the reliefs prayed for
in the present case and in the specific performance case are not the same. In the present case,
they merely impleaded the City Government of Butuan as a nominal party to pay for the value of
the land only if possession of the land was awarded to the respondents. On the other hand, the
complaint for specific performance prayed that the City Government of Butuan execute the
necessary certificate of sale and other relevant documents pertaining to the auction.

The respondents, for their part, reiterate the lower courts’ findings that there could have been no
legal redemption in favor of the petitioners as the highest bidder was disqualified from bidding.
Moreover, the CA correctly applied the law in finding the petitioners guilty of forum shopping.
Most importantly, the grant of preliminary injunction lies in the sound discretion of the court and
the petitioners failed to show proof that they are entitled to it.

Meanwhile, on August 8, 2013, the RTC dismissed the main action and ordered the petitioners
to pay the respondents attorney’s fees and litigation expenses.14

THE COURT’S RULING

We resolve to deny the petition for lack of merit.

The petitioners may not

raise factual issues

The petitioners maintain that they did not falsify the tax declaration they reimbursed the property
with. According to them, the document already existed in 1987, way before they acquired the
land in 1997. Contrary likewise to the lower courts’ finding, they did not purchase the land from
Tuazon as redemptioners; they directly bought the property from the City Government of
Butuan.

These factual contests are not appropriate for a petition for review on certiorari under Rule 45.
The Court is not a trier of facts.15 The Court will not revisit, re-examine, and re-evaluate the
evidence and the factual conclusions arrived at by the lower courts.16 In the absence of
compelling reasons, the Court will not disturb the rule that factual findings of the lower tribunals
are final and binding on this Court.17

Sections 181 and 267 of the Local Government Code of 1991 are inapplicable; these provisions
do not apply to the present case

The petitioners may not invoke Section 18118 of the Local Government Code of 1991 to validate
their alleged title. The law authorizes the local government unit to purchase the auctioned
property only in instances where "there is no bidder" or "the highest bid is xxx insufficient." A
disqualified bidder is not among the authorized grounds. The local government also never
undertook steps to purchase the property under Section 181 of the Local Government Code of
1991, presumably because it knew the invoked provision does not apply.

Neither can the Court agree with the petitioners’ stance that the respondents’ defense — the
petitioners’ defective title — must fail for want of deposit to the court the amount required by
Section 267 of the Local Government Code. The provision states:

Section 267. Action Assailing Validity of Tax Sale. - No court shall entertain any action assailing
the validity or any sale at public auction of real property or rights therein under this Title until the
taxpayer shall have deposited with the court the amount for which the real property was sold,
together with interest of two percent (2%) per month from the date of sale to the time of the
institution of the action. The amount so deposited shall be paid to the purchaser at the auction
sale if the deed is declared invalid but it shall be returned to the depositor if the action fails.

Neither shall any court declare a sale at public auction invalid by reason or irregularities or
informalities in the proceedings unless the substantive rights of the delinquent owner of the real
property or the person having legal interest therein have been impaired. [underscores ours;
italics supplied]
A simple reading of the title readily reveals that the provision relates to actions for annulment of
tax sales. The section likewise makes use of terms "entertain" and "institution" to mean that the
deposit requirement applies only to initiatory actions assailing the validity of tax sales. The intent
of the provision to limit the deposit requirement to actions for annulment of tax sales led to the
Court’s ruling in National Housing Authority v. Iloilo City, et al.19 that the deposit requirement is
jurisdictional — a condition necessary for the court to entertain the action:

As is apparent from a reading of the foregoing provision, a deposit equivalent to the amount of
the sale at public auction plus two percent (2%) interest per month from the date of the sale to
the time the court action is instituted is a condition — a "prerequisite," to borrow the term used
by the acknowledged father of the Local Government Code — which must be satisfied before
the court can entertain any action assailing the validity of the public auction sale. The law, in
plain and unequivocal language, prevents the court from entertaining a suit unless a deposit is
made. xxx. Otherwise stated, the deposit is a jurisdictional requirement the nonpayment of
which warrants the failure of the action.

xxxx

Clearly, the deposit precondition is an ingenious legal device to guarantee the satisfaction of the
tax delinquency, with the local government unit keeping the payment on the bid price no matter
the final outcome of the suit to nullify the tax sale.20

The Court would later reiterate the jurisdictional nature of the deposit in Wong v. City of
Iloilo,21 and pronounce:

In this regard, National Housing Authority v. Iloilo City holds that the deposit required under
Section 267 of the Local Government Code is a jurisdictional requirement, the nonpayment of
which warrants the dismissal of the action. Because petitioners in this case did not make such
deposit, the RTC never acquired jurisdiction over the complaints.22

These rulings clearly render inapplicable the petitioners’ insistence that the respondents should
have made a deposit to the court. The suit filed by the petitioners was an action for injunction
and damages; the issue of nullity of the auction was raised by the respondents themselves
merely as a defense and in no way converted the action to an action for annulment of a tax sale.

The petitioners failed to show clear

and unmistakable rights to be protected
by the writ; the present action has been
rendered moot and academic by the
dismissal of the main action

As the lower courts correctly found, Tuazon had no ownership to confer to the petitioners
despite the latter’s reimbursement of Tuazon’s purchase expenses. Because they were never
owners of the property, the petitioners failed to establish entitlement to the writ of preliminary
injunction. "[T]o be entitled to an injunctive writ, the right to be protected and the violation
against that right must be shown. A writ of preliminary injunction may be issued only upon clear
showing of an actual existing right to be protected during the pendency of the principal action.
When the complainant’s right or title is doubtful or disputed, he does not have a clear legal right
and, therefore, the issuance of injunctive relief is not proper."23
Likewise, upon the dismissal of the main case by the RTC on August 8, 2013, the question of
issuance of the writ of preliminary injunction has become moot and academic. In Arevalo v.
Planters Development Bank,24 the Court ruled that a case becomes moot and academic when
there is no more issue between the parties or object that can be served in deciding the merits of
the case. Upon the dismissal of the main action, the question of the non-issuance of a writ of
preliminary injunction automatically died with it. A writ of preliminary injunction is a provisional
remedy; it is auxiliary, an adjunct of, and subject to the determination of the main action. It is
deemed lifted upon the dismissal of the main case, any appeal therefrom notwithstanding.25

The petitioners are guilty

of forum shopping

We agree with the CA that the petitioners committed forum shopping when they filed the specific
performance case despite the pendency of the present case before the CA. In the recent case
of Heirs of Marcelo Sotto, etc., et al. v. Matilde S. Palicte,26 the Court laid down the three ways
forum shopping may be committed: 1) through litis pendentia — filing multiple cases based on
the same cause of action and with the same prayer, the previous case not having been resolved
yet; 2) through res judicata — filing multiple cases based on the same cause of action and the
same prayer, the previous case having been finally resolved; and 3) splitting of causes of action
— filing multiple cases based on the same cause of action but with different prayers — the
ground to dismiss being either litis pendentia or res judicata. "The requisites of litis pendentia
are: (a) the identity of parties, or at least such as representing the same interests in both
actions; (b) the identity of rights asserted and relief prayed for, the relief being founded on the
same facts; and (c) the identity of the two cases such that judgment in one, regardless of which
party is successful, would amount to res judicata in the other."27

Noticeable among these three types of forum shopping is the identity of the cause of action in
the different cases filed. Cause of action is "the act or omission by which a party violates the
right of another."28

The cause of action in the present case (and the main case) is the petitioners’ claim of
ownership of the land when they bought it, either from the City Government of Butuan or from
Tuazon. This ownership is the petitioners’ basis in enjoining the respondents from
dispossessing them of the property. On the other hand, the specific performance case prayed
that the City Government of Butuan be ordered to issue the petitioners the certificate of sale
grounded on the petitioners’ ownership of the land when they had bought it, either from the City
Government of Butuan or from Tuazon. While it may appear that the main relief prayed for in the
present injunction case is different from what was prayed for in the specific performance case,
the cause of action which serves as the basis for the reliefs remains the same — the petitioners’
alleged ownership of the property after its purchase in a public auction.

Thus, the petitioners' subsequent filing of the specific performance action is forum shopping of
the third kind-splitting causes of action or filing multiple cases based on the same cause of
action, but with different prayers. As the Court has held in the past, "there is still forum shopping
even if the reliefs prayed for in the two cases are different, so long as both cases raise
substantially the same issues."29

Similarly, the CA correctly found that the petitioners and their counsel were guilty of forum
shopping based on litis pendentia. Not only were the parties in both cases the same insofar as
the City Government of Butuan is concerned, there was also identity of rights asserted and
identity of facts alleged. The cause of action in the specific performance case had already been
ruled upon in the present case, although it was still pending appeal before the CA. Likewise, the
prayer sought in the specific performance case-for the City Government ofButuan to execute a
deed of sale in favor of the petitioners - had been indirectly ruled upon in the present case when
the R TC declared that no certificate of sale could be issued because there had been no valid
sale.

WHEREFORE, premises considered, the Court DENIES the petition for review on
certiorari.1âwphi1 The decision dated October 24, 2005 and the resolution dated April 6, 2006
of the Court of Appeals in CA-G.R. SP No. 59859 are hereby AFFIRMED.

SO ORDERED.
G.R. No. 208740 November 19, 2014

CORPORATE STRATEGIES DEVELOPMENT CORP., and RAFAEL R. PRIETO, Petitioners,

vs.
NORMAN A. AGOJO, Respondent.

DECISION

MENDOZA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, Corporate Strategies
Development Corporation (CSDC) and Rafael R. Prieto (Prieto) seek the review of the March
18, 2013 Amended Decision1 and August 15, 2013 Resolution2 of the Court of Appeals (CA), in
CA-G.R. CV No. 96076. In the said rulings, the CA reversed the January 15, 2010 Decision of
the Regional Trial Court of Makati City, Branch 150 (RTC), which dismissed the petition filed by
Norman A. Agojo (respondent) for the issuance of a new certificate of title covering a parcel of
land registered in the name of CSDC on the ground that the auction sale conducted by the City
of Makati was null and void.

The Facts

CSDC is the registered owner of a parcel of land in Makati City located at Lot 18, Block 29 of
Pcs-1310 and covered by Transfer Certificate of Title (TCT)No. 125211, with an area of 1,000
square meters. It is likewise covered by Tax Declaration Nos. F00401455 and F00401456, in
the name of CSDC.

From 1994 to 2006, its real property taxes in the amount of ₱1,458,199.85, had not been paid.
As a result, a warrant was issued on April 7, 2006, by the City Treasurer of Makati subjecting
the property to levy pursuant to Section 258 of the Local Government Code (LGC).3 A public
auction sale was then conducted on May 24, 2006, during which respondent turned out to be
the highest bidder with a bid amount of ₱2,000,000.00. Consequently, a certificate of sale was
issued in his favor on even date. The said certificate was later registered with the Registry of
Deeds.

With the issuance of the Final Deed of Conveyance on July 3, 2007, or after the expiration of
the one (1) year redemption period, respondent filed with the RTC a petition for the issuance of
a new certificate of title for the subject property. The case was docketed as LRC Case No. M-
5050. On February 13, 2008, an order was issued by the RTC setting the case for hearing and
directing the service of the notice of hearing upon all interested persons – the petitioners herein,
the Land Registration Authority (LRA), and the Register of Deeds of Makati City.

On August 22, 2008,4 CSDC filed its opposition to the said petition; while Prieto, in his capacity
as CSDC President, filed his on October 20, 2008. As oppositors, CSDC and Prieto (petitioners)
alleged that they did not receive a notice of tax delinquency orthe warrant subjecting the
property; that the pertinent notice and warrant were apparently sent to CSDC’s old office
address at 6/F Tuscan Building, Herrera St., Legaspi Village, Makati City, despite its transfer to
another location years ago; and that the sale violated the procedural requirements prescribed
under the LGC. Specifically, they questioned the following: (a) the failure of the City Treasurer to
exert further steps to send the warrant at the address where the property itself was located; (b)
the failure to serve the warrant on the occupant of the property as mandated by Section 258 of
the LGC; (c) the failure to serve the copies of the warrant of levy upon the Register of Deeds
and the City Assessor of Makati prior to the auction sale following the said provision in relation
to Section 260 of the LGC; (d) the failure to annotate the notice of levy on the title of the
property prior to the conduct of the auction sale on May 24, 2006;and (e) the gross inadequacy
of the bid price for the property considering that it only represented five (5) percent of the value
of the property in the total amount of ₱35,000,000.00 based on the zonal valuation. Because of
these alleged defects, petitioner assailed the auction sale for being defective pursuant to the
provisions of the LGC.

On August 23, 2008, CSDC filed a motion to deposit the amount of ₱3,080,000.00 pursuant to
Section 267 of the LGC,5 as a guarantee to respondent should the sale be declared void. The
RTC granted the said motion in its August 29, 2008 Order. After the filing of their respective
memoranda, the case was submitted for decision by the RTC.

On January 15, 2010, the RTC rendered a decision which voided the auction sale. The
dispositive portion of the said decision reads:

WHEREFORE, for failure of the petitioner to present sufficient and competent evidence to
entitle him to the reliefs sought in his petition, particularly, his failure to prove compliance of the
legal requirements for a valid tax delinquency sale which evidently affected the substantive
rights of the oppositor, the auction sale of the subject property by the City Treasurer to him is
declared invalid.

As a consequence of the nullification of the sale, the amount deposited by the oppositor with the
Clerk of Court, RTC, Makati covered by official receipt no. 0205076 dated September 9, 2008 in
the amount of ₱3,086,000.00 intended to cover the amount for which the lot with improvement
was sold including interest of 2% per month from date of sale up to the filing of the opposition
shall be paid to the petitioner as purchaser in the auction sale.

SO ORDERED.6

Unsatisfied, respondent filed an appeal with the CA. He alleged that the RTC erred in not
upholding the presumption of regularity in the performance of the official duties of the City
Treasurer of Makati.

On January 26, 2012, the CA decided to affirm the findings and conclusions of the RTC. It held
that there was failure on the part of the City of Makati to fully comply with the requirements of
publication, posting and service of the notice of delinquency and warrant of levy laid down by
the LGC before proceeding with the auction sale, and that the RTC correctly dismissed the
petition for the issuance of a new certificate of title filed by the respondent, to wit:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us

DENYINGthe instant appeal for lack of merit. The Decision rendered by Branch 150 of the
Regional Trial Court of the National Capital Judicial Region in the City of Makati on January 15,
2010 in LRC Case No. M. 5050 is hereby AFFIRMED in toto.

SO ORDERED.7

On February 29, 2012 respondent moved for reconsideration. On March 18, 2013, the CA
reconsidered its decision, thus, reversing its earlier pronouncement. It held as valid the subject
auction sale on the basis of the presumption of regularity in the performance of the City
Treasurer’s duties. It held in part that "as to the other requirements for a valid tax delinquency
sale of real property such as publication, service and posting of notice of such sale and the
warrant of levy thereon, these should be deemed complied with because the sale was
conducted by the OIC-Treasurer of Makati in the performance of her official duty."8 Hence:
WHEREFORE, in view of all the foregoing premises, judgment is hereby rendered by us
RECONSIDERING our original decision promulgated on January 26, 2012, SETTING ASIDEthe
said decision and RENDERING a new one setting aside the decision rendered by the court a
quo on January 15, 2010 in LRC Case No. M-5050, thus declaring asvalid the auction sale of
the land covered by TCT No. 125211 of the Registry of Deeds of Makati City, together with the
house existing thereon, that was made by the City Treasurer of Makati in favor of the petitioner-
appellant and directing the Register of Deeds of Makati City to issue to the petitioner-appellant a
new certificate of title for the said land in his name.

SO ORDERED.9

Aggrieved, petitioners asked for reconsideration. In a resolution, dated August 15, 2013, the CA
denied their motion.10

Hence, this petition.

GROUNDS FOR THE PETITION

A. THE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR OF

LAW IN APPLYING THE PRESUMPTION OF REGULARITY OF AN OFFICIAL ACT IN
A TAX DELIQUENCY SALE.

B. THE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR OF

LAW IN DISREGARDING THE LEGAL REQUIREMENTS OF TAX DELIQUENCY
SALE.

C. THE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR OF

LAW IN PASSING ON TO PETITIONERS THE BURDEN OF PROOF IN
DETERMINING THE VALIDITY OF THE SALE.

D. THE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR OF

LAW FOR FAILURE TO CONSIDER THE GROSS INADEQUACY OF THE PRICE IN
DECLARING THE VALIDITY OF THE SALE.11

Petitioners submit that the CA erred in: (1) applying the presumption of regularity of an official
act in a tax delinquency case; (2) disregarding the legal requirements of a tax delinquency sale;
(3) passing on to the petitioners the burden of proof in determining the validity of the sale; and in
(4) failing to consider the gross inadequacy of the bid price.

Citing Spouses Sarmiento, et al. v. CA,12 petitioners argue that "there can be no presumption of
regularity of any administrative action which results in depriving a taxpayer of his property
through a tax sale; "that, as such, it is incumbent upon respondentto prove the regularity of all
proceedings leading to the sale; and that reliance on the presumption of regularity should,
therefore, not apply in administrative proceedings. It is their position that respondent’s
merereliance on the presumption of regularity shows his failure to discharge the burden of
proving compliance with the mandatory and indispensable requirements of a valid auction sale
pursuant to LGC as held by the Court in Engracio Francia v. IAC and Ho
Fernandez.13 Petitioners refer specifically to the failure in notifying them of the delinquency and
to the fact that no notice of levy was served on them or on the occupant of the subject property.
They further manifest that the Register of Deeds and the City Assessor were not notified of the
levy prior to the sale. There was no annotation on the title prior to the auction either.

In his Comment,14 respondent asks that the pleadings filed by petitioners be expunged from the
records on account of the failure of their counsels to indicate observance with the MCLE
requirements for the fourth compliance period.15 It is his submission that the instant petition
should be treated as if not signed and a mere scrap of paper following Bar Matter No. 1922,16 in
relation to Bar Matter No. 850,17 which mandates all practicing lawyers to indicate in all
pleadingsthe MCLE Compliance Certificate Number.

Furthermore, respondent argues thatpetitioners failed to overturn the disputable presumption of

regularity accorded to the official actions of the City Government of Makati pursuant to Section
3(m) of Rule 131 of the Rules of Court;18that he has clearly proven his right over the subject
property as evidenced by the Warrant of Levy, Notice of Public Auction of Real Properties,
Certification of Posting, Certificate of Sale, Annotations of Warrant of Levy and the Certificate of
Sale and Final Deed of Conveyance covering the subject property; that the burden of proof in
determining the validity of the sale rests with petitioners; that the Notice of Tax Delinquency and
the Warrant of Levy were sent to CSDC; that the Notice of Warrant of Levy was served on the
City Assessor and the Register of Deeds; and that inadequacy of the bid price is not a ground to
nullify the sale.

In their Reply,19 petitioners call the attention of the Court to the fact that their counsels, Atty.
Guillerganand Atty. Leynes, have already submitted their MCLE Certificates for the Fourth
Compliance Period20 on March 26, 2014 and May 5, 2014, respectively. They opined that an
outright dismissal of this petition on a mere technical ground as inconsistent with the ruling of
the Court in Alcantara v. The Phil. Commercial and International Bank21 where it was held that
rules of procedure were mere tools aimed at facilitating the attainment of justice, rather than its
frustration. As regards this issue, petitioners ask the Court’s liberality.

On a substantive note, petitioners disagree with the contentions of respondent that the
presumption of regularity is applicable in tax delinquency sales. They assertthat this Court has
held in many cases that no presumption of regularity is enjoyed by any administrative action
which results in depriving a taxpayer of his property. Petitioners believe that the burden to prove
compliance with the mandatory requirements of a valid auction sale lies on respondent. It is in
this respect that respondent allegedly failed because no documentary evidence was presented
showing that proper service of notice of tax delinquency and notice of levy, including the
publication and posting, was effected.

The Court’s Ruling

The Court grants the petition.

Under Section 75 of Presidential Decree (P.D.) No. 1529, otherwise known as the Property
Registration Decree,22the registered owner is given the right to pursue legal and equitable
remedies to impeach or annul the proceedings for the issuance of new certificates of title upon
the expiration of the redemption period. In this case, petitioners opposed the issuance of a new
certificate of title in favor of the respondent on the ground that the auction sale was null and
void. It was submitted that the auction sale was made without affording the petitioners
dueprocess of law attributable to the following errors:

(a) the failure of the City Treasurer to exert further steps to send the warrant at the
address where the property itself was located;

(b) the failure to serve the warrant on the occupant of the property as mandated by
Section 258 of the LGC;

(c) the failure to serve the copiesof the warrant of levy upon the Register of Deeds and
the City Assessor of Makati prior to the auction sale following the said provision in
relation to Section 260 of the LGC;

(d) the failure to annotate the notice of levy on the title of the property prior to the
conduct of the auction sale on May 24, 2006; and

(e) the gross inadequacy of the bid price for the property considering that it only
represented five (5) percent of the value of the property in the total amount of
₱35,000,000.00 based on the zonal valuation.

Because of these alleged defects, petitioners assailed the auction sale for being defective
pursuant to the provisions of the LGC.

Respondent is of the view that the auction sale enjoys the presumption of regularity. The CA
agreed with him when it reversed the RTC ruling holding the auction sale as invalid.

The Court, however, does not.

In Spouses Sarmiento v. CA,23 this Court reiterated the rule that there could be no presumption
of the regularity of any administrative action which resulted in depriving a taxpayer of his
property through a tax sale. This is an exception to the rule that administrative proceedings are
presumed to be regular. This has been the rule since the 1908 case of Valencia v. Jimenez and
Fuster24 where this Court held:

The American law does not create a presumption of the regularity of any administrative action
which results in depriving a citizen or taxpayer of his property, but, on the contrary, the due
process of law to be followed in tax proceedings must be established by proof and the general
rule is that the purchaser of a tax title is bound to take upon himself the burden of showing the
regularity of all proceedings leading up to the sale. The difficulty of supplying such proof has
frequently lead to efforts on the part of legislatures to avoid it by providing by statute that a tax
deed shall be deemed either conclusive or presumptive proof of such regularity.

Those statutes attributing to it a conclusive effect have been held invalid as operating to deprive
the owner of his property without due process of law. But those creating a presumption only
have been sustained as affecting a rule of evidence, changing nothing but the burden of proof.
(Turpin v. Lemon, 187 U.S., 51.)
The tax law applicable to Manila does not attempt to give any special probative effect to the
deed of the assessor and collector, and therefore leaves the purchaser to establish the
regularity of all vital steps in the assessment and sale. (Emphasis supplied)

In 1915, the Court reiterated this doctrine in Camo v. Boyco.25 It was written therein that no
presumption of the regularity existed in any administrative action which resulted in depriving a
citizen or taxpayer of his property. It further stated that on the contrary, the due process of law
to be followed in tax proceedings must be established by proof and the general rule was that the
purchaser of a tax title was bound to take upon himself the burden of showing the regularity ofall
proceedings leading up to the sale.

And in the 2003 case of Requiron v. Sinaban,26 this Court likewise pronounced that it was
incumbent upon the buyer at an auction sale to prove the regularity of all proceedings leading to
the sale for the buyer could not rely on the presumption of regularity accorded to ordinary
administrative proceedings.

The above jurisprudential tenor clearly demonstrates that the burden to prove compliance with
the validity of the proceedings leading up to the tax delinquency sale is incumbent upon the
buyer or the winning bidder, which, in this case, is the respondent. This is premised on the rule
that a sale of land for tax delinquency is in derogation of property and due process rights of the
registered owner. In order to be valid, the steps required by law must be strictly followed. 27

The burden to show that such steps were taken lies on the person claiming its validity, for the
Court cannot allow mere presumption of regularity to take precedence over the right of a
property owner to due process accorded no less than by the Constitution.

It is, thus, necessary to determine whether respondent has fulfilled his burden of proving
compliance with the requirements for a valid tax delinquency sale.

Under Section 254 of the LGC, it is required that the notice of delinquency must be posted at
the mainhall and in a publicly accessible and conspicuous place in each barangay of the local
government unit concerned. It shall also be published once a week for two (2) consecutive
weeks, in a newspaper of general circulation in the province, city, or municipality.

Section 258 of the LGC further requires that should the treasurer issue a warrant of levy, the
same shall be mailed to or served upon the delinquent owner of the real property or person
having legal interest therein, or in case he is out of the country or cannot be located, the
administrator or occupant of the property. At the same time, the written notice of the levy with
the attached warrant shall be mailed to or served upon the assessor and the Registrar of Deeds
of the province, city or municipality within the Metropolitan Manila Area where the property is
located, who shall annotate the levy on the tax declaration and certificate of title of the property,
respectively.

Section 260 of the LGC also mandates that within thirty (30) days after service of the warrant of
levy, the local treasurer shall proceed to publicly advertise for sale or auction the property or a
usable portion thereof as may be necessary to satisfy the tax delinquency and expenses of sale.
Such advertisement shall be effected by posting a notice at the main entrance of the provincial,
city or municipal building, and in a publicly accessible and conspicuous place in the barangay
where the real property is located, and by publication once a week for two (2) weeks in a
newspaper of general circulation in the province, city or municipality where the property is
located.

Respondent utterly failed to show compliance with the aforestated requirements. First, no
evidence was adduced to prove that the notice of levy was ever received by the CSDC. There
was no proof either that such notice was served on the occupant of the property. It is essential
that there be an actual notice to the delinquent taxpayer, otherwise, the sale is null and void
although preceded by proper advertisement or publication. This proceeds from the principle of
administrative proceedings for the sale of private lands for non-payment of taxes being in
personam.28

Second, the notice of tax delinquency was not proven to have been posted at the Makati City
Hall and in Barangay Dasmariñas, Makati City, where the property is located. It was not proven
either that the required advertisements were effected in accordance with law. In fact, the RTC
stated that:

[E]xcept for the certification issued by the City Administrator and the attachment described in
the preceding paragraph, no other proof was adduced to prove compliance with the other
requirements of Section 254. Specifically, petitioner failed to establish that the City Treasurer
actually caused a Notice of Deliquency posted in a publicly accessible and conspicuous place in
Barangay Dasmariñas, Cypress St. where the property is located. Petitioner is (sic) likewise
failed to present proof that the Notice of Deliquency was published once a week for two (2)
consecutive weeks in a newspaper of general circulation in the city. The pleadings with
Annexes/Attachments do not support the conclusion that the notice of tax delinquency was
published in a newspaper of general circulation once a week for two (2) consecutive weeks
without the Affidavit of Publication of the newspaper’s publisher and the presentation of the
issues of the newspaper where the notice of delinquency is published. Likewise, the pleadings
with attachment/annexes do not support the conclusion that the City Treasurer of Makati, her
deputy or any authorized officer of the city cause (sic) the notice of delinquency posted in the
barangay where the property is located. To be precise, the petitioner failed to show the
requirements under Sec. 254 (Notice of Deliquency in the payment of real property tax) have
been fully complied with.29

Having established the lack of proof of receipt of the notice of levy by CSDC or by the occupant
of the subject property, and of the fact of publication, there is clearly reason to doubt the validity
of the proceedings leading to the tax delinquency sale made in favor of the respondent. Verily,
the inescapable fact that can be derived from all these is respondent’s inability to prove that he
derived his right over the property from a valid proceeding pursuant to the requirements of the
LGC.

In reversing itself, the CA took respondent’s side without recognizing the strict rules on tax
delinquency sales. It also erred in relying on Bank of the Philippines Islands v. Evangeline L.
Puzon30 for the Court finds it inapplicable with the issue at hand. Although the Court has applied
the presumption of regularity in that case, there were other pieces of evidence which showed
compliance with the requirements of a valid foreclosure sale. In ruling that there was indeed
compliance, the Court said as follows:

Besides, even if the notices of sale were not posted in public places, this does render the
foreclosure sale invalid. As held in Development Bank of the Philippines v. Aguirre, the failure to
post a notice is not a ground for invalidating the sale as long as the notice is duly published in a
newspaper of general circulation. Thus, publication of the notice of saleis sufficient compliance
with the statutory requirement on notice-posting.

xxx xxx xxx

To prove compliance with the requisites for valid publication of the notice of sale, Citytrust
offered the following evidence: (1) Notice of Sheriff’s Sale, stating its publication at "The
Guardian" newspaper on 1, 8, and 15 February 1992; (2) Copies of "The Guardian" newspaper,
for the issues dated 1-7 February 1992, 8-14 February 1992, and 15-21 February 1992, [ where
the Notice of Sheriff’s Sale was published; and (3) Affidavit of Publication by the General
Manager of "The Guardian" newspaper stating that "The Guardian" is a weekly newspaper,
published and circulated in the Philippines and that the foreclosure sale was published in "The
Guardian" on 1, 8, and 15 February 1992. Moreover, in its motion for reconsideration filed with
the Court of Appeals, Citytrust attached a Certification issued on 25 April 2003 by the Office of
the Clerk of Court of the Regional Trial Court of Quezon City, attesting and confirming the
qualification of "The Guardian" newspaper to publish the Notice of Sheriff’s Sale.31 (citations
omitted)

In comparison, respondent here merely attached the following in his petition: (1) sheriff’s return
about the service of the order issued by the RTC on February 13, 2008 upon the Register of
Deeds, the LRA and the petitioner marked as Exhibit A, (2) the certificate of posting of the court
order and the petition in three conspicuous public placesin Makati City marked as Exhibit B, (3)
the order issued by the RTC on February 13, 2008 marked as Exhibit C, (4) the certified copy of
the TCT No. 125211 marked as Exhibit E, (5) the Final Deed of Conveyance marked as Exhibit
F, (6) the warrant of levy on the property marked as Exhibit G, and (7) the Certificate of Sale
issued by the City Treasurer of Makati marked as Exhibit H.32

A cursory reading of the above-cited documents showed that these patently failed to prove the
crucial requirements for a valid tax sale. The fact that publication was effected was not clear and
thus cannot be presumed. Also, compliance with the other requirements was not proved,
specifically the receipt of the notice of levy by CSDC. In BPI, this was not the case. Besides,
BPI did not deal with a tax delinquency sale, hence inapplicable.

Moreover, respondent’s failures are highlighted by his vigorous reliance that it is the petitioners
who should prove the invalidity of the administrative proceedings. He merelystated in his
Comment that the burden was placed on the petitioners; that indeed it was petitioners who
failed to adduce any evidence to support the claim that no notice of tax delinquency and warrant
of levy were received by CSDC; that petitioners should be blamed for not receiving the notice
for they should have informed the Register of Deeds, the City of Makati, and the SEC of the
change of business address; and that the notice of warrant was served on the City Assessor
and Register of Deeds, the factof which could have been verified by petitioners themselves had
they doneso by proceeding to the Office of the City Treasurer of Makati. He made these
statements without adducing proof to support his claim that faithful compliance with all the
requirements of the LGC was made. Respondent could have provided documentary proof to
establish that he derived his right from a proceeding that did not violate the petitioners’ right to
due process. Yet, he chose to rely on the presumption of regularity, which is not even applicable
here. Indeed, respondent failed to exercise prudence in directing his affairs.

Respondent must be reminded that the requirements for a tax delinquency sale under the LGC
are mandatory.1âwphi1Strict adherence to the statutes governing tax sales is imperative not
only for the protection of the taxpayers, but also to allay any possible suspicion of collusion
between the buyer and the public officials called upon to enforce the laws. Particularly, the
notice of sale to the delinquent land owners and to the public in general is an essential and
indispensable requirement of law, the non-fulfilment of which vitiates the sale.33 Thus, the
holding of a tax sale despite the absence of the requisite notice, as in this case, is tantamount to
a violation of the delinquent taxpayer’s substantial right to due process.34

For the foregoing reasons, the Court has no recourse but to agree with the RTC ruling, which
was even affirmed by the CA in its original decision. Undeniably, there was insufficiency of
evidence to prove compliance with the LGC requirements for a valid tax delinquency sale. As
such, the Court finds no need to delve on the other issues raised in this petition.

Finally, as to the issue of petitioners' counsel's compliance with the MCLE Certifications, the
Court notes that the required MCLE Certificates, showing fulfilment of the requirements for the
fourth compliance period, have been submitted. This renders the issue moot. SufTice it to state
that the Court "cannot look with favor on a course of action which would place the administration
of justice in a straightjacket, for then the result would be a poor kind of justice if there would be
justice at all. Verily, judicial orders arc issued to be obeyed, nonetheless a non-compliance is to
be dealt with as the circumstances attending the case may warrant. What should guide judicial
action is the principle that a party-litigant is to be given the fullest opportunity to establish the
merits of his complaint of defense rather than for him to lose life, liberty, honor or property on
technicalities."35

WHEREFORE, the petition is GRANTED. The March 18, 2013 Amended Decision of the Court
of Appeals and its August 1 5, 2013 Resolution are hereby REVERSED and SET ASIDE. The
January 15, 2010 Decision of the Regional Trial Court of Makati City, Branch 150, dismissing
the petition for the issuance of a new certificate of title for lack of merit, is hereby AFFIRMED
and REINSTATED.

SO ORDERED.
G.R. No. 181459 June 9, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
MANILA ELECTRIC COMPANY (MERALCO), Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of
Court which seeks to annul and set aside the Decision1 of the Court of Tax Appeals, dated
October 15, 2007, and its Resolution2 dated January 9, 2008 denying petitioner's Motion for
Reconsideration in the case entitled Commissioner of Internal Revenue v. Manila Electric
Company (MERALCO), docketed as C.T.A EB No. 262.

The facts of this case are uncontroverted.

On July 6, 1998, respondent Manila Electric Company (MERALCO) obtained a loan from
Norddeutsche Landesbank Girozentrale (NORD/LB) Singapore Branch in the amount of
USD120,000,000.00 with ING Barings South East Asia Limited (ING Barings) as the
Arranger.3 On September 4, 2000, respondent MERALCO executed another loan agreement
with NORD/LB Singapore Branch for a loan facility in the amount of USD100,000,000.00 with
Citicorp International Limited as Agent.4

Under the foregoing loan agreements, the income received by NORD/LB, by way of respondent
MERALCO’s interest payments, shall be paid in full without deductions, as respondent
MERALCO shall bear the obligation of paying/remitting to the BIR the corresponding ten percent
(10%) final withholding tax.5 Pursuant thereto, respondent MERALCO paid/remitted to the
Bureau of Internal Revenue (BIR) the said withholding tax on its interest payments to NORD/LB
Singapore Branch, covering the period from January 1999 to September 2003 in the aggregate
sum of ₱264,120,181.44.6

However, sometime in 2001, respondent MERALCO discovered that NORD/LB Singapore

Branch is a foreign government-owned financing institution of Germany.7 Thus, on December
20, 2001, respondent MERALCO filed a request for a BIR Ruling with petitioner Commissioner
of Internal Revenue (CIR) with regard to the tax exempt status of NORD/LB Singapore Branch,
in accordance with Section 32(B)(7)(a) of the 1997 National Internal Revenue Code (Tax Code),
as amended.8

On October 7, 2003, the BIR issued Ruling No. DA-342-2003 declaring that the interest
payments made to NORD/LB Singapore Branch are exempt from the ten percent (10%) final
withholding tax, since it is a financing institution owned and controlled by the foreign
government of Germany.9

Consequently, on July 13, 2004, relying on the aforesaid BIR Ruling, respondent MERALCO
filed with petitioner a claim for tax refund or issuance of tax credit certificate in the aggregate
amount of ₱264,120,181.44, representing the erroneously paid or overpaid final withholding tax
on interest payments made to NORD/LB Singapore Branch.10
On November 5, 2004, respondent MERALCO received a letter from petitioner denying its claim
for tax refund on the basis that the same had already prescribed under Section 204 of the Tax
Code, which gives a taxpayer/claimant a period of two (2) years from the date of payment of tax
to file a claim for refund before the BIR.11

Aggrieved, respondent MERALCO filed a Petition for Review with the Court of Tax Appeals
(CTA) on December 6, 2004.12 After trial on the merits, the CTA-First Division rendered a
Decision partially granting respondent MERALCO’s Petition for Review in the following wise:

IN VIEW OF THE FOREGOING, petitioner’s claim in the amount of TWO HUNDRED TWENTY-
FOUR MILLION SEVEN HUNDRED SIXTY THOUSAND NINE HUNDRED TWENTY-SIX
PESOS & SIXTY-FIVE CENTAVOS (₱224,760,926.65) representing erroneously paid and
remitted final income taxes for the period January 1999 to July 2002 is hereby DENIED on the
ground of prescription. However, petitioner’s claim in the amount of THIRTY-NINE MILLION
THREE HUNDRED FIFTY NINETHOUSAND TWO HUNDRED FIFTY-FOUR PESOS &
SEVENTY-NINE CENTAVOS (₱39,359,254.79) is hereby GRANTED.

Accordingly, respondent is ORDERED TO REFUND or ISSUE A TAX CREDIT CERTIFICATE

to petitioner in the amount of THIRTYNINE MILLION THREE HUNDRED FIFTY-NINE
THOUSAND TWO HUNDRED FIFTY-FOUR PESOS & SEVENTY-NINE CENTAVOS
(₱39,359,254.79) representing the final withholding taxes erroneously paid and remitted for the
period December 2002 to September 2003.

SO ORDERED.13

On November 2, 2006, petitioner filed its Motion for Reconsideration with the CTA-First Division,
while on November 7, 2006, respondent MERALCO filed its Partial Motion for
Reconsideration.14 Finding no justifiable reason to overturn its Decision, the CTA-First Division
denied both the petitioner’s Motion for Reconsideration and respondent MERALCO’s Partial
Motion for Reconsideration in a Resolution dated January 11, 2007.15

Unyielding to the Decision of the CTA, both petitioner and respondent MERALCO filed their
respective Petitions for Review before the Court of Tax Appeals En Banc (CTA En Banc)
docketed as C.T.A. EB Nos. 264 and 262, respectively.16 In a Resolution dated May 9, 2007,
the CTA En Banc ordered the consolidation of both cases in accordance with Section 1, Rule 31
of the Revised Rules of Court and gave due course thereto, requiring both parties to submit
their respective consolidated memoranda.17 Only petitioner filed its Consolidated Memorandum
on July 2, 2007.18

In its Decision19 dated October 15, 2007, the CTA En Banc denied both petitions and upheld in
toto the Decision of the CTA-First Division, the dispositive portion of which states:

In the light of the laws and jurisprudence on the matter, We see no reason to reverse the
assailed Decision dated October 16, 2006 and Resolution dated January 11, 2007 of the First
Division.

WHEREFORE, premises considered, both petitions are hereby DISMISSED.

SO ORDERED.20
In the same vein, the motions for reconsideration filed by the respective parties were also
denied in a Resolution21dated January 9, 2008.

Hence, the instant petition.

The sole issue presented before us is whether or not respondent MERALCO is entitled to a tax
refund/credit relative to its payment of final withholding taxes on interest payments made to
NORD/LB from January 1999 to September 2003.

Petitioner maintains that respondent MERALCO is not entitled to a tax refund/credit, considering
that its testimonial and documentary evidence failed to categorically establish that NORD/LB is
owned and controlled by the Federal Republic of Germany; hence, exempted from final
withholding taxes on income derived from investments in the Philippines.22

On the other hand, respondent MERALCO claims that the evidence it presented in trial,
consisting of the testimony of Mr. German F. Martinez, Jr., Vice-President and Head of Tax and
Tariff of MERALCO, which was affirmed by a certification issued by the Embassy of the Federal
Republic of Germany, dated March 27, 2002, through its Mr. Lars Leymann, clearly defined the
status of NORD/LB as one being owned by various German States.23 Respondent MERALCO
further argues that in the Joint Stipulation of Facts, petitioner admitted the fact that NORD/LB is
a financial institution owned and controlled by a foreign government.24

Petitioner’s argument fails to persuade.

After a careful scrutiny of the records and evidence presented before us, we find that
respondent MERALCO has discharged the requisite burden of proof in establishing the factual
basis for its claim for tax refund.

First, as correctly decided by the CTA En Banc, the certification issued by the Embassy of the
Federal Republic of Germany, dated March 27, 2002, explicitly states that NORD/LB is owned
by the State of Lower Saxony, Saxony-Anhalt and Mecklenburg-Western Pomerania, and
serves as a regional bank for the said states which offers support in the public sector financing,
to wit:

x x x x.

Regarding your letter dated March 1, 2002, I can confirm the following:

NORD/LB is owned by the State (Land)of Lower Saxony to the extent of 40%, by the States of
[Saxony-]Anhalt and Mecklenburg-Western Pomerania to the extent of 10% each. The Lower
Saxony Savings Bank and Central Savings Bank Association have a share of [26.66%]. The
Savings Bank Association Saxony-Anhalt and the Savings Bank Association Mecklenburg-
Western Pomerania have a share of [6.66%] each.

As the regional bank for Lower Saxony, Saxony-Anhalt and MecklenburgWestern Pomerania,
NORD/LB offers support in public sector financing. It fulfills as Girozentrale the function of a
central bank for the savings bank in these three states (Lander).

x x x25
Given that the same was issued by the Embassy of the Federal Republic of Germany in the
regular performance of their official functions, and the due execution and authenticity thereof
was not disputed when it was presented in trial, the same may be admitted as proof of the facts
stated therein. Further, it is worthy to note that the Embassy of the Federal Republic of
Germany was in the best position to confirm such information, being the representative of the
Federal Republic of Germany here in the Philippines.

To bolster this, respondent MERALCO presented as witness its Vice-President and Head of Tax
and Tariff, German F. Martinez, Jr., who testified on and identified the existence of such
certification. In this regard, we concur with the CTA En Banc that absent any strong evidence to
disprove the truthfulness of such certification, there is no basis to controvert the findings of the
CTA-First Division, to wit:

The foregoing documentary and testimonial evidence were given probative value as the First
Division ruled that there was no strong evidence to disprove the truthfulness of the said pieces
of evidence, considering that the CIR did not present any rebuttal evidence to prove otherwise.
The weight of evidence is not a question of mathematics, but depends on its effects in inducing
belief, under all of the facts and circumstances proved. The probative weight of any document
or any testimonial evidence must be evaluated not in isolation but in conjunction with other
evidence, testimonial, admissions, judicial notice, and presumptions, adduced or given judicial
cognizance of, and if the totality of the evidence presented by both parties supports the
claimant’s claim, then he is entitled to a favorable judgment. (Donato C. Cruz Trading Corp. v.
Court of Appeals, 347 SCRA 13).26

Consequently, such certification was used by petitioner as basis in issuing BIR Ruling No. DA-
342-2003, which categorically declared that the interest income remitted by respondent
MERALCO to NORD/LB Singapore Branch is not subject to Philippine income tax, and
accordingly, not subject to ten percent (10%) withholding tax.1âwphi1 Contrary to petitioner’s
view, therefore, the same constitutes a compelling basis for establishing the tax exempt status
of NORD/LB, as was held in Miguel J. Ossorio Pension Foundation, Incorporated v. Court of
Appeals,27 which may be applied by analogy to the present case, to wit:

Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling exempting it
from the payment of withholding tax on the sale of the land by various BIR-approved trustees
and tax-exempt private employees' retirement benefit trust funds represented by Citytrust. The
BIR ruled that the private employees’ benefit trust funds, which included petitioner, have met the
requirements of the law and the regulations and, therefore, qualify as reasonable retirement
benefit plans within the contemplation of Republic Act No. 4917 (now Sec. 28 [b] [7] [A], Tax
Code). The income from the trust fund investments is, therefore, exempt from the payment of
income tax and, consequently, from the payment of the creditable withholding tax on the sale of
their real property.

Thus, the documents issued and certified by Citytrust showing that money from the Employees'
Trust Fund was invested in the MBP lot cannot simply be brushed aside by the BIR as self-
serving, in the light of previous cases holding that Citytrust was indeed handling the money of
the Employees' Trust Fund. These documents, together with the notarized Memorandum of
Agreement, clearly establish that petitioner, on behalf of the Employees' Trust Fund, indeed
invested in the purchase of the MBP lot. Thus, the Employees' Trust Fund owns 49.59% of the
MBP lot.
Since petitioner has proven that the income from the sale of the MBP lot came from an
investment by the Employees' Trust Fund, petitioner, as trustee of the Employees' Trust Fund,
is entitled to claim the tax refund of ₱3,037,500 which was erroneously paid in the sale of the
MBP lot.28

Second, in the parties’ Joint Stipulation of Facts, petitioner admitted the issuance of the
aforesaid BIR Ruling and did not contest it as one of the admitted documentary evidence in
Court. A judicial admission binds the person who makes the same, and absent any showing that
this was made thru palpable mistake, no amount of rationalization can offset it.29 In Camitan v.
Fidelity Investment Corporation,30 we sustained the judicial admission of petitioner’s counsel for
failure to prove the existence of palpable mistake, thus:

x x x. A judicial admission is an admission, verbal or written, made by a party in the course of

the proceedings in the same case, which dispenses with the need for proof with respect to the
matter or fact admitted. It may be contradicted only by a showing that it was made through
palpable mistake or that no such admission was made.

xxxx

Upon examination of the said exhibits on record, it appears that the alleged discrepancies are
more imagined than real. Had these purported discrepancies been that evident during the
preliminary conference, it would have been easy for petitioners' counsel to object to the
authenticity of the owner's duplicate copy of the TCT presented by Fidelity. As shown in the
transcript of the proceedings, there was ample opportunity for petitioners' counsel to examine
the document, retract his admission, and point out the alleged discrepancies. But he chose not
to contest the document. Thus, it cannot be said that the admission of the petitioners' counsel
was made through palpable mistake.31

Based on the foregoing, we are of the considered view that respondent MERALCO has shown
clear and convincing evidence that NORD/LB is owned, controlled or enjoying refinancing from
the Federal Republic of Germany, a foreign government, pursuant to Section 32(B)(7)(a) of the
Tax Code, as amended, which provides that:

Section 32. Gross Income. –

x x x x.

(B) Exclusions from Gross Income. −The following items shall not be included in gross income
and shall be exempt from taxation under this title:

xxxx

(7) Miscellaneous Items. −

(a) Income Derived by Foreign Government. − Income derived from investments in the
Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in
banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled,
or enjoying refinancing from foreign governments, and (iii) international or regional financial
institutions established by foreign governments.
x x x x.32

Notwithstanding the foregoing, however, we uphold the ruling of the CTA En Banc that the claim
for tax refund in the aggregate amount of Thirty-Nine Million Three Hundred Fifty-Nine
Thousand Two Hundred Fifty-Four Pesos and Seventy-Nine Centavos (₱39,359,254.79)
pertaining to the period from January 1999 to July2002 must fail since the same has already
prescribed under Section 229 of the Tax Code, to wit:

Section 229. Recovery of Tax Erroneously or Illegally Collected. − No suit or proceeding shall
be maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to
have been collected without authority, 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.33

As can be gleaned from the foregoing, the prescriptive period provided is mandatory regardless
of any supervening cause that may arise after payment. It should be pointed out further that
while the prescriptive period of two (2) years commences to run from the time that the refund is
ascertained, the propriety thereof is determined by law (in this case, from the date of payment of
tax), and not upon the discovery by the taxpayer of the erroneous or excessive payment of
taxes. The issuance by the BIR of the Ruling declaring the tax-exempt status of NORD/LB, if at
all, is merely confirmatory in nature. As aptly held by the CTA-First Division, there is no basis
that the subject exemption was provided and ascertained only through BIR Ruling No. DA-342-
2003, since said ruling is not the operative act from which an entitlement of refund is
determined.34 In other words, the BIR is tasked only to confirm what is provided under the Tax
Code on the matter of tax exemptions as well as the period within which to file a claim for
refund.

In this regard, petitioner is misguided when it relied upon the six (6)-year prescriptive period for
initiating an action on the ground of quasi contract or solutio indebiti under Article 1145 of the
New Civil Code. There is solutio indebiti where: (1) payment is made when there exists no
binding relation between the payor, who has no duty to pay, and the person who received the
payment; and (2) the payment is made through mistake, and not through liberality or some other
cause.35 Here, there is a binding relation between petitioner as the taxing authority in this
jurisdiction and respondent MERALCO which is bound under the law to act as a withholding
agent of NORD/LB Singapore Branch, the taxpayer. Hence, the first element of solutio indebitiis
lacking. Moreover, such legal precept is inapplicable to the present case since the Tax Code, a
special law, explicitly provides for a mandatory period for claiming a refund for taxes
erroneously paid.

Tax refunds are based on the general premise that taxes have either been erroneously or
excessively paid. Though the Tax Code recognizes the right of taxpayers to request the return
of such excess/erroneous payments from the government, they must do so within a prescribed
period. Further, "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."36 In the case at bar, respondent MERALCO had ample opportunity to verify on the tax-
exempt status of NORD/LB for purposes of claiming tax refund. Even assuming that respondent
MERALCO could not have emphatically known the status of NORD/LB, its supposition of the
same was already confirmed by the BIR Ruling which was issued on October 7, 2003.
Nevertheless, it only filed its claim for tax refund on July 13, 2004, or ten (10) months from the
issuance of the aforesaid Ruling. We agree with the CTA-First Division, therefore, that
respondent MERALCO's claim for refund in the amount of Two Hundred Twenty-Four Million
Seven Hundred Sixty Thousand Nine Hundred Twenty-Six Pesos and Sixty-Five Centavos
(₱224,760,926.65) representing erroneously paid and remitted final income taxes for the period
January 1999 to July 2002 should be denied on the ground of prescription.

Finally, we ought to remind petitioner that the arguments it raised in support of its position have
already been thoroughly discussed both by the CTA-First Division and the CTA En Banc. Oft
repeated is the rule that the Court will not lightly set aside the conclusions reached by the CT A
which, by the very nature of its function of being dedicated exclusively to the resolution of tax
problems, has accordingly developed an expertise on the subject, unless there has been an
abuse or improvident exercise of authority.37 This Court recognizes that the CTA's findings can
only be disturbed on appeal if they are not supported by substantial evidence, or there is a
showing of gross error or abuse on the part of the Tax Court.38 In the absence of any clear and
convincing proof to the contrary, this Court must presume that the CT A rendered a decision
which is valid in every respect.39 It has been a long-standing policy and practice of the Court to
respect the conclusions of quasi-judicial agencies such as the CT A, a highly specialized body
specifically created for the purpose of reviewing tax cases.40

WHEREFORE, the petition is DENIED. The October 15, 2007 Decision and January 9, 2008
Resolution of the Court of Tax Appeals in C.T.A. EB No. 262 are hereby AFFIRMED.

SO ORDERED.
G.R. Nos. 212536-37 August 27, 2014

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF

CUSTOMS, Petitioners,
vs.
PHILIPPINE AIRLINES, INC., Respondent.

DECISION

VELASCO, JR., J.:

This is a Petition for Review on Certiorari under Rule 45 assailing and seeking to set aside the
December 9, 2013 Decision1 and May 2, 2014 Resolution2 of the Court of Tax Appeals en bane
in CTA EB No. 942 and 944, which granted the claim of respondent Philippine Airlines, Inc.
(PAL) for refund of excise taxes it paid in connection with its importation in 2007 of certain items
for its commissary and catering supplies.

The antecedent facts are simple and undisputed.

On June 11, 1978, PAL was granted under Presidential Decree No. 1590 (PD 1590) a franchise
to operate air transport services domestically and internationally. Section 133 of the decree
prescribes the tax component of PAL’s franchise. Under it, PAL, during the lifetime of its
franchise, shall pay the government either basic corporate income tax or franchise tax based on
revenues and/or the ratedefined in the provision, whichever is lower and the taxes thus paid
under either scheme shall be inlieu of all other taxes, duties and other fees.

On January 1, 2005, Republic Act No. 9334 (RA 9334)4 took effect. Of pertinent relevance in
this proceeding is its Sec. 6 which amended Sec. 131 of the 1997 National Internal Revenue
Code (NIRC) to read:

SEC. 6.Section 131 of the National Internal Revenue Code of 1997, as amended, is hereby
amended to read as follows:

"SEC. 131. Payment of Excise Taxes on Imported Articles.-

"(A) Persons Liable.- Excise taxes on imported articles shall be paid by the owner or importer to
the Customs Officers, x x x before the release of such articles from the customs house, or by
the person who is found in possession of articles which are exempt from excise taxes other than
those legally entitled to exemption.

"In the case of tax-free articles brought or imported into the Philippines by persons, entities, or
agencies exempt from tax which are subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the purchasers or recipients shall be considered
the importers thereof x x x.

"The provision of any special or general law to the contrary notwithstanding, the importation of x
x x cigarettes, distilled spirits, fermented liquorsand wines x x x, even if destined for tax and
duty-free shops, shall be subject to all applicable taxes, duties, charges, including excise taxes
due thereon.This shall apply to [said items] x x x brought directly into the duly chartered or
legislated freeports x x x, and such other freeports as may hereafter be established or created
by law x x x. (emphasis added.)

Pursuant to the above-quoted tax code provisions, PAL was assessed excise taxes on its
February and March 2007 importation of cigarettes and alcoholic drinks for its commissary
supplies used in its international flights. In due time, PAL paid the corresponding amounts, as
indicated below, under protest:

BOC Official Receipt Date of Payment Amount Paid

Number
138110892 February 5, 2007 PhP 1,497,182
1138348761 February 26, 2007 PhP 1,525,480
138773503 March 23, 2007 PhP 1,528,196.85

PAL, thereafter, filed separate administrative claims for refund before the Bureau of Internal
Revenue (BIR) for the alleged excise taxes it erroneously paid on said dates. Asthere was no
appropriate action on the part of the then Commissioner of Internal Revenue (CIR) and
obviously to forestall the running of the two-year prescriptive period for claiming tax refunds,
PAL filed before the Court of Tax Appeals (CTA) a petition for review, docketed asCTA Case
No. 7868. After the parties had submitted their respective memoranda following the joinder of
issues and the formaloffer of evidence, the CTA Second Division rendered on June 22, 2012 in
CTA Case No. 7868 a Decision5finding for PAL, as petitioner, the CIR and the Commissioner of
Customs (COC), as respondents, being ordered to pay PAL by way of refund the amount of
PhP 4,550,858.85. The amount represented the excise taxes paid in February and March 2007,
covering PAL’s importation of commissary supplies. Thefalloof the June 22, 2012 judgment
reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED.
Accordingly, respondents are hereby ORDERED TO REFUND to petitioner the amount of
₱4,550,858, representing petitioner’s erroneously paid excise taxes.

SO ORDERED.

Therefrom, the CIR and the COC interposed separate motions for reconsideration, both of
which were, however, denied, in a consolidated Resolution6 of September 20, 2012. This
prompted the CIR to elevate the matter to the CTA en bancon a petition for review, the recourse
docketed as CTA EB No. 942. The COC later followed with his own petition, docketed as CTA
EB No. 944. The cases werethereafter ordered consolidated.

By Decision dated December 9, 2013, the CTAen banc, with two justices dissenting, dismissed
the CIR and COC’s petitions, thereby effectively affirming the judgment of the CTA Second
Division. Just as its Second Division, the CTA en banc, citing an earlier case between the same
parties and involving similar issues, heldin the main that the "in lieu of all taxes" clause in PAL’s
franchise exempts it from excise tax, an exemption that, contrary to petitioners’ unyielding
posture, has not been withdrawn by Congress when it enacted RA9334. Pushing the point, the
tax court stated that Sec. 6 of RA 9334, as couched, cannot be construed as an express repeal
of the "in lieu of all taxes" exemption granted under PAL’s franchise, because said Sec. 6,
despite its "the provisions of any special law or general law to the contrary notwithstanding"
proviso, has failed to specifically refer to Sec. 13 of PD 1590 as one of the key provisions
intended to be repealed.

Anent PAL’s entitlement to the exemption claimed, and consequently the refund, the CTA took
note of the following issuances:

1. Section 227 of RA 9337, which took effect on July 1, 2005, abolished the franchise tax
under PAL’s and other domestic airlines’ charter and subjected them to corporate
income tax and value-added tax. Nevertheless, the same section provides that PAL shall
remain exempt from any taxes, duties, royalties, etc., as may be provided in PD 1590.

2. Philippine Air Lines, Inc. v. Commissioner of Internal Revenue,8 in which the Court
has recognized the applicability of the exemption granted to PAL under its charter and
necessarily its right to a refund, when appropriate.

Still dissatisfied, petitioners separately sought reconsideration, but the CTA en banc, in its May
2, 2014 Resolution, denied the motions, with the same adverted justices reiterating their dissent.
Hence, this petition, on this core issue: whether or not PAL’s importations of alcohol and
tobacco products for its commissary supplies are subject to excise tax.

Petitioners, as to be expected, would dispose of the query in the affirmative, on the contention
that PAL’s tax exemption it heretofore enjoyed under Sec. 13 of its franchise had been revoked
by Congress when, via RA 9334, it amended Sec. 131 of the NIRC, which, as earlier recited,
subjects the importation of cigars, cigarettes, distilled spirits and wines to all applicable taxes
inclusive of excise tax "the provision of any special or general law to the contrary
notwithstanding."

On the other hand, PAL, citing at every turn the assailed CTA ruling, contends that its
exemption from excise tax, as provided in its franchise under PD 1590, has not been withdrawn
by the NIRC of 1997, as amended by RA 9334. And on the postulate thatRA 9334 partakes the
nature of a general law which could not have plausibly repealed a special law, e.g., PD 1590,
PAL would draw attention to Sec. 24 of PD 1590 providing how its franchise or any of its
provisionsmay be modified or amended:

SECTION 24. This franchise, as amended, or any section or provision hereof may only be
modified, amended or repealed expressly by a special law or decreethat shall specifically
modify, amend or repeal this franchise or any section of provisions. (emphasis added)

The petition lacks merit.

It is a basic principle of statutory construction that a later law, general in terms and not expressly
repealing or amending a prior special law, will not ordinarily affect the special provisions of such
earlier statute.9 So it must be here.

Indeed, as things stand, PD 1590 has not been revoked by the NIRC of 1997, as amended. Or
to be more precise, the tax privilege of PAL provided in Sec. 13 of PD 1590 has not been
revoked by Sec. 131 of the NIRC of 1997, as amended by Sec. 6 of RA 9334. We said as much
in Commissioner of Internal Revenue v. Philippine Air Lines, Inc:
That the Legislature chose not toamend or repeal [PD] 1590 even after PAL was privatized
reveals the intent of the Legislature to let PAL continue to enjoy, as a private corporation, the
very same rights and privileges under the terms and conditions stated in said charter.10 x x x To
be sure, the manner to effectively repeal or at least modify any specific provision of PAL’s
franchise under PD 1590, as decreed in the aforequoted Sec. 24, has not been demonstrated.
And as aptly held by the CTA en banc, borrowing from the same Commissioner of Internal
Revenue case:

While it is true that Sec. 6 of RA9334 as previously quoted states that "the provisions of any
special orgeneral law to the contrary notwithstanding,"such phrase left alone cannot be
considered as an express repeal of the exemptions granted under PAL’s franchise because it
fails to specifically identify PD 1590 as one of the acts intended to be repealed. x x x

Noteworthy is the fact that PD 1590 is a special law, which governs the franchise of PAL.
Between the provisions under PD 1590 as against the provisions under the NIRC of 1997, as
amended by 9334, which is a general law, the former necessary prevails. This is in accordance
with the rule that on a specific matter, the special law shall prevail over the general law, which
shall be resorted 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 other general
creates a presumption that the special is considered as remaining an exception tothe general,
one as a general law of the land and the other as the law of a particular case.11

Any lingering doubt, however, as tothe continued entitlement of PAL under Sec. 13 of its
franchise to excisetax exemption on otherwise taxable items contemplated therein, e.g., aviation
gas, wine, liquor or cigarettes, should once and for all be put to restby the fairly recent
pronouncement in Philippine Airlines, Inc. v. Commissioner of Internal Revenue.12 In that case,
the Court, on the premise that the "propriety of a tax refund is hinged on the kind of exemption
which forms its basis,"13 declared in no uncertain terms that PAL has "sufficiently prove[d]" its
entitlement to a tax refund of the excise taxes and that PAL’s payment of either the franchise tax
or basic corporate income tax in the amount fixed thereat shall be in lieu of all other taxes or
duties, and inclusive of all taxes on all importations of commissary and catering supplies,
subject to the condition of their availability and eventual use. The Court wrote in thatparticular
case involving PAL’s claim for refund of the excise taxes imposed on its purchase from Caltex
(Phils.), Inc. of imported aviation fuel for domestic operations, thus:

In this case, PAL’s franchise grants it an exemption from both direct and indirect taxes on its
purchase of petroleum products.1âwphi1 Section 13 thereof reads:

SEC. 13. In consideration of the franchise and rights hereby granted, the grantee [PAL] 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 bein 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 x x x, now or in the future,
including but not limitedto 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 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 dueon 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 transport operations and other activities incidental thereto and are not locally
available in reasonable quantity, quality, or price;

xxxx

Based on the above-cited provision, PAL’s payment of either the basic corporate income tax or
franchise tax, whichever is lower, shall be in lieu of all other taxes, duties, royalties, registration,
license, and other fees and charges, except only real property tax. The phrase "in lieu of all
other taxes" includes but is not limited to taxes that are "directly due from or imposable upon the
purchaser orthe seller, producer, manufacturer, or importer of said petroleum products butare
billed or passed on the grantee either as part of the price or cost thereof or by mutual
agreement or other arrangement." In other words, in view of PAL’s payment of either the basic
corporate income tax or franchise tax, whichever is lower, PAL is exempt from paying: (a) taxes
directly due from or imposable upon it as the purchaser of the subjectpetroleum products; and
(b) the cost of the taxes billed or passed on to it by the seller, producer, manufacturer, or
importer of the said products either as part of the purchase price or by mutual agreement or
other arrangement. Therefore, given the foregoing direct and indirect tax exemptionsunder its
franchise, and applying the principles as above-discussed, PAL is endowed with the legal
standing to file the subject tax refund claim, notwithstanding the fact that it is not the statutory
taxpayer as contemplated by law.14 (emphasis ours)

Petitioners, in a bid to foil PAL’s instant claim for refund, has raised as a corollary sub-issue the
question of PAL’s non-compliance with the conditions particularly set by Sec. 13 of PD 1509 for
the imported supplies to be exempt from excisetax. These conditions are: (1) such supplies are
imported for the use of the franchisee in its transport/non-transport operations and other
incidental activities; and (2) they are not locally available in reasonable quantity, quality and
price. Suffice it to state in this regard that the question thus raised is one of fact, the
determination of which is best left to the CTA, it being a highly specialized body that reviews tax
cases.15 Without a showing that the CTA’s findings are unsupported by substantial evidence,
the findingsthereof are binding on the Court.16
This being the case, We find no cogent reason to disturb for the nonce the finding of the CTA en
banc, affirmatory of that of its Second Division.

In all then, PAL has presented in context a clear statutory basis for its refund claim of excise tax,
a claim predicated on a statutory grant of exemption from that forced exaction. It thus behooves
the government to refund what it erroneously collected. To borrow from CIR v. Fortune Tobacco
Corporation,17 if the state expects taxpayers to observe fairness and honesty in paying their
taxes, it must hold itself against the same standard in refunding erroneous exactions and
payment of such taxes.

WHEREFORE, the instant Petition for Review is DENIED. The assailed Decision of the Court of
Tax Appeals en bane dated December 9, 2013 and its Resolution dated May 2, 2014 are
hereby AFFIRMED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 125346 November 11, 2014

LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner,

vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, Respondents.

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

G.R. Nos. 136328-29

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FORTUNE TOBACCO CORPORATION, Respondent.

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

G.R. No. 144942

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
LA SUERTE CIGAR & CIGARETTE FACTORY, Respondent.

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

G.R. No. 148605

STERLING TOBACCO CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 158197

LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 165499

LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONEN, J.:

These cases involve the taxability of stemmed leaf tobacco imported and locally purchased by
cigarette manufacturers for use as raw material in the manufacture of their cigarettes. Under the
National Internal Revenue Code of 1997 (1997 NIRC), before it was amended on December 19,
2012 through Republic Act No. 103511 (Sin Tax Law), stemmed leaf tobacco is subject to an
excise tax of P0.75 for each kilogram thereof.2 The 1997 NIRC further provides that stemmed
leaf tobacco - "leaf tobacco which has had the stem or midrib removed"3 - "may be sold in bulk
as raw material by one manufacturer directly to another without payment of the tax, under such
conditions as may be prescribed in the rules and regulations prescribed by the Secretary of
Finance."4

This is a consolidation of six petitions for review of several decisions of the Court of Appeals,
involving three cigarette manufacturers and the Commissioner of Internal Revenue. G.R. No.
125346 is anal5 from the Court of Appeals (Sixth Division) that rever LEONEN, LEONEN,
sed6 the Court of Tax Appeals' decision7 and held petitioner La Suerte Cigar & Cigarette Factory
(La Suerte) liable for deficiency specific tax on its purchase of imported and locally produced
stemmed leaf tobacco and sale of stemmed leaf tobacco to Associated Anglo-American
Tobacco Corporation (AATC) during the period from January 1, 1986 to June 30, 1989. GR.
Nos. 136328-29 is an appeal8 by the Commissioner of Internal Revenue (Commissioner) from
the decision9 of the Court of Appeals that affirmed the Court of Tax Appeals' rulings10 that
Fortune Tobacco Corporation (Fortune) was not obliged to pay the excise tax on its importations
of stemmed leaf tobacco for the periods from January 1, 1986 to June 30, 1989 and July 1,
1989 to November 30, 1990. In G.R. No. 148605, Sterling Tobacco Corporation (Sterling)
appeals11 the decision12 of the Court of Appeals that reversed the Court of Tax Appeals’
decision13 and held it liable to pay deficiency excise taxes on its importation and local purchases
of stemmed leaf tobacco from November 1986 to June 24, 1989. G.R. No. 144942is an
appeal14 from the Court of Appeals’ decision15 that affirmed the Court of Tax Appeals’
decision16 and ordered the refund of specific taxes paid by La Suerte on its importation of
stemmed leaf tobacco in April 1995. In G.R. No. 158197, La Suerte sought to appeal17 the
decision18 of the Court of Appeals holding it liable for deficiency specific tax on its local and
imported purchases of stemmed leaf tobacco and those it sold for the period from June 21,
1989 to November 20, 1990. Finally, in G.R. No. 165499, La Suerte again sought to appeal by
certiorari19 the decision20 of the Court of Appeals reversing the Court of Tax Appeals and
holding it liable for deficiency specific tax on its importation of stemmed leaf tobacco in March
1995.

Factual background

Overview of cigarette manufacturing

The primary component of cigarettes is tobacco, a processed product derived from the leaves of
the plants in the genus Nicotiana.21 Most cigarettes contain a mixture or blend of several types
of tobacco from a variety of sources.
The tobacco types grown in the Philippines are: Virginia (or ‘fluecured’),22 which accounts for
59.35% of tobacco production, Burley (or ‘bright air-cured’),23 which makes up 22.21%, and the
Native (or ‘dark air-cured),24 which makes up the remaining 18.44%.25 "[T]he ‘native’ type is
normally categorized into three: cigar filler type, wrapper type and chewing type, or . . . ‘Batek’
tobacco."26 Virginia and Burley, considered as the aromatic type, are intended for cigarette
manufacturing.

Growing and harvesting

"Tobacco seeds undergo a process of germination, which takes about 7 to 10 days, depending
on the tobacco varieties. . . . The tobacco seedlings are then sown in cold frames or hotbedsto
prevent attacks from insects, and then transplanted into the fields"27 after 45 to 65
days.28 Harvesting begins 55 to 60 days after transplanting.29 A farmer carries out either
priming(leaf by leaf) or stalk harvesting (by the whole plant).30

Curing

"After harvest, tobacco is stored for curing, which allows for the slow oxidation and degradation
of carotenoids. This allows for the leaves to take on properties that are usually attributed to the
‘smoothness’ of the smoke."31

"Curing methods vary with the type of tobacco grown. The tobacco barn design varies
accordingly."32 There are two main ways of curing tobacco in the Philippine setting:

1) Air-curing (for Burley and Native tobacco) "is carried out by hanging the tobacco in
well-ventilated barns, where the tobacco is allowed to dry over a period of 4 to 8 weeks.
Air-cured tobacco is generally low in sugar content, which gives the tobacco smoke a
light, smooth, semi-sweet flavor. These tobacco leaves usually have a high nicotine
content[;]"33 and

2) Flue-curing (for Virginia tobacco) process "starts by the sticking of tobacco leaves,
which are then hung from tier-poles in curing barns. The procedure will generally take
about a week. Fluecured tobacco generally produces cigarette tobacco, which usually
has a high content of sugar, with medium to high levels of nicotine."34

Once cured, the leaves are sorted into grades based on size, color, and quality, and packed in
standard bales.35 The bales are then moved to accredited trading centers where they are
purchased by leaf buyers such as wholesale tobacco dealers and exporters or cigarette
manufacturing companies.36

Redrying and aging

After purchase, leaf tobacco is re-dried and then added with moisture to make the tobacco
pliable enough to remove its large stems.37 The leaves are stripped or de-stemmed, eitherby
hand or machine, cleaned and compressed into boxes or porous wooden vats called
hogsheads, and aged.38 Thereafter, the leaves are either exported or used for the manufacture
of cigarettes, cigars, and other tobacco products.

Primary processing39
In the cigarette factory, the tobacco leaves undergo a conditioning process where "high
temperatures and humidity restore moisture to suitable levels for cutting and blending tobacco
and completing the cigarette-making process."40

"[T]obaccos are precisely cut and blended according to . . . formulas, or recipes, to produce
tobaccos for various brands of cigarettes. These brand recipes include ingredients and flavors
that are added to the tobacco to give each brand its unique characteristics."41

Cigarette making and packing42

"The blended tobacco — often referred to as "filler" or "cut-filler" — . . . is delivered by a

pneumatic feed system to cigarette making machines . . . within the factory."43 The machine
disperses the shredded tobacco over a continuous roll of cigarette paper and cuts the paper to
the desired length. The completed cigarettes are subsequently packed, sealed, and placed in
cartons.

Cigarette manufacturers

La Suerte Cigar & Cigarette Factory (La Suerte),44 Fortune Tobacco Corporation
(Fortune),45 and Sterling Tobacco Corporation (Sterling)46 are domestic corporations engaged in
the production and manufacture of cigars and cigarettes. These companies import leaf tobacco
from foreign sources and purchase locally produced leaf tobacco to be used in the manufacture
of cigars and cigarettes.47

The transactions of these cigarette manufacturers pertinent to these consolidated cases are the
following:

1. La Suerte’s local purchases, importations, and sale of stemmed leaf tobacco from
January 1, 1986 to June 30, 1989 (G.R. No. 125346), and from June 1989 to November
1990 (G.R. No. 158197), and importations in March 1995 (G.R. No. 165499) and April
1995 (G.R. No. 144942); 2. Fortune’s importation of tobacco strips from January 1, 1986
to June 30, 1989, and from July 1, 1989 to November 30, 1990 (G.R. Nos. 136328–29);
and

3. Sterling’s importations and local purchases of stemmed leaf tobacco from November
1986 to June 24, 1989 (G.R. No. 148605).

History of applicable tax provisions

The first tax code came into existence in 1939 with the enactment of Commonwealth Act No.
46648 (1939 Code). Section 136 of the 1939 Code imposed specific (excise) taxes on
manufactured products of tobacco, but excluded cigars and cigarettes, which were subject to
tax under a different section.49 Section 136 provided thus:

SECTION 136. Specific Tax on Products of Tobacco. – On manufactured products of tobacco,

except cigars, cigarettes, and tobacco specially prepared for chewing so as to be unsuitable for
consumption in any other manner, but including all other tobacco twisted by hand or reduced
into a condition to be consumed in any manner other than by the ordinary mode of drying and
curing; and on all tobacco prepared or partially prepared for sale or consumption, even if
prepared without the use of any machine or instrument and without being pressed or
sweetened; and on all fine-cut shorts and refuse, scraps, clippings, cuttings, and sweepings of
tobacco, there shall be collected on each kilogram, sixty centavos.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner,
on each kilogram, forty-eight centavos. (Emphasis supplied)

Section 132 of the 1939 Code, however, by way of exception, provided that "stemmed leaf
tobacco . . . may be sold in bulk as raw material by one manufacturer directly to another, under
such conditions as may be prescribed in the regulations of the Department of Finance, without
the prepayment of the tax." Section 132 stated:

SECTION 132. Removal of Tobacco Products Without Prepayment of Tax. – Products of

tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or
industrial use, under such conditionsas may be prescribed in the regulations of the Department
of Finance; and stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco,
refuse, scraps, cuttings, clippings and sweepings of tobacco may be sold in bulk as raw material
byone manufacturer directly to another, under such conditions as may be prescribed in the
regulations of the Department of Finance, without the prepayment of the tax.

"Stemmed leaf tobacco," as herein used means leaf tobacco which has had the stem or midrib
removed. The term does not include broken leaf tobacco. (Emphasis supplied)

On September 29, 1954, upon the recommendation of then Acting Collector of Internal Revenue
J. Antonio Araneta, the Department of Finance promulgated Revenue Regulations No. V-39
(RR No. V-39), or "The Tobacco Products Regulations," relative to "the enforcement of the
provisions of Title IV of the [1939 Tax Code] in so far as they affect the manufacture or
importation of, and the collection and payment of the specific tax on, manufactured tobacco or
products of tobacco."50 Section 20(a) of RR No. V-39, which lays the rules for tax exemption on
tobacco products, states:

SECTION 20. Exemption from tax of tobacco products intended for agricultural or industrial
purposes. — (a) Sale of stemmed leaf tobacco, etc., by one factory to another. — Subject to the
limitations herein established, products of tobacco entirely unfit for chewing or smoking may be
removed free of tax for agricultural or industrial use;and stemmed leaf tobacco, finecut shorts,
the refuse of fine-cut chewing tobacco, refuse, scraps, cuttings, clippings, and sweepings of
tobacco may be sold in bulk as raw materials by one manufacturer directly to another without
the prepayment of specific tax.

Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings,
clippings, and sweeping of leaf tobacco or partially manufactured tobacco or other refuse of
tobacco may be transferred from one factory to another under an official L-7 in voice on which
shall be entered the exact weight of the tobacco at the time of its removal, and entry shall be
made in the L-7 register in the place provided on the page of removals.

Corresponding debit entry will be made in the L-7 register book of the factory receiving the
tobacco under heading "Refuse, etc., received from other factory," showing the date of receipt,
assessment and invoice numbers, name and address of the consignor, form in which received,
and the weight of the tobacco. This paragraph should not, however, be construed to permit the
transfer of materials unsuitable for the manufacture of tobacco products from one factory to
another. (Emphasis supplied)
Sections 10 and 11 of RR No. V-39 enumerate and describe the record books to be kept and
used by manufacturers of tobacco products, viz:

SECTION 10. (a) Register, auxiliary, and stamps requisition books for manufacturers. — The
Collector of Internal Revenue shall from time to time supply provincial revenue agents or the
Chief of the Tobacco Tax Section with the necessary number of manufacturers official register
books and official auxiliary register booksas may be required in each locality by manufacturers
of tobacco products. Whenever any manufacturer shall have qualified himself as such by
executing a proper bond, registering his factory, and paying the privilege tax and shall have
complied with all the requirements ofengaging in such business contained in the National
Internal Revenue Code and in these regulations, the internal revenue agent within whose district
the factory is located shall deliver to said manufacturer the necessary official register books and
auxiliary register books. These books consist of the following:

B.I.R. No. 31.09—Official RegisterBook, A-3 for manufacturers of chewing and smoking
tobacco. B.I.R. No. 31.10—Manufactured tobacco (Transcript sheet of above).

B.I.R. No. 31.18—Official Register Book, A-4, for manufacturers of cigar.

B.I.R. No. 31.19—(Transcriptsheet of the above).

B.I.R. No. 31.27—Official Register Book, A-5, for Manufacturers of cigarettes.

B.I.R. No. 31.28—(Transcript sheet of above).

B.I.R. No. 31.01—Official Register Book, L-7, record of raw materials for manufacturers
of any class of tobacco products.

B.I.R. No. 31.02—(Transcript sheet of above)[.]

B.I.R. No. 31.46—Auxiliary Register Book, L-7-1/2, bale book, for manufacturers of any
class of tobacco products.

B.I.R. No. 31.47—(Transcript sheet of above).

B.I.R. No. 31.12—Stamp requisition book, for manufacturers of manufactured tobacco.

B.I.R. No. 31.21—Stamp requisition book, for manufacturers of cigars.

B.I.R. No. 31.30—Stamp requisition book, for manufacturers of cigarettes.

B.I.R. No. 31.05—L-7 Official Invoice Book for, use in connection with L-7 register book.

B.I.R. No. 31.05—L-7-1/2 OfficialInvoice Book, for use in connection with L-7-1/2 bale
book.

(b) General nature of official register and auxiliary register books.— The L-7 official
register book isthe record of all raw materials used in the manufacture of tobacco
products of all description in the factory.It is the primary record of the internal operations
 of the factory. It shows the raw materials used in the manufacture and the articles
actually manufactured or produced. The Schedule A register books are the record of the
articles actually manufactured or produced, and transferred from the credit side of the
official register book, L-7. They show the amount of taxes paid and the name of the
person to whom the finished products is consigned or sold when leaving the factory. The
bale book[,] L-7-1/2, is an auxiliary to the L-7 official register book.

All official register books and other official records herein required of manufacturers shall
be kept in the factory premises, or in the factory warehouse, in the case of bale books,
and open to inspection by any internal revenue officer at all times of the day or night.

....

SECTION 11. Entries to be made in the official register and auxiliary register books; monthly
transcripts.— (a) Official bale book (L-7-1/2). All leaf tobacco received in any factory or factory
warehouse shall be debited, and any removal of tobacco from the factory shall be credited in the
official bale book; except cuttings, clippings, sweepings, and other partially manufactured
tobacco, which shall be credited in the L-7 register book.

The Collector of Internal Revenue may in his discretion waive the requirements of keeping an
official bale book by small factories.

(b) The Official Register Book (L-7).— One L-7 books shall suffice for each manufacturer of
tobacco products, regardless of the classes of tobacco manufactured by him.All loose leaf
tobacco received in the factory proper and all bales of leaf tobacco which are opened in the
factory for use in the manufacture of tobacco products shall be entered in the L-7 official register
book under the heading "Received from Dealers" at the net weights. In the column headed
"Name["] and "Address" shall be shown the words "Transferred from tobacco factory
warehouse". All leaf tobacco received into a factory must be entered in the official bale book
pertaining to the factory and bales of leaf tobacco shall not be taken up in the L-7 register book
until said bales are transferred for use and credited in the official bale book. While leaf tobacco
must be taken in the official bale book, this is done for statistical purposes only. As soon asit
enters the factory for use in manufacture it should be taken up in the L-7 register book and
credited in the official bale book.

All removals of waste of tobacco, whether transferred to other factories, removed for agricultural
orindustrial purposes, or destroyed on the premises or elsewhere, shall be entered in the official
register book, L-7, under the heading "Raw Materials Removed", showing all information
required therein. (Emphasis supplied)

Section 2 of RR No. V-39 broadly defined "manufactured products of tobacco" and

"manufacturer of tobacco products" as follows:

Section 2. Definition of terms. — When used in there [sic] regulations, the following terms shall
begiven the interpretations indicated in their respective definitions given below, except where
the context indicates otherwise:

(a) "Manufactured products of tobacco" shall include cigars, cigarettes, smoking

tobacco, chewing, snuff, and all other forms of manufactured and partially manufactured
tobacco, as defined in section 194 (M)51 of the National Internal Revenue Code.
 (b) "Manufacturer of tobacco products" shall include all persons engaged in the
manufacture of any of the forms of tobacco mentioned in the next preceding paragraph.

In 1967, the Secretary of Finance promulgated Revenue Regulations No. 17-67 (RR No. 17-67),
as amended,52 or the "Tobacco Revenue Regulations on Leaf, Scrap, Other Partially
Manufactured Tobacco and Other Tobacco Products; Grading, Classification, Inspection,
Shipments, Exportation, Importation and the Manufacturers thereof under the provisions of Act
No. 2613, as amended." Section 2(i) of RR No. 17-67 defined a "manufacturer of tobacco" and
included in the definition one who prepares partially manufactured tobacco. Section 2(m)
defined "partially manufactured tobacco" as including stemmed leaf tobacco. Thus, Sections 2(i)
and (m) read:

(i) "Manufacturer of tobacco" — Includes every person whose business it is to manufacture

tobacco o[r] snuff or who employs others to manufacture tobacco or snuff, whether such
manufacture be by cutting, pressing (not baling), grinding, or rubbing (grating) any raw or leaf
tobacco, or otherwise preparing raw or leaf tobacco, or manufactured or partially manufactured
tobacco and snuff, or putting up for consumption scraps, refuse, or stems of tobacco resulting
from any process of handling tobacco stems, scraps, clippings, or waste by sifting, twisting,
screening or by any other process.

....

(m) "Partially manufactured tobacco" — Includes:

(1) "Stemmed leaf" — handstripped tobacco, clean, good, partially broken leaf only, free
from mold and dust.

(2) "Long-filler" — handstripped tobacco of good, long pieces of broken leaf usableas
filler for cigars without further preparation, and free from mold, dust stems and cigar
cuttings.

(3) "Short-filler" — handstripped or machine-stripped tobacco, clean, good, short pieces

of broken leaf, which will not pass through a screen of two inches (2") mesh.

(4) "Cigar-cuttings" — clean cuttings or clippings from cigars, unsized with any other
form of tobacco.

(5) "Machine-scrap tobacco"— machine-threshed, clean, good tobacco, not included in

any of the above terms, usable in the manufacture of tobacco products.

(6) "Stems" — midribs of leaftobacco removed from the whole leaf or broken leaf either
by hand or machine.

(7) "Waste tobacco" — denatured tobacco; powder or dust, refuse, unfit for human
consumption; discarded materials in the manufacture of tobacco products, which may
include stems.

Section 3 of RR No. 17-67 classifiedentities that dealt with tobacco according to the type of
permit that the Bureau of Internal Revenue issued to each entity. Under this classification,
wholesale leaf tobacco dealers were considered L-3 permittees. Those (referring to wholesale
leaf tobacco dealers) that reprocess partially manufactured tobacco for export, for themselves,
and/or for other L-6 or L-7 permittees were considered L-6 permittees. Manufacturers of tobacco
products such as cigarette manufacturers were considered L-7 permittees. Section 3 of RR No.
17-67 reads:

(a) L-3 — Wholesale leaf tobacco dealer.

(b) L-3F — Wholesale leaf tobacco dealer. Issued only in favor of Farmer's Cooperative
Marketing Association (FaCoMas) duly organized in accordance with law. [This function
relative to tobacco trading was transferred to the Philippine Virginia Tobacco
Administration (PVTA) under Section 15 of Republic Act No. 2265].

(c) L-3R — Wholesale leaf tobacco dealers. Issued only in favor of persons or entities
having fully equipped Redrying Plants.

(d) L-3-1/4 — Buyers for wholesale leaf tobacco dealers.

(e) L-4 — Wholesale leaf tobacco dealers. Issued only in favor of persons or entities
having flue-curing barns, who may purchase or receive green Virginia leaf tobacco from
bona fide tobacco planters only, or handle green leaf of their own production, which
tobacco shall be sold or transferred only to holders of L-3 and L-3R permits after flue-
curing the tobacco.

(f) L-5 — Tobacco planters selling to consumers part or the whole of their tobacco
production. (g) L-6 — Wholesale leaf tobacco dealers who, exclusively for export, except
as otherwise provided for in these regulations, perform the following functions:

(1) Handstripped and/or threshwhole leaf tobacco for themselves or for other L-6
or L-7 permittees;

(2) Re-process partially manufactured tobacco for themselves, or for other L-6 or
L-7 permittees; (3) Sell their partially manufactured tobacco to other L-6
permittees.

(h) L-7 — Manufacturers of tobacco products. [L-7 1/2 designates an auxiliary registered
book (bale books), for manufacturers of tobacco products.]

(i) B-14 — Wholesale leaf tobaccodealers (Privilege tax receipt)

(j) B-14 (a) — Retail leaf tobacco dealers (Privilege tax receipt)

La Suerte contends that on December 12, 1972, then Internal Revenue Commissioner Misael P.
Vera issued a ruling which declared that:

. . . . The subsequent sale or transfer by the L-6/L-3R permittee for export or to an L-7-1/2 for
use in the manufacture of cigars or cigarettes may also be allowed without the prepayment of
the specific tax.53
Almost 40 years from the enactment of the 1939 Tax Code, Presidential Decree No. 1158-A,
otherwise known as the "National Internal Revenue Code of 1977," was promulgated on June 3,
1977, to consolidate and integrate the various tax laws which have so far amended or repealed
the provisions found in the 1939 Tax Code. Section 132 was renumbered as Section 144, and
Section 136 as Section 148. Sections 144 and 148, read:

SEC. 144. Removal of tobacco products without prepayment of tax.—Products of tobacco

entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial
use, under such conditions as may be prescribed in the regulations of the Department of
Finance, and stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cuts chewing tobacco, re-
refuse, scraps, cuttings, clippings, stems or midribs, and sweepings of tobacco may be sold in
bulk as raw material by one manufacturer directly to another, under such conditions as may be
prescribed in the regulations of the Department of Finance, without the prepayment of the tax.
"Stemmed leaf tobacco", as herein used means leaf tobacco which has had the stem or midrib
removed. The term does not include broken leaf tobacco.

....

SEC. 148. Specific tax on products of tobacco.—On manufactured products of tobacco, except
cigars, cigarettes, and tobacco specially prepared for chewing so as to be unsuitable for
consumption in any other manner, but including all other tobacco twisted by hand or reduced
into a condition to be consumed in any manner other than by the ordinary mode of drying and
curing; and on all tobacco prepared orpartially prepared for sale or consumption, even if
prepared without the use of any machine or instrument and without being pressed or
sweetened; and on all fine-cut shorts and refuse, scraps, clippings,cuttings, stems, and
sweepings of tobacco, there shall be collected on each kilogram, seventy-five centavos:
Provided, however, That fine-cut shorts and refuse, scraps, clippings, cuttings, stems and
sweepings of tobacco resulting from the handling, or stripping of whole leaf tobacco may be
transferred, disposed of, or otherwise sold, without prepayment ofthe specific tax herein
provided for under such conditions as may be prescribed in the regulations promulgated by the
Secretary of Finance upon recommendation of the Commissioner if the same are to be exported
or to be used in the manufacture of other tobacco products on which the specific tax will
eventually be paid on the finished product.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner,
on each kilogram, sixty centavos.

Sections 144 and 148 were subsequently renumbered as Sections 120 and 125 respectively
under Presidential Decree No. 1994,54 which took effect on January 1, 1986 (1986 Tax Code);
then as Sections 137 and 141 under Executive Order No. 273;55 and finally as Sections 140 and
144 under Republic Act No. 8424 or the "Tax Reform Act of 1997." However, the provisions
remained basically unchanged.

The business transactions of La Suerte, Fortune, and Sterling that the Commissioner found to
be taxable for specific tax took place during the effectivity of the 1986 Tax Code, as amended
by Executive Order No. 273. The pertinent provisions are Sections 137 and 141, thus:

SEC. 137. Removal of tobacco products without prepayment of tax. – Products of tobacco
entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial
use, under such conditions as may be prescribed in the regulations of the Ministry of Finance.
Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings,
clippings, stems or midribs, and sweepings of tobacco may be soldin bulk as raw material by
one manufacturer directly to another, without payment of the tax under such conditions as may
be prescribed in the regulations of the Ministry of Finance.

‘Stemmed leaf tobacco,' as herein used, means leaf tobacco which has had the stem or midrib
removed. The term does not include broken leaf tobacco.

....

SEC. 141. Tobacco Products. – There shall be collected a tax of seventy-five centavos on each
kilogram of the following products of tobacco:

(a) tobacco twisted by hand or reduced into a condition to be consumed in any manner
other than the ordinary mode of drying and curing;

(b) tobacco prepared or partially prepared with or without the use of any machine or
instruments or without being pressed or sweetened; and

(c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of
tobacco. Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of
tobacco resulting from the handling or stripping of whole leaf tobacco may be
transferred, disposed of, or otherwise sold, without prepayment of the specific tax herein
provided for under such conditions as may be prescribed in the regulations promulgated
by the Ministry of Finance upon recommendation of the Commissioner, if the same are
to be exported or to be used in the manufacture of other tobacco products on which the
excise tax will eventuallybe paid on the finished product.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner,
on each kilogram, sixty centavos.

Parenthetically, the present provisionsexplicitly state the following:

Stemmed leaf tobacco, tobacco prepared or partially prepared with or without the use of any
machine or instrument or without being pressed or sweetened, fine-cut shorts and refuse,
scraps, clippings, cuttings, stems, midribs, and sweepings of tobacco resulting from the
handling or stripping of whole leaf tobacco shall be transferred, disposed of, or otherwise sold,
without any prepayment of the excisetax . . . if the same are to be exported or to be used in the
manufacture of cigars, cigarettes, or other tobacco products on which the excise tax will
eventually be paid on the finished product, under such conditions as may be prescribed in the
rules and regulations promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.56

BIR assessments

G.R. No. 125346

Sometime in June, 1989, a team of examiners from the Bureau of Internal Revenue, led by
Crisanto G. Luna, Revenue Officer III of the Field Operation Division of the Excise Tax Service,
conducted an examination of the books of La Suerte by virtue of a letter of authority issued by
then Commissioner Jose U. Ong.

On January 3, 1990, La Suerte received a letter from then Commissioner Jose U. Ong
demanding the payment of 34,934,827.67 as deficiency excise tax on La Suerte’s entire
importation and local purchase of stemmed leaf tobacco for the period covering January 1, 1986
to June 30, 1989.

On January 12, 1990, La Suerte . . . protest[ed] the excise tax deficiency assessment . . .
stressing that the BIR assessment was based solely on Section 141(b) of the Tax Code without,
however, applying Section 137 thereof, the more specific provision, which expressly allows the
sale of stemmed leaf tobacco as raw material by one manufacturer directly to another without
payment of the excise tax. However, in a letter, dated August 31, 1990, Commissioner Jose U.
Ong denied La Suerte’s protest, insisting that stemmed leaf tobacco is subject to excise tax
"unless there is an express grant of exemption from [the] payment of tax."

In a letter dated October 17, 1990, Commissioner Ong reiterated his demand for the payment of
the alleged deficiency excise taxes due from La Suerte, to wit:

"Please be informed that in an investigation conducted by this Office, it was ascertainedthat you
incurred a deficiency specific tax on your importation and local purchase of stemmed leaf
tobacco covering the period from January 1, 1986 to June 30, 1989 in the total amount of
34,904,247.00 computed as follows:

STEMMED–LEAF TOBACCO

Imported 13,918,465 kls. x 0.75 ₱10,438,848.00

Local 32,620,532 kls. x 0.75 24,465,399.00

Total Amount Due (Basic Tax)- - - - - - - - - - - - ₱34,904,247.00

. . . ." (page 99, Rollo)

On December 6, 1990, La Suerte filed with the Court of Tax Appeals a Petition for Review
seeking for the annulment of the assessments. . .

. . . On July 13, 1995, the Tax Court rendered [its] Decision, the dispositive portion of which
reads[:]

"WHEREFORE, in all the foregoing, the assessment of alleged deficiency specific tax in the
amount of ₱34,904,247.00 issued by the Respondent is hereby CANCELLED for lack of merit.

SO ORDERED."57

The Commissioner appealed the Court of Tax Appeals’ decision before the Court of Appeals.
On December 29, 1995, the Court of Appeals Sixth Division ruled against La Suerteand found
that RR No. V-39 limits the tax exemption on transfers of stemmed leaf tobacco to transfers
between two L-7 permittees.58 The Court of Appeals ruled as follows:

IN THE LIGHT OF ALL THE FOREGOING, the Decision appealed from is hereby REVERSED
and SET ASIDE. Respondent is ordered to pay the petitioner Commissioner of Internal
Revenue the amount of ₱34,904,247.00 as deficiency specific tax on its importations and local
purchases of stemmed leaf tobacco and its sale of stemmed leaf tobacco to Associated Anglo-
American Tobacco Corporation covering the period from January 1, 1986 to June 30, 1989, plus
25% surcharge for late payment and 20% interest per annum from October 17, 1990 until fully
paid pursuant to sections 248 and 249 of the Tax Code.

SO ORDERED.59

La Suerte filed a motion for reconsideration, which was denied by the Court of Appeals in its
June 7, 1996 resolution.60

On August 2, 1996, La Suerte filed the instant petition for review,61 praying for the reversal of
the Court of Appeals’ decision and cancellation of the assessment by the Commissioner. La
Suerte raises the following grounds in support of its prayer:

A. THE COURT OF APPEALS ERRED WHEN IT CONSIDERED SECTION 20 (A) OF

RR NO. V-39, SINCE THE COMMISSIONER RAISED IT FOR THE FIRST TIMEIN THE
COURT OF APPEALS

B. THE COURT OF APPEALS ERRED WHEN IT HELD THAT SECTION 20(A) OF RR

NO. V-39 RESTRICTS THE APPLICATION OF SECTION 137 OF THE TAX CODE,
SINCE LANGUAGE IN SEC. 137 IS UNQUALIFIED, WHILE SEC. 20(A) CONTAINS NO
RESTRICTIVE LANGUAGE

C. THE COURT OF APPEALS ERRED WHEN IT IGNORED SEC. 43 OF RR NO. 17-67

AS WELL AS OPINIONS OF BIR OFFICIALS WHICH CONFIRMED THE EXEMPTION
OFSTEMMED LEAF TOBACCO FROM PREPAYMENT OF SPECIFIC TAX

D. THE COURT OF APPEALS ERRED WHEN IT HELD THAT SEC. 43 OF RR NO. 17-
67 DID NOT REPEAL SECTIONS 35 AND 20(A) OF RR NO. V-39, SINCE THEIR
PROVISIONS ARE REPUGNANT TO EACH OTHER

E. THE COURT OF APPEALS ERRED WHEN IT HELD THAT RR NO. V-39 IMPOSES
SPECIFIC TAXES ON STEMMED LEAF TOBACCO, SINCE IT MAKES NO MENTION
AT ALL OF TAXES ON STEMMED LEAF TOBACCO

F. THE COURT OF APPEALS ERRED WHEN IT HELD RR NO. V-39 APPLIED TO L-6
PERMITTEES OR MANUFACTURERS OF STEMMED LEAF TOBACCO, SINCE L-6
CLASSIFICATION WAS NON-EXISTENT AT THE TIME

G. THE COURT OF APPEALS ERRED WHEN IT INTERPRETED SECTION 20(A) OF

RR NO. V-39 IN SUCH A WAY AS TO RESULT IN ADMINISTRATIVE LEGISLATION,
SINCE THE INTERPRETATION SANCTIONED THE RESTRICTION OF AN
UNQUALIFIED PROVISION OF LAW BY A MERE REGULATION
 H. THE COURT OF APPEALS ERRED WHEN IT GAVE NO WEIGHT TO THE
DECEMBER 12, 1972 BIR RULING AND OPINIONS OF OTHER BIR OFFICIALS
WHICH CONFIRMED THE EXEMPTION OF STEMMED LEAF TOBACCO FROM
PREPAYMENT OF SPECIFIC TAX

I. THE COURT OF APPEALS ERRED WHEN IT HELD [THAT] NONAPPLICATION OF

[THE] DECEMBER 12 RULING DID NOT IMPINGE ON PRINCIPLE OF NON-
RETROACTIVITY OF RULINGS BECAUSE THE ASSESSMENT DID NOT CITE THE
RULING, SINCE CITATION OF A RULING INAN ASSESSMENT [IS] NOT
NECESSARY FOR PRINCIPLE TO APPLY

J. THE COURT OF APPEALS ERRED WHEN IT DISREGARDED THE

ADMINISTRATIVE PRACTICE OF BIR FOR OVER HALF A CENTURY OF NOT
SUBJECTINGSTEMMED LEAF TOBACCO TO SPECIFIC TAX

K. THE COURT OF APPEALS ERRED WHEN IT HELD THAT SUBJECTING

STEMMED LEAF TOBACCO TO SPECIFIC TAX IS NOT PROHIBITED FORM OF
DOUBLE TAXATION, SINCE A TAX ON BOTH STEMMED LEAF TOBACCO AND
CIGARETTES INTO WHICH IT IS MANUFACTURED IS DOUBLE TAXATION

L. THE COURT OF APPEALS ERRED WHEN IT HELD LA SUERTE LIABLE FOR

SPECIFIC TAX EVENIF NO EFFORT WAS FIRST MADE TO COLLECT THE TAX
FROM THE MANUFACTURER OF STEMMED LEAF TOBACCO, SINCE TAX CODE
ALLOWS THIS ONLY IF SPECIAL ALLOWANCE IS GRANTED, WHICH IS NOT THE
CASE

M. THE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT THE

REENACTMENT OF THE 1939 CODE AS THE 1977 CODE AND 1986 TAX CODES
ADOPTED THE INTERPRETATION IN THE DECEMBER 1972 BIR RULING

N. THE COURT OF APPEALS ERRED WHEN IT APPLIED THE RULES OF

CONSTRUCTION ON EXEMPTION FROM TAXES, SINCE NO TAX EXEMPTION WAS
INVOLVED BUT MERELY AN EXEMPTION FROM PREPAYMENT OF TAX.62

G.R. No. 136328–29

In the letter dated November 24,1989, the Commissioner demanded from Fortune the payment
of deficiency excise tax in the amount of ₱28,938,446.25 for its importation of tobacco strips
from January 1, 1986 to June 30, 1989. Fortune requested for reconsideration, which was
denied by the Commissioner on August 31, 1990. Undaunted, Fortune appealed to the Court of
Tax Appeals through a petition for review, which was docketed as CTA Case No. 4587.63

In the decision dated November 23, 1994, the Court of Tax Appeals ruled in favor of Fortune
and set aside the Commissioner’s assessment of ₱28,938,446.25 as deficiency excise tax.
Meanwhile, on March 20, 1991, Fortune received another letter from the Bureau of Internal
Revenue, demanding payment of 1,989,821.86 as deficiency specific tax on its importation of
stemmed leaf tobacco from July 1, 1989 to November 30, 1990.64 Fortune filed its protest and
requested the Commissioner to cancel and withdraw the assessment.65 On April 18, 1991, the
Commissioner denied with finality Fortune’s request.66 Fortune appealed to the Court of Tax
Appeals, and the case was docketed as CTA Case No. 4616.67
In the decision dated October 6, 1994, the Court of Tax Appeals ruled in favor of Fortune and
set aside the Commissioner’s assessment of ₱1,989,821.26 as deficiency excisetax on
stemmed leaf tobacco.

The Commissioner filed separate petitions before the Court of Appeals, challenging the
decisions rendered by the Court of Tax Appeals in CTA Case Nos. 4587 and 4616. These
petitions were consolidated on November 28, 1996.68

In the decision dated January 30, 1998, the Court of Appeals Seventeenth Division dismissed
the consolidated petitions filed by the Commissioner and affirmedthe assailed decisions of the
Court of Tax Appeals. It also denied the Commissioner’s motion for reconsideration.

Hence, the Commissioner filed the present petition69 on January 8, 1999. The Commissioner
claims that the Court of Appeals erred (1) "in holding that stemmed leaf tobacco is not subject to
the specific tax imposed under Section 141 of the Tax Code[;]"70 (2) "in not holding that under
Section 137 of the Tax Code, stemmed leaf tobacco is exempt from specific tax when sold in
bulk as raw material by one manufacturer directly to another under such conditions as may be
prescribed in the regulations of the Department of Finance[;]"71 and (3) "in holding that there is
double taxation in the prohibited sense when specific tax is imposed on stemmed leaf tobacco
and again on the finished product of which stemmed leaf tobacco is a raw material."72

G.R. No. 144942

In April 1995, "[La Suerte] imported stemmed leaf tobacco from various sellers abroad."73 The
Commissioner "assessed specific taxes on the stemmed leaf tobacco in the amount of
175,909.50, which [La Suerte] paid under protest."74 "Consequently, [La Suerte] filed a claim for
refund with [the Commissioner], [who] failed to act on the same."75 Undeterred, La Suerte
appealed to the Court of Tax Appeals, which in its March 9, 1999 decision, ruled in its favor. The
Commissioner appealed to the Court of Appeals Third Division, which on August 31, 2000,
rendered its decision in CA-G.R. SP. No. 51902, affirming the decision of the Court of Tax
Appeals.

The Commissioner then filed the instant petition for review76 asking this court to overturn the
Court of Appeals’ decision. It avers that the Court of Appeals erred in holding that Section 137
of the Tax Code applied "without any conditions as to the domicile of the manufacturers and that
[the Commissioner] cannot indirectly restrict its application to local manufacturers."77

The Third Division of this court initially denied78 the petition due to an insufficient or defective
verification and because "the petition was filed by revenue lawyers and not by the Solicitor
General."79

The Commissioner filed a motion for clarification80 seeking to clarify whether the Bureau of
Internal Revenuelegal officers can file petitions for review pursuant to Section 220 of the Tax
Code without the intervention of the Office of the Solicitor General.

The motion was referred to the En Banc81 on August 7, 2001, which issued the resolution on
July 4, 2002, holding that "Section 220 of the Tax Reform Act must not be understood
asoverturning the long established procedure before this Court in requiring the Solicitor General
to represent the interest of the Republic. This Court continues to maintain that it is the Solicitor
General who has the primary responsibility to appear for the government in appellate
proceedings."82 In the same resolution, this court also declared the following:

The present controversy ruminate upon the singular issue of whether or not Revenue
Regulation 1767 [sic] issued by petitioner, in relation to Section 137 of the InternalRevenue
Code in the imposition of a tax on stemmed-leaf tobacco, deviated from the tax code. This
question basically inquires then into whether or not the revenue regulation has exceeded, on
constitutional grounds, the allowable limits of legislative delegation.

Aware that the dismissal of the petition could have lasting effect on government tax revenues,
the lifeblood of the state, the Court heeds the plea of petitioner for a chance to prosecute its
case.83 (Emphasis and underscoring supplied)

This court resolved to reinstate84 and give due course85 to the Commissioner’s petition. G.R. No.
148605

"On January 12, 1990, [Sterling] received a pre-assessment notice for alleged deficiency excise
tax on itsimportation and local purchase of stemmed-leaf tobacco for ₱5,187,432.00 covering
the period from November 1986 to January 1989."86 Sterling filed its protest letter87 dated
January 19, 1990. The Commissioner, through its letters88 dated August 31, 1990 and October
17, 1990, denied the protest with finality.

Sterling filed before the Court of Tax Appeals a petition for review89 dated January 3, 1991,
seeking the cancellation of the deficiency assessment and praying that the Commissioner be
ordered to desist from collecting the assessed excise tax. On July 13, 1995,the Court of Tax
Appeals rendered its decision ordering the cancellation of the assessment for deficiency excise
tax.

The Commissioner then appealed90 to the Court of Appeals. On March 7, 2001, the latter,
through its Ninth Division, rendered a decision reversing the Court of Tax Appeals’ ruling, thus:

WHEREFORE, premises considered, the Decision of the Court of Tax Appeals in C.T.A. Case
No. 4532 is hereby REVERSED and SET ASIDE, and the respondent is ORDERED to pay to
the public petitioner the amount of ₱5,187,432.00 as deficiency specific tax on its imported and
locally purchased stemmed leaf tobacco from November 1986 to June 24, 1989, plus 25%
surcharge on ₱5,187,432.00, and 20% interest per annum on the total amount due from
December 07, 1990 until full payment, pursuant to Sections 248-49 of the Tax Code.

SO ORDERED.91

Sterling filed a motion for reconsideration,92 which was denied by the Court of Appeals in its
June 19, 2001 resolution.

Hence, on August 13, 2001, Sterling filed the instant petition for review.93

Sterling argues that the Court of Appeals erred in holding that (1) then Section 141 of the Tax
Code subjects stemmed leaf tobacco to excise tax; (2) Section 137 of the Tax Code did
notexempt stemmed leaf tobacco from prepayment of excise tax; (3) Section 20(A) of RR No. V-
39 restricts the application of Section 137 of the Tax Code since its language was unqualified,
while Section 20(A) contained no restrictive language; (4) RR No. V-39 imposed specific taxes
on stemmed leaf tobacco since its language made no mention of taxes on stemmed leaf
tobacco; (5) the reason behind limiting exemptions only to transfers fromone L-7 to another L-7
is because sale has previously been subjected tospecific tax; and (6) the exemption from
specific tax did not apply to imported stemmed leaf tobacco.94

Sterling further argues that the Court of Appeals erred in not holding that (1) the
Commissioner’s interpretation of Section 141 of the Tax Code and Section 20(A) of RR No. V-
39 amounts to an amendment of Sections 141 and 137 of the Tax Code by a mere
administrative regulation; (2) a December 12, 1972 Bureau of Internal Revenue ruling and
opinions of other Bureau of Internal Revenue officials confirmed the exemption of stemmed leaf
tobacco from prepayment of specific tax; (3) the administrative practice of the Bureau of Internal
Revenue for over half a century of not subjecting stemmed leaf tobacco to excise tax proves
that no excise taxes were ever intended to be imposed; (4) imposition of excise tax on stemmed
leaf tobacco would result in the prohibited form of double taxation; and (5) the re-enactment of
the relevant provisions in the 1977 and 1986 Tax Codes adopted the interpretation in the
December 1972 Bureau of Internal Revenue ruling.95 Sterling also contends that the "Court of
Appeals erred in applying the rules of construction on exemption from taxes, since no tax
exemption was involved, but merely an exemption from prepayment of excise tax."96

G.R. No. 158197

On January 10, 1991, the Commissioner sent a pre-assessment notice to La Suerte demanding
payment of 11,757,275.25 as deficiency specific tax on its local purchases and importations and
on the sale of stemmed leaf tobacco during the period from September 14, 1989 to November
20, 1990.97 On February 8, 1991, La Suerte received the formal assessment letter of the
Commissioner.98

La Suerte filed its protest on March 8, 1991.99 On May 14, 1991, La Suerte received the
Commissioner’s decision "denying the protest with finality."100

"On June 13, 1991, the Court of Tax Appeals promulgated a Decision finding for . . . La Suerte
and disposing [as follows:]"101

WHEREFORE, in view of the foregoing, We find the petition for review meritorious and the
same is hereby GRANTED. Respondent’s decision dated April 29, 1991 is hereby set aside and
the formal assessment for the deficiency specific tax in the sum of ₱11,575,275.25 subject of
the respondent’s letter, dated January 30, 1991, is deemed cancelled.

No pronouncement as to costs of suit.

SO ORDERED.102

The Commissioner filed a motion for reconsideration that was denied by the Court of Tax
Appeals in its April 5, 1995 resolution.103

The Commissioner appealed to the Court of Appeals.104 In its decision dated July 18, 2002, the
Court of Appeals reversed the decision of the Court of Tax Appeals. It cited Commissioner of
Internal Revenue v. La Campaña Fabrica de Tabacos, Inc.105 as basis for its ruling. La Suerte
filed a motion for reconsideration, but it was denied by the Court of Appeals in the
resolution106 dated May 9, 2003.
La Suerte prays for the reversal of the Court of Appeals’ decision and resolution in its petition for
review,107 wherein it raises the following arguments:

I. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT SECTION

20(A) OF REV. REGS. NO. V-39 LIMITED THE CLASS OF MANUFACTURERS
WHOSE SALES OF STEMMED LEAF TOBACCO WERE EXEMPT FROM PRE-
PAYMENT OF SPECIFIC TAX.

II. EVEN IF SEC. 3 OF RR NO. 17-67 HAD BEEN WAS [sic] INTENDED TO LIMIT
MANUFACTURERS EXEMPT FROM PREPAYMENT OF SPECIFIC TAX, THIS
WOULD AMOUNT TO UNLAWFUL DELEGATION OF LEGISLATIVE POWER.

III. RR NO. 17-67 WAS NEITHER ISSUED TO AMEND RR NO. V-39 NOR TO AMEND
THE TAX CODE, BUT SOLELY TO IMPLEMENT ACT NO. 2613, AS AMENDED,
WHICH WAS ENACTED IN 1916 AND HAD ABSOLUTELY NOTHING TO DO WITH
TAXES.

IV. SECTION 2(H) OF RR NO. 17-67 EXCEEDED THE CONSTITUTIONAL LIMITS ON

THE DELEGATION OF LEGISLATIVE POWER.

V. SECTION 3(M) OF RR NO. 17-67 AS INTERPRETED BY COMMISSIONER

EXCEEDED ALLOWABLE LIMITS ON DELEGATION OF LEGISLATIVE POWER.

VI. THE HONORABLE COURT OFAPPEALS ERRED IN APPLYING SECTION 20(A)

OF RR NO. V-39 TO LA SUERTE’S IMPORTS OF STEMMED LEAF TOBACCO, FOR
THE APPLICABLE PROVISION IS CHAPTER V OF RR NO. V-39.

VII. THE COMMISSIONER’S PRESENT INTERPRETATION OF SECTIONS 2(M)(1)

AND 3(H)OF RR NO. 17-67, WAS NOT THE INTERPRETATION GIVEN TO THOSE
SECTIONS BY ITS FRAMERS, AS SHOWN BY THE LONG ADMINISTRATIVE
PRACTICE AFTER THE ISSUANCE OF RR NO. 17-67 AND THE BIR RULING DATED
DECEMBER 12, 1972, WHICH CONFIRMED THE TAX-FREE TRANSFER OF
STEMMED- LEAF TOBACCO.108

G.R. No. 165499

On various dates in March 1995, the Commissioner of Internal Revenue . . . collected from La
Suerte the aggregate amount of THREE HUNDRED TWENTY-FIVE THOUSAND FOUR
HUNDRED TEN PESOS (₱325,410.00) for specific taxes on La Suerte’s bulk purchases of
stemmed-leaf tobacco from foreign tobacco manufacturers. La Suerte paid the said amount
under protest.

....

On September 27, 1996 and October 2, 1996, La Suerte instituted with the Commissioner of
Internal Revenue . . . and with Revenue District No. 52, a claim for refund of specific taxes said
to have been erroneously paid on its importations of stemmed-leaf tobacco for the period of
November 1994 up to May 1995, including the amount of Three Hundred Twenty Five
Thousand Four Hundred Ten Pesos (₱325,410.00). . . .
Inasmuch as its claim for refund was not acted upon by petitioner and in order to toll the running
of the two-year reglementary period within which to file a judicial claim for such refund as
provided under Section 229 of the 1997 National Internal Revenue Code, as amended, La
Suerte filed on February 8, 1997 a petition for review with the CTA.109

On September 23, 1998, the Court of Tax Appeals rendered judgment granting the petition for
review and ordering the Commissioner to refund the amount of ₱325,410.00 to La
Suerte.110 The Commissioner filed a motion for reconsideration, but this was denied by the
Court of Tax Appeals on December 15, 1998.111

On appeal, the Court of Appeals Fourth Division reversed112 the Court of Tax Appeals’ ruling. It
also denied113 La Suerte’s motion for reconsideration. Hence, this petition was
filed,114 reiterating the same arguments already presented in the other cases.

This court ordered the consolidation of G.R. Nos. 136328–29 and 125346.115 Thereafter, this
court consolidated G.R. Nos. 165499, 144942, and 148605.116 Finally, this court approved the
consolidation of G.R. Nos. 125346, 136328–29, 144942, 148605, 158197, and 165499.117

Issues

I. Whether stemmed leaf tobacco is subject to excise (specific) tax under Section 141 of
the 1986 Tax Code;

II. Whether Section 137 of the 1986 Tax Code exempting from the payment of specific
tax the sale of stemmed leaf tobacco by one manufacturer to another is not subject to
any qualification and, therefore, exempts an L-7 manufacturer from paying said tax on its
purchase of stemmed leaf tobacco from other manufacturers who are not classified as L-
7 permittees;

III. Whether stemmed leaf tobacco imported by La Suerte, Fortune, and Sterling is
exempt from specific tax under Section 137 of the 1986 Tax Code;

IV. Whether Section 20(a) of RR No. V-39, in relation to RR No. 17-67, which limits the
exemption from payment of specific tax on stemmed leaf tobacco to sales transactions
between manufacturers classified as L-7 permittees is a valid exercise by the
Department of Finance ofits rule-making power under Section 338118of the 1939 Tax
Code;

V. Whether the possessor or owner of stemmed leaf tobacco may be held liable for the
payment of specific tax if such tobacco product is removed from the place of production
without payment of said tax;

VI. Whether the August 31, 1990 ruling of then Bureau of Internal Revenue
Commissioner Jose U. Ong denying La Suerte’s request for exemption from specific tax
on its local purchase and importation of stemmed leaf tobacco violates the principle on
non-retroactivity of administrative ruling for allegedly contradicting the previous position
taken by the Bureau of Internal Revenue that such a transaction is not subject to specific
tax as expressed in the December 12, 1972 ruling of then Bureau of Internal Revenue
Commissioner Misael P. Vera; and
 VII. Whether the imposition of excise tax on stemmed leaf tobacco under Section 141 of
the 1986 Tax Code constitutes double taxation.

Arguments of the cigarette manufacturers

The cigarette manufacturers claim that since Section 137 of the 1986 Tax Code and Section
20(a) of RR No. V-39 do not distinguish "as to the type of manufacturer that may sell stemmed-
leaf tobacco without the prepayment of specific tax[,] [t]he logical conclusion is that any kind of
tobacco manufacturer is entitled to this treatment."119 The authority of the Secretary of Finance
to prescribe the "conditions" refers only to procedural matters and should not curtail or
modifythe substantive right granted by the law.120 The cigarette manufacturers add thatthe
reference to an L-7 invoice and L-7 register book in the second paragraph of Section 20(a)
cannot limit the application of the tax exemption provision only to transfers between L-7
permittees because (1) it does not so provide;121 and (2) under the terms of RR No. V-39, L-7
referred to manufacturers of any class of tobacco products, including manufacturers of stemmed
leaf tobacco.122

They further argue that, going by the theory of the Commissioner, RR No. 17-67 would have
unduly restricted the meaning of "manufacturers" by limiting it to a few manufacturers suchas
manufacturers of cigars and cigarettes.123Allegedly, RR No. 17-67 cannotchange the original
meaning of L-7 in Section 20(A) of RR No. V-39 without exceeding constitutional limits of
delegated legislative power.124 La Suerte further points out that RR No. 17-67 was not even
issued for the purpose of implementing the Tax Code but for the sole purpose of implementing
Act No. 2613; and Section 3 of RR No. 17-67 restricts the new designations only for
administrative purposes.125

Moreover, the cigarette manufacturers contend "that Section 132 does not operate as a tax
exemption" because "prepayment means payment of obligation in advance or before it is
due."126 Consequently, the rules of construction on tax exemption do not apply.127 According to
them, "the absence of tax prepayment for the saleof stemmed leaf tobacco impliedly indicates
the underlying policy of the law: that stemmed leaf tobacco shall not be taxed twice, first, as
stemmed leaf tobacco and, second, as a component of the finished products of which it forms
an integral part."128

Fortune, for its part, claims that stemmed leaf tobacco is not subject to excise tax. It argues that
stemmed leaf tobacco cannot be considered prepared or partially prepared tobaccobecause it
does not fall within the definition of a "processed tobacco" under Section 1-b of Republic Act No.
698, as amended.129 Furthermore, it adds that Section 141 should be strictly construed against
the taxing power.130 "There being no explicit reference to stemmed leaf tobacco in Section 141,
it cannot be claimed or construed to be subject to specific tax."131

According to Fortune, "a plain reading of Section 141 readily reveals that the intention was to
impose excise taxes on products oftobacco that are not to be used as raw materials in the
manufacture of other tobacco products."132"Section 2(m)(1) unduly expanded the meaning of
prepared or partially prepared tobacco to includea raw material like stemmed leaf tobacco;
hence, ultra viresand invalid."133

As regards the taxability of their importations, Sterling argues that since locally manufactured
stemmed leaf tobaccos are not subject to specific tax, it follows that imported stemmed leaf
tobaccos are also not subject to specific tax.134 On the other hand, La Suerteclaims that Section
20(A) of RR No. V-39 does not apply to its imports because the applicable provision is Section
128(b) of the 1986 Tax Code, which states that "imported articles shall be subject to the same
tax and the same rates and basis of excise taxes applicable to locally manufactured articles,"
and Chapter V of RR No. V-39 (Payment of specific taxes on imported cigars, cigarettes,
smoking and chewing tobacco).135

Finally, La Suerte and Sterling136 argues that the Court of Appeals erred: (1) in ignoring Section
43 of RR No. 17-67, December 12, 1972 Bureau of Internal Revenue ruling and other Bureau of
Internal Revenue opinions confirming the exemption of stemmed leaf tobacco from prepayment
of specific tax;137 (2) in disregarding the Bureau of Internal Revenue’s practice for over half a
century of not subjecting stemmed leaf tobacco to specific tax;138 (3) in failing to consider that
the re-enactment of the 1939 Tax Code as the 1977 and 1986 Tax Codes impliedly adopted the
interpretation in the December 12, 1972 ruling; and 4) in holding that nonapplication of the
December 12, 1972 ruling did not impinge on the principle of non-retroactivity of
rulings.139 Moreover, it argues that the Tax Code does not authorize collection of specific tax
from buyers without a prior attempt to collect tax from manufacturers. 140

Respondent’s arguments

Respondent counters that "under Section 141(b), partially prepared or manufactured tobacco is
subject to specific tax."141 The definition of "partially manufactured tobacco" in Section 2(m) of
RR No. 17-67 includes stemmed leaf tobacco; hence, stemmed leaf tobacco is subject to
specific tax.142 "Imported stemmed leaf tobacco isalso subject to specific tax under Section
141(b) in relation to Section 128 of the 1977 Tax Code."143 Fortune’s reliance on the definition of
"processed tobacco" in Section 1-b of Republic Act No. 698144 as amended by Republic Act No.
1194 is allegedly misplaced because the definition therein of processed tobacco merely clarified
the type of tobacco product that may not be imported into the country.145 Respondent posits that
"there is no double taxation in the prohibited sense even if specific tax is also imposed on the
finished product of which stemmed leaf tobacco is a raw material."146 Congress clearly intended
it "considering that stemmed leaf tobacco, as partially prepared or manufactured tobacco, is
subjected to specific tax under Section 141(b), while cigars and cigarettes, of which stemmed
leaf tobacco is a raw material, are also subjected to specific tax under Section 142."147 It adds
that there is no constitutional prohibition against double taxation.148

"Foreign manufacturers of tobacco products not engaged in trade or business in the Philippines
cannot be classified as L-7, L-6, or L-3R since they are beyond the pale of Philippine laws and
regulations."149 "Since the transfer of stemmed leaf tobacco from one factory to another must be
under an official L-7 invoice and entered in the L-7 registers of both transferor and transferee, it
is obvious that the factories contemplated are those located or operating in the Philippines and
operated only by L-7 permittees."150 The transaction contemplated under Section 137 is sale
and not importation because the law uses the word "sold."151 The law uses "importation" or
"imported" whenever the transaction involves bringing in articles from foreign countries. 152

Respondent argues that "the issuance of RR Nos. V-39 and 17-67 is a valid exercise by the
Department of Finance of its rule-making power" under Sections 132 and 338 of the 1939 Tax
Code.153 It explains that "the reason for the exemption from specific tax of the sale of stemmed
leaf tobacco as raw material by one L-7 directly to another L-7 is that the stemmed leaf tobacco
is supposed to have been already subjected to specific tax when an L-7 purchased the same
from an L-6."154 "Section 20(A) of RR No. V-39 adheres to the standards set forth in Section 245
because it provides the conditions for a tax-free removal of stemmed leaf tobacco under Section
137 without negating the imposition of specific tax under Section 141(b)."155 "To construe
Section 137 in the restrictive manner suggested by La Suerte will practically defeat the revenue-
generating provision of Section 141(b)."156

It further argues that the August 31, 1990 ruling of then Bureau of Internal Revenue
Commissioner Jose U. Ong denying La Suerte’s request for exemption from specific tax on its
local purchase and importation of stemmed leaf tobacco does not violate the principle on non-
retroactivity of administrative ruling. It alleges that an erroneous ruling, like the December 12,
1972 ruling, does not give rise to a vested right that can be invoked by La Suerte.157

Finally, respondent contends that under Section 127, if domestic products are removed from the
place ofproduction without payment of the excise taxes due thereon, it is not required that the
tax be collected first from the manufacturer or producer before the possessor thereof shall be
liable.158

Court’s ruling

Nature of excise tax

Excise tax is a tax on the production, sale, or consumption of a specific commodity in a country.
Section 110 of the 1986 Tax Code explicitly provides that the "excise taxes on domestic
products shall be paid by the manufacturer or producer before[the] removal [of those products]
from the place of production." "It does not matter to what use the article[s] subject to tax is put;
the excise taxes are still due, even though the articles are removed merely for storage in
someother place and are not actually sold or consumed."159 The excise tax based on weight,
volume capacity or any other physical unit of measurement is referred to as "specific tax." If
based on selling price or other specified value, itis referred to as "ad valorem" tax.

Section 141 subjects partially

prepared tobacco, such as
stemmed leaf tobacco, to
excise tax

Section 141 of the 1986 Tax Code provides:

SEC. 141. Tobacco Products. – There shall be collected a tax of seventy-five centavos on each
kilogram of the following products of tobacco:

(a) tobacco twisted by hand or reduced into a condition to be consumed in any manner
other than the ordinary mode of drying and curing;

(b) tobacco prepared orpartially prepared with or without the use of any machine or
instruments or without being pressed or sweetened; and

(c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of
tobacco. Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of
tobacco resulting from the handling or stripping of whole leaf tobacco may be
transferred, disposed of, or otherwise sold, without prepayment of the specific tax herein
provided for under such conditions as may be prescribed in the regulations promulgated
by the Ministry of Finance upon recommendation of the Commissioner, if the same are
 tobe exported or to be used in the manufacture of other tobacco products on which the
excise tax will eventually be paid on the finished product.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner,
on each kilogram, sixty centavos. (Emphasis supplied)

It is evident that when tobacco is harvested and processed either by hand or by machine, all
itsproducts become subject to specific tax. Section 141 reveals the legislative policy to tax all
forms of manufactured tobacco — in contrast to raw tobacco leaves — including tobacco refuse
or all other tobacco which has been cut, split, twisted, or pressed and is capable of being
smoked without further industrial processing.

Stemmed leaf tobacco is subject to the specific tax under Section 141(b). It is a partially
prepared tobacco. The removal of the stem or midrib from the leaf tobacco makes the resulting
stemmed leaf tobacco a prepared or partially prepared tobacco. The following is La Suerte’s
own illustration of how the stemmed leaf tobacco comes about: In the process of removing the
stems, the whole leaf tobacco breaks into pieces; after the stems or midribs are removed, the
tobacco is threshed (cut by machine into fine narrow strips) and then undergoes a process of
redrying,160 undoubtedly showing that stemmed leaf tobacco is a partially prepared tobacco.
Since the Tax Code contained no definition of "partially prepared tobacco," then the term should
be construed in its general, ordinary, and comprehensive sense.161

RR No. 17-67, as amended, supplements the law by delineating what products of tobacco are
"prepared or manufactured" and "partially prepared or partially manufactured." Section 2(m)
states:

(m) "Partially manufactured tobacco" — Includes:

(1) "Stemmed leaf" — handstripped tobacco, clean, good, partially broken leaf only, free
from mold and dust.

(2) "Long-filler" — handstripped tobacco of good, long pieces of broken leaf usableas
filler for cigars without further preparation, and free from mold, dust stems and cigar
cuttings.

(3) "Short-filler" — handstripped or machine-stripped tobacco, clean, good, short pieces

of broken leaf, which will not pass through a screen of two inches (2") mesh.

(4) "Cigar-cuttings" — clean cuttings or clippings from cigars, unsized with any other
form of tobacco.

(5) "Machine-scrap tobacco"— machine-threshed, clean, good tobacco, not included in

any of the above terms, usable in the manufacture of tobacco products.

(6) "Stems" — midribs of leaftobacco removed from the whole leaf or broken leaf either
by hand or machine.

(7) "Waste tobacco" — denatured tobacco; powder or dust, refuse, unfit for human
consumption;
discarded materials in the manufacture of tobacco products, which may include stems.

Insisting on the inapplicability of RR No. 17-67, La Suerte points to the different definitions given
to stemmed leaf tobacco by Section 2(m)(1) of RR No. 17-67 and Section 137. It argues that
while RR No. 17-67 defines stemmed leaf tobacco as handstripped tobacco of clean, good,
partially broken leaf only, free from mold and dust,Section 137 defines it as leaf tobacco which
has had the stemor midrib removed.The term does not include broken leaf tobacco. We are not
convinced.

Different definitions of the term "stemmed leaf" are unavoidable, especially considering that
Section 2(m)(1) is an implementing regulation of Act No. 2613, which was enacted in 1916 for
purposes of improving the qualityof Philippine tobacco products, while Section 137 defines the
tobacco product only for the purpose of exempting it from the specific tax. Whichever definition
is adopted, there is no doubt that stemmed leaf tobacco is a partially prepared tobacco.

The onus of proving that stemmed leaf tobacco is not subject to the specific tax lies with the
cigarette manufacturers. Taxation is the rule, exemption is the exception.162 Accordingly,
statutes granting tax exemptions must be construed instrictissimi jurisagainst the taxpayer and
liberally in favor of the taxing authority. The cigarette manufacturers must justify their claim by a
clear and categorical provision in the law. Otherwise, they are liable for the specific tax on
stemmed leaf tobacco found in their possession pursuant to Section 127163 of the 1986 Tax
Code, as amended.

Stemmed leaf tobacco

transferred in bulk between
cigarette manufacturers are
exempt from excise tax under
Section 137 of the 1986 Tax
Code in conjunction with RR
No. V-39 and RR No. 17-67

In the instant case, an exemption on the taxability of stemmed leaf tobacco is found in Section
137, which provides the following:

SEC. 137. Removal of tobacco products without prepayment of tax. – Products of tobacco
entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial
use, under such conditions as may be prescribed in the regulations of the Ministry of Finance.
Stemmed leaf tobacco,fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings,
clippings, stems or midribs, and sweepings of tobacco may be sold in bulk as raw material by
one manufacturer directly to another, without payment of the tax under such conditions as may
be prescribed in the regulations of the Ministry of Finance.

‘Stemmed leaf tobacco,' as herein used, means leaf tobacco which has had the stem or midrib
removed. The term does not include broken leaf tobacco. (Emphasis and underscoring
supplied) Section 137 authorizes a tax exemption subject to the following: (1) that the stemmed
leaf tobacco is sold in bulk as raw material by one manufacturerdirectly to another; and (2) that
the sale or transfer has complied with the conditions prescribed by the Department of Finance.
That the title of Section 137 uses the term "without prepayment" while the body itself uses
"without payment" is of no moment. Both terms simply mean that stemmed leaf tobacco may be
removed from the factory or place of production without prior payment of the specific tax.

This court has held in Commissioner of Internal Revenue v. La Campaña Fabrica de Tabacos,
Inc.,164 reiterated in Compania General de Tabacos de Filipinas v. Court of Appeals165 and
Commissioner of Internal Revenue v. La Suerte Cigar and Cigarette Factory, Inc.166 that the
exemption from specific tax of the sale of stemmed leaf tobacco is qualified by and is subject to
"such conditions as may be prescribed in the regulations of the Department of Finance." These
conditions were provided for in RR Nos. V-39 and 17-67. Thus, Section 137 must be read and
interpreted in accordance with these regulations.

Section 20(a) of RR No. V-39 provides the rules for tax exemption on tobacco products:
SECTION 20. Exemption from tax of tobacco products intended for agricultural or industrial
purposes. — (a) Sale of stemmed leaf tobacco, etc., by one factory to another.— Subject to the
limitations herein established, products of tobacco entirely unfit for chewing or smoking may be
removed free of tax for agricultural or industrial use; and stemmed leaf tobacco, fine-cut shorts,
the refuse of fine-cut chewing tobacco, refuse, scraps, cuttings, clippings, and sweepings of
tobacco may be sold in bulk as raw materials by one manufacturer directly to another without
the prepayment of the specific tax.

Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings,
clippings, and sweeping of leaf tobacco or partially manufactured tobaccoor other refuse of
tobacco may be transferred from one factory to another under an official L-7 invoiceon which
shall be entered the exact weightof the tobacco at the time of its removal, and entry shall be
made in the L-7 register in the place provided on the page of removals. Corresponding debit
entry will be made in the L-7 register book of the factory receiving the tobacco under heading
"Refuse, etc., received from other factory," showing the date of receipt, assessment and invoice
numbers, name and address of the consignor, form in which received, and the net weight of the
tobacco. This paragraph should not, however, be construed to permit the transfer of materials
unsuitable for the manufacture of tobacco products from one factory to another. (Emphasis
supplied)

The conditions under which stemmed leaf tobacco may be transferred from one factory to
another without prepayment of specific tax are as follows:

(a) The transfer shall be under an official L-7 invoice on which shall be entered the exact
weight of the tobacco at the time of its removal;

(b) Entry shall be made in the L-7 register in the place provided on the page for
removals; and

(c) Corresponding debit entry shall bemade in the L-7 register book of the factory
receiving the tobacco under the heading, "Refuse, etc.,received from the other factory,"
showing the date of receipt, assessment and invoice numbers, name and address of the
consignor, formin which received, and the weight of the tobacco.

Under Section 3(h) of RR No. 17-67, entities that were issued by the Bureau of Internal
Revenue with an L-7 permit refer to "manufacturers of tobacco products." Hence, the transferor
and transferee of the stemmed leaf tobacco must be an L-7 tobacco manufacturer.
La Campañaexplained that the reason behind the tax exemption of stemmed leaf tobacco
transferred between two L-7 manufacturers is that the same had already been previouslytaxed
when acquired by the L-7 manufacturer from dealers of tobacco, thus:

[T]he exemption from specific tax of the sale of stemmed leaf tobacco as raw material by one L-
7 directly to another L-7 is because such stemmed leaf tobacco has been subjected to specific
tax when an L-7 manufacturer purchased the same from wholesale leaf tobacco dealers
designated under Section 3, Chapter I, Revenue Regulations No. 17-67 (supra) as L-3, L-3F, L-
3R, L-4, or L-6, the latter being also a stripper of leaf tobacco. These are the sources of
stemmed leaf tobacco to be used as raw materials by an L-7 manufacturer which does not
produce stemmed leaf tobacco. When an L-7 manufacturer sells the stemmed leaf tobacco
purchased from the foregoing suppliersto another L-7 manufacturer as raw material, such sale
is not subject to specific tax under Section 137 (now Section 140), as implemented by Section
20(a) of Revenue Regulations No. V-39.167

There is no new product when stemmed leaf tobacco is transferred between two L-7 permit
holders. Thus, there can be no excise tax that will attach. The regulation, therefore, is
reasonable and does not create a new statutory right.

RR Nos. V-39 and 17-67 did

not exceed the allowable
limits of legislative delegation

The cigarette manufacturers contend that the authority of the Department of Finance to
prescribe conditions is merely procedural. Its rule-making power is only for the effective
enforcement of the law, which implicitly rules out substantive modifications. The Secretary of
Finance cannot, by mere regulation, limit the classes of manufacturers that may be entitled to
the tax exemption. Otherwise, Section 137 (Section 132 in the 1939 Tax Code) would be invalid
as an undue delegation of legislative power without the required standards or parameters.

The power of taxation is inherently legislative and may be imposed or revoked only by the
legislature.168 Moreover, this plenary power of taxation cannot be delegated by Congress to any
other branch of government or private persons, unless its delegation is authorized by the
Constitution itself.169 Hence, the discretion to ascertain the following — (a) basis, amount, or
rate of tax; (b) person or property that is subject to tax; (c) exemptions and exclusions from tax;
and (d) manner of collecting the tax — may not be delegated away by Congress.

However, it is well-settled that the power to fill in the details and manner as to the enforcement
and administration of a law may be delegated to various specialized administrative agencies like
the Secretary of Finance in this case.170

This court in Maceda v. Macaraig, Jr.171 explained the rationale behind the permissible
delegation of legislative powers to specialized agencies like the Secretary of Finance:

The latest in our jurisprudence indicates that delegation of legislative power has become the
rule and its non-delegation the exception. The reason is the increasing complexity of modern life
and many technical fields of governmental functions as in matters pertaining to tax exemptions.
This is coupled by the growing inability of the legislature to cope directly with the many problems
demanding its attention. The growth of society has ramified its activities and created peculiar
and sophisticated problems that the legislature cannot be expected reasonably to comprehend.
Specialization even in legislation has become necessary. To many of the problems attendant
upon present day undertakings, the legislature may not have the competence, let alone the
interest and the time, to provide the required directand efficacious, not to say specific
solutions.172

Thus, rules and regulations implementing the law are designed to fill in the details or to make
explicit whatis general, which otherwise cannot all be incorporated in the provision of the
law.173 Such rules and regulations, when promulgated in pursuance of the procedure or
authority conferred upon the administrative agency by law,174"deserve to be given weight and
respect by the courts in view of the rule-making authority given to those who formulate them and
their specific expertise in their respective fields."175 To be valid, a revenue regulation mustbe
within the scope of statutory authority or standard granted by the legislature. Specifically, the
regulation must (1) be germane to the object and purpose of the law;176 (2) not contradict, but
conform to, the standards the law prescribes;177 and (3) be issued for the sole purpose of
carrying into effect the general provisions of our tax laws.178

Section 338 authorizes the Secretary of Finance to promulgate all needful rules and regulations
for the effective enforcement of the provisions of the 1939 Tax Code.

The specific authority of the Department of Finance to issue regulations relating to the taxation
of tobacco products is found in Section 4179 (Specific provisions to be contained in regulations);
Section 125180 (Payment of specific tax on imported articles to customs officers prior to release
from the customhouse); Section 132 (Removal of tobacco products without prepayment of tax);
Section 149181 (Extent of supervision over establishments producing taxable output); Section
150182 (Records to be kept by manufacturers; Assessment based thereon); and Section
152183(Labels and form of packages) of the 1939 Tax Code.

RR No. V-39 was promulgated to enforce the provisions of Title IV (Specific Taxes) of the 1939
Tax Code relating to the manufacture and importation of, and payment of specific tax on,
manufactured tobacco or products of tobacco. By an explicit provision in Section 132, the
lawmakers defer to the Department of Finance to provide the details upon which the removal of
stemmed leaf tobacco may be exempt from the specific tax in view of its supposed expertise in
the tobacco trade. Section 20(a) of RR No. V-39 adhered to the standards because it provided
the conditions— the proper documentation and recording of raw materials transferred from one
factory to another — for a tax-free removal of stemmed leaf tobacco, without negating the
imposition of specific tax under Section 137. The "effective enforcement of the provisions of [the
Tax Code]" in Section 338 provides a sufficient standard for the Secretary of Finance in
determining the conditionsfor the tax-free removal of stemmed leaf tobacco. Section 4 further
provides a limitation on the contents of revenue regulations to be issued by the Secretary of
Finance.

On the other hand, RR No. 17-67 was promulgated "[i]n accordance with the provisions of
Section 79 (B) of the Administrative Code, as amended by Act No. 2803."184 Among the specific
administrative powers conferred upon a department head under the Administrative Code is that
of promulgating rules and regulations, not contrary to law, "necessary to regulate the proper
working and harmonious and efficient administration of each and all of the offices and
dependencies of his Department, and for the strict enforcement and proper execution ofthe laws
relative to matters under the jurisdiction of said Department."185 Under the 1939 Tax Code, the
Secretary of Finance is authorized to prescribe regulations affecting the business of persons
dealing in articles subject to specific tax, including the mode in which the processes of
production of tobacco and tobacco products should be conducted and the records to be kept by
manufacturers. Clearly then, the provisions of RR No. 17-67 classifying and regulating the
business of persons dealing in tobacco and tobacco products are within the rulemaking
authority of the Secretary of Finance.

RR No. 17-67 did not create a

new classification

The contention of the cigarette manufacturers that RR No. 17-67 unduly restricted the meaning
of manufacturers of tobacco products by limiting it to a few manufacturers suchas
manufacturers of cigars and cigarettes is misleading.

The definitions in RR No. 17-67 of"manufacturer of tobacco" and "manufacturer of cigars and/or
cigarettes" are in conformity with, as in fact they are verbatim adoptions of, the definitions under
Section 194(m) and (n) of the 1939 Tax Code.

The cigarette companies further argue that RR No. 17-67 unduly restricted the meaning of L-7
in Section 20(a) of RR No. V-39 because when RR No. V-39 was issued, there was no
distinction at all between L-7, L-3, L-6 permittees, and L-7 referred to manufacturers of any
class of tobacco products including stemmed leaf tobacco.

This argument is similarly misplaced.

A reading of the entire RR No. V-39 shows that the regulation pertains particularly to activities
ofmanufacturers of smoking and chewing tobacco, cigars and cigarettes.186 This was rightly so
because the regulation was issued to enforce the tax law provisions in relation to the
manufacture and importation of tobacco products. Clearly apparent in Section 10(a) is that when
a manufacturer of chewing and smoking tobacco, cigars, or cigarettes has been qualified to
conduct his or her business as such, he or she is issued by the internal revenue agent the
corresponding register books and auxiliary register books pertaining to his business as well as
the official register book, L-7, to be used as record of the raw materials for his or her product. It
is, therefore, logical toconclude that the L-7 invoice and L-7 register book under Section 20(a)
refers to those invoice and books used by manufacturers of chewing and smoking tobacco,
cigars or cigarettes.

RR No. 17-67 clarified RR No. V-39 by explicitly designating the manufacturers of tobacco
products as L-7 permittees (Section 2), in contrast to wholesale leaf tobacco dealers and those
that process partially manufactured tobacco such as stemmed leaf tobacco. RR No. 17-67 did
not create a new and restrictive classification but only expressed in clear and categorical terms
the distinctions between "manufacturers" and "dealers" of tobacco that were already implicit in
RR No. V-39.

Indeed, there is no repugnancy between RR No. 17-67 and RR No. V-39, on the one hand, and
the Tax Code, on the other. It is safer to presume that the term "manufacturer" used in Section
137 on tax exempt removals referred to an entity that is engaged in the business of, and was
licensed by the Bureau of Internal Revenue as a, manufacturer of tobacco products. It does not
include an entity engaged in business as a dealer in tobacco that, incidentally or in furtherance
of its business as a dealer, strip or thresh whole leaf tobacco or reprocess partially
manufactured tobacco.187
Such construction is consistent with the rule that tax exemptions, deemed to be in derogation of
the state’s sovereign right of taxation, are strictly applied and may be granted only under clear
and unmistakable terms of the law and not merely upon a vague implication or inference.188

RR No. V-39 must be applied

and read together with RR
No. 17-67

The cigarette manufacturers’ argument is misplaced, stating that RR No. 17-67 could not modify
RR No. V-39 because it was promulgated to enforce Act No. 2613, as amended (entitled "An
Act to Improve the Methods of Production and the Quality ofTobacco in the Philippines and to
Develop the Export Trade Therein"), which allegedly had nothing whatsoever to do with the Tax
Code or with the imposition of taxes.

"The Tobacco Inspection Service,instituted under Act No. 2613, was made part of the Bureau of
Internal Revenue and Bureau of Customs administration for . . . internal revenue
purposes."189 The Collector of Internal Revenue was charged to enforce Act No. 2613,
otherwise known as the Tobacco Inspection Law, with a view to promoting the Philippine
tobacco trade and thereby increase the revenues of the government. This can be inferred from
a reading of the following provisions of Act No. 2613:

SEC. 6. The Collector of InternalRevenue shall have the power and it shall be his duty:

(a) To establish general and local rules respecting the classification, marking, and
packing of tobacco for domestic sale or factory use and for exportation so far as may be
necessary to secure leaf tobacco of good quality and to secure its handling under
sanitary conditions, and to the end that leaf tobacco be not mixed, packed, and marked
and of the same quality when it is not of the same class and origin.

(b) To establish from time to time adequate rules defining the standard and the type of
leaf and manufactured tobacco which shall be exported, as well also as the manner in
which standard tobacco, shall be packed. Before establishing the rules above specified,
the Collector of Internal Revenue shall give due notice of the proposed rules or
amendments to those interested and shall give them an opportunity to present their
objections to such rules or amendments.

(c) To require, whenever it shall be deemed expedient the inspection of and affixture of
inspection labels to tobacco removed from the province of itsorigin to another province
before such removal, or to tobacco for domestic sale or factory use.190

SEC. 7. No leaf tobacco or manufactured tobacco shall be exported until it shall have been
inspected by the Collector of Internal Revenue or his duly authorized representative and found
to be standard for export.Collector of customs shall not permit the exportation of tobacco from
the Philippines unless the shipment be in conformity with the requirements set forth in this Act.
The prohibition contained in this section shall not apply to waste and refuse tobacco
accumulated in the manufacturing process when it is invoiced and marked as such waste and
refuse.191(Emphasis supplied)

....
SEC. 9. The Collector of Internal Revenue may appoint inspectors of tobacco for the purpose of
making the inspections herein required, and may also detail any officer or employee of the
Bureau to perform such duty. Said inspectors or employees shall likewise be charged with the
dutyof grading leaf tobacco and shall perform such other duties as may be required of them in
the promotion of the Philippine tobacco industry. The Collector of Internal Revenue shall
likewise appoint, with the approval of the Secretary of Finance, agents in the United States for
the purpose of promoting the export trade in tobacco with the United States, whose duty it shall
be to inspect shipments of tobacco upon or after their arrival in that country when so required, to
assist manufacturers of, exporters of, and dealers in tobacco in disseminating information
regarding Philippine tobacco and, at the request of the parties, to act as arbitrators between the
exporter in the Philippine Islands and the importer in the United States whenever a dispute
arises between them as to the quality, sizes, classes, or shapes shipped or received. When
acting asarbitrator as aforesaid, the agent shall proceed in accordance with the law governing
arbitration and award inthe locality where the dispute arises. All agents, inspectors, and
employees acting under and by virtue of this Act shall be subject to all penal provisions
applicable to internal-revenue officers generally.192 (Emphasis supplied)

....

SEC. 12. The inspection fees collectedby virtue of the provisions of this Act shall constitute a
special fund to be known a the Tobacco Inspection Fund, which shall be expended by the
Collector of Internal Revenue, with the approval of the Secretary of Finance, upon allotment by
a Board consisting of the Commissioner of Internal Revenue, the Director of Plant Industry, the
Director of the Bureau of Commerce and Industry, two manufacturers designated by the Manila
Tobacco Association, and two persons representing the interests of the tobacco producers and
growers, appointed by the President of the Philippine Islands[.]

These funds may be expended for any of the following purposes:

(a) The payment of the expenses incident to the enforcement of this Act including the
salaries of the inspectors and agents.

(b) The payment of expenses incident to the reconditioning and returning to the
Philippine Islands of damaged tobacco and the reimbursement of the value of the United
States internal-revenue stamps lost thereby.

(c) The advertising of Philippine tobacco products in the United States and in foreign
countries. (d) The establishment of tobaccowarehouses in the Philippine Islands and in
the United States at such points as the trade conditions may demand.

(e) The payment of bounties to encourage the production of leaf tobacco of high quality.

(f) The promotion and defense of the Philippine tobacco interests in the United States
and in foreign countries.

(g) The establishment, operation, and maintenance of tobacco experimental farms for
the purpose of studying and testing the best methods for the improvement of the
leaves:Provided, however, That thirty per centum of the total annual income of the
tobacco inspection fund shall be expended for the establishment, operation, and
maintenance of said tobacco experimental farms and for the investigation and discovery
 of efficacious ways and means for the extermination and control of the pests and
diseases of tobacco: Provided, further, That in the establishment of experimental farms,
preference shall be given to municipalities offering the necessary suitable land for the
establishment of an experimental farm.

(h) The sending of special agentsand commissions to study the markets of the United
States and foreign countries with regard to the Philippine cigars and their propaganda in
said markets.

(i) The organization of exhibits of cigars and other Philippine tobacco products in the
United States and in foreign countries.193

SEC. 13. The Collector Internal Revenue shall be the executive officer charged with the
enforcement of the provisions of this Act and of the regulations issued in accordance therewith,
but it shall be the duty of the Director of Agriculture, with the approval of the Secretary of Public
Instruction, to execute and enforce the provisions hereof referring to the cultivation of tobacco.
(Emphasis supplied)

The cigarette manufacturers, thus, erroneously concluded that Act No. 2613 does not involve
taxation.

Parenthetically, Section 8 of Act No. 2613 pertained to the imposition of tobacco inspection
fees, which are National Internal Revenue taxes, these being one of the miscellaneous taxes
provided for under the Tax Code. Said Section 8 was in fact repealed by Section 369(b) of the
1939 Tax Code, and the provision regarding inspection feesare found in Section 302 of the
1939 Tax Code.

Since the two revenue regulations, RR Nos. V-34 and 17-67, are in pari materia, i.e., they both
pertain specifically to the regulation of tobacco trade, they should be read and applied together.
Statutes are in pari materia when they relate to the same person or thing or to the same class of
persons or things, or object, or cover the same specific or particular subject matter.

It is axiomatic in statutory construction that a statute must be interpreted, not only to be

consistent with itself, but also to harmonize with other laws on the same subject matter, as to
form a complete, coherent and intelligible system. The rule is expressed in the maxim,
"interpretare et concordare legibus est optimus interpretandi,"or every statute must be so
construed and harmonized with other statutes as to form a uniform system of
jurisprudence.194(Citation omitted)

The foregoing rules on statutory construction can be applied by analogy to administrative

issuances suchas RR No. V-39 and RR No. 17-67, especially since both are issued by the
same administrative agency.

Importation of stemmed leaf

tobacco not included in the
exemption under Section 137

The transaction contemplated in Section 137 does not include importation of stemmed leaf
tobacco for the reason that the law uses the word "sold" to describe the transaction of
transferring the raw materials from one manufacturer to another.
The Tax Code treats an importerand a manufacturer differently. Section 123 clearly
distinguishes between goods manufactured or produced in the Philippines and things imported.
The law uses the proper term "importation" or "imported" whenever the transaction involves
bringing in articles from foreign countries as provided under Section 125 (cf. Section 124).
Whenever the Tax Code refers to importers and manufacturers, they are separately mentioned
as two distinct persons or entities (Sections 156 and 160). Under Chapter II, whenever the law
uses the word manufacturer, it only means local manufacturer or producer of domestic products
(Sections 150, 151, and 152 of the 1939 Tax Code).

Moreover, foreign manufacturers oftobacco products not engaged in trade or business in the
Philippines cannot be designated as L-7 since these are beyond the pale of Philippine law and
regulations. The factories contemplated are those located oroperating only in the Philippines.
Contrary to La Suerte’s claim, Chapter V, Section 61 of RR No. V-39195 is not applicable to
justify the tax exemption of its importation of stemmed leaf tobacco because from the title of
Chapter V, the provision particularly refers to specific taxes on imported cigars, cigarettes,
smoking and chewing tobacco.

No estoppel against government

The cigarette manufacturers contend that for a long time prior to the transactions herein
involved, the Collector of Internal Revenue had never subjected their purchases and
importations of stemmed leaf tobacco to excise taxes. This prolonged practice allegedly
represents the official and authoritative interpretation of the law by the Bureau of Internal
Revenue which must be respected.

We are not persuaded.

In Philippine Long Distance Telephone Co. v. Collector of Internal Revenue,196 this court has
held that this principle is not absolute, and an erroneous implementation by an officerbased on a
misapprehension of law may be corrected when the true construction is ascertained. Thus:

The appellant argues that the Collector of Internal Revenue, previous to the transactions
hereininvolved, had never collected the franchise tax on items of the same nature as those
herein in question and this is strong evidence that such transactions are not subject to tax on
the principle that a prolonged practice on the part of an executive or administrative officer in
charge of executing a certain statute is an authoritative construction of great weight. This
contention may be granted, but the principle is not absolute and may be overcome by strong
reasons to the contrary. If through a misapprehension of law an officer has erroneously
executed it for a long time, the error may be corrected when the true construction is ascertained.
Such we deem to be the situation in the present case. Incidentally, the doctrine of estoppel does
not apply here.197 (Emphasis supplied)

This court reiterated this rule in Abello v. Commissioner of Internal Revenue198 where it rejected
petitioners’ claim that the prolonged practice (since 1939 up to 1988) of the Bureau of Internal
Revenue in not subjecting political contributions to donor’s tax was an authoritative
interpretation of the statute, entitled to great weight and the highest respect:

This Court holds that the BIR isnot precluded from making a new interpretation of the law,
especially when the old interpretation was flawed. It is a well-entrenched rule that[:]
. . . erroneous application and enforcement of the law by public officers do not block subsequent
correct application of the statute, and that the Government is never estopped by mistake or
error on the part of its agents.199 (Emphasis supplied, citations omitted)

Prolonged practice of the Bureau of Internal Revenue in not collecting the specific tax on
stemmed leaf tobacco cannot validate what is otherwise an erroneous application and
enforcement of the law. The government is never estopped from collecting legitimate taxes
because of the error committed by its agents.200

In La Suerte Cigar and Cigarette Factory v. Court of Tax Appeals,201 this court upheld the
validity of a revenue memorandum circular issued by the Commissioner of Internal Revenue to
correct an error in a previous circular that resulted in the non-collection of tobacco inspection
fees for a long time and declared that estoppel cannot work against the government:

. . . the assailed Revenue Memorandum Circular was issued to rectify the error in General
Circular No. V-27 and to interpret the phrase "tobacco for domestic sale or factory use" with the
view of arresting huge losses of tobacco inspection fees which were not collected and imposed
since the said Circular (No. V-27) took effect. Furthermore, the questioned Revenue
Memorandum Circular was also issued to apprise those concerned of the construction and
interpretation which should be accorded to Act No. 2613, as amended, and which respondent is
duty bound to enforce. It is an opinion on how the law should be construed and there was no
attempt whatsoever to enlarge or restrict the meaning of the law.

The basis for the issuance of said Memorandum Circular was so stated in Resolution No. 2-67
of the Tobacco Board, wherein petitioners as members of the Manila Tobacco Association, Inc.
were duly represented, the pertinent portions of which read:

". . . .

WHEREAS, this original recommendation of Mr. Hernandez was perfectly in accordance with
existing law, more particularly Sec. 1 of Republic Act No. 31 which took effect since September
25, 1946, but perhaps thru oversight by the former Commissioners and officers of the Tobacco
Inspection Service the propriety and legality of effecting the inspection of tobacco products for
local salesand imported leaf tobacco for factory use might have overlooked resulting in huge
losses of tobacco inspection fees. . ." (Italics supplied)

....

Tobacco Inspection fees are undoubtedly National Internal Revenue taxes, they being one of
the miscellaneous taxes provided for under the Tax Code. Section 228 (formerly Section 302) of
Chapter VII of the Code specificallyprovides for the collection and manner of payment of the
said inspection fees. It is within the power and duty of the Commissioner to collect the same,
even without inspection, should tobacco products be removed clandestinely or surreptitiously
from the establishment of the wholesaler, manufacturer or redrying plant and from the customs
custody in case of imported leaf tobacco. Errors, omissions or flaws committed by BIR
inspectors and representatives while in the performance of their duties cannot beset up as
estoppel nor estop the Government from collecting a tax legally due. Tobacco inspection fees
are levied and collected for purposes of regulation and control and also as a source of revenue
since fifty percentum (50%) of said fees shall accrue to the Tobacco Inspection Fee Fund
created by Sec. 12 of Act No. 2613, as amended and the other fifty percentum, to the Cultural
Center of the Philippines. (Sec. 88, Chapter VII, NIRC)202 (Emphasis in this paragraph supplied,
citation omitted)

Furthermore, the December 12, 1972 ruling of Commissioner Misael P. Vera runs counter to
Section 20(a)of RR No. V-39 in relation to RR No. 17-67, which provides that only transfers of
stemmed leaf tobacco between L-7 permittees are exempt. An implementing regulation cannot
be superseded by a ruling which is a mere interpretation of the law. While opinions and rulings
of officials of the government called upon to execute or implement administrative laws command
much respect and weight, courts are not bound to accept the same if they override, instead of
remain consistent and in harmony with, the law they seek to apply and implement.203

Double taxation

The contention that the cigarette manufacturers are doubly taxed because they are paying the
specific tax on the raw material and on the finished product in which the raw material was a part
is also devoid of merit.

For double taxation in the objectionable or prohibited sense to exist, "the same property must be
taxed twice, when it should be taxed but once."204 "[B]oth taxes must be imposed on the same
property or subject- matter, for the same purpose, by the same. . . taxing authority, within the
same jurisdiction or taxing district, during the same taxing period, and they must be the same
kind or character of tax."205

At all events, there is no constitutional prohibition against double taxation in the

Philippines.206 This court has explained in Pepsi-Cola Bottling Company of the Philippines, Inc.
v. Municipality of Tanauan, Leyte:207

There is no validity to the assertion that the delegated authority can be declared unconstitutional
on the theory of double taxation.1âwphi1 It must be observed that the delegating authority
specifies the limitations and enumerates the taxes over which local taxation may not be
exercised. The reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law,
since We have not adopted as part thereof the injunction against double taxation found in the
Constitution of the United States and some states of the Union. Double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental
entity or by the same jurisdiction for the same purpose, but not in a case where one tax is
imposed by the State and the other by the city or municipality.208 (Emphasis supplied, citations
omitted)

"It is something not favored, but is permissible, provided some other constitutional requirement
is not thereby violated, such as the requirement that taxes must be uniform."209

Excise taxes are essentially taxes on property210 because they are levied on certain specified
goods or articles manufactured or produced in the Philippines for domestic saleor consumption
or for any other disposition, and on goods imported. In this case, there is no double taxation in
the prohibited sense because the specific tax is imposed by explicit provisions of the Tax Code
on two different articles or products: (1) on the stemmed leaf tobacco; and (2) on cigar or
cigarette.211

WHEREFORE, this court:

 1. DENIESthe petition for review filed by La Suerte Cigar & Cigarette Factory in G.R. No.
125346 and AFFIRMSthe questioned decision and resolution of the Court of Appeals in
CA-G.R. SP. No. 38107;

2. GRANTS the petition for review filed by the Commissioner of Internal Revenue in G.R.
Nos. 136328–29 and REVERSES and SETS ASIDE the challenged decision and
resolution of the Court of Appeals in CA-G.R. SP. Nos. 38219 and 40313. Fortune
Tobacco Corporation is ORDERED to pay the following taxes:

a. ₱28,938,446.25 as deficiency excise tax for the period covering January 1,

1986to June 30, 1989, plus 20% interest per annum from November 24,1989
until fully paid; and

b. ₱1,989,821.26 as deficiency excise tax for the period covering July 1, 1989 to
November 30, 1990, plus 20% interest per annum from March 1,1991 until fully
paid.

3. GRANTS the petition for review filed by the Commissioner of Internal Revenue in G.R.
No. 144942 and REVERSES and SETS ASIDE the challenged decision of the Court of
Appeals in CA-G.R. SP. No. 51902. La Suerte Cigar & Cigarette Factory’s claim for
refund of the amount of ₱175,909.50 is DENIED.

4. DENIES the petition for review filed by Sterling Tobacco Corporation in G.R. No.
148605 and AFFIRMS the questioned decision and resolution of the Court of Appeals in
CA-G.R. SP. No. 38159;

5. DENIES the petition for review filed by La Suerte Cigar & Cigarette Factory in G.R.
No. 158197 and AFFIRMS the questioned decision and resolution of the Court of
Appeals in CA-G.R. SP. No. 37124; and

6. DENIES the petition for review filed by La Suerte Cigar & Cigarette Factory in G.R.
No. 165499 and AFFIRMS the questioned decision and resolution of the Court of
Appeals in

CA-G.R. SP. No. 50241.

G.R. No. 184203 November 26, 2014

CITY OF LAPU-LAPU, Petitioner,

vs.
PHILIPPINE ECONOMIC ZONE AUTHORITY, Respondent.

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

G.R. No. 187583

PROVINCE OF BATAAN, represented by GOVERNOR ENRIQUE T. GARCIA, JR., and

EMERLINDA S. TALENTO, in her capacity as Provincial Treasurer of Bataan, Petitioners,
vs.
PHILIPPINE ECONOMIC ZONE AUTHORITY, Respondent.

DECISION

LEONEN, J.:

The Philippine Economic Zone Authority is exempt from payment of real property taxes.

These are consolidated1 petitions for review on certiorari the City of Lapu-Lapu and the Province
of Bataan separately filed against the Philippine Economic Zone Authority (PEZA).

In G.R. No. 184203, the City of Lapu-Lapu (the City) assails the Court of Appeals’
decision2 dated January 11, 2008 and resolution3 dated August 6, 2008, dismissing the City’s
appeal for being the wrong mode of appeal. The City appealed the Regional Trial Court,Branch
111, Pasay City’s decision finding the PEZA exempt from payment of real property taxes.

In G.R. No. 187583, the Province of Bataan (the Province) assails the Court of Appeals’
decision4 dated August 27, 2008 and resolution5 dated April 16, 2009, granting the PEZA’s
petition for certiorari. The Court of Appeals ruled that the Regional Trial Court, Branch 115,
Pasay City gravely abused its discretion in finding the PEZA liable for real property taxes to the
Province of Bataan.

Facts common to the consolidated petitions

In the exercise of his legislative powers,6 President Ferdinand E. Marcos issued Presidential
Decree No. 66 in 1972, declaring as government policy the establishment of export processing
zones in strategic locations in the Philippines. Presidential Decree No. 66 aimed "to encourage
and promote foreign commerce as a means of making the Philippines a center of international
trade, of strengthening our export trade and foreign exchange position, of hastening
industrialization,of reducing domestic unemployment, and of accelerating the development of
the country."7

To carry out this policy, the Export Processing Zone Authority (EPZA) was created to operate,
administer, and manage the export processing zones established in the Port of Mariveles,
Bataan8 and such other export processing zones that may be created by virtue of the decree.9
The decree declared the EPZA non-profit in character10 with all its revenues devoted to its
development, improvement, and maintenance.11 To maintain this non-profit character, the EPZA
was declared exempt from all taxes that may be due to the Republic of the Philippines, its
provinces, cities, municipalities, and other government agencies and
instrumentalities.12 Specifically, Section 21 of Presidential Decree No. 66 declared the EPZA
exempt from payment of real property taxes:

Section 21. Non-profit Character of the Authority; Exemption from Taxes. The Authority shall be
non-profit and shall devote and use all its returns from its capital investment, as well as excess
revenues from its operations, for the development, improvement and maintenance and other
related expenditures of the Authority to pay its indebtedness and obligations and in furtherance
and effective implementation of the policy enunciated in Section 1 of this Decree. In consonance
therewith, the Authority is hereby declared exempt:

....

(b) From all income taxes, franchise taxes, realty taxes and all other kinds of taxes and licenses
to be paid to the National Government, its provinces, cities, municipalities and other government
agenciesand instrumentalities[.]

In 1979, President Marcos issued Proclamation No. 1811, establishing the Mactan Export
Processing Zone. Certain parcels of land of the public domain located in the City of Lapu-Lapuin
Mactan, Cebu were reserved to serve as site of the Mactan Export Processing Zone.

In 1995, the PEZA was created by virtue of Republic Act No. 7916 or "the Special Economic
Zone Act of 1995"13 to operate, administer, manage, and develop economic zones in the
country.14 The PEZA was granted the power to register, regulate, and supervise the enterprises
located in the economic zones.15 By virtue of the law, the export processing zone in Mariveles,
Bataan became the Bataan Economic Zone16 and the Mactan Export Processing Zone the
Mactan Economic Zone.17

As for the EPZA, the law required it to "evolve into the PEZA in accordance with the guidelines
and regulations set forth in an executive order issued for [the] purpose."18

On October 30, 1995, President Fidel V. Ramos issued Executive Order No. 282, directing the
PEZA to assume and exercise all of the EPZA’s powers, functions, and responsibilities "as
provided in Presidential Decree No. 66, as amended, insofar as they are not inconsistent with
the powers, functions, and responsibilities of the PEZA, as mandated under [the Special
Economic Zone Act of 1995]."19 All of EPZA’s properties, equipment, and assets, among others,
were ordered transferred to the PEZA.20

Facts of G.R. No. 184203

In the letter21 dated March 25, 1998, the City of Lapu-Lapu, through the Office of the Treasurer,
demanded from the PEZA 32,912,350.08 in real property taxes for the period from 1992 to 1998
on the PEZA’s properties located in the Mactan Economic Zone.

The City reiterated its demand in the letter22 dated May 21, 1998. It cited Sections 193 and 234
of the Local Government Code of 1991 that withdrew the real property tax exemptions
previously granted to or presently enjoyed by all persons. The City pointed out that no provision
in the Special Economic Zone Act of 1995 specifically exempted the PEZA from payment of real
property taxes, unlike Section 21 of Presidential Decree No. 66 that explicitly provided for
EPZA’s exemption. Since no legal provision explicitly exempted the PEZA from payment of real
property taxes, the City argued that it can tax the PEZA.

The City made subsequent demands23 on the PEZA. In its last reminder24 dated May 13, 2002,
the City assessed the PEZA 86,843,503.48 as real property taxes for the period from 1992 to
2002.

On September 11, 2002, the PEZAfiled a petition for declaratory Relief25 with the Regional Trial
Court of Pasay City, praying that the trial court declare it exempt from payment ofreal property
taxes. The case was raffled to Branch 111.

The City answered26 the petition, maintaining that the PEZA is liable for real property taxes. To
support its argument, the City cited a legal opinion dated September 6, 1999 issued by the
Department of Justice,27 which stated that the PEZA is not exempt from payment of real
property taxes. The Department of Justice based its opinion on Sections 193 and 234 of the
Local Government Code that withdrew the tax exemptions, including real property tax
exemptions, previously granted to all persons.

A reply28 was filed by the PEZA to which the City filed a rejoinder.29

Pursuant to Rule 63, Section 3 of Rules of Court,30 the Office of the Solicitor General filed a
comment31 on the PEZA’s petition for declaratory relief. It agreed that the PEZA is exempt from
payment of real property taxes, citing Sections 24 and 51 of the Special Economic Zone Act of
1995.

The trial court agreed with the Solicitor General. Section 24 of the Special Economic Zone Act
of 1995 provides:

SEC. 24. Exemption from National and Local Taxes. – Except for real property taxes on land
owned by developers, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross
income earned by all business enterprises within the ECOZONE shall be paid and remitted as
follows:

a. Three percent (3%) to the National Government;

b. Two percent (2%) which shall be directly remitted by the business establishments to
the treasurer’s office of the municipality or city where the enterprise is located.

Section 51 of the law, on the other hand, provides:

SEC. 51. Ipso-Facto Clause. – All privileges, benefits, advantages or exemptions granted to
special economic zones under Republic Act No. 7227, shall ipso-facto be accorded to special
economic zones already created or to be created under this Act. The free port status shall not
be vested upon new special economic zones.
Based on Section 51, the trial court held that all privileges, benefits, advantages, or exemptions
granted tospecial economic zones created under the Bases Conversion and Development Act
of 1992 apply to special economic zones created under the Special Economic ZoneAct of 1995.

Since these benefits include exemption from payment of national or local taxes, these benefits
apply to special economic zones owned by the PEZA.

According to the trial court, the PEZA remained tax-exempt regardless of Section 24 of the
Special Economic Zone Act of 1995. It ruled that Section 24, which taxes real property owned
by developers of economic zones, only applies to private developers of economic zones, not to
public developers like the PEZA. The PEZA, therefore, is not liable for real property taxes on the
land it owns.

Characterizing the PEZA as an agency of the National Government, the trial court ruled that the
City had no authority to tax the PEZA under Sections 133(o) and 234(a) of the Local
Government Code of 1991.

In the resolution32 dated June 14, 2006, the trial court granted the PEZA’s petition for
declaratory relief and declared it exempt from payment of real property taxes.

The City filed a motion for reconsideration,33 which the trial court denied in its resolution34 dated
September 26, 2006.

The City then appealed35 to the Court of Appeals.

The Court of Appeals noted the following issues the City raised in its appellant’s brief: (1)
whether the trial court had jurisdiction over the PEZA’s petition for declaratory relief; (2) whether
the PEZA is a government agency performing governmental functions; and (3) whether the
PEZA is exempt from payment of real property taxes.

The issues presented by the City, according to the Court of Appeals, are pure questions of law
which should have been raised in a petition for review on certiorari directly filed before this
court. Since the City availed itself of the wrong mode of appeal, the Court of Appeals dismissed
the City’s appeal in the decision36 dated January 11, 2008.

The City filed a motion for extension of time to file a motion for reconsideration, 37 which the
Court of Appeals denied in the resolution38 dated April 11, 2008.

Despite the denial of its motion for extension, the City filed a motion for reconsideration.39 In the
resolution40 dated August 6, 2008, the Court of Appeals denied that motion.

In its petition for review on certiorari with this court,41 the City argues that the Court of Appeals
"hid under the skirts of technical rules"42 in resolving its appeal. The City maintains that its
appeal involved mixed questions of fact and law. According to the City, whether the PEZA
performed governmental functions "cannot completely be addressed by law but [by] the factual
and actual activities [the PEZA is] carrying out."43

Even assuming that the petition involves pure questions of law, the City contends that the
subject matter of the case "is of extreme importance with [far-reaching] consequence that [its
magnitude] would surely shape and determine the course ofour nation’s future."44 The Court of
Appeals, the City argues, should have resolved the case on the merits.

The City insists that the trial court had no jurisdiction to hear the PEZA’s petition for declaratory
relief. According to the City, the case involves real property located in the City of Lapu-Lapu.
The petition for declaratory relief should have been filed before the Regional Trial Court of the
City of Lapu-Lapu.45

Moreover, the Province of Bataan, the City of Baguio, and the Province of Cavite allegedly
demanded real property taxes from the PEZA. The City argues that the PEZA should have
likewise impleaded these local government units as respondents in its petition for declaratory
relief. For its failure to do so, the PEZA violated Rule 63, Section 2 of the Rules of Court, and
the trial court should have dismissed the petition.46

This court ordered the PEZA to comment on the City’s petition for review on certiorari.47

At the outset of its comment, the PEZA argues that the Court of Appeals’ decision dated
January 11, 2008 had become final and executory. After the Court of Appeals had denied the
City’s appeal, the City filed a motion for extension of time to file a motion for reconsideration.
Arguing that the time to file a motion for reconsideration is not extendible, the PEZA filed its
motion for reconsideration out of time. The Cityhas no more right to appeal to this court.48

The PEZA maintains that the City availed itself of the wrong mode of appeal before the Court of
Appeals. Since the City raised pure questions of law in its appeal, the PEZA argues that the
proper remedy is a petition for review on certiorari with this court, not an ordinary appeal before
the appellate court. The Court of Appeals, therefore, correctly dismissed outright the City’s
appeal under Rule 50, Section 2 of the Rules of Court.49

On the merits, the PEZA argues that it is an agency and instrumentality of the National
Government. It is therefore exempt from payment of real property taxes under Sections 133(o)
and 234(a) of the Local Government Code.50 It adds that the tax privileges under Sections 24
and 51 of the Special Economic Zone Act of 1995 applied to it.51

Considering that the site of the Mactan Economic Zoneis a reserved land under Proclamation
No. 1811, the PEZA claims that the properties sought to be taxed are lands of public dominion
exempt from real property taxes.52

As to the jurisdiction issue, the PEZA counters that the Regional Trial Court of Pasay had
jurisdiction to hear its petition for declaratory relief under Rule 63, Section 1 of the Rules of
Court.[53]] It also argued that it need not implead the Province of Bataan, the City of Baguio,
and the Province of Cavite as respondents considering that their demands came after the PEZA
had already filed the petition in court.54

Facts of G.R. No. 187583

After the City of Lapu-Lapu had demanded payment of real property taxes from the PEZA, the
Province of Bataan followed suit. In its letter55 dated May 29, 2003, the Province, through the
Office of the Provincial Treasurer, informed the PEZA that it would be sending a real property
tax billing to the PEZA. Arguing that the PEZA is a developer of economic zones, the Province
claimed that the PEZA is liable for real property taxes under Section 24 of the Special Economic
Zone Act of 1995.

In its reply letter56 dated June 18, 2003, the PEZA requested the Province to suspend the
service of the real property tax billing. It cited its petition for declaratory relief against the City of
Lapu-Lapu pending before the Regional Trial Court, Branch 111, Pasay City as basis.

The Province argued that serving a real property tax billing on the PEZA "would not in any way
affect [its] petition for declaratory relief before [the Regional Trial Court] of Pasay City."57 Thus,
in its letter58 dated June 27, 2003, the Province notified the PEZAof its real property tax liabilities
for June 1, 1995 to December 31, 2002 totalling ₱110,549,032.55.

After having been served a tax billing, the PEZA again requested the Province to suspend
collecting its alleged real property tax liabilities until the Regional Trial Court of Pasay
Cityresolves its petition for declaratory relief.59

The Province ignored the PEZA’s request. On January 20, 2004, the Province served on the
PEZA a statement of unpaid real property tax for the period from June 1995 to December
2004.60

The PEZA again requested the Province to suspend collecting its alleged real property
taxes.61 The Province denied the request in its letter62 dated January 29, 2004, then servedon
the PEZA a warrant of levy63 covering the PEZA’s real properties located in Mariveles, Bataan.

The PEZA’s subsequent requests64 for suspension of collection were all denied by the
Province.65 The Province then served on the PEZA a notice of delinquency in the payment of
real property taxes66 and a notice of sale of real property for unpaid real property tax.67 The
Province finally sent the PEZA a notice of public auction of the latter’s properties in Mariveles,
Bataan.68

On June 14, 2004, the PEZA filed a petition for injunction69 with prayer for issuance of a
temporary restraining order and/or writ of preliminary injunction before the Regional Trial Court
of Pasay City, arguing that it is exempt from payment ofreal property taxes. It added that the
notice of sale issued by the Province was void because it was not published in a newspaper
ofgeneral circulation asrequired by Section 260 of the Local Government Code.70

The case was raffled to Branch 115.

In its order71 dated June 18, 2004, the trial court issued a temporary restraining order against
the Province. After the PEZA had filed a ₱100,000.00 bond,72 the trial court issued a writ of
preliminary injunction,73 enjoining the Province from selling the PEZA’s real properties at public
auction.

On March 3, 2006, the PEZA and Province both manifested that each would file a memorandum
after which the case would be deemed submitted for decision. The parties then filed their
respective memoranda.74

In the order75 dated January 31, 2007, the trial court denied the PEZA’s petition for injunction.
The trial court ruled that the PEZA is not exempt from payment of real property taxes. According
to the trial court, Sections 193 and 234 of the Local Government Code had withdrawn the real
property tax exemptions previously granted to all persons, whether natural or juridical.76 As to
the tax exemptions under Section 51 of the Special Economic Zone Act of 1995, the trial court
ruled that the provision only applies to businesses operating within the economic zones, not to
the PEZA.77

The PEZA filed before the Court of Appeals a petition for certiorari78 with prayer for issuance of
a temporary restraining order.

The Court of Appeals issued a temporary restraining order, enjoining the Province and its
Provincial Treasurer from selling PEZA's properties at public auction scheduled on October 17,
2007.79 It also ordered the Province to comment on the PEZA’s petition.

In its comment,80 the Province alleged that it received a copy of the temporary restraining order
only on October 18, 2007 when it had already sold the PEZA’s properties at public auction.
Arguing that the act sought to be enjoined was already fait accompli, the Province prayed for the
dismissal of the petition for certiorari.

The PEZA then filed a supplemental petition for certiorari, prohibition, and mandamus81 against
the Province, arguing that the Provincial Treasurer of Bataan acted with grave abuse of
discretion in issuing the notice of delinquency and notice of sale. It maintained that it is exempt
from payment of real property taxes because it is a government instrumentality. It added that its
lands are property of public dominion which cannot be sold at public auction.

The PEZA also filed a motion82 for issuance of an order affirming the temporary restraining
order and a writ of preliminary injunction to enjoin the Province from consolidating title over the
PEZA’s properties.

In its resolution83 dated January 16, 2008,the Court of Appeals admitted the supplemental
petition for certiorari, prohibition, and mandamus. It required the Province to comment on the
supplemental petition and to file a memorandum on the PEZA’s prayer for issuance of
temporary restraining order.

The Province commented84 on the PEZA’s supplemental petition, to which the PEZA replied.85

The Province then filed a motion86 for leave to admit attached rejoinder with motion to dismiss.
In the rejoinder with motion to dismiss,87 the Province argued for the first time that the Court of
Appeals had no jurisdiction over the subject matter of the action.

According to the Province, the PEZA erred in filing a petition for certiorari. Arguing that the
PEZA sought to reverse a Regional Trial Court decision in a local tax case, the Province
claimed that the court with appellate jurisdiction over the action is the Court of Tax Appeals. The
PEZA then prayed that the Court of Appeals dismiss the petition for certiorari for lack of
jurisdiction over the subject matter of the action.

The Court of Appeals held that the issue before it was whether the trial court judge gravely
abused his discretion in dismissing the PEZA’s petition for prohibition. This issue, according to
the Court of Appeals, is properly addressed in a petition for certiorari over which it has
jurisdiction to resolve. It, therefore, maintained jurisdiction to resolve the PEZA’s petition for
certiorari.88
Although it admitted that appeal, not certiorari, was the PEZA’s proper remedy to reverse the
trial court’s decision,89the Court of Appeals proceeded to decide the petition for certiorari in "the
broader interest of justice."90

The Court of Appeals ruled that the trial court judge gravely abused his discretion in dismissing
the PEZA’s petition for prohibition. It held that Section 21 of Presidential Decree No. 66 and
Section 51 of the Special Economic Zone Act of 1995 granted the PEZA exemption from
payment of real property taxes.91 Based on the criteria set in Manila International Airport
Authority v. Court of Appeals,92 the Court of Appeals found that the PEZA is an instrumentality
of the national government. No taxes, therefore, could be levied on it by local government
units.93

In the decision94 dated August 27, 2008, the Court of Appeals granted the PEZA’s petition for
certiorari. It set aside the trial court’s decision and nullified all the Province’s proceedings with
respect to the collection of real property taxes from the PEZA.

The Province filed a motion for reconsideration,95 which the Court of Appeals denied in the
resolution96 dated April 16, 2009 for lack of merit.

In its petition for review on certiorari with this court,97 the Province of Bataan insists that the
Court of Appeals had no jurisdiction to take cognizance of the PEZA’s petition for certiorari. The
Province maintains that the Court of Tax Appeals had jurisdiction to hear the PEZA’s petition
since it involved a local tax case decided by a Regional Trial Court.98

The Province reiterates that the PEZA is not exempt from payment of real property taxes. The
Province points out that the EPZA, the PEZA’s predecessor, had to be categorically exempted
from payment of real property taxes. The EPZA, therefore, was not inherently exempt from
payment of real property taxes and so is the PEZA. Since Congress omitted from the Special
Economic Zone Act of 1995 a provision specifically exempting the PEZA from payment of real
property taxes, the Province argues that the PEZA is a taxable entity. It cited the rule in
statutory construction that provisions omitted in revised statutes are deemed repealed.99

With respect to Sections 24 and 51 of the Special Economic Zone Act of 1995 granting tax
exemptions and benefits, the Province argues that these provisions only apply to business
establishments operating within special economic zones,100 not to the PEZA.

This court ordered the PEZA tocomment on the Province’s petition for review on certiorari. 101 In
its comment,102 the PEZA argues that the Court of Appeals had jurisdiction to hear its petition for
certiorari since the issue was whether the trial court committed grave abuse of discretion in
denying its petition for injunction. The PEZA maintains thatit is exempt from payment of real
property taxes under Section 21 of Presidential Decree No. 66 and Section 51 of the Special
Economic Zone Act of 1995.

The Province filed its reply,103 reiterating its arguments in its petition for review on certiorari. On
the PEZA’s motion,104 this court consolidated the petitions filed by the City of Lapu-Lapu and the
Province of Bataan.105

The issues for our resolution are the following:

 I. Whether the Court of Appeals erred in dismissing the City of Lapu-Lapu’s appeal for
raising pure questions of law;

II. Whether the Regional Trial Court, Branch 111, Pasay City had jurisdiction to hear, try,
and decide the City of Lapu-Lapu’s petition for declaratory relief;

III. Whether the petition for injunction filed before the Regional Trial Court, Branch 115,
Pasay City, is a local tax case appealable to the Court of Tax Appeals; and

IV. Whether the PEZA is exempt from payment of real property taxes.

We deny the consolidated petitions.

I.

The Court of Appeals did not err in

dismissing the City of Lapu-Lapu’s
appeal for raising pure questions of law

Under the Rules of Court, there are three modes of appeal from Regional Trial Court decisions.
The first mode is through an ordinary appeal before the Court of Appeals where the decision
assailed was rendered in the exercise of the Regional Trial Court’s original jurisdiction. Ordinary
appeals are governed by Rule 41, Sections 3 to 13 of the Rules of Court. In ordinary appeals,
questions of fact or mixed questions of fact and law may be raised.106

The second mode is through a petition for review before the Court of Appeals where the
decision assailed was rendered by the Regional Trial Court in the exercise of its appellate
jurisdiction. Rule 42 of the Rules of Court governs petitions for review before the Court of
Appeals. In petitions for review under Rule 42, questions of fact, of law, or mixed questions of
fact and law may be raised.107

The third mode is through an appealby certiorari before this court under Rule 45 where only
questions of law shall be raised.108

A question of fact exists when there is doubt as to the truth or falsity of the alleged facts. 109 On
the other hand, there is a question of law if the appeal raises doubt as to the applicable law on a
certain set of facts.110

Under Rule 50, Section 2, an improper appeal before the Court of Appeals is dismissed outright
and shall not be referred to the proper court:

SEC. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal under Rule 41 taken
from the Regional Trial Court to the Court of Appeals raising only questions of law shall be
dismissed, issues purely of law not being reviewable by said court. Similarly, an appeal by
notice of appeal instead of by petition for review from the appellate judgment of a Regional Trial
Court shall be dismissed.

An appeal erroneously taken to the Court of Appeals shall not be transferred to the appropriate
court but shall be dismissed outright.
Rule 50, Section 2 repealed Rule 50, Section 3 of the 1964 Rules of Court, which provided that
improper appeals to the Court of Appeals shall not be dismissed but shall be certified to the
proper court for resolution:

Sec. 3. Where appealed case erroneously, brought. — Where the appealed case has been
erroneously brought to the Court of Appeals, it shall not dismiss the appeal, but shall certify the
case to the proper court, with a specific and clear statement of the grounds therefor.

With respect to appeals by certiorari directly filed before this court but which raise questions of
fact, paragraph 4(b) of Circular No. 2-90 dated March 9, 1990 states that this court "retains the
option, in the exercise of its sound discretion and considering the attendant circumstances,
either itself to take cognizance of and decide such issues or to refer them to the Court of
Appeals for determination." In Indoyon, Jr. v. Court of Appeals,111 we said that this court "cannot
tolerate ignorance of the law on appeals."112 It is not this court’s task to determine for litigants
their proper remedies under the Rules.113

We agree that the City availed itself of the wrong mode of appeal before the Court of Appeals.
The City raised pure questions of law in its appeal. The issue of whether the Regional Trial
Court of Pasay had jurisdiction over the PEZA’s petition for declaratory relief is a question of
law, jurisdiction being a matter of law.114 The issue of whether the PEZA is a government
instrumentality exempt from payment of real property taxes is likewise a question of law since
this question is resolved by examining the provisions of the PEZA’s charter as well as other
laws relating to the PEZA.115

The Court of Appeals, therefore, did not err in dismissing the City’s appeal pursuant to Rule 50,
Section 2 of the Rules of Court.

Nevertheless, considering the important questions involved in this case, we take cognizance of
the City’s petition for review on certiorari in the interest of justice.

In Municipality of Pateros v. The Honorable Court of Appeals,116 the Municipality of Pateros filed
an appeal under Rule 42 before the Court of Appeals, which the Court of Appeals denied
outright for raising pure questions of law. This court agreed that the Municipality of Pateros
"committed a procedural infraction"117 and should have directly filed a petition for review on
certiorari before this court. Nevertheless, "in the interest of justice and in order to write finisto
[the] controversy,"118 this court "opt[ed] to relax the rules"119 and proceeded to decide the case.
This court said:

While it is true that rules of procedure are intended to promote rather than frustrate the ends of
justice, and while the swift unclogging of the dockets of the courts is a laudable objective, it
nevertheless must not be met at the expense of substantial justice.

The Court has allowed some meritorious cases to proceed despite inherent procedural defects
and lapses. Thisis in keeping with the principle that rules of procedure are mere tools designed
to facilitate the attainment of justice, and that strict and rigid application ofrules which should
result in technicalities that tend to frustrate rather than promote substantial justice must always
be avoided. It is a far better and more prudent cause of action for the court to excuse a technical
lapse and afford the parties a review of the case to attain the ends of justice, rather than
dispose of the case on technicality and cause grave injustice to the parties, giving a false
impression of speedy disposal of cases while actually resulting in more delay, if not a
miscarriage of justice.120

Similar to Municipality of Pateros, we opt to relax the rules in this case. The PEZA operates or
otherwise administers special economic zones all over the country. Resolving the substantive
issue of whether the PEZA is taxable for real property taxes will clarify the taxing powers of all
local government units where special economic zones are operated. This case, therefore,
should be decided on the merits.

II.

The Regional Trial Court of Pasay had no

jurisdiction to hear, try, and decide the
PEZA’s petition for declaratory relief
against the City of Lapu-Lapu

Rule 63 of the Rules of Court governs actions for declaratory relief. Section 1 of Rule 63
provides:

SECTION 1. Who may file petition. – Any person interested under a deed, will, contract or other
written instrument, or whose rights are affected by a statute, executive order or regulation,
ordinance, or any other governmental regulation may, before breach or violation, thereof, bring
an action in the appropriate Regional Trial Court to determine any question of construction or
validity arising, and for a declaration of his rights or duties, thereunder.

An action for reformation of an instrument, to quiet title to real property or remove clouds
therefrom, or to consolidate ownership under Article 1607 of the Civil Code, may be brought
under this Rule.

The court with jurisdiction over petitions for declaratory relief is the Regional Trial Court, the
subject matter of litigation in an action for declaratory relief being incapable of pecuniary
estimation.121 Section 19 of the Judiciary Reorganization Act of 1980 provides:

SEC. 19. Jurisdiction in Civil Cases. – Regional Trial Courts shall exercise exclusive original
jurisdiction:

(1) In all civil actions in which the subject of litigation is incapable of pecuniary estimation[.]

Consistent with the law, the Rules state that a petition for declaratory relief is filed "in the
appropriate Regional Trial Court."122

A special civil action for declaratory relief is filed for a judicial determination of any question of
construction or validity arising from, and for a declaration of rights and duties, under any of the
following subject matters: a deed, will, contract or other written instrument, statute, executive
order or regulation, ordinance, orany other governmental regulation.123 However, a declaratory
judgment may issue only if there has been "no breach of the documents in question."124 If the
contract or statute subject matter of the action has already been breached, the appropriate
ordinary civil action must be filed.125 If adequate relief is available through another form of action
or proceeding, the other action must be preferred over an action for declaratory relief.126
In Ollada v. Central Bank of the Philippines,127 the Central Bank issued CB-IED Form No. 5
requiring certified public accountants to submit an accreditation under oath before they were
allowed to certify financial statements submitted to the bank. Among those financial statements
the Central Bank disallowed were those certified by accountant Felipe B. Ollada.128 Claiming
that the requirement "restrained the legitimate pursuit of one’s trade,"129

Ollada filed a petition for declaratory relief against the Central Bank.

This court ordered the dismissal of Ollada’s petition "without prejudice to [his] seeking relief in
another appropriate action."130 According to this court, Ollada’s right had already been violated
when the Central Bank refused to accept the financial statements he prepared. Since there was
already a breach, a petition for declaratory relief was not proper. Ollada must pursue the
"appropriate ordinary civil action or proceeding."131 This court explained:

Petitioner commenced this action as, and clearly intended it to be one for Declaratory Relief
under the provisions of Rule 66 of the Rules of Court. On the question of when a special civil
action of this nature would prosper, we have already held that the complaint for declaratory
relief will not prosper if filed after a contract, statute or right has been breached or violated. In
the present case such is precisely the situation arising from the facts alleged in the petition for
declaratory relief. As vigorously claimed by petitioner himself, respondent had already invaded
or violated his right and caused him injury — all these giving him a complete cause of action
enforceable in an appropriate ordinary civil action or proceeding. The dismissal of the action
was, therefore, proper in the lightof our ruling in De Borja vs. Villadolid, 47 O.G. (5) p. 2315, and
Samson vs. Andal, G.R. No. L-3439, July 31, 1951, where we held that an action for declaratory
relief should be filed before there has been a breach of a contract, statutes or right, and that it is
sufficient tobar such action, that there had been a breach — which would constitute actionable
violation. The rule is that an action for Declaratory Relief is proper only if adequate relief is not
available through the means of other existing forms of action or proceeding (1 C.J.S. 1027-
1028).132

It is also required that the parties to the action for declaratory relief be those whose rights or
interests are affected by the contract or statute in question.133 "There must be an actual
justiciable controversy or the ‘ripening seeds’ of one"134 between the parties. The issue between
the parties "must be ripe for judicial determination."135 An action for declaratory relief based on
theoreticalor hypothetical questions cannot be filed for our courts are not advisory courts.136

In Republic v. Roque,137 this court dismissed respondents’ petition for declaratory relief for lack
of justiciable controversy. According to this court, "[the respondents’] fear of prospective
prosecution [under the Human Security Act] was solely based on remarks of certain government
officials which were addressed to the general public."138

In Velarde v. Social Justice Society,139 this court refused to resolve the issue of "whether or not
[a religious leader’s endorsement] of a candidate for elective office or in urging or requiring the
members of his flock to vote for a specific candidate is violative [of the separation
clause]."140 According to the court, there was no justiciable controversy and ordered the
dismissal of the Social Justice Society’s petition for declaratory relief. This court explained:
Indeed, SJS merely speculated or anticipated without factual moorings that, as religious
leaders, the petitioner and his co-respondents below had endorsed or threatened to endorse a
candidate or candidates for elective offices; and that such actual or threatened endorsement
"will enable [them] to elect men to public office who [would] in turn be forever beholden to their
leaders, enabling them to control the government"[;] and "pos[ing] a clear and present danger
ofserious erosion of the people’s faith in the electoral process[;] and reinforc[ing] their belief that
religious leaders determine the ultimate result of elections," which would then be violative of the
separation clause.

Such premise is highly speculative and merely theoretical, to say the least. Clearly, it does not
suffice to constitute a justiciable controversy. The Petition does not even allege any indication or
manifest intent on the part of any of the respondents below to champion an electoral candidate,
or to urge their so-called flock to vote for, or not to vote for, a particular candidate. It is a time-
honored rule that sheer speculation does not give rise to an actionable right.

Obviously, there is no factual allegation that SJS’ rights are being subjected to any threatened,
imminent and inevitable violation that should be prevented by the declaratory relief sought. The
judicial power and duty of the courts to settle actual controversies involving rights that are
legally demandable and enforceable cannot be exercised when there is no actual or threatened
violation of a legal right.

All that the 5-page SJS Petition prayed for was "that the question raised in paragraph 9 hereof
be resolved." In other words, it merely sought an opinion of the trial court on whether the
speculated acts of religious leaders endorsing elective candidates for political offices violated
the constitutional principle on the separation of church and state. SJS did not ask for a
declaration of its rights and duties; neither did it pray for the stoppage of any threatened
violation of its declared rights. Courts, however, are proscribed from rendering an advisory
opinion.141 In sum, a petition for declaratory relief must satisfy six requisites:

[F]irst, the subject matter of the controversy must be a deed, will, contract or other written
instrument, statute, executive order or regulation, or ordinance; second, the terms of said
documents and the validity thereof are doubtful and require judicial construction; third, there
must have been no breach of the documents in question; fourth, there must be an actual
justiciable controversy or the "ripening seeds" of one between persons whose interests are
adverse; fifth, the issue must be ripe for judicial determination; and sixth, adequate relief is not
available through other means or other forms of action or proceeding.142 (Emphases omitted)

We rule that the PEZA erred in availing itself of a petition for declaratory relief against the City.
The City had already issued demand letters and real property tax assessment against the
PEZA, in violation of the PEZA’s alleged tax-exempt status under its charter. The Special
Economic Zone Act of 1995, the subject matter of PEZA’s petition for declaratory relief, had
already been breached. The trial court, therefore, had no jurisdiction over the petition for
declaratory relief. There are several aspects of jurisdiction.143 Jurisdiction over the subject
matter is "the power to hear and determine cases of the general class to which the proceedings
in question belong."144 It is conferred by law, which may either be the Constitution or a
statute.145 Jurisdiction over the subject matter means "the nature of the cause of action and the
relief sought."146 Thus, the cause of action and character of the relief sought as alleged in the
complaint are examinedto determine whether a court had jurisdiction over the subject
matter.147 Any decision rendered by a court without jurisdiction over the subjectmatter of the
action is void.148

Another aspect of jurisdiction is jurisdiction over the person. It is "the power of [a] court to render
a personal judgment or to subject the parties in a particular action to the judgment and other
rulings rendered in the action."149A court automatically acquires jurisdiction over the person of
the plaintiff upon the filing of the initiatory pleading.150With respect to the defendant, voluntary
appearance in court or a valid service of summons vests the court with jurisdiction over the
defendant’s person.151 Jurisdiction over the person of the defendant is indispensable in actions
in personamor those actions based on a party’s personal liability.152 The proceedings in an
action in personamare void if the court had no jurisdiction over the person of the defendant.153

Jurisdiction over the resor the thing under litigation is acquired either "by the seizure of the
property under legal process, whereby it is brought into actual custody of the law; or asa result
of the institution of legal proceedings, in which the power of the court is recognized and made
effective."154 Jurisdiction over the res is necessary in actions in remor those actions "directed
against the thing or property or status of a person and seek judgments with respect thereto as
against the whole world."155 The proceedings in an action in rem are void if the court had no
jurisdiction over the thing under litigation.156

In the present case, the Regional Trial Court had no jurisdiction over the subject matter of the
action, specifically, over the remedy sought. As this court explained in Malana v. Tappa:157

. . . an action for declaratory relief presupposes that there has been no actual breach of the
instruments involved or of rights arising thereunder. Since the purpose of an action for
declaratory relief is to secure an authoritative statement of the rights and obligations of the
parties under a statute, deed, or contract for their guidance in the enforcement thereof, or
compliance therewith, and not to settle issues arising from an alleged breach thereof, it may be
entertained only before the breach or violation of the statute, deed, or contract to which it refers.
A petition for declaratory relief gives a practical remedy for ending controversies that have not
reached the state where another relief is immediately available; and supplies the need for a
form of action that will set controversies at rest before they lead to a repudiation of obligations,
an invasion of rights, and a commission of wrongs.

Where the law or contract has already been contravened prior to the filing of an action for
declaratory relief, the courts can no longer assume jurisdiction over the action. In other words, a
court has no more jurisdiction over an action for declaratory relief if its subject has already been
infringed or transgressed before the institution of the action.158 (Emphasis supplied)

The trial court should have dismissed the PEZA’s petition for declaratory relief for lack of
jurisdiction.

Once an assessment has already been issued by the assessor, the proper remedy of a
taxpayer depends on whether the assessment was erroneous or illegal.

An erroneous assessment "presupposes that the taxpayer is subject to the tax but is disputing
the correctness of the amount assessed."159 With an erroneous assessment, the taxpayer
claims that the local assessor erred in determining any of the items for computing the real
property tax, i.e., the value of the real property or the portion thereof subject to tax and the
proper assessment levels. In case of an erroneous assessment, the taxpayer must exhaust the
administrative remedies provided under the Local Government Code before resorting to judicial
action.

The taxpayer must first pay the realproperty tax under protest. Section 252 of the Local
Government Code provides:
SECTION 252. Payment Under Protest. -(a) No protest shall be entertained unless the taxpayer
first paysthe tax. There shall be annotated on the tax receipts the words "paid under protest".
The protest in writing must be filed within thirty (30) days from payment of the tax to the
provincial, city treasurer or municipal treasurer, in the case of a municipality within Metropolitan
Manila Area, who shall decide the protest within sixty (60) days from receipt.

(b) The tax or a portion thereof paidunder protest, shall be held in trust by the treasurer
concerned.

(c) In the event that the protest is finally decided in favor of the taxpayer, the amount or
portion of the tax protested shall be refunded to the protestant, or applied as tax credit
against his existing or future tax liability.

(d) In the event that the protest is denied or upon the lapse of the sixty day period
prescribed in subparagraph (a), the taxpayer may avail of the remedies as provided for
in Chapter 3, Title II, Book II of this Code.

Should the taxpayer find the action on the protest unsatisfactory, the taxpayer may appeal with
the Local Board of Assessment Appeals within 60 days from receipt of the decision on the
protest:

SECTION 226. Local Board of Assessment Appeals. - Any owner or person having legal
interest in the property who is not satisfied with the action of the provincial, city or municipal
assessor in the assessment of his property may, within sixty (60) days from the date of receipt
of the written notice of assessment, appeal to the Board of Assessment Appeals of the
provincial or city by filing a petition under oath in the form prescribed for the purpose, together
with copies of the tax declarations and such affidavits or documents submitted in support of the
appeal.

Payment under protest and appeal to the Local Board of Assessment Appeals are "successive
administrative remedies to a taxpayer who questions the correctness of an assessment."160 The
Local Board Assessment Appeals shall not entertain an appeal "without the action of the local
assessor"161 on the protest.

If the taxpayer is still unsatisfied after appealing with the Local Board of Assessment Appeals,
the taxpayer may appeal with the Central Board of Assessment Appeals within 30 days from
receipt of the Local Board’s decision:

SECTION 229. Action by the Local Board of Assessment Appeals. - (a) The Board shall decide
the appeal within one hundred twenty (120) days from the date of receipt of such appeal. The
Board, after hearing, shall render its decision based on substantial evidence or such relevant
evidence on record as a reasonable mind might accept as adequate to support the conclusion.
(b) In the exercise ofits appellate jurisdiction, the Board shall have the power to summon
witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena
and subpoena duces tecum. The proceedings of the Board shall be conducted solely for the
purpose of ascertaining the facts without necessarily adhering to technical rules applicable in
judicial proceedings.

(c) The secretary of the Board shall furnish the owner of the property or the person having legal
interest therein and the provincial or city assessor with a copy of the decision of the Board. In
case the provincial or city assessor concurs in the revision or the assessment, it shall be his
duty to notify the owner of the property or the person having legal interest therein of such
factusing the form prescribed for the purpose. The owner of the property or the person having
legal interest therein or the assessor who is not satisfied with the decision of the Board, may,
within thirty (30) days after receipt of the decision of said Board, appeal to the Central Board of
Assessment Appeals, as herein provided. The decision of the Central Board shall be final and
executory. (Emphasis supplied)

On the other hand, an assessment is illegal if it was made without authority under the law.162 In
case of an illegal assessment, the taxpayer may directly resort to judicial action without paying
under protest the assessed tax and filing an appeal with the Local and Central Board of
Assessment Appeals.

In Ty v. Trampe,163 the Municipal Assessor of Pasig sent Alejandro B. Ty a notice of

assessment with respect to Ty’s real properties in Pasig. Without resorting to the administrative
remedies under the Local Government Code, Ty filed before the Regional Trial Court a petition,
praying that the trial court nullify the notice of assessment. In assessing the real property taxes
due, the Municipal Assessor used a schedule of market values solely prepared by him. This, Ty
argued, was void for being contrary to the Local Government Code requiring that the schedule
of market values be jointly prepared by the provincial, city, and municipal assessors of the
municipalities within the Metropolitan Manila Area.

This court ruled that the assessmentwas illegal for having been issued without authority of the
Municipal Assessor. Reconciling provisions of the Real Property Tax Code and the Local
Government Code, this court held that the schedule of market valuesmust be jointly prepared by
the provincial, city, and municipal assessors of the municipalities within the Metropolitan Manila
Area.

As to the issue of exhaustion of administrative remedies, this court held that Ty did not err in
directly resorting to judicial action. According to this court, payment under protest is required
only "where there is a question as to the reasonableness of the amount assessed."164 As to
appeals before the Local and Central Board of Assessment Appeals, they are "fruitful only
where questions of fact are involved."165

Ty raised the issue of the legality of the notice of assessment, an issue that did not go into the
reasonableness of the amount assessed. Neither did the issue involve a question of fact. Ty
raised a question of law and, therefore, need not resort to the administrative remedies provided
under the Local Government Code.

In the present case, the PEZA did not avail itself of any of the remedies against a notice of
assessment. A petition for declaratory relief is not the proper remedy once a notice of
assessment was already issued.

Instead of a petition for declaratory relief, the PEZA should have directly resorted to a judicial
action. The PEZA should have filed a complaint for injunction, the "appropriate ordinary civil
action"166 to enjoin the City from enforcing its demand and collecting the assessed taxes from
the PEZA. After all, a declaratory judgment as to the PEZA’s tax-exempt status is useless
unless the City isenjoined from enforcing its demand.
Injunction "is a judicial writ, process or proceeding whereby a party is ordered to do or refrain
from doing a certain act."167 "It may be the main action or merely a provisional remedy for and
as incident in the main action."168 The essential requisites of a writ of injunction are: "(1) there
must be a right in esseor the existence of a right to be protected; and (2) the act against which
the injunction is directed to constitute a violation of such right."169

We note, however, that the City confused the concepts of jurisdiction and venue in contending
that the Regional Trial Court of Pasay had no jurisdiction because the real properties involved in
this case are located in the City of Lapu-Lapu.

On the one hand, jurisdiction is "the power to hear and determine cases of the general class to
which the proceedings in question belong."170 Jurisdiction is a matter of substantive
law.171 Thus, an action may be filed only with the court or tribunal where the Constitution or a
statute says it can be brought.172 Objections to jurisdiction cannot be waived and may be
brought at any stage of the proceedings, even on appeal.173 When a case is filed with a court
which has no jurisdiction over the action, the court shall motu propriodismiss the case. 174

On the other hand, venue is "the place of trial or geographical location in which an action or
proceeding should be brought." 175 In civil cases, venue is a matter of procedural law.176 A
party’s objections to venue must be brought at the earliest opportunity either in a motion to
dismiss or in the answer; otherwise the objection shall be deemed waived.177 When the venue of
a civil action is improperly laid, the court cannot motu propriodismiss the case.178

The venue of an action depends on whether the action is a real or personal action. Should the
action affect title to or possession of real property, or interest therein, it is a real action. The
action should be filed in the proper court which has jurisdiction over the area wherein the real
property involved, or a portion thereof, is situated.179 If the action is a personal action, the action
shall be filed with the proper court where the plaintiff or any of the principal plaintiffs resides, or
where the defendant or any of the principal defendants resides, or in the case of a non-resident
defendant where he may be found, at the election of the plaintiff.180

The City was objecting to the venue of the action, not to the jurisdiction of the Regional Trial
Court of Pasay. In essence, the City was contending that the PEZA’s petition is a real action as
it affects title to or possession of real property, and, therefore, the PEZA should have filed the
petition with the Regional Trial Court of Lapu-Lapu City where the real properties are located.
However, whatever objections the City has against the venue of the PEZA’s action for
declaratory relief are already deemed waived. Objections to venue must be raised at the earliest
possible opportunity.181 The City did not file a motion to dismiss the petition on the ground that
the venue was improperly laid. Neither did the City raise this objection in its answer.

In any event, the law sought to be judicially interpreted in this case had already been breached.
The Regional Trial Court of Pasay, therefore, had no jurisdiction over the PEZA’s petition for
declaratory relief against the City.

III.

The Court of Appeals had no jurisdiction

over the PEZA’s petition for certiorari
against the Province of Bataan
Appeal is the remedy "to obtain a reversal or modification of a judgment on the merits." 182 A
judgment on the merits is one which "determines the rights and liabilities of the parties based on
the disclosed facts, irrespective of the formal, technical or dilatory objections."183 It is not even
necessary that the case proceeded to trial.184 So long as the "judgment is general"185 and "the
parties had a full legal opportunity to be heard on their respective claims and
contentions,"186 the judgment is on the merits.

On the other hand, certiorari is a special civil action filed to annul or modify a proceeding of a
tribunal, board, or officer exercising judicial or quasi-judicial functions.187 Certiorari, which in
Latin means "to be more fully informed,"188was originally a remedy in the common law. This
court discussed the history of the remedy of certiorari in Spouses Delos Santos v. Metropolitan
Bank and Trust Company:189

In the common law, from which the remedy of certiorari evolved, the writ of certiorari was issued
out of Chancery, or the King’s Bench, commanding agents or officers of the inferior courts to
return the record of a cause pending before them, so as to give the party more sure and speedy
justice, for the writ would enable the superior court to determine froman inspection of the record
whether the inferior court’s judgment was rendered without authority. The errors were of such a
nature that, if allowed to stand, they would result in a substantial injury to the petitioner to whom
no other remedy was available. If the inferior court acted without authority, the record was then
revised and corrected in matters of law. The writ of certiorari was limited to cases in which the
inferior court was said to be exceeding its jurisdiction or was not proceeding according to
essential requirements of law and would lie only to review judicial or quasi-judicial acts.190

In our jurisdiction, the term "certiorari" is used in two ways. An appeal before this court raising
pure questions of law is commenced by filing a petition for reviewon certiorari under Rule 45 of
the Rules of Court. An appeal by certiorari, which continues the proceedings commenced before
the lower courts,191 is filed to reverse or modify judgments or final orders.192 Under the Rules, an
appeal by certiorarimust be filed within 15 days from notice of the judgment or final order, or of
the denial of the appellant’s motion for new trial or reconsideration.193

A petition for certiorari under Rule 65, on the other hand, is an independent and original action
filed to set aside proceedings conducted without or in excess of jurisdiction or with grave abuse
of discretion amounting to lack or excess of jurisdiction.194 Under the Rules, a petition for
certiorari may only be filed if there is no appeal or any plain, speedy, or adequate remedy in the
ordinary course of law.195 The petition must be filed within 60 days from notice of the judgment,
order, or resolution.196

Because of the longer period to file a petition for certiorari, some litigants attempt to file petitions
for certiorari as substitutes for lost appeals by certiorari. However, Rule 65 is clear that a petition
for certiorari will not prosper if appeal is available. Appealis the proper remedy even if the error,
or one of the errors, raised is grave abuse of discretion on the part of the court rendering
judgment.197 If appeal is available, a petition for certiorari cannot be filed.

In this case, the trial court’s decision dated January 31, 2007 is a judgment on the merits. Based
on the facts disclosed by the parties, the trial court declared the PEZA liable to the Province of
Bataan for real property taxes. The PEZA’s proper remedy against the trial court’s decision,
therefore, is appeal.
Since the PEZA filed a petition for certiorari against the trial court’s decision, it availed itself of
the wrong remedy. As the Province of Bataan contended, the trial court’s decision dated
January 31, 2007 "is only an error of judgment appealable to the higher level court and may not
be corrected by filing a petition for certiorari."198 That the trial court judge allegedly committed
grave abuse of discretion does not make the petition for certiorari the correct remedy. The
PEZA should haveraised this ground in an appeal filed within 15 days from notice of the
assailed resolution.

This court, "in the liberal spirit pervading the Rules of Court and in the interest of substantial
justice,"199 has treated petitions for certiorari as an appeal: "(1) if the petition for certiorari was
filed within the reglementary period within which to file a petition for review on certiorari; (2)
when errors of judgment are averred; and (3) when there is sufficient reason to justify the
relaxation of the rules."200 Considering that "the nature of an action is determined by the
allegationsof the complaint or the petition and the character of the relief sought,"201 a petition
which "actually avers errors of judgment rather than errors than that of jurisdiction" 202 may be
considered a petition for review.

However, suspending the application of the Rules has its disadvantages. Relaxing procedural
rules may reduce the "effective enforcement of substantive rights,"203 leading to "arbitrariness,
caprice, despotism, or whimsicality in the settlement of disputes."204 Therefore, for this court to
suspend the application of the Rules, the accomplishment of substantial justice must outweigh
the importance of predictability of court procedures.

The PEZA’s petition for certiorari may be treated as an appeal. First, the petition for certiorari
was filed withinthe 15-day reglementary period for filing an appeal. The PEZA filed its petition
for certiorari before the Court of Appeals on October 15, 2007,205 which was 12 days from
October 3, 2007206 when the PEZA had notice of the trial court’s order denying the motion for
reconsideration.

Second, the petition for certiorari raised errors of judgment. The PEZA argued that the trial court
erred in ruling that it is not exempt from payment of real property taxes given Section 21 of
Presidential Decree No. 66 and Sections 11 and 51 of the Special Economic Zone Act of
1995.207

Third, there is sufficient reason to relax the rules given the importance of the substantive issue
presented in this case.

However, the PEZA’s petition for certiorari was filed before the wrong court. The PEZA should
have filed its petition before the Court of Tax Appeals.

The Court of Tax Appeals has the exclusive appellate jurisdiction over local tax cases decided
by Regional Trial Courts. Section 7, paragraph (a)(3) of Republic Act No. 1125, as amended by
Republic Act No. 9282, provides:

Sec. 7. Jurisdiction. – The [Court of Tax Appeals] shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

....
 3. Decisions, orders or resolutions of the Regional Trial Courts in local tax cases
originally decided or resolved by them in the exercise of their original or appellate
jurisdiction[.]

The local tax cases referred to in Section 7, paragraph (a)(3) of Republic Act No. 1125, as
amended, include cases involving real property taxes. Real property taxation is governed by
Book II of the Local Government Code on "Local Taxation and Fiscal Matters." Real property
taxes are collected by the Local Treasurer,208 not by the Bureau of Internal Revenue in charge
of collecting national internal revenue taxes, fees, and charges.209

Section 7, paragraph (a)(5) of Republic Act No. 1125, as amended by Republic Act No. 9282,
separately provides for the exclusive appellate jurisdiction of the Court of Tax Appeals over
decisions of the Central Board of Assessment Appeals involving the assessment or collection of
real property taxes:

Sec. 7. Jurisdiction. – The [Court of Tax Appeals] shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

....

5. Decisions of the Central Board of Assessment Appeals in the exercise of its appellate
jurisdiction over cases involving the assessment and taxation of real property originally decided
by the provincial or city board of assessment appeals[.]

This separate provision, nevertheless, does not bar the Court of Tax Appeals from taking
cognizance of trial court decisions involving the collection of real property tax cases. Sections
256210 and 266211 of the Local Government Code expressly allow localgovernment units to file
"in any court of competent jurisdiction" civil actions to collect basic real property taxes. Should
the trial court rule against them, local government units cannot be barred from appealing before
the Court of Tax Appeals – the "highly specialized body specifically created for the purpose of
reviewing tax cases."212

We have also ruled that the Court of Tax Appeals, not the Court of Appeals, has the exclusive
original jurisdiction over petitions for certiorari assailing interlocutory orders issued by Regional
Trial Courts in a local tax case. We explained in The City of Manila v. Hon. Grecia-
Cuerdo213 that while the Court of Tax Appeals has no express grant of power to issue writs of
certiorari under Republic Act No. 1125,214 as amended, the tax court’s judicial power as defined
in the Constitution215 includes the power to determine "whether or not there has been grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of the [Regional Trial
Court] in issuing an interlocutory order of jurisdiction in cases falling within the exclusive
appellate jurisdiction of the tax court."216 We further elaborated:

Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must
have the authority to issue, among others, a writ of certiorari. In transferring exclusive
jurisdiction over appealed tax cases to the CTA, it can reasonably be assumed that the law
intended to transfer also such power as is deemed necessary, if not indispensable, in aid of
such appellate jurisdiction. There is no perceivable reason why the transfer should only be
considered as partial, not total.
 ....

If this Court were to sustain petitioners' contention that jurisdiction over their certiorari petition
lies with the CA, this Court would be confirming the exercise by two judicial bodies, the CA and
the CTA, of jurisdiction over basically the same subject matter – precisely the split-jurisdiction
situation which is anathema to the orderly administration of justice.The Court cannot accept that
such was the legislative motive, especially considering that the law expressly confers on the
CTA, the tribunal with the specialized competence over tax and tariff matters, the role of judicial
review over local tax cases without mention of any other court that may exercise such power.
Thus, the Court agrees with the ruling of the CA that since appellate jurisdiction over private
respondents' complaint for tax refund is vested in the CTA, it follows that a petition for certiorari
seeking nullification of an interlocutory order issued in the said case should, likewise, be filed
with the same court. To rule otherwise would lead to an absurd situation where one court
decides an appeal in the main case while another court rules on an incident in the very same
case.

Stated differently, it would be somewhat incongruent with the pronounced judicial abhorrence to
split jurisdiction to conclude that the intention of the law is to divide the authority over a local tax
case filed with the RTC by giving to the CA or this Court jurisdiction to issue a writ of certiorari
against interlocutory orders of the RTC but giving to the CTA the jurisdiction over the appeal
from the decision of the trial court in the same case. It is more in consonance with logic and
legal soundness to conclude that the grant of appellate jurisdiction to the CTA over tax cases
filed in and decided by the RTC carries withit the power to issue a writ of certiorari when
necessary in aid of such appellate jurisdiction. The supervisory power or jurisdiction of the CTA
to issue a writ of certiorari in aid of its appellate jurisdiction should co-exist with, and be a
complement to, its appellate jurisdiction to review, by appeal, the final orders and decisionsof
the RTC, in order to have complete supervision over the acts of the latter.217 (Citations omitted)

In this case, the petition for injunction filed before the Regional Trial Court of Pasay was a local
tax case originally decided by the trial court in its original jurisdiction. Since the PEZA assailed a
judgment, not an interlocutory order, of the Regional Trial Court, the PEZA’s proper remedy was
an appeal to the Court of Tax Appeals.

Considering that the appellate jurisdiction of the Court of Tax Appeals is to the exclusion of all
other courts, the Court of Appeals had no jurisdiction to take cognizance of the PEZA’s petition.
The Court of Appeals acted without jurisdiction in rendering the decision in CA-G.R. SP No.
100984. Its decision in CA-G.R. SP No. 100984 is void.218

The filing of appeal in the wrong court does not toll the period to appeal. Consequently, the
decision of the Regional Trial Court, Branch 115, Pasay City, became final and executory after
the lapse of the 15th day from the PEZA’s receipt of the trial court’s decision.219 The denial of
the petition for injunction became final and executory.

IV.

The remedy of a taxpayer depends on the

stage in which the local government unit
is enforcing its authority to impose real
property taxes
The proper remedy of a taxpayer depends on the stage in which the local government unit is
enforcing its authority to collect real property taxes. For the guidance of the members of the
bench and the bar, we reiterate the taxpayer’s remedies against the erroneous or illegal
assessment of real property taxes.

Exhaustion of administrative remedies under the Local Government Code is necessary in cases
of erroneous assessments where the correctness of the amount assessed is assailed. The
taxpayer must first pay the tax then file a protest with the Local Treasurer within 30 days from
date of payment of tax.220 If protest is denied or upon the lapse of the 60-day period to decide
the protest, the taxpayer may appeal to the Local Board of Assessment Appeals within 60 days
from the denial of the protest or the lapse of the 60-day period to decide the protest.221 The
Local Board of Assessment Appeals has 120 days to decide the appeal.222

If the taxpayer is unsatisfied withthe Local Board’s decision, the taxpayer may appeal before the
Central Board of Assessment Appeals within 30 days from receipt of the Local Board’s
decision.223

The decision of the Central Board of Assessment Appeals is appealable before the Court of Tax
Appeals En Banc.224 The appeal before the Court of Tax Appeals shall be filed following the
procedure under Rule 43 of the Rules of Court.225

The Court of Tax Appeals’ decision may then be appealed before this court through a petition
for review on certiorari under Rule 45 of the Rules of Court raising pure questions of law.226

In case of an illegal assessment where the assessment was issued without authority,
exhaustion of administrative remedies is not necessary and the taxpayer may directly resort to
judicial action.227 The taxpayer shall file a complaint for injunction before the Regional Trial
Court228 to enjoin the local government unit from collecting real property taxes.

The party unsatisfied with the decision of the Regional Trial Court shall file an appeal, not a
petition for certiorari, before the Court of Tax Appeals, the complaint being a local tax case
decided by the Regional Trial Court.229 The appeal shall be filed within fifteen (15) days from
notice of the trial court’s decision.

The Court of Tax Appeals’ decision may then be appealed before this court through a petition
for review on certiorari under Rule 45 of the Rules of Court raising pure questions of law.230

In case the local government unit has issued a notice of delinquency, the taxpayer may file a
complaint for injunction to enjoin the impending sale of the real property at public auction. In
case the local government unit has already sold the property at public auction, the taxpayer
must first deposit with the court the amount for which the real property was sold, together with
interest of 2% per month from the date ofsale to the time of the institution of action. The
taxpayer may then file a complaint to assail the validity of the public auction.231 The decisions of
the Regional Trial Court in these cases shall be appealable before the Court of Tax
Appeals,232 and the latter’s decisions appealable before this court through a petition for review
on certiorari under Rule 45 of the Rules of Court.233

V.
 The PEZA is exempt from payment of
real property taxes

The jurisdictional errors in this case render these consolidated petitions moot. We do not review
void decisions rendered without jurisdiction.

However, the PEZA alleged that several local government units, including the City of Baguio
and the Province of Cavite, have issued their respective real property tax assessments against
the PEZA. Other local government units will likely follow suit, and either the PEZA or the local
government units taxing the PEZA may file their respective actions against each other.

In the interest of judicial economy234 and avoidance of conflicting decisions involving the same
issues,235 we resolve the substantive issue of whether the PEZA is exempt from payment of real
property taxes.

Real property taxes are annual taxes levied on real property such as lands, buildings,
machinery, and other improvements not otherwise specifically exempted under the Local
Government Code.236 Real property taxes are ad valorem, with the amount charged based on a
fixed proportion of the value of the property.237 Under the law, provinces, cities, and
municipalities within the Metropolitan Manila Area have the power to levy real property taxes
within their respective territories.238

The general rule is that real properties are subject to real property taxes. This is true especially
since the Local Government Code has withdrawn exemptions from real property taxes of all
persons, whether natural or juridical:

SEC. 234. Exemptions from Real Property Tax. – The following are exempted from payment of
real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration
or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, nonprofit or religious cemeteries and all lands, buildings, and improvements
actually, directly, and exclusively used for religious, charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by
local water districts and government-owned or – controlled corporations engaged in the
supply and distribution of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided under R.A. No.
6938; and

(e) Machinery and equipment usedfor pollution control and environmental protection.

Except as provided herein, any exemption from payment of real property taxes previously
granted to, or presently enjoyed by, all persons, whether natural or juridical, including
government-owned or -controlled corporations are hereby withdrawn upon the effectivity of this
Code. (Emphasis supplied)

The person liable for real property taxes is the "taxable person who had actual or beneficial use
and possession [of the real property for the taxable period,] whether or not [the person owned
the property for the period he or she is being taxed]."239

The exceptions to the rule are provided in the Local Government Code. Under Section 133(o),
local government units have no power to levy taxes of any kind on the national government, its
agencies and instrumentalities and local government units:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:

....

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.

Specifically on real property taxes, Section 234 enumerates the persons and real property
exempt from real property taxes:

SEC. 234. Exemptions from Real Property Tax. – The following are exempted from payment of
real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration
or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, nonprofitor religious cemeteries and all lands, buildings, and improvements
actually, directly, and exclusively used for religious, charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by
local water districts and government-owned or – controlled corporations engaged in the
supply and distribution of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided under R.A. No.
6938; and

(e) Machinery and equipment used for pollution control and environmental protection.

Except as provided herein, any exemption from payment of real property tax previously granted
to, or presently enjoyed by, all persons, whether natural or juridical, including all government-
owned or -controlled corporations are hereby withdrawn upon the effectivity of this Code.
(Emphasis supplied)
For persons granted tax exemptions or incentives before the effectivity of the Local Government
Code, Section 193 withdrew these tax exemption privileges. These persons consist of both
natural and juridical persons, including government-owned or controlled corporations:

SEC. 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in this code,
tax exemptions or incentives granted to or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non stock and non profit hospitals and
educational institutions, are hereby withdrawn upon effectivity of this Code.

As discussed, Section 234 withdrew all tax privileges with respect to real property taxes.
Nevertheless, local government units may grant tax exemptions under such terms and
conditions asthey may deem necessary:

SEC. 192. Authority to Grant Tax Exemption Privileges. – Local government units may, through
ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and
conditions as they may deem necessary.

In Mactan Cebu International Airport Authority v. Hon. Marcos,240 this court classified the
exemptions from real property taxes into ownership, character, and usage exemptions.
Ownership exemptions are exemptions based on the ownership of the real property. The
exemptions of real property owned by the Republic of the Philippines, provinces, cities,
municipalities, barangays, and registered cooperatives fall under this classification. 241 Character
exemptions are exemptions based on the character of the real property. Thus, no real property
taxes may be levied on charitable institutions, houses and temples of prayer like churches,
parsonages, or convents appurtenant thereto, mosques, and non profitor religious
cemeteries.242

Usage exemptions are exemptions based on the use of the real property. Thus, no real property
taxes may be levied on real property such as: (1) lands and buildings actually, directly, and
exclusively used for religious, charitable or educational purpose; (2) machineries and equipment
actually, directly and exclusively used by local water districts or by government-owned or
controlled corporations engaged in the supply and distribution of water and/or generation and
transmission of electric power; and (3) machinery and equipment used for pollution control and
environmental protection.243

Persons may likewise be exempt from payment of real properties if their charters, which were
enacted or reenacted after the effectivity of the Local Government Code, exempt them payment
of real property taxes.244

V.

(A) The PEZA is an instrumentality of the national government

An instrumentality is "any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter."245
Examples of instrumentalities of the national government are the Manila International Airport
Authority,246 the Philippine Fisheries Development Authority,247 the Government Service
Insurance System,248 and the Philippine Reclamation Authority.249 These entities are not
integrated within the department framework but are nevertheless vested with special functions
to carry out a declared policy of the national government.

Similarly, the PEZA is an instrumentality of the national government. It is not integrated within
the department framework but is an agency attached to the Department of Trade and
Industry.250 Book IV, Chapter 7, Section 38(3)(a) of the Administrative Code of 1987 defines
"attachment": SEC. 38. Definition of Administrative Relationship.– Unless otherwise expressly
stated in the Code or in other laws defining the special relationships of particular agencies,
administrative relationships shall be categorized and defined as follows:

....

(3) Attachment.– (a) This refers to the lateral relationship between the department or its
equivalent and the attached agency or corporation for purposes of policy and program
coordination. The coordination may be accomplished by having the department represented in
the governing board of the attached agency or corporation, either as chairman or as a member,
with or without voting rights, if this is permitted by the charter; having the attached corporation or
agency comply with a system of periodic reporting which shall reflect the progress of the
programs and projects; and having the department or its equivalent provide general policies
through its representative in the board, which shall serve as the framework for the internal
policies of the attached corporation or agency[.]

Attachment, which enjoys "a larger measure of independence"251 compared with other
administrative relationships such as supervision and control, is further explained in Beja, Sr. v.
Court of Appeals:252

An attached agency has a larger measure of independence from the Department to which it is
attached than one which is under departmental supervision and control or administrative
supervision. This is borne out by the "lateral relationship" between the Department and the
attached agency. The attachment is merely for "policy and program coordination." With respect
to administrative matters, the independence of an attached agency from Departmental control
and supervision is further reinforced by the fact that even an agency under a Department’s
administrative supervision is free from Departmental interference with respect to appointments
and other personnel actions "in accordance with the decentralization of personnel functions"
under the Administrative Code of 1987. Moreover, the Administrative Code explicitly provides
that Chapter 8 of Book IV on supervision and control shall not apply to chartered institutions
attached to a Department.253

With the PEZA as an attached agency to the Department of Trade and Industry, the 13-person
PEZA Board is chaired by the Department Secretary.254 Among the powers and functions of the
PEZA is its ability to coordinate with the Department of Trade and Industry for policy and
program formulation and implementation.255 In strategizing and prioritizing the development of
special economic zones, the PEZA coordinates with the Department of Trade and Industry.256

The PEZA also administers its own funds and operates autonomously, with the PEZA Board
formulating and approving the PEZA’s annual budget.257 Appointments and other personnel
actions in the PEZA are also free from departmental interference, with the PEZA Board having
the exclusive and final authority to promote, transfer, assign and reassign officers of the
PEZA.258

As an instrumentality of the national government, the PEZA is vested with special functions or
jurisdiction by law. Congress created the PEZA to operate, administer, manage and develop
special economic zones in the Philippines.259 Special economic zones are areas with highly
developed or which have the potential to be developed into agro-industrial, industrial
tourist/recreational, commercial, banking, investment and financial centers.260 By operating,
administering, managing, and developing special economic zones which attract investments
and promote use of domestic labor, the PEZA carries out the following policy of the
Government: SECTION 2. Declaration of Policy. — It is the declared policy of the government to
translate into practical realities the following State policies and mandates in the 1987
Constitution, namely:

(a) "The State recognizes the indispensable role of the private sector, encourages
private enterprise, and provides incentives to needed investments." (Sec. 20, Art. II)

(b) "The State shall promote the preferential use of Filipino labor, domestic materials and
locally produced goods, and adopt measures that help make them competitive." (Sec.
12, Art. XII) In pursuance of these policies, the government shall actively encourage,
promote, induce and accelerate a sound and balanced industrial, economic and social
development of the country in order to provide jobs to the people especially those in the
rural areas, increase their productivity and their individual and family income, and
thereby improve the level and quality of their living condition through the establishment,
among others, of special economic zones in suitable and strategic locations in the
country and through measures that shall effectively attract legitimate and productive
foreign investments.261

Being an instrumentality of the national government, the PEZA cannot be taxed by local
government units.

Although a body corporate vested with some corporate powers,262 the PEZA is not a
government-owned or controlled corporation taxable for real property taxes.

Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines the term
"government-owned or controlled corporation":

SEC. 2. General Terms Defined. – Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:

....

(13) Government-owned or controlled corporation refers to any agency organized as a stock or

non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to the extent of at least
fifty-one (51) per cent of its capital stock: Provided, That government owned or controlled
corporations may be further categorized by the Department of the Budget, the Civil Service
Commission, and the Commission on Audit for purposes of the exercise and discharge of their
respective powers, functions and responsibilities with respect to such corporations.
Government entities are created by law, specifically, by the Constitution or by statute. In the
case of government-owned or controlled corporations, they are incorporated by virtue of special
charters263 to participate in the market for special reasons which may be related to dysfunctions
or inefficiencies of the market structure. This is to adjust reality as against the concept of full
competition where all market players are price takers. Thus, under the Constitution,
government-owned or controlled corporations are created in the interest of the common good
and should satisfy the test of economic viability.264 Article XII, Section 16 of the Constitution
provides:

Section 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the common
good and subject to the test of economic viability.

Economic viability is "the capacity to function efficiently in business."265 To be economically

viable, the entity "should not go into activities which the private sector can do better."266

To be considered a government-owned or controlled corporation, the entity must have been

organized as a stock or non-stock corporation.267

Government instrumentalities, on the other hand, are also created by law but partake of
sovereign functions. When a government entity performs sovereign functions, it need not meet
the test of economic viability. In Manila International Airport Authority v. Court of Appeals, 268 this
court explained:

In contrast, government instrumentalities vested with corporate powers and performing

governmental orpublic functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every
modern State must provide its citizens. These instrumentalities need not be economically viable
since the government may even subsidize their entire operations. These instrumentalities are
not the "government-owned or controlled corporations" referred to in Section 16, Article XII of
the 1987 Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or
public services. However, when the legislature creates through special charters corporations
that perform economic or commercial activities, such entities — known as "government-owned
or controlled corporations" — must meetthe test of economic viability because they compete in
the market place.

....

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the test
of economic performance. We know what happened in the past. If a government corporation
loses, then it makes its claim upon the taxpayers' money through new equity infusions from the
government and what is always invoked is the common good. That is the reason why this year,
out of a budget of ₱115 billion for the entire government, about ₱28 billion of this will go into
equity infusions to support a few government financial institutions. And this is all taxpayers'
money which could have been relocated to agrarian reform, to social services like health and
education, to augment the salaries of grossly underpaid public employees. And yet this is all
going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common
good," this becomes a restraint on future enthusiasts for state capitalism to excuse themselves
from the responsibility of meeting the market test so that they become viable. And so, Madam
President, I reiterate, for the committee's consideration and I am glad that I am joined in this
proposal by Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY OR
THE ECONOMIC TEST," together with the common good.

....

Clearly, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. The State is obligated to render
essential public services regardless of the economic viability of providing such service. The
noneconomic viability of rendering such essential public service does not excuse the State from
withholding such essential services from the public.269 (Emphases and citations omitted)

The law created the PEZA’s charter. Under the Special Economic Zone Act of 1995, the PEZA
was established primarily to perform the governmental function of operating,administering,
managing, and developing special economic zones to attract investments and provide
opportunities for preferential use of Filipino labor.

Under its charter, the PEZA was created a body corporate endowed with some corporate
powers. However, it was not organized as a stock270 or non-stock271 corporation. Nothing in the
PEZA’s charter provides that the PEZA’s capital is divided into shares.272 The PEZA also has no
members who shall share in the PEZA’s profits.

The PEZA does not compete with other economic zone authorities in the country. The
government may even subsidize the PEZA’s operations. Under Section 47 of the Special
Economic Zone Act of 1995, "any sum necessary to augment [the PEZA’s] capital outlay shall
be included in the General Appropriations Act to be treated as an equity of the national
government."273

The PEZA, therefore, need not be economically viable. It is not a government-owned or

controlled corporation liable for real property taxes.

V. (B)

The PEZA assumed the non-profit character, including the tax exempt status, of the EPZA

The PEZA’s predecessor, the EPZA, was declared non-profit in character with all its revenues
devoted for its development, improvement, and maintenance. Consistent with this non-profit
character, the EPZA was explicitly declared exempt from real property taxes under its charter.
Section 21 of Presidential Decree No. 66 provides:
Section 21. Non-profit Character of the Authority; Exemption from Taxes. The Authority shall be
non-profit and shall devote and use all its returns from its capital investment, as well as excess
revenues from its operations, for the development, improvement and maintenance and other
related expenditures of the Authority to pay its indebtedness and obligations and in furtherance
and effective implementation of the policy enunciated in Section 1 of this Decree. In consonance
therewith, the Authority is hereby declared exempt:

....

(b) From all income taxes, franchise taxes, realty taxes and all other kinds of taxes and licenses
to be paid to the National Government, its provinces, cities, municipalities and other government
agencies and instrumentalities[.]

The Special Economic Zone Act of 1995, on the other hand, does not specifically exempt the
PEZA from payment of real property taxes.

Nevertheless, we rule that the PEZA is exempt from real property taxes by virtue of its charter.
A provision in the Special Economic Zone Act of 1995 explicitly exempting the PEZA is
unnecessary. The PEZA assumed the real property exemption of the EPZA under Presidential
Decree No. 66.

Section 11 of the Special Economic Zone Act of 1995 mandated the EPZA "to evolve into the
PEZA in accordance with the guidelines and regulations set forth in an executive order issued
for this purpose." President Ramos then issued Executive Order No. 282 in 1995, ordering the
PEZA to assume the EPZA’s powers, functions, and responsibilities under Presidential Decree
No. 66 not inconsistent with the Special Economic Zone Act of 1995:

SECTION 1. Assumption of EPZA’s Powers and Functions by PEZA. All the powers, functions
and responsibilities of EPZA as provided under its Charter, Presidential Decree No. 66, as
amended, insofar as they are not inconsistent with the powers,functions and responsibilities of
the PEZA, as mandated under Republic Act No. 7916, shall hereafter be assumed and
exercised by the PEZA. Henceforth, the EPZA shall be referred to as the PEZA.

The following sections of the Special Economic Zone Act of 1995 provide for the PEZA’s
powers,functions, and responsibilities:

SEC. 5. Establishment of ECOZONES. – To ensure the viability and geographical dispersal of

ECOZONES through a system of prioritization, the following areas are initially identified as
ECOZONES, subject to the criteria specified in Section 6:

....

The metes and bounds of each ECOZONE are to be delineated and more particularly described
in a proclamation to be issued by the President of the Philippines, upon the recommendation of
the Philippine Economic Zone Authority (PEZA), which shall be established under this Act, in
coordination with the municipal and / or city council, National Land Use Coordinating Committee
and / or the Regional Land Use Committee.

SEC. 6. Criteria for the Establishment of Other ECOZONES. – In addition to the ECOZONES
identified in Section 5 of this Act, other areas may be established as ECOZONES in a
proclamation to be issued by the President of the Philippines subject to the evaluation and
recommendation of the PEZA, based on a detailed feasibility and engineering study which must
conform to the following criteria:

(a) The proposed area must be identified as a regional growth center in the Medium-
Term Philippine Development Plan or by the Regional Development Council;

(b) The existence of required infrastructure in the proposed ECOZONE, such as roads,
railways, telephones, ports, airports, etc., and the suitability and capacity of the
proposed site to absorb such improvements;

(c) The availability of water source and electric power supply for use of the ECOZONE;

(d) The extent of vacant lands available for industrial and commercial development and
future expansion of the ECOZONE as well as of lands adjacent to the ECOZONE
available for development of residential areas for the ECOZONE workers;

(e) The availability of skilled, semi-skilled and non-skilled trainable labor force in and
around the ECOZONE;

(f) The area must have a significant incremental advantage over the existing economic
zones and its potential profitability can be established;

(g) The area must be strategically located; and

(h) The area must be situated where controls can easily be established to curtail
smuggling activities.

Other areas which do not meet the foregoing criteria may be established as ECOZONES:
Provided, That the said area shall be developed only through local government and/or private
sector initiative under any of the schemes allowed in Republic Act No. 6957 (the build-operate-
transfer law), and without any financial exposure on the part of the national government:
Provided, further, That the area can be easily secured to curtail smuggling activities: Provided,
finally, That after five (5) years the area must have attained a substantial degree of
development, the indicators of which shall be formulated by the PEZA.

SEC. 7. ECOZONE to be a Decentralized Agro-Industrial, Industrial, Commercial / Trading,

Tourist, Investment and Financial Community. - Within the framework of the Constitution, the
interest of national sovereignty and territorial integrity of the Republic, ECOZONE shall be
developed, as much as possible, into a decentralized, self-reliant and self-sustaining industrial,
commercial/trading, agro-industrial, tourist, banking, financial and investment center with
minimum government intervention. Each ECOZONE shall be provided with transportation,
telecommunications, and other facilities needed to generate linkage with industries and
employment opportunitiesfor its own inhabitants and those of nearby towns and cities.

The ECOZONE shall administer itself on economic, financial, industrial, tourism development
and such other matters within the exclusive competence of the national government.
The ECOZONE may establish mutually beneficial economic relations with other entities within
the country, or, subject to the administrative guidance of the Department of Foreign Affairs
and/or the Department of Trade and Industry, with foreign entities or enterprises.

Foreign citizens and companies owned by non-Filipinos in whatever proportion may set up
enterprises in the ECOZONE, either by themselves or in joint venture with Filipinos in any sector
of industry, international trade and commerce within the ECOZONE. Their assets, profits and
other legitimate interests shall be protected: Provided, That the ECOZONE through the PEZA
may require a minimum investment for any ECOZONE enterprises in freely convertible
currencies: Provided, further, That the new investment shall fall under the priorities, thrusts and
limits provided for in the Act.

SEC. 8. ECOZONE to be Operated and Managed as Separate Customs Territory. – The

ECOZONE shall be managed and operated by the PEZA as separate customs territory.

The PEZA is hereby vested with the authority to issue certificate of origin for products
manufactured or processed in each ECOZONE in accordance with the prevailing rules or origin,
and the pertinent regulations of the Department of Trade and Industry and/or the Department of
Finance.

SEC. 9. Defense and Security. – The defense of the ECOZONE and the security of its perimeter
fence shall be the responsibility of the national government in coordination with the PEZA.
Military forces sent by the national government for the purpose of defense shall not interfere in
the internal affairs of any of the ECOZONE and expenditure for these military forces shall be
borne by the national government. The PEZA may provide and establish the ECOZONES’
internal security and firefighting forces.

SEC. 10. Immigration. – Any investor within the ECOZONE whose initial investment shall not be
less than One Hundred Fifty Thousand Dollars ($150,000.00), his/her spouse and dependent
children under twenty-one (21) years of age shall be granted permanent resident status within
the ECOZONE. They shall have freedom of ingress and egress to and from the ECOZONE
without any need of special authorization from the Bureau of Immigration.

The PEZA shall issue working visas renewable every two (2) years to foreign executives and
other aliens, processing highly-technical skills which no Filipino within the ECOZONE
possesses, as certified by the Department of Labor and Employment. The names of aliens
granted permanent resident status and working visas by the PEZA shall be reported to the
Bureau of Immigration within thirty (30) days after issuance thereof.

SEC. 13. General Powers and Functions of the Authority. – The PEZA shall have the following
powers and functions:

(a) To operate, administer, manage and develop the ECOZONE according to the
principles and provisions set forth in this Act;

(b) To register, regulate and supervise the enterprises in the ECOZONE in an efficient
and decentralized manner;
 (c) To coordinate with local government units and exercise general supervision over the
development, plans, activities and operations of the ECOZONES, industrial estates,
export processing zones, free trade zones, and the like;

(d) In coordination with local government units concerned and appropriate agencies, to
construct,acquire, own, lease, operate and maintain on its own or through contract,
franchise, license, bulk purchase from the private sector and build-operate-transfer
scheme or joint venture, adequate facilities and infrastructure, such as light and power
systems, water supply and distribution systems, telecommunication and transportation,
buildings, structures, warehouses, roads, bridges, ports and other facilities for the
operation and development of the ECOZONE;

(e) To create, operate and/or contractto operate such agencies and functional units or
offices of the authority as it may deem necessary;

(f) To adopt, alter and use a corporate seal; make contracts, lease, own or otherwise
dispose of personal or real property; sue and be sued; and otherwise carry out its duties
and functions as provided for in this Act;

(g) To coordinate the formulation and preparation of the development plans of the
different entities mentioned above;

(h) To coordinate with the National Economic Development Authority (NEDA), the
Department of Trade and Industry (DTI), the Department of Science and Technology
(DOST), and the local government units and appropriate government agencies for policy
and program formulation and implementation; and

(i) To monitor and evaluate the development and requirements of entities in subsection
(a) and recommend to the local government units or other appropriate authorities the
location, incentives, basic services, utilities and infrastructure required or to be made
available for said entities.

SEC. 17. Investigation and Inquiries. – Upon a written formal complaint made under oath, which
on its face provides reasonable basis to believe that some anomaly or irregularity might have
been committed, the PEZA or the administrator of the ECOZONE concerned, shall have the
power to inquire into the conduct of firms or employees of the ECOZONE and to conduct
investigations, and for that purpose may subpoena witnesses, administer oaths, and compel the
production of books, papers, and other evidences: Provided, That to arrive at the truth, the
investigator(s) may grant immunity from prosecution to any person whose testimony or whose
possessions of documents or other evidence is necessary or convenient to determine the truth
in any investigation conducted by him or under the authority of the PEZA or the administrator of
the ECOZONE concerned.

SEC. 21. Development Strategy of the ECOZONE. - The strategy and priority of development of
each ECOZONE established pursuant to this Act shall be formulated by the PEZA, in
coordination with the Department of Trade and Industry and the National Economic and
Development Authority; Provided, That such development strategy is consistent with the
priorities of the national government as outlined in the medium-term Philippine development
plan. It shall be the policy of the government and the PEZA to encourage and provide Incentives
and facilitate private sector participation in the construction and operation of public utilities and
infrastructure in the ECOZONE, using any of the schemes allowed in Republic Act No. 6957
(the build-operate-transfer law).

SEC. 22. Survey of Resources. The PEZA shall, in coordination with appropriate authorities and
neighboring cities and municipalities, immediately conduct a survey of the physical, natural
assets and potentialities of the ECOZONE areas under its jurisdiction.

SEC. 26. Domestic Sales. – Goods manufactured by an ECOZONE enterprise shall be made
available for immediate retail sales in the domestic market, subject to payment of corresponding
taxes on the raw materials and other regulations that may be adopted by the Board of the
PEZA. However, in order to protect the domestic industry, there shall be a negative list of
Industries that willbe drawn up by the PEZA. Enterprises engaged in the industries included in
the negative list shall not be allowed to sell their products locally. Said negative list shall be
regularly updated by the PEZA.

The PEZA, in coordination with the Department of Trade and Industry and the Bureau of
Customs, shall jointly issue the necessary implementing rules and guidelines for the effective
Implementation of this section.

SEC. 29. Eminent Domain. – The areas comprising an ECOZONE may be expanded or
reduced when necessary. For this purpose, the government shall have the power to acquire,
either by purchase, negotiation or condemnation proceedings, any private lands within or
adjacent to the ECOZONE for:

a. Consolidation of lands for zone development purposes;

b. Acquisition of right of way to the ECOZONE; and

c. The protection of watershed areas and natural assets valuable to the prosperity of the
ECOZONE.

If in the establishment of a publicly-owned ECOZONE, any person or group of persons who has
been occupying a parcel of land within the Zone has to be evicted, the PEZA shall provide the
person or group of persons concerned with proper disturbance compensation: Provided,
however, That in the case of displaced agrarian reform beneficiaries, they shall be entitled to the
benefits under the Comprehensive Agrarian Reform Law, including but not limited to Section 36
of Republic Act No. 3844, in addition to a homelot in the relocation site and preferential
employment in the project being undertaken.

SEC. 32. Shipping and Shipping Register. – Private shipping and related business including
private container terminals may operate freely in the ECOZONE, subject only to such minimum
reasonable regulations of local application which the PEZA may prescribe.

The PEZA shall, in coordination with the Department of Transportation and Communications,
maintain a shipping register for each ECOZONE as a business register of convenience for
ocean-going vessels and issue related certification.

Ships of all sizes, descriptions and nationalities shall enjoy access to the ports of the
ECOZONE, subject only to such reasonable requirement as may be prescribed by the PEZA In
coordination with the appropriate agencies of the national government.
SEC. 33. Protection of Environment. - The PEZA, in coordination with the appropriate agencies,
shall take concrete and appropriate steps and enact the proper measure for the protection of the
local environment.

SEC. 34. Termination of Business. - Investors In the ECOZONE who desire to terminate
business or operations shall comply with such requirements and procedures which the PEZA
shall set, particularly those relating to the clearing of debts. The assets of the closed enterprise
can be transferred and the funds con be remitted out of the ECOZONE subject to the rules,
guidelines and procedures prescribed jointly by the Bangko Sentral ng Pilipinas, the Department
of Finance and the PEZA.

SEC. 35. Registration of Business Enterprises. - Business enterprises within a designated

ECOZONE shall register with the PEZA to avail of all incentives and benefits provided for in this
Act.

SEC. 36. One Stop Shop Center. - The PEZA shall establish a one stop shop center for the
purpose of facilitating the registration of new enterprises in the ECOZONE. Thus, all appropriate
government agencies that are Involved In registering, licensing or issuing permits to investors
shall assign their representatives to the ECOZONE to attend to Investor’s requirements.

SEC. 39. Master Employment Contracts. - The PEZA, in coordination with the Department of
Tabor and Employment, shall prescribe a master employment contract for all ECOZONE
enterprise staff members and workers, the terms of which provide salaries and benefits not less
than those provided under this Act, the Philippine Labor Code, as amended, and other relevant
issuances of the national government.

SEC. 41. Migrant Worker. - The PEZA, in coordination with the Department of Labor and
Employment, shall promulgate appropriate measures and programs leading to the expansion of
the services of the ECOZONE to help the local governments of nearby areas meet the needs of
the migrant workers.

SEC. 42. Incentive Scheme. - An additional deduction equivalent to one- half (1/2) of the value
of training expenses incurred in developing skilled or unskilled labor or for managerial or other
management development programs incurred by enterprises in the ECOZONE can be deducted
from the national government's share of three percent (3%) as provided In Section 24.

The PEZA, the Department of Labor and Employment, and the Department of Finance shall
jointly make a review of the incentive scheme provided In this section every two (2) years or
when circumstances so warrant.

SEC. 43. Relationship with the Regional Development Council. - The PEZA shall determine the
development goals for the ECOZONE within the framework of national development plans,
policies and goals, and the administrator shall, upon approval by the PEZA Board, submit the
ECOZONE plans, programs and projects to the regional development council for inclusion in
and as inputs to the overall regional development plan.

SEC. 44. Relationship with the Local Government Units. - Except as herein provided, the local
government units comprising the ECOZONE shall retain their basic autonomy and identity. The
cities shall be governed by their respective charters and the municipalities shall operate and
function In accordance with Republic Act No. 7160, otherwise known as the Local Government
Code of 1991.

SEC. 45. Relationship of PEZA to Privately-Owned Industrial Estates. – Privately-owned

industrial estates shall retain their autonomy and independence and shall be monitored by the
PEZA for the implementation of incentives.

SEC. 46. Transfer of Resources. - The relevant functions of the Board of Investments over
industrial estates and agri-export processing estates shall be transferred to the PEZA. The
resources of government owned Industrial estates and similar bodies except the Bases
Conversion Development Authority and those areas identified under Republic Act No. 7227, are
hereby transferred to the PEZA as the holding agency. They are hereby detached from their
mother agencies and attached to the PEZA for policy, program and operational supervision.

The Boards of the affected government-owned industrial estates shall be phased out and only
the management level and an appropriate number of personnel shall be retained.

Government personnel whose services are not retained by the PEZA or any government office
within the ECOZONE shall be entitled to separation pay and such retirement and other benefits
theyare entitled to under the laws then in force at the time of their separation: Provided, That in
no case shall the separation pay be less than one and one-fourth (1 1/4) month of every year of
service.

The non-profit character of the EPZA under Presidential Decree No. 66 is not inconsistent with
any of the powers, functions, and responsibilities of the PEZA. The EPZA’s non-profit character,
including the EPZA’s exemption from real property taxes, must be deemed assumed by the
PEZA.

In addition, the Local Government Code exempting instrumentalities of the national government
from real property taxes was already in force274 when the PEZA’s charter was enacted in 1995.
It would have been redundant to provide for the PEZA’s exemption in its charter considering that
the PEZA is already exempt by virtue of Section 133(o) of the Local Government Code.

As for the EPZA, Commonwealth Act No. 470 or the Assessment Law was in force when the
EPZA’s charter was enacted. Unlike the Local Government Code, Commonwealth Act No. 470
does not contain a provision specifically exempting instrumentalities of the national government
from payment of real property taxes.275 It was necessary to put an exempting provision in the
EPZA’s charter.

Contrary to the PEZA’s claim, however, Section 24 of the Special Economic Zone Act of 1995 is
not a basis for the PEZA’s exemption. Section 24 of the Special Economic Zone Act of 1995
provides:

Sec. 24. Exemption from National and Local Taxes. — Except for real property taxes on land
owned by developers, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross
income earned by all business enterprises within the ECOZONEshall be paid and remitted as
follows:

(a) Three percent (3%) to the National Government;

 (b) Two percent (2%) which shall be directly remitted by the business establishments to
the treasurer's office of the municipality or city where the enterprise is located.
(Emphasis supplied)

Tax exemptions provided under Section 24 apply only to business establishments operating
within economic zones. Considering that the PEZA is not a business establishment but an
instrumentality performing governmental functions, Section 24 is inapplicable to the PEZA. Also,
contrary to the PEZA’s claim, developers ofeconomic zones, whether public or private
developers, are liable for real property taxes on lands they own. Section 24 does not distinguish
between a public and private developer. Thus, courts cannot distinguish.276 Unless the public
developer is exempt under the Local Government Code or under its charter enacted after the
Local Government Code’s effectivity, the public developer must pay real property taxes on their
land.

At any rate, the PEZA cannot be taxed for real property taxes even if it acts as a developer or
operator of special economic zones. The PEZA is an instrumentality of the national government
exempt from payment of real property taxes under Section 133(o) of the Local Government
Code. As this court said in Manila International Airport Authority, "there must be express
language in the law empowering local governments to tax national government
instrumentalities. Any doubt whether such power exists is resolved against local
governments."277

V. (C)

Real properties under the PEZA’s title are owned by the Republic of the Philippines

Under Section 234(a) of the LocalGovernment Code, real properties owned by the Republic of
the Philippines are exempt from real property taxes:

SEC. 234. Exemptions from Real Property Tax. – The following are exempted from payment of
real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person[.]

Properties owned by the state are either property of public dominion or patrimonial property.
Article 420 of the Civil Code of the Philippines enumerates property of public dominion:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without belonging for public use, and are intended
for some public service or for the development of the national wealth.
Properties of public dominion are outside the commerce of man. These properties are exempt
from "levy, encumbrance or disposition through public or private sale."278 As this court explained
in Manila International Airport Authority:

Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction sale
of any property of public dominion is void for being contrary to public policy. Essential public
services will stop if properties of public dominion are subject to encumbrances, foreclosures and
auction sale[.]279

On the other hand, all other properties of the state that are not intended for public use or are not
intended for some public service or for the development of the national wealth are patrimonial
properties. Article 421 of the Civil Code of the Philippines provides:

Art. 421. All other property of the State, which is not of the character stated in the preceding
article, is patrimonial property.

Patrimonial properties are also properties of the state, but the state may dispose of its
patrimonial property similar to private persons disposing of their property. Patrimonial properties
are within the commerce of man and are susceptible to prescription, unless otherwise
provided.280

In this case, the properties sought to be taxed are located in publicly owned economic zones.
These economic zones are property of public dominion. The City seeks to tax properties located
within the Mactan Economic Zone,281 the site of which was reserved by President Marcos under
Proclamation No. 1811, Series of 1979. Reserved lands are lands of the public domain set
aside for settlement or public use, and for specific public purposes by virtue of a presidential
proclamation.282 Reserved lands are inalienable and outside the commerce of man,283 and
remain property of the Republic until withdrawn from publicuse either by law or presidential
proclamation.284 Since no law or presidential proclamation has been issued withdrawing the site
of the Mactan Economic Zone from public use, the property remains reserved land.

As for the Bataan Economic Zone, the law consistently characterized the property as a port.
Under Republic Act No. 5490, Congress declared Mariveles, Bataan "a principal port of
entry"285 to serve as site of a foreign trade zone where foreign and domestic merchandise may
be brought in without being subject to customs and internal revenue laws and regulations of the
Philippines.286

Section 4 of Republic Act No. 5490 provided that the foreign trade zone in Mariveles, Bataan
"shall at all times remain to be owned by the Government":

SEC. 4. Powers and Duties.– The Foreign Trade Zone Authority shall have the following powers
and duties:

a. To fix and delimit the site of the Zone which at all times remain to be owned by the
Government, and which shall have a contiguous and adequate area with well defined and
policed boundaries, with adequate enclosures to segregate the Zone from the customs territory
for protection of revenues, together with suitable provisions for ingress and egress of persons,
conveyance, vessels and merchandise sufficient for the purpose of this Act[.] (Emphasis
supplied)
The port in Mariveles, Bataan then became the Bataan Economic Zone under the Special
Economic Zone Act of 1995.287 Republic Act No. 9728 then converted the Bataan Economic
Zone into the Freeport Area of Bataan.288

A port of entry, where imported goods are unloaded then introduced in the market for public
consumption, is considered property for public use. Thus, Article 420 of the Civil Code classifies
a port as property of public dominion. The Freeport Area of Bataan, where the government
allows tax and duty-free importation of goods,289 is considered property of public dominion. The
Freeport Area of Bataan is owned by the state and cannot be taxed under Section 234(a) of the
Local Government Code.

Properties of public dominion, even if titled in the name of an instrumentality as in this case,
remain owned by the Republic of the Philippines. If property registered in the name of an
instrumentality is conveyed to another person,the property is considered conveyed on behalf of
the Republic of the Philippines. Book I, Chapter 12, Section 48 of the Administrative Code of
1987 provides:

SEC. 48. Official Authorized to Convey Real Property. – Whenever real property of the
government is authorized by law to be conveyed, the deed of conveyance shall be executed in
behalf of the government by the following:

....

(2) For property belonging to the Republic of the Philippines, but titled in the name of any
political subdivision orof any corporate agency or instrumentality, by the executive head of the
agency or instrumentality. (Emphasis supplied)

In Manila International Airport Authority, this court explained:

[The exemption under Section 234(a) of the Local Government Code] should be read in relation
with Section 133(o) of the same Code, which prohibits local governments from imposing
"[t]axes, fess or charges of any kind on the National Government, its agencies and
instrumentalitiesx x x." The real properties owned by the Republic are titled either in the name of
the Republic itself or in the name of agencies or instrumentalities of the National
Government.The Administrative Code allows real property owned by the Republic to be titled in
the name of agencies or instrumentalities of the national government. Such real properties
remained owned by the Republic of the Philippines and continue to be exempt from real estate
tax.

The Republic may grant the beneficialuse of its real property to an agency or instrumentality of
the national government. This happens when title of the real property is transferred to an
agency or instrumentality even as the Republic remains the owner of the real property. Such
arrangement does not result in the loss of the tax exemption/ Section 234(a) of the Local
Government Code states that real property owned by the Republic loses its tax exemption only
if the "beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person." . . .290 (Emphasis in the original; italics supplied)

Even the PEZA’s lands and buildings whose beneficial use have been granted to other persons
may not be taxed with real property taxes. The PEZA may only lease its lands and buildings to
PEZA-registered economic zone enterprises and entities.291 These PEZA-registered enterprises
and entities, which operate within economic zones, are not subject to real property taxes. Under
Section 24 of the Special Economic Zone Act of 1995, no taxes, whether local or national, shall
be imposed on all business establishments operating within the economic zones: SEC. 24.
Exemption from National and Local Taxes. – Except for real property on land owned by
developers, no taxes, local and national, shall be imposed on business establishments
operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by
all business enterprises within the ECOZONE shall be paid and remitted as follows:

a. Three percent (3%) to the National Government;

b. Two percent (2%) which shall be directly remitted by the business establishments to the
treasurer’s office of the municipality or city where the enterprise is located.292 (Emphasis
supplied)

In lieu of revenues from real property taxes, the City of Lapu-Lapu collects two-fifths of 5% final
tax on gross income paid by all business establishments operating withinthe Mactan Economic
Zone:

SEC. 24. Exemption from National and Local Taxes. – Except for real property on land owned
by developers, no taxes, local and national, shall be imposed on business establishments
operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by
all business enterprises within the ECOZONE shall be paid and remitted as follows:

a. Three percent (3%) to the National Government;

b. Two percent (2%) which shall be directly remitted by the business establishments to
the treasurer’s office of the municipality or city where the enterprise is
located.293 (Emphasis supplied)

For its part, the Province of Bataan collects a fifth of the 5% final tax on gross income paid by all
business establishments operating within the Freeport Area of Bataan:

Section 6. Imposition of a Tax Rate of Five Percent (5%) on Gross Income Earned. - No taxes,
local and national, shall be imposed on business establishments operating withinthe FAB. In lieu
thereof, said business establishments shall pay a five percent (5%) final tax on their gross
income earned in the following percentages:

(a) One per centum (1%) to the National Government;

(b) One per centum (1%) to the Province of Bataan;

(c) One per centum (1%) to the treasurer's office of the Municipality of Mariveles; and

(d) Two per centum (2%) to the Authority of the Freeport of Area of
Bataan.294 (Emphasis supplied)

Petitioners, therefore, are not deprived of revenues from the operations of economic zones
within their respective territorial jurisdictions.
The national government ensured that loeal government units comprising economic zones shall
retain their basic autonomy and identity.295

All told, the PEZA is an instrumentality of the national government.1âwphi1 Furthermore, the
lands owned by the PEZA are real properties owned by the Republic of the Philippines. The City
of Lapu-Lapu and the Province of Bataan cannot collect real property taxes from the PEZA.

WHEREFORE, the consolidated petitions are DENIED.

SO ORDERED.
G.R. No. 215427 December 10, 2014

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his
capacity as Commissioner of the Bureau of Internal Revenue, and JOHN DOE and JANE
DOE, who are Promulgated: persons acting for, in behalf or under the authority of
respondent, Respondents.

DECISION

PERALTA, J.:

The present petition stems from the Motion for Clarification filed by petitioner Philippine
Amusement and Gaming Corporation (PAGCOR) on September 13, 2013 in the case entitled
Philippine Amusement and Gaming Corporation (PAGCOR) v. The Bureau of Internal Revenue,
et al.,1 which was promulgated on March 15, 2011. The Motion for Clarification essentially prays
for the clarification of our Decision in the aforesaid case, as well the issuance of a Temporary
Restraining Order and/or Writ of Preliminary Injunction against the Bureau of Internal Revenue
(BIR), their employees, agents and any other persons or entities acting or claiming any right on
BIR’s behalf, in the implementation of BIR Revenue Memorandum Circular (RMC) No. 33-2013
dated April 17, 2013.

At the onset, it bears stressing that while the instant motion was denominated as a "Motion for
Clarification," in the session of the Court En Bancheld on November 25, 2014, the members
thereof ruled to treat the same as a new petition for certiorari under Rule 65 of the Rules of
Court, given that petitioner essentially alleges grave abuse of discretion on the part of the BIR
amounting to lack or excess of jurisdiction in issuing RMC No. 33-2013. Consequently, a new
docket number has been assigned thereto, while petitioner has been ordered to pay the
appropriate docket fees pursuant to the Resolution dated November 25,2014, the pertinent
portion of which reads:

G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal
Revenue, et al.). – The Court Resolved to

(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining
Order and/or Preliminary Injunction Application dated September 6, 2013 filed by
PAGCOR;

(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for
Clarification, subject to payment of the appropriate docket fees; and

(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for
Clarification within five (5) days from notice hereof. Brion, J., no part and on leave.
Perlas-Bernabe, J., on official leave.

Considering that the parties havefiled their respective pleadings relative to the instant petition,
and the appropriate docket fees have been duly paid by petitioner, this Court considers the
instant petition submitted for resolution.
The facts are briefly summarized as follows:

On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari and
Prohibition (With Prayer for the Issuance of a Temporary Restraining Order and/or Preliminary
Injunction) seeking the declaration of nullity of Section 12 of Republic Act (R.A.)No.
93373 insofar as it amends Section 27(C)4 of R.A. No. 8424,5 otherwise known as the National
Internal Revenue Code (NIRC) by excluding petitioner from the enumeration of government-
owned or controlled corporations (GOCCs) exempted from liability for corporate income tax.

On March 15, 2011, this Court rendered a Decision6 granting in part the petition filed by
petitioner. Its fallo reads:

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337,
amending Section 27(c) of the National Internal Revenue Code of 1997, by excluding petitioner
Philippine Amusement and Gaming Corporation from the enumeration of government-owned
and controlled corporations exempted from corporate income tax is valid and constitutional,
while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null
and void for being contrary to the National Internal Revenue Code of 1997, as amended by
Republic Act No. 9337.

No costs.

SO ORDERED.7

Both petitioner and respondent filed their respective motions for partial reconsideration, but the
samewere denied by this Court in a Resolution8 dated May 31, 2011.

Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the Decision
dated March 15, 2011 and the Resolution dated May 31, 2011, which clarifies the "Income Tax
and Franchise Tax Due from the Philippine Amusement and Gaming Corporation (PAGCOR),
its Contractees and Licensees." Relevant portions thereof state:

II. INCOME TAX

Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as amended,

PAGCOR is no longer exempt from corporate income tax as it has been effectively omitted from
the list of government-owned or controlled corporations (GOCCs) that are exempt from income
tax. Accordingly, PAGCOR’s income from its operations and licensing of gambling casinos,
gaming clubs and other similar recreation or amusement places, gaming pools, and other
related operations, are subject to corporate income tax under the NIRC, as amended. This
includes, among others:

a) Income from its casino operations;

b) Income from dollar pit operations;

c) Income from regular bingo operations; and

 d) Income from mobile bingo operations operated by it, with agents on commission
basis. Provided, however, that the agents’ commission income shall be subject to
regular income tax, and consequently, to withholding tax under existing regulations.

Income from "other related operations" includes, butis not limited to:

a) Income from licensed private casinos covered by authorities to operate issued to

private operators;

b) Income from traditional bingo, electronic bingo and other bingo variations covered by
authorities to operate issued to private operators;

c) Income from private internet casino gaming, internet sports betting and private mobile
gaming operations;

d) Income from private poker operations;

e) Income from junket operations;

f) Income from SM demo units; and

g) Income from other necessary and related services, shows and entertainment.

PAGCOR’s other income that is not connected with the foregoing operations are likewise
subject to corporate income tax under the NIRC, as amended.

PAGCOR’s contractees and licensees are entities duly authorized and licensed by PAGCOR to
perform gambling casinos, gaming clubs and other similar recreation or amusement places, and
gaming pools. These contractees and licensees are subject to income tax under the NIRC, as
amended.

III. FRANCHISE TAX

Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to a franchise tax of five
percent (5%) of the gross revenue or earnings it derives from its operations and licensing of
gambling casinos, gaming clubs and other similar recreation or amusement places, gaming
pools, and other related operations as described above.

On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration of the
tax treatment of its income from gaming operations and other related operations under RMC No.
33-2013. The request was, however, denied by the BIR Commissioner.

On August 4, 2011, the Decision dated March 15, 2011 became final and executory and was,
accordingly, recorded in the Book of Entries of Judgment.10

Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an
erroneous interpretation and application of the aforesaid Decision, and seeking clarification with
respect to the following:
 1. Whether PAGCOR’s tax privilege of paying 5% franchise tax in lieu of all other taxes
with respect toits gaming income, pursuant to its Charter – P.D. 1869, as amended by
R.A. 9487, is deemed repealed or amended by Section 1 (c) of R.A. 9337.

2. If it is deemed repealed or amended, whether PAGCOR’s gaming income is subject to

both 5% franchise tax and income tax.

3. Whether PAGCOR’s income from operation of related services is subject to both

income tax and 5% franchise tax.

4. Whether PAGCOR’s tax privilege of paying 5% franchise tax inures to the benefit of
third parties with contractual relationship with PAGCOR in connection with the operation
of casinos.11

In our Decision dated March 15, 2011, we have already declared petitioner’s income tax liability
in view of the withdrawal of its tax privilege under R.A. No. 9337. However, we made no
distinction as to which income is subject to corporate income tax, considering that the issue
raised therein was only the constitutionality of Section 1 of R.A. No. 9337, which excluded
petitioner from the enumeration of GOCCs exempted from corporate income tax.

For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCOR’s income is
classified into two: (1) income from its operations conducted under its Franchise, pursuant to
Section 13(2) (b) thereof (income from gaming operations); and (2) income from its operation of
necessary and related services under Section 14(5) thereof (income from other related
services). In RMC No. 33-2013, respondent further classified the aforesaid income as follows:

1. PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs and
other similar recreation or amusement places, gaming pools, includes, among others:

(a) Income from its casino operations;

(b) Income from dollar pit operations;

(c) Income from regular bingo operations; and

(d) Income from mobile bingo operations operated by it, with agents on commission
basis. Provided, however, that the agents’ commission income shall be subject to
regular income tax, and consequently, to withholding tax under existing regulations.

2. Income from "other related operations"includes, but is not limited to:

(a) Income from licensed private casinos covered by authorities to operate issued to
private operators;

(b) Income from traditional bingo, electronic bingo and other bingo variations covered by
authorities to operate issued to private operators;

(c) Income from private internet casino gaming, internet sports betting and private mobile
gaming operations;
 (d) Income from private poker operations;

(e) Income from junket operations;

(f) Income from SM demo units; and

(g) Income from other necessary and related services, shows and entertainment.12

After a thorough study of the arguments and points raised by the parties, and in accordance
with our Decision dated March 15, 2011, we sustain petitioner’s contention that its income from
gaming operations is subject only to five percent (5%) franchise tax under P.D. 1869, as
amended, while its income from other related services is subject to corporate income tax
pursuant to P.D. 1869, as amended, as well as R.A. No. 9337. This is demonstrable.

First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its
operation of related services. Accordingly, the income tax exemption ordained under Section
27(c) of R.A. No. 8424 clearly pertains only to petitioner’sincome from operation of related
services. Such income tax exemption could not have been applicable to petitioner’s income
from gaming operations as it is already exempt therefrom under P.D. 1869, as amended, to wit:
SECTION 13. Exemptions. –

xxxx

(2) Income and other taxes. — (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges or levies of whatever nature, whether National or Local,
shall be assessed and collected under this Franchise from the Corporation; nor shall any form of
tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of
five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation
under this Franchise. Such tax shall be due and payable quarterly to the National Government
and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any municipal, provincial, or national government
authority.13

Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity
involved is subject to tax. This is the most sound and logical interpretation because petitioner
could not have been exempted from paying taxes which it was not liable to pay in the first place.
This is clear from the wordings of P.D. 1869, as amended, imposing a franchise tax of five
percent (5%) on its gross revenue or earnings derived by petitioner from its operation under the
Franchise in lieuof all taxes of any kind or form, as well as fees, charges or leviesof whatever
nature, which necessarily include corporate income tax.

In other words, there was no need for Congress to grant tax exemption to petitioner with respect
to its income from gaming operations as the same is already exempted from all taxes of any
kind or form, income or otherwise, whether national or local, under its Charter, save only for the
five percent (5%) franchise tax. The exemption attached to the income from gaming operations
exists independently from the enactment of R.A. No. 8424. To adopt an assumption otherwise
would be downright ridiculous, if not deleterious, since petitioner would be in a worse position if
the exemption was granted (then withdrawn) than when it was not granted at all in the first
place.
Moreover, as may be gathered from the legislative records of the Bicameral Conference
Meeting of the Committee on Ways and Means dated October 27, 1997, the exemption of
petitioner from the payment of corporate income tax was due to the acquiescence of the
Committee on Ways and Means to the request of petitioner that it be exempt from such tax.
Based on the foregoing, it would be absurd for petitioner to seek exemption from income tax on
its gaming operations when under its Charter, it is already exempted from paying the same.

Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable
construction is possible, the laws must be reconciled in that manner.14

As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The
former lays down the taxes imposable upon petitioner, as follows: (1) a five percent (5%)
franchise tax of the gross revenues or earnings derived from its operations conducted under the
Franchise, which shall be due and payable in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by any
municipal, provincial or national government authority;15 (2) income tax for income realized from
other necessary and related services, shows and entertainment of petitioner.16 With the
enactment of R.A. No. 9337, which withdrew the income tax exemption under R.A. No. 8424,
petitioner’s tax liability on income from other related services was merely reinstated.

It cannot be gain said, therefore, that the nature of taxes imposable is well defined for each kind
of activity oroperation. There is no inconsistency between the statutes; and in fact, they
complement each other.

Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly
provides the tax treatment of petitioner’s income prevails over R.A. No. 9337, which is a general
law. It is a canon of statutory construction that a special law prevails over a general law —
regardless of their dates of passage — and the special is to be considered as remaining an
exception to the general.17 The rationale is:

Why a special law prevails over a general law has been put by the Court as follows: x x x x

x x x The Legislature consider and make provision for all the circumstances of the particular
case. The Legislature having specially considered all of the facts and circumstances in the
particular case in granting a special charter, it will not be considered that the Legislature, by
adopting a general law containing provisions repugnant to the provisions of the charter, and
without making any mention of its intention to amend or modify the charter, intended to amend,
repeal, or modify the special act. (Lewis vs. Cook County, 74 I11. App., 151; Philippine Railway
Co. vs. Nolting 34 Phil., 401.)18

Where a general law is enacted to regulate an industry, it is common for individual franchises
subsequently granted to restate the rights and privileges already mentioned in the general law,
or to amend the later law, as may be needed, to conform to the general law.19 However, if no
provision or amendment is stated in the franchise to effect the provisions of the general law, it
cannot be said that the same is the intent of the lawmakers, for repeal of laws by implication is
not favored.20

In this regard, we agree with petitioner that if the lawmakers had intended to withdraw
petitioner’s tax exemption of its gaming income, then Section 13(2)(a) of P.D. 1869 should have
been amended expressly in R.A. No. 9487, or the same, at the very least, should have been
mentioned in the repealing clause of R.A. No. 9337.21 However, the repealing clause never
mentioned petitioner’s Charter as one of the laws being repealed. On the other hand, the repeal
of other special laws, namely, Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph
of R.A. No. 9136, is categorically provided under Section 24 (a) (b) of R.A. No. 9337, to wit:

SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and
the persons and/or transactions affected herein are made subject to the value-added tax subject
to the provisions of Title IV of the National Internal Revenue Code of 1997, as amended:

(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National
Power Corporation (NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the
sales of generated power by generation companies; and

(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations
or parts thereof which are contrary to and inconsistent with any provisions of this Act are
hereby repealed, amended or modified accordingly.22

When petitioner’s franchise was extended on June 20, 2007 without revoking or withdrawing
itstax exemption, it effectively reinstated and reiterated all of petitioner’s rights, privileges and
authority granted under its Charter. Otherwise, Congress would have painstakingly enumerated
the rights and privileges that it wants to withdraw, given that a franchise is a legislative grant of
a special privilege to a person. Thus, the extension of petitioner’s franchise under the
sameterms and conditions means a continuation of its tax exempt status with respect to its
income from gaming operations. Moreover, all laws, rules and regulations, or parts thereof,
which are inconsistent with the provisions ofP.D. 1869, as amended, a special law, are
considered repealed, amended and modified, consistent with Section 2 of R.A. No. 9487, thus:

SECTION 2. Repealing Clause. – All laws, decrees, executive orders, proclamations, rules and
regulations and other issuances, or parts thereof, which are inconsistent with the provisions of
this Act, are hereby repealed, amended and modified.

It is settled that where a statute is susceptible of more than one interpretation, the court should
adopt such reasonable and beneficial construction which will render the provision thereof
operative and effective, as well as harmonious with each other.23

Given that petitioner’s Charter is notdeemed repealed or amended by R.A. No. 9337,
petitioner’s income derived from gaming operations is subject only to the five percent
(5%)franchise tax, in accordance with P.D. 1869, as amended. With respect to petitioner’s
income from operation of other related services, the same is subject to income tax only. The five
percent (5%) franchise tax finds no application with respect to petitioner’s income from other
related services, inview of the express provision of Section 14(5) of P.D. 1869, as amended, to
wit:

Section 14. Other Conditions.

xxxx
(5) Operation of related services. — The Corporation is authorized to operate such necessary
and related services, shows and entertainment. Any income that may be realized from these
related services shall not be included as part of the income of the Corporation for the purpose of
applying the franchise tax, but the same shall be considered as a separate income of the
Corporation and shall be subject to income tax.24

Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income
from other related services without basis therefor.

For proper guidance, the first classification of PAGCOR’s income under RMC No. 33-2013 (i.e.,
income from its operations and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places, gambling pools) should be interpreted in relation to Section
13(2) of P.D. 1869, which pertains to the income derived from issuing and/or granting the
license to operate casinos to PAGCOR’s contractees and licensees, as well as earnings derived
by PAGCOR from its own operations under the Franchise. On the other hand, the second
classification of PAGCOR’s income under RMC No. 33-2013 (i.e., income from other related
operations) should be interpreted in relation to Section 14(5) of P.D. 1869, which pertains to
income received by PAGCOR from its contractees and licensees in the latter’s operation of
casinos, as well as PAGCOR’s own income from operating necessary and related services,
shows and entertainment.

As to whether petitioner’s tax privilege of paying five percent (5%) franchise tax inures to the
benefit of third parties with contractual relationship with petitioner in connection with the
operation of casinos, we find no reason to rule upon the same. The resolution of the instant
petition is limited to clarifying the tax treatment of petitioner’s income vis-à-visour Decision dated
March 15, 2011. This Decision is not meant to expand our original Decision by delving into new
issues involving petitioner’s contractees and licensees. For one, the latter are not parties to the
instant case, and may not therefore stand to benefit or bear the consequences of this resolution.
For another, to answer the fourth issue raised by petitioner relative to its contractees and
licensees would be downright premature and iniquitous as the same would effectively
countenance sidesteps to judicial process.

In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion
amounting to lack of jurisdiction when it issued RMC No. 33-2013 subjecting both income from
gaming operations and other related services to corporate income tax and five percent (5%)
franchise tax.1âwphi1 This unduly expands our Decision dated March 15, 2011 without due
process since the imposition creates additional burden upon petitioner. Such act constitutes an
overreach on the part of the respondent, which should be immediately struck down, lest grave
injustice results. More, it is settled that in case of discrepancy between the basic law and a rule
or regulation issued to implement said law, the basic law prevails, because the said rule or
regulation cannot go beyond the terms and provisions of the basic law.

In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of
R.A. No. 8424, by excluding petitioner from the enumeration of GOCCs exempted from
corporate income tax, is valid and constitutional. In addition, we hold that:

1. Petitioner’s tax privilege of paying five percent (5%) franchise tax in lieu of all other
taxes with respect to its income from gaming operations, pursuant to P.D. 1869, as
amended, is not repealed or amended by Section l(c) ofR.A. No. 9337;
 2. Petitioner's income from gaming operations is subject to the five percent (5%)
franchise tax only; and

3. Petitioner's income from other related services is subject to corporate income tax only.

In view of the above-discussed findings, this Court ORDERS the respondent to cease and
desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax
on petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's
income from other related services.

WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED to

cease and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate
income tax on petitioner's income derived from its gaming operations; and (2) franchise tax on
petitioner's income from other related services.

SO ORDERED.
G.R. No. 188497 February 19, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.

RESOLUTION

VILLARAMA, JR., J.:

For resolution are the Motion for Reconsideration dated May 22, 2012 and Supplemental Motion
for Reconsideration dated December 12, 2012 filed by Pilipinas Shell Petroleum Corporation
(respondent). As directed, the Solicitor General on behalf of petitioner Commissioner of Internal
Revenue filed their Comment, to which respondent filed its Reply.

In our Decision promulgated on April 25, 2012, we ruled that the Court of Tax Appeals (CTA)
erred in granting respondent's claim for tax refund because the latter failed to establish a tax
exemption in its favor under Section 135(a) of the National Internal Revenue Code of 1997
(NIRC).

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25,
2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No.
415 are hereby REVERSED and SET ASIDE. The claims for tax refund or credit filed by
respondent Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.

No pronouncement as to costs.

SO ORDERED.1

Respondent argues that a plain reading of Section 135 of the NIRC reveals that it is the
petroleum products sold to international carriers which are exempt from excise tax for which
reason no excise taxes are deemed to have been due in the first place. It points out that excise
tax being an indirect tax, Section 135 in relation to Section 148 should be interpreted as
referring to a tax exemption from the point of production and removal from the place of
production considering that it is only at that point that an excise tax is imposed. The situation is
unlike the value-added tax (VAT) which is imposed at every point of turnover – from production
to wholesale, to retail and to end-consumer. Respondent thus concludes that exemption could
only refer to the imposition of the tax on the statutory seller, in this case the respondent. This is
because when a tax paid by the statutory seller is passed on to the buyer it is no longer in the
nature of a tax but an added cost to the purchase price of the product sold.

Respondent also contends that our ruling that Section 135 only prohibits local petroleum
manufacturers like respondent from shifting the burden of excise tax to international carriers has
adverse economic impact as it severely curtails the domestic oil industry. Requiring local
petroleum manufacturers to absorb the tax burden in the sale of its products to international
carriers is contrary to the State’s policy of "protecting gasoline dealers and distributors from
unfair and onerous trade conditions," and places them at a competitive disadvantage since
foreign oil producers, particularly those whose governments with which we have entered into
bilateral service agreements, are not subject to excise tax for the same transaction. Respondent
fears this could lead to cessation of supply of petroleum products to international carriers,
retrenchment of employees of domestic manufacturers/producers to prevent further losses, or
worse, shutting down of their production of jet A-1 fuel and aviation gas due to unprofitability of
sustaining operations. Under this scenario, participation of Filipino capital, management and
labor in the domestic oil industry is effectively diminished.

Lastly, respondent asserts that the imposition by the Philippine Government of excise tax on
petroleum products sold to international carriers is in violation of the Chicago Convention on
International Aviation ("Chicago Convention") to which it is a signatory, as well as other
international agreements (the Republic of the Philippines’ air transport agreements with the
United States of America, Netherlands, Belgium and Japan).

In his Comment, the Solicitor General underscores the statutory basis of this Court’s ruling that
the exemption under Section 135 does not attach to the products. Citing Exxonmobil Petroleum
& Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue,2 which held
that the excise tax, when passed on to the purchaser, becomes part of the purchase price, the
Solicitor General claims this refutes respondent’s theory that the exemption attaches to the
petroleum product itself and not to the purchaser for it would have been erroneous for the seller
to pay the excise tax and inequitable to pass it on to the purchaser if the excise tax exemption
attaches to the product.

As to respondent’s reliance in the cases of Silkair (Singapore) Pte. Ltd. v. Commissioner of

Internal Revenue3 and Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v.
Commissioner of Internal Revenue,4 the Solicitor General points out that there was no
pronouncement in these cases that petroleum manufacturers selling petroleum products to
international carriers are exempt from paying excise taxes. In fact, Exxonmobil even cited the
case of Philippine Acetylene Co, Inc. v. Commissioner of Internal Revenue.5 Further, the ruling
in Maceda v. Macaraig, Jr.6 which confirms that Section 135 does not intend to exempt
manufacturers or producers of petroleum products from the payment of excise tax.

The Court will now address the principal arguments proffered by respondent: (1) Section 135
intended the tax exemption to apply to petroleum products at the point of production; (2)
Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue and Maceda v. Macaraig,
Jr. are inapplicable in the light of previous rulings of the Bureau of Internal Revenue (BIR) and
the CTA that the excise tax on petroleum products sold to international carriers for use or
consumption outside the Philippines attaches to the article when sold to said international
carriers, as it is the article which is exempt from the tax, not the international carrier; and (3) the
Decision of this Court will not only have adverse impact on the domestic oil industry but is also
in violation of international agreements on aviation.

Under Section 129 of the NIRC, excise taxes are those applied to goods manufactured or
produced in the Philippines for domestic sale or consumption or for any other disposition and to
things imported. Excise taxes as used in our Tax Code fall under two types – (1) specific tax
which is based on weight or volume capacity and other physical unit of measurement, and (2)
ad valorem tax which is based on selling price or other specified value of the goods. Aviation
fuel is subject to specific tax under Section 148 (g) which attaches to said product "as soon as
they are in existence as such."

On this point, the clarification made by our esteemed colleague, Associate Justice Lucas P.
Bersamin regarding the traditional meaning of excise tax adopted in our Decision, is well-taken.
The transformation undergone by the term "excise tax" from its traditional concept up to its
current definition in our Tax Code was explained in the case of Petron Corporation v.
Tiangco,7 as follows:

Admittedly, the proffered definition of an excise tax as "a tax upon the performance, carrying on,
or exercise of some right, privilege, activity, calling or occupation" derives from the compendium
American Jurisprudence, popularly referred to as Am Jur and has been cited in previous
decisions of this Court, including those cited by Petron itself. Such a definition would not have
been inconsistent with previous incarnations of our Tax Code, such as the NIRC of 1939, as
amended, or the NIRC of 1977 because in those laws the term "excise tax" was not used at all.
In contrast, the nomenclature used in those prior laws in referring to taxes imposed on specific
articles was "specific tax." Yet beginning with the National Internal Revenue Code of 1986, as
amended, the term "excise taxes" was used and defined as applicable "to goods manufactured
or produced in the Philippines… and to things imported." This definition was carried over into
the present NIRC of 1997. Further, these two latest codes categorize two different kinds of
excise taxes: "specific tax" which is imposed and based on weight or volume capacity or any
other physical unit of measurement; and "ad valorem tax" which is imposed and based on the
selling price or other specified value of the goods. In other words, the meaning of "excise tax"
has undergone a transformation, morphing from the Am Jur definition to its current signification
which is a tax on certain specified goods or articles.

The change in perspective brought forth by the use of the term "excise tax" in a different
connotation was not lost on the departed author Jose Nolledo as he accorded divergent
treatments in his 1973 and 1994 commentaries on our tax laws. Writing in 1973, and essentially
alluding to the Am Jur definition of "excise tax," Nolledo observed:

Are specific taxes, taxes on property or excise taxes –

In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specific taxes are
property taxes, a ruling which seems to be erroneous. Specific taxes are truly excise taxes for
the fact that the value of the property taxed is taken into account will not change the nature of
the tax. It is correct to say that specific taxes are taxes on the privilege to import, manufacture
and remove from storage certain articles specified by law.

In contrast, after the tax code was amended to classify specific taxes as a subset of excise
taxes, Nolledo, in his 1994 commentaries, wrote:

1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certain specified
goods or articles manufactured or produced in the Philippines for domestic sale or
consumption or for any other disposition and to things imported into the Philippines.
They are either specific or ad valorem.

2. Nature of excise taxes. – They are imposed directly on certain specified goods. (infra)
They are, therefore, taxes on property. (see Medina vs. City of Baguio, 91 Phil. 854.)

A tax is not excise where it does not subject directly the produce or goods to tax but indirectly as
an incident to, or in connection with, the business to be taxed.

In their 2004 commentaries, De Leon and De Leon restate the Am Jur definition of excise tax,
and observe that the term is "synonymous with ‘privilege tax’ and [both terms] are often used
interchangeably." At the same time, they offer a caveat that "[e]xcise tax, as [defined by Am
Jur], is not to be confused with excise tax imposed [by the NIRC] on certain specified articles
manufactured or produced in, or imported into, the Philippines, ‘for domestic sale or
consumption or for any other disposition.’"

It is evident that Am Jur aside, the current definition of an excise tax is that of a tax levied on a
specific article, rather than one "upon the performance, carrying on, or the exercise of an
activity."

This current definition was already in place when the Code was enacted in 1991, and we can
only presume that it was what the Congress had intended as it specified that local government
units could not impose "excise taxes on articles enumerated under the [NIRC]." This prohibition
must pertain to the same kind of excise taxes as imposed by the NIRC, and not those previously
defined "excise taxes" which were not integrated or denominated as such in our present tax
law.8 (Emphasis supplied.)

That excise tax as presently understood is a tax on property has no bearing at all on the issue of
respondent’s entitlement to refund. Nor does the nature of excise tax as an indirect tax supports
respondent’s postulation that the tax exemption provided in Sec. 135 attaches to the petroleum
products themselves and consequently the domestic petroleum manufacturer is not liable for the
payment of excise tax at the point of production. As already discussed in our Decision, to which
Justice Bersamin concurs, "the accrual and payment of the excise tax on the goods enumerated
under Title VI of the NIRC prior to their removal at the place of production are absolute and
admit of no exception." This also underscores the fact that the exemption from payment of
excise tax is conferred on international carriers who purchased the petroleum products of
respondent.

On the basis of Philippine Acetylene, we held that a tax exemption being enjoyed by the buyer
cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for
any tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products
under Section 148 is the direct liability of the manufacturer who cannot thus invoke the excise
tax exemption granted to its buyers who are international carriers. And following our
pronouncement in Maceda v. Macarig, Jr. we further ruled that Section 135(a) should be
construed as prohibiting the shifting of the burden of the excise tax to the international carriers
who buy petroleum products from the local manufacturers. Said international carriers are thus
allowed to purchase the petroleum products without the excise tax component which otherwise
would have been added to the cost or price fixed by the local manufacturers or
distributors/sellers.

Excise tax on aviation fuel used for international flights is practically nil as most countries are
signatories to the 1944 Chicago Convention on International Aviation (Chicago Convention).
Article 249 of the Convention has been interpreted to prohibit taxation of aircraft fuel consumed
for international transport. Taxation of international air travel is presently at such low level that
there has been an intensified debate on whether these should be increased to "finance
development rather than simply to augment national tax revenue" considering the "cross-border
environmental damage" caused by aircraft emissions that contribute to global warming, not to
mention noise pollution and congestion at airports).10 Mutual exemptions given under bilateral
air service agreements are seen as main legal obstacles to the imposition of indirect taxes on
aviation fuel. In response to present realities, the International Civil Aviation Organization
(ICAO) has adopted policies on charges and emission-related taxes and charges.11
Section 135(a) of the NIRC and earlier amendments to the Tax Code represent our
Governments’ compliance with the Chicago Convention, its subsequent resolutions/annexes,
and the air transport agreements entered into by the Philippine Government with various
countries. The rationale for exemption of fuel from national and local taxes was expressed by
ICAO as follows:

...The Council in 1951 adopted a Resolution and Recommendation on the taxation of fuel, a
Resolution on the taxation of income and of aircraft, and a Resolution on taxes related to the
sale or use of international air transport (cf. Doc 7145) which were further amended and
amplified by the policy statements in Doc 8632 published in 1966. The Resolutions and
Recommendation concerned were designed to recognize the uniqueness of civil aviation and
the need to accord tax exempt status to certain aspects of the operations of international air
transport and were adopted because multiple taxation on the aircraft, fuel, technical supplies
and the income of international air transport, as well as taxes on its sale and use, were
considered as major obstacles to the further development of international air transport. Non-
observance of the principle of reciprocal exemption envisaged in these policies was also seen
as risking retaliatory action with adverse repercussions on international air transport which plays
a major role in the development and expansion of international trade and travel.12

In the 6th Meeting of the Worldwide Air Transport Conference (ATCONF) held on March 18-22,
2013 at Montreal, among matters agreed upon was that "the proliferation of various taxes and
duties on air transport could have negative impact on the sustainable development of air
transport and on consumers." Confirming that ICAO’s policies on taxation remain valid, the
Conference recommended that "ICAO promote more vigorously its policies and with industry
stakeholders to develop analysis and guidance to States on the impact of taxes and other levies
on air transport."13 Even as said conference was being held, on March 7, 2013, President
Benigno Aquino III has signed into law Republic Act (R.A.) No. 1037814 granting tax incentives
to foreign carriers which include exemption from the 12% value-added tax (VAT) and 2.5%
gross Philippine billings tax (GPBT). GPBT is a form of income tax applied to international
airlines or shipping companies. The law, based on reciprocal grant of similar tax exemptions to
Philippine carriers, is expected to increase foreign tourist arrivals in the country.

Indeed, the avowed purpose of a tax exemption is always "some public benefit or interest, which
the law-making body considers sufficient to offset the monetary loss entailed in the grant of the
exemption."15 The exemption from excise tax of aviation fuel purchased by international carriers
for consumption outside the Philippines fulfills a treaty obligation pursuant to which our
Government supports the promotion and expansion of international travel through avoidance of
multiple taxation and ensuring the viability and safety of international air travel. In recent years,
developing economies such as ours focused more serious attention to significant gains for
business and tourism sectors as well. Even without such recent incidental benefit, States had
long accepted the need for international cooperation in maintaining a capital intensive, labor
intensive and fuel intensive airline industry, and recognized the major role of international air
transport in the development of international trade and travel.

Under the basic international law principle of pacta sunt servanda, we have the duty to fulfill our
treaty obligations in good faith. This entails harmonization of national legislation with treaty
provisions. In this case, Sec. 135(a) of the NIRC embodies our compliance with our
undertakings under the Chicago Convention and various bilateral air service agreements not to
impose excise tax on aviation fuel purchased by international carriers from domestic
manufacturers or suppliers. In our Decision in this case, we interpreted Section 135 (a) as
prohibiting domestic manufacturer or producer to pass on to international carriers the excise tax
it had paid on petroleum products upon their removal from the place of production, pursuant to
Article 148 and pertinent BIR regulations. Ruling on respondent’s claim for tax refund of such
paid excise taxes on petroleum products sold to tax-exempt international carriers, we found no
basis in the Tax Code and jurisprudence to grant the refund of an "erroneously or illegally paid"
tax.

Justice Bersamin argues that "(T)he shifting of the tax burden by manufacturers-sellers is a
business prerogative resulting from the collective impact of market forces," and that it is
"erroneous to construe Section 135(a) only as a prohibition against the shifting by the
manufacturers-sellers of petroleum products of the tax burden to international carriers, for such
construction will deprive the manufacturers-sellers of their business prerogative to determine the
prices at which they can sell their products."

We maintain that Section 135 (a), in fulfillment of international agreement and practice to
exempt aviation fuel from excise tax and other impositions, prohibits the passing of the excise
tax to international carriers who buys petroleum products from local manufacturers/sellers such
as respondent. However, we agree that there is a need to reexamine the effect of denying the
domestic manufacturers/sellers’ claim for refund of the excise taxes they already paid on
petroleum products sold to international carriers, and its serious implications on our
Government’s commitment to the goals and objectives of the Chicago Convention.

The Chicago Convention, which established the legal framework for international civil aviation,
did not deal comprehensively with tax matters. Article 24 (a) of the Convention simply provides
that fuel and lubricating oils on board an aircraft of a Contracting State, on arrival in the territory
of another Contracting State and retained on board on leaving the territory of that State, shall be
exempt from customs duty, inspection fees or similar national or local duties and charges.
Subsequently, the exemption of airlines from national taxes and customs duties on spare parts
and fuel has become a standard element of bilateral air service agreements (ASAs) between
individual countries.

The importance of exemption from aviation fuel tax was underscored in the following
observation made by a British author16 in a paper assessing the debate on using tax to control
aviation emissions and the obstacles to introducing excise duty on aviation fuel, thus:

Without any international agreement on taxing fuel, it is highly likely that moves to impose duty
on international flights, either at a domestic or European level, would encourage 'tankering':
carriers filling their aircraft as full as possible whenever they landed outside the EU to avoid
paying tax.1âwphi1 Clearly this would be entirely counterproductive. Aircraft would be travelling
further than necessary to fill up in low-tax jurisdictions; in addition they would be burning up
more fuel when carrying the extra weight of a full fuel tank.

With the prospect of declining sales of aviation jet fuel sales to international carriers on account
of major domestic oil companies' unwillingness to shoulder the burden of excise tax, or of
petroleum products being sold to said carriers by local manufacturers or sellers at still high
prices , the practice of "tankering" would not be discouraged. This scenario does not augur well
for the Philippines' growing economy and the booming tourism industry. Worse, our Government
would be risking retaliatory action under several bilateral agreements with various countries.
Evidently, construction of the tax exemption provision in question should give primary
consideration to its broad implications on our commitment under international agreements.
In view of the foregoing reasons, we find merit in respondent's motion for reconsideration. We
therefore hold that respondent, as the statutory taxpayer who is directly liable to pay the excise
tax on its petroleum products, is entitled to a refund or credit of the excise taxes it paid for
petroleum products sold to international carriers, the latter having been granted exemption from
the payment of said excise tax under Sec. 135 (a) of the NIRC.

WHEREFORE, the Court hereby resolves to:

(1) GRANT the original and supplemental motions for reconsideration filed by
respondent Pilipinas Shell Petroleum Corporation; and

(2) AFFIRM the Decision dated March 25, 2009 and Resolution dated June 24, 2009 of
the Court of Tax Appeals En Banc in CT A EB No. 415; and DIRECT petitioner
Commissioner of Internal Revenue to refund or to issue a tax credit certificate to
Pilipinas Shell Petroleum Corporation in the amount of J195,014,283.00 representing the
excise taxes it paid on petroleum products sold to international carriers from October
2001 to June 2002.

SO ORDERED.
G.R. No. 179260 April 2, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
TEAM [PHILIPPINES] OPERATIONS CORPORATION [formerly MIRANT (PHILS)
OPERATIONS CORPORATION], Respondent.

DECISION

PEREZ, J.:

Before the Court is a Petition for Review on Certiorari seeking to reverse and set aside the 19
June 2007 Decision1and the 13 August 2007 Resolution2 of the Court of Tax Appeals (CTA) En
Banc in C.T.A. EB No. 224 which affirmed in toto the Decision and Resolution dated 4 August
2006 and 8 November 2006, respectively, of the First Division of the CTA (CTA in Division)3 in
C.T.A. Case No. 6623, granting Team (Philippines) Operations Corporation’s (respondent) claim
for refund in the amount of ₱69,562,412.00 representing unutilized tax credits for taxable period
ending 31 December 2001.

The Facts

The factual antecedents of the case are undisputed:

Petitioner is the duly appointed Commissioner of Internal Revenue, charged with the duty of
enforcing the provisions of the National Internal Revenue Code (NIRC), including the power to
decide and approve administrative claims for refund.

Respondent, on the other hand, is a corporation duly organized and existing under and virtue of
the laws of the Republic of the Philippines, with its principal office at Bo. Ibabang Pulo, Pagbilao
Grande Island, Pagbilao, Quezon Province. It is primarily engaged in the business of designing,
constructing, erecting, assembling, commissioning, operating, maintaining, rehabilitating and
managing gas turbine and other power generating plants and related facilities for the conversion
into electricity of coal, distillate and other fuels provided by and under contract with the
Government of the Republic of the Philippines, or any subdivision, instrumentality or agency
thereof, or any government owned or controlled corporations or other entity engaged in the
development, supply or distribution of energy.

On 30 April 2001, respondent secured from the Securities and Exchange Commission (SEC) its
Certificate of Filing of Amended Articles of Incorporation, reflecting its change of name from
Southern Energy Asia-Pacific Operations (Phils.), Inc. to Mirant (Philippines) Operations
Corporation. Prior to its use of the name Southern Energy Asia-Pacific Operations (Phils.), Inc.,
respondent operated under the corporate names CEPA Operations (Philippines) Corporation,
CEPA Tileman Project Management Corporation and Hopewell Tileman Project Management
Corporation. The changes in respondent’s corporate name from CEPA Operations (Philippines)
Corp. to Southern Energy Asia-Pacific Operations (Phils.) Inc., from CEPA Tileman Project
Management Corporation to CEPA Operations (Philippines) Corp. and from Hopewell Tileman
Project Management Corporation to CEPA Tileman Project Management Corp., were approved
by the SEC on 24 November 2000, 21 November 1997 and 29 July 1994, respectively.
Under its original corporate name, Hopewell Tileman Project Management Corp., respondent
was registered with the Bureau of Internal Revenue (BIR) with Tax Identification No. 003-057-
796 as shown by its original BIR Certificate of Registration issued on 29 March 1994.

In line with its primary purpose, respondent entered into Operating and Management
Agreements with Mirant Pagbilao Corporation (MPC) [formerly Southern Energy Quezon, Inc.]
and Mirant Sual Corporation (MSC) [formerly Southern Energy Pangasinan, Inc.] to provide
MPC and MSC with operation and maintenance services in connection with the operation,
construction and commissioning of the coal-fired thermal power stations situated in Pagbilao,
Quezon and Sual, Pangasinan, respectively. Payments received by respondent from MPC and
MSC relative to the said agreements were allegedly subjected to creditable withholding taxes.

On 15 April 2002, respondent filed its 2001 income tax return with the BIR, reporting an income
tax overpayment in the amount of ₱69,562,412.00 arising from unutilized creditable taxes
withheld during the year, detailed as follows:4

Sales/Revenues ₱922,569,303.00
Less: Cost of Sales/Services 938,543,252.00
Gross Income from Operation (₱15,973,949.00)
Add: Non-Operating & Other Income 74,995,982.00
Total Gross Income P 59,022,033.00
Less: Deductions 59,022,033.00
Taxable Income -
Tax Rate 32%
Income Tax NIL
Less: Tax Credits/Payments
Creditable Tax Withheld for the
First Three Quarters
Creditable Tax Withheld for the P 27,784,217.00
Fourth Quarter 41,778,195.00
Total Tax Credits/Payments P 69,652,412.00
Tax Payable/(Overpayment) (₱69,562,412.00)

Respondent marked the appropriate box manifesting its intent to have the above overpayment
refunded.

On 19 March 2003, pursuant to Section 76 in relation to Section 204 of the NIRC of 1997, as
amended, respondent filed with the BIR, a letter requesting for the refund or issuance of a tax
credit certificate corresponding to its reported unutilized creditable withholding taxes for taxable
year 2001 in the amount of ₱69,562,412.00.
Thereafter, on 27 March 2003, respondent filed a Petition for Review before the CTA, in order to
toll the running of the two-year prescriptive period provided under Section 229 of the NIRC of
1997, as amended, which was docketed as C.T.A. Case No. 6623.

The Ruling of the CTA in Division

In a Decision dated 4 August 2006,5 the CTA in Division granted respondent’s Petition and
ordered petitioner to refund or issue a tax credit certificate in favor of the former the entire
amount of ₱69,562,412.00, representing its unutilized tax credits for the taxable year ended 31
December 2001.

The CTA in Division based its ruling on the numerous documentary evidence presented by
respondent during the proceedings, such as its Income Tax Returns (ITRs) for taxable years
2001 and 2002, various Certificates of Creditable Tax Withheld at Source for taxable year 2001
duly issued to it by its withholding agents, and Report of the Commissioned Independent
Certified Public Accountant dated 15 March 2004, among others. The court a quo reasoned that
respondent has indeed established its entitlement to a refund/tax credit of its excess creditable
withholding taxes in compliance with the following basic requirements: (1) that the claim for
refund (or issuance of a tax credit certificate) was filed within the two-year prescriptive period
prescribed under Section 204(C), in relation to Section 229 of the NIRC of 1997, as amended;
(2) that the fact of withholding is established by a copy of a statement duly issued by the payor
(withholding agent) to the payee, showing the amount paid and the amount of tax withheld
therefrom; and (3) that the income upon which the taxes were withheld was included in the
return of the recipient.6

Subsequently, on 8 November 2006, the CTA in Division denied petitioner’s Motion for
Reconsideration for lack of merit.7

Aggrieved, petitioner appealed to the CTA En Banc by filing a Petition for Review pursuant to
Section 18 of Republic Act (RA) No. 1125, as amended by RA No. 92828 on 6 December 2006,
docketed as CTA EB No. 224.

The Ruling of the CTA En Banc

The CTA En Banc affirmed in toto both the aforesaid Decision and Resolution rendered by the
CTA in Division in CTA Case No. 6623, pronouncing that there was no cogent reason to disturb
the findings and conclusion spelled out therein. It revealed that what the petition seeks to
accomplish was for the CTA En Banc to view and appreciate the evidence in another
perspective, which unfortunately had already been considered and passed upon correctly by the
CTA in Division.

Upon denial of petitioner’s Motion for Reconsideration of the 19 June 2007 Decision9 of the CTA
En Banc, it filed this Petition for Review on Certiorari before this Court seeking the reversal of
the aforementioned Decision and the 13 August 2007 Resolution10 rendered in CTA EB No.
224. Petitioner11 relies on the sole ground that the CTA En Banc gravely erred on a question of
law in affirming the CTA in Division’s ruling which ordered a refund or issuance of tax credit
certificate in favor of respondent despite the fact that it is not supported by the evidence on
record.12

The Issue and Our Ruling

The core issue for the Court’s resolution is whether or not respondent has established its
entitlement for the refund or issuance of a tax credit certificate in its favor the entire amount of
₱69,562,412.00 representing its unutilized tax credits for taxable year ended 31 December
2001, pursuant to the applicable provisions of the NIRC of 1997, as amended.

This is not novel.

In order to be entitled to a refund claim or issuance of a tax credit certificate representing any
excess or unutilized creditable withholding tax, it must be shown that the claimant has complied
with the essential basic conditions set forth under pertinent provisions of law and existing
jurisprudential declarations.

In Banco Filipino Savings and Mortgage Bank v. Court of Appeals,13 this Court had previously
articulated that there are three essential conditions for the grant of a claim for refund of
creditable withholding income tax, to wit: (1) the claim is filed with the Commissioner of Internal
Revenue within the two-year period from the date of payment of the tax;14 (2) it is shown on the
return of the recipient that the income payment received was declared as part of the gross
income;15 and (3) the fact of withholding is established by a copy of a statement duly issued by
the payor to the payee showing the amount paid and the amount of the tax withheld therefrom.

The first condition is pursuant to Sections 204(C) and 229 of the NIRC of 1997, as amended,
viz:

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. (Emphasis supplied)

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 a written claim
therefor, refund or credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously paid. (Emphasis supplied)

The second and third conditions are anchored on Section 2.58.3(B) of Revenue Regulations No.
2-98,16 which states:

Sec. 2.58.3.Claim for Tax Credit or Refund

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(B) Claims for tax credit or refund of any creditable income tax which was deducted and
withheld on income payments shall be given due course only when it is shown that the income
payment has been declared as part of the gross income and the fact of withholding is
established by a copy of the withholding tax statement duly issued by the payor to the payee
showing the amount paid and the amount of tax withheld therefrom. (Emphasis supplied)

In addition to the abovementioned requisites, the NIRC of 1997, as amended, likewise provides
for the strict observance of the concept of the irrevocability rule,17 the focal provision of which is
Section 76 thereof, quoted hereunder for easy reference:

SEC. 76. Final Adjustment Return. — Every corporation liable to tax under Section 27 shall file
a final adjustment return covering the total taxable income for the preceding calendar or fiscal
year. If the sum of the quarterly tax payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year, the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried over
and credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and apply the excess quarterly income
tax against income tax due for the taxable quarters of the succeeding taxable years has been
made, such option shall be considered irrevocable for that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed therefor. (Emphasis supplied)

Applying the foregoing discussion to the present case, we find that respondent had indeed
complied with the abovementioned requirements.

Here, it is undisputed that the claim for refund was filed within the two-year prescriptive period
prescribed under Section 22918 of the NIRC of 1997, as amended. Respondent filed19 its income
tax return for taxable year 2001 on 15 April 2002. Counting from said date, it indeed had until 14
April 200420 within which to file its claim for refund or issuance of tax credit certificate in its favor
both administratively and judicially. Thus, petitioner’s administrative claim and petition for review
filed on 19 March 2003 and 27 March 2003, respectively, fell within the abovementioned
prescriptive period.

Likewise, respondent was able to present various certificates of creditable tax withheld at
source from its payors, MPC and MSC, for taxable year 2001, showing creditable withholding
taxes in the aggregate amount of ₱70,805,771.42 (although the refund claim was only
₱69,562,412.00).21 Moreover, as determined by the CTA in Division, respondent declared the
income related to the claimed creditable withholding taxes of ₱69,562,412.00 on its return.22

Lastly, in compliance with Section 76 of the NIRC of 1997, as amended, respondent opted to be
refunded of its unutilized tax credit (as evidenced by the "x" mark in the appropriate box of its
2001 income tax return), and the same was not carried over in its 2002 income tax return;
therefore, the entire amount of ₱69,562,412.00 may be a proper subject of a claim for refund/tax
credit certificate.23

It is apt to restate here the hornbook doctrine that the findings and conclusions of the CTA are
accorded the highest respect and will not be lightly set aside. The CTA, 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 abusive or improvident
exercise of authority.24

Consequently, its conclusions will not be overturned unless there has been an abuse or
improvident exercise of authority. Its findings can only be disturbed on appeal if they are not
supported by substantial evidence or there is a showing of gross error or abuse on the part of
the Tax Court. In the absence of any clear and convincing proof to the contrary, this Court must
presume that the CTA rendered a decision which is valid in every respect.25

The Court in this case agrees with the conclusion of the CTA in Division and subsequent
affirmation of the CTA En Banc that respondent complied with all the requirements for the
refund of its unutilized creditable withholding taxes for taxable period ending 31 December
2001. We adopt the factual and legal findings as follows:

On the first ground, [petitioner] argues that [respondent] failed to present the various withholding
agents/payors to testify on the validity of the contents of the Certificates of Creditable Tax
Withheld at Source ("certificates"). Thus, the certificates presented by [respondent] are not
valid. And even assuming that the certificates are valid, this Court cannot entertain the claim for
refund/tax credit certificates because the certificates were not submitted to [petitioner].

[Petitioner’s] arguments are untenable since the certificates presented (Exhibits "R", "S", "T",
"U", "V", "W", and "X") were duly signed and prepared under penalties of perjury, the figures
appearing therein are presumed to be true and correct. Thus, the testimony of the various
agents/payors need not be presented to validate the authenticity of the certificates.

In addition, that [respondent] did not submit the certificates to the [petitioner] is of no moment.
The administrative and judicial claim for refund and/or tax credit certificates must be filed within
the two-year prescriptive period starting from the date of payment of the tax (Section 229,
NIRC). In the instant case, [respondent] filed its judicial claim (after filing its administrative claim)
precisely to preserve its right to claim. Otherwise, [respondent's] right to the claim would have
been barred. Considering that this [c]ourt had jurisdiction over the claim, frespondent] rightfully
presented the certificates before this [c]ourt. Besides, any records that [petitioner] may have on
the administrative claim would eventually be transmitted to this [c]ourt under Section S(b), Rule
6 of the Revised Rules of the Court of (Tax) Appeals.

As for the second ground, this [ c ]ourt finds [petitioner's] contention unmeritorious.1âwphi1 The
requirements for claiming a tax refund/tax credit certificates had been laid down in Citibank N.A.
vs. Court of Appeals, G.R. No. 107434, October 10, 1997. Nowhere in the case cited is proof of
actual remittance of the withheld taxes to the [petitioner] required before the taxpayer may claim
for a tax refund/tax credit certificates.26 (Emphasis supplied)

In the same vein, this Court finds no abusive or improvident exercise of authority on the part of
the CT A in Division. Since there is no showing of gross error or abuse on the part of the CT A
in Division, and its findings are supported by substantial evidence which were thoroughly
considered during the trial, there is no cogent reason to disturb its findings and conclusions.

All told, respondent complied with all the legal requirements and it is entitled, as it opted, to a
refund of its excess creditable withholding tax for the taxable year 2001 in the amount of
₱69,562,412.00.

WHEREFORE, the petition is hereby DENIED for lack of merit. Accordingly, the Decision dated
19 June 2007 and Resolution dated 13 August 2007 of the CTA En Banc are hereby
AFFIRMED. No costs.

SO ORDERED.