Taxation Cases

1. COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.CEBU PORTLAND CEMENT COMPANY and COURT
OF TAX APPEALS, respondents. G.R. No. L-29059
December 15, 1987

(Lifeblood of the govt)

FACTS: By virtue of a decision of the CTA, as modified on appeal by the
Supreme Court, the CIR was ordered to refund to Cebu Portland Cement
Company the amount of P 359,408.98, representing overpayments of ad
valorem taxes on cement produced and sold by it. When respondent moved
for a writ of execution, petitioner opposed on the ground that the private
respondent had an outstanding sales tax liability to which the judgment debt
had already been credited. In fact, it was stressed, there was still a balance
owing on the sales taxes in the amount of P 4,789,279.85 plus 28% surcharge.
The CTA granted the CIR’s motion.
The CIR claims that the refund should be charged against the tax deficiency
of the private respondent on the sales of cement under Section 186 of the Tax
Code. His position is that cement is a manufactured and not a mineral
product and therefore not exempt from sales taxes. The petitioner also denies
that the sales tax assessments have already prescribed because the
prescriptive period should be counted from the filing of the sales tax returns,
which had not yet been done by the private respondent.
Meanwhile, the private respondent disclaims liability for the sales taxes, on
the ground that cement is not a manufactured product but a mineral product.
As such, it was exempted from sales taxes. Also, the alleged sales tax
deficiency could not as yet be enforced against it because the tax assessment
was not yet final, the same being still under protest and still to be definitely
resolved on the merits. Besides, the assessment had already prescribed, not
having been made within the reglementary five-year period from the filing of
the tax returns.

ISSUE: Whether or not sales tax was properly imposed upon private
respondent.

HELD: Yes, because cement has always been considered a manufactured

product and not a mineral product. This matter was extensively discussed
and categorically resolved in Commissioner of Internal Revenue v. Republic
Cement Corporation, decided on August 10, 1983, stating that
cement qua cement was never considered as a mineral product within the
meaning of Section 246 of the Tax Code, notwithstanding that at least 80%
of its components are minerals, for the simple reason that cement is the
product of a manufacturing process and is no longer the mineral product
contemplated in the Tax Code (i.e.; minerals subjected to simple treatments)
for the purpose of imposing the ad valorem tax.

The argument that the assessment cannot as yet be enforced because it is still
being contested loses sight of the urgency of the need to collect taxes as "the
lifeblood of the government." If the payment of taxes could be postponed by
simply questioning their validity, the machinery of the state would grind to a
halt and all government functions would be paralyzed.
 2. Municipality of Makati v. Court of Appeals
GR # 89898-9 10/01/90
(exempt from execution)
Facts: An expropriation proceeding for a piece of land filed by the
Municipality of Makati against Admiral Financial and Credit Corp resulted
with the Municipality having to pay P 5,291,666.00 less initial payments by
the municipality. After that, private respondent filed a writ for execution for
the balance. Regional Trial Court granted the motion and directed the bank
to deliver the said balance. Subsequent motions for reconsideration and
appeal to the respondent Court of Appeals by the municipality in order to
stop the garnishment.

Issues: Whether or not the court can validly subject government

accounts/property to garnishment. Whether or not the the court erred with
the decision of assessing the higher amount as to how much the municipality
is willing to pay.

Held: The court ruled that the Municipality of Makati's accounts or property
cannot be held for garnishment as government's fund, held for public use,
can not be held for garnishment. However, the court still held the
Municipality liable for the assessed value of the land and improvements
because the private respondent should be entitled to just compensation.
 3. CIR –v– Algue, Inc., & CTA
G.R. No. L-28896 February 17, 1988
(lifeblood; symbiotic rel; timeliness assess/collect; effect warrant
of destrsint/levy; deductibility promo expense)
FACTS: Algue, Inc., a domestic corporation engaged in engineering,
construction and other allied activities. Philippine Sugar Estate
Development Company had earlier appointed Algue as its agent, authorizing
it to sell its land, factories and oil manufacturing process. [There was a sale
for which] Algue received as agent a commission of P126,000.00, and it was
from this commission that the P75,000.00 promotional fees were paid to the
aforenamed individuals. The payees duly reported their respective shares of
the fees in their income tax returns and paid the corresponding taxes
thereon, and there was no distribution of dividends was involved.

[Algue claimed the 75,000 to be deductible from their tax, to which the CIR
disallowed.]

ISSUE: Whether or not the Collector of Internal Revenue correctly

disallowed the P75,000.00 deduction claimed by private respondent Algue
as legitimate business expenses in its income tax returns.

HELD: NO – CIR is not correct. The burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that
the onus has been discharged satisfactorily. The private respondent has
proved that the payment of the fees was necessary and reasonable in the light
of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos. This was no mean
feat and should be, as it was, sufficiently recompensed.

Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made
in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be
achieved.
It is said that taxes are what we pay for civilization society. Without taxes,
the government would be paralyzed for lack of the motive power to activate
and operate it. Hence, despite the natural reluctance to surrender part of
one's hard earned income to the taxing authorities, every person who is able
to must contribute his share in the running of the government. The
government for its part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance
their moral and material values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it

is a requirement in all democratic regimes that it be exercised reasonably and
in accordance with the prescribed procedure. If it is not, then the taxpayer
has a right to complain and the courts will then come to his succor. For all
the awesome power of the tax collector, he may still be stopped in his tracks
if the taxpayer can demonstrate, as it has here, that the law has not been
observed.
 4. BPI Family Savings Bank v. CA, et al.
GR No. 122480; April 12, 2000
(Mutual observance fairness/honesty; claim refund due to
losses, how to improve entitlement)

Facts: Petitioner BPI Family Savings Bank had an excess withholding taxes
for the year 1989 amounting to P112,491.90. It indicated in its 1989 Income
Tax Return that it would apply the said amount as a tax credit for the
succeeding taxable year, 1990. However because of business losses,
petitioner informed the Bureau of Internal Revenue (BIR) that it would claim
the amount as a tax refund, instead of applying it as a tax credit. When no
action from the BIR was forthcoming, petitioner filed its claim with the Court
of Tax Appeals.

The CTA and the CA, however, denied the claim for tax refund. Since
petitioner declared in its 1989 Income Tax Return that it would apply the
excess withholding tax as a tax credit for the following year, the Tax Court
held that petitioner was presumed to have done so. The CTA and the CA ruled
that petitioner failed to overcome this presumption because it did not
present its 1990 Return, which would have shown that the amount in dispute
was not applied as a tax credit. Hence, the CA concluded that petitioner was
not entitled to a tax refund.

Issue: Whether or not petitioner is entitled to the refund of P112,491.90,

representing excess creditable withholding tax paid for the taxable year 1989.

Held: It is undisputed that petitioner had excess withholding taxes for the
year 1989 and was thus entitled to a refund amounting to P112,491. Pursuant
to Section 69 of the 1986 Tax Code which states that a corporation entitled
to a refund may opt either (1) to obtain such refund or (2) to credit said
amount for the succeeding taxable year.

Petitioner presented evidence to prove its claim that it did not apply the
amount as a tax credit.

A copy of the Final Adjustment Return for 1990 was attached to petitioner's
Motion for Reconsideration filed before the CTA. A final adjustment return
shows whether a corporation incurred a loss or gained a profit during the
taxable year. In this case, that Return clearly showed that petitioner incurred
P52,480,173 as net loss in 1990. Clearly, it could not have applied the amount
in dispute as a tax credit.

The BIR did not controvert the veracity of the said return. It did not even file
an opposition to petitioner's Motion and the 1990 Final Adjustment Return
attached thereto.

Petitioner also calls the attention of this Court, as it had done before the CTA,
to a Decision rendered by the Tax Court in CTA Case No. 4897, involving its
claim for refund for the year 1990. In that case, the Tax Court held that
"petitioner suffered a net loss for the taxable year 1990 . . . ." Respondent,
however, urges this Court not to take judicial notice of the said case.

Respondents' reasoning underscores the weakness of their case. For if they

had really believed that petitioner is not entitled to a tax refund, they could
have easily proved that it did not suffer any loss in 1990. Indeed, it is
noteworthy that respondents opted not to assail the fact appearing therein —
that petitioner suffered a net loss in 1990 — in the same way that it refused
to controvert the same fact established by petitioner's other documentary
exhibits

Technicalities and legalisms, however exalted, should not be misused by the

government to keep money not belonging to it and thereby enrich itself at
the expense of its law-abiding citizens. If the State expects its taxpayers to
observe fairness and honesty in paying their taxes, so must it apply the same
standard against itself in refunding excess payments of such taxes. Indeed,
the State must lead by its own example of honor, dignity and uprightness.
5. COMMISSIONER OF INTERNAL REVENUE vs.TOKYO
SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP
AGENCIES INC., and COURT OF TAX APPEALS
244 SCRA 342; May 26, 1995

Facts: Tokyo Shipping a foreign corporation represented in the Philippines

by Soriamont Steamship Agencies and owns and operates M/V Gardenia.
NASUTRA 2 chartered M/V Gardenia to load 16,500 metric tons of raw sugar
in the Philippines. Soriamont Agency, 4 paid the required income and
common carrier's taxes P59,523.75 and P47,619.00, respectively (Total
P107,142.75). Upon arriving, however, at Guimaras Port of Iloilo, the vessel
found no sugar for loading. NASUTRA and Soriamont mutually agreed to
have the vessel sail for Japan without any cargo. Claiming the pre-payment
of income and common carrier's taxes as erroneous since no receipt was
realized from the charter agreement, Tokyo instituted a claim for tax credit
or refund of the sum P107,142.75 from CIR. Petitioner failed to act promptly
on the claim , hence Tokyo filed a petition for review 6 before Court of Tax
Appeals. CTA decided for Tokyo and denied MR of CIR.

Issue: WON Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit –
whether it was able to prove that it derived no receipts from its charter
agreement, and hence is entitled to a refund of the taxes it pre-paid to the
government.

Ruling: Yes. Pursuant to Section 24 (b) (2) of the National Internal Revenue
Code which at that time, a resident foreign corporation engaged in the
transport of cargo is liable for taxes depending on the amount of income it
derives from sources within the Philippines. Thus, before such a tax liability
can be enforced the taxpayer must be shown to have earned income sourced
from the Philippines.
Indeed, a claim for refund is in the nature of a claim for exemption 8 and
should be construed in strictissimi juris against the taxpayer. And Tokyo has
the burden of proof to establish the factual basis of its claim for tax refund.
But sufficient evidence has already been adduced by Tokyo proving that it
derived no receipt from its charter agreement with NASUTRA - M/V
"Gardenia" arrived in Iloilo on January 10, 1981 but found no raw sugar to
load and returned to Japan without any cargo laden on board.
 6. COMMISSIONER OF INTERNAL REVENUE V.
MISTUBISHIMETAL CORPORATION (181 SCRA 214)

Facts: Atlas Consolidated Mining andDevelopment Corporation, a domestic

corporation, entered into a Loan and Sales Contract with Mitsubishi Metal
Corporation, a Japanese corporation licensed to engage in business in the
Philippines. To be able to extend the loan to Atlas, Mitsubishi entered into
another loan agreement with Export-Import Bank (Eximbank), a financing
institution owned, controlled, and financed by the Japanese government.
After making interest payments to Mitsubishi, with the corresponding 15% tax
thereon remitted to the Government of the Philippines, Altas claimed for tax
credit with the Commissioner of Internal Revenue based on Section 29(b)(7)
(A) of the National Internal Revenue Code, stating that since Eximbank, and
not Mitsubishi, is where the money for the loan originated from Eximbank,
then it should be exempt from paying taxes on its loan thereon.

Issue: WON the interest income from the loans extended to Atlas by
Mitsubishi is excludible from gross income taxation.

NO. Mitsubishi secured the loan from Eximbank in its own independent
capacity as a private entity and not as a conduit of Eximbank. Therefore, what
the subject of the 15% withholding tax is not the interest income paid
by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi
from the loan to Atlas. Thus, it does not come within the ambit of Section
29(b)(7)(A), and it is not exempt from the payment of taxes.

Notes: Findings of fact of the Court of Tax Appeals are entitled to the highest
respect and can only be disturbed on appeal if they are not supported by
substantial evidence or if there is a showing of gross error or abuse on the part
of the tax court. Laws granting exemption from tax are construed strictissimi
jurisagainst the taxpayer and liberally in favor of the taxing power. Taxation
is the rule and exemption is the exception.
 7. Phil Bank of Communications vs. CIR, et. al.
302 SCRA 241 January 28, 1999

Facts: Petitioner, Philippine Bank of Communications (PBCom), a

commercial banking corporation duly organized under Philippine laws, filed
its quarterly income tax returns for the first and second quarters of 1985,
reported profits, and paid the total income tax of P5,016,954.00. The taxes
due were settled by applying PBCom's tax credit memos.

Subsequently, however, PBCom suffered losses so that when it filed its

Annual Income Tax Returns for the year-ended December 31, 1986, the
petitioner likewise reported a net loss of P14,129,602.00, and thus declared
no tax payable for the year.

But during these two years, PBCom earned rental income from leased
properties. The lessees withheld and remitted to the BIR withholding
creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.

Subsequently, Petitioner requested the Commissioner of Internal Revenue,

among others, for a tax credit of P5,016,954.00 representing the
overpayment of taxes in the first and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable
taxes withheld by their lessees from property rentals in 1985 for P282,795.50
and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal

Revenue, petitioner instituted a Petition for Review on November 18, 1988
before the Court of Tax Appeals (CTA).

The CTA rendered a decision which, as stated on the outset, denied the
request of petitioner for a tax refund or credit in the sum amount of
P5,299,749.95, on the ground that it was filed beyond the two-year
reglementary period provided for by law. The petitioner's claim for refund in
1986 amounting to P234,077.69 was likewise denied on the assumption that
it was automatically credited by PBCom against its tax payment in the
succeeding year.
ISSUE: Whether the Court of Appeals erred in denying the plea for tax
refund or tax credits on the ground of prescription

HELD: No. Basic is the principle that "taxes are the lifeblood of the nation."
The primary purpose is to generate funds for the State to finance the needs
of the citizenry and to advance the common weal. 13 Due process of law
under the Constitution does not require judicial proceedings in tax cases.
This must necessarily be so because it is upon taxation that the government
chiefly relies to obtain the means to carry on its operations and it is of utmost
importance that the modes adopted to enforce the collection of taxes levied
should be summary and interfered with as little as possible.

From the same perspective, claims for refund or tax credit should be
exercised within the time fixed by law because the BIR being an
administrative body enforced to collect taxes, its functions should not be
unduly delayed or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec.
229, NIRC of 1997) provides for the prescriptive period for filing a court
proceeding for the recovery of tax erroneously or illegally collected.

The rule states that the taxpayer may file a claim for refund or credit with the
Commissioner of Internal Revenue, within two (2) years after payment of
tax, before any suit in CTA is commenced. The two-year prescriptive period
provided, should be computed from the time of filing the Adjustment Return
and final payment of the tax for the year.
 8. Sison v. Ancheta
GR No. L-59431; 25 July 1984

F A C T S: Batas Pambansa 135 was enacted. Sison, as taxpayer, alleged that

its provision (Section 1) unduly discriminated against him by the imposition
of higher rates upon his income as a professional, that it amounts to class
legislation, and that it transgresses against the equal protection and due
process clauses of the Constitution as well as the rule requiring uniformity in
taxation.

I S S U E: Whether or not BP 135 violates the due process and equal

protection clauses, and the rule on uniformity in taxation.

H E L D: There is a need for proof of such persuasive character as would

lead to a conclusion that there was a violation of the due process and equal
protection clauses. Absent such showing, the presumption of validity must
prevail. Equality and uniformity in taxation means that all taxable articles or
kinds of property of the same class shall be taxed at the same rate. The taxing
power has the authority to make reasonable and natural classifications for
purposes of taxation. Where the differentiation conforms to the practical
dictates of justice and equity, similar to the standards of equal protection, it
is not discriminatory within the meaning of the clause and is therefore
uniform. Taxpayers may be classified into different categories, such as
recipients of compensation income as against professionals. Recipients of
compensation income are not entitled to make deductions for income tax
purposes as there is no practically overhead expense, while professionals and
businessmen have no uniform costs or expenses necessary to produce their
income. There is ample justification to adopt the gross system of income
taxation to compensation income, while continuing the system of net income
taxation as regards professional and business income.
 9. Reyes vs. Almanzor
196 SCRA 322; April 26, 1991

FACTS: Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners
of parcels of land situated in Tondo and Sta. Cruz Districts, City of Manila,
which are leased and entirely occupied as dwelling sites by tenants. Said
tenants were paying monthly rentals not exceeding three hundred pesos
(P300.00) in July, 1971.

On July 14, 1971, the National Legislature enacted Republic Act No. 6359
prohibiting for one year from its effectivity, an increase in monthly rentals of
dwelling units or of lands on which another's dwelling is located, where such
rentals do not exceed three hundred pesos (P300.00) a month but allowing
an increase in rent by not more than 10% thereafter.

On October 12, 1972, Presidential Decree No. 20 amended R.A. No. 6359 by
making absolute the prohibition to increase monthly rentals below P300.00
and by indefinitely suspending the aforementioned provision of the Civil
Code, excepting leases with a definite period. Consequently, the Reyeses
were precluded from raising the rentals and from ejecting the tenants
thereof.

The City Assessor of Manila assessed the value of the Reyeses property on
the schedule of market values duly reviewed by the Secretary of Finance. The
revision entailed an increase to the tax rates and the petitioners averred that
the reassessment imposed upon them greatly exceeded the annual income
derived from their properties.

ISSUE: WON income approach is the method to be used in the tax

assessment and not the comparable sales approach.

HELD: The income approach and not the comparable sales approach must
be used.
“By no strength of the imagination can the market value of properties
covered by P.D. No. 20 be equated with the market value of properties not so
covered. The former has naturally a much lesser market value in view of the
rental restrictions.
In the case at bar, not even the factors determinant of the assessed value of
subject properties under the "comparable sales approach" were presented by
the public respondents, namely: (1) that the sale must represent
a bonafide arm's length transaction between a willing seller and a willing
buyer and (2) the property must be comparable property. Nothing can justify
or support their view as it is of judicial notice that for properties covered by
P.D. 20 especially during the time in question, there were hardly any willing
buyers. As a general rule, there were no takers so that there can be no
reasonable basis for the conclusion that these properties were comparable
with other residential properties not burdened by P.D. 20.”
 10.Nitafan vs. Commissioner of Internal Revenue GR L-78780,
23 July 1987

FACTS: Nitafan and some others seek to prohibit the CIR from making any
deduction of withholding taxes from their salaries or compensation for such
would tantamount to a diminution of their salary, which is unconstitutional.
On June 7 1987, the Court en banc had reaffirmed the directive of the Chief
Justice.

ISSUE: Whether or not the members of the judiciary are exempt from the
payment of income tax.

HELD: What is provided for by the constitution is that salaries of judges may
not be decreased during their continuance in office. They have a fix salary
which may not be subject to the whims and caprices of congress. But the
salaries of the judges shall be subject to the general income tax as well as
other members of the judiciary.
 11. PAL v. Sec of Finance
GR No. 115852; 30 October 1995

F A C T S: The Value-Added Tax [VAT] is levied on the sale, barter or

exchange of goods and properties as well as on the sale or exchange of
services. It is equivalent to 10% of the gross selling price or gross value in
money of goods or properties sold, bartered or exchanged or of the gross
receipts from the sale or exchange of services. Republic Act No. 7716 seeks to
widen the tax base of the existing VAT system and enhance its administration
by amending the National Internal Revenue Code.

These are various suits for certiorari and prohibition challenging the
constitutionality of RA 7716:

In the case at bar, PAL attacks the formal validity of Republic Act No. 7716.
PAL contends that it violates Art. VI, Section 26[1] which provides that
"Every bill passed by Congress shall embrace only one subject which shall be
expressed in the title thereof." It is contended that neither H. No. 11197 nor
S. No. 1630 provided for removal of exemption of PAL transactions from the
payment of the VAT and that this was made only in the Conference
Committee bill which became Republic Act No. 7716 without reflecting this
fact in its title.

The title of Republic Act No. 7716 is:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX [VAT] SYSTEM,

WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION,
AND FOR THESE PURPOSES AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, AND FOR OTHER PURPOSES.

Furthermore, section 103 of RA 7716 states the following:

Section 103. Exempt Transactions.- The following shall be exempt from the
value-added tax:

[q] Transactions which are exempt under special laws, except those granted
under Presidential Decree Nos. 66, 529, 972, 1491, 1590.
The effect of the amendment is to remove the exemption granted to PAL, as
far as the VAT is concerned.

Philippine Airlines [PAL] claims that its franchise under P.D. No. 1590 which
makes it liable for a franchise tax of only 2% of gross revenues "in lieu of all
the other fees and charges of any kind, nature or description, imposed,
levied, established, assessed or collected by any municipal, city, provincial,
or national authority or government agency, now or in the future," cannot be
amended by Rep. Act No. 7716 as to make it [PAL] liable for a 10% value-
added tax on revenues, because Sec. 24 of P.D. No. 1590 provides that PAL's
franchise can only be amended, modified or repealed by a special law
specifically for that purpose.

I S S U E: Whether or not this amendment of Section 103 of the NIRC is

fairly embraced in the title of Republic Act No. 7716, although no mention is
made therein of P. D. No. 1590

H E L D: The court ruled in in the affirmative. The title states that the
purpose of the statute is to expand the VAT system, and one way of doing this
is to widen its base by withdrawing some of the exemptions granted before.
To insist that P. D. No. 1590 be mentioned in the title of the law, in addition
to Section 103 of the NIRC, in which it is specifically referred to, would be to
insist that the title of a bill should be a complete index of its content.

The constitutional requirement that every bill passed by Congress shall

embrace only one subject which shall be expressed in its title is intended to
prevent surprise upon the members of Congress and to inform the people of
pending legislation so that, if they wish to, they can be heard regarding it. If,
in the case at bar, petitioner did not know before that its exemption had been
withdrawn, it is not because of any defect in the title but perhaps for the same
reason other statutes, although published, pass unnoticed until some event
somehow calls attention to their existence.

Republic Act No. 7716 expressly amends PAL's franchise [P. D. No. 1590] by
specifically excepting from the grant of exemptions from the VAT PAL's
exemption under P. D. No. 1590. This is within the power of Congress to do
under Art. XII, Section 11 of the Constitution, which provides that the grant
of a franchise for the operation of a public utility is subject to amendment,
alteration or repeal by Congress when the common good so requires.
 12. ARTURO M. TOLENTINO, petitioner, vs. THE
SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, respondents. G.R. No. 115455 August 25,
1994

FACTS: Herein various petitioners seek to declare RA 7166 as

unconstitutional as it seeks to widen the tax base of the existing VAT system
and enhance its administration by amending the National Internal Revenue
Code. The value-added tax (VAT) is levied on the sale, barter or exchange of
goods and properties as well as on the sale or exchange of services. It is
equivalent to 10% of the gross selling price or gross value in money of goods
or properties sold, bartered or exchanged or of the gross receipts from the
sale or exchange of services.

CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2)
classifies transactions as covered or exempt without reasonable basis and (3)
violates the rule that taxes should be uniform and equitable and that
Congress shall "evolve a progressive system of taxation."
With respect to the first contention, it is claimed that the application of the
tax to existing contracts of the sale of real property by installment or on
deferred payment basis would result in substantial increases in the monthly
amortizations to be paid because of the 10% VAT. The additional amount, it
is pointed out, is something that the buyer did not anticipate at the time he
entered into the contract.

It is next pointed out that while Section 4 of R.A. No. 7716 exempts such
transactions as the sale of agricultural products, food items, petroleum, and
medical and veterinary services, it grants no exemption on the sale of real
property which is equally essential. The sale of real property for socialized
and low-cost housing is exempted from the tax, but CREBA claims that real
estate transactions of "the less poor," i.e., the middle class, who are equally
homeless, should likewise be exempted.

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also
violates Art. VI, Section 28(1) which provides that "The rule of taxation shall
be uniform and equitable. The Congress shall evolve a progressive system of
taxation."
ISSUE: Whether or not RA 7166 violates the principle of progressive system
of taxation.

HELD: No, there is no justification for passing upon the claims that the law
also violates the rule that taxation must be progressive and that it denies
petitioners' right to due process and that equal protection of the laws. The
reason for this different treatment has been cogently stated by an eminent
authority on constitutional law thus: "When freedom of the mind is
imperiled by law, it is freedom that commands a momentum of respect; when
property is imperiled it is the lawmakers' judgment that commands respect.
This dual standard may not precisely reverse the presumption of
constitutionality in civil liberties cases, but obviously it does set up a
hierarchy of values within the due process clause."

Petitioners contend that as a result of the uniform 10% VAT, the tax on
consumption goods of those who are in the higher-income bracket, which
before were taxed at a rate higher than 10%, has been reduced, while basic
commodities, which before were taxed at rates ranging from 3% to 5%, are
now taxed at a higher rate.
Just as vigorously as it is asserted that the law is regressive, the opposite
claim is pressed by respondents that in fact it distributes the tax burden to
as many goods and services as possible particularly to those which are within
the reach of higher-income groups, even as the law exempts basic goods and
services. It is thus equitable. The goods and properties subject to the VAT are
those used or consumed by higher-income groups. These include real
properties held primarily for sale to customers or held for lease in the
ordinary course of business, the right or privilege to use industrial,
commercial or scientific equipment, hotels, restaurants and similar places,
tourist buses, and the like. On the other hand, small business establishments,
with annual gross sales of less than P500,000, are exempted. This, according
to respondents, removes from the coverage of the law some 30,000 business
establishments. On the other hand, an occasional paper of the Center for
Research and Communication cities a NEDA study that the VAT has minimal
impact on inflation and income distribution and that while additional
expenditure for the lowest income class is only P301 or 1.49% a year, that for
a family earning P500,000 a year or more is P8,340 or 2.2%.
Lacking empirical data on which to base any conclusion regarding these
arguments, any discussion whether the VAT is regressive in the sense that it
will hit the "poor" and middle-income group in society harder than it will the
"rich," is largely an academic exercise. On the other hand, the CUP's
contention that Congress' withdrawal of exemption of producers
cooperatives, marketing cooperatives, and service cooperatives, while
maintaining that granted to electric cooperatives, not only goes against the
constitutional policy to promote cooperatives as instruments of social justice
(Art. XII, § 15) but also denies such cooperatives the equal protection of the
law is actually a policy argument. The legislature is not required to adhere to
a policy of "all or none" in choosing the subject of taxation. 44

Nor is the contention of the Chamber of Real Estate and Builders Association
(CREBA), petitioner in G.R. 115754, that the VAT will reduce the mark up of
its members by as much as 85% to 90% any more concrete. It is a mere
allegation. On the other hand, the claim of the Philippine Press Institute,
petitioner in G.R. No. 115544, that the VAT will drive some of its members
out of circulation because their profits from advertisements will not be
enough to pay for their tax liability, while purporting to be based on the
financial statements of the newspapers in question, still falls short of the
establishment of facts by evidence so necessary for adjudicating the question
whether the tax is oppressive and confiscatory.

Indeed, regressivity is not a negative standard for courts to enforce. What

Congress is required by the Constitution to do is to "evolve a progressive
system of taxation." This is a directive to Congress, just like the directive to
it to give priority to the enactment of laws for the enhancement of human
dignity and the reduction of social, economic and political inequalities (Art.
XIII, § 1), or for the promotion of the right to "quality education" (Art. XIV,
§ 1). These provisions are put in the Constitution as moral incentives to
legislation, not as judicially enforceable rights.
 13. ABAKADA v. Ermita (Delegation to the President)
469 SCRA 1: September 1, 2005

Facts: RA 9337: VAT Reform Act enacted on May 24, 2005. Sec. 4 (sales of
goods and properties), Sec. 5 (importation of goods) and Sec. 6 (services and
lease of property) of RA 9337, in collective, granted the Secretary of Finance
the authority to ascertain: (a) whether by 12/31/05, the VAT collection as a
percentage of the 2004 GDP exceeds 2.8% or (b)the national government
deficit as a percentage of the 2004 GDP exceeds 1.5%. If either condition is
met, the Sec of Finance must inform the President who, in turn, must impose
the 12% VAT rate (from 10%) effective January 1, 2006.

ABAKADA maintained that Congress abandoned its exclusive authority to fix

taxes and that RA 9337 contained a uniform proviso authorizing the
President upon recommendation by the DOF Secretary to rasie VAT to 12%.

Sen Pimentel maintained that RA 9337 constituted undue delegation of

legislative powers and a violation of due process since the law was ambiguous
and arbitrary. Same with Rep. Escudero.

Pilipinas Shell dealers argued that the VAT reform was arbitrary, oppressive
and confiscatory.

Respondents countered that the law was complete, that it left no discretion
to the President, and that it merely charged the President with carrying out
the rate increase once any of the two conditions arise.

Issue: WON there was undue delegation.

Held: No delegation but mere implementation of the law. Constitution

allows as under exempted delegation the delegation of tariffs, customs
duties, and other tolls, levies on goods imported and exported. VAT is tax
levied on sales of goods and services which could not fall under this
exemption. Hence, its delegation if unqualified is unconstitutional.

Legislative power is authority to make a complete law. Thus, to be valid, a

law must be complete in itself, setting forth therein the policy and it must fix
a standard, limits of which are sufficiently determinate and determinable.
No undue delegation when congress describes what job must be done who
must do it and the scope of the authority given. (Edu v Ericta)

Sec of Finance was merely tasked to ascertain the existence of facts. All else
was laid out. Mainly ministerial for the Secretary to ascertain the facts and
for the president to carry out the implementation for the VAT. They were
agents of the legislative department.
 14. CIR and Commissioner of Customs vs. Botelho
Shipping Corp. & General Shipping Co., Inc.
G.R. Nos. L-21633-34 June 29, 1967

FACTS: Reparations Commission of the Philippines sold to Botelho the

vessel "M/S Maria Rosello" for the amount of P6,798,888.88. The former
likewise sold to General Shipping the vessel "M/S General Lim" at the price
of P6,951,666.66. Upon arrival at the port of Manila, the Bureau of Customs
placed the same under custody and refused to give due course [to
applications for registration], unless the aforementioned sums of P483,433
and P494,824 be paid as compensating tax. The buyers subsequently filed
with the CTA their respective petitions for review. Pending the case, Republic
Act No. 3079 amended Republic Act No. 1789 — the Original Reparations
Act, under which the aforementioned contracts with the Buyers had been
executed — by exempting buyers of reparations goods acquired from the
Commission, from liability for the compensating tax.

Invoking [section 20 of the RA 3079], the Buyers applied, for the renovation
of their utilizations contracts with the Commission, which granted the
application, and, then, filed with the Tax Court, their supplemental petitions
for review. The CTA ruled in favor of the buyers.

[On appeal, the CIR and COC maintain that such proviso should not be
applied retroactively], upon the ground that a tax exemption must be clear
and explicit; that there is no express provision for the retroactivity of the
exemption, established by Republic Act No. 3079, from the compensating
tax; that the favorable provisions, which are referred to in section 20 thereof,
cannot include the exemption from compensating tax; and, that Congress
could not have intended any retroactive exemption, considering that the
result thereof would be prejudicial to the Government.

ISSUE: Whether or not the tax exemption can be applied retroactively

HELD: YES. The inherent weakness of the last ground becomes manifest
when we consider that, if true, there could be no tax exemption of any kind
whatsoever, even if Congress should wish to create one, because every such
exemption implies a waiver of the right to collect what otherwise would be
due to the Government, and, in this sense, is prejudicial thereto. It may not
be amiss to add that no tax exemption — like any other legal exemption or
exception — is given without any reason therefor. In much the same way as
other statutory commands, its avowed purpose is some public benefit or
interest, which the law-making body considers sufficient to offset the
monetary loss entitled in the grant of the exemption. Indeed, section 20 of
Republic Act No. 3079 exacts a valuable consideration for the retroactivity of
its favorable provisions, namely, the voluntary assumption, by the end-user
who bought reparations goods prior to June 17, 1961 of "all the new
obligations provided for in" said Act.

Furthermore, Section 14 of the Law on Reparations, as amended, exempts

from the compensating tax, not particular persons, but persons belonging to
a particular class. Indeed, appellants do not assail the constitutionality of
said section 14, insofar as it grants exemptions to end-users who, after the
approval of Republic Act No. 3079, on June 17, 1961, purchased reparations
goods procured by the Commission. From the viewpoint of Constitutional
Law, especially the equal protection clause, there is no difference between
the grant of exemption to said end-users, and the extension of the grant to
those whose contracts of purchase and sale mere made before said date,
under Republic Act No. 1789.
 15. Tan v. Del Rosario
G.R. No. 109289. October 3, 1994

Facts: Petitioners assail RA 7496, also commonly known as the Simplified

Net Income Taxation Scheme ("SNIT"), amending certain provisions of the
National Internal Revenue Code, as violative of the constitutional
requirement that taxation shall be "shall be uniform and equitable." The law
would now attempt to tax single proprietorships and professionals
differently from the manner it imposes the tax on corporations and
partnerships.

Petitioner gives a fairly extensive discussion on the merits of the law,

illustrating, in the process, what he believes to be an imbalance between the
tax liabilities of those covered by the amendatory law and those who are not.

Issue: Whether or not RA 7496 is violative of the constitutional requirement

that taxation shall be uniform and equitable.

Held: Petition denied. Uniformity of taxation means that (1) the standards
that are used therefore are substantial and not arbitrary, (2) the
categorization is germane to achieve legislative purpose, (3) the law applies,
all things being equal, to both present and future conditions and (4) the
classification applies equally well to all those belonging to the same class.

With the legislature primarily lies the discretion to determine the nature
(kind), object (purpose), extent (rate), coverage (subjects) and situs (place)
of taxation. This court cannot freely delve into those matters which, by
constitutional fiat, rightly rest on legislative judgment. Of course, where a tax
measure becomes so unconscionable and unjust as to amount to confiscation
of property, courts will not hesitate to strike it down, for, despite all its
plenitude, the power to tax cannot override constitutional proscriptions. This
stage, however, has not been demonstrated to have been reached within any
appreciable distance in this controversy before us.
 16. MACEDA vs. MACARAIG, JR
223 SCRA 217 June 8, 1993
Topic: Classification of Taxes According to Burden or Incidence
(Direct or Indirect)

Facts: This matter of indirect tax exemption of the private respondent

National Power Corporation (NPC) is brought to this Court a second time.
Unfazed by the Decision We promulgated on May 31, 1991 petitioner Ernesto
Maceda asks this Court to reconsider said Decision.

A Chronological review of the relevant NPC laws, specially with respect to its
tax exemption provisions.
1. On November 3, 1936, Commonwealth Act No. 120: creating the
National Power Corporation. The main source of funds for the NPC was the
flotation of bonds in the capital markets 4 and these bonds...“issued under
the authority of this Act shall be exempt from the payment of all taxes by the
Commonwealth of the Philippines…”
2. On June 24, 1938, C.A. No. 344, the provision on tax exemption in
relation to the issuance of the NPC bonds was neither amended nor deleted.
3. On September 30, 1939, C.A. No. 495, the provision on tax exemption
in relation to the issuance of the NPC bonds was neither amended nor
deleted.
4. On June 4, 1949, Republic Act No. 357, any such loan or loans shall be
exempt from taxes, duties, fees, imposts, charges, contributions and
restrictions of the Republic of the Philippines
5. On the same date, R.A. No. 358, to facilitate payment of its
indebtedness, the National Power Corporation shall be exempt from all
taxes.
6. On July 10, 1952, R.A. No. 813 amended R.A. No. 357. The tax provision
as stated in R.A. No. 357, was not amended.
7. On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw
NPC's tax exemption for real estate taxes.
8. On September 8, 1955, R.A. No. 1397, the tax exemption provision
related to the payment of this total indebtedness was not amended nor
deleted.
9. On June 13, 1958, R.A. No. 2055, the tax provision related to the
repayment of loans was not amended nor deleted.
10. On June 18, 1960, R.A. No 2641 converted the NPC from a public
corporation into a stock corporation. No tax exemption was incorporated in
said Act.
11. On June 17, 1961, R.A. No. 3043. No tax provision was incorporated in
said Act.
12. On June 17, 1967, R.A. No 4897. No tax provision was incorporated in
said Act.
13. On September 10, 1971, R.A. No. 6395 was enacted revising the charter
of the NPC. The bonds issued shall be exempt from the payment of all taxes.
As to the foreign loans the NPC was authorized to contract, shall also be
exempt from all taxes,
14. On January 22, 1974, P.D. No. 380…shall also be exempt from all direct
and indirect taxes,
15. On February 26, 1970, P.D. No. 395, no tax exemption provision was
amended, deleted or added.
16. On July 31, 1975, P.D. No. 758 was issued directing that
P200,000,000.00 would be appropriated annually to cover the unpaid
subscription of the Government in the NPC authorized capital stock, which
amount would be taken from taxes accruing to the General Funds of the
Government, proceeds from loans, issuance of bonds, treasury bills or notes
to be issued
17. On May 27, 1976 P.D. No. 938, declared exempt from the payment of all
forms of taxes…
18. On January 30, 1976, P.D. No. 882 was issued withdrawing the tax
exemption of NPC with regard to imports
19. On July 30, 1977, P.D. 1177, All units of government, including
government-owned or controlled corporations, shall pay income taxes,
customs duties and other taxes and fees are imposed under revenues laws:
provided, that organizations otherwise exempted by law from the payment
of such taxes/duties may ask for a subsidy from the General Fund
20. On July 11, 1984, P.D. No. 1931, all exemptions from the payment of
duties, taxes, fees, imposts and other charges heretofore granted in favor of
government-owned or controlled corporations including their subsidiaries,
are hereby withdrawn.
21. On December 17, 1986, E.O. No. 93 was issued with a view to correct
presidential restoration or grant of tax exemption to other government and
private entities without benefit of review by the Fiscal Incentives Review
Board, “WHEREAS, in addition to those tax and duty exemption privileges
were restored by the Fiscal Incentives Review Board (FIRB), a number of
affected entities, government and private, had their tax and duty exemption
privileges restored”
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of
NPC.

Issue: WON NPC is exempted to pay Indirect Income Tax

Held: Yes. Classifications or kinds of Taxes: According to Persons who pay

or who bear the burden:

a. Direct Tax — that where the person supposed to pay the tax
really pays it. WITHOUT transferring the burden to someone else.
Examples: Individual income tax, corporate income tax, transfer
taxes (estate tax, donor's tax), residence tax, immigration tax
b. Indirect Tax — that where the tax is imposed upon
goods BEFORE reaching the consumer who ultimately pays for it, not as a
tax, but as a part of the purchase price.
Examples: the internal revenue indirect taxes (specific tax,
percentage taxes, (VAT) and the tariff and customs indirect taxes (import
duties, special import tax and other dues)

A chronological review of the NPC laws will show that it has been the
lawmaker's intention that the NPC was to be completely tax exempt from all
forms of taxes — direct and indirect.

P.D. No. 380 added phrase "directly or indirectly,"

P.D. No. 938 amended into “exempt from the payment of ALL FORMS
OF taxes”

President Marcos must have considered all the NPC statutes from C.A. No.
120 up to P.D. No. 938.

One common theme in all these laws is that the NPC must be enable to pay
its indebtedness 56 which, as of P.D. No. 938, was P12 Billion in total
domestic indebtedness, at any one time, and U$4 Billion in total foreign
loans at any one time. The NPC must be and has to be exempt from all forms
of taxes if this goal is to be achieved.

The tax exemption stood as is — with the express mention of "direct and
indirect" tax exemptions. Lawmakers wanted the NPC to be exempt from
ALL FORMS of taxes — direct and indirect.
Therefore, that NPC had been granted tax exemption privileges for both
direct and indirect taxes under P.D. No. 938.

The Court rules and declares that the oil companies which supply bunker fuel
oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to
NPC. By the very nature of indirect taxation, the economic burden of such
taxation is expected to be passed on through the channels of commerce to
the user or consumer of the goods sold. Because, however, the NPC has been
exempted from both direct and indirect taxation, the NPC must be held
exempted from absorbing the economic burden of indirect taxation.
 17. ABAKADA v. Ermita (Delegation to the President)
469 SCRA 1: September 1, 2005

Facts: RA 9337: VAT Reform Act enacted on May 24, 2005. Sec. 4 (sales of
goods and properties), Sec. 5 (importation of goods) and Sec. 6 (services and
lease of property) of RA 9337, in collective, granted the Secretary of Finance
the authority to ascertain: (a) whether by 12/31/05, the VAT collection as a
percentage of the 2004 GDP exceeds 2.8% or (b)the national government
deficit as a percentage of the 2004 GDP exceeds 1.5%. If either condition is
met, the Sec of Finance must inform the President who, in turn, must impose
the 12% VAT rate (from 10%) effective January 1, 2006.

ABAKADA maintained that Congress abandoned its exclusive authority to fix

taxes and that RA 9337 contained a uniform proviso authorizing the
President upon recommendation by the DOF Secretary to rasie VAT to 12%.

Sen Pimentel maintained that RA 9337 constituted undue delegation of

legislative powers and a violation of due process since the law was ambiguous
and arbitrary. Same with Rep. Escudero.

Pilipinas Shell dealers argued that the VAT reform was arbitrary, oppressive
and confiscatory.

Respondents countered that the law was complete, that it left no discretion
to the President, and that it merely charged the President with carrying out
the rate increase once any of the two conditions arise.

Issue: WON there was undue delegation.

Held: No delegation but mere implementation of the law. Constitution

allows as under exempted delegation the delegation of tariffs, customs
duties, and other tolls, levies on goods imported and exported. VAT is tax
levied on sales of goods and services which could not fall under this
exemption. Hence, its delegation if unqualified is unconstitutional.

Legislative power is authority to make a complete law. Thus, to be valid, a

law must be complete in itself, setting forth therein the policy and it must fix
a standard, limits of which are sufficiently determinate and determinable.
No undue delegation when congress describes what job must be done who
must do it and the scope of the authority given. (Edu v Ericta)

Sec of Finance was merely tasked to ascertain the existence of facts. All else
was laid out. Mainly ministerial for the Secretary to ascertain the facts and
for the president to carry out the implementation for the VAT. They were
agents of the legislative department.
 19. PHILIPPINE AIRLINES, INC. v. EDU
G.R. No. L- 41383, August 15, 1988

FACTS:
The Philippine Airlines (PAL) is a corporation engaged in the air
transportation business under a legislative franchise, Act No. 42739. Under
its franchise, PAL is exempt from the payment of taxes.
Sometime in 1971, however, Land Transportation Commissioner
Romeo F. Elevate (Elevate) issued a regulation pursuant to Section 8,
Republic Act 4136, otherwise known as the Land and Transportation and
Traffic Code, requiring all tax exempt entities, among them PAL to pay motor
vehicle registration fees.
Despite PAL's protestations, Elevate refused to register PAL's motor
vehicles unless the amounts imposed under Republic Act 4136 were paid.
PAL thus paid, under protest, registration fees of its motor vehicles. After
paying under protest, PAL through counsel, wrote a letter dated May 19,1971,
to Land Transportation Commissioner Romeo Edu (Edu) demanding a
refund of the amounts paid. Edu denied the request for refund. Hence, PAL
filed a complaint against Edu and National Treasurer Ubaldo Carbonell
(Carbonell).

The trial court dismissed PAL's complaint. PAL appealed to the Court
of Appeals which in turn certified the case to the Supreme Court.

ISSUE:
Whether or not motor vehicle registration fees are considered as
taxes.

RULING:
Yes. If the purpose is primarily revenue, or if revenue is, at least, one
of the real and substantial purposes, then the exaction is properly called a
tax. Such is the case of motor vehicle registration fees. The motor vehicle
registration fees are actually taxes intended for additional revenues of the
government even if one fifth or less of the amount collected is set aside for
the operating expenses of the agency administering the program.
 20. ESSO STANDARD EASTERN, INC vs. COMMISSIONER
OF INTERNAL REVENUE
G.R. Nos. L-28508-9, July 7, 1989

FACTS: In CTA Case No. 1251, Esso Standard Eastern Inc. (Esso) deducted
from its gross income for 1959, as part of its o r di na r y a nd ne c e s s a r y
b us ine s s e x p e ns e s , th e a m o u nt i t h a d s p e n t f o r dr il l ing a n d
e x p l o r a t io n o f it s p e tr o le um concessions. This claim was disallowed
by the Commissioner of Internal Revenue (CIR) on the ground that the
expenses should be capitalized and might be written off as a loss only when
a "dry hole" should result. Esso then filed an amended return where it asked
for the refund of P323,279.00 by reason of its abandonment as dry holes of
several of its oil wells. Also claimed as ordinary and necessary expenses
in the same return was the amount of P340,822.04,
representing margin fees it had paid to the Central Bank on its profit
remittances to its New York head office. On August 5, 1964, the CIR granted
a tax credit of P221,033.00 only, disallowing the claimed deduction for the
margin fees paid on the ground that the margin fees paid to the Central Bank
could not be considered taxes or allowed as deductible business expenses.
Esso appealed to the Court of Tax Appeals (CTA) for the refund of the margin
fees it had earlier paid contending that the margin fees were deductible
from gross income either as a tax or as an ordinary and necessary
business expense. However, Esso’s appeal was denied.

ISSUE: (1) Whether or not the margin fees are taxes.

(2) Whether or not the margin fees are necessary and ordinary business
expenses.

RULING: (1) No. A tax is levied to provide revenue for government

operations, while the proceeds of the margin fee are applied to strengthen
our country's international reserves. The margin fee was imposed by the
State in the exercise of its police power and not the power of taxation.(2) No.
Ordinarily, an expense will be considered 'necessary' where the expenditure
is appropriate and helpful in the development of the taxpayer's business. It
is 'ordinary' when it connotes a payment which is normal in relation to
the business of the taxpayer and the surrounding circumstances.
Since the margin fees in question were incurred for the remittance of
funds to Esso's Head Office in New York, which is a separate and distinct
income taxpayer from the branchin the Philippines, for its disposal abroad,
it can never be said therefore that the margin fees were appropriate and
helpful in the development of Esso's business in the Philippines exclusively
or were incurred for purposes proper to the conduct of the affairs of Esso's
branch in the Philippines exclusively or for the purpose of realizing a profit
or of minimizing a loss in the Philippines exclusively.
 22. MERALCO SECURITIES INDUSTRIAL CORPORATION VS.
CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF
ASSESSMENT APPEALS OF LAGUNA and PROVINCIAL
ASSESSOR OF LAGUNA, respondents. G.R. No. L-46245 May 31,
1982

Facts:
Pursuant to a pipeline concession issued under the Petroleum Act of 1949,
Republic Act No. 387, Meralco Securities installed from Batangas to Manila
a pipeline system consisting of cylindrical steel pipes joined together and
buried not less than one meter below the surface along the shoulder of the
public highway. The pipes are embedded in the soil and are firmly and solidly
welded together so as to preclude breakage or damage thereto and prevent
leakage or seepage of the oil. The valves are welded to the pipes so as to make
the pipeline system one single piece of property from end to end.

In order to repair, replace, remove or transfer segments of the pipeline, the

pipes have to be cold-cut by means of a rotary hard-metal pipe-cutter after
digging or excavating them out of the ground where they are buried. In points
where the pipeline traversed rivers or creeks, the pipes were laid beneath the
bed thereof. Hence, the pipes are permanently attached to the land.

Pursuant to the Assessment Law, Commonwealth Act No. 470, the provincial
assessor of Laguna treated the pipeline as real property and issued tax
declarations, containing the assessed values of portions of the pipeline.

Meralco appealed the assessments to the defendants, but the latter ruled that
pipeline is subject to realty tax. The defendants argued that the pipeline is
subject to realty tax because they are contemplated in Assessment Law and
Real Property Tax Code; that they do not fall within the category of property
exempt from realty tax under those laws; that Articles 415 & 416 of the Civil
Code, defining real and personal property have no applications to this case
because these pipes are constructions adhered to soil and things attached to
the land in a fixed manner, and that Meralco Securities is not exempt from
realty tax under petroleum law.

Meralco insists that its pipeline is not subject to realty tax because it is not
real property within the meaning of Art. 415.
Issue:

Whether the aforementioned pipelines are subject to realty tax.

Held:
Yes, the pipelines are subject to realty tax.
Section 2 of the Assessment Law provides that the realty tax is due “on real
property, including land, buildings, machinery, and other improvements.”
This provision is reproduced with some modification in Section 38, Real
Property Tax Code, which provides that “there shall be levied, assessed, and
collected xxx annual ad valorem tax on real property such as land, buildings,
machinery, and other improvements affixed or attached to real property
xxx.”

It is incontestable that the pipeline of Meralco Securities does not fall within
any of the classes of exempt real property enumerated in section 3 of the
Assessment Law and section 40 of the Real Property Tax Code.

Pipeline means a line of pipe connected to pumps, valves and control devices
for conveying liquids, gases or finely divided solids. It is a line of pipe running
upon or in the earth, carrying with it the right to the use of the soil in which
it is placed.

Article 415[l] and [3] provides that real property may consist of constructions
of all kinds adhered to the soil and everything attached to an immovable in a
fixed manner, in such a way that it cannot be separated therefrom without
breaking the material or deterioration of the object.

The pipeline system in question is indubitably a construction adhering to the

soil. It is attached to the land in such a way that it cannot be separated
therefrom without dismantling the steel pipes which were welded to form the
pipeline.
 23. PROCTER & GAMBLE PHILIPPINE MANUFACTURING
CORPORATION
vs. THE MUNICIPALITY OF JAGNA, PROVINCE OF BOHOL
G.R. No. L-24265 December 28, 1979

TOPIC: Nature and amount of license

FACTS: Plaintiff-appellant is a domestic corporation with principal offices

in Manila. lt is a consolidated corporation of Procter & Gamble Trading
Company and Philippine Manufacturing Company, which later became
Procter & Gamble Trading Company, Philippines. It is engaged in the
manufacture of soap, edible oil, margarine and other similar products, and
for this purpose maintains a "bodega" in defendant Municipality where it
stores copra purchased in the municipality and therefrom ships the same for
its manufacturing and other operations.

On December 13, 1957, the Municipal Council of Jagna enacted Municipal

Ordinance No. 4, Series of 1957 or An Ordinance imposing storage fees of all
exportable copra deposited in the bodega within the jurisdlcti0n of the
municipality of jagna bohol. For a period of six years, from 1958 to 1963,
plaintiff paid defendant Municipality, allegedly under protest, storage fees in
the total sum of P42,265.13.

On March 3, 1964, plaintiff filed this suit in the Court of First Instance of
Manila, Branch VI, wherein it prayed that 1) Ordinance No. 4 be declared
inapplicable to it, or in the alter. native, that it be pronounced ultra-vires and
void for being beyond the power of the Municipality to enact; and 2) that
defendant Municipality be ordered to refund to it the amount of P42,265.13
which it had paid under protest; and costs.

The trial Court upheld its jurisdiction as well as defendant Municipality's

power to enact the Ordinance in question under section 2238 of the Revised
Administrative Code, otherwise known as the general welfare clause.

ISSUES: Whether defendant Municipality was authorized to impose and

collect the storage fee provided for in the challenged Ordinance under the
laws then prevailing.
Whether the imposition of P0.10 per 100 kilos of copra stored in a bodega
within the municipality ofJagnas' territory is beyond the cost of regulation
and surveillance

HELD: The validity of the Ordinance must be upheld pursuant to the broad
authority conferred upon municipalities by Commonwealth Act No. 472,
which was the prevailing law when the Ordinance was enacted.

A municipality is authorized to impose three kinds of licenses: (1) a license

for regulation of useful occupation or enterprises; (2) license for restriction
or regulation of non-useful occupations or enterprises; and (3) license for
revenue. 4 It is thus unnecessary, as plaintiff would have us do, to determine
whether the subject storage fee is a tax for revenue purposes or a license fee
to reimburse defendant Municipality for service of supervision because
defendant Municipality is authorized not only to impose a license fee but also
to tax for revenue purposes.

The storage fee imposed under the question Ordinance is actually a

municipal license tax or fee on persons, firms and corporations, like plaintiff,
exercising the privilege of storing copra in a bodega within the Municipality's
territorial jurisdiction. For the term "license tax" has not acquired a fixed
meaning. It is often used indiseriminately to designate impositions exacted
for the exercise of various privileges. In many instances, it refers to revenue-
raising exactions on privileges or activities.

(2) Municipal corporations are allowed wide discretion in determining the

rates of imposable license fees even in cases of purely police power measures.
In the absence of proof as to municipal conditions and the nature of the
business being taxed as well as other factors relevant to the issue of
arbitrariness or unreasonableness of the questioned rates, Courts will go
slow in writing off an Ordinance. In the case at bar, appellant has not
sufficiently shown that the rate imposed by the questioned Ordinance is
oppressive, excessive and prohibitive.
 24. Golden Ribbon Lumber Co., Inc. v. City of Butuan
GR No. L-18534 24 December 1964

F A C T S: Golden Ribbon Lumber Co., Inc., a duly organized domestic

corporation, operated a lumber mill and lumber yard in Butuan City.
Pursuant to Ordinance No. 5, as amended by Ordinance Nos. 9, 10, 47, and
49 of the said city, it paid the taxes provided therein. Claiming that said
ordinance, as amended, was void, it later brought the present action to have
it so declared; to recover the amount paid, and to have appellants
permanently enjoined from enforcing said ordinance as amended.

I S S U E: Whether or not Ordinance No. 5 falls within the Charter of the

City of Butuan.

H E L D: No. The tax imposed is and was really intended to be on lumber

sold and not a tax on, or, license fee for the privilege of operating a lumber
mill and/or a lumber yard. It violates RA 2264 as municipal corporations are
prohibited from imposing charges of taxes of such nature.

Appellants’ claim that the questioned tax is one on business or a privilege tax
for the operation of a lumber mill or a lumber yard is without merit. The
character or nature of a tax is determined by its operation, practical results
and incidents. Neither the original ordinance in question nor the amendatory
ones provide that payment thereof is a condition precedent to the enjoyment
of such privilege or that its non-payment would result in the cancellation of
any previous license granted.

Lastly, the rule is well-settled that municipal corporations are clothed with
no power of taxation; that its charter or a statute must clearly show an intent
to confer that power or the municipal corporation cannot assume and
exercise it, and that any such power granted must be construed strictly, any
doubt or ambiguity arising out from the terms of the grant to be resolved
against the municipality.
 25. City of Ozamiz v. Lumapas
G.R. No. 30727; July 15, 1975;

A. Facts

Serapio LUMAPAS was an operator of Romar Line, a business of

transportation buses for passengers and cargoes in OzamizCity and
Pagadian (Zamboanga del Sur).2.

On Sept. 15, 1964, the Municipal BOARDof Ozamiz CITY enacted Ordinance
No. 466, which imposed “parking fees for everymotor vehicle parked on
any portion of the existing parking space in the City of Ozamiz.

This ordinance covered LUMAPAS’ buses, which parked along Zulueta Street
(in the market area) whenever theywould wait for passengers.b.

The buses had to pay the “parking fee” at a toll station, around 100 ft. after
the “parking area” along Zulueta Street.c.

Under the Ordinance, LUMAPAS paid P1.00 for each of his busses from Oct.
1964 to Jan. 1967, paying a total sumof P1,259.00 under protest.3.

In 1968, LUMAPAS filed a complaint against the CITY, alleging that

Ordinance No. 466 was ultra vires and asking that it be nullified and his
parking fees reimbursed.

The CFI found that (a) the“parking area” was a municipal street, and
(b) the parking fees were in the nature of “toll fees” for the use of
public worksand violated R.A. 4136 (Land Transportation &Traffic Code)
since the “tollfees” were imposed without prior recommendation of the Sec.
of Public Works and
approval by the President

The CFI then declared the Ordinance null and void , and ordered
reimbursement.

[In the course of the petition, the Court noted that the President had
approved the ordinance in question, after the Secretary recommended it to
him.]
Issue:

WON the CITY (through its Municipal BOARD) had the power to enact
Ordinance No. 466.

Held:
YES, the fees were in the nature of parking fees and not toll fees. Petition
granted.

The powers of municipal corporations, as “mere creatures of law,” are

limited to powers (a) expressly granted to them by statute and those (b)
necessarily implied or incidental. The power to tax, meanwhile, is inherent
in Congress. Because of the nature of the limited power of LGUs, “said
powers are construed strictissimijuris and any doubt or ambiguity
arising out of the terms used in granting said powers must be construed
against the municipality.

Under the Ozamiz City Charter (R.A. No. 321), the BOARD has the power to
“regulate the use of streets, avenues, alleys, sidewalks, wharves, piers,
parks, cemeteries, and other public places” and “enact all ordinances it may
deem necessary and proper for the promotion of the morality, peace, good
order, comfort, convenience, andgeneral welfare” of the City. Hence, the
Charter granted the city police power to be exercised as a
governmental function for municipal purposes.

The CITY’s police power included the full power to control and regulate
its streets to promote public health, safety, and welfare and
therefore the time, place, and manner of parking in streets and
public places.

As to LUMAPAS’ contention that the ordinance charged a toll fee:

“Parking” ordinarily implies “more than a temporary and momentary

stoppage at the curb *…+ it involves the idea of using a portion of the street
as a storage for an automobile.”

“Toll,” when used in connection with highways, is “a duty

imposed on goods and passengers travelling public roads. The toll
for use of a toll road is for its use in travelling thereon, not for its
use as a parking place[.]”
In this case, the PUVs are only charged the P1.00 fee when they stop“on any
portion of the existing parking areasfor the purpose of loading and unloading
passengers or cargoes,” not when they merely pass through without
stopping. The fees are therefore “parking fees.”

The Court noted that the purpose of the Ordinance was actually for
regulation not revenue, since the amounts charged are minimal (and
decrease according to the size of the vehicle.) The intended result is
increased safety and convenience arising from decongestion of
traffic.
 26. Apostolic Prefect of Mountain Province v City Treasurer of
Baguio City (1941)
GR No 47252, April 18, 1941

FACTS:

The Apostolic Prefect is a corporation sole, of religious character, organized

under the Philippine laws, and with residence
in Baguio. The City imposed a special assessment against properties within
its territorial jurisdiction, including those of the Apostolic Prefect, which
benefits from its drainage and sewerage system. The Apostolic Prefect
contends that its properties should be free from tax.

ISSUE:

Is the Apostolic Prefect exempt from paying?

RULING:

No, it is liable.

In its broad meaning, tax includes both general taxes and special assessment.
Yet actually, there is a recognized distinction between them in that
assessment is confined to local impositions upon property for the payment
of the cost of public improvements in its immediate vicinity and levied with
reference to special benefits to the property assessed.
A special assessment is not, strictly speaking, a tax; and neither the decree
nor the Constitution exempt the Apostolic Prefect from payment of said
special assessment.

Furthermore, arguendo that exemption may encompass such assessment,

the Apostolic Prefect cannot claim exemption as it has not proven the
property in question is used exclusively for religious purposes; but that it
appears that the same is being used to other non-religious purposes.

Thus, the Apostolic Prefect is required to pay the special assessment.

 27. VICTORIAS MILLING CO. V PPA
153 SCRA 317; August 27, 1987

FACTS: This is a petition for review on certiorari of the July 27, 1984
Decision of the Office of the Presidential Assistant For Legal Affairs
dismissing the appeal from the adverse ruling of the Philippine Ports
Authority on the sole ground that the same was filed beyond the
reglementary period.
On April 28, 1981, the Iloilo Port Manager of respondent Philippine Ports
Authority (PPA for short) wrote petitioner Victorias Milling Co., requiring it
to have its tugboats and barges undergo harbor formalities and pay
entrance/clearance fees as well as berthing fees effective May 1, 1981. PPA,
likewise, requiring petitioner to secure a permit for cargo handling
operations at its Da-an Banua wharf and remit 10% of its gross income for
said operations as the government's share.
Victorias Milling Co. maintained that it is except from paying PPA any fee or
charge because: 1. The wharf and its facilities are built and installed on it’s
own land; 2. Repairs and maintenance are solely paid by it; 3. Maintenance
and dredging of the channel are done by the Company personnel; 4. At not
time has the government paid any centavo for such activities.
ISSUE: WON the Victorias Milling Co. claim of exception for PPA fees is
meritorious.

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

As correctly stated by the Solicitor General, the fees and charges PPA collects
are not for the use of the wharf that petitioner owns but for the privilege of
navigating in public waters, of entering and leaving public harbours and
berthing on public streams or waters.
As to the requirement to remit 10% of the handling charges, Section 6B-(ix)
of the Presidential Decree No. 857 authorized the PPA "To levy dues, rates,
or charges for the use of the premises, works, appliances, facilities, or for
services provided by or belonging to the Authority, or any organization
concerned with port operations." This 10% government share of earnings of
arrastre and stevedoring operators is in the nature of contractual
compensation to which a person desiring to operate arrastre service must
agree as a condition to the grant of the permit to operate.
 28. THE COMMISSIONER OF INTERNAL
REVENUE vs. CONSUELO L. VDA. DE PRIETO
G.R. No. L-13912 September 30, 1960
FACTS:
Respondent Vda. de Prieto conveyed by way of gifts a real property to
her children. The Commissioner of Internal Revenue appraised the property
donated at P1,231,268.00, and assessed the total sum of P117,706.50 as
donor's gift tax, interest and compromises due thereon. Of the total sum of
P117,706.50 paid by respondent on April 29, 1954, the sum of P55,978.65
represents the total interest on account of deliquency. Said sum was claimed
as deduction, among others, by respondent in her 1954 income tax return.
Petitioner disallowed the claim and as a consequence of such disallowance
assessed respondent for 1954 deficiency income tax due on the aforesaid
P55,978.65, including interest 1957, surcharge and compromise for the late
payment.

ISSUE:
Whether or not interest paid for the late payment of tax is deductible
from gross income.

HELD:
YES. For interest to be deductible, it must be shown that: (1) there be
an indebtedness, (2) there should be interest upon it, and (3) what is claimed
as an interest deduction should have been paid or accrued within the year.
In this case, the last two requirements are undisputed. The only question is
if interest on account of late payments of taxes be considered as
indebtedness. Indebtedness has been defined as an unconditional and
legally enforceable obligation for the payment of money. Within the meaning
of that definition, it is apparent that a tax may be considered
indebtedness. Although taxes already due have not, strictly speaking, the
same concept as debts, they are, however, obligations that may be considered
as such. Where statute imposes a personal liability for a tax, the tax becomes,
at least in a board sense, a debt. It follows that the interest paid by herein
respondent for the late payment of her donor's tax is deductible from her
gross income.
In conclusion, interest payment for delinquent taxes is not deductible
as tax but the taxpayer is not precluded thereby from claiming said payment
as deduction on account of interest.
 30.LUZON STEVEDORING CORPORATION vs. COURT OF TAX
APPEALS and the COMMISSIONER OF INTERNAL REVENUE
GR No. L-30232
July 29, 1988

FACTS:
Petitioner-appellant Luzon Stevadoring Corporation (LSC), in 1961 and
1962, for the repair and maintenance of its tugboats, imported various
engine parts and other equipment for which it paid, under protest, the
assessed compensating tax. Unable to secure a tax refund from the CIR, on
January 2, 1964, it filed a Petition for Review with the CTA, praying among
others, that it be granted the refund of the amount of P33,442.13.

Petitioner contends that tugboats are embraced and included in the

term cargo vesselunder the tax exemption provisions of Section 190 of the
Revenue Code, as amended by Republic Act. No. 3176. He argues that in legal
contemplation, the tugboat and a barge loaded with cargoes with the former
towing the latter for loading and unloading of a vessel in part, constitute a
single vessel. Accordingly, it concludes that the engines, spare parts and
equipment imported by it and used in the repair and maintenance of its
tugboats are exempt from compensating tax.
The CTA, however, in a Decision dated October 21, 1969 denied the various
claims for tax refund. Its Motion for Reconsideration was also denied.

ISSUES:
Whether or not petitioner’s tugboats can be interpreted to be included in the
term “cargo vessels” for purposes of the tax exemption provided for in
Section 190 of the National Internal Revenue Code, as amended by Republic
Act No. 3176.

HELD:
Petition without merit. Section 190 of NIRC provides that the tax imposed in
this section shall not apply to articles to be used by the importer himself in
the manufacture or preparation of articles subject to specific tax or those for
consignment abroad and are to form part thereof or to articles to be used by
the importer himself as passenger and/or cargo vessel, whether coastwise or
oceangoing, including engines and spare parts of said vessel.
This Court has laid down the rule that “as the power of taxation is a high
prerogative of sovereignty, the relinquishment is never presumed and any
reduction or dimunition thereof with respect to its mode or its rate, must be
strictly construed, and the same must be coached in clear and unmistakable
terms in order that it may be applied. More specifically stated, the general
rule is that any claim for exemption from the tax statute should be strictly
construed against the taxpayer.

As correctly analyzed by the Court of Tax Appeals, in order that the

importations in question may be declared exempt from the compensating
tax, it is indispensable that the requirements of the amendatory law be
complied with, namely: (1) the engines and spare parts must be used by the
importer himself as a passenger and/or cargo, vessel; and (2) the said
passenger and/or cargo vessel must be used in coastwise or oceangoing
navigation.

As pointed out by the CTA, the amendatory provisions of RA 3176 limit tax
exemption from the compensating tax to imported items to be used by the
importer himself as operator of passenger and/or cargo vessel.

As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as

follows:

A tugboat is a strongly built, powerful steam or power vessel, used for towing
and, now, also used for attendance on vessel. (Webster New International
Dictionary, 2nd Ed.)
A tugboat is a diesel or steam power vessel designed primarily for moving
large ships to and from piers for towing barges and lighters in harbors, rivers
and canals. (Encyclopedia International Grolier, Vol. 18, p. 256).
A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier’s
Law Dictionary.).
Under the foregoing definitions, petitioner’s tugboats clearly do not fall
under the categories of passenger and/or cargo vessels. Thus, it is a cardinal
principle of statutory construction that where a provision of law speaks
categorically, the need for interpretation is obviated, no plausible pretense
being entertained to justify non-compliance. All that has to be done is to
apply it in every case that falls within its terms (Allied Brokerage Corp. v.
Commissioner of Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v.
DBP, L-26419, 35 SCRA 270 [1970]).

And, even if construction and interpretation of the law is insisted upon,

following another fundamental rule that statutes are to be construed in the
light of purposes to be achieved and the evils sought to be remedied (People
v. Purisima etc., et al., L-42050-66, 86 SCRA 544 [1978], it will be noted that
the legislature in amending Section 190 of the Tax Code by Republic Act
3176, as appearing in the records, intended to provide incentives and
inducements to bolster the shipping industry and not the business of
stevedoring, as manifested in the sponsorship speech of Senator Gil Puyat.
 31. CIR v Gotamco
GR No L-31092, February 27, 1987

FACTS:

The World Health Organization (WHO) decided to construct a building to

house its offices, as well as the other United
Nations Offices in Manila. Inviting bids for the construction of the building,
the WHO informed the bidders of its tax exemptions. The contract was
awarded to John Gotamco and sons. The Commissioner opined that a 3%
contractor’s tax should be due from the contractor. The WHO issued a
certification that Gotamco should be exempted, but the Commissioner
insisted on the tax. Raised in the Court of Tax Appeals, the Court ruled in
favor of Gotamco.

ISSUE:
Is Gotamco liable for the tax?

RULING:
No. Direct taxes are those that are demanded from the very person who, it is
intended or desired, should pay them; while indirect taxes are those that are
demanded in the first instance from one person in the expectation and
intention that he can shift the burden to someone else.

Herein, the contractor’s tax is payable by the contractor but it is the owner of
the building that shoulders the burden of the tax because the same is shifted
by the contractor to the owner as a matter of self-preservation. Such tax is an
“indirect tax” on the organization, as the payment thereof or its inclusion in
the bid price would have meant an increase in the construction cost of the
building.

Hence, WHO’s exemption from “indirect taxes” implies that Gotamco is

exempt from contractor’s tax.
 32.CIR v. CA, CTA, AdMU
GR No.115349; 18 April 1997

F A C T S:

Private respondent, Ateneo de Manila University, is a non-stock, non-profit

educational institution with auxiliary units and branches all over the
country. The Institute of Philippine Culture (IPC) is an auxiliary unit with no
legal personality separate and distinct from private respondent. The IPC is a
Philippine unit engaged in social science studies of Philippine society and
culture. Occasionally, it accepts sponsorships for its research activities from
international organizations, private foundations and government agencies.

On 8 July 1983, private respondent received from CIR a demand letter dated
3 June 1983, assessing private respondent the sum of P174,043.97 for alleged
deficiency contractor’s tax, and an assessment dated 27 June 1983 in the sum
of P1,141,837 for alleged deficiency income tax, both for the fiscal year ended
31 March 1978. Denying said tax liabilities, private respondent sent
petitioner a letter-protest and subsequently filed with the latter a
memorandum contesting the validity of the assessments.

After some time petitioner issued a final decision dated 3 August 1988
reducing the assessment for deficiency contractor’s tax from P193,475.55 to
P46,516.41, exclusive of surcharge and interest.

The lower courts ruled in favor of respondent. Hence this petition.

Petitioner Commissioner of Internal Revenue contends that Private

Respondent Ateneo de Manila University "falls within the definition" of an
independent contractor and "is not one of those mentioned as excepted";
hence, it is properly a subject of the three percent contractor's tax levied by
the foregoing provision of law. Petitioner states that the "term 'independent
contractor' is not specifically defined so as to delimit the scope thereof, so
much so that any person who . . . renders physical and mental service for a
fee, is now indubitably considered an independent contractor liable to 3%
contractor's tax."
I S S U E:

Whether or not private respondent falls under the purview of independent

contractor pursuant to Section 205 of the Tax Code and is subject to a 3%
contractors tax.

H E LD:

The petition is unmeritorious.

The term "independent contractors" include persons (juridical or

natural) not enumerated above (but not including individuals subject to the
occupation tax under Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for a fee regardless of
whether or not the performance of the service calls for the exercise or use of
the physical or mental faculties of such contractors or their employees.
Petitioner Commissioner of Internal Revenue erred in applying the
principles of tax exemption without first applying the well-settled doctrine
of strict interpretation in the imposition of taxes. It is obviously both illogical
and impractical to determine who are exempted without first determining
who are covered by the aforesaid provision. The Commissioner should have
determined first if private respondent was covered by Section 205, applying
the rule of strict interpretation of laws imposing taxes and other burdens on
the populace, before asking Ateneo to prove its exemption therefrom.

Interpretation of Tax Laws. The doctrine in the interpretation of tax

laws is that “(a) statute will not be construed as imposing a tax unless it does
so clearly, expressly, and unambiguously. . . . (A) tax cannot be imposed
without clear and express words for that purpose. Accordingly, the general
rule of requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are not to be
extended by implication.” In case of doubt, such statutes are to be construed
most strongly against the government and in favor of the subjects or citizens
because burdens are not to be imposed nor presumed to be imposed beyond
what statutes expressly and clearly import.

Ateneo’s Institute of Philippine Culture never sold its services for a fee to
anyone or was ever engaged in a business apart from and independently of
the academic purposes of the university. Funds received by the Ateneo de
Manila University are technically not a fee. They may however fall as gifts or
donations which are “tax-exempt” as shown by private respondent’s
compliance with the requirement of Section 123 of the National Internal
Revenue Code providing for the exemption of such gifts to an educational
institution.

Transaction of IPC not a contract of sale nor a contract for a piece

of work. The transactions of Ateneo’s Institute of Philippine Culture cannot
be deemed either as a contract of sale or a contract for a piece of work. By the
contract of sale, one of the contracting parties obligates himself to transfer
the ownership of and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent. In the case of a contract
for a piece of work, “the contractor binds himself to execute a piece of work
for the employer, in consideration of a certain price or compensation. . . . If
the contractor agrees to produce the work from materials furnished by him,
he shall deliver the thing produced to the employer and transfer dominion
over the thing. . . .” In the case at bench, it is clear from the evidence on record
that there was no sale either of objects or services because, as adverted to
earlier, there was no transfer of ownership over the research data obtained
or the results of research projects undertaken by the Institute of Philippine
Culture.
33. PROVINCE OF MISAMIS ORIENTAL v. CAGAYAN ELECTRIC
POWER AND LIGHTCOMPANY, INC. (CEPALCO)G.R. No. L-
45355 January 12, 1990

FACTS:

CEPALCO was given a franchise to install, operate and maintain an electric light, heat
and power system in the City of Cagayan de Oro and its suburbs. RA 3247 (as
amended by RA 3570 and RA6020), the law which granted CEPALCO the franchise,
provides that CEPALCO should pay a franchise tax which is equal to three percentum of
the gross earnings for electric current sold under the franchise. CEPALCO was also
exempted from all taxes and assessments of whatever authority upon privileges, earnings,
income, franchise, and poles, wires, transformers, and insulators. However, the Local Tax
Code was subsequently promulgated in 1973 and it provided that the province may impose
a tax on businesses enjoying franchise. Because of this, the province of Misamis Oriental
demanded payment of the provincial franchise tax from CEPALCO. The company refused
to pay, alleging that it is exempt from all taxes except the franchise tax required under RA
6020.

ISSUE:

Whether or not a corporation whose franchise expressly provides that the

payment of the "franchise tax of three per centum of the gross earnings shall be in lieu
of all taxes and assessments of whatever authority upon privileges, earnings, income,
franchise, and poles, wires, transformers, and insulators of the grantee" is exempt from
paying a provincial franchise tax.

HELD:
Yes. Such exemption is part of the inducement for the acceptance of the franchise and the
rendition of public service by the grantee. As a charter is in the nature of a private contract,
the imposition of another franchise tax on the corporation by the local authority would
constitute an impairment of the contract between the government and the corporation.
Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only to CEPALCO,
while P.D. No.231 is a general tax law. The presumption is that the special statutes are
exceptions to the general law(P.D. No. 231) because they pertain to a special charter
granted to meet a particular set of conditions and circumstances. In an earlier case, the
phrase "shall be in lieu of all taxes and at any time levied, established by, or collected by any
authority" found in the franchise of the Visayan Electric Company was held to exempt the
company from payment of the 5% tax on corporate franchise provided in Section 259 of
the Internal Revenue Code .Local Tax Regulation No. 3-75 issued by the Secretary of
Finance on June 26, 1976, has made it crystal clear that the franchise tax provided in the
Local Tax Code (P.D. No. 231, Sec. 9) may only be imposed on companies with franchises
that do not contain the exempting clause. Thus it provides: The franchise tax imposed
under local tax ordinance pursuant to Section9 of the Local Tax Code, as amended, shall
be collected from businesses holding franchise but not from business establishments
whose franchise contain the "in-lieu-of-all-taxes-proviso".

Misamis Oriental vs Cagayan Electric

G. R. NO. 453555, 12 JAN 1990, 181 SCRA 38
Facts: Cagayan Electric Power and light Co, Inc. (CEPALCO) was granted a
franchise in 1961 under RA 3247 to install, operate and maintain an electric
light, heat and power system in Cagayan de Oro and its suburbs. In 1973, the
Local Tax Code (PD 231) was promulgated, where Section 9 thereof
providing for a franchise tax. Pursuant thereto, the province of Misamis
Oriental enacted Provincial Revenue Ordinance 19, whose Section 12 also
provides for a franchise tax. The Provincial Treasurer demanded payment of
the provincial franchise tax from CEPALCO. CEPALCO paid under protest.
Issue: Whether CEPALCO is exempt from the provincial franchise tax.
Held: Local Tax Regulation 3-75 issued by the Secretary of Finance in 1976
made it clear that the franchise tax provided in the Local Tax Code may only
be imposed on companies with franchise that do not contain the exempting
clause, i.e. “in-lieu-of-all-taxes-proviso.” CEPALCO’s franchise i.e. RA 3247,
3571 and 6020 (Section 3 thereof), uniformly provides that “in consideration
of the franchise and rights hereby granted, the grantee shall pay a franchise
tax equal to 3% of the gross earnings for electric current sold under the
franchise, of which 2% goes to the national Treasury and 1% goes into the
treasury of the municipalities of Tagoloan, Opol, Villanueva, Jasaan, and
Cagayan de Oro, as the case may be: Provided, that the said franchise tax of
3% of the gross earnings shall be in lieu of all taxes and assessments of
whatever authority upon privileges, earnings, income, franchise and poles,
wires, transformers, and insulators of the grantee from which taxes and
assessments the grantee is hereby expressly exempted.
 34.COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.THE HON. COURT OF APPEALS, R.O.H. AUTO PRODUCTS
PHILIPPINES, INC. and THE HON. COURT OF TAX
APPEALS,respondents. G.R. No. 108358 January 20, 1995

Facts: On 22 August 1986, Executive Order No. 41 was promulgated

declaring a one-time tax amnesty on unpaid income taxes, later amended to
include estate and donor's taxes and taxes on business, for the taxable years
1981 to 1985. Respondent R.O.H. Auto Products Philippines, Inc., availing of
the amnesty, filed in October 1986 and November 1986, its Tax Amnesty
Return and Supplemental Tax Amnesty Return No. and paid the
corresponding amnesty taxes due. Prior to this availment, petitioner
Commissioner of Internal Revenue, in a communication received by private
respondent on August 13, 1986, assessed the latter deficiency income and
business taxes for its fiscal years 1981 and 1982 in an aggregate amount of
P1,410,157.71. Meanwhile, respondent averred that since it had been able to
avail itself of the tax amnesty, the deficiency tax notice should forthwith be
cancelled and withdrawn. This was denied by the CIR Revenue
Memorandum Order No. 4-87, implementing Executive Order No. 41, had
construed the amnesty coverage to include only assessments issued by the
Bureau of Internal Revenue after the promulgation of the executive order on
August 22 1986 and not to assessments theretofore made. On appeal, The
Court of Tax appeal upheld for the respondent, which was further upheld by
the Court of Appeals.

ISSUE: Whether or not the the deficiency assessments were extinguished

by reason of respondent’s availment of the tax amnesty.

HELD: Yes, as the scope of the amnesty covers the unpaid income taxes for
the years 1981 to 1985. If, as the Commissioner argues, Executive Order No.
41 had not been intended to include 1981-1985 tax liabilities already assessed
(administratively) prior to August 22, 1986, the law could have simply so
provided in its exclusionary clauses. It did not. The conclusion is
unavoidable, and it is that the executive order has been designed to be in the
nature of a general grant of tax amnesty subject only to the
cases specifically excepted by it.
Further, the law provides that, upon full compliance with the conditions of
the tax amnesty and the rules and regulations issued pursuant to this
Executive order, the taxpayer shall be relieved of any income tax liability on
any untaxed income from January 1, 1981 to December 31, 1985, including
increments thereto and penalties on account of the non-payment of the said
tax. Civil, criminal or administrative liability arising from the non-payment
of the said tax, which are actionable under the National Internal Revenue
Code, as amended, are likewise deemed extinguished.

G.R. No. 88291 June 8, 1993

MACEDA taxpayer, senator VS. MACARAIG Executive Secretary
(Original Decision - promulgated on May 31, 1991)
(Subject case – Motion for Reconsideration)
FACTS:
Commonwealth Act 120 created NAPOCOR as a public corporation to
undertake the development of hydraulic power and the production of power
from other sources. On June 4, 1949, Republic Act No. 357 was enacted
authorizing the President of the Philippines (Pres. Quirino) to guarantee,
absolutely and unconditionally, as primary obligor, the payment of any and all
NPC loans.
He was also authorized to contract on behalf of the NPC with the
International Bank for Reconstruction and Development (IBRD) for NP
C
loans for the accomplishment of NPC's corporate objectives and for the
reconstruction and development of the economy of the country. It was
expressly stated that any such loan or loans shall be exempt from taxes,
duties, fees, imposts, charges, contributions and restrictions of the Republic
of the Philippines, its provinces, cities and municipalities.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's
tax exemption for real estate taxes and on September 10, 1971, R.A. No.
6395 was enacted revising the charter of the NPC, C.A. No. 120, as
amended. A new section was added to the charter, now known as Section
13, R.A .No. 6395, which declares the non-profit character and tax
exemptions of NPC.
To enable the Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section
one of this Act, the Corporation is hereby declared exempt from the payment
of all taxes, duties, fees, imposts, charges costs and service fees in any court
or administrative proceedings.
It is also exempt from all income taxes, franchise taxes and realty taxes to be
paid to the National Government including import duties, compensating taxes
and advanced sales tax, and wharfage fees on import of foreign goods and
all taxes, duties, fees, imposts on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale of electric
power.
On January 22, 1974, P.D. No. 380 was issued giving extra powers to the
NPC to enable it to fulfill its role under aforesaid P.D. No. 40. PD
380
specified that NAPOCORs exemption includes all taxes, etc. imposed directly
or indirectly.
PD 938 integrated the exemptions in favor of GOCCs including their
subsidiaries; however, empowering the President or the Minister of Finance,
upon recommendation of the Fiscal Incentives Review Board (FIRB) to
restore, partially or completely, the exemptions withdrawn or revised. The
FIRB issued Resolution 10-85 restoring the duty and tax exemptions
privileges of NAPOCOR for period 11 June 1984- 30 June 1985. Resolution
1-86 restored such exemption indefinitely effective July 1, 1985.
EO 93 withdrew the exemption. FIRB issued Resolution 17-87 restoring
NAPOCORs exemption .Since 1976, oil firms never paid excise or specific
and ad valorem taxes for petroleum products sold and delivered to
NAPOCOR. Oil companies started to pay specific and ad valorem taxes on
their sales of oil products to NAPOCOR only in 1984.
ISSUE
Whether or not the NAPOCOR is no longer subject to tax exemption from
indirect tax when PD 938 stated the exemption in general term.
HELD:
NEGATIVE.
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of
NPC as the phrase "all forms of taxes etc.," in its section 10, amending
Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not expressly
include "indirect taxes (Indirect Tax - tax is imposed upon goods BEFORE
reaching the consumer who ultimately pays for it, not as a tax, but as a part
of the purchase price. E.g. the internal revenue indirect taxes (specific tax,
percentage taxes, (VAT) and the tariff and customs indirect taxes (import
duties, special import tax and other dues).
Supreme Court ruled that NPC laws show that it has been the lawmaker's
intention that the NPC was to be completely tax exempt from all forms of
taxes — direct and indirect. And when the NPC was authorized to contract
with the IBRD for foreign financing, any loans obtained were to be completely
tax exempt.
G.R. No. 88291 June 8, 1993
MACEDA taxpayer, senator VS. MACARAIG Executive Secretary
(Original Decision - promulgated on May 31, 1991)
(Subject case – Motion for Reconsideration)
FACTS:
Commonwealth Act 120 created NAPOCOR as a public corporation to
undertake the development of hydraulic power and the production of power
from other sources. On June 4, 1949, Republic Act No. 357 was enacted
authorizing the President of the Philippines (Pres. Quirino) to guarantee,
absolutely and unconditionally, as primary obligor, the payment of any and all
NPC loans.
He was also authorized to contract on behalf of the NPC with the
International Bank for Reconstruction and Development (IBRD) for NP
C
loans for the accomplishment of NPC's corporate objectives and for the
reconstruction and development of the economy of the country. It was
expressly stated that any such loan or loans shall be exempt from taxes,
duties, fees, imposts, charges, contributions and restrictions of the Republic
of the Philippines, its provinces, cities and municipalities.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's
tax exemption for real estate taxes and on September 10, 1971, R.A. No.
6395 was enacted revising the charter of the NPC, C.A. No. 120, as
amended. A new section was added to the charter, now known as Section
13, R.A .No. 6395, which declares the non-profit character and tax
exemptions of NPC.
To enable the Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section
one of this Act, the Corporation is hereby declared exempt from the payment
of all taxes, duties, fees, imposts, charges costs and service fees in any court
or administrative proceedings.
It is also exempt from all income taxes, franchise taxes and realty taxes to be
paid to the National Government including import duties, compensating taxes
and advanced sales tax, and wharfage fees on import of foreign goods and
all taxes, duties, fees, imposts on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale of electric
power.
On January 22, 1974, P.D. No. 380 was issued giving extra powers to the
NPC to enable it to fulfill its role under aforesaid P.D. No. 40. PD
380
specified that NAPOCORs exemption includes all taxes, etc. imposed directly
or indirectly.
PD 938 integrated the exemptions in favor of GOCCs including their
subsidiaries; however, empowering the President or the Minister of Finance,
upon recommendation of the Fiscal Incentives Review Board (FIRB) to
restore, partially or completely, the exemptions withdrawn or revised. The
FIRB issued Resolution 10-85 restoring the duty and tax exemptions
privileges of NAPOCOR for period 11 June 1984- 30 June 1985. Resolution
1-86 restored such exemption indefinitely effective July 1, 1985.
EO 93 withdrew the exemption. FIRB issued Resolution 17-87 restoring
NAPOCORs exemption .Since 1976, oil firms never paid excise or specific
and ad valorem taxes for petroleum products sold and delivered to
NAPOCOR. Oil companies started to pay specific and ad valorem taxes on
their sales of oil products to NAPOCOR only in 1984.
ISSUE
Whether or not the NAPOCOR is no longer subject to tax exemption from
indirect tax when PD 938 stated the exemption in general term.
HELD:
NEGATIVE.
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of
NPC as the phrase "all forms of taxes etc.," in its section 10, amending
Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not expressly
include "indirect taxes (Indirect Tax - tax is imposed upon goods BEFORE
reaching the consumer who ultimately pays for it, not as a tax, but as a part
of the purchase price. E.g. the internal revenue indirect taxes (specific tax,
percentage taxes, (VAT) and the tariff and customs indirect taxes (import
duties, special import tax and other dues).
Supreme Court ruled that NPC laws show that it has been the lawmaker's
intention that the NPC was to be completely tax exempt from all forms of
taxes — direct and indirect. And when the NPC was authorized to contract
with the IBRD for foreign financing, any loans obtained were to be completely
tax exempt.
G.R. No. 88291 June 8, 1993
MACEDA taxpayer, senator VS. MACARAIG Executive Secretary
(Original Decision - promulgated on May 31, 1991)
(Subject case – Motion for Reconsideration)
FACTS:
Commonwealth Act 120 created NAPOCOR as a public corporation to
undertake the development of hydraulic power and the production of power
from other sources. On June 4, 1949, Republic Act No. 357 was enacted
authorizing the President of the Philippines (Pres. Quirino) to guarantee,
absolutely and unconditionally, as primary obligor, the payment of any and all
NPC loans.
He was also authorized to contract on behalf of the NPC with the
International Bank for Reconstruction and Development (IBRD) for NP
C
loans for the accomplishment of NPC's corporate objectives and for the
reconstruction and development of the economy of the country. It was
expressly stated that any such loan or loans shall be exempt from taxes,
duties, fees, imposts, charges, contributions and restrictions of the Republic
of the Philippines, its provinces, cities and municipalities.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's
tax exemption for real estate taxes and on September 10, 1971, R.A. No.
6395 was enacted revising the charter of the NPC, C.A. No. 120, as
amended. A new section was added to the charter, now known as Section
13, R.A .No. 6395, which declares the non-profit character and tax
exemptions of NPC.
To enable the Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section
one of this Act, the Corporation is hereby declared exempt from the payment
of all taxes, duties, fees, imposts, charges costs and service fees in any court
or administrative proceedings.
It is also exempt from all income taxes, franchise taxes and realty taxes to be
paid to the National Government including import duties, compensating taxes
and advanced sales tax, and wharfage fees on import of foreign goods and
all taxes, duties, fees, imposts on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale of electric
power.
On January 22, 1974, P.D. No. 380 was issued giving extra powers to the
NPC to enable it to fulfill its role under aforesaid P.D. No. 40. PD
380
specified that NAPOCORs exemption includes all taxes, etc. imposed directly
or indirectly.
PD 938 integrated the exemptions in favor of GOCCs including their
subsidiaries; however, empowering the President or the Minister of Finance,
upon recommendation of the Fiscal Incentives Review Board (FIRB) to
restore, partially or completely, the exemptions withdrawn or revised. The
FIRB issued Resolution 10-85 restoring the duty and tax exemptions
privileges of NAPOCOR for period 11 June 1984- 30 June 1985. Resolution
1-86 restored such exemption indefinitely effective July 1, 1985.
EO 93 withdrew the exemption. FIRB issued Resolution 17-87 restoring
NAPOCORs exemption .Since 1976, oil firms never paid excise or specific
and ad valorem taxes for petroleum products sold and delivered to
NAPOCOR. Oil companies started to pay specific and ad valorem taxes on
their sales of oil products to NAPOCOR only in 1984.
ISSUE
Whether or not the NAPOCOR is no longer subject to tax exemption from
indirect tax when PD 938 stated the exemption in general term.
HELD:
NEGATIVE.
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of
NPC as the phrase "all forms of taxes etc.," in its section 10, amending
Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not expressly
include "indirect taxes (Indirect Tax - tax is imposed upon goods BEFORE
reaching the consumer who ultimately pays for it, not as a tax, but as a part
of the purchase price. E.g. the internal revenue indirect taxes (specific tax,
percentage taxes, (VAT) and the tariff and customs indirect taxes (import
duties, special import tax and other dues).
Supreme Court ruled that NPC laws show that it has been the lawmaker's
intention that the NPC was to be completely tax exempt from all forms of
taxes — direct and indirect. And when the NPC was authorized to contract
with the IBRD for foreign financing, any loans obtained were to be completely
tax exempt.
 35. Maceda v Macaraig
197 SCRA 77
Facts:

The petition seeks to nullify certain decisions, orders, ruling, and resolutions
of the respondents (Macaraig et. al) for exempting the National Power
Corporation (NPC) from indirect tax and duties. Commonwealth Act 120
created NPC as a public corporation. RA 6395 revised the charter of NPC and
provided in detail the exemption of NPC from all taxes, duties and other
charges by the government. There were many resolutions and decisions that
followed after RA 6395 which talked about the exemption and non-
exemption from taxes of NPC.
Issue:
Whether or not NPC is really exempt from indirect taxes

Held:
Yes. NPC is a non-profit public corporation created for the general good and
welfare of the people. From the very beginning of its corporate existence,
NPC enjoyed preferential tax treatment to enable it to pay its debts and
obligations. From the changes made in the NPC charter, the intention to
strengthen its preferential tax treatment is obvious. The tax exemption is
intended not only to insure that the NPC shall continue to generate electricity
for the country but more importantly, to assure cheaper rates to be paid by
consumers.
------------------
Some Notes on Direct and Indirect Taxes:
Direct Taxes – those which a taxpayer is directly liable on the transaction or
business it engages in. Examples are: custom duties, ad valorem taxes paid
by oil companies for importation of crude oil
Indirect Taxes – paid by persons who can shift the burden upon someone
else.
Examples are: ad valorem taxes that oil companies pay to BIR upon removal
of petroleum products from its refinery can be shifted to its buyer, like the
NPC
Dissenting Opinion of Justice Sarmiento: The fact that NPC has been tasked
with the enormous undertaking to improve the quality of life, is no reason,
to include indirect taxes, within the coverage of its preferential tax treatment.
The deletion of “indirect taxes” as stated in one of the assailed orders (PD
938), is significant, because if said law truly intends to exempt NPC from
indirect taxes, it would have said so specifically.
 37. HYDRO RESOURCES V. COURT OF TAX APPEALS ET
AL.
GR 80276; December 21, 1990

FACTS Hydro Resources Contractors Corporation entered into a contract of

sale with the National Irrigation Authority (NIA) for the construction
of Magat River Multipurpose Project in Isabella in August 1978. The
contract provided that Hydro will import parts, construction equipment and
tools and taxes and duties to be paid by NIA. Tools and equipment arrived
during 1978 and 1979. NIA reneged on the contract. Therefore causing the
transfer its sale to Hydro in seperate dates in December 6, 1982 and March
24, 1983. Executive Order 860 took effect during December 21, 1982
provided for 3% ad valorem tax on importations and it specifically provided
that it should have no retroactive effect. During the contract of sale
execution, Hydro was assessed and paid the said 3% ad valorem tax worth P
281,591 under protest. The Hydro when filing for refund with Customs
Commissioner who indorsed the approval of the refund but was denied by
the Secretary of Finance and motion was denied by the Court of Tax Appeals.

ISSUE Whether or not should the Executive Order 860 should have a
retroactive effect.

HELD The Court of Tax Appeals erred in applying a retroactive effect for the
Executive Order therefore should not have been subject to the additional 3%
ad valorem tax. In general tax laws are not retroactive in nature. Not only
that Executive Order 860 specifically provides that it is not retroactive in
nature, but also when the conditional contract of sale was executed, its had a
suspensive condition contemplated in the Civil Code (Article 1187) where it
returned ownership to the seller Hydro because NIA was not able to comply
with its part of the contract, it was deemed executed as if during the
constitution of the obligation which was in 1978 and not in 1982.
 38. Central Azucarera Don Pedro –v– CIR and CTA
G.R. Nos. L-23236 and L-23254 May 31, 1967

FACTS: Central Azucarera Don Pedro, a domestic corporation with office at

Nasugbu, Batangas, had been filing its income tax returns on the "fiscal year"
basis ending August 31, of every year.

[It had been assessed deficiency tax plus interest. It paid the deficiency tax
but protested on the imposition of the interest], claiming that the imposition
of ½% monthly interest on its deficiency tax for the fiscal year 1954 to 1958,
Pursuant to Section 51 (d) of the Revenue Code, as amended by Republic Act
No. 2343, is illegal, because the imposition of interest on efficiency income
tax earned prior to the effectivity of the amendatory law (Rep. Act 2343) [on
1959] will be tantamount to giving it (Rep. Act No. 2343) retroactive
application. [It further contends that] the application of the amended
provision (now Sec. 51-d of the Tax Code) to the cases at bar would run
counter to the constitutional restriction against the enactment of ex post
facto laws.

ISSUE: Whether or not the imposition of the interest, is unconstitutional

HELD: NO – [the interest was correctly imposed]. It is to be noted that the

collection of interest in these cases is not penal in nature, thus —

the imposition of . . . interest is but a just compensation to the state for the
delay in paying the tax, and for the concomitant use by the taxpayer of
funds that rightfully should be in the government's hands (U.S. vs.
Goldstein, 189 F [2d] 752; Ross vs. U.S., 148 Fed. Supp. 330; U.S. vs. Joffray,
97 Fed. [2d] 488). The fact that the interest charged is made proportionate
to the period of delay constitutes the best evidence that such interest is not
penal but compensatory. (Castro vs. Collector of Internal Revenue, G.R. No.
L-12174, Resolution on Motion for Reconsideration, December 28, 1962)

and we had already held that —

The doctrine of unconstitutionality raised by appellant is based on the

prohibition against ex post facto laws. But this prohibition applies only to
criminal or penal matters, and not to laws which concern civil matters or
proceedings generally, or which affect or regulate civil or private rights (Ex
parte Garland, 18 Law Ed., 366; 16 C.J.S., 889-891). (Republic vs. Oasan
Vda. de Fernandez, 99 Phil. 934, 937).

Finally, section 13 of the amendatory Republic Act No. 2343 refers only to
the basic tax rates, which are made applicable to income received in 1959
onward, but does not affect the interest due on deficiencies, which are left to
be governed by section 51 (d).
 39. CIR v. Benguet Corp
G.R. Nos. 134587 and 134588; January 8, 2005

Facts:

Benguet Corporation is a domestic corporation engaged in the exploration,

development and operation of mineral resources, and the sale or marketing
thereof to various entities. It is a VAT registered enterprise.

The transactions in question occurred during the period between 1988 and
1991. Under Sec. 99 of NIRC as amended by E.O. 273 s. 1987 then in effect,
any person who, in the course of trade or business, sells, barters or exchanges
goods, renders services, or engages in similar transactions and any person
who imports goods is liable for output VAT at rates of either 10% or 0% (zero-
rated) depending on the classification of the transaction under Sec. 100 of
the NIRC.

In January of 1988, Benguet applied for and was granted by the BIR zero-
rated status on its sale of gold to Central Bank. On 28 August 1988 VAT
Ruling No. 3788-88 was issued which declared that the sale of gold to
Central Bank is considered as export sale subject to zero-rate pursuant to
Section 100 of the Tax Code, as amended by EO 273.

Relying on its zero-rated status and the above issuances, Benguet sold gold
to the Central Bank during the period of 1 August 1989 to 31 July 1991 and
entered into transactions that resulted in input VAT incurred in relation to
the subject sales of gold. It then filed applications for tax refunds/credits
corresponding to input VAT.

However, such request was not granted due to BIR VAT Ruling No. 008-92
dated 23 January 1992 that was issued subsequent to the consummation of
the subject sales of gold to the Central Ban`k which provides that sales of
gold to the Central Bank shall not be considered as export sales and thus,
shall be subject to 10% VAT. BIR VAT Ruling No. 008-92 withdrew,
modified, and superseded all inconsistent BIR issuances.
Both petitioner and Benguet agree that the retroactive application of VAT
Ruling No. 008-92 is valid only if such application would not be prejudicial
to the Benguet pursuant Sec. 246 of the NIRC.
Issues:

(1) WON Benguet’s sale of gold to the Central Bank during the
period when such was classified by BIR issuances as zerorated could be taxed
validly at a 10% rate after the consummation of the transactions involved;

(2) WON there was prejudice to Benguet Corp due to the new BIR VAT
Ruling.

Held:

(1) NO. At the time when the subject transactions were consummated, the
prevailing BIR regulations relied upon by Benguet ordained that gold sales
to the Central Bank were zero-rated. Benguet should not be faulted for
relying on the BIRs interpretation of the said laws and regulations.

While it is true, as CIR alleges, that government is not estopped from

collecting taxes which remain unpaid on account of the errors or mistakes of
its agents and/or officials and there could be no vested right arising from an
erroneous interpretation of law, these principles must give way to
exceptions based on and in keeping with the interest of justice and fair play.
(then the Court cited the ABS-CBN case).

(2) YES. The adverse effect is that Benguet Corp became the unexpected and
unwilling debtor to the BIR of the amount equivalent to the total VAT cost of
its product, a liability it previously could have recovered from the BIR in a
zero-rated scenario or at least passed on to the Central Bank had it known it
would have been taxed at a 10% rate. Thus, it is clear that Benguet suffered
economic prejudice when it consummated sales of gold to the Central Bank
were taken out of the zero-rated category. The change in the VAT rating of
Benguet’s transactions with the Central Bank resulted in the twin loss of its
exemption from payment of output VAT and its opportunity to recover input
VAT, and at the same time subjected it to the 10% VAT sans the option to
pass on this cost to the Central Bank, with the total prejudice in money terms
being equivalent to the 10% VAT levied on its sales of gold to the Central
Bank.

Even assuming that the right to recover Benguets excess payment of income
tax has not yet prescribed, this relief would only address Benguet’s
overpayment of income tax but not the other burdens discussed above.
Verily, this remedy is not a feasible option for Benguet because the very
reason why it was issued a deficiency tax assessment is that its input VAT
was not enough to offset its retroactive output VAT. Indeed, the burden of
having to go through an unnecessary and cumbersome refund process is
prejudice enough.
 40. CIR v Bursmeiters & Wain Scandinavian
GR 153205; January 22, 2007

Facts:

A foreign consortium, parent company of Burmeister, entered into an O&M

contract with NPC. The foreign entity then subcontracted the actual O&M to
Burmeister. NPC paid the foreign consortium a mixture of currencies while
the consortium, in turn, paid Burmeister foreign currency inwardly remitted
into the Philippines. BIR did not want to grant refund since the services are
“not destined for consumption abroad” (or the destination principle).

Issue:

Are the receipts of Burmeister entitled to VAT zero-rated status?

Held:
PARTIALLY. Respondent is entitled to the refund prayed for BUT ONLY for
the period covered prior to the filing of CIR’s Answer in the CTA.

The claim has no merit since the consortium, which was the recipient of
services rendered by Burmeister, was deemed doing business within the
Philippines since its 15-year O&M with NPC can not be interpreted as an
isolated transaction.

In addition, the services referring to ‘processing, manufacturing, repacking’

and ‘services other than those in (1)’ of Sec. 102 both require (i) payment in
foreign currency; (ii) inward remittance; (iii) accounted for by the BSP; AND
(iv) that the service recipient is doing business outside the Philippines. The
Court ruled that if this is not the case, taxpayers can circumvent just by
stipulating payment in foreign currency.

The refund was partially allowed since Burmeister secured a ruling from the
BIR allowing zero-rating of its sales to foreign consortium. However, the
ruling is only valid until the time that CIR filed its Answer in the CTA which
is deemed revocation of the previously-issued ruling. The Court said the
revocation can not retroact since none of the instances in Section 246 (bad
faith, omission of facts, etc.) are present.
 41.Commissioner of Internal Revenue v Ayala Securities
Corporation, GR No. L-29485, 21 Nov 1989

Facts:

Ayala Securities Corp. (Ayala) failed to file returns of their accumulated

surplus so Ayala was charged with 25% surtax by the Commissioner of
internal Revenue. The CTA (Court of Tax Appeals) reversed the
Commissioner’s decision and held that the assessment made against Ayala
was beyond the 5-yr prescriptive period as provided in section 331 of the
National Internal Revenue Code. Commissioner now files a motion for
reconsideration of this decision. Ayala invokes the defense of prescription
against the right of the Commissioner to assess the surtax.

Issue:

Whether or not the right to assess and collect the 25% surtax has prescribed
after five years.

Held:

No. There is no such time limit on the right of the Commissioner to assess
the 25% surtax since there is no express statutory provision limiting such
right or providing for its prescription. Hence, the collection of surtax is
imprescriptible. The underlying purpose of the surtax is to avoid a situation
where the corporation unduly retains its surplus earnings instead of
declaring and paying dividends to its shareholders. SC reverses the ruling of
the CTA.
 42.Pepsi-Cola Bottling Company of the Philippines, Inc.
v. Municipality of Tanauan
G.R. No. L-31156; February 27, 1976

Facts: In February 1963, plaintiff commenced a complaint seeking to

declare Section 2 of R.A. 2264 (Local Autonomy Act) unconstitutional as an
undue delegation of taxing power and to declare Ordinance Nos. 23 and 27
issued by the Municipality of Tanauan, Leyte as null and void.

Municipal Ordinance No. 23 levies and collects from soft drinks producers
and manufacturers one-sixteenth (1/16) of a centavo for every bottle of soft
drink corked. On the other hand, Municipal Ordinance No. 27 levies and
collects on soft drinks produced or manufactured within the territorial
jurisdiction of the municipality a tax of one centavo (P0.01) on each gallon
of volume capacity. The tax imposed in both Ordinances Nos. 23 and 27 is
denominated as "municipal production tax.”

Issues: (1) Is Section 2 of R.A. 2264 an undue delegation of the power of

taxation? (2) Do Ordinance Nos. 23 and 24 constitute double taxation and
impose percentage or specific taxes?

Held: (1) NO. The power of taxation is purely legislative and cannot be
delegated to the executive or judicial department of the government without
infringing upon the theory of separation of powers. But as an exception, the
theory does not apply to municipal corporations. Legislative powers may be
delegated to local governments in respect of matters of local concern. (2) NO.
The Municipality of Tanauan discovered that manufacturers could increase
the volume contents of each bottle and still pay the same tax rate since tax is
imposed on every bottle corked. To combat this scheme, Municipal
Ordinance No. 27 was enacted. As such, it was a repeal of Municipal
Ordinance No. 23. In the stipulation of facts, the parties admitted that the
Municipal Treasurer was enforcing Municipal Ordinance No. 27 only. Hence,
there was no case of double taxation.
 43. COMMISSIONER OF INTERNAL REVENUE vs. S.C.
JOHNSON AND SON, INC., and COURT OF APPEALS
309 SCRA 87 ; June 25, 1999

Facts: SC. JOHNSON AND SON, INC., a domestic corporation organized

and operating under the Philippine laws, entered into a license agreement
with SC Johnson and Son, United States of America (USA), a non-resident
foreign corporation was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture, package
and distribute the products. 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. SC.
JOHNSON AND SON, INC 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 from July
1992 to May 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 Since the agreement was approved by the Technology
Transfer Board, the preferential tax rate of 10% should apply hence 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.

The Commissioner did not act on said claim for refund. Respondent filed a
petition for review before the CTA to claim a refund of the overpaid
withholding tax on royalty payments. CTA decided for Respondent and
ordered CIR 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. CIR filed a petition for review with CA. CA upheld CTA.

CIR contends that under 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 in 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. Also petitioner argues that since S.C. Johnson's
invocation of the "most favored nation" clause is in the nature of a claim for
exemption from the application of the regular tax rate of 25% for royalties,
the provisions of the treaty must be construed strictly against it.

Respondent countered 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".

Issue: WON SC Johnson can refund.

Ruling: NO. The tax rates on royalties and the circumstances of payment
thereof are the same for all the recipients of such royalties and there is no
disparity based on nationality in the circumstances of such payment. 6 On the
other hand, a cursory reading of the various tax treaties will show that there
is no similarity in the provisions on relief from or avoidance of double
taxation 7 as this is a matter of negotiation between the contracting parties.
This dissimilarity is true particularly in the treaties between the Philippines
and the United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the
Philippines has entered into for the avoidance of double taxation. 9 The
purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions. 10 More precisely, the
tax conventions are drafted with a view towards the elimination of
international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of
the same subject matter and for identical periods. 11 The apparent rationale
for doing away with double taxation is of encourage the free flow of goods
and services and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic
economies.
Double taxation usually takes place when a person is resident of a contracting
state and derives income from, or owns capital in, the other contracting state
and both states impose tax on that income or capital. In order to eliminate
double taxation, a tax treaty resorts to several methods. First, it sets out the
respective rights to tax of the state of source or situs and of the state of
residence with regard to certain classes of income or capital. In some cases,
an exclusive right to tax is conferred on one of the contracting states;
however, for other items of income or capital, both states are given the right
to tax, although the amount of tax that may be imposed by the state of source
is limited.

Double taxation usually takes place when a person is resident of a contracting

state and derives income from, or owns capital in, the other contracting state
and both states impose tax on that income or capital. In order to eliminate
double taxation, a tax treaty resorts to several methods. First, it sets out the
respective rights to tax of the state of source or situs and of the state of
residence with regard to certain classes of income or capital. In some cases,
an exclusive right to tax is conferred on one of the contracting states;
however, for other items of income or capital, both states are given the right
to tax, although the amount of tax that may be imposed by the state of source
is limited. 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

The phrase "royalties paid under similar circumstances" in the most favored
nation clause of the US-RP Tax Treaty necessarily contemplated
"circumstances that are tax-related".

In the case at bar, the state of source is the Philippines because the royalties
are paid for the right to use property or rights, i.e. trademarks, patents and
technology, located within the Philippines. 17 The United States is the state
of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based
there. Under the RP-US Tax Treaty, the state of residence and the state of
source are both permitted to tax the royalties, with a restraint on the tax that
may be collected by the state of source. 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.

If the rates of tax are lowered by the state of source, in this case, by the
Philippines, there should be a concomitant commitment on the part of the
state of residence to grant some form of tax relief, whether this be in the form
of a tax credit or exemption. 24 Otherwise, the tax which could have been
collected by the Philippine government will simply be collected by another
state, defeating the object of the tax treaty since the tax burden imposed upon
the investor would remain unrelieved. If the state of residence does not grant
some form of tax relief to the investor, no benefit would redound to the
Philippines, i.e., increased investment resulting from a favorable tax regime,
should it impose a lower tax rate on the royalty earnings of the investor, and
it would be better to impose the regular rate rather than lose much-needed
revenues to another country.

The entitlement of the 10% rate by U.S. firms despite the absence of a
matching credit (20% for royalties) would derogate from the design behind
the most grant equality of international treatment since the tax burden laid
upon the income of the investor is not the same in the two countries. The
similarity in the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to underscore the
need for equality of treatment.
Respondent cannot be deemed entitled to the 10 percent rate granted under
the RP-West Germany Tax Treaty for the reason that there is no payment of
taxes on royalties under similar circumstances in RP-US treaty.
 44. CIR v Rufino
GR Nos. L-33665-68; February 27, 1987

Facts: This is a petition for review on certiorari of the CTA decision which
absolved petitioners from liability for capital gains tax on stocks received by
them from Eastern Theatrical, Inc. The Rufinos were majority stockholders
of Eastern Theatrical Co., Inc (hereinafter Old ETC) which had a corporate
term of 25 years, which terminated on January 25, 1959, president of which
was Ernesto Rufino. On December 8, 1958, the Eastern Theatrical Co, Inc.
(hereinafter New ETC, with a corporate term of 50 years) was organized, and
the Rufinos were also the majority stockholders of the corporation, with
Vicente Rufino as the General-Manager. Both ETCs were engaged in the
same business.

Old ETC held a stockholder’s meeting to merge with the New ETC on
December 17, 1958 to continue its business after the end of Old ETC’s
corporate term. The merger was authorized by a board resolution. It was
expressly declared that the merger was necessary to continue operating the
Capitol and Lyric Theaters in Manila even after the expiration of corporate
existence, to preserve both its booking contracts and to uphold its collective
bargaining agreements. Through the two Rufinos (Ernesto and Vicente), a
Deed of Assignment was executed, which conveyed and transferred all the
business, property, assets and good will of the Old ETC to the New ETC in
exchange for shares of stock of the latterto be issued to the shareholders
at the rate of one stock for each stock heldin the Old ETC. The Deed
was to retroact from January 1, 1959. New ETC’s Board approved the merger
and the Deed of Assignment on January 12, 1959 and all changes duly
registered with the SEC.

The BIR, after examination, declared that the merger was not undertaken
for a bona fide business purpose but only to avoid liability for the capital
gains tax on the exchange of the old for the new shares of stock. He then
imposed deficiency assessments against the private respondents, the
Rufinos. The Rufinos requested for a reconsideration, which was denied.
Therefore, they elevated their matter to the CTA, who reversed the judgment
of the CIR, saying that they found that there was “no taxable gain derived
from the exchange of old stocks simply for new stocks for the New
Corporation” because it was pursuant to a valid plan of reorganization. The
CIR raised it to the SC on petition for review oncertiorari.
Issue: WON there was a valid merger and that there was no taxable gain
derived therefrom.

Held: YES, the CTA was correct in ruling that there WAS a merger and that
no taxable gain was derived. CTA decision is AFFIRMED.

Rationale:
 Validity of transfer. In support of its argument that the Rufinos were
trying to avoid the payment of capital gains tax, the CIR said that the New
ETC did not actually issue stocks in exchange for the properties of the Old
ETC. The increase in capitalization only happened in March 1959, or 37 days
after the Old ETC expired. Prior to registration, the New ETC could not have
validly performed the transfer. The SC ruled that the retroactivity of the Deed
of Assignment cured the defect and there was no impediment.
 Bona Fide Business Purpose. The criterion of the law is that the
purpose of the merger must be for a bona fide business purpose and not for
the purpose of escaping taxes. The case of Helvering v. Gregory stated that
a mere “operation having no business or corporate purpose—a mere devise
which put on the form of a corporate reorganization as a disguise for
concealing its real character and the sole object and accomplishment of
which was the consummation of a preconceived plan, not to reorganize a
business but to transfer a parcel of corporate shares.” When the corporation
created is nothing more than a contrivance, there is no legitimate business
purpose. The Court states that there is no such furtive intention in this case.
In fact, the New ETC continues to operate the Capitol and Lyric movie
theaters even up to 27 years after the merger. There is as yet no dissolution,
so the Rufinos haven’t gained any benefit yet from the merger, which makes
them no more liable than the time the merger took place.

The government’s remedy: The merger merely deferred the payment for
taxes until the future, which the government may assert later on when gains
are realized and benefits are distributed among the stockholders as a result
of the merger. The taxes are not forfeited but merely postponed and may be
imposed at the proper time later on.
 45. DELPHER TRADES CORPORATIONvs. IAC
G.R. No. L-69259 January 26, 1988

Facts: Delfin Pacheco and sister Pelagia were the owners of a parcel of land
in Polo (now Valenzuela). On April 3, 1974, they leased to Construction
Components International Inc. the property and providing for a right of
firstrefusal should it decide to buy the said property.

Construction Components International, Inc. assigned its rights and

obligations under the contract of lease in favor of Hydro Pipes Philippines,
Inc. with the signed conformity and consent of Delfin and Pelagia. In 1976, a
deed of exchange was executed between lessors Delfin and Pelagia Pacheco
and defendant Delpher Trades Corporation whereby the Pachecos conveyed
to the latter the leased property together with another parcel of land also
located in Malinta Estate, Valenzuela for 2,500 shares of stock of defendant
corporation with a total value of P1.5M.

On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes
Philippines, Inc., filed an amended complaint for reconveyance of the lot.

Issue: WON the Deed of Exchange of the properties executed by the

Pachecos and the Delpher Trades Corporation on the other was meant to be
a contract of sale which, in effect, prejudiced the Hydro Phil's right of first
refusal over the leased property included in the "deed of exchange,"

Held: No, by their ownership of the 2,500 no par shares of stock, the
Pachecos have control of the corporation. Their equity capital is 55% as
against 45% of the other stockholders, who also belong to the same family
group. In effect, the Delpher Trades Corporation is a business conduit of the
Pachecos. What they really did was to invest their properties and change the
nature of their ownership from unincorporated to incorporated form
by organizing Delpher Trades Corporation to take control of their properties
and at the same time save on inheritance taxes.

The "Deed of Exchange" of property between the Pachecos and Delpher

Trades Corporation cannot be considered a contract of sale. There was no
transfer of actual ownership interests by the Pachecos to a third party. The
Pacheco family merely changed their ownership from one form to another.
The ownershipremained in the same hands. Hence, the private respondent
has no basis for its claim of a light of first refusal
 46. CIR v. Toda, Jr.
GR No. 147188; 14 September 2004

F A C T S: On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President

and owner of 99.991% of its outstanding capital stock, to sell the Cibeles
Building. On 30 August 1989, Toda purportedly sold the property for P100
million to Rafael A. Altonaga, who, in turn, sold the same property on the
same day to Royal Match Inc. (RMI) for P200 million. Three and a half years
later Toda died. On 29 March 1994, the BIR sent an assessment notice and
demand letter to the CIC for deficiency income tax for the year 1989. On 27
January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-
administrators Lorna Kapunan and Mario Luza Bautista, received a Notice
of Assessment from the CIR for deficiency income tax for the year 1989. The
Estate thereafter filed a letter of protest. The Commissioner dismissed the
protest. On 15 February 1996, the Estate filed a petition for review with the
CTA. In its decision the CTA held that the Commissioner failed to prove that
CIC committed fraud to deprive the government of the taxes due it. It ruled
that even assuming that a pre-conceived scheme was adopted by CIC, the
same constituted mere tax avoidance, and not tax evasion. Hence, the CTA
declared that the Estate is not liable for deficiency of income tax. The
Commissioner filed a petition for review with the Court of Appeals. The Court
of Appeals affirmed the decision of the CTA, hence, this recourse.

I S S U E: Whether or not this is a case of tax evasion or tax avoidance.

H E L D: Tax evasion connotes the integration of three factors: (1) the end
to be achieved, i.e. the payment of less than that known by the taxpayer to be
legally due, or the non-payment of tax when it is shown that a tax is due; (2)
an accompanying state of mind which is described as being “evil,” in “bad
faith,” “willfull,” or “deliberate and not accidental”; and (3) a course of action
or failure of action which is unlawful. All these factors are present in the
instant case. The scheme resorted to by CIC in making it appear that there
were two sales of the subject properties, i.e. from CIC to Altonaga, and then
from Altonaga to RMI cannot be considered a legitimate tax planning. Such
scheme is tainted with fraud. Altonaga’s sole purpose of acquiring and
transferring title of the subject properties on the same day was to create a tax
shelter. The sale to him was merely a tax ploy, a sham, and without business
purpose and economic substance. Doubtless, the execution of the two sales
was calculated to mislead the BIR with the end in view of reducing the
consequent income tax liability.
 48. Philex Mining Corporation v. CIR
GR No. L-125704, 28, August 1998

FACTS:

On August 5, 1992, the BIR sent a letter to Philex asking it to settle its excise tax liabilities
amounting to P123,821,982.52. Philex protested the demand for payment of the tax
liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid
for the years 1989 to 1991in the amount of P119,977,037.02 plus interest. Therefore, these
claims for tax credit/refund should be applied against the tax liabilities. In reply, the BIR
held that since these pending claims have not yet been established or determined with
certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated
its demand that Philex settle the amount plus interest within 30 days from the receipt of
the letter. Philex raised the issue to the Court of Tax Appeals and in the course of the
proceedings, the BIR issued a Tax Credit Certificate SN 001795 in the amount of
P13,144,313.88 which, applied to the total tax liabilities of Philex of
P123,821,982.52; effectively lowered the latter’s tax obligation
of P110,677,688.52. Despite the reduction of its tax liabilities, the CTA still ordered Philex
to pay the remaining balance of P110,677,688.52 plus interest, elucidating its
reason that “taxes cannot be subject to set -off on compensation since claim for
taxes is not a debt or contract. Philex appealed the case before the Court of Appeals.
Nonetheless, the Court of Appeals affirmed the Court of Tax Appeals observation. Philex
filed a motion for reconsideration which was again denied. However, a few days after the
denial of its motion for reconsideration, Philex was ableto obtain its VAT input
credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and1994,
computed amounting to 205,595,289.20.In view of the grant of its VAT input
credit/refund, Philex now contends that the same should, ipso jure, off-set its excise tax
liabilities since both had already become “due and demandable, as well as fully
liquidated;” hence, legal compensation can properly take place.

ISSUE:

Whether or not the petitioner is correct in its contention that tax liability and VAT input
credit/refund can be subjected to legal compensation

HELD:
The Supreme Court has already made the pronouncement that taxes cannot be subject to
compensation for the simple reason that the government and the taxpayer are not
creditors and debtors of each other. There is a material distinction between a tax and
debt. Debts are due to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. Philex’s claim is an outright disregard of the
basic principle in tax law that taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance. Evidently, to countenance Philex’s
whimsical reason would render ineffective our tax collection system. Philex is
not allowed to refuse the payment of its tax liabilities on the ground that it has a pending
tax claim for refund or credit against the government which has not yet been
granted. It must be noted that a distinguishing feature of a tax is that it is compulsory
rather than a matter of bargain. Hence, a tax does not depend upon the consent of the
taxpayer. If any payer can defer the payment of taxes by raising the defense that it still has
a pending claim for refund or credit, this would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has
a claim against the government or that the collection of the tax is contingent on the result
of the lawsuit it filed against the government. Moreover, Philex's theory that would
automatically apply its VAT input credit/refund against its tax liabilities can easily give rise
to confusion and abuse, depriving the government of authority over the manner by which
taxpayers credit and offset their tax liabilities." The power of taxation is sometimes called
also the power to destroy. Therefore it should be exercised with caution to minimize injury
to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly,
lest the tax collector kill the 'hen that lays the golden egg.' And, in the order to maintain the
general public's trust and confidence in the Government this power must be used justly
and not treacherously." The petition is hereby dismissed.
 48. Philex Mining Corporation v. CIR
GR No. L-125704, 28, August 1998

FACTS:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals affirming the
Court of Tax Appeals decision ordering it to pay the amount of P110.7 M as excise tax
liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20%
annual interest from 1994 until fully paid pursuant to Sections 248 and 249 of the Tax
Code of 1977. Philex protested the demand for payment of the tax liabilities stating that it
has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to
1991 in the amount of P120 M plus interest. Therefore these claims for tax credit/refund
should be applied against the tax liabilities.

ISSUE:
Can there be an off-setting between the tax liabilities vis-a-vis claims of tax refund of the
petitioner?

HELD:
No. Philex's claim is an outright disregard of the basic principle in tax law that taxes are the
lifeblood of the government and so should be collected without unnecessary hindrance.
Evidently, to countenance Philex's whimsical reason would render ineffective our tax
collection system. Too simplistic, it finds no support in law or in jurisprudence. To be sure,
Philex cannot be allowed to refuse the payment of its tax liabilities on the ground that ithas
a pending tax claim for refund or credit against the government which has not yet been
granted. Taxes cannot be subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors of each other. There is a
material distinction between a tax and debt. Debts are due to the Government in its
corporate capacity, while taxes are due to the Government in its sovereign capacity. xxx
There can be no off-setting of taxes against the claims that the taxpayer may have against
the government. A person cannot refuse to pay a tax on the ground that the government
owes him an amount equal to or greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government.
 48. Philex Mining Corporation v. CIR
GR No. L-125704, 28, August 1998

FACTS:

BIR sent a letter to Philex asking it to settle its tax liabilities amounting to P124 million.
Philex protested the demand for payment stating that it has pending claims for VAT input
credit/refund amounting to P120 million. Therefore, these claims for tax credit/refund
should be applied against the tax liabilities. In reply the BIR found no merit in
Philex’s position. On appeal, the CTA reduced the tax liability of Philex.

ISSUES:
1. Whether legal compensation can properly take place between the VAT input
credit/refund andthe excise tax liabilities of Philex Mining Corp;

2. Whether the BIR has violated the NIRC which requires the refund of input taxes within
60 days

3.Whether the violation by BIR is sufficient to justify non-payment by Philex

RULING:

1. No, legal compensation cannot take place. The government and the taxpayer are not
creditorsand debtors of each other.

2. Yes, the BIR has violated the NIRC. It took five years for the BIR to grant its claim for
VAT inputcredit. Obviously, had the BIR been more diligent and judicious with their duty,
it could havegranted the refund

3. No, despite the lethargic manner by which the BIR handled Philex’s tax
claim, it is a settled rule
that in the performance of government function, the State is not bound by the neglect of
itsagents and officers. It must be stressed that the same is not a valid reason for the non-
paymentof its tax liabilities.
 49.CIR v. ESSO (Set-off)
172 SCRA 369; April 18, 1989

Facts: ESSO overpaid its 1959 income tax by P221, 033.00. It was
accordingly granted a tax credit. However, ESSO’s payment of its income tax
for 1960 was found to be short byP367,994. So the Commissioner demanded
payment of the deficiency, with interest. ESSO paid under protest, including
the interest as reckoned by the Commissioner. ESSO’s contention: The
interest was more than that properly
due. It should not have been required to pay interest on the total amount of
the deficiency tax, P367,994.00, but only on the
amount of P146,961.00—representing the difference between said deficiency
and ESSOs earlier overpayment. ESSO thus asked for a refund.

CIR’s contention: It denied the claim for refund. Income taxes are
determined and paid on an annual basis, such determination and payment
are separate and independent transactions; and a tax credit could not be
considered until it has been finally approved and the taxpayer notified. Since
in this case, the tax credit was approved only on August 5, 1964, it could not
be availed of in reduction of ESSOs earlier tax deficiency for 1960; as of that
year there was no tax credit to speak of. In support of this, the Commissioner
invokes the Section 51 of the Tax Code: (d) Interest on deficiency. — Interest
upon the amount determined as deficiency shall be assessed at the same time
as the deficiency and shall be paid upon notice and demand from the
Commissioner of Internal Revenue; and shall be collected as a part of the tax.
ESSO appealed to the Court of Tax Appeals, which in turn ordered payment
to ESSO of its "refund-claim. Hence, this appeal by the Commissioner.

ISSUE: Was it proper to apply ESSO’s tax credit in reducing the total
deficiency subject to interest?

HELD: Yes, regardless of CIR’s assertions, the fact is that as early as July 15,
1960, the Government already had in its hands the sum representing excess
payment. Having been paid and received by mistake, that sum
unquestionably belonged to ESSO, and the Government had the obligation
to return it to ESSO. The obligation to return money mistakenly paid arises
from the moment that payment is made, and not from the time that the payee
admits the obligation to reimburse. The obligation of the payee to reimburse
results from the mistake, not from the payee's confession of the mistake or
recognition of the obligation to reimburse. In other words, since the amount
of P221,033.00 belonging to ESSO was already in the hands of the
Government as of July, 1960, it was neither legally nor logically possible for
ESSO thereafter to be considered a debtor of the Government; and whatever
other obligation ESSO might subsequently incur in favor of the Government
would have to be reduced by that sum, in respect of which no interest could
be charged.

Nothing is better settled than that courts are not to give words a meaning
which would lead to absurd or unreasonable consequences.” "Statutes
should receive a sensible construction, such as will give effect to the
legislative intention and so as to avoid an unjust or absurd conclusion."
 Domingo v. Garlitos
GR No. L-18993 29 June 1963

F A C T S: In Domingo vs. Moscoso (106 PHIL 1138), the Supreme Court

declared as final and executory the order of the Court of First Instance of
Leyte for the payment of estate and inheritance taxes, charges and penalties
amounting to P40,058.55 by the Estate of the late Walter Scott Price. The
petition for execution filed by the fiscal, however, was denied by the lower
court. The Court held that the execution is unjustified as the Government
itself is indebted to the Estate for 262,200; and ordered the amount of
inheritance taxes be deducted from the Government’s indebtedness to the
Estate.

I S S U E: Whether a tax and a debt may be compensated.

H E L D: 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 by a corresponding law (RA 2700).
Under the 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 as well as fully liquidated. Compensation,
therefore, takes place by operation of law, in accordance with Article 1279
and 1290 of the Civil Code, and both debts are extinguished to the concurrent
amount. In other words, the estate and inheritance taxes are set off, by virtue
of the government’s indebtedness to the estate.
 COMMISSIONER OF INTERNAL REVENUE V.
ISABELACULTURAL CORP.
(515 SCRA 556); February 12, 2007

Topic: The all-events test; when deductions from income taxes may be
claimed

Facts: When the Bureau of Internal Revenue disallowed Isabela Cultural

Corporation¶s claimed deductions for the years 1984-1986 in their 1986 taxes
for expense deductions, to wit:
(1) Expenses for auditing services for the year ending 31December 1985;
(2) Expenses for legal services for the years 1984 and 1985; and
(3) Expense for security services for the months of April and May 1986.

As such, the former charged the latter for deficiency income taxes. Isabela
Cultural Corporation contests the assessment.

Issue No. 1. For a taxpayer using the accrual method, when do the facts
present themselves in such a manner that the taxpayer must recognize income
or expense?

Ruling: The accrual of income and expense is permitted when the all-events
test has been met. This test requires: (1) fixing of a right to income or liability
to pay; and (2) the availability of the reasonable accurate determination of
such incomeor liability. The test does not demand that the amount of income
or liability be known absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with reasonable accuracy. The
all-events test issatisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but
is not as much as unknowable, within the taxable year.

Issue No. 2. WON the deductions were properly claimed by Isabela Cultural
Corporation.

Ruling: The deductions for expenses for professional fees consisting of

expenses for legal and auditing services are NOT allowable. However, the
deductions for expenses for security services were properly claimed by Isabela
CulturalCorporation. For the legal and auditing services, Isabela Cultural
Corporation could have reasonably known the fees of those firms that it hired,
thus satisfying the ³all-events test.´ As such, per Revenue Audit
Memorandum Order No. 1-2000, they cannot validly be deducted from its
gross income for the said year and were therefore properly disallowed by the
BIR. As for the security services, because they were incurred in 1986, they
could be properly claimed as deductions for the said year.

Notes The requisites for the deductibility of ordinary and necessary trade,
business, or professional expenses, like expenses paid for legal and auditing
services, are:

a. The expense must be ordinary and necessary;

b. It must have been paid or incurred during the taxable year;
c. It must have been paid or incurred in carrying on the trade or business of
the taxpayer; and
d. It must be supported by receipts, records, or other pertinent papers.

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

The propriety of an accrual must be judged by the facts that a taxpayer knew,
or could reasonably be expected to have known, at the closing of its books for
the taxable year. Accrual method of accounting presents largely a question
of fact; such that the taxpayer bears the burden of proof of establishing the
accrual of an item of income or deduction.
Chamber of Real Estate and Builders’ Associations, Inc., v. The
Hon. Executive Secretary Alberto Romulo, et al
G.R. No. 160756. March 9, 2010

Facts: Petitioner Chamber of Real Estate and Builders’ Associations, Inc.

(CREBA), an association of real estate developers and builders in the
Philippines, questioned the validity of Section 27(E) of the Tax Code which
imposes the minimum corporate income tax (MCIT) on corporations.

Under the Tax Code, a corporation can become subject to the MCIT at the
rate of 2% of gross income, beginning on the 4th taxable year immediately
following the year in which it commenced its business operations, when such
MCIT is greater than the normal corporate income tax. If the regular income
tax is higher than the MCIT, the corporation does not pay the MCIT.

CREBA argued, among others, that the use of gross income as MCIT base
amounts to a confiscation of capital because gross income, unlike net
income, is not realized gain.

CREBA also sought to invalidate the provisions of RR No. 2-98, as amended,

otherwise known as the Consolidated Withholding Tax Regulations, which
prescribe the rules and procedures for the collection of CWT on sales of real
properties classified as ordinary assets, on the grounds that these
regulations:

 Use gross selling price (GSP) or fair market value (FMV) as basis for
determining
the income tax on the sale of real estate classified as ordinary assets, instead
of the entity’s net taxable income as provided for under the Tax Code;
 Mandate the collection of income tax on a per transaction basis, contrary
to the Tax Code provision which imposes income tax on net income at the
end of the taxable period;
 Go against the due process clause because the government collects income
tax even when the net income has not yet been determined; gain is never
assured by mere receipt of the selling price; and
 Contravene the equal protection clause because the CWT is being charged
upon real estate enterprises, but not on other business enterprises, more
particularly, those in the manufacturing sector, which do business similar to
that of a real estate enterprise.
Issues: (1) Is the imposition of MCIT constitutional? (2) Is the imposition
of CWT on income from sales of real properties classified as ordinary assets
constitutional?

Held: (1) Yes. The imposition of the MCIT is constitutional. An income tax
is arbitrary and confiscatory if it taxes capital, because it is income, and not
capital, which is subject to income tax. However, MCIT is imposed on gross
income which is computed by deducting from gross sales the capital spent by
a corporation in the sale of its goods, i.e., the cost of goods and other direct
expenses from gross sales. Clearly, the capital is not being taxed.

Various safeguards were incorporated into the law imposing MCIT.

Firstly, recognizing the birth pangs of businesses and the reality of the need
to recoup initial major capital expenditures, the MCIT is imposed only on the
4th taxable year immediately following the year in which the corporation
commenced its operations.

Secondly, the law allows the carry-forward of any excess of the MCIT paid
over the normal income tax which shall be credited against the normal
income tax for the three immediately succeeding years.

Thirdly, since certain businesses may be incurring genuine repeated losses,

the law authorizes the Secretary of Finance to suspend the imposition of
MCIT if a corporation suffers losses due to prolonged labor dispute, force
majeure and legitimate business reverses.

(2) Yes. Despite the imposition of CWT on GSP or FMV, the income tax base
for sales of real property classified as ordinary assets remains as the entity’s
net taxable income as provided in the Tax Code, i.e., gross income less
allowable costs and deductions. The seller shall file its income tax return and
credit the taxes withheld by the withholding agent-buyer against its tax due.
If the tax due is greater than the tax withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is less than the tax withheld, the
taxpayer will be entitled to a refund or tax credit.

The use of the GSP or FMV as basis to determine the CWT is for purposes of
practicality and convenience. The knowledge of the withholding agent-buyer
is limited to the particular transaction in which he is a party. Hence, his basis
can only be the GSP or FMV which figures are reasonably known to him.
Also, the collection of income tax via the CWT on a per transaction basis, i.e.,
upon consummation of the sale, is not contrary to the Tax Code which calls
for the payment of the net income at the end of the taxable period. The taxes
withheld are in the nature of advance tax payments by a taxpayer in order to
cancel its possible future tax obligation. They are installments on the annual
tax which may be due at the end of the taxable year. The withholding agent-
buyer’s act of collecting the tax at the time of the transaction, by withholding
the tax due from the income payable, is the very essence of the withholding
tax method of tax collection.

On the alleged violation of the equal protection clause, the taxing power has
the authority to make reasonable classifications for purposes of taxation.
Inequalities which result from singling out a particular class for taxation, or
exemption, infringe no constitutional limitation. The real estate industry is,
by itself, a class and can be validly treated differently from other business
enterprises.

What distinguishes the real estate business from other manufacturing

enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the number of
transactions involved. The income from the sale of a real property is bigger
and its frequency of transaction limited, making it less cumbersome for the
parties to comply with the withholding tax scheme. On the other hand, each
manufacturing enterprise may have tens of thousands of transactions with
several thousand customers every month involving both minimal and
substantial amounts.