The facts and the issue are set forth in the aforementioned decision of the Court
of Tax Appeals, from which we quote:
On July 24, 1952, the Director of the Bureau of Hospitals authorized the
petitioners to establish and operate the "St. Catherine's Hospital", located at 58
D. Tuazon, Sta. Mesa Heights, Quezon City (Exhibit "F-1", p. 7, BIR rec.). On or
about January 3, 1953, the petitioners sent a letter to the Quezon City Assessor
requesting exemption from payment of real estate tax on the lot, building and
other improvements comprising the hospital stating that the same was
established for charitable and humanitarian purposes and not for commercial
gain (Exhibit "F-2", pp. 8-9, BIR rec.). After an inspection of the premises in
question and after a careful study of the case, the exemption from real property
taxes was granted effective the years 1953, 1954 and 1955.
free medicines which are not costly like aspirin, sulfatiazole, etc. The charity
lying-in-patients are given free medical service and medicine although the food
served to the pay-patients is very much better than that given to the former.
Although no condition is imposed by the hospital on the admission of charity
lying-in-patients, they however, usually give donations to the hospital. On the
other hand, the pay-patients are required to pay for hospital services ranging
from the minimum charge of P5.00 to the maximum of P40.00 for each day of
stay in the hospital. The income realized from pay-patients is spent for the
improvement of the charity wards. The hospital personnel is composed of three
nurses, two graduate midwives, a resident physician receiving a salary of
P170.00 a month and the petitioner, Dr. Ester Ochangco Herrera, as directress.
As such directress, the latter does not receive any salary.
Petitioners also operate within the premises of the hospital the "St.
Catherine's School of Midwifery" which was granted government
recognition by the Secretary of Education on February 1, 1955 (Exhibit "F-
3", p. 10, BIR rec.) This school has an enrollment of about two hundred
students. The students are charged a matriculation fee of P300.00 for 1-½
years, plus P50.00 a month for board and lodging, which includes
transportation to the St. Mary's Hospital. The students practice in the St.
Catherine's Hospital, as well as in the St. Mary's Hospital, which is also
owned by the petitioners. A separate set of accounting books is maintained
by the school for midwifery distinct from that kept by the hospital. The
petitioners alleged that the accounts of the school are not included in
Exhibits "A", "A-1", "A-2", "B", "B-1", "B-2", "C", "C-1" and "C-2" which relate
to the hospital only. However, the petitioners have refused to submit a
separate statement of accounts of the school. A brief tabulation indicating
the amount of income of the hospital for the years 1954, 1955 and 1956,
and its operational expenses, is as follows:
1954
P 5,280.04 P1,303.80
Charity P10,803.26
Ward P14,779.50
Pay Ward
P16,083.30
1955
P 6,859.32
Charity 14,038.92
Ward P17,433.30 P3,464.94
Pay Ward
P20,898.24
1956
P 5,559.89 P 341.53
Charity 16,249.04
Ward P21,467.40
Pay Ward
P21,809.93
Aside from the St. Catherine and St. Mary hospitals, the petitioners declared that
they also own lands and coconut plantations in Quezon Province, and other real
estate in the City of Manila consisting of apartments for rent. The petitioner, Jose
V. Herrera, is an architect, actively engaged in the practice of his profession, with
office at Tuason Building, Escolta, Manila. He was formerly Chairman, Board of
Examiners for Architects and Chairman, Board of Architects connected with the
United Nations. He was also connected with the Allied Technologists which
constructed the Veterans Hospital in Quezon City.
The only issue raised, is whether or not the lot, building and other improvements
occupied by the St. Catherine Hospital are exempt from the real property tax.
The resolution of this question boils down to the corollary issue as to whether or
not the said properties are used exclusively for charitable or educational
purposes. (Petitioners' brief, pp. 24-29).
4|Page
The Court of Tax Appeals decided the issue in the negative, upon the ground
that the St. Catherine's Hospital "has a pay ward for ... pay-patients, who are
charged for the use of the private rooms, operating room, laboratory room,
delivery room, etc., like other hospitals operated for profit" and that "petitioners
and their family occupy a portion of the building for their residence." With respect
to petitioners' claim for exemption based upon the operation of the school of
midwifery, the Court conceded that "the proposition might be proper if the
property used for the school of midwifery were separate and distinct from the
hospital." It added, however, that, "in the instant case, the portions of the building
used for classrooms of the school of midwifery have not been shown to be
exclusively for school purposes"; that said portions "rather ... have a dual use,
i.e., for classroom and for hospital use, the latter not being a purpose that
renders the property tax exempt;" that part of the building and lot in question "is
used as a hospital, part as residence of the petitioners, part as garage, part as
dormitory and part as school"; and that "the portion dedicated to educational and
charitable purposes can not be identified from those destined to other uses; and
the building is itself an indivisible unit of property."
Thus, we have held that the U.S.T. Hospital was not established for profit-making
purposes, although it had 140 paying beds maintained only to partly finance the
expenses of the free wards, containing 203 beds for charity patients (U.S.T.
Hospital Employees Association vs. Sto. Tomas University Hospital, L-6988, May
24, 1954), that St. Paul's Hospital of Iloilo, a corporation organized for "charitable
educational and religious purposes" can not be considered as engaged in
business merely because its pharmacy department charges paying patients the
5|Page
cost of their medicine, plus 10% thereof, to partly offset the cost of medicines
supplied free of charge to charity patients (Collector of Internal Revenue vs. St.
Paul's Hospital of Iloilo, L-12127, May 25, 1959), and that the amendment of the
original articles of incorporation of the University of Visayas to convert it from a
non-stock to a stock corporation and the increase of its assets from P9,000 to
P50,000, distributed among the members of the original non-stock corporation in
terms of shares of stock, as well as the subsequent move of its board of trustees
to double the stock dividends of the corporation, in view of a gain of P200,000.00
in property, besides good-will, which was not carried out, does not justify the
inference that the corporation has become one for business and profit, none of its
profits having inured to the benefit of any stockholder or individual (Collector of
Internal Revenue vs. University of Visayas, L-13554, February 28, 1961).
Within the purview of the Constitutional exemption from taxation, the St.
Catherine's Hospital is, therefore, a charitable institution, and the fact that it
admits pay-patients does not bar it from claiming that it is devoted exclusively to
benevolent purposes, it being admitted that the income derived from pay-patients
is devoted to the improvement of the charity wards, which represent almost two-
thirds (2/3) of the bed capacity of the hospital, aside from "out-charity patients"
who come only for consultation.
factor is, however, immaterial to the issue in the case at bar, for "all lands,
building and improvements used exclusively for religious, charitable or
educational purposes shall be exempt from taxation," pursuant to the
Constitution, regardless of whether or not material profits are derived from the
operation of the institutions in question. In other words, Congress may, if it
deems fit to do so, impose taxes upon such "profits", but said "lands, buildings
and improvements" are beyond its taxing power.
Similarly, the garage in the building above referred to — which was obviously
essential to the operation of the school of midwifery, for the students therein
enrolled practiced, not only in St. Catherine's Hospital, but, also, in St. Mary's
Hospital, and were entitled to transportation thereto — for Mrs. Herrera received
no compensation as directress of St. Catherine's Hospital — were incidental to
the operation of the latter and of said school, and, accordingly, did not affect the
charitable character of said hospital and the educational nature of said school.
WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the
Assessment Board of Appeals of Quezon City, are hereby reversed and set
aside, and another one entered declaring that the lot, building and improvements
constituting the St. Catherine's Hospital are exempt from taxation under the
provisions of the Constitution, without special pronouncement as to costs. It is so
ordered.
On the face of this certiorari and mandamus petition filed by the Province of
Abra, 1 it clearly appears that the actuation of respondent Judge Harold M.
Hernando of the Court of First Instance of Abra left much to be desired. First,
there was a denial of a motion to dismiss 2 an action for declaratory relief by
private respondent Roman Catholic Bishop of Bangued desirous of being
exempted from a real estate tax followed by a summary judgment 3 granting such
exemption, without even hearing the side of petitioner. In the rather vigorous
language of the Acting Provincial Fiscal, as counsel for petitioner, respondent
Judge “virtually ignored the pertinent provisions of the Rules of Court; …
wantonly violated the rights of petitioner to due process, by giving due course to
the petition of private respondent for declaratory relief, and thereafter without
7|Page
allowing petitioner to answer and without any hearing, adjudged the case; all in
total disregard of basic laws of procedure and basic provisions of due process in
the constitution, thereby indicating a failure to grasp and understand the law,
which goes into the competence of the Honorable Presiding Judge.” 4
It was the submission of counsel that an action for declaratory relief would be
proper only before a breach or violation of any statute, executive order or
regulation. 5 Moreover, there being a tax assessment made by the Provincial
Assessor on the properties of respondent Roman Catholic Bishop, petitioner
failed to exhaust the administrative remedies available under Presidential Decree
No. 464 before filing such court action. Further, it was pointed out to respondent
Judge that he failed to abide by the pertinent provision of such Presidential
Decree which provides as follows: “No court shall entertain any suit assailing the
validity of a tax assessed under this Code until the taxpayer, shall have paid,
under protest, the tax assessed against him nor shall any court declare any tax
invalid by reason of irregularities or informalities in the proceedings of the officers
charged with the assessment or collection of taxes, or of failure to perform their
duties within this time herein specified for their performance unless such
irregularities, informalities or failure shall have impaired the substantial rights of
the taxpayer; nor shall any court declare any portion of the tax assessed under
the provisions of this Code invalid except upon condition that the taxpayer shall
pay the just amount of the tax, as determined by the court in the pending
proceeding.” 6
When asked to comment, respondent Judge began with the allegation that there
“is no question that the real properties sought to be taxed by the Province of Abra
are properties of the respondent Roman Catholic Bishop of Bangued, Inc.” 7 The
very next sentence assumed the very point it asked when he categorically stated:
“Likewise, there is no dispute that the properties including their procedure
are actually, directly and exclusively used by the Roman Catholic Bishop of
Bangued, Inc. for religious or charitable purposes.” 8 For him then: “The proper
remedy of the petitioner is appeal and not this special civil action.” 9 A more
exhaustive comment was submitted by private respondent Roman Catholic
Bishop of Bangued, Inc. It was, however, unable to lessen the force of the
objection raised by petitioner Province of Abra, especially the due process
aspect. it is to be admitted that his opposition to the petition, pressed with vigor,
ostensibly finds a semblance of support from the authorities cited. It is thus
impressed with a scholarly aspect. It suffers, however, from the grave infirmity of
stating that only a pure question of law is presented when a claim for exemption
is made.
WHEREFORE, the petition is GRANTED and the resolution of June 19, 1978
is SET ASIDE. Respondent Judge, or who ever is acting on his behalf, is ordered
to hear the case on the merit. No costs.
That the distraint seizure and sale by the Municipal Treasurer of Bangued,
Abra, the Provincial Treasurer of said province against the lot and building of
the Abra Valley Junior College, Inc., represented by Director Pedro Borgonia
located at Bangued, Abra, is valid;
That since the school is not exempt from paying taxes, it should therefore pay
all back taxes in the amount of P5,140.31 and back taxes and penalties from
the promulgation of this decision;
That the amount deposited by the plaintaff him the sum of P60,000.00 before
the trial, be confiscated to apply for the payment of the back taxes and for the
redemption of the property in question, if the amount is less than P6,000.00, the
remainder must be returned to the Director of Pedro Borgonia, who represents
the plaintiff herein;
That the deposit of the Municipal Treasurer in the amount of P6,000.00 also
before the trial must be returned to said Municipal Treasurer of Bangued, Abra;
And finally the case is hereby ordered dismissed with costs against
the plaintiff.SO ORDERED. (Rollo, pp. 22-23)
10 | P a g e
On August 10, 1972, the respondent Paterno Millare (now deceased) filed
through counstel a motion to dismiss the complaint.
On September 1, 1972 the respondent Paterno Millare filed his answer (Annex
"5," ibid; Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school premises at public
auction, the respondent Judge, Hon. Juan P. Aquino of the Court of First
Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the
respondents provincial and municipal treasurers to deliver to the Clerk of Court
the proceeds of the auction sale. Hence, on December 14, 1972, petitioner,
through Director Borgonia, deposited with the trial court the sum of P6,000.00
evidenced by PNB Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of facts adopted and
embodied by the trial court in its questioned decision. Said Stipulations reads:
STIPULATION OF FACTS
COME NOW the parties, assisted by counsels, and to this Honorable Court
respectfully enter into the following agreed stipulation of facts:
2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and
buildings thereon located in Bangued, Abra under Original Certificate of Title
No. 0-83;
4. That on June 8, 1972 the above properties of the Abra Valley Junior College,
Inc. was sold at public auction for the satisfaction of the unpaid real property
taxes thereon and the same was sold to defendant Paterno Millare who offered
the highest bid of P6,000.00 and a Certificate of Sale in his favor was issued by
the defendant Municipal Treasurer.
5. That all other matters not particularly and specially covered by this stipulation
of facts will be the subject of evidence by the parties.
Sgd. Loreto Roldan - Typ LORETO ROLDAN - Provincial Fiscal -Counsel for
Defendants
Provincial Treasurer of Abra and the Municipal ,Treasurer of Bangued, Abra
Aside from the Stipulation of Facts, the trial court among others, found the
following: (a) that the school is recognized by the government and is offering
Primary, High School and College Courses, and has a school population of more
than one thousand students all in all; (b) that it is located right in the heart of the
town of Bangued, a few meters from the plaza and about 120 meters from the
Court of First Instance building; (c) that the elementary pupils are housed in a
two-storey building across the street; (d) that the high school and college
students are housed in the main building; (e) that the Director with his family is in
the second floor of the main building; and (f) that the annual gross income of the
school reaches more than one hundred thousand pesos.
12 | P a g e
From all the foregoing, the only issue left for the Court to determine and as
agreed by the parties, is whether or not the lot and building in question are used
exclusively for educational purposes. (Rollo, p. 20)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant,
Hon. Eustaquio Z. Montero, filed a Memorandum for the Government on March
25, 1974, and a Supplemental Memorandum on May 7, 1974, wherein they
opined "that based on the evidence, the laws applicable, court decisions and
jurisprudence, the school building and school lot used for educational purposes
of the Abra Valley College, Inc., are exempted from the payment of taxes."
(Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed because of the use of the second
floor by the Director of petitioner school for residential purposes. He thus ruled
for the government and rendered the assailed decision.
After having been granted by the trial court ten (10) days from August 6,
1974 within which to perfect its appeal (Per Order dated August 6, 1974; Annex
"G" of Petition; Rollo, p. 57) petitioner instead availed of the instant petition for
review on certiorari with prayer for preliminary injunction before this Court, which
petition was filed on August 17, 1974 (Rollo, p.2).
In the resolution dated August 16, 1974, this Court resolved to give DUE
COURSE to the petition (Rollo, p. 58). Respondents were required to answer
said petition (Rollo, p. 74).
II. THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT
AND BUILDING OF THE PETITIONER ARE NOT USED EXCLUSIVELY FOR
EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE PRESIDENT
RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.
III. THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT
AND BUILDING OF THE PETITIONER ARE NOT EXEMPT FROM PROPERTY
TAXES AND IN ORDERING PETITIONER TO PAY P5,140.31 AS REALTY
TAXES.
The main issue in this case is the proper interpretation of the phrase "used
exclusively for educational purposes."
13 | P a g e
Petitioner contends that the primary use of the lot and building for educational
purposes, and not the incidental use thereof, determines and exemption from
property taxes under Section 22 (3), Article VI of the 1935 Constitution. Hence,
the seizure and sale of subject college lot and building, which are contrary
thereto as well as to the provision of Commonwealth Act No. 470, otherwise
known as the Assessment Law, are without legal basis and therefore void.
On the other hand, private respondents maintain that the college lot and building
in question which were subjected to seizure and sale to answer for the unpaid tax
are used: (1) for the educational purposes of the college; (2) as the permanent
residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his
family including the in-laws and grandchildren; and (3) for commercial purposes
because the ground floor of the college building is being used and rented by a
commercial establishment, the Northern Marketing Corporation (See photograph
attached as Annex "8" (Comment; Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds application in the
case at bar is Section 22, paragraph 3, Article VI, of the then 1935 Philippine
Constitution, which expressly grants exemption from realty taxes for "Cemeteries,
churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable or
educational purposes ...
The following are exempted from real property tax under the Assessment Law:
(c) churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable, scientific
or educational purposes.
In this regard petitioner argues that the primary use of the school lot and building
is the basic and controlling guide, norm and standard to determine tax
exemption, and not the mere incidental use thereof.
payment of land tax in favor of the convent includes, not only the land actually
occupied by the building but also the adjacent garden devoted to the incidental
use of the parish priest. The lot which is not used for commercial purposes but
serves solely as a sort of lodging place, also qualifies for exemption because this
constitutes incidental use in religious functions.
The phrase "exclusively used for educational purposes" was further clarified by
this Court in the cases of Herrera vs. Quezon City Board of assessment Appeals,
3 SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop of the
Missionary District, 14 SCRA 991 [1965], thus —
The test of exemption from taxation is the use of the property for purposes
mentioned in the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71
Phil, 547 [1941]).
It must be stressed however, that while this Court allows a more liberal and non-
restrictive interpretation of the phrase "exclusively used for educational
purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935
Philippine Constitution, reasonable emphasis has always been made that
exemption extends to facilities which are incidental to and reasonably necessary
for the accomplishment of the main purposes. Otherwise stated, the use of the
school building or lot for commercial purposes is neither contemplated by law,
nor by jurisprudence. Thus, while the use of the second floor of the main building
in the case at bar for residential purposes of the Director and his family, may find
justification under the concept of incidental use, which is complimentary to the
main or primary purpose—educational, the lease of the first floor thereof to the
Northern Marketing Corporation cannot by any stretch of the imagination be
considered incidental to the purpose of education.
It will be noted however that the aforementioned lease appears to have been
raised for the first time in this Court. That the matter was not taken up in the to
court is really apparent in the decision of respondent Judge. No mention thereof
was made in the stipulation of facts, not even in the description of the school
building by the trial judge, both embodied in the decision nor as one of the issues
to resolve in order to determine whether or not said properly may be exempted
15 | P a g e
from payment of real estate taxes (Rollo, pp. 17-23). On the other hand, it is
noteworthy that such fact was not disputed even after it was raised in this Court.
Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up
for the first time on appeal. Nonetheless, as an exception to the rule, this Court
has held that although a factual issue is not squarely raised below, still in the
interest of substantial justice, this Court is not prevented from considering a
pivotal factual matter. "The Supreme Court is clothed with ample authority to
review palpable errors not assigned as such if it finds that their consideration is
necessary in arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA
645 [1984]).
Under the 1935 Constitution, the trial court correctly arrived at the conclusion that
the school building as well as the lot where it is built, should be taxed, not
because the second floor of the same is being used by the Director and his
family for residential purposes, but because the first floor thereof is being used
for commercial purposes. However, since only a portion is used for purposes of
commerce, it is only fair that half of the assessed tax be returned to the school
involved.
This is a petition for review on certiorari under Rule 45 of the Rules of Court,
as amended, of the Decision[1] dated July 17, 2000 of the Court of Appeals in CA-
G.R. SP No. 57014 which affirmed the decision of the Central Board of
Assessment Appeals holding that the lot owned by the petitioner and its hospital
building constructed thereon are subject to assessment for purposes of real
property tax.
The Antecedents
ground floor is being leased to private parties, for canteen and small store
spaces, and to medical or professional practitioners who use the same as their
private clinics for their patients whom they charge for their professional
services. Almost one-half of the entire area on the left side of the building
along Quezon Avenue is vacant and idle, while a big portion on the right side, at
the corner of Quezon Avenue and Elliptical Road, is being leased for commercial
purposes to a private enterprise known as the Elliptical Orchids
and Garden Center.
On June 7, 1993, both the land and the hospital building of the petitioner were
assessed for real property taxes in the amount of P4,554,860 by the City
Assessor of Quezon City.[3] Accordingly, Tax Declaration Nos. C-021-01226 (16-
2518) and C-021-01231 (15-2518-A) were issued for the land and the hospital
building, respectively.[4] On August 25, 1993, the petitioner filed a Claim for
Exemption[5] from real property taxes with the City Assessor, predicated on its
claim that it is a charitable institution. The petitioners request was denied, and a
petition was, thereafter, filed before the Local Board of Assessment Appeals of
Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the City
Assessor. The petitioner alleged that under Section 28, paragraph 3 of the 1987
Constitution, the property is exempt from real property taxes. It averred that a
minimum of 60% of its hospital beds are exclusively used for charity patients and
that the major thrust of its hospital operation is to serve charity patients. The
petitioner contends that it is a charitable institution and, as such, is exempt from
real property taxes. The QC-LBAA rendered judgment dismissing the petition and
holding the petitioner liable for real property taxes.[6]
Undaunted, the petitioner filed its petition in this Court contending that:
17 | P a g e
In their comment on the petition, the respondents aver that the petitioner is
not a charitable entity. The petitioners real property is not exempt from the
payment of real estate taxes under P.D. No. 1823 and even under the 1987
Constitution because it failed to prove that it is a charitable institution and that the
said property is actually, directly and exclusively used for charitable
purposes. The respondents noted that in a newspaper report, it appears that
graft charges were filed with the Sandiganbayan against the director of the
petitioner, its administrative officer, and Zenaida Rivera, the proprietress of the
Elliptical Orchids and Garden Center, for entering into a lease contract over
7,663.13 square meters of the property in 1990 for only P20,000 a month, when
the monthly rental should be P357,000 a month as determined by the
Commission on Audit; and that instead of complying with the directive of the COA
for the cancellation of the contract for being grossly prejudicial to the
18 | P a g e
government, the petitioner renewed the same on March 13, 1995 for a monthly
rental of only P24,000. They assert that the petitioner uses the subsidies granted
by the government for charity patients and uses the rest of its income from the
property for the benefit of paying patients, among other purposes. They aver that
the petitioner failed to adduce substantial evidence that 100% of its out-patients
and 170 beds in the hospital are reserved for indigent patients. The respondents
further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its
record of service. That before a patient is admitted for treatment in the Center,
first impression is that it is pay-patient and required to pay a certain amount as
deposit. That even if a patient is living below the poverty line, he is charged with
high hospital bills. And, without these bills being first settled, the poor patient
cannot be allowed to leave the hospital or be discharged without first paying the
hospital bills or issue a promissory note guaranteed and indorsed by an
influential agency or person known only to the Center; that even the remains of
deceased poor patients suffered the same fate. Moreover, before a patient is
admitted for treatment as free or charity patient, one must undergo a series of
interviews and must submit all the requirements needed by the Center, usually
accompanied by endorsement by an influential agency or person known only to
the Center. These facts were heard and admitted by the Petitioner LCP during
the hearings before the Honorable QC-BAA and Honorable CBAA. These are the
reasons of indigent patients, instead of seeking treatment with the Center, they
prefer to be treated at the Quezon Institute. Can such practice by the Center be
called charitable?[10]
The Issues
The issues for resolution are the following: (a) whether the petitioner is a
charitable institution within the context of Presidential Decree No. 1823 and the
1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and
(b) whether the real properties of the petitioner are exempt from real property
taxes.
On the first issue, we hold that the petitioner is a charitable institution within
the context of the 1973 and 1987 Constitutions. To determine whether an
enterprise is a charitable institution/entity or not, the elements which should be
considered include the statute creating the enterprise, its corporate purposes, its
constitution and by-laws, the methods of administration, the nature of the actual
19 | P a g e
work performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.[11]
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be administered by the Office
of the President of the Philippineswith the Ministry of Health and the Ministry of
Human Settlements. It was organized for the welfare and benefit of the Filipino
people principally to help combat the high incidence of lung and pulmonary
diseases in the Philippines. The raison detre for the creation of the petitioner is
stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern, having
been the leading cause of illness and death in the Philippines, comprising more
than 45% of the total annual deaths from all causes, thus, exacting a tremendous
toll on human resources, which ailments are likely to increase and degenerate
into serious lung diseases on account of unabated pollution, industrialization and
unchecked cigarette smoking in the country;
Whereas, the more common lung diseases are, to a great extent, preventable,
and curable with early and adequate medical care, immunization and through
prompt and intensive prevention and health education programs;
The purposes for which the petitioner was created are spelled out in its
Articles of Incorporation, thus:
SECOND: That the purposes for which such corporation is formed are as follows:
8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be
given to the organization;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
maladies of the people in any and all walks of life, including those who are poor
and needy, all without regard to or discrimination, because of race, creed, color
or political belief of the persons helped; and to enable them to obtain treatment
when such disorders occur;
12. To acquire and/or borrow funds and to own all funds or equipment,
educational materials and supplies by purchase, donation, or otherwise and to
dispose of and distribute the same in such manner, and, on such basis as the
Center shall, from time to time, deem proper and best, under the particular
circumstances, to serve its general and non-profit purposes and objectives;
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and
dispose of properties, whether real or personal, for purposes herein mentioned;
and
Hence, the medical services of the petitioner are to be rendered to the public
in general in any and all walks of life including those who are poor and the needy
without discrimination. After all, any person, the rich as well as the poor, may fall
sick or be injured or wounded and become a subject of charity.[17]
[A]n institution does not lose its charitable character, and consequent exemption
from taxation, by reason of the fact that those recipients of its benefits who are
able to pay are required to do so, where no profit is made by the institution and
the amounts so received are applied in furthering its charitable purposes, and
those benefits are refused to none on account of inability to pay therefor. The
fundamental ground upon which all exemptions in favor of charitable institutions
are based is the benefit conferred upon the public by them, and a consequent
relief, to some extent, of the burden upon the state to care for and advance the
interests of its citizens.[20]
[T]he fact that paying patients are taken, the profits derived from attendance
upon these patients being exclusively devoted to the maintenance of the charity,
seems rather to enhance the usefulness of the institution to the poor; for it is a
matter of common observation amongst those who have gone about at all
amongst the suffering classes, that the deserving poor can with difficulty be
persuaded to enter an asylum of any kind confined to the reception of objects of
charity; and that their honest pride is much less wounded by being placed in an
institution in which paying patients are also received. The fact of receiving money
from some of the patients does not, we think, at all impair the character of the
charity, so long as the money thus received is devoted altogether to the
charitable object which the institution is intended to further. [22]
The money received by the petitioner becomes a part of the trust fund and
must be devoted to public trust purposes and cannot be diverted to private profit
or benefit.[23]
Under P.D. No. 1823, the petitioner is entitled to receive donations. The
petitioner does not lose its character as a charitable institution simply because
the gift or donation is in the form of subsidies granted by the government. As held
by the State Supreme Court of Utah in Yorgason v. County Board of Equalization
of Salt Lake County:[24]
Second, the government subsidy payments are provided to the project. Thus,
those payments are like a gift or donation of any other kind except they come
from the government. In both Intermountain Health Care and the present case,
the crux is the presence or absence of material reciprocity. It is entirely irrelevant
23 | P a g e
to this analysis that the government, rather than a private benefactor, chose to
make up the deficit resulting from the exchange between St. Marks Tower and
the tenants by making a contribution to the landlord, just as it would have been
irrelevant in Intermountain Health Care if the patients income supplements had
come from private individuals rather than the government.
Therefore, the fact that subsidization of part of the cost of furnishing such
housing is by the government rather than private charitable contributions does
not dictate the denial of a charitable exemption if the facts otherwise support
such an exemption, as they do here.[25]
In this case, the petitioner adduced substantial evidence that it spent its
income, including the subsidies from the government for 1991 and 1992 for its
patients and for the operation of the hospital. It even incurred a net loss in 1991
and 1992 from its operations.
The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from
tax payments must be clearly shown and based on language in the law too plain
to be mistaken.[26] As held in Salvation Army v. Hoehn:[27]
An intention on the part of the legislature to grant an exemption from the taxing
power of the state will never be implied from language which will admit of any
other reasonable construction. Such an intention must be expressed in clear and
unmistakable terms, or must appear by necessary implication from the language
used, for it is a well settled principle that, when a special privilege or exemption is
claimed under a statute, charter or act of incorporation, it is to be construed
strictly against the property owner and in favor of the public. This principle
applies with peculiar force to a claim of exemption from taxation . [28]
The Lung Center of the Philippines shall be exempt from the payment of taxes,
charges and fees imposed by the Government or any political subdivision or
instrumentality thereof with respect to equipment purchases made by, or for
the Lung Center.[29]
It is plain as day that under the decree, the petitioner does not enjoy any
property tax exemption privileges for its real properties as well as the building
constructed thereon. If the intentions were otherwise, the same should have
been among the enumeration of tax exempt privileges under Section 2:
...
The rule of expressio unius est exclusio alterius and its variations are canons of
restrictive interpretation. They are based on the rules of logic and the natural
workings of the human mind. They are predicated upon ones own voluntary act
and not upon that of others. They proceed from the premise that the legislature
would not have made specified enumeration in a statute had the intention been
not to restrict its meaning and confine its terms to those expressly mentioned. [30]
The tax exemption under this constitutional provision covers property taxes
only.[33] As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: . . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or
educational purposes.[34]
SECTION 234. Exemptions from Real Property Tax. The following are exempted
from payment of the real property tax:
...
We note that under the 1935 Constitution, ... all lands, buildings, and
improvements used exclusively for charitable purposes shall be exempt from
taxation.[36] However, under the 1973 and the present Constitutions, for lands,
buildings, and improvements of the charitable institution to be considered
exempt, the same should not only be exclusively used for charitable purposes; it
is required that such property be used actually and directly for such purposes. [37]
cemeteries and required that for the exemption of lands, buildings, and
improvements, they should not only be exclusively but also actually and directly
used for religious or charitable purposes. The Constitution is worded
differently. The change should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have sufficed were the words
actually as well as directly not added. There must be proof therefore of
the actual and direct use of the lands, buildings, and improvements for religious
or charitable purposes to be exempt from taxation.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. Exclusive is defined as possessed and enjoyed to the exclusion of
others; debarred from participation or enjoyment; and exclusively is defined,
in a manner to exclude; as enjoying a privilege exclusively.[40] If real property is
used for one or more commercial purposes, it is not exclusively used for the
exempted purposes but is subject to taxation.[41] The words dominant use or
principal use cannot be substituted for the words used exclusively without doing
violence to the Constitutions and the law.[42] Solely is synonymous with
exclusively.[43]
What is meant by actual, direct and exclusive use of the property for
charitable purposes is the direct and immediate and actual application of the
property itself to the purposes for which the charitable institution is organized. It
is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.[44]
The petitioner failed to discharge its burden to prove that the entirety of its
real property is actually, directly and exclusively used for charitable
purposes. While portions of the hospital are used for the treatment of patients
and the dispensation of medical services to them, whether paying or non-paying,
other portions thereof are being leased to private individuals for their clinics and a
canteen.Further, a portion of the land is being leased to a private individual for
her business enterprise under the business name Elliptical Orchids
and Garden Center. Indeed, the petitioners evidence shows that it
collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the
said lessees.
Accordingly, we hold that the portions of the land leased to private entities as
well as those parts of the hospital leased to private individuals are not exempt
from such taxes.[45] On the other hand, the portions of the land occupied by the
27 | P a g e
hospital and portions of the hospital used for its patients, whether paying or non-
paying, are exempt from real property taxes.
This is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to set aside the decision of the Court of Appeals dated November 7,
1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals
in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed,
to wit:
The said License Agreement was duly registered with the Technology Transfer
Board of the Bureau of Patents, Trade Marks and Technology Transfer under
Certificate of Registration No. 8064 (Exh. A).
For the use of the trademark or technology, [respondent] was obliged to pay SC
Johnson and Son, USA royalties based on a percentage of net sales and
subjected the same to 25% withholding tax on royalty payments which
[respondent] paid for the period covering July 1992 to May 1993 in the total
amount of P1,603,443.00 (Exhs. B to L and submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs Division
(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties
arguing that, the antecedent facts attending [respondents] case fall squarely
28 | P a g e
within the same circumstances under which said MacGeorge and Gillete rulings
were issued. Since the agreement was approved by the Technology Transfer
Board, the preferential tax rate of 10% should apply to the [respondent]. We
therefore submit that royalties paid by the [respondent] to SC Johnson and Son,
USA is only subject to 10% withholding tax pursuant to the most-favored nation
clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the
RP-West Germany Tax Treaty [Article 12 (2) (b)] (Petition for Review [filed with
the Court of Appeals], par. 12). [Respondents] claim for the refund
of P963,266.00 was computed as follows:
The Commissioner did not act on said claim for refund. Private respondent
S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before
the Court of Tax Appeals (CTA) where the case was docketed as CTA Case No.
29 | P a g e
5136, to claim a refund of the overpaid withholding tax on royalty payments from
July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of
S.C. Johnson and ordered the Commissioner of Internal Revenue to issue a tax
credit certificate in the amount of P963,266.00 representing overpaid withholding
tax on royalty payments beginning July, 1992 to May, 1993.[2]
The Commissioner of Internal Revenue thus filed a petition for review with the
Court of Appeals which rendered the decision subject of this appeal on
November 7, 1996 finding no merit in the petition and affirming in toto the CTA
ruling.[3]
This petition for review was filed by the Commissioner of Internal Revenue
raising the following issue:
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty,
which is known as the most favored nation clause, the lowest rate of the
Philippine tax at 10% may be imposed on royalties derived by a resident of the
United States from sources within the Philippines only if the circumstances of the
resident of the United States are similar to those of the resident of West
Germany. Since the RP-US Tax Treaty contains no matching credit provision as
that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on
royalties under the RP-US Tax Treaty is not paid under similar circumstances as
those obtaining in the RP-West Germany Tax Treaty. Even assuming that the
phrase paid under similar circumstances refers to the payment of royalties, and
not taxes, as held by the Court of Appeals, still, the most favored nation clause
cannot be invoked for the reason that when a tax treaty contemplates
circumstances attendant to the payment of a tax, or royalty remittances for that
matter, these must necessarily refer to circumstances that are tax-
related. Finally, petitioner argues that since S.C. Johnsons invocation of the most
favored nation clause is in the nature of a claim for exemption from the
application of the regular tax rate of 25% for royalties, the provisions of the treaty
must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant
petition should be denied (1) because it contains a defective certification against
forum shopping as required under SC Circular No. 28-91, that is, the certification
30 | P a g e
was not executed by the petitioner herself but by her counsel; and (2) that the
most favored nation clause under the RP-US Tax Treaty refers to royalties paid
under similar circumstances as those royalties subject to tax in other treaties;
that the phrase paid under similar circumstances does not refer to payment of the
tax but to the subject matter of the tax, that is, royalties, because the most
favored nation clause is intended to allow the taxpayer in one state to avail of
more liberal provisions contained in another tax treaty wherein the country of
residence of such taxpayer is also a party thereto, subject to the basic condition
that the subject matter of taxation in that other tax treaty is the same as that in
the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax
Treaty speaks of royalties of the same kind paid under similar
circumstances. S.C. Johnson also contends that the Commissioner is estopped
from insisting on her interpretation that the phrase paid under similar
circumstances refers to the manner in which the tax is paid, for the reason that
said interpretation is embodied in Revenue Memorandum Circular (RMC) 39-92
which was already abandoned by the Commissioners predecessor in 1993; and
was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid
to an American licensor are subject only to 10% withholding tax pursuant to Art
13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax
Treaty. Said ruling should be given retroactive effect except if such is prejudicial
to the taxpayer pursuant to Section 246 of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum
shopping was signed by petitioners counsel is not a fatal defect as to warrant the
dismissal of this petition since Circular No. 28-91 applies only to original actions
and not to appeals, as in the instant case. Moreover, the requirement that the
certification should be signed by petitioner and not by counsel does not apply to
petitioner who has only the Office of the Solicitor General as statutory
counsel. Petitioner reiterates that even if the phrase paid under similar
circumstances embodied in the most favored nation clause of the RP-US Tax
Treaty refers to the payment of royalties and not taxes, still the presence or
absence of a matching credit provision in the said RP-US Tax Treaty would
constitute a material circumstance to such payment and would be determinative
of the said clauses application.
The attention of the Court has been called to the filing of multiple petitions and
complaints involving the same issues in the Supreme Court, the Court of Appeals
or other tribunals or agencies, with the result that said courts, tribunals or
agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the
Court of Appeals, the petitioner aside from complying with pertinent provisions of
the Rules of Court and existing circulars, must certify under oath to all of the
following facts or undertakings: (a) he has not theretofore commenced any other
action or proceeding involving the same issues in the Supreme Court, the Court
of Appeals, or any tribunal or agency; xxx
(2) Any violation of this revised Circular will entail the following sanctions: (a) it
shall be a cause for the summary dismissal of the multiple petitions or
complaints; xxx
Anent the requirement that the party, not counsel, must certify under oath that
he has not commenced any other action involving the same issues in this Court
or the Court of Appeals or any other tribunal or agency, we are inclined to accept
petitioners submission that since the OSG is the only lawyer for the petitioner,
which is a government agency mandated under Section 35, Chapter 12, title III,
Book IV of the 1987 Administrative Code[4] to be represented only by the Solicitor
General, the certification executed by the OSG in this case constitutes
substantial compliance with Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in this
appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty
regarding the rate of tax to be imposed by the Philippines upon royalties received
by a non-resident foreign corporation. The provision states insofar as pertinent
that-
32 | P a g e
2) However, the tax imposed by that Contracting State shall not exceed.
a) In the case of the United States, 15 percent of the gross amount of the
royalties, and
(ii) 15 percent of the gross amount of the royalties, where the royalties are paid
by a corporation registered with the Philippine Board of Investments and
engaged in preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third State.
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the
quoted provision, it is entitled to the concessional tax rate of 10 percent on
royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which
provides:
(2) However, such royalties may also be taxed in the Contracting State in
which they arise, and according to the law of that State, but the tax so
charged shall not exceed:
xxx
b) 10 percent of the gross amount of royalties arising from the use of, or
the right to use, any patent, trademark, design or model, plan, secret
formula or process, or from the use of or the right to use, industrial,
commercial, or scientific equipment, or for information concerning
industrial, commercial or scientific experience.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit
of 20 percent of the gross amount of such royalties against German income and
corporation tax for the taxes payable in the Philippines on such royalties where
33 | P a g e
the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the
RP-Germany Tax Treaty states-
b) Subject to the provisions of German tax law regarding credit for foreign tax,
there shall be allowed as a credit against German income and corporation tax
payable in respect of the following items of income arising in the Republic of the
Philippines, the tax paid under the laws of the Philippines in accordance with this
Agreement on:
c) For the purpose of the credit referred in subparagraph b) the Philippine tax
shall be deemed to be
cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent
according to paragraph 2 of Article 12, 20 percent of the gross amount of such
royalties.
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty
are not paid under circumstances similar to those in the RP-West Germany Tax
Treaty since there is no provision for a 20 percent matching credit in the former
convention and private respondent cannot invoke the concessional tax rate on
the strength of the most favored nation clause in the RP-US Tax
Treaty. Petitioners position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the
Philippine tax paid on income from sources within the Philippines is allowed as a
credit against German income and corporation tax on the same income. In the
case of royalties for which the tax is reduced to 10 or 15 percent according to
paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be
20% of the gross amount of such royalty. To illustrate, the royalty income of a
German resident from sources within the Philippines arising from the use of, or
the right to use, any patent, trade mark, design or model, plan, secret formula or
process, is taxed at 10% of the gross amount of said royalty under certain
conditions. The rate of 10% is imposed if credit against the German income and
corporation tax on said royalty is allowed in favor of the German resident. That
means the rate of 10% is granted to the German taxpayer if he is similarly
granted a credit against the income and corporation tax of West Germany. The
clear intent of the matching credit is to soften the impact of double taxation by
different jurisdictions.
34 | P a g e
The RP-US Tax Treaty contains no similar matching credit as that provided
under the RP-West Germany Tax Treaty. Hence, the tax on royalties under the
RP-US Tax Treaty is not paid under similar circumstances as those obtaining in
the RP-West Germany Tax Treaty. Therefore, the most favored nation clause in
the RP-West Germany Tax Treaty cannot be availed of in interpreting the
provisions of the RP-US Tax Treaty.[5]
We are unable to sustain the position of the Court of Tax Appeals, which was
upheld by the Court of Appeals, that the phrase paid under similar circumstances
in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted to refer to
payment of royalty, and not to the payment of the tax, for the reason that the
phrase paid under similar circumstances is followed by the phrase to a resident
of a third state. The respondent court held that Words are to be understood in the
context in which they are used, and since what is paid to a resident of a third
state is not a tax but a royalty logic instructs that the treaty provision in question
should refer to royalties of the same kind paid under similar circumstances.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the
Philippines has entered into for the avoidance of double taxation.[9] The purpose
of these international agreements is to reconcile the national fiscal legislations of
the contracting parties in order to help the taxpayer avoid simultaneous taxation
in two different jurisdictions.[10] More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical double taxation,
which is defined as the imposition of comparable taxes in two or more states on
the same taxpayer in respect of the same subject matter and for identical
periods.[11], citing the Committee on Fiscal Affairs of the Organization for
35 | P a g e
The second method for the elimination of double taxation applies whenever
the state of source is given a full or limited right to tax together with the state of
residence. In this case, the treaties make it incumbent upon the state of
residence to allow relief in order to avoid double taxation. There are two methods
of relief- the exemption method and the credit method. In the exemption method,
the income or capital which is taxable in the state of source or situs is exempted
in the state of residence, although in some instances it may be taken into
account in determining the rate of tax applicable to the taxpayers remaining
income or capital. On the other hand, in the credit method, although the income
or capital which is taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the tax levied in the
latter. The basic difference between the two methods is that in the exemption
method, the focus is on the income or capital itself, whereas the credit method
focuses upon the tax.[15]
In negotiating tax treaties, the underlying rationale for reducing the tax rate is
that the Philippines will give up a part of the tax in the expectation that the tax
given up for this particular investment is not taxed by the other country. [16] Thus
the petitioner correctly opined that the phrase royalties paid under similar
circumstances in the most favored nation clause of the US-RP Tax Treaty
necessarily contemplated circumstances that are tax-related.
In the case at bar, the state of source is the Philippines because the royalties
are paid for the right to use property or rights, i.e. trademarks, patents and
36 | P a g e
technology, located within the Philippines.[17] The United States is the state of
residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based
there. Under the RP-US Tax Treaty, the state of residence and the state of
source are both permitted to tax the royalties, with a restraint on the tax that may
be collected by the state of source.[18] Furthermore, the method employed to give
relief from double taxation is the allowance of a tax credit to citizens or residents
of the United States (in an appropriate amount based upon the taxes paid or
accrued to the Philippines) against the United States tax, but such amount shall
not exceed the limitations provided by United States law for the taxable
year.[19] Under Article 13 thereof, the Philippines may impose one of three rates-
25 percent of the gross amount of the royalties; 15 percent when the royalties are
paid by a corporation registered with the Philippine Board of Investments and
engaged in preferred areas of activities; or the lowest rate of Philippine tax that
may be imposed on royalties of the same kind paid under similar circumstances
to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most
favored nation clause, the concessional tax rate of 10 percent provided for in the
RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in
the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar
circumstances. This would mean that private respondent must prove that the RP-
US Tax Treaty grants similar tax reliefs to residents of the United States in
respect of the taxes imposable upon royalties earned from sources within the
Philippines as those allowed to their German counterparts under the RP-
Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar
provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra,
expressly allows crediting against German income and corporation tax of 20% of
the gross amount of royalties paid under the law of the Philippines. On the other
hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with
respect to relief for double taxation, does not provide for similar crediting of 20%
of the gross amount of royalties paid. Said Article 23 reads:
The reason for construing the phrase paid under similar circumstances as
used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is
anchored upon a logical reading of the text in the light of the fundamental
purpose of such treaty which is to grant an incentive to the foreign investor by
lowering the tax and at the same time crediting against the domestic tax abroad a
figure higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere
compositions, but have ends to be achieved and that the general purpose is a
more important aid to the meaning of a law than any rule which grammar may lay
down.[20] It is the duty of the courts to look to the object to be accomplished, the
evils to be remedied, or the purpose to be subserved, and should give the law a
reasonable or liberal construction which will best effectuate its purpose. [21] The
Vienna Convention on the Law of Treaties states that a treaty shall be interpreted
in good faith in accordance with the ordinary meaning to be given to the terms of
the treaty in their context and in the light of its object and purpose.[22]
At the same time, the intention behind the adoption of the provision on relief
from double taxation in the two tax treaties in question should be considered in
light of the purpose behind the most favored nation clause.
We accordingly agree with petitioner that since the RP-US Tax Treaty does
not give a matching tax credit of 20 percent for the taxes paid to the Philippines
on royalties as allowed under the RP-West Germany Tax Treaty, private
respondent cannot be deemed entitled to the 10 percent rate granted under the
latter treaty for the reason that there is no payment of taxes on royalties under
similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such
they are regarded as in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming the
exemption.[27] The burden of proof is upon him who claims the exemption in his
favor and he must be able to justify his claim by the clearest grant of organic or
statute law.[28] Private respondent is claiming for a refund of the alleged
39 | P a g e
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The
decision dated May 7, 1996 of the Court of Tax Appeals and the decision dated
November 7, 1996 of the Court of Appeals are hereby SET ASIDE.SO
ORDERED.
From the decision of the Court of First Instance of Manila (in Civil Case No.
34100) ordering it to pay to plaintiff Republic of the Philippines the sum of
P4,802.37 with 6% interest thereon from the date of the filing of the complaint
until fully paid, plus costs, defendant Mambulao Lumber Company interposed the
present appeal.1
The facts of the case are briefly stated in the decision of the trial court, to wit: .
The facts of this case are not contested and may be briefly summarized as
follows: (a) under the first cause of action, for forest charges covering the period
from September 10, 1952 to May 24, 1953, defendants admitted that they have
a liability of P587.37, which liability is covered by a bond executed by defendant
General Insurance & Surety Corporation for Mambulao Lumber Company,
jointly and severally in character, on July 29, 1953, in favor of herein plaintiff; (b)
under the second cause of action, both defendants admitted a joint and several
liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated
November 27, 1953; and (c) under the third cause of action, both defendants
admitted a joint and several liability in favor of plaintiff for P3,928.30, also
covered by a bond dated July 20, 1954. These three liabilities aggregate to
P4,802.37. If the liability of defendants in favor of plaintiff in the amount already
mentioned is admitted, then what is the defense interposed by the defendants?
The defense presented by the defendants is quite unusual in more ways than
one. It appears from Exh. 3 that from July 31, 1948 to December 29, 1956,
defendant Mambulao Lumber Company paid to the Republic of the Philippines
P8,200.52 for 'reforestation charges' and for the period commencing from April
30, 1947 to June 24, 1948, said defendant paid P927.08 to the Republic of the
Philippines for 'reforestation charges'. These reforestation were paid to the
plaintiff in pursuance of Section 1 of Republic Act 115 which provides that there
shall be collected, in addition to the regular forest charges provided under
Section 264 of Commonwealth Act 466 known as the National Internal Revenue
40 | P a g e
Code, the amount of P0.50 on each cubic meter of timber... cut out and
removed from any public forest for commercial purposes. The amount collected
shall be expended by the director of forestry, with the approval of the secretary
of agriculture and commerce, for reforestation and afforestation of watersheds,
denuded areas ... and other public forest lands, which upon investigation, are
found needing reforestation or afforestation .... The total amount of the
reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it
is the contention of the defendant Mambulao Lumber Company that since the
Republic of the Philippines has not made use of those reforestation charges
collected from it for reforesting the denuded area of the land covered by its
license, the Republic of the Philippines should refund said amount, or, if it
cannot be refunded, at least it should be compensated with what Mambulao
Lumber Company owed the Republic of the Philippines for reforestation
charges. In line with this thought, defendant Mambulao Lumber Company wrote
the director of forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of
which said defendant requested "that our account with your bureau be credited
with all the reforestation charges that you have imposed on us from July 1,
1947 to June 14, 1956, amounting to around P2,988.62 ...". This letter of
defendant Mambulao Lumber Company was answered by the director of
forestry on March 12, 1957, marked Exh. 2, in which the director of forestry
quoted an opinion of the secretary of justice, to the effect that he has no
discretion to extend the time for paying the reforestation charges and also
explained why not all denuded areas are being reforested.
The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid
by defendant-appellant company to plaintiff-appellee as reforestation charges
from 1947 to 1956 may be set off or applied to the payment of the sum of
P4,802.37 as forest charges due and owing from appellant to appellee. It is
appellant's contention that said sum of P9,127.50, not having been used in the
reforestation of the area covered by its license, the same is refundable to it or
may be applied in compensation of said sum of P4,802.37 due from it as forest
charges.1äwphï1.ñët
We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115,
provides:
All revenues collected by virtue of, and pursuant to, the provisions of the
preceding paragraph and from the sale of barks, medical plants and other
products derived from plantations as herein provided shall constitute a fund
to be known as Reforestation Fund, to be expended exclusively in carrying
out the purposes provided for under this Act. All provincial or city treasurers
and their deputies shall act as agents of the Director of Forestry for the
collection of the revenues or incomes derived from the provisions of this
Act. (Emphasis supplied.)
Under this provision, it seems quite clear that the amount collected as
reforestation charges from a timber licenses or concessionaire shall constitute a
fund to be known as the Reforestation Fund, and that the same shall be
expended by the Director of Forestry, with the approval of the Secretary of
Agriculture and Natural Resources for the reforestation or afforestation, among
others, of denuded areas which, upon investigation, are found to be needing
reforestation or afforestation. Note that there is nothing in the law which requires
that the amount collected as reforestation charges should be used exclusively for
the reforestation of the area covered by the license of a licensee or
concessionaire, and that if not so used, the same should be refunded to him.
Observe too, that the licensee's area may or may not be reforested at all,
depending on whether the investigation thereof by the Director of Forestry shows
that said area needs reforestation. The conclusion seems to be that the amount
paid by a licensee as reforestation charges is in the nature of a tax which forms a
part of the Reforestation Fund, payable by him irrespective of whether the area
covered by his license is reforested or not. Said fund, as the law expressly
provides, shall be expended in carrying out the purposes provided for
42 | P a g e
Under Article 1278, NCC, compensation should take place when two
persons in their own right are creditors and debtors of each other. With
respect to the forest charges which the defendant Mambulao Lumber
Company has paid to the government, they are in the coffers of the
government as taxes collected, and the government does not owe
anything, crystal clear that the Republic of the Philippines and the
Mambulao Lumber Company are not creditors and debtors of each other,
because compensation refers to mutual debts. ..
And the weight of authority is to the effect that internal revenue taxes, such as
the forest charges in question, can be the subject of set-off or compensation.
WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in
all respects, with costs against the defendant-appellant. So ordered.
This is a petition for certiorari and mandamus against the Judge of the Court of
First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul
certain orders of the court and for an order in this Court directing the respondent
court below to execute the judgment in favor of the Government against the
estate of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No.
L-14674, January 30, 1960, this Court declared as final and executory the order
for the payment by the estate of the estate and inheritance taxes, charges and
penalties, amounting to P40,058.55, issued by the Court of First Instance of
Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate
of the Late Walter Scott Price." In order to enforce the claims against the estate
the fiscal presented a petition dated June 21, 1961, to the court below for the
execution of the judgment. The petition was, however, denied by the court which
held that the execution is not justifiable as the Government is indebted to the
estate under administration in the amount of P262,200. The orders of the court
below dated August 20, 1960 and September 28, 1960, respectively, are as
follows:
Revenue as ordered paid by this Court on July 5, 1960 in accordance with the
order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be
deducted from the amount of P262,200.00 due and payable to the
Administratrix Simeona K. Price, in this estate, the balance to be paid by the
Government to her without further delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and
it orders that the payment of the claim of the Collector of Internal Revenue be
deferred until the Government shall have paid its accounts to the administratrix
herein amounting to P262,200.00. It may not be amiss to repeat that it is only
fair for the Government, as a debtor, to its accounts to its citizens-creditors
before it can insist in the prompt payment of the latter's account to it, specially
taking into consideration that the amount due to the Government draws
interests while the credit due to the present state does not accrue any interest.
(Order of September 28, 1960)
The petition to set aside the above orders of the court below and for the
execution of the claim of the Government against the estate must be denied for
lack of merit. The ordinary procedure by which to settle claims of indebtedness
against the estate of a deceased person, as an inheritance tax, is for the claimant
to present a claim before the probate court so that said court may order the
administrator to pay the amount thereof. To such effect is the decision of
this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R.
No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court
for the payment of debts and expenses of administration. The proper procedure
is for the court to order the sale of personal estate or the sale or mortgage of
real property of the deceased and all debts or expenses of administrator and
with the written notice to all the heirs legatees and devisees residing in the
Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when
sale or mortgage of real estate is to be made, the regulations contained in Rule
90, section 7, should be complied with.1äwphï1.ñët
Execution may issue only where the devisees, legatees or heirs have entered
into possession of their respective portions in the estate prior to settlement and
payment of the debts and expenses of administration and it is later ascertained
that there are such debts and expenses to be paid, in which case "the court
having jurisdiction of the estate may, by order for that purpose, after hearing,
settle the amount of their several liabilities, and order how much and in what
manner each person shall contribute, and may issue execution if circumstances
45 | P a g e
require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.)
And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or
intestate proceedings to settle the estate of a deceased person, the properties
belonging to the estate are under the jurisdiction of the court and such jurisdiction
continues until said properties have been distributed among the heirs entitled
thereto. During the pendency of the proceedings all the estate is in custodia
legis and the proper procedure is not to allow the sheriff, in case of the court
judgment, to seize the properties but to ask the court for an order to require the
administrator to pay the amount due from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact
that the court having jurisdiction of the estate had found that the claim of the
estate against the Government has been recognized and an amount of P262,200
has already been appropriated for the purpose by a corresponding law (Rep. Act
No. 2700). Under the above circumstances, both the claim of the Government for
inheritance taxes and the claim of the intestate for services rendered have
already become overdue and demandable is well as fully liquidated.
Compensation, therefore, takes place by operation of law, in accordance with the
provisions of Articles 1279 and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguished both debts
to the concurrent amount, eventhough the creditors and debtors are not
aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment
for taxes against the estate of the deceased Walter Scott Price. Furthermore, the
petition for certiorari and mandamus is not the proper remedy for the petitioner.
Appeal is the remedy.
recover a 203 square meter lot which was, sold at public auction to Ho
Fernandez and ordered titled in the latter's name.
On October 15, 1977, a 125 square meter portion of Francia's property was
expropriated by the Republic of the Philippines for the sum of P4,116.00
representing the estimated amount equivalent to the assessed value of the
aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes.
Thus, on December 5, 1977, his property was sold at public auction by the City
Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464
known as the Real Property Tax Code in order to satisfy a tax delinquency of
P2,400.00. Ho Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that
time helping his uncle ship bananas.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He
later amended his complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of
which reads:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of
Title in favor of the defendant Ho Fernandez over the parcel of land including
the improvements thereon, subject to whatever encumbrances appearing at the
back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795)
cancelled.
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Francia prefaced his arguments with the following assignments of grave errors of
law:
We gave due course to the petition for a more thorough inquiry into the
petitioner's allegations that his property was sold at public auction without notice
to him and that the price paid for the property was shockingly inadequate,
amounting to fraud and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought
the problems raised in his petition upon himself. While we commiserate with him
48 | P a g e
at the loss of his property, the law and the facts militate against the grant of his
petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by
legal compensation. He claims that the government owed him P4,116.00 when a
portion of his land was expropriated on October 15, 1977. Hence, his tax
obligation had been set-off by operation of law as of October 15, 1977.
(1) that each one of the obligors be bound principally and that he be at the same
time a principal creditor of the other;
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court
ruled that Internal Revenue Taxes can not be the subject of set-off or
compensation. We stated that:
We stated that a taxpayer cannot refuse to pay his tax when called upon by
the collector because he has a claim against the governmental body not included
in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where
we stated that: "... internal revenue taxes can not be the subject of
compensation: Reason: government and taxpayer are not mutually creditors and
debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes
is not such a debt, demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The
tax was due to the city government while the expropriation was effected by the
national government. Moreover, the amount of P4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the
Philippine National Bank long before the sale at public auction of his remaining
property. Notice of the deposit dated September 28, 1977 was received by the
petitioner on September 30, 1977. The petitioner admitted in his testimony that
he knew about the P4,116.00 deposited with the bank but he did not withdraw it.
It would have been an easy matter to withdraw P2,400.00 from the deposit so
that he could pay the tax obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as
well be shown later, he claimed that he pocketed the notice of the auction sale
without reading it.
Petitioner contends that "the auction sale in question was made without
complying with the mandatory provisions of the statute governing tax sale. No
evidence, oral or otherwise, was presented that the procedure outlined by law on
sales of property for tax delinquency was followed. ... Since defendant Ho
Fernandez has the affirmative of this issue, the burden of proof therefore rests
upon him to show that plaintiff was duly and properly notified ... .(Petition for
Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the
auction sale, has the burden of proof to show that there was compliance with all
the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
But even if the burden of proof lies with the purchaser to show that all legal
prerequisites have been complied with, the petitioner can not, however, deny that
he did receive the notice for the auction sale. The records sustain the lower
court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he
was not properly notified of the auction sale. Surprisingly, however, he admitted
in his testimony that he received the letter dated November 21, 1977 (Exhibit
"I") as shown by his signature (Exhibit "I-A") thereof. He claimed further that he
was not present on December 5, 1977 the date of the auction sale because he
went to Iligan City. As long as there was substantial compliance with the
requirements of the notice, the validity of the auction sale can not be assailed ...
.
A. I just signed it because I was not able to read the same. It was just sent by
mail carrier.
Q. So you admit that you received the original of Exhibit I and you signed upon
receipt thereof but you did not read the contents of it?
Q. After you received that original where did you place it?
Petitioner, therefore, was notified about the auction sale. It was negligence on his
part when he ignored such notice. By his very own admission that he received
the notice, his now coming to court assailing the validity of the auction sale loses
its force.
51 | P a g e
... [R]espondent treasurer now claims that the prices for which the lands
were sold are unconscionable considering the wide divergence between their
assessed values and the amounts for which they had been actually sold.
However, while in ordinary sales for reasons of equity a transaction may be
invalidated on the ground of inadequacy of price, or when such inadequacy
shocks one's conscience as to justify the courts to interfere, such does not
follow when the law gives to the owner the right to redeem, as when a sale is
made at public auction, upon the theory that the lesser the price the easier it is
for the owner to effect the redemption. And so it was aptly said: "When there is
the right to redeem, inadequacy of price should not be material, because the
judgment debtor may reacquire the property or also sell his right to redeem and
thus recover the loss he claims to have suffered by reason of the price obtained
at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et.
ux. v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
In this case now before us, we can aptly use the language of McGuire, et al. v.
Bean, et al. (267 P. 555):
established rules and lead to uncertainty and difficulty in the collection of taxes
which are the life blood of the state. We are convinced that the present rules
are just, and that they bring hardship only to those who have invited it by their
own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has
greatly appreciated in value. Precisely because of the widening of Buendia
Avenue in Pasay City, which necessitated the expropriation of adjoining areas,
real estate values have gone up in the area. However, the price quoted by the
petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the
foregoing reasons which answer the petitioner's claims lead us to deny the
petition.
disallowing its claims which are still pending resolution before the Office of
Energy Affairs (OEA) and the Department of Finance (DOF).
Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no
respect for the findings and rulings of the administrator of the fund itself and in
disallowing a claim which is still pending resolution at the OEA level, and (b)
"grave abuse of discretion and completely without jurisdiction" 5 in declaring that
petitioner cannot avail of the right to offset any amount that it may be required
under the law to remit to the OPSF against any amount that it may receive by
way of reimbursement therefrom are sufficient to bring this petition within Rule 65
of the Rules of Court, and, considering further the importance of the issues
raised, the error in the designation of the remedy pursued will, in this instance, be
excused.
The issues raised revolve around the OPSF created under Section 8 of
Presidential Decree (P.D.) No. 1956, as amended by Executive Order (E.O.) No.
137. As amended, said Section 8 reads as follows:
Sec. 8 . There is hereby created a Trust Account in the books of accounts of the
Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF) for
the purpose of minimizing frequent price changes brought about by exchange
rate adjustments and/or changes in world market prices of crude oil and
imported petroleum products. The Oil Price Stabilization Fund may be sourced
from any of the following:
a) Any increase in the tax collection from ad valorem tax or customs duty
imposed on petroleum products subject to tax under this Decree arising from
exchange rate adjustment, as may be determined by the Minister of Finance in
consultation with the Board of Energy;
b) Any increase in the tax collection as a result of the lifting of tax exemptions of
government corporations, as may be determined by the Minister of Finance in
consultation with the Board of Energy;
d) Any resulting peso cost differentials in case the actual peso costs paid by oil
companies in the importation of crude oil and petroleum products is less than
the peso costs computed using the reference foreign exchange rate as fixed by
the Board of Energy.
1) To reimburse the oil companies for cost increases in crude oil and imported
petroleum products resulting from exchange rate adjustment and/or increase in
world market prices of crude oil;
i. Reduction in oil company take as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;
The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of
Energy.
The material operative facts of this case, as gathered from the pleadings of
the parties, are not disputed.
On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI),
hereinafter referred to as Petitioner, directing the latter to remit to the OPSF its
collection, excluding that unremitted for the years 1986 and 1988, of the
additional tax on petroleum products authorized under the aforesaid Section 8 of
P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00
and informing it that, pending such remittance, all of its claims for reimbursement
from the OPSF shall be held in abeyance. 6
55 | P a g e
On 9 March 1989, the COA sent another letter to petitioner informing it that
partial verification with the OEA showed that the grand total of its unremitted
collections of the above tax is P1,287,668,820.00, broken down as follows:
1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;
directing it to remit the same, with interest and surcharges thereon, within sixty
(60) days from receipt of the letter; advising it that the COA will hold in abeyance
the audit of all its claims for reimbursement from the OPSF; and directing it to
desist from further offsetting the taxes collected against outstanding claims in
1989 and subsequent periods. 7
In its letter of 3 May 1989, petitioner requested the COA for an early
release of its reimbursement certificates from the OPSF covering claims with the
Office of Energy Affairs since June 1987 up to March 1989, invoking in support
thereof COA Circular No. 89-299 on the lifting of pre-audit of government
transactions of national government agencies and government-owned or
controlled corporations. 8
In its Answer dated 8 May 1989, the COA denied petitioner's request for
the early release of the reimbursement certificates from the OPSF and
repeated its earlier directive to petitioner to forward payment of the latter's
unremitted collections to the OPSF to facilitate COA's audit action on the
reimbursement claims. 9
By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA
a proposal for the payment of the collections and the recovery of claims, since
the outright payment of the sum of P1.287 billion to the OEA as a prerequisite for
the processing of said claims against the OPSF will cause a very serious
impairment of its cash position. 10 The proposal reads:
(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as
payment to OPSF, similarly OEA will deliver to Caltex the same amount in cash
reimbursement from OPSF.
56 | P a g e
(3) The COA audit will commence immediately and will be conducted
expeditiously.
On 7 June 1989, the COA, with the Chairman taking no part, handed down
Decision No. 921 accepting the above-stated proposal but prohibiting petitioner
from further offsetting remittances and reimbursements for the current and
ensuing years. 11 Decision No. 921 reads:
Pursuant to this decision, the COA, on 18 August 1989, sent the following letter
to Executive Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12
Disallowance of COA
ParticularsAmount
d. Sales to Atlas/Marcopper
LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the
suspension of payment of all taxes, duties, fees, imposts and other charges
whether direct or indirect due and payable by the copper mining companies in
distress to the national and local governments." It is our opinion that LOI 1416
59 | P a g e
On 16 February 1990, the COA, with Chairman Domingo taking no part and
with Commissioner Fernandez dissenting in part, handed down Decision No.
1171 affirming the disallowance for recovery of financing charges, inventory
losses, and sales to MARCOPPER and ATLAS, while allowing the recovery of
product sales or those arising from export sales. 15 Decision No. 1171 reads as
follows:
Anent the recovery of financing charges you contend that Caltex Phil. Inc. has
the .authority to recover financing charges from the OPSF on the basis of
Department of Finance (DOF) Circular 1-87, dated February 18, 1987, which
allowed oil companies to "recover cost of financing working capital associated
with crude oil shipments," and provided a schedule of reimbursement in terms
60 | P a g e
of peso per barrel. It appears that on November 6, 1989, the DOF issued a
memorandum to the President of the Philippines explaining the nature of these
financing charges and justifying their reimbursement as follows:
exempts distressed mining companies from "all taxes, duties, import fees and
other charges" was issued when OPSF was not yet in existence and could not
have contemplated OPSF imposts at the time of its formulation. Moreover, it is
evident that OPSF was not created to aid distressed mining companies but
rather to help the domestic oil industry by stabilizing oil prices.
Unsatisfied with the decision, petitioner filed on 28 March 1990 the present
petition wherein it imputes to the COA the commission of the following errors: 16
In the Resolution of 5 April 1990, this Court required the respondents to comment
on the petition within ten (10) days from notice. 18
This Court resolved to give due course to this petition on 30 May 1991 and
required the parties to file their respective Memoranda within twenty (20) days
from notice. 20
Upon the other hand, petitioner filed its Memorandum on 14 August 1991.
(1) In view of the expanded role of the OPSF pursuant to Executive Order No.
137, which added a second purpose, to wit:
i. Reduction in oil company take as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;
the "other factors" mentioned therein that may be determined by the Ministry
(now Department) of Finance may include financing charges for "in essence,
financing charges constitute unrecovered cost of acquisition of crude oil incurred
by the oil companies," as explained in the 6 November 1989 Memorandum to the
President of the Department of Finance; they "directly translate to cost
underrecovery in cases where the money market placement rates decline and at
the same time the tax on interest income increases. The relationship is such that
the presence of underrecovery or overrecovery is directly dependent on the
amount and extent of financing charges."
(2) The claim for recovery of financing charges has clear legal and factual basis;
it was filed on the basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:
1. The OPSF foreign exchange premium shall be reduced to a flat rate of one
(1) percent for the first (6) months and 1/32 of one percent per month thereafter
up to a maximum period of one year, to be applied on crude oil' shipments from
January 1, 1987. Shipments with outstanding financing as of January 1, 1987
shall be charged on the basis of the fee applicable to the remaining period of
financing.
63 | P a g e
2. In addition, for shipments loaded after January 1987, oil companies shall be
allowed to recover financing charges directly from the OPSF per barrel of crude
oil based on the following schedule:
Financing Period
Reimbursement Rate
Pesos per Barrel
D ear Sir:
This refers to the letters of the Oil Industry dated December 4, 1986 and
February 5, 1987 and subsequent discussions held by the Price Review
committee on February 6, 1987.
charges, reimbursement may be secured from the OPSF in accordance with the
provisions of the attached Department of Finance circular. 23
Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which
contains the guidelines for the computation of the foreign exchange risk fee and
the recovery of financing charges from the OPSF, to wit:
B. FINANCE CHARGES
1. Oil companies shall be allowed to recover financing charges directly from the
OPSF for both crude and product shipments loaded after January 1, 1987
based on the following rates:
2. The claim shall be filed with the Office of Energy Affairs together with the
claim on peso cost differential for a particular shipment and duly certified
supporting documents providedfor under Ministry of Finance No. 11-85.
The OEA disseminated this Circular to all oil companies in its Memorandum
Circular No. 88-12-017. 26
65 | P a g e
The COA can neither ignore these issuances nor formulate its own
interpretation of the laws in the light of the determination of executive agencies.
The determination by the Department of Finance and the OEA that financing
charges are recoverable from the OPSF is entitled to great weight and
consideration. 27 The function of the COA, particularly in the matter of allowing
or disallowing certain expenditures, is limited to the promulgation of accounting
and auditing rules for, among others, the disallowance of irregular,
unnecessary, excessive, extravagant, or unconscionable expenditures, or uses
of government funds and properties. 28
2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing
charges from the OPSF;
3. Under the principle of ejusdem generis, the "other factors" mentioned in the
second purpose of the OPSF pursuant to E.O. No. 137 can only include "factors
which are of the same nature or analogous to those enumerated;"
As to the power of the COA, which must first be resolved in view of its primacy,
We find the theory of petitioner –– that such does not extend to the
disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or use of government funds and properties, but
only to the promulgation of accounting and auditing rules for, among others,
such disallowance –– to be untenable in the light of the provisions of the 1987
Constitution and related laws.
66 | P a g e
Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts
of, and expenditures or uses of funds and property, owned or held in trust by, or
pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned and controlled corporations with
original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this
Constitution; (b) autonomous state colleges and universities; (c) other
government-owned or controlled corporations and their subsidiaries; and (d)
such non-governmental entities receiving subsidy or equity, directly or indirectly,
from or through the government, which are required by law or the granting
institution to submit to such audit as a condition of subsidy or equity. However,
where the internal control system of the audited agencies is inadequate, the
Commission may adopt such measures, including temporary or special pre-
audit, as are necessary and appropriate to correct the deficiencies. It shall keep
the general accounts, of the Government and, for such period as may be
provided by law, preserve the vouchers and other supporting papers pertaining
thereto.
(2) The Commission shall have exclusive authority, subject to the limitations in
this Article, to define the scope of its audit and examination, establish the
techniques and methods required therefor, and promulgate accounting and
auditing rules and regulations, including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or,
unconscionable expenditures, or uses of government funds and properties.
Examine, audit, and settle, in accordance with law and regulations, all accounts
pertaining to the revenues, and receipts of, and expenditures or uses of funds
and property, owned or held in trust by, or pertaining to, the Government, or any
of its subdivisions, agencies, or instrumentalities including government-owned
or controlled corporations, keep the general accounts of the Government and,
for such period as may be provided by law, preserve the vouchers pertaining
thereto; and promulgate accounting and auditing rules and regulations including
those for the prevention of irregular, unnecessary, excessive, or extravagant
expenditures or uses of funds and property. 31
67 | P a g e
Upon the other hand, under the 1935 Constitution, the power and authority of
the COA's precursor, the General Auditing Office, were, unfortunately, limited;
its very role was markedly passive. Section 2 of Article XI thereofprovided:
Sec. 2. The Auditor General shall examine, audit, and settle all accounts
pertaining to the revenues and receipts from whatever source, including trust
funds derived from bond issues; and audit, in accordance with law and
administrative regulations, all expenditures of funds or property pertaining to or
held in trust by the Government or the provinces or municipalities thereof. He
shall keep the general accounts of the Government and the preserve the
vouchers pertaining thereto. It shall be the duty of the Auditor General to bring
to the attention of the proper administrative officer expenditures of funds or
property which, in his opinion, are irregular, unnecessary, excessive, or
extravagant. He shall also perform such other functions as may be prescribed
by law.
The ruling on this particular point, quoted by petitioner from the cases
of Guevarra vs. Gimenez 32 and Ramos vs.Aquino, 33 are no longer controlling
as the two (2) were decided in the light of the 1935 Constitution.
There can be no doubt, however, that the audit power of the Auditor General
under the 1935 Constitution and the Commission on Audit under the 1973
Constitution authorized them to disallow illegal expenditures of funds or uses of
funds and property. Our present Constitution retains that same power and
authority, further strengthened by the definition of the COA's general jurisdiction
in Section 26 of the Government Auditing Code of the Philippines 34 and
Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting
and auditing rules and regulations for the prevention of irregular, unnecessary,
excessive or extravagant expenditures or uses of funds, 36 the COA
promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is
responsible for the enforcement of the rules and regulations, it goes without
saying that failure to comply with them is a ground for disapproving the payment
of the proposed expenditure. As observed by one of the Commissioners of the
1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37
68 | P a g e
It should be noted, however, that whereas under Article XI, Section 2, of the
1935 Constitution the Auditor General could not correct "irregular, unnecessary,
excessive or extravagant" expenditures of public funds but could only "bring
[the matter] to the attention of the proper administrative officer," under the 1987
Constitution, as also under the 1973 Constitution, the Commission on Audit can
"promulgate accounting and auditing rules and regulations including those for
the prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures or uses of government funds and
properties." Hence, since the Commission on Audit must ultimately be
responsible for the enforcement of these rules and regulations, the failure to
comply with these regulations can be a ground for disapproving the payment of
a proposed expenditure.
Indeed, when the framers of the last two (2) Constitutions conferred upon the
COA a more active role and invested it with broader and more extensive
powers, they did not intend merely to make the COA a toothless tiger, but rather
envisioned a dynamic, effective, efficient and independent watchdog of the
Government.
The issue of the financing charges boils down to the validity of Department of
Finance Circular No. 1-87, Department of Finance Circular No. 4-88 and the
implementing circulars of the OEA, issued pursuant to Section 8, P.D. No.
1956, as amended by E.O. No. 137, authorizing it to determine "other factors"
which may result in cost underrecovery and a consequent reimbursement from
the OPSF.
The Solicitor General maintains that, following the doctrine of ejusdem generis,
financing charges are not included in "cost underrecovery" and, therefore,
cannot be considered as one of the "other factors." Section 8 of P.D. No. 1956,
as amended by E.O. No. 137, does not explicitly define what "cost
underrecovery" is. It merely states what it includes. Thus:
These "other factors" can include only those which are of the same class or
nature as the two specifically enumerated in subparagraphs (i) and (ii). A
common characteristic of both is that they are in the nature of government
mandated price reductions. Hence, any other factor which seeks to be a part of
the enumeration, or which could qualify as a cost underrecovery, must be of the
same class or nature as those specifically enumerated.
Petitioner, however, suggests that E.O. No. 137 intended to grant the
Department of Finance broad and unrestricted authority to determine or define
"other factors."
The rule of ejusdem generis states that "[w]here general words follow an
enumeration of persons or things, by words of a particular and specific
meaning, such general words are not to be construed in their widest extent, but
are held to be as applying only to persons or things of the same kind or class as
those specifically mentioned. 38 A reading of subparagraphs (i) and (ii) easily
discloses that they do not have a common characteristic. The first relates to
price reduction as directed by the Board of Energy while the second refers to
reduction in internal ad valoremtaxes. Therefore, subparagraph (iii) cannot be
limited by the enumeration in these subparagraphs. What should be considered
for purposes of determining the "other factors" in subparagraph (iii) is the first
sentence of paragraph (2) of the Section which explicitly allows cost
underrecovery only if such were incurred as a result of the reduction of
domestic prices of petroleum products.
allowed to recover its financing losses, if any, which may have been sustained
because it accommodated the request of the Government. Although under
Section 29 of the National Internal Revenue Code such losses may be
deducted from gross income, the effect of that loss would be merely to reduce
its taxable income, but not to actually wipe out such losses. The Government
then may consider some positive measures to help petitioner and others
similarly situated to obtain substantial relief. An amendment, as aforestated,
may then be in order.
II. Anent the claims arising from sales to the National Power Corporation, We
find for the petitioner. The respondents themselves admit in their Comment that
underrecovery arising from sales to NPC are reimbursable because NPC was
granted full exemption from the payment of taxes; to prove this, respondents
trace the laws providing for such exemption. 40 The last law cited is the Fiscal
Incentives Regulatory Board's Resolution No. 17-87 of 24 June 1987 which
provides, in part, "that the tax and duty exemption privileges of the National
Power Corporation, including those pertaining to its domestic purchases of
petroleum and petroleum products . . . are restored effective March 10, 1987."
In a Memorandum issued on 5 October 1987 by the Office of the President,
NPC's tax exemption was confirmed and approved.
(1) That the Fund shall be used to reimburse the oil companies for (a) cost
increases of imported crude oil and finished petroleum products resulting from
foreign exchange rate adjustments and/or increases in world market prices of
crude oil; (b) cost underrecovery incurred as a result of fuel oil sales to the
National Power Corporation (NPC); and (c) other cost underrecoveries incurred
as may be finally decided by the Supreme
Court; . . .
Hence, petitioner can recover its claim arising from sales of petroleum products
to the National Power Corporation.
III. With respect to its claim for reimbursement on sales to ATLAS and
MARCOPPER, petitioner relies on Letter of Instruction (LOI) 1416, dated 17
July 1984, which ordered the suspension of payments of all taxes, duties, fees
and other charges, whether direct or indirect, due and payable by the copper
mining companies in distress to the national government. Pursuant to this LOI,
then Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular
No. 84-11-22 advising the oil companies that Atlas Consolidated Mining
Corporation and Marcopper Mining Corporation are among those declared to be
in distress.
In denying the claims arising from sales to ATLAS and MARCOPPER, the
COA, in its 18 August 1989 letter to Executive Director Wenceslao R. de la Paz,
states that "it is our opinion that LOI 1416 which implements the exemption
from payment of OPSF imposts as effected by OEA has no legal basis;" 42 in its
Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to
claim reimbursement for this uncollected impost because LOI 1416 dated July
17, 1984, . . . was issued when OPSF was not yet in existence and could not
have contemplated OPSF imposts at the time of its formulation." 43 It is further
stated that: "Moreover, it is evident that OPSF was not created to aid distressed
mining companies but rather to help the domestic oil industry by stabilizing oil
prices."
a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D.
1956 creating the OPSF was promulgated on October 10, 1984, while E.O. 137,
amending P.D. 1956, was issued on February 25, 1987.
72 | P a g e
b. LOI 1416 was issued in 1984 to assist distressed copper mining companies
in line with the government's effort to prevent the collapse of the copper
industry. P.D No. 1956, as amended, was issued for the purpose of minimizing
frequent price changes brought about by exchange rate adjustments and/or
changes in world market prices of crude oil and imported petroleum product's;
and
c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other
charges, whether direct or indirect, due and payable by the copper mining
companies in distress to the Notional and Local Governments . . ." On the other
hand, OPSF dues are not payable by (sic) distressed copper companies but by
oil companies. It is to be noted that the copper mining companies do not pay
OPSF dues. Rather, such imposts are built in or already incorporated in the
prices of oil products. 44
Lastly, respondents allege that while LOI 1416 suspends the payment of taxes
by distressed mining companies, it does not accord petitioner the same
privilege with respect to its obligation to pay OPSF dues.
We concur with the disquisitions of the respondents. Aside from such reasons,
however, it is apparent that LOI 1416 was never published in the Official
Gazette 45 as required by Article 2 of the Civil Code, which reads:
Laws shall take effect after fifteen days following the completion of their
publication in the Official Gazette, unless it is otherwise provided. . . .
In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46
Resolving the motion for reconsideration of said decision, this Court, in its
Resolution promulgated on 29 December 1986, 47 ruled:
We hold therefore that all statutes, including those of local application and
private laws, shall be published as a condition for their effectivity, which shall
begin fifteen days after publication unless a different effectivity date is fixed by
the legislature.
Covered by this rule are presidential decrees and executive orders promulgated
by the President in the exercise of legislative powers whenever the same are
validly delegated by the legislature or, at present, directly conferred by the
Constitution. Administrative rules and regulations must also be published if their
73 | P a g e
LOI 1416 has, therefore, no binding force or effect as it was never published in
the Official Gazette after its issuance or at any time after the decision in the
abovementioned cases.
Article 2 of the Civil Code was, however, later amended by Executive Order No.
200, issued on 18 June 1987. As amended, the said provision now reads:
Laws shall take effect after fifteen days following the completion of their
publication either in the Official Gazette or in a newspaper of general circulation
in the Philippines, unless it is otherwise provided.
We are not aware of the publication of LOI 1416 in any newspaper of general
circulation pursuant to Executive Order No. 200.
Furthermore, even granting arguendo that LOI 1416 has force and effect,
petitioner's claim must still fail. Tax exemptions as a general rule are construed
strictly against the grantee and liberally in favor of the taxing authority. 48The
burden of proof rests upon the party claiming exemption to prove that it is in fact
covered by the exemption so claimed. The party claiming exemption must
therefore be expressly mentioned in the exempting law or at least be within its
purview by clear legislative intent.
substantiate it. 50 In fact, when OEA submitted the claims of petitioner for pre-
audit, the abovementioned amount was already excluded.
An examination of the records of this case shows that petitioner failed to prove
or substantiate its contention that the amount of P130,420,235.00 is still
pending before the OEA and the DOF. Additionally, We find no reason to doubt
the submission of respondents that said amount has already been passed upon
by the OEA. Hence, the ruling of respondent COA disapproving said claim must
be upheld.
V. The last issue to be resolved in this case is whether or not the amounts due
to the OPSF from petitioner may be offset against petitioner's outstanding
claims from said fund. Petitioner contends that it should be allowed to offset its
claims from the OPSF against its contributions to the fund as this has been
allowed in the past, particularly in the years 1987 and 1988. 51
Furthermore, petitioner cites, as bases for offsetting, the provisions of the New
Civil Code on compensation and Section 21, Book V, Title I-B of the Revised
Administrative Code which provides for "Retention of Money for Satisfaction of
Indebtedness to Government." 52 Petitioner also mentions communications from
the Board of Energy and the Department of Finance that supposedly authorize
compensation.
Refuting respondents' contention, petitioner claims that the amounts due from it
do not arise as a result of taxation because "P.D. 1956, amended, did not
75 | P a g e
create a source of taxation; it instead established a special fund . . .," 56 and that
the OPSF contributions do not go to the general fund of the state and are not
used for public purpose, i.e., not for the support of the government, the
administration of law, or the payment of public expenses. This alleged lack of a
public purpose behind OPSF exactions distinguishes such from a tax. Hence,
the ruling in the Francia case is inapplicable.
Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby
Fund to support the OPSF; the said law provides in part that:
(3) That no amount of the Petroleum Price Standby Fund shall be used to
pay any oil company which has an outstanding obligation to the Government
without said obligation being offset first, subject to the requirements of
compensation or offset under the Civil Code.
Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that
the source of OPSF is taxation. No amount of semantical juggleries could dim
this fact.
It is settled that a taxpayer may not offset taxes due from the claims that he
may have against the government. 58Taxes cannot be the subject of
compensation because the government and taxpayer are not mutually creditors
and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off. 59
76 | P a g e
We may even further state that technically, in respect to the taxes for the
OPSF, the oil companies merely act as agents for the Government in the
latter's collection since the taxes are, in reality, passed unto the end-users ––
the consuming public. In that capacity, the petitioner, as one of such
companies, has the primary obligation to account for and remit the taxes
collected to the administrator of the OPSF. This duty stems from the fiduciary
relationship between the two; petitioner certainly cannot be considered merely
as a debtor. In respect, therefore, to its collection for the OPSF vis-a-vis its
claims for reimbursement, no compensation is likewise legally feasible. Firstly,
the Government and the petitioner cannot be said to be mutually debtors and
creditors of each other. Secondly, there is no proof that petitioner's claim is
already due and liquidated. Under Article 1279 of the Civil Code, in order that
compensation may be proper, it is necessary that:
(1) each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) both debts consist in a sum of :money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been
stated;
That compensation had been the practice in the past can set no valid
precedent. Such a practice has no legal basis. Lastly, R.A. No. 6952 does not
authorize oil companies to offset their claims against their OPSF contributions.
Instead, it prohibits the government from paying any amount from the
Petroleum Price Standby Fund to oil companies which have outstanding
obligations with the government, without said obligation being offset first subject
to the rules on compensation in the Civil Code.
This is a petition for review on certiorari of the June 30, 2000 Decision[1] of the
Court of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision[2] of the
Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April 3,
2001 Resolution[3] denying the motion for reconsideration.
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio
Gold) shall make available to the MANAGERS (Philex Mining) up to
ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as
from time to time may be required by the MANAGERS within the said
3-year period, for use in the MANAGEMENT of the STO. NINO
MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be
deemed, for internal audit purposes, as the owners account in the
Sto. Nino PROJECT. Any part of any income of the PRINCIPAL from
the STO. NINO MINE, which is left with the Sto. Nino PROJECT,
shall be added to such owners account.
(a) The properties shall be appraised and, together with the cash,
shall be carried by the Sto. Nino PROJECT as a special fund to be
known as the MANAGERS account.
(c) The cash and property shall not thereafter be withdrawn from the
Sto. Nino PROJECT until termination of this Agency.
(d) The MANAGERS account shall not accrue interest. Since it is the
desire of the PRINCIPAL to extend to the MANAGERS the benefit of
subsequent appreciation of property, upon a projected termination of
this Agency, the ratio which the MANAGERS account has to the
owners account will be determined, and the corresponding proportion
of the entire assets of the STO. NINO MINE, excluding the claims,
shall be transferred to the MANAGERS, except that such transferred
assets shall not include mine development, roads, buildings, and
similar property which will be valueless, or of slight value, to the
MANAGERS. The MANAGERS can, on the other hand, require at
their option that property originally transferred by them to the Sto.
Nino PROJECT be re-transferred to them. Until such assets are
transferred to the MANAGERS, this Agency shall remain subsisting.
12. The compensation of the MANAGER shall be fifty per cent (50%)
of the net profit of the Sto. Nino PROJECT before income tax. It is
understood that the MANAGERS shall pay income tax on their
compensation, while the PRINCIPAL shall pay income tax on the net
profit of the Sto. Nino PROJECT after deduction therefrom of the
MANAGERS compensation.
79 | P a g e
In the course of managing and operating the project, Philex Mining made
advances of cash and property in accordance with paragraph 5 of the
agreement. However, the mine suffered continuing losses over the years which
resulted to petitioners withdrawal as manager of the mine on January 28,
1982 and in the eventual cessation of mine operations on February 20, 1982.[6]
Subsequently, petitioner wrote off in its 1982 books of account the remaining
outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to
allowances and reserves that were set up in 1981 and P2,860,768.00 to the 1982
operations.
In its 1982 annual income tax return, petitioner deducted from its gross income
the amount of P112,136,000.00 as loss on settlement of receivables from Baguio
Gold against reserves and allowances.[9] However, the Bureau of Internal
Revenue (BIR) disallowed the amount as deduction for bad debt and assessed
petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be allowed
since all requisites for a bad debt deduction were satisfied, to wit: (a) there was a
valid and existing debt; (b) the debt was ascertained to be worthless; and (c) it
was charged off within the taxable year when it was determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management contract it
entered into with Baguio Gold. The bad debt deduction represented advances
made by petitioner which, pursuant to the management contract, formed part of
Baguio Golds pecuniary obligations to petitioner. It also included payments made
by petitioner as guarantor of Baguio Golds long-term loans which legally entitled
petitioner to be subrogated to the rights of the original creditor.
81 | P a g e
On October 28, 1994, the BIR denied petitioners protest for lack of legal
and factual basis. It held that the alleged debt was not ascertained to be
worthless since Baguio Gold remained existing and had not filed a petition for
bankruptcy; and that the deduction did not consist of a valid and subsisting debt
considering that, under the management contract, petitioner was to be paid fifty
percent (50%) of the projects net profit.[10]
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered
judgment, as follows:
The CTA rejected petitioners assertion that the advances it made for the
Sto. Nino mine were in the nature of a loan. It instead characterized the
advances as petitioners investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the
Power of Attorney executed by petitioner and Baguio Gold was actually a
partnership agreement. Since the advanced amount partook of the nature of an
investment, it could not be deducted as a bad debt from petitioners gross
income.
82 | P a g e
The CTA likewise held that the amount paid by petitioner for the long-term
loan obligations of Baguio Gold could not be allowed as a bad debt deduction. At
the time the payments were made, Baguio Gold was not in default since its loans
were not yet due and demandable. What petitioner did was to pre-pay the loans
as evidenced by the notice sent by Bank of America showing that it was merely
demanding payment of the installment and interests due. Moreover, Citibank
imposed and collected a pre-termination penalty for the pre-payment.
The Court of Appeals affirmed the decision of the CTA.[12] Hence, upon
denial of its motion for reconsideration,[13] petitioner took this recourse under Rule
45 of the Rules of Court, alleging that:
II. The Court of Appeals erred in ruling that the 50%-50% sharing in the net
profits of the Sto. Nino Mine indicates that Philex is a partner of Baguio
Gold in the development of the Sto. Nino Mine notwithstanding the clear
absence of any intent on the part of Philex and Baguio Gold to form a
partnership.
III. The Court of Appeals erred in relying only on the Power of Attorney and
in completely disregarding the Compromise Agreement and the Amended
Compromise Agreement when it construed the nature of the advances
made by Philex.
IV. The Court of Appeals erred in refusing to delve upon the issue of the
propriety of the bad debts write-off.[14]
The lower courts correctly held that the Power of Attorney is the instrument
that is material in determining the true nature of the business relationship
between petitioner and Baguio Gold. Before resort may be had to the two
compromise agreements, the parties contractual intent must first be discovered
from the expressed language of the primary contract under which the parties
business relations were founded. It should be noted that the compromise
agreements were mere collateral documents executed by the parties pursuant to
the termination of their business relationship created under the Power of
Attorney. On the other hand, it is the latter which established the juridical relation
of the parties and defined the parameters of their dealings with one another.
business with some degree of continuity, while the joint venture is formed
for the execution of a single transaction, and is thus of a temporary
nature. x x x This observation is not entirely accurate in this jurisdiction,
since under the Civil Code, a partnership may be particular or universal,
and a particular partnership may have for its object a specific undertaking.
x x x It would seem therefore that under Philippine law, a joint venture is a
form of partnership and should be governed by the law of partnerships.
The Supreme Court has however recognized a distinction between these
two business forms, and has held that although a corporation cannot
enter into a partnership contract, it may however engage in a joint venture
with others. x x x (Citations omitted) [16]
However, petitioner asserts that it could not have entered into a partnership
agreement with Baguio Gold because it did not bind itself to contribute money or
property to the project; that under paragraph 5 of the agreement, it was only
optional for petitioner to transfer funds or property to the Sto. Nio project
(w)henever the MANAGERS shall deem it necessary and convenient in
connection with the MANAGEMENT of the STO. NIO MINE.[18]
It should be stressed that the main object of the Power of Attorney was not
to confer a power in favor of petitioner to contract with third persons on behalf of
Baguio Gold but to create a business relationship between petitioner and Baguio
Gold, in which the former was to manage and operate the latters mine through
the parties mutual contribution of material resources and industry. The essence
of an agency, even one that is coupled with interest, is the agents ability
to represent his principal and bring about business relations between the latter
and third persons.[20] Where representation for and in behalf of the principal is
merely incidental or necessary for the proper discharge of ones paramount
undertaking under a contract, the latter may not necessarily be a contract of
agency, but some other agreement depending on the ultimate undertaking of the
parties.[21]
86 | P a g e
In this case, the totality of the circumstances and the stipulations in the
parties agreement indubitably lead to the conclusion that a partnership was
formed between petitioner and Baguio Gold.
First, it does not appear that Baguio Gold was unconditionally obligated to
return the advances made by petitioner under the agreement. Paragraph 5 (d)
thereof provides that upon termination of the parties business relations, the ratio
which the MANAGERS account has to the owners account will be determined,
and the corresponding proportion of the entire assets of the STO. NINO MINE,
excluding the claims shall be transferred to petitioner.[22] As pointed out by the
Court of Tax Appeals, petitioner was merely entitled to a proportionate return of
the mines assets upon dissolution of the parties business relations. There was
nothing in the agreement that would require Baguio Gold to make payments of
the advances to petitioner as would be recognized as an item of obligation or
accounts payable for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a
distribution of assets of the Sto. Nio mine upon termination, a provision that is
more consistent with a partnership than a creditor-debtor relationship. It should
be pointed out that in a contract of loan, a person who receives a loan or money
or any fungible thing acquires ownership thereof and is bound to pay the creditor
an equal amount of the same kind and quality.[23] In this case, however, there
was no stipulation for Baguio Gold to actually repay petitioner the cash and
property that it had advanced, but only the return of an amount pegged at a ratio
which the managers account had to the owners account.
In this connection, we find no contractual basis for the execution of the two
compromise agreements in which Baguio Gold recognized a debt in favor of
petitioner, which supposedly arose from the termination of their business
relations over the Sto. Nino mine. The Power of Attorney clearly provides that
petitioner would only be entitled to the return of a proportionate share of the mine
assets to be computed at a ratio that the managers account had to the owners
account. Except to provide a basis for claiming the advances as a bad debt
deduction, there is no reason for Baguio Gold to hold itself liable to petitioner
87 | P a g e
under the compromise agreements, for any amount over and above the
proportion agreed upon in the Power of Attorney.
Next, the tax court correctly observed that it was unlikely for a business
corporation to lend hundreds of millions of pesos to another corporation with
neither security, or collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a specific maturity date
for the advances to become due and demandable, and the manner of payment
was unclear. All these point to the inevitable conclusion that the advances were
not loans but capital contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto Nio mine is
the fact that it would receive 50% of the net profits as compensation under
paragraph 12 of the agreement. The entirety of the parties contractual
stipulations simply leads to no other conclusion than that petitioners
compensation is actually its share in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the receipt by a
person of a share in the profits of a business is prima facie evidence that he is a
partner in the business. Petitioner asserts, however, that no such inference can
be drawn against it since its share in the profits of the Sto Nio project was in the
nature of compensation or wages of an employee, under the exception provided
in Article 1769 (4) (b).[24]
On this score, the tax court correctly noted that petitioner was not an
employee of Baguio Gold who will be paid wages pursuant to an employer-
employee relationship. To begin with, petitioner was the manager of the project
and had put substantial sums into the venture in order to ensure its viability and
profitability. By pegging its compensation to profits, petitioner also stood not to be
remunerated in case the mine had no income. It is hard to believe that petitioner
would take the risk of not being paid at all for its services, if it were truly just an
ordinary employee.
contribution of the parties to the St. Nino mine. The compensation agreed upon
only serves to reinforce the notion that the parties relations were indeed of
partners and not employer-employee.
All told, the lower courts did not err in treating petitioners advances as
investments in a partnership known as the Sto. Nino mine. The advances were
not debts of Baguio Gold to petitioner inasmuch as the latter was under no
unconditional obligation to return the same to the former under the Power of
Attorney. As for the amounts that petitioner paid as guarantor to Baguio Golds
creditors, we find no reason to depart from the tax courts factual finding that
Baguio Golds debts were not yet due and demandable at the time that petitioner
paid the same. Verily, petitioner pre-paid Baguio Golds outstanding loans to its
bank creditors and this conclusion is supported by the evidence on record.[26]
In sum, petitioner cannot claim the advances as a bad debt deduction from
its gross income. Deductions for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction claimed.[27] In this case,
petitioner failed to substantiate its assertion that the advances were subsisting
debts of Baguio Gold that could be deducted from its gross
income. Consequently, it could not claim the advances as a valid bad debt
deduction.