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Adversely affecting as it does properly rights, both the due process and equal protection
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy
Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of
Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman,
Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on
the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional
infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code
of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation income,
(b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and
yield or any other monetary benefit from deposit substitutes and from trust fund and similar
arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership,
(f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be
unduly discriminated against by the imposition of higher rates of tax upon his income arising from
the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to class legislation,
oppressive and capricious in character 5 For petitioner, therefore, there is a transgression of both
the equal protection and due process clauses 6 of the Constitution as well as of the rule requiring
uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10
days from notice. Such an answer, after two extensions were granted the Office of the Solicitor
General, was filed on May 28, 1982. 8 The facts as alleged were admitted but not the allegations
which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the
truth [for them] being those stated [in their] Special and Affirmative Defenses." 9 The answer then
affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities
and cases cited while correctly quoted or paraghraph do not support petitioner's stand." 10 The
prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so
clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private
enterprise and initiative and which the government was called upon to enter optionally, and only
'because it was better equipped to administer for the public welfare than is any private individual
or group of individuals,' continue to lose their well-defined boundaries and to be absorbed within
activities that the government must undertake in its sovereign capacity if it is to meet the increasing
social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent
prerogative, has to be availed of to assure the performance of vital state functions. It is the source
of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the
government, their prompt and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is
the strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its
plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth
such limits .
clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue
measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall
that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves v. New
York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a
flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of
absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a constitutional
mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's
famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is
not the power to destroy while this Court sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any
legislative or executive, act that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision — as petitioner here alleges — fails to abide
by its command, then this Court must so declare and adjudge it null. The injury thus is centered on
the question of whether the imposition of a higher tax rate on taxable net income derived from
business or profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation,
as here. does not suffice. There must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as void or its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that were the due process
and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad
standards, there is a need for of such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary
that it finds no support in the Constitution. An obvious example is where it can be shown to amount
to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of
this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred.
That properly calls for the application of the Holmes dictum. It has also been held that where the
assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case
of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds.
19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of
this constitutional mandate whether the assailed act is in the exercise of the lice power or the power
of eminent domain is to demonstrated that the governmental act assailed, far from being inspired
by the attainment of the common weal was prompted by the spirit of hostility, or at the very least,
discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different, both in the privileges conferred and the liabilities
imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal
protection and security shall be given to every person under circumtances which if not Identical are
analogous. If law be looked upon in terms of burden or charges, those that fall within a class should
be treated in the same fashion, whatever restrictions cast on some in the group equally binding on
the rest." 20 That same formulation applies as well to taxation measures. The equal protection clause
is, of course, inspired by the noble concept of approximating the Ideal of the laws benefits being
available to all and the affairs of men being governed by that serene and impartial uniformity, which
is of the very essence of the Idea of law. There is, however, wisdom, as well as realism in these
words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is not a
disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and
laws are not abstract propositions. They do not relate to abstract units A, B and C, but are
expressions of policy arising out of specific difficulties, address to the attainment of specific ends by
the use of specific remedies. The Constitution does not require things which are different in fact or
opinion to be treated in law as though they were the same." 21 Hence the constant reiteration of
the view that classification if rational in character is allowable. As a matter of fact, in a leading case
of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is
inherent in the power to tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that 'inequalities which result from a singling out of one particular class for taxation,
or exemption infringe no constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The
rule of taxation shag be uniform and equitable." 24 This requirement is met according to Justice
Laurel in Philippine Trust Company v. Yatco,25 decided in 1940, when the tax "operates with the
same force and effect in every place where the subject may be found. " 26 He likewise added: "The
rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable." 27 The problem of classification did not present itself in that case. It did not arise until
nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all
taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing
power has the authority to make reasonable and natural classifications for purposes of taxation, ...
. 28 As clarified by Justice Tuason, where "the differentiation" complained of "conforms to the
practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause
and is therefore uniform." 29 There is quite a similarity then to the standard of equal protection for
all that is required is that the tax "applies equally to all persons, firms and corporations placed in
similar situation."30

8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration
the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base
or taxable income by eliminating all deductible items and at the same time reducing the applicable
tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the
gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification
is the susceptibility of the income to the application of generalized rules removing all deductible
items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of
them. Taxpayers who are recipients of compensation income are set apart as a class. As there is
practically no overhead expense, these taxpayers are e not entitled to make deductions for income
tax purposes because they are in the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is no uniformity in the costs or
expenses necessary to produce their income. It would not be just then to disregard the disparities
by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on
the basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the
gross system of income taxation to compensation income, while continuing the system of net
income taxation as regards professional and business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack
of factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of
controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the
reasonableness of the distinction between compensation and taxable net income of professionals
and businessman certainly not a suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner.

TAX
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile
the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of
taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed
the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in
its income tax returns. The corollary issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was made on time and in accordance with
law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the petitioner
assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and
1959.1 On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which
letter was stamp received on the same day in the office of the petitioner. 2 On March 12, 1965, a
warrant of distraint and levy was presented to the private respondent, through its counsel, Atty.
Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of
the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave
a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty.
Guevara was finally informed that the BIR was not taking any action on the protest and it was only
then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days
later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of
Internal Revenue with the Court of Tax Appeals.6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125,
the appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is
true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and
renders hopeless a request for reconsideration," 9 being "tantamount to an outright denial thereof
and makes the said request deemed rejected." 10 But there is a special circumstance in the case at
bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of
the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all,
considered by the tax authorities. During the intervening period, the warrant was premature and
could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on January
18, 1965, when it was filed, the reglementary period which started on the date the assessment was
received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the
private respondent was definitely informed of the implied rejection of the said protest and the
warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days
of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because
it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen
it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment was in the form of promotional fees.
These were collected by the Payees for their work in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar
Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional
fees to be personal holding company income 12 but later conformed to the decision of the
respondent court rejecting this assertion.13 In fact, as the said court found, the amount was earned
through the joint efforts of the persons among whom it was distributed It has been established that
the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority,
Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked
for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in
it.14 Ultimately, after its incorporation largely through the promotion of the said persons, this new
corporation purchased the PSEDC properties.15 For this sale, Algue received as agent a commission
of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid
to the aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of the fees in their income
tax returns and paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after
examining the evidence, that no distribution of dividends was involved.18
The petitioner claims that these payments are fictitious because most of the payees are members
of the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made
in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should
be remembered that this was a family corporation where strict business procedures were not
applied and immediate issuance of receipts was not required. Even so, at the end of the year, when
the books were to be closed, each payee made an accounting of all of the fees received by him or
her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This
arrangement was understandable, however, in view of the close relationship among the persons in
the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21 After deducting the said fees, Algue still had a balance of rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total exaction by those in the seat of power.
commission. This was a reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with democratic regimes that it be exercised reasonably and in accordance with the prescribed
the following provision of the Tax Code: 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
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as taxpayer can demonstrate, as it has here, that the law has not been observed.
deductions —
We hold that the appeal of the private respondent from the decision of the petitioner was filed on
(a) Expenses: time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year should therefore not have been disallowed by the petitioner.
in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22 ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without
costs.
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SO ORDERED.
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business may be included a reasonable allowance for
salaries or other compensation for personal services actually rendered. The test of deductibility
in the case of compensation payments is whether they are reasonable and are, in fact, payments
purely for service. This test and deductibility in the case of compensation payments is whether
they are reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services,
is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend
on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all
of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for
similar services, and the excessive payment correspond or bear a close relationship to the
stockholdings of the officers of employees, it would seem likely that the salaries are not paid
wholly for services rendered, but the excessive payments are a distribution of earnings upon the
stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity
of the claimed deduction. In the present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would
be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values. This symbiotic relationship is the
TAX
G.R. No. L-10405 December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner-
appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL., respondents-appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.
Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for appellee.
CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and dissolving the writ of preliminary injunction therein issued,
without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this
action for declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled
"An Act Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section 1-
C (a) thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair, extension
and improvement" of Pasig feeder road terminals (Gen. Roxas — Gen. Araneta — Gen. Lucban —
Gen. Capinpin — Gen. Segundo — Gen. Delgado — Gen. Malvar — Gen. Lim)"; that, at the time of
the passage and approval of said Act, the aforementioned feeder roads were "nothing but projected
and planned subdivision roads, not yet constructed, . . . within the Antonio Subdivision . . . situated
at . . . Pasig, Rizal" (according to the tracings attached to the petition as Annexes A and B, near Shaw
Boulevard, not far away from the intersection between the latter and Highway 54), which projected
feeder roads "do not connect any government property or any important premises to the main
highway"; that the aforementioned Antonio Subdivision (as well as the lands on which said feeder
roads were to be construed) were private properties of respondent Jose C. Zulueta, who, at the time
of the passage and approval of said Act, was a member of the Senate of the Philippines; that on
May, 1953, respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering
to donate said projected feeder roads to the municipality of Pasig, Rizal; that, on June 13, 1953, the
offer was accepted by the council, subject to the condition "that the donor would submit a plan of
the said roads and agree to change the names of two of them"; that no deed of donation in favor
of the municipality of Pasig was, however, executed; that on July 10, 1953, respondent Zulueta
wrote another letter to said council, calling attention to the approval of Republic Act. No. 920, and
the sum of P85,000.00 appropriated therein for the construction of the projected feeder roads in
question; that the municipal council of Pasig endorsed said letter of respondent Zulueta to the
District Engineer of Rizal, who, up to the present "has not made any endorsement thereon" that
inasmuch as the projected feeder roads in question were private property at the time of the passage
and approval of Republic Act No. 920, the appropriation of P85,000.00 therein made, for the
construction, reconstruction, repair, extension and improvement of said projected feeder roads,
was illegal and, therefore, void ab initio"; that said appropriation of P85,000.00 was made by
Congress because its members were made to believe that the projected feeder roads in question
were "public roads and not private streets of a private subdivision"'; that, "in order to give a
semblance of legality, when there is absolutely none, to the aforementioned appropriation",
respondents Zulueta executed on December 12, 1953, while he was a member of the Senate of the
Philippines, an alleged deed of donation — copy of which is annexed to the petition — of the four
(4) parcels of land constituting said projected feeder roads, in favor of the Government of the
Republic of the Philippines; that said alleged deed of donation was, on the same date, accepted by
the then Executive Secretary; that being subject to an onerous condition, said donation partook of
the nature of a contract; that, such, said donation violated the provision of our fundamental law
prohibiting members of Congress from being directly or indirectly financially interested in any
contract with the Government, and, hence, is unconstitutional, as well as null and void ab initio, for
the construction of the projected feeder roads in question with public funds would greatly enhance
or increase the value of the aforementioned subdivision of respondent Zulueta, "aside from
relieving him from the burden of constructing his subdivision streets or roads at his own expense";
that the construction of said projected feeder roads was then being undertaken by the Bureau of
Public Highways; and that, unless restrained by the court, the respondents would continue to
execute, comply with, follow and implement the aforementioned illegal provision of law, "to the
irreparable damage, detriment and prejudice not only to the petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and
void; that the alleged deed of donation of the feeder roads in question be "declared
unconstitutional and, therefor, illegal"; that a writ of injunction be issued enjoining the Secretary of
Public Works and Communications, the Director of the Bureau of Public Works and Highways and
Jose C. Zulueta from ordering or allowing the continuance of the above-mentioned feeder roads
project, and from making and securing any new and further releases on the aforementioned item
of Republic Act No. 920, and the disbursing officers of the Department of Public Works and
Highways from making any further payments out of said funds provided for in Republic Act No. 920;
and that pending final hearing on the merits, a writ of preliminary injunction be issued enjoining the
aforementioned parties respondent from making and securing any new and further releases on the
aforesaid item of Republic Act No. 920 and from making any further payments out of said illegally
appropriated funds.
Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity
to sue", and that the petition did "not state a cause of action". In support to this motion, respondent
Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor, should represent the
Province of Rizal, pursuant to section 1683 of the Revised Administrative Code; that said respondent
is " not aware of any law which makes illegal the appropriation of public funds for the improvements
of . . . private property"; and that, the constitutional provision invoked by petitioner is inapplicable
to the donation in question, the same being a pure act of liberality, not a contract. The other
respondents, in turn, maintained that petitioner could not assail the appropriation in question
because "there is no actual bona fide case . . . in which the validity of Republic Act No. 920 is
necessarily involved" and petitioner "has not shown that he has a personal and substantial interest"
in said Act "and that its enforcement has caused or will cause him a direct injury."
Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated
October 29, 1953, holding that, since public interest is involved in this case, the Provincial Governor
of Rizal and the provincial fiscal thereof who represents him therein, "have the requisite
personalities" to question the constitutionality of the disputed item of Republic Act No. 920; that
"the legislature is without power appropriate public revenues for anything but a public purpose",
that the instructions and improvement of the feeder roads in question, if such roads where private
property, would not be a public purpose; that, being subject to the following condition:
The within donation is hereby made upon the condition that the Government of the
Republic of the Philippines will use the parcels of land hereby donated for street purposes
only and for no other purposes whatsoever; it being expressly understood that should the
Government of the Republic of the Philippines violate the condition hereby imposed upon
 it, the title to the land hereby donated shall, upon such violation, ipso facto revert to the
DONOR, JOSE C. ZULUETA. (Emphasis supplied.)
which is onerous, the donation in question is a contract; that said donation or contract is "absolutely
forbidden by the Constitution" and consequently "illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existence and void from the very beginning contracts "whose cause, objector
purpose is contrary to law, morals . . . or public policy"; that the legality of said donation may not
be contested, however, by petitioner herein, because his "interest are not directly affected"
thereby; and that, accordingly, the appropriation in question "should be upheld" and the case
dismissed.
At the outset, it should be noted that we are concerned with a decision granting the aforementioned
motions to dismiss, which as much, are deemed to have admitted hypothetically the allegations of
fact made in the petition of appellant herein. According to said petition, respondent Zulueta is the
owner of several parcels of residential land situated in Pasig, Rizal, and known as the Antonio
Subdivision, certain portions of which had been reserved for the projected feeder roads
aforementioned, which, admittedly, were private property of said respondent when Republic Act
No. 920, appropriating P85,000.00 for the "construction, reconstruction, repair, extension and
improvement" of said roads, was passed by Congress, as well as when it was approved by the
President on June 20, 1953. The petition further alleges that the construction of said roads, to be
undertaken with the aforementioned appropriation of P85,000.00, would have the effect of
relieving respondent Zulueta of the burden of constructing his subdivision streets or roads at his
own expenses, 1and would "greatly enhance or increase the value of the subdivision" of said
respondent. The lower court held that under these circumstances, the appropriation in question
was "clearly for a private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However,
respondent Zulueta contended, in his motion to dismiss that:
A law passed by Congress and approved by the President can never be illegal because
Congress is the source of all laws . . . Aside from the fact that movant is not aware of any
law which makes illegal the appropriation of public funds for the improvement of what
we, in the meantime, may assume as private property . . . (Record on Appeal, p. 33.)
The first proposition must be rejected most emphatically, it being inconsistent with the nature of
the Government established under the Constitution of the Republic of the Philippines and the
system of checks and balances underlying our political structure. Moreover, it is refuted by the
decisions of this Court invalidating legislative enactments deemed violative of the Constitution or
organic laws. 3
As regards the legal feasibility of appropriating public funds for a public purpose, the principle
according to Ruling Case Law, is this:
It is a general rule that the legislature is without power to appropriate public revenue for
anything but a public purpose. . . . It is the essential character of the direct object of the
expenditure which must determine its validity as justifying a tax, and not the magnitude
of the interest to be affected nor the degree to which the general advantage of the
community, and thus the public welfare, may be ultimately benefited by their promotion.
Incidental to the public or to the state, which results from the promotion of private
interest and the prosperity of private enterprises or business, does not justify their aid by
the use public money. (25 R.L.C. pp. 398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:
In accordance with the rule that the taxing power must be exercised for public purposes
only, discussed supra sec. 14, money raised by taxation can be expended only for public
purposes and not for the advantage of private individuals. (85 C.J.S. pp. 645-646; emphasis
supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
Generally, under the express or implied provisions of the constitution, public funds may
be used only for public purpose. The right of the legislature to appropriate funds is
correlative with its right to tax, and, under constitutional provisions against taxation
except for public purposes and prohibiting the collection of a tax for one purpose and the
devotion thereof to another purpose, no appropriation of state funds can be made for
other than for a public purpose.
xxx xxx xxx
The test of the constitutionality of a statute requiring the use of public funds is whether
the statute is designed to promote the public interest, as opposed to the furtherance of
the advantage of individuals, although each advantage to individuals might incidentally
serve the public. (81 C.J.S. pp. 1147; emphasis supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from being
patently sound, are a necessary corollary to our democratic system of government, which, as such,
exists primarily for the promotion of the general welfare. Besides, reflecting as they do, the
established jurisprudence in the United States, after whose constitutional system ours has been
patterned, said views and jurisprudence are, likewise, part and parcel of our own constitutional
law.lawphil.net
This notwithstanding, the lower court felt constrained to uphold the appropriation in question,
upon the ground that petitioner may not contest the legality of the donation above referred to
because the same does not affect him directly. This conclusion is, presumably, based upon the
following premises, namely: (1) that, if valid, said donation cured the constitutional infirmity of the
aforementioned appropriation; (2) that the latter may not be annulled without a previous
declaration of unconstitutionality of the said donation; and (3) that the rule set forth in Article 1421
of the Civil Code is absolute, and admits of no exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the time of its passage or approval,
not upon events occurring, or acts performed, subsequently thereto, unless the latter consists of an
amendment of the organic law, removing, with retrospective operation, the constitutional
limitation infringed by said statute. Referring to the P85,000.00 appropriation for the projected
feeder roads in question, the legality thereof depended upon whether said roads were public or
private property when the bill, which, latter on, became Republic Act 920, was passed by Congress,
or, when said bill was approved by the President and the disbursement of said sum became
effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which the
projected feeder roads were to be constructed belonged then to respondent Zulueta, the result is
that said appropriation sought a private purpose, and hence, was null and void. 4 The donation to
the Government, over five (5) months after the approval and effectivity of said Act, made, according
to the petition, for the purpose of giving a "semblance of legality", or legalizing, the appropriation
in question, did not cure its aforementioned basic defect. Consequently, a judicial nullification of
said donation need not precede the declaration of unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to exceptions.
For instance, the creditors of a party to an illegal contract may, under the conditions set forth in
Article 1177 of said Code, exercise the rights and actions of the latter, except only those which are vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer and employee of the Government was
inherent in his person, including therefore, his right to the annulment of said contract, even though not permitted to question the constitutionality of an appropriation for backpay of members of
such creditors are not affected by the same, except indirectly, in the manner indicated in said legal Congress. However, in Rodriguez vs. Treasurer of the Philippines and Barredo vs. Commission on
provision. Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action of taxpayers impugning the
validity of certain appropriations of public funds, and invalidated the same. Moreover, the reason
Again, it is well-stated that the validity of a statute may be contested only by one who will sustain a that impelled this Court to take such position in said two (2) cases — the importance of the issues
direct injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the therein raised — is present in the case at bar. Again, like the petitioners in the Rodriguez and
instance of taxpayers, laws providing for the disbursement of public funds, 5upon the theory that Barredo cases, petitioner herein is not merely a taxpayer. The Province of Rizal, which he represents
"the expenditure of public funds by an officer of the State for the purpose of administering an officially as its Provincial Governor, is our most populated political subdivision, 8and, the taxpayers
unconstitutional act constitutes a misapplication of such funds," which may be enjoined at the therein bear a substantial portion of the burden of taxation, in the Philippines.
request of a taxpayer. 6Although there are some decisions to the contrary, 7the prevailing view in
the United States is stated in the American Jurisprudence as follows: Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify
petitioners action in contesting the appropriation and donation in question; that this action should
In the determination of the degree of interest essential to give the requisite standing to not have been dismissed by the lower court; and that the writ of preliminary injunction should have
attack the constitutionality of a statute, the general rule is that not only persons been maintained.
individually affected, but also taxpayers, have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore question the constitutionality Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the
of statutes requiring expenditure of public moneys. (11 Am. Jur. 761; emphasis supplied.) lower court for further proceedings not inconsistent with this decision, with the costs of this
instance against respondent Jose C. Zulueta. It is so ordered.
However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon
(262 U.S. 447), insofar as federal laws are concerned, upon the ground that the relationship of a
taxpayer of the U.S. to its Federal Government is different from that of a taxpayer of a municipal
corporation to its government. Indeed, under the composite system of government existing in the
U.S., the states of the Union are integral part of the Federation from an international viewpoint,
but, each state enjoys internally a substantial measure of sovereignty, subject to the limitations
imposed by the Federal Constitution. In fact, the same was made by representatives of each state
of the Union, not of the people of the U.S., except insofar as the former represented the people of
the respective States, and the people of each State has, independently of that of the others, ratified
said Constitution. In other words, the Federal Constitution and the Federal statutes have become
binding upon the people of the U.S. in consequence of an act of, and, in this sense, through the
respective states of the Union of which they are citizens. The peculiar nature of the relation between
said people and the Federal Government of the U.S. is reflected in the election of its President, who
is chosen directly, not by the people of the U.S., but by electors chosen by each State, in such
manner as the legislature thereof may direct (Article II, section 2, of the Federal
Constitution).lawphi1.net

The relation between the people of the Philippines and its taxpayers, on the other hand, and the
Republic of the Philippines, on the other, is not identical to that obtaining between the people and
taxpayers of the U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that
existing between the people and taxpayers of each state and the government thereof, except that
the authority of the Republic of the Philippines over the people of the Philippines is more fully direct
than that of the states of the Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those imposed by the Federal Constitution
upon the states of the Union, and those imposed upon the Federal Government in the interest of
the Union. For this reason, the rule recognizing the right of taxpayers to assail the constitutionality
of a legislation appropriating local or state public funds — which has been upheld by the Federal
Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) — has greater application in the Philippines
than that adopted with respect to acts of Congress of the United States appropriating federal funds.

Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land by
the Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for the purpose of
contesting the price being paid to the owner thereof, as unduly exorbitant. It is true that in Custodio
TAX
G.R. No. L-30232 July 29, 1988
LUZON STEVEDORING CORPORATION, petitioner-appellant,
vs.
COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF INTERNAL REVENUE,
respondents-appellees.
PARAS, J.:
This is a petition for review of the October 21, 1968 Decision * of the Court of Tax Appeals in CTA
Case No. 1484, "Luzon Stevedoring Corporation v. Hon. Ramon Oben, Commissioner, Bureau of
Internal Revenue", denying the various claims for tax refund; and the February 20, 1969 Resolution
of the same court denying the motion for reconsideration.
Herein petitioner-appellant, 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 Commissioner of Internal Revenue, on
January 2, 1964, it filed a Petition for Review (Rollo, pp. 14-18) with the Court of Tax Appeals,
docketed therein as CTA Case No. 1484, praying among others, that it be granted the refund of the
amount of P33,442.13. The Court of Tax Appeals, however, in a Decision dated October 21, 1969
(Ibid., pp. 22-27), denied the various claims for tax refund. The decretal portion of the said decision
reads:
WHEREFORE, finding petitioner's various claims for refund amounting to P33,442.13 without
sufficient legal justification, the said claims have to be, as they are hereby, denied. With costs
against petitioner.
On January 24, 1969, petitioner-appellant filed a Motion for Reconsideration (Ibid., pp. 28-34), but
the same was denied in a Resolution dated February 20, 1969 (Ibid., p. 35). Hence, the instant
petition.
This Court, in a Resolution dated March 13, 1969, gave due course to the petition (Ibid., p. 40).
Petitioner-appellant raised three (3) assignments of error, to wit:
I
The lower court erred in holding that the petitioner-appellant is engaged in business as stevedore,
the work of unloading and loading of a vessel in port, contrary to the evidence on record.
II
The lower court erred in not holding that the business in which petitioner-appellant is engaged,
is part and parcel of the shipping industry.
III
The lower court erred in not allowing the refund sought by petitioner-appellant.
The instant petition is without merit.
The pivotal issue in this case is 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.
Said law provides:
Sec. 190. Compensating tax. — ... And Provided further, 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. ....
Petitioner contends that tugboats are embraced and included in the term cargo vessel under 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 (Rollo, p. 23).
On the other hand, respondents-appellees counter that petitioner-appellant's "tugboats" are not
"Cargo vessel" because they are neither designed nor used for carrying and/or transporting persons
or goods by themselves but are mainly employed for towing and pulling purposes. As such, it cannot
be claimed that the tugboats in question are used in carrying and transporting passengers or cargoes
as a common carrier by water, either coastwise or oceangoing and, therefore, not within the
purview of Section 190 of the Tax Code, as amended by Republic Act No. 3176 (Brief for
Respondents-Appellees, pp. 45).
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." (84 C.J.S. pp. 659-800), More specifically stated,
the general rule is that any claim for exemption from the tax statute should be strictly construed
against the taxpayer (Acting Commissioner of Customs v. Manila Electric Co. et al., 69 SCRA 469
[1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd., et al., 65 SCRA 142 [1975]).
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 (Decision, CTA Case No. 1484; Rollo, p. 24).
As pointed out by the Court of Tax Appeals, the amendatory provisions of Republic Act No. 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 (Ibid., p. 25).
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.)
(Rollo, p. 24).

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 (Rollo, p. 26).

On analysis of petitioner-appellant's transactions, the Court of Tax Appeals found that no evidence
was adduced by petitioner-appellant that tugboats are passenger and/or cargo vessels used in the
shipping industry as an independent business. On the contrary, petitioner-appellant's own evidence
supports the view that it is engaged as a stevedore, that is, the work of unloading and loading of a
vessel in port; and towing of barges containing cargoes is a part of petitioner's undertaking as a
stevedore. In fact, even its trade name is indicative that its sole and principal business is stevedoring
and lighterage, taxed under Section 191 of the National Internal Revenue Code as a contractor, and
not an entity which transports passengers or freight for hire which is taxed under Section 192 of the
same Code as a common carrier by water (Decision, CTA Case No. 1484; Rollo, p. 25).

Under the circumstances, there appears to be no plausible reason to disturb the findings and
conclusion of the Court of Tax Appeals.

As a matter of principle, this Court will not set aside the conclusion reached by an agency such as
the Court of Tax Appeals, which is, by the very nature of its function, dedicated exclusively to the
study and consideration of tax problems and has necessarily developed an expertise on the subject
unless there has been an abuse or improvident exercise of authority (Reyes v. Commissioner of
Internal Revenue, 24 SCRA 199 [1981]), which is not present in the instant case.

PREMISES CONSIDERED, the instant petition is DISMISSED and the decision of the Court of Tax
Appeals is AFFIRMED.

SO ORDERED.
TAX indebtedness and obligations and in furtherance and effective implementation of the policy
enunciated in Section One of this Act, the Corporation, including its subsidiaries, is hereby
G.R. No. 87479 June 4, 1990 declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and
service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative
NATIONAL POWER CORPORATION, petitioner, proceedings. 5
vs.
THE PROVINCE OF ALBAY, ALBAY GOVERNOR ROMEO R. SALALIMA, and ALBAY PROVINCIAL (2) On August 24, 1975, Presidential Decree No. 776 was promulgated, creating the Fiscal Incentives
TREASURER ABUNDIO M. NUÑEZ, respondents. Review Board (FIRB). Among other things, the Board was tasked as follows:

SARMIENTO, J.: Section 2. A Fiscal Incentives Review Board is hereby created for the purpose of determining what
subsidies and tax exemptions should be modified, withdrawn, revoked or suspended, which shall
The National Power Corporation (NAPOCOR) questions the power of the provincial government of be composed of the following officials:
Albay to collect real property taxes on its properties located at Tiwi, Albay, amassed between June
11, 1984 up to March 10, 1987. Chairman - Secretary of Finance
Members - Secretary of Industry
It appears that on March 14 and 15, 1989, the respondents caused the publication of a notice of - Director General of the National Economic and
auction sale involving the properties of NAPOCOR and the Philippine Geothermal Inc. consisting of Development Authority
buildings, machines, and similar improvements standing on their offices at Tiwi, Albay. The amounts - Commissioner of Internal Revenue
to be realized from this advertised auction sale are supposed to be applied to the tax delinquencies - Commissioner of Customs
claimed, as and for, as we said, real property taxes. The back taxes NAPOCOR has supposedly
accumulated were computed at P214,845,184.76. The Board may recommend to the President of the Philippines and for reasons of compatibility
with the declared economic policy, the withdrawal, modification, revocation or suspension of the
NAPOCOR opposed the sale, interposing in support of its non-liability Resolution No. 17-87, of the enforceability of any of the abovestated statutory subsidies or tax exemption grants, except those
Fiscal Incentives Review Board (FIRB), which provides as follows: granted by the Constitution. To attain its objectives, the Board may require the assistance of any
appropriate government agency or entity. The Board shall meet once a month, or oftener at the
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges of the
call of the Secretary of Finance. 6
National Power Corporation, including those pertaining to its domestic purchases of petroleum
and petroleum products, granted under the terms and conditions of Commonwealth Act No. 120 (3) On June 11, 1984, Presidential Decree No. 1931 was promulgated, prescribing, among other
(Creating the National Power Corporation, defining its powers, objectives and functions, and for things, that:
other purposes), as amended, are restored effective March 10, 1987, subject to the following
conditions: 1 Section 1. The provisions of special or general law to the contrary notwithstanding, all exemptions
from the payment of duties, taxes, fees, impost and other charges heretofore granted in favor of
as well as the Memorandum of Executive Secretary Catalino Macaraig, which also states thus: government-owned or controlled corporations including their subsidiaries are hereby withdrawn.
7
Pursuant to Sections 1 (f) and 2 (e) of Executive Order No. 93, series of 1986, FIRB Resolution No.
17-87, series of 1987, restoring, subject to certain conditions prescribed therein, the tax and duty (4) Meanwhile, FIRB Resolution No. 10-85 was issued, "restoring" NAPOCOR's tax exemption
exemption privileges of NPC as provided under Commonwealth Act No. 120, as amended, effective June 11, 1984 to June 30, 1985;
effective March 10, 1987, is hereby confirmed and approved. 2
(5) Thereafter, FIRB Resolution No. 1-86 was issued, granting tax exemption privileges to NAPOCOR
On March 10, 1989, the Court resolved to issue a temporary restraining order directing the Albay from July 1, 1985 and indefinitely thereafter;
provincial government "to CEASE AND DESIST from selling and disposing of the NAPOCOR properties
subject matter of this petition. 3 It appears, however, that "the temporary restraining order failed (6) Likewise, FIRB Resolution No. 17-87 was promulgated, giving NAPOCOR tax exemption privileges
to reach respondents before the scheduled bidding at 10:00 a.m. on March 30, 1989 ... [h]ence, the effective until March 10, 1987; 8
respondents proceeded with the bidding wherein the Province of Albay was the highest bidder. 4
(7) On December 17, 1986, Executive Order No. 93 was promulgated by President Corazon Aquino,
The Court gathers from the records that: providing, among other things, as follows:
(1) Under Section 13, of Republic Act No. 6395, amending Commonwealth Act No. 120 (charter of SECTION 1. The provisions of any general or special law to the contrary notwithstanding, all tax
NAPOCOR): and duty incentives granted to government and private entities are hereby withdrawn, except. 9

Section 13. Non-profit Character of the Corporation; Exemption from All Taxes, Duties, Fees, and
Imposts and Other Charges by the Government and Government Instrumentalities. The
Corporation shall be non-profit and shall devote all its returns from its capital investment as well SECTION 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as
as excess revenues from its operation, for expansion, To enable the Corporation to pay its amended, is hereby authorized to:
 a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax and/or duty exemption that may be restored;
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date or period of effectivity of the restoration of tax and/or duty exemption;
e) formulate and submit to the President for approval, a complete system for the grant of
subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax and
duty exemptions or preferential treatment in taxation, indicating the source of funding therefor,
eligible beneficiaries and the terms and conditions for the grant thereof taking into consideration
the international commitments of the Philippines and the necessary precautions such that the
grant of subsidies does not become the basis for countervailing action. 10
(8) On October 5, 1987, the Office of the President issued the Memorandum, confirming NAPOCOR's
tax exemption aforesaid. 11
The provincial government of Albay now defends the auction sale in question on the theory that the
various FIRB issuances constitute an undue delegation of the taxing Power and hence, null and void,
under the Constitution. It is also contended that, insofar as Executive Order No. 93 authorizes the
FIRB to grant tax exemptions, the same is of no force and effect under the constitutional provision
allowing the legislature alone to accord tax exemption privileges.
It is to be pointed out that under Presidential Decree No. 776, the power of the FIRB was merely to
"recommend to the President of the Philippines and for reasons of compatibility with the declared
economic policy, the withdrawal, modification, revocation or suspension of the enforceability of
any of the above-cited statutory subsidies or tax exemption grants, except those granted by the
Constitution." It has no authority to impose taxes or revoke existing ones, which, after all, under the
Constitution, only the legislature may accomplish. 12 The question therefore is whether or not the
various tax exemptions granted by virtue of FIRB Resolutions Nos. 10-85, 1-86, and 17-87 are valid
and constitutional.
We shall deal with FIRB No. 17-87 later, but with respect to FIRB Resolutions Nos. 10- 85 and 1-86,
we sustain the provincial government of Albay.
As we said, the FIRB, under its charter, Presidential Decree No. 776, had been empowered merely
to "recommend" tax exemptions. By itself, it could not have validly prescribed exemptions or
restore taxability. Hence, as of June 11, 1984 (promulgation of Presidential Decree No. 1931),
NAPOCOR had ceased to enjoy tax exemption privileges.
The fact that under Executive Order No. 93, the FIRB has been given the prerogative to "restore tax
and/or duty exemptions withdrawn hereunder in whole or in part," 13 and "impose conditions for
... tax and/or duty exemption" 14 is of no moment. These provisions are prospective in character and
can not affect the Board's past acts.
The Court is aware that in its preamble, Executive Order No. 93 states:
WHEREAS, a number of affected entities, government and private were able to get back their tax
and duty exemption privileges through the review mechanism implemented by the Fiscal Incentives
Review Board (FIRB); 15 but by no means can we say that it has "ratified" the acts of FIRB. It is to
misinterpret the scope of FIRB's powers under Presidential Decree No. 776 to say that it has. Apart
from that, Section 2 of the Executive Order was clearly intended to amend Presidential Decree No.
776, which means, mutatis mutandis, that FIRB did not have the right, in the first place, to grant tax
exemptions or withdraw existing ones.
Does Executive Order No. 93 constitute an unlawful delegation of legislative power? It is to be
stressed that the provincial government of Albay admits that as of March 10, 1987 (the date
Resolution No. 17-87 was affirmed by the Memorandum of the Office of the President, dated
October 5, 1987), NAPOCOR's exemption had been validly restored. What it questions is NAPOCOR's
liability in the interregnum between June 11, 1984, the date its tax privileges were withdrawn, and
March 10, 1987, the date they were purportedly restored. To be sure, it objects to Executive Order
No. 93 as alledgedly a delegation of legislative power, but only insofar as its (NAPOCOR's) June 11,
1984 to March 10, 1987 tax accumulation is concerned. We therefore leave the issue of "delegation"
to the future and its constitutionality when the proper case arises. For the nonce, we leave Executive
Order No. 93 alone, and so also, its validity as far as it grants tax exemptions (through the FIRB)
beginning December 17, 1986, the date of its promulgation.
NAPOCOR must then be held liable for the intervening years aforesaid. So it has been held:
xxx xxx xxx
The last issue to be resolved is whether or not the private-respondent is liable for the fixed and
deficiency percentage taxes in the amount of P3,025.96 (i.e. for the period from January 1, 1946
to February 29, 1948) before the approval of its municipal franchises. As aforestated, the
franchises were approved by the President only on February 24,1948. Therefore, before the said
date, the private respondent was liable for the payment of percentage and fixed taxes as seller
of light, heat, and power which, as the petitioner claims, amounted to P3,025.96. The legislative
franchise (R.A. No. 3843) exempted the grantee from all kinds of taxes other than the 2% tax from
the date the original franchise was granted. The exemption, therefore, did not cover the period
before the franchise was granted, i.e. before February 24, 1948. ... 16
Actually, the State has no reason to decry the taxation of NAPOCOR's properties, as and by way of
real property taxes. Real property taxes, after all, form part and parcel of the financing apparatus
of the Government in development and nation-building, particularly in the local government level,
Thus:
SEC. 86. Distribution of proceeds. — (a) The proceeds of the real property tax, except as otherwise
provided in this Code, shall accrue to the province, city or municipality where the property subject
to the tax is situated and shall be applied by the respective local government unit for its own use
and benefit.
(b) Barrio shares in real property tax collections. — The annual shares of the barrios in real
property tax collections shall be as follows:
(1) Five per cent of the real property tax collections of the province and another five percent of
the collections of the municipality shall accrue to the barrio where the property subject to the
tax is situated.
(2) In the case of the city, ten per cent of the collections of the tax shag likewise accrue to the
barrio where the property is situated.
Thirty per cent of the barrio shares herein referred to may be spent for salaries or per diems of the
barrio officials and other administrative expenses, while the remaining seventy per cent shall be
utilized for development projects approved by the Secretary of Local Government and Community
Development or by such committee created, or representatives designated, by him.
 SEC. 87. Application of proceeds. — (a) The proceeds of the real property tax pertaining to the
city and to the municipality shall accrue entirely to their respective general funds. In the case of
the province, one-fourth thereof shall accrue to its road and bridge fund and the remaining three-
fourths, to its general fund.

(b) The entire proceeds of the additional one per cent real property tax levied for the Special
Education Fund created under R.A. No. 5447 collected in the province or city on real property
situated in their respective territorial jurisdictions shall be distributed as follows:

(1) Collections in the provinces: Fifty per cent shall accrue to the municipality where the property
subject to the tax is situated; twenty per cent shall accrue to the province; and thirty per cent
shall be remitted to the Treasurer of the Philippines to be expended exclusively for stabilizing the
Special Education Fund in municipalities, cities and provinces in accordance with the provisions
of Section seven of R.A. No. 5447.

(2) Collections in the cities: Sixty per cent shall be retained by the city; and forty per cent shall be
remitted to the Treasurer of the Philippines to be expended exclusively for stabilizing the special
education fund in municipalities, cities and provinces as provided under Section 7 of R.A. No.
5447.

However, any increase in the shares of provinces, cities and municipalities from said additional
tax accruing to their respective local school boards commencing with fiscal year 1973-74 over
what has been actually realized during the fiscal year 1971-72 which, for purposes of this Code,
shall remain as the based year, shall be divided equally between the general fund and the
special education fund of the local government units concerned. The Secretary of Finance may,
however, at his discretion, increase to not more than seventy-five per cent the amount that
shall accrue annually to the local general fund.

(c) The proceeds of all delinquent taxes and penalties, as well as the income realized from the
use, lease or other disposition of real property acquired by the province or city at a public auction
in accordance with the provisions of this Code, and the proceeds of the sale of the delinquent
real property or, of the redemption thereof shall accrue to the province, city or municipality in
the same manner and proportion as if the tax or taxes had been paid in regular course.

(d) The proceeds of the additional real property tax on Idle private lands shall accrue to the
respective general funds of the province, city and municipality where the land subject to the tax
is situated. 17

To all intents and purposes, real property taxes are funds taken by the State with one hand and
given to the other. In no measure can the Government be said to have lost anything.

As a rule finally, claims of tax exemption are construed strongly against the claimant. 18 They must
also be shown to exist clearly and categorically, and supported by clear legal provisions. 19

Taxes are the lifeblood of the nation. 20 Their primary purpose is to generate funds for the State to
finance the needs of the citizenry and to advance the common weal.

WHEREFORE, the petition is DENIED. No costs. The auction sale of the petitioner's properties to
answer for real estate taxes accumulated between June 11, 1984 through March 10, 1987 is hereby
declared valid.

SO ORDERED.
TAX
G.R. No. 45697 November 1, 1939
MANILA ELECTRIC COMPANY, plaintiff-appellant,
vs.
A.L. YATCO, Collector of Internal Revenue, defendant-appellee.
MORAN, J.:
In 1935, plaintiff Manila Electric Company, a corporation organized and existing under the laws of
the Philippines, with its principal office and place of business in the City of Manila, insured with the
city of New York Insurance Company and the United States Guaranty Company, certain real and
personal properties situated in the Philippines. The insurance was entered into in behalf of said
plaintiff by its broker in New York City. The insurance companies are foreign corporations not
licensed to do business in the Philippines and having no agents therein. The policies contained
provisions for the settlement and payment of losses upon the occurence of any risk insured against,
a sample of which is policy No. 20 of the New York insurance Company attached to and made an
integral part of the agreed statement of facts.
Plaintiff through its broker paid, in New York, to said insurance company premiums in the sum of
P91,696. The Collector of Internal Revenue, under the authority of section 192 of act No. 2427, as
amended, assessed and levied a tax of one per centum on said premiums, which plaintiff paid under
protest. The protest having been overruled, plaintiff instituted the present action to recover the tax.
The trial court dismissed the complaint, and from the judgment thus rendered, plaintiff took the
instant appeal.
The pertinent portions of the Act here involved read:
SEC. 192. It shall be unlawful for any person, company or corporation, or forward applications for
insurance in or to issue or to deliver or accept policies of or for any company or companies not
having been legally authorized to transact business in the Philippine Islands, as provided in this
chapter; and any such person, company or corporation violating the provisions of this section
shall be deemed guilty of a penal offense, and upon conviction thereof, shall for each such offense
be punished by a fine of two hundred pesos, or imprisonment for two months, or both in the
discretion not authorized to transact business in the Philippine Island may be placed upon terms
and conditions as follows:
xxx xxx xxx
. . . . And provided further, that the prohibitions of this section shall not affect the right of an
owner of property to apply for and obtain for himself policies in foreign companies in cases were
said owner does not make use of the services of any agent, company or corporation residing or
doing business in the Philippine Islands. In all case where owners of property obtain insurance
directly with foreign companies, it shall be the duty of said owners to report to the insurance
commissioner and to the Collector of Internal Revenue each case where insurance has been so
effected, and shall pay the tax of one per centum on premium paid, in the manner required by
law of insurance companies, and shall be subject to the same penalties for failure to do so.
Appellant maintains that the second paragraph of the provisions of the Act aforecited is
unconstitutional, and has been so declared by the Supreme Court of the United States in the case
of Compania General de Tabacos v. Collector of Internal Revenue, 275 U.S., 87, 48 Sup. Ct. Rep., 100,
72 Law. ed., 177.
The case relied upon involves a suit to recover from the Collector of Internal Revenue certain taxes
in connection with insurance premiums which the Tobacco Barcelona, Spain, paid to the Guardian
Insurance Company of London, England, and to Le Comite des Assurances Maritimes de Paris, of
Paris, France. The Tobacco Company, through its head office in Barcelona, insured against fire with
the London Company the merchandise it had in deposit in the warehouse in the Philippines. As the
merchandise were from time to time shipped to Europe, the head office at Barcelona insured the
same with the Paris Company against marine risks while such merchandise were in transit from the
Philippines to Spain. The London Company, unlike the Paris Company, was licensed to do insurance
business in the Philippines and had an agent therein. Losses, if any, on policies were to be paid to
the Tobacco Company in Paris. The tax assessed and levied by the Collector of Internal Revenue,
under the same law now involved, was challenged as unconstitutional. The Supreme Court of the
united States sustained the tax with respect to premiums paid to the London Company and held it
erroneous with respect to premiums paid to the Paris Company.lawphi1.net
The factual basis upon which the imposition of the tax on premiums paid to the Paris Company was
declared erroneous, is stated by the Supreme Court of the United States thus:
Coming then to the tax on the premiums paid to the Paris Company the contract of insurance on
which the premium was paid was made at Barcelona in Spain, the headquarters of the Tobacco
Company between the Tobacco Company and the Paris Company, and any losses arising
thereunder were to be paid in Paris. The Paris Company had no communication whatever with
anyone in the Philippine Islands. The collection of this tax involves an ex-action upon a company
of Spain lawfully doing business in the Philippine Islands effected by reason of a contract made
by that company with a company in Paris on merchandise shipped from the Philippine Islands for
delivery in Barcelona. It is an imposition upon a contract not made in the Philippines and having
no situs there and to be measured by money paid as premiums in Paris, with the place of payment
of loss, if any, in Paris. We are very clear that the contract and the premiums paid under it are
not within the jurisdiction of the government of the Philippine Islands.
And, upon the authority of the cases of Allgeyer v. Lousiana, 165 U.S., 578, 41 Law. ed., 832, and St.
Louis Cotton Compress Company v. Arkansas, 250 U.S., 346, 677 Law. ed., 279, the Supreme Court
of the United States held that "as the state is forbidden to deprive a person of his liberty without
due process of law, it may not compel anyone within its jurisdiction to pay tribute to it for contracts
or money paid to secure the benefits of contract made and to be performed outside of the state."
On the other hand, the Supreme Court of the United States, in sustaining the imposition of the tax
upon premiums paid by the assured to the London Company, says:
. . . . Does the fact that while the Tobacco Company and the London Company were within the
jurisdiction of the Philippines they made a contract outside of the Philippines, prevent the
imposition upon the assured of a tax of 1 per cent upon the money paid by it as a premium to the
London Company? We may properly assume that this tax placed upon the assured must
ultimately be paid by the insurer, and treating its real incidence as such, the question arises
whether making and carrying out the policy does not involve an exercise or use of the right of the
London Company to do business in the Philippine Islands under its license, because the policy
covers fire risks no property within the Philippine Islands which may require adjustment and the
activities of agents in the Philippine Islands with respect to settlement of losses arising
thereunder. This we think must be answered affirmatively under Equitable Life Assur. Soc. v.
Pennsylvania, 238 U.S., 143 Law. ed., 1239, 35 Sup. Ct. Rep., 829. The case is a close one, but in
 deference to the conclusion we reached in the latter case, we affirm the judgment of the court into the Philippines in case of dispute, or making of proof of loss, the Commonwealth of the
below in respect to the tax upon the premium paid to the London Company. Philippines has the power to impose the tax upon the insured, regardless of whether the contract
is executed in a foreign country and with a foreign corporation. Under such circumstances,
The ruling in the Paris Company case is obviously not applicable in the instant one, for there, not substantial elements of the contract may be said to be so situated in the Philippines as to give its
only was the contract executed in a foreign country, but the merchandise insured was in transit government the power to tax. And, even if it be assumed that the tax imposed upon the insured will
from the Philippines to Spain, and nothing was to be done in the Philippines in pursuance of the ultimately be passed on the insurer, thus constituting an indirect tax upon the foreign corporation,
contract. However, the rule laid down in connection with the London Company may, by analogy, be it would still be valid, because the foreign corporation, by the stipulations of its contract, has
applied in the present case, the essential facts of both cases being similar. Here, the insured is a subjected itself to the taxing jurisdiction of the Philippines. After all, Commonwealth of the
corporation organized under the laws of the Philippines, its principal office and place of business Philippines, by protecting the properties insured, benefits the foreign corporation, and it is but
being in the City of Manila. The New York Insurance Company and the United States Guaranty reasonable that the latter should pay a just contribution therefor. It would certainly be a
Company may be said to be doing policies issued by them cover risks on properties within the discrimination against domestic corporations to hold the tax valid when the policy is given by them
Philippines, which may require adjustment and the activities of agents in the Philippines with and invalid when issued by foreign corporations.
respect to the settlement of losses arising thereunder. For instance, it is therein stipulated that "the
insured, as often as may be reasonably required, shall exhibit to any person designated by the Judgment affirmed, with costs against appellant.
company all the remains of any property therein described and submit to examination under oath
by any person named by the company, and as often as may be reasonably required, shall exhibit to
any person designated by the company all the remains of any property therein described and submit
to an examination all books of accounts . . . at such reasonable time and place as may be designated
by the company or its representative." And, in case of disagreement as to the amount of losses or
damages as to require the appointment of appraisers, the insurance contract provides that "the
appraisers shall first select a competent umpire; and failure for fifteen days to agree to such umpire,
then, on request of the insured or of the company, such umpire shall be selected by a judge of the
court of record in the state in which the property insured is located.".

True it is that the London Company had a license to do business in the Philippines, but this fact was
not a decisive factor in the decision of that case, for reliance was therein placed on the Equitable
Life Assurance Society v. Pennsylvania, 238 U.S., 143, 59 Law. ed., 1239, 35 Sup. Ct. Rep., 829,
wherein it was said that "the Equitable Society was doing business in Pennsylvania when it was
annually paying the dividends in Pennsylvania or sending an adjuster into the state in case of dispute
or making proof of death," and therefore "the taxpayer had subjected itself to the jurisdiction of
Pennsylvania in doing business there." (See Compañia General de Tabacos v. Collector of Internal
Revenue, 275 U.S., 87, 72 Law. ed., 177, 182.)

The controlling consideration, therefore, in the decision of the London Company case was that said
company, by making and carrying out policies covering risks located in this country which might
require adjustment or the making of proof of loss therein, did business in the Philippines and
subjected itself to its jurisdiction, a rule that can perfectly be applied in the present case to the new
York Insurance Company and the United States Guaranty Company.

It is argued, however, that the sending of an unjuster to the Philippines to fix the amount of losses,
is a mere contingency and not an actual fact, as such, it cannot be a ground for holding that the
insurance companies subjected themselves to the taxing jurisdiction of the Philippines. This
argument could have been made in the London Company case where no adjuster appears to have
ever been sent to the Philippines nor any adjustment ever made, and yet the stipulations to that
effect were held to be sufficient to bring the foreign corporation within the taxing jurisdiction of the
Philippines.

In epitome, then, the whole question involved in this appeal is whether or not the disputed tax is
one imposed by the Commonwealth of the Philippines upon a contract beyond its jurisdiction. We
are of the opinion and so hold that where the insured against also within the Philippines, the risk
insured against also within the Philippines, and certain incidents of the contract are to be attended
to in the Philippines, such as, payment of dividends when received in cash, sending of an unjuster
TAX Undeclared gross income from Philphos and NDC P483,634,905.57
construction projects
G.R. No. 137377 December 18, 2001 Less: Income tax thereon 169,272,217.00
Amount subject to Tax 314,362,688.57
COMMISSIONER OF INTERNAL REVENUE, petitioner, Tax due thereon 47,154,403.00
vs. Add: 50% surcharge 23,577,201.50
MARUBENI CORPORATION, respondent. 20% int. p.a.fr. 4-26-85 to 8-15-86 12,305,360.66
TOTAL AMOUNT DUE P83,036,965.16
PUNO, J.:
III. DEFICIENCY CONTRACTOR'S TAX
In this petition for review, the Commissioner of Internal Revenue assails the decision dated January FY ended March 31, 1985
15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, Undeclared gross receipts/gross income from P967,269,811.14
1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of Philphos and NDC construction projects
Internal Revenue to desist from collecting the 1985 deficiency income, branch profit remittance and Contractor's tax due thereon (4%) 38,690,792.00
contractor's taxes from Marubeni Corporation after finding the latter to have properly availed of Add: 50% surcharge for non-declaration 19,345,396.00
the tax amnesty under Executive Orders Nos. 41 and 64, as amended. 20% surcharge for late payment 9,672,698.00
Sub-total 67,708,886.00
Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 17,854,739.46
of Japan. It is engaged in general import and export trading, financing and the construction business. TOTAL AMOUNT DUE P85,563,625.46
It is duly registered to engage in such business in the Philippines and maintains a branch office in IV. DEFICIENCY COMMERCIAL BROKER'S TAX
Manila. FY ended March 31, 1985
Undeclared share from commission income P24,683,114.50
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of (denominated as "subsidy from Home Office")
authority to examine the books of accounts of the Manila branch office of respondent corporation Tax due thereon 1,628,569.00
for the fiscal year ending March 1985. In the course of the examination, petitioner found Add: 50% surcharge for non-declaration 814,284.50
respondent to have undeclared income from two (2) contracts in the Philippines, both of which 20% surcharge for late payment 407,142.25
were completed in 1984. One of the contracts was with the National Development Company (NDC) Sub-total 2,849,995.75
in connection with the construction and installation of a wharf/port complex at the Leyte Industrial Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 751,539.98
Development Estate in the municipality of Isabel, province of Leyte. The other contract was with TOTAL AMOUNT DUE P3,600,535.68
the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia
storage complex also at the Leyte Industrial Development Estate.
The 50% surcharge was imposed for your client's failure to report for tax purposes the aforesaid
On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency taxable revenues while the 25% surcharge was imposed because of your client's failure to pay on
income, branch profit remittance, contractor's and commercial broker's taxes. Respondent time the above deficiency percentage taxes.
questioned this assessment in a letter dated June 5, 1986.
xxx xxx xxx"1
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from
petitioner assessing respondent several deficiency taxes. The assessed deficiency internal revenue Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that the
taxes, inclusive of surcharge and interest, were as follows: gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece of
work and since the projects called for the construction and installation of facilities in the Philippines,
I. DEFICIENCY INCOME TAX the entire income therefrom constituted income from Philippine sources, hence, subject to internal
FY ended March 31, 1985 revenue taxes. The assessment letter further stated that the same was petitioner's final decision
Undeclared gross income (Philphos and NDC P967,269,811.14 and that if respondent disagreed with it, respondent may file an appeal with the Court of Tax
construction projects) Appeals within thirty (30) days from receipt of the assessment.
Less: Cost and expenses (50%) 483,634,905.57
Net undeclared income 483,634,905.57 On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax Appeals.
Income tax due thereon 169,272,217.00 The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit remittance
Add: 50% surcharge 84,636,108.50 and contractor's tax assessments in petitioner's assessment letter. The second, CTA Case No. 4110,
20% int. p.a.fr. 7-15-85 to 8-15-86 36,675,646.90 questioned the deficiency commercial broker's assessment in the same letter.
TOTAL AMOUNT DUE P290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a one-time amnesty covering
FY ended March 31, 1985 unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished
to avail of the income tax amnesty should, on or before October 31, 1986: (a) file a sworn statement
declaring his net worth as of December 31, 1985; (b) file a certified true copy of his statement
declaring his net worth as of December 31, 1980 on record with the Bureau of Internal Revenue
(BIR), or if no such record exists, file a statement of said net worth subject to verification by the BIR;
and (c) file a return and pay a tax equivalent to ten per cent (10%) of the increase in net worth from
December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October
30, 1986 and attached thereto its sworn statement of assets and liabilities and net worth as of Fiscal
Year (FY) 1981 and FY 1986. The return was received by the BIR on November 3, 1986 and
respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth
increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December
5, 1986 by E.O. No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order
(E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to
1985, E.O. No. 64 3 included estate and donor's taxes under Title III and the tax on business under
Chapter II, Title V of the National Internal Revenue Code, also covering the years 1981 to 1985. E.O.
No. 64 further provided that the immunities and privileges under E.O. No. 41 were extended to the
foregoing tax liabilities, and the period within which the taxpayer could avail of the amnesty was
extended to December 15, 1986. Those taxpayers who already filed their amnesty return under E.O.
No. 41, as amended, could avail themselves of the benefits, immunities and privileges under the
new E.O. by filing an amended return and paying an additional 5% on the increase in net worth to
cover business, estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated
December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of
E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent (5%)
of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered a
decision in CTA Case No. 4109. The tax court found that respondent had properly availed of the tax
amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as deemed
cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:
"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to DESIST
from collecting the 1985 deficiency taxes it had assessed against petitioner and the same are
deemed considered [sic] CANCELLED and WITHDRAWN by reason of the proper availment by
petitioner of the amnesty under Executive Order No. 41, as amended."4
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court of
Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the
Court of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax
Appeals which ruled that herein respondent's deficiency tax liabilities were extinguished upon
respondent's availment of tax amnesty under Executive Orders Nos. 41 and 64.
(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner."5
The main controversy in this case lies in the interpretation of the exception to the amnesty coverage
of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein — income tax, branch
profit remittance tax and contractor's tax. These taxes are covered by the amnesties granted by E.O.
Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from availing of the said
amnesties because the latter falls under the exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:
"Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty herein
granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in court as of
the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue Code, as
amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the
effectivity hereof as a result of information furnished under Section 316 of the National Internal
Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth before the
Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and
Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code, as
amended."
Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986,
CTA Case No. 4109 had already been filed and was pending; before the Court of Tax Appeals.
Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous.
It excepts from income tax amnesty those taxpayers "with income tax cases already filed in court as
of the effectivity hereof." The point of reference is the date of effectivity of E.O. No. 41. The filing
of income tax cases in court must have been made before and as of the date of effectivity of E.O.
No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b) there must have been no
income tax cases filed in court against him when E.O. No. 41 took effect. This is regardless of when
the taxpayer filed for income tax amnesty, provided of course he files it on or before the deadline
for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency
income, branch profit remittance and contractor's tax assessments was filed by respondent with
the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on August 22,
1986, CTA Case No. 4109 had not yet been filed in court. Respondent corporation did not fall under
the said exception in Section 4 (b), hence, respondent was not disqualified from availing of the
amnesty for income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch
profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the
National Internal Revenue Code.6 In the tax code, this tax falls under Title II on Income Tax. It is a
tax on income. Respondent therefore did not fall under the exception in Section 4 (b) when it filed
for amnesty of its deficiency branch profit remittance tax assessment.
The difficulty herein is with respect to the contractor's tax assessment and respondent's availment
of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by including
estate and donor's taxes and tax on business. Estate and donor's taxes fall under Title III of the Tax
Code while business taxes fall under Chapter II, Title V of the same. The contractor's tax is provided
in Section 205, Chapter II, Title V of the Tax Code; it is defined and imposed under the title on
business taxes, and is therefore a tax on business.7
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the
coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No. 64
provided that:
"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive Order shall remain in full force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent
with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the
exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4 (b) in
particular, this provision excepts from tax amnesty coverage a taxpayer who has "income tax cases
already filed in court as of the effectivity hereof." As to what Executive Order the exception refers
to, respondent argues that because of the words "income" and "hereof," they refer to Executive
Order No. 41.8
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to
E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates
prospectively.9 While an amendment is generally construed as becoming a part of the original act
as if it had always been contained therein,10 it may not be given a retroactive effect unless it is so
provided expressly or by necessary implication and no vested right or obligations of contract are
thereby impaired.11
There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O.
No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its
provisions should apply retroactively. Executive Order No. 64 is a substantive amendment of E.O.
No. 41. It does not merely change provisions in E.O. No. 41. It supplements the original act by adding
other taxes not covered in the first.12 It has been held that where a statute amending a tax law is
silent as to whether it operates retroactively, the amendment will not be given a retroactive effect
so as to subject to tax past transactions not subject to tax under the original act.13 In an amendatory
act, every case of doubt must be resolved against its retroactive effect.14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty
of evasion or violation of a revenue or tax law.15 It partakes of an absolute forgiveness or waiver by
the government of its right to collect what is due it and to give tax evaders who wish to relent a
chance to start with a clean slate.16 A tax amnesty, much like a tax exemption, is never favored nor
presumed in law.17 If granted, the terms of the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing authority. 18 For the right
of taxation is inherent in government. The State cannot strip itself of the most essential power of
taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden
must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon
a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved
in favor of the state.19
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be
construed strictly against the taxpayer. The term "income tax cases" should be read as to refer to
estate and donor's taxes and taxes on business while the word "hereof," to E.O. No. 64. Since
Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O.
No. 64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be
November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time
respondent filed its supplementary tax amnesty return on December 15, 1986, respondent already
fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing of
the business tax amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail of the amnesty under the
two Executive Orders, it is still not liable for the deficiency contractor's tax because the income from
the projects came from the "Offshore Portion" of the contracts. The two contracts were divided into
two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and equipment in the
contract under the "Offshore Portion" were manufactured and completed in Japan, not in the
Philippines, and are therefore not subject to Philippine taxes.
Before going into respondent's arguments, it is necessary to discuss the background of the two
contracts, examine their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate
investment arm of the Philippine Government, established the Philphos to engage in the large-scale
manufacture of phosphatic fertilizer for the local and foreign markets.20 The Philphos plant complex
which was envisioned to be the largest phosphatic fertilizer operation in Asia, and among the largest
in the world, covered an area of 180 hectares within the 435-hectare Leyte Industrial Development
Estate in the municipality of Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable,
efficient and integrated wharf/port complex at the Leyte Industrial Development Estate. The
wharf/port complex was intended to be one of the major facilities for the industrial plants at the
Leyte Industrial Development Estate. It was to be specifically adapted to the site for the handling of
phosphate rock, bagged or bulk fertilizer products, liquid materials and other products of Philphos,
the Philippine Associated Smelting and Refining Corporation (Pasar), 21 and other industrial plants
within the Estate. The bidding was participated in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project
Between National Development Company and Marubeni Corporation."22 The Port Development
Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and loading
systems, fuel oil depot, utilities systems, storage and service buildings, offsite facilities, harbor
service vessels, navigational aid system, fire-fighting system, area lighting, mobile equipment, spare
parts and other related facilities.23 The scope of the works under the contract covered turn-key
supply, which included grants of licenses and the transfer of technology and know-how,24 and:
". . . the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Wharf-Port Complex as set
forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and schedule
of the use of a part or the whole of the Wharf/Port Complex through the Owner, with the design
and construction of other facilities around the site. The scope of works shall also include any
activity, work and supply necessary for, incidental to or appropriate under present international
industrial port practice, for the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned Annex I."25
The contract price for the wharf/port complex was ¥12,790,389,000.00 and P44,327,940.00. In the
contract, the price in Japanese currency was broken down into two portions: (1) the Japanese Yen
Portion I; (2) the Japanese Yen Portion II, while the price in Philippine currency was referred to as
the Philippine Pesos Portion. The Japanese Yen Portions I and II were financed in two (2) ways: (a)
by yen credit loan provided by the Overseas Economic Cooperation Fund (OECF); and (b) by
supplier's credit in favor of Marubeni from the Export-Import Bank of Japan. The OECF is a Fund
under the Ministry of Finance of Japan extended by the Japanese government as assistance to
foreign governments to promote economic development.26 The OECF extended to the Philippine
Government a loan of ¥7,560,000,000.00 for the Leyte Industrial Estate Port Development Project
and authorized the NDC to implement the same.27 The other type of financing is an indirect type
where the supplier, i.e., Marubeni, obtained a loan from the Export-Import Bank of Japan to
advance payment to its sub-contractors.28
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion
were further broken down and subdivided according to the materials, equipment and services
rendered on the project. The price breakdown and the corresponding materials, equipment and
services were contained in a list attached as Annex III to the contract.29
A few months after execution of the NDC contract, Philphos opened for public bidding a project to
construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni
Head Office in Japan that participated in and won the bidding. Thus, on May 2, 1982, Philphos and
respondent corporation entered into an agreement entitled "Turn-Key Contract for Ammonia
Storage Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni
Corporation."30 The object of the contract was to establish and place in operating condition a
modern, reliable, efficient and integrated ammonia storage complex adapted to the site for the
receipt and storage of liquid anhydrous ammonia31 and for the delivery of ammonia to an integrated
fertilizer plant adjacent to the storage complex and to vessels at the dock.32 The storage complex
was to consist of ammonia storage tanks, refrigeration system, ship unloading system, transfer
pumps, ammonia heating system, fire-fighting system, area lighting, spare parts, and other related
facilities.33 The scope of the works required for the completion of the ammonia storage complex
covered the supply, including grants of licenses and transfer of technology and know-how,34 and:
". . . the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Ammonia Storage Complex
as set forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and
schedule of the use of a part or the whole of the Ammonia Storage Complex through the Owner
with the design and construction of other facilities at and around the Site. The scope of works
shall also include any activity, work and supply necessary for, incidental to or appropriate under
present international industrial practice, for the timely and successful implementation of the
object of this Contract, whether or not expressly referred to in the abovementioned Annex I." 35
The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00. Like the NDC
contract, the price was divided into three portions. The price in Japanese currency was broken down
into the Japanese Yen Portion I and Japanese Yen Portion II while the price in Philippine currency
was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed by
supplier's credit from the Export-Import Bank of Japan. The price stated in the three portions were
further broken down into the corresponding materials, equipment and services required for the
project and their individual prices. Like the NDC contract, the breakdown in the Philphos contract is
contained in a list attached to the latter as Annex III.36
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion under
the two contracts corresponds to the two parts into which the contracts were classified — the
Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the Japanese Yen
Portion I corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion II and the Philippine
Pesos Portion correspond to the Philippine Onshore Portion.38
Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's tax
on the income from the two projects. In fact respondent claims, which petitioner has not denied,
that the income it derived from the Onshore Portion of the two projects had been declared for tax
purposes and the taxes thereon already paid to the Philippine government. 39 It is with regard to the
gross receipts from the Foreign Offshore Portion of the two contracts that the liabilities involved in
the assessments subject of this case arose. Petitioner argues that since the two agreements are
turn-key,40 they call for the supply of both materials and services to the client, they are contracts
for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the
materials provided and services rendered were all done and completed within the territorial
jurisdiction of the Philippines.41 Accordingly, respondent's entire receipts from the contracts,
including its receipts from the Offshore Portion, constitute income from Philippine sources. The
total gross receipts covering both labor and materials should be subjected to contractor's tax in
accordance with the ruling in Commissioner of Internal Revenue v. Engineering Equipment & Supply
Co.42
A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:
"Sec. 205. Contractors, proprietors or operators of dockyards, and others. —A contractor's tax of
four percent of the gross receipts is hereby imposed on proprietors or operators of the
following business establishments and/or persons engaged in the business of selling or
rendering the following services for a fee or compensation:
(a) General engineering, general building and specialty contractors, as defined in Republic Act
No. 4566;
xxx xxx xxx
(q) Other independent contractors. The term "independent contractors" includes persons
(juridical or natural) not enumerated above (but not including individuals subject to the
occupation tax under 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.
It does not include regional or area headquarters established in the Philippines by
multinational corporations, including their alien executives, and which headquarters do not
 earn or derive income from the Philippines and which act as supervisory, communications and
coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region.
xxx xxx xxx43
Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance
of the service calls for the exercise or use of the physical or mental faculties of such contractors or
their employees. The word "contractor" refers to a person who, in the pursuit of independent
business, undertakes to do a specific job or piece of work for other persons, using his own means
and methods without submitting himself to control as to the petty details.44
A contractor's tax is a tax imposed upon the privilege of engaging in business. 45 It is generally in the
nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on
products;46 and is directly collectible from the person exercising the privilege.47 Being an excise tax,
it can be levied by the taxing authority only when the acts, privileges or business are done or
performed within the jurisdiction of said authority.48 Like property taxes, it cannot be imposed on
an occupation or privilege outside the taxing district.49
In the case at bar, it is undisputed that respondent was an independent contractor under the terms
of the two subject contracts. Respondent, however, argues that the work therein were not all
performed in the Philippines because some of them were completed in Japan in accordance with
the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment to be
made and the works and services to be performed by respondent are indeed classified into two.
The first part, entitled "Breakdown of Japanese Yen Portion I" provides:
"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete portions
of materials and equipment which will be shipped to Leyte as units and lots. This subdivision of
price is to be used by owner to verify invoice for Progress Payments under Article 19.2.1 of the
Contract. The agreed subdivision of Japanese Yen Portion I is as follows:
xxx xxx xxx50
The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen
Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words, the supplies for the project are
listed under Portion I while labor and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section II of the
Industrial Plant Department of Marubeni Corporation in Japan who supervised the implementation
of the two projects, testified that all the machines and equipment listed under Japanese Yen Portion
I in Annex III were manufactured in Japan. 51 The machines and equipment were designed,
engineered and fabricated by Japanese firms sub-contracted by Marubeni from the list of sub-
contractors in the technical appendices to each contract.52 Marubeni sub-contracted a majority of
the equipment and supplies to Kawasaki Steel Corporation which did the design, fabrication,
engineering and manufacture thereof;53 Yashima & Co. Ltd. which manufactured the mobile
equipment; Bridgestone which provided the rubber fenders of the mobile equipment; 54 and B.S.
Japan for the supply of radio equipment.55 The engineering and design works made by Kawasaki
Steel Corporation included the lay-out of the plant facility and calculation of the design in
accordance with the specifications given by respondent.56 All sub-contractors and manufacturers
are Japanese corporations and are based in Japan and all engineering and design works were
performed in that country.57
The materials and equipment under Portion I of the NDC Port Project is primarily composed of two
(2) sets of ship unloader and loader; several boats and mobile equipment. 58 The ship unloader
unloads bags or bulk products from the ship to the port while the ship loader loads products from
the port to the ship. The unloader and loader are big steel structures on top of each is a large crane
and a compartment for operation of the crane. Two sets of these equipment were completely
manufactured in Japan according to the specifications of the project. After manufacture, they were
rolled on to a barge and transported to Isabel, Leyte.59 Upon reaching Isabel, the unloader and
loader were rolled off the barge and pulled to the pier to the spot where they were installed. 60 Their
installation simply consisted of bolting them onto the pier.61
Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured
in Japan. The boats sailed to Isabel on their own power. The mobile equipment, consisting of three
to four sets of tractors, cranes and dozers, trailers and forklifts, were also manufactured and
completed in Japan. They were loaded on to a shipping vessel and unloaded at the Isabel Port. These
pieces of equipment were all on wheels and self-propelled. Once unloaded at the port, they were
ready to be driven and perform what they were designed to do.62
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the
NDC contract. These other items consist of supplies and materials for five (5) berths, two (2) roads,
a causeway, a warehouse, a transit shed, an administration building and a security building. Most
of the materials consist of steel sheets, steel pipes, channels and beams and other steel structures,
navigational and communication as well as electrical equipment.63
In connection with the Philphos contract, the major pieces of equipment supplied by respondent
were the ammonia storage tanks and refrigeration units.64 The steel plates for the tank were
manufactured and cut in Japan according to drawings and specifications and then shipped to Isabel.
Once there, respondent's employees put the steel plates together to form the storage tank. As to
the refrigeration units, they were completed and assembled in Japan and thereafter shipped to
Isabel. The units were simply installed there. 65 Annex III to the Philphos contract lists down under
the Japanese Yen Portion I the materials for the ammonia storage tank, incidental equipment, piping
facilities, electrical and instrumental apparatus, foundation material and spare parts.
All the materials and equipment transported to the Philippines were inspected and tested in Japan
prior to shipment in accordance with the terms of the contracts. 66 The inspection was made by
representatives of respondent corporation, of NDC and Philphos. NDC, in fact, contracted the
services of a private consultancy firm to verify the correctness of the tests on the machines and
equipment67 while Philphos sent a representative to Japan to inspect the storage equipment.68
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by
respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the
Assistant General Manager and Manager of the Steel Plant Marketing Department, Engineering &
Construction Division, Kawasaki Steel Corporation, testified that the equipment and supplies for the
two projects provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan.
Receipts for such payments were duly issued by Kawasaki in Japanese and English.69 Yashima & Co.
Ltd. and B.S. Japan were likewise paid by Marubeni in Japan. 70
Between Marubeni and the two Philippine corporations, payments for all materials and equipment
under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The NDC,
through the Philippine National Bank, established letters of credit in favor of respondent through
the Bank of Tokyo. The letters of credit were financed by letters of commitment issued by the OECF
with the Bank of Tokyo. The Bank of Tokyo, upon respondent's submission of pertinent documents,
released the amount in the letters of credit in favor of respondent and credited the amount therein
to respondent's account within the same bank.71

Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . . "72 of
the two projects involved two taxing jurisdictions. These acts occurred in two countries — Japan
and the Philippines. While the construction and installation work were completed within the
Philippines, the evidence is clear that some pieces of equipment and supplies were completely
designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile
equipment for the NDC project and the ammonia storage tanks and refrigeration units were made
and completed in Japan. They were already finished products when shipped to the Philippines. The
other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and
structures, electrical and instrumental apparatus, these were not finished products when shipped
to the Philippines. They, however, were likewise fabricated and manufactured by the sub-
contractors in Japan. All services for the design, fabrication, engineering and manufacture of the
materials and equipment under Japanese Yen Portion I were made and completed in Japan. These
services were rendered outside the taxing jurisdiction of the Philippines and are therefore not
subject to contractor's tax.

Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering

Equipment & Supply Co73 is not in point. In that case, the Court found that Engineering Equipment,
although an independent contractor, was not engaged in the manufacture of air conditioning units
in the Philippines. Engineering Equipment designed, supplied and installed centralized air-
conditioning systems for clients who contracted its services. Engineering, however, did not
manufacture all the materials for the air-conditioning system. It imported some items for the system
it designed and installed.74 The issues in that case dealt with services performed within the local
taxing jurisdiction. There was no foreign element involved in the supply of materials and services.

With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.

SO ORDERED.