Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-9637 April 30, 1957

AMERICAN BIBLE SOCIETY, plaintiff-appellant,

vs.
CITY OF MANILA, defendant-appellee.

City Fiscal Eugenio Angeles and Juan Nabong for appellant.

Assistant City Fiscal Arsenio Nañawa for appellee.

FELIX, J.:

Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary

corporation duly registered and doing business in the Philippines through its
Philippine agency established in Manila in November, 1898, with its principal
office at 636 Isaac Peral in said City. The defendant appellee is a municipal
corporation with powers that are to be exercised in conformity with the
provisions of Republic Act No. 409, known as the Revised Charter of the City of
Manila.

In the course of its ministry, plaintiff's Philippine agency has been distributing and
selling bibles and/or gospel portions thereof (except during the Japanese
occupation) throughout the Philippines and translating the same into several
Philippine dialects. On May 29 1953, the acting City Treasurer of the City of
Manila informed plaintiff that it was conducting the business of general
merchandise since November, 1945, without providing itself with the necessary
Mayor's permit and municipal license, in violation of Ordinance No. 3000, as
amended, and Ordinances Nos. 2529, 3028 and 3364, and required plaintiff to
secure, within three days, the corresponding permit and license fees, together
with compromise covering the period from the 4th quarter of 1945 to the 2nd
quarter of 1953, in the total sum of P5,821.45 (Annex A).

Plaintiff protested against this requirement, but the City Treasurer demanded
that plaintiff deposit and pay under protest the sum of P5,891.45, if suit was to be
taken in court regarding the same (Annex B). To avoid the closing of its business
as well as further fines and penalties in the premises on October 24, 1953,
plaintiff paid to the defendant under protest the said permit and license fees in
the aforementioned amount, giving at the same time notice to the City Treasurer
that suit would be taken in court to question the legality of the ordinances under
which, the said fees were being collected (Annex C), which was done on the same
date by filing the complaint that gave rise to this action. In its complaint plaintiff
prays that judgment be rendered declaring the said Municipal Ordinance No.
3000, as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal and
unconstitutional, and that the defendant be ordered to refund to the plaintiff the
sum of P5,891.45 paid under protest, together with legal interest thereon, and
the costs, plaintiff further praying for such other relief and remedy as the court
may deem just equitable.

Defendant answered the complaint, maintaining in turn that said ordinances were
enacted by the Municipal Board of the City of Manila by virtue of the power
granted to it by section 2444, subsection (m-2) of the Revised Administrative
Code, superseded on June 18, 1949, by section 18, subsection (1) of Republic Act
No. 409, known as the Revised Charter of the City of Manila, and praying that the
complaint be dismissed, with costs against plaintiff. This answer was replied by
the plaintiff reiterating the unconstitutionality of the often-repeated ordinances.

Before trial the parties submitted the following stipulation of facts:

COME NOW the parties in the above-entitled case, thru their undersigned
attorneys and respectfully submit the following stipulation of facts:

1. That the plaintiff sold for the use of the purchasers at its principal office
at 636 Isaac Peral, Manila, Bibles, New Testaments, bible portions and bible
concordance in English and other foreign languages imported by it from the
United States as well as Bibles, New Testaments and bible portions in the
local dialects imported and/or purchased locally; that from the fourth
quarter of 1945 to the first quarter of 1953 inclusive the sales made by the
plaintiff were as follows:

Quarter Amount of
Sales
4th quarter 1945 P1,244.21
1st quarter 1946 2,206.85
2nd quarter 1946 1,950.38
3rd quarter 1946 2,235.99
4th quarter 1946 3,256.04
1st quarter 1947 13,241.07
2nd quarter 1947 15,774.55
3rd quarter 1947 14,654.13
4th quarter 1947 12,590.94
1st quarter 1948 11,143.90
2nd quarter 1948 14,715.26
3rd quarter 1948 38,333.83
4th quarter 1948 16,179.90
1st quarter 1949 23,975.10
2nd quarter 1949 17,802.08
3rd quarter 1949 16,640.79
4th quarter 1949 15,961.38
1st quarter 1950 18,562.46
2nd quarter 1950 21,816.32
3rd quarter 1950 25,004.55
4th quarter 1950 45,287.92
1st quarter 1951 37,841.21
2nd quarter 1951 29,103.98
 3rd quarter 1951 20,181.10
4th quarter 1951 22,968.91
1st quarter 1952 23,002.65
2nd quarter 1952 17,626.96
3rd quarter 1952 17,921.01
4th quarter 1952 24,180.72
1st quarter 1953 29,516.21

2. That the parties hereby reserve the right to present evidence of other
facts not herein stipulated.

WHEREFORE, it is respectfully prayed that this case be set for hearing so

that the parties may present further evidence on their behalf. (Record on
Appeal, pp. 15-16).

When the case was set for hearing, plaintiff proved, among other things, that it
has been in existence in the Philippines since 1899, and that its parent society is in
New York, United States of America; that its, contiguous real properties located at
Isaac Peral are exempt from real estate taxes; and that it was never required to
pay any municipal license fee or tax before the war, nor does the American Bible
Society in the United States pay any license fee or sales tax for the sale of bible
therein. Plaintiff further tried to establish that it never made any profit from the
sale of its bibles, which are disposed of for as low as one third of the cost, and
that in order to maintain its operating cost it obtains substantial remittances from
its New York office and voluntary contributions and gifts from certain churches,
both in the United States and in the Philippines, which are interested in its
missionary work. Regarding plaintiff's contention of lack of profit in the sale of
bibles, defendant retorts that the admissions of plaintiff-appellant's lone witness
who testified on cross-examination that bibles bearing the price of 70 cents each
from plaintiff-appellant's New York office are sold here by plaintiff-appellant at
P1.30 each; those bearing the price of $4.50 each are sold here at P10 each; those
bearing the price of $7 each are sold here at P15 each; and those bearing the
price of $11 each are sold here at P22 each, clearly show that plaintiff's
contention that it never makes any profit from the sale of its bible, is evidently
untenable.

After hearing the Court rendered judgment, the last part of which is as follows:

As may be seen from the repealed section (m-2) of the Revised

Administrative Code and the repealing portions (o) of section 18 of
Republic Act No. 409, although they seemingly differ in the way the
legislative intent is expressed, yet their meaning is practically the same for
the purpose of taxing the merchandise mentioned in said legal provisions,
and that the taxes to be levied by said ordinances is in the nature of
percentage graduated taxes (Sec. 3 of Ordinance No. 3000, as amended,
and Sec. 1, Group 2, of Ordinance No. 2529, as amended by Ordinance No.
3364).

IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion

and so holds that this case should be dismissed, as it is hereby dismissed,
for lack of merits, with costs against the plaintiff.

Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals
which certified the case to Us for the reason that the errors assigned to the lower
Court involved only questions of law.

Appellant contends that the lower Court erred:

1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended,

are not unconstitutional;

2. In holding that subsection m-2 of Section 2444 of the Revised

Administrative Code under which Ordinances Nos. 2592 and 3000 were
promulgated, was not repealed by Section 18 of Republic Act No. 409;

3. In not holding that an ordinance providing for taxes based on gross sales
or receipts, in order to be valid under the new Charter of the City of Manila,
must first be approved by the President of the Philippines; and

4. In holding that, as the sales made by the plaintiff-appellant have

assumed commercial proportions, it cannot escape from the operation of
said municipal ordinances under the cloak of religious privilege.
The issues. — As may be seen from the proceeding statement of the case, the
issues involved in the present controversy may be reduced to the following: (1)
whether or not the ordinances of the City of Manila, Nos. 3000, as amended, and
2529, 3028 and 3364, are constitutional and valid; and (2) whether the provisions
of said ordinances are applicable or not to the case at bar.

Section 1, subsection (7) of Article III of the Constitution of the Republic of the
Philippines, provides that:

(7) No law shall be made respecting an establishment of religion, or

prohibiting the free exercise thereof, and the free exercise and enjoyment
of religious profession and worship, without discrimination or preference,
shall forever be allowed. No religion test shall be required for the exercise
of civil or political rights.

Predicated on this constitutional mandate, plaintiff-appellant contends that

Ordinances Nos. 2529 and 3000, as respectively amended, are unconstitutional
and illegal in so far as its society is concerned, because they provide for religious
censorship and restrain the free exercise and enjoyment of its religious
profession, to wit: the distribution and sale of bibles and other religious literature
to the people of the Philippines.

Before entering into a discussion of the constitutional aspect of the case, We shall
first consider the provisions of the questioned ordinances in relation to their
application to the sale of bibles, etc. by appellant. The records, show that by letter
of May 29, 1953 (Annex A), the City Treasurer required plaintiff to secure a
Mayor's permit in connection with the society's alleged business of distributing
and selling bibles, etc. and to pay permit dues in the sum of P35 for the period
covered in this litigation, plus the sum of P35 for compromise on account of
plaintiff's failure to secure the permit required by Ordinance No. 3000 of the City
of Manila, as amended. This Ordinance is of general application and not
particularly directed against institutions like the plaintiff, and it does not contain
any provisions whatever prescribing religious censorship nor restraining the free
exercise and enjoyment of any religious profession. Section 1 of Ordinance No.
3000 reads as follows:

SEC. 1. PERMITS NECESSARY. — It shall be unlawful for any person or entity

to conduct or engage in any of the businesses, trades, or
 occupations enumerated in Section 3 of this Ordinance or other businesses,
trades, or occupations for which a permit is required for the proper
supervision and enforcement of existing laws and ordinances governing the
sanitation, security, and welfare of the public and the health of the
employees engaged in the business specified in said section 3
hereof, WITHOUT FIRST HAVING OBTAINED A PERMIT THEREFOR FROM
THE MAYOR AND THE NECESSARY LICENSE FROM THE CITY TREASURER.

The business, trade or occupation of the plaintiff involved in this case is not
particularly mentioned in Section 3 of the Ordinance, and the record does not
show that a permit is required therefor under existing laws and ordinances for the
proper supervision and enforcement of their provisions governing the sanitation,
security and welfare of the public and the health of the employees engaged in the
business of the plaintiff. However, sections 3 of Ordinance 3000 contains item No.
79, which reads as follows:

79. All other businesses, trades or occupations not

mentioned in this Ordinance, except those upon which the
City is not empowered to license or to tax P5.00

Therefore, the necessity of the permit is made to depend upon the power of the
City to license or tax said business, trade or occupation.

As to the license fees that the Treasurer of the City of Manila required the society
to pay from the 4th quarter of 1945 to the 1st quarter of 1953 in the sum of
P5,821.45, including the sum of P50 as compromise, Ordinance No. 2529, as
amended by Ordinances Nos. 2779, 2821 and 3028 prescribes the following:

SEC. 1. FEES. — Subject to the provisions of section 578 of the Revised

Ordinances of the City of Manila, as amended, there shall be paid to the
City Treasurer for engaging in any of the businesses or occupations below
enumerated, quarterly, license fees based on gross sales or receipts
realized during the preceding quarter in accordance with the rates herein
prescribed: PROVIDED, HOWEVER, That a person engaged in any businesses
or occupation for the first time shall pay the initial license fee based on the
probable gross sales or receipts for the first quarter beginning from the
date of the opening of the business as indicated herein for the
corresponding business or occupation.
 xxx xxx xxx

GROUP 2. — Retail dealers in new (not yet used) merchandise, which

dealers are not yet subject to the payment of any municipal tax, such as
(1) retail dealers in general merchandise; (2) retail dealers exclusively
engaged in the sale of . . . books, including stationery.

xxx xxx xxx

As may be seen, the license fees required to be paid quarterly in Section 1 of said
Ordinance No. 2529, as amended, are not imposed directly upon any religious
institution but upon those engaged in any of the business or occupations therein
enumerated, such as retail "dealers in general merchandise" which, it is alleged,
cover the business or occupation of selling bibles, books, etc.

Chapter 60 of the Revised Administrative Code which includes section 2444,

subsection (m-2) of said legal body, as amended by Act No. 3659, approved on
December 8, 1929, empowers the Municipal Board of the City of Manila:

(M-2) To tax and fix the license fee on (a) dealers in new automobiles or
accessories or both, and (b) retail dealers in new (not yet used)
merchandise, which dealers are not yet subject to the payment of any
municipal tax.

For the purpose of taxation, these retail dealers shall be classified as (1)
retail dealers in general merchandise, and (2) retail dealers exclusively
engaged in the sale of (a) textiles . . . (e) books, including stationery, paper
and office supplies, . . .: PROVIDED, HOWEVER, That the combined total tax
of any debtor or manufacturer, or both, enumerated under these
subsections (m-1) and (m-2), whether dealing in one or all of the articles
mentioned herein, SHALL NOT BE IN EXCESS OF FIVE HUNDRED PESOS PER
ANNUM.

and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as
amended, were enacted in virtue of the power that said Act No. 3669 conferred
upon the City of Manila. Appellant, however, contends that said ordinances are
longer in force and effect as the law under which they were promulgated has
been expressly repealed by Section 102 of Republic Act No. 409 passed on June
18, 1949, known as the Revised Manila Charter.
Passing upon this point the lower Court categorically stated that Republic Act No.
409 expressly repealed the provisions of Chapter 60 of the Revised Administrative
Code but in the opinion of the trial Judge, although Section 2444 (m-2) of the
former Manila Charter and section 18 (o) of the new seemingly differ in the way
the legislative intent was expressed, yet their meaning is practically the same for
the purpose of taxing the merchandise mentioned in both legal provisions and,
consequently, Ordinances Nos. 2529 and 3000, as amended, are to be considered
as still in full force and effect uninterruptedly up to the present.

Often the legislature, instead of simply amending the pre-existing statute,

will repeal the old statute in its entirety and by the same enactment re-
enact all or certain portions of the preexisting law. Of course, the problem
created by this sort of legislative action involves mainly the effect of the
repeal upon rights and liabilities which accrued under the original statute.
Are those rights and liabilities destroyed or preserved? The authorities are
divided as to the effect of simultaneous repeals and re-enactments. Some
adhere to the view that the rights and liabilities accrued under the repealed
act are destroyed, since the statutes from which they sprang are actually
terminated, even though for only a very short period of time. Others, and
they seem to be in the majority, refuse to accept this view of the situation,
and consequently maintain that all rights an liabilities which have accrued
under the original statute are preserved and may be enforced, since the re-
enactment neutralizes the repeal, therefore, continuing the law in force
without interruption. (Crawford-Statutory Construction, Sec. 322).

Appellant's counsel states that section 18 (o) of Republic Act No, 409 introduces a
new and wider concept of taxation and is different from the provisions of Section
2444(m-2) that the former cannot be considered as a substantial re-enactment of
the provisions of the latter. We have quoted above the provisions of section
2444(m-2) of the Revised Administrative Code and We shall now copy hereunder
the provisions of Section 18, subdivision (o) of Republic Act No. 409, which reads
as follows:

(o) To tax and fix the license fee on dealers in general merchandise,
including importers and indentors, except those dealers who may be
expressly subject to the payment of some other municipal tax under the
provisions of this section.
 Dealers in general merchandise shall be classified as (a) wholesale dealers
and (b) retail dealers. For purposes of the tax on retail dealers, general
merchandise shall be classified into four main classes: namely (1) luxury
articles, (2) semi-luxury articles, (3) essential commodities, and (4)
miscellaneous articles. A separate license shall be prescribed for each class
but where commodities of different classes are sold in the same
establishment, it shall not be compulsory for the owner to secure more
than one license if he pays the higher or highest rate of tax prescribed by
ordinance. Wholesale dealers shall pay the license tax as such, as may be
provided by ordinance.

For purposes of this section, the term "General merchandise" shall include
poultry and livestock, agricultural products, fish and other allied products.

The only essential difference that We find between these two provisions that may
have any bearing on the case at bar, is that, while subsection (m-2) prescribes
that the combined total tax of any dealer or manufacturer, or both, enumerated
under subsections (m-1) and (m-2), whether dealing in one or all of the articles
mentioned therein, shall not be in excess of P500 per annum, the corresponding
section 18, subsection (o) of Republic Act No. 409, does not contain any limitation
as to the amount of tax or license fee that the retail dealer has to pay per annum.
Hence, and in accordance with the weight of the authorities above referred to
that maintain that "all rights and liabilities which have accrued under the original
statute are preserved and may be enforced, since the reenactment neutralizes
the repeal, therefore continuing the law in force without interruption", We hold
that the questioned ordinances of the City of Manila are still in force and effect.

Plaintiff, however, argues that the questioned ordinances, to be valid, must first
be approved by the President of the Philippines as per section 18, subsection (ii)
of Republic Act No. 409, which reads as follows:

(ii) To tax, license and regulate any business, trade or occupation being
conducted within the City of Manila, not otherwise enumerated in the
preceding subsections, including percentage taxes based on gross sales or
receipts, subject to the approval of the PRESIDENT, except amusement
taxes.
but this requirement of the President's approval was not contained in section
2444 of the former Charter of the City of Manila under which Ordinance No. 2529
was promulgated. Anyway, as stated by appellee's counsel, the business of "retail
dealers in general merchandise" is expressly enumerated in subsection (o),
section 18 of Republic Act No. 409; hence, an ordinance prescribing a municipal
tax on said business does not have to be approved by the President to be
effective, as it is not among those referred to in said subsection (ii). Moreover,
the questioned ordinances are still in force, having been promulgated by the
Municipal Board of the City of Manila under the authority granted to it by law.

The question that now remains to be determined is whether said ordinances are
inapplicable, invalid or unconstitutional if applied to the alleged business of
distribution and sale of bibles to the people of the Philippines by a religious
corporation like the American Bible Society, plaintiff herein.

With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821
and 3028, appellant contends that it is unconstitutional and illegal because it
restrains the free exercise and enjoyment of the religious profession and worship
of appellant.

Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted,
guarantees the freedom of religious profession and worship. "Religion has been
spoken of as a profession of faith to an active power that binds and elevates man
to its Creator" (Aglipay vs. Ruiz, 64 Phil., 201).It has reference to one's views of his
relations to His Creator and to the obligations they impose of reverence to His
being and character, and obedience to His Will (Davis vs. Beason, 133 U.S., 342).
The constitutional guaranty of the free exercise and enjoyment of religious
profession and worship carries with it the right to disseminate religious
information. Any restraints of such right can only be justified like other restraints
of freedom of expression on the grounds that there is a clear and present danger
of any substantive evil which the State has the right to prevent". (Tañada and
Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the
case at bar the license fee herein involved is imposed upon appellant for its
distribution and sale of bibles and other religious literature:

In the case of Murdock vs. Pennsylvania, it was held that an ordinance

requiring that a license be obtained before a person could canvass or solicit
orders for goods, paintings, pictures, wares or merchandise cannot be
made to apply to members of Jehovah's Witnesses who went about from
door to door distributing literature and soliciting people to "purchase"
certain religious books and pamphlets, all published by the Watch Tower
Bible & Tract Society. The "price" of the books was twenty-five cents each,
the "price" of the pamphlets five cents each. It was shown that in making
the solicitations there was a request for additional "contribution" of
twenty-five cents each for the books and five cents each for the pamphlets.
Lesser sum were accepted, however, and books were even donated in case
interested persons were without funds.

On the above facts the Supreme Court held that it could not be said that
petitioners were engaged in commercial rather than a religious venture.
Their activities could not be described as embraced in the occupation of
selling books and pamphlets. Then the Court continued:

"We do not mean to say that religious groups and the press are free from
all financial burdens of government. See Grosjean vs. American Press Co.,
297 U.S., 233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444. We have here
something quite different, for example, from a tax on the income of one
who engages in religious activities or a tax on property used or employed in
connection with activities. It is one thing to impose a tax on the income or
property of a preacher. It is quite another to exact a tax from him for the
privilege of delivering a sermon. The tax imposed by the City of Jeannette is
a flat license tax, payment of which is a condition of the exercise of these
constitutional privileges. The power to tax the exercise of a privilege is the
power to control or suppress its enjoyment. . . . Those who can tax the
exercise of this religious practice can make its exercise so costly as to
deprive it of the resources necessary for its maintenance. Those who can
tax the privilege of engaging in this form of missionary evangelism can close
all its doors to all those who do not have a full purse. Spreading religious
beliefs in this ancient and honorable manner would thus be denied the
needy. . . .

It is contended however that the fact that the license tax can suppress or
control this activity is unimportant if it does not do so. But that is to
disregard the nature of this tax. It is a license tax — a flat tax imposed on
the exercise of a privilege granted by the Bill of Rights . . . The power to
impose a license tax on the exercise of these freedom is indeed as potent
 as the power of censorship which this Court has repeatedly struck down. . .
. It is not a nominal fee imposed as a regulatory measure to defray the
expenses of policing the activities in question. It is in no way apportioned. It
is flat license tax levied and collected as a condition to the pursuit of
activities whose enjoyment is guaranteed by the constitutional liberties of
press and religion and inevitably tends to suppress their exercise. That is
almost uniformly recognized as the inherent vice and evil of this flat license
tax."

Nor could dissemination of religious information be conditioned upon the

approval of an official or manager even if the town were owned by a
corporation as held in the case of Marsh vs. State of Alabama (326 U.S.
501), or by the United States itself as held in the case of Tucker vs. Texas
(326 U.S. 517). In the former case the Supreme Court expressed the opinion
that the right to enjoy freedom of the press and religion occupies a
preferred position as against the constitutional right of property owners.

"When we balance the constitutional rights of owners of property against

those of the people to enjoy freedom of press and religion, as we must
here, we remain mindful of the fact that the latter occupy a preferred
position. . . . In our view the circumstance that the property rights to the
premises where the deprivation of property here involved, took place, were
held by others than the public, is not sufficient to justify the State's
permitting a corporation to govern a community of citizens so as to restrict
their fundamental liberties and the enforcement of such restraint by the
application of a State statute." (Tañada and Fernando on the Constitution
of the Philippines, Vol. 1, 4th ed., p. 304-306).

Section 27 of Commonwealth Act No. 466, otherwise known as the National

Internal Revenue Code, provides:

SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. — The following

organizations shall not be taxed under this Title in respect to income
received by them as such —

(e) Corporations or associations organized and operated exclusively

for religious, charitable, . . . or educational purposes, . . .: Provided,
however, That the income of whatever kind and character from any of its
 properties, real or personal, or from any activity conducted for profit,
regardless of the disposition made of such income, shall be liable to the tax
imposed under this Code;

Appellant's counsel claims that the Collector of Internal Revenue has exempted
the plaintiff from this tax and says that such exemption clearly indicates that the
act of distributing and selling bibles, etc. is purely religious and does not fall under
the above legal provisions.

It may be true that in the case at bar the price asked for the bibles and other
religious pamphlets was in some instances a little bit higher than the actual cost
of the same but this cannot mean that appellant was engaged in the business or
occupation of selling said "merchandise" for profit. For this reason We believe
that the provisions of City of Manila Ordinance No. 2529, as amended, cannot be
applied to appellant, for in doing so it would impair its free exercise and
enjoyment of its religious profession and worship as well as its rights of
dissemination of religious beliefs.

With respect to Ordinance No. 3000, as amended, which requires the obtention
the Mayor's permit before any person can engage in any of the businesses, trades
or occupations enumerated therein, We do not find that it imposes any charge
upon the enjoyment of a right granted by the Constitution, nor tax the exercise of
religious practices. In the case of Coleman vs. City of Griffin, 189 S.E. 427, this
point was elucidated as follows:

An ordinance by the City of Griffin, declaring that the practice of

distributing either by hand or otherwise, circulars, handbooks, advertising,
or literature of any kind, whether said articles are being delivered free, or
whether same are being sold within the city limits of the City of Griffin,
without first obtaining written permission from the city manager of the City
of Griffin, shall be deemed a nuisance and punishable as an offense against
the City of Griffin, does not deprive defendant of his constitutional right of
the free exercise and enjoyment of religious profession and worship, even
though it prohibits him from introducing and carrying out a scheme or
purpose which he sees fit to claim as a part of his religious system.

It seems clear, therefore, that Ordinance No. 3000 cannot be considered

unconstitutional, even if applied to plaintiff Society. But as Ordinance No. 2529 of
the City of Manila, as amended, is not applicable to plaintiff-appellant and
defendant-appellee is powerless to license or tax the business of plaintiff Society
involved herein for, as stated before, it would impair plaintiff's right to the free
exercise and enjoyment of its religious profession and worship, as well as its rights
of dissemination of religious beliefs, We find that Ordinance No. 3000, as
amended is also inapplicable to said business, trade or occupation of the plaintiff.

Wherefore, and on the strength of the foregoing considerations, We hereby

reverse the decision appealed from, sentencing defendant return to plaintiff the
sum of P5,891.45 unduly collected from it. Without pronouncement as to costs. It
is so ordered.

Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and

Endencia, JJ., concur.

THIRD DIVISION

[G.R. No. 131359. May 5, 1999]

MANILA ELECTRIC COMPANY, petitioner vs. PROVINCE OF LAGUNA and BENITO

R. BALAZO, in his capacity as Provincial Treasurer of Laguna, respondents.

DECISION
VITUG, J.:

On various dates, certain municipalities of the Province of Laguna including,

Bian, Sta Rosa, San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing
laws then in effect, issued resolutions through their respective municipal councils
granting franchise in favor of petitioner Manila Electric Company (MERALCO) for
the supply of electric light, heat and power within their concerned areas. On 19
January 1983, MERALCO was likewise granted a franchise by the National
Electrification Administration to operate an electric light and power service in the
Municipality of Calamba, Laguna.
On 12 September 1991, Republic Act No. 7160, otherwise known as the Local
Government Code of 1991, was enacted to take effect on 01 January 1992
enjoining local government units to create their own sources of revenue and to
levy taxes, fees and charges, subject to the limitations expressed therein,
consistent with the basic policy of local autonomy. Pursuant to the provisions of
the Code, respondent province enacted Laguna Provincial Ordinance No. 01-92,
effective 01 January 1993, providing, in part, as follows:

Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a
franchise, at a rate of fifty percent (50%) of one percent (1%) of the gross annual
receipts, which shall include both cash sales and sales on account realized during
the preceding calendar year within this province, including the territorial limits on
any city located in the province[1]

On the basis of the above ordinance, respondent Provincial Treasurer sent a

demand letter to MERALCO for the corresponding tax payment. Petitioner
MERALCO paid the tax, which then amounted to P19,520,628.42, under protest. A
formal claim for refund was thereafter sent by MERALCO to the Provincial
Treasurer of Laguna claiming that the franchise tax it had paid and continued to
pay to the National Government pursuant to P.D. 551 already included the
franchise tax imposed by the Provincial Tax Ordinance. MERALCO contended that
the imposition of a franchise tax under Section 2.09 of Laguna Provincial
Ordinance No. 01-92, insofar as it concerned MERALCO, contravened the
provisions of Section 1 of P.D. 551 which read:

Any provision of law or local ordinance to the contrary notwithstanding, the

franchise tax payable by all grantees of franchises to generate, distribute and sell
electric current for light, heat and power shall be two per cent (2%) of their gross
receipts received from the sale of electric current and from transactions incident
to the generation, distribution and sale of electric current.

Such franchise tax shall be payable to the Commissioner of Internal Revenue or

his duly authorized representative on or before the twentieth day of the month
following the end of each calendar quarter or month, as may be provided in the
respective franchise or pertinent municipal regulation and shall, any provision of
the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of
all taxes and assessments of whatever nature imposed by any national or local
authority on earnings, receipts, income and privilege of generation, distribution
and sale of electric current.
 On 28 August 1995, the claim for refund of petitioner was denied in a letter
signed by Governor Jose D. Lina. In denying the claim, respondents relied on a
more recent law, i.e., Republic Act No. 7160 or the Local Government Code of
1991, than the old decree invoked by petitioner.
On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court
of Sta Cruz, Laguna, a complaint for refund, with a prayer for the issuance of a
writ of preliminary injunction and/or temporary restraining order, against the
Province of Laguna and also Benito R. Balazo in his capacity as the Provincial
Treasurer of Laguna. Aside from the amount of P19,520,628.42 for which
petitioner MERALCO had priority made a formal request for refund, petitioner
thereafter likewise made additional payments under protest on various dates
totaling P27,669,566.91.
The trial court, in its assailed decision of 30 September 1997, dismissed the
complaint and concluded:

WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS,

JUDGMENT is hereby rendered in favor of the defendants and against the
plaintiff, by:

1. Ordering the dismissal of the Complaint; and

2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding,

reasonable and enforceable.[2]

In the instant petition, MERALCO assails the above ruling and brings up the
following issues; viz:

1. Whether the imposition of a franchise tax under Section 2.09 of Laguna

Provincial Ordinance No. 01-92, insofar as petitioner is concerned, is violative of
the non-impairment clause of the Constitution and Section 1 of Presidential
Decree No. 551.

2. Whether Republic Act. No. 7160, otherwise known as the Local Government
Code of 1991, has repealed, amended or modified Presidential Decree No. 551.

3. Whether the doctrine of exhaustion of administrative remedies is applicable in

this case.[3]
 The petition lacks merit.
Prefatorily, it might be well to recall that local governments do not have
the inherent power to tax[4] except to the extent that such power might
be delegated to them either by the basic law or by statute. Presently, under
Article X of the 1987 Constitution, a general delegation of that power has been
given in favor of local government units. Thus:

Sec. 3. The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a
system of decentralization with effective mechanisms of recall, initiative, and
referendum, allocate among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications, election,
appointment and removal, term, salaries, powers and functions, and duties of
local officials, and all other matters relating to the organization and operation of
the local units.

xxxxxxxxx

Sec. 5. Each local government shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees and charges shall accrue exclusively to the local
governments.

The 1987 Constitution has a counterpart provision in the 1973 Constitution which
did come out with a similar delegation of revenue making powers to local
governments.[5]
Under the regime of the 1935 Constitution no similar delegation of tax powers
was provided, and local government units instead derived their tax powers under
a limited statutory authority. Whereas, then, the delegation of tax powers
granted at that time by statute to local governments was confined and defined
(outside of which the power was deemed withheld), the present constitutional
rule (starting with the 1973 Constitution), however, would broadly confer such
tax powers subject only to specific exceptions that the law might prescribe.
Under the now prevailing Constitution, where there is neither a grant nor a
prohibition by statute, the tax power must be deemed to exist although Congress
may provide statutory limitations and guidelines. The basic rationale for the
current rule is to safeguard the viability and self-sufficiency of local government
units by directly granting them general and broad tax powers. Nevertheless, the
fundamental law did not intend the delegation to be absolute and unconditional;
the constitutional objective obviously is to ensure that, while the local
government units are being strengthened and made more autonomous,[6] the
legislature must still see to it that (a) the taxpayer will not be over-burdened or
saddled with multiple and unreasonable impositions; (b) each local government
unit will have its fair share of available resources; (c) the resources of the national
government will not be unduly disturbed; and (d) local taxation will be fair,
uniform, and just.
The Local Government Code of 1991 has incorporated and adopted, by and
large the provisions of the now repealed Local Tax Code, which had been in effect
since 01 July 1973, promulgated into law by Presidential Decree No.
231[7] pursuant to the then provisions of Section 2, Article XI, of the 1973
Constitution. The 1991 Code explicitly authorizes provincial governments,
notwithstanding any exemption granted by any law or other special law, x x x (to)
impose a tax on businesses enjoying a franchise. Section 137 thereof provides:

Sec. 137. Franchise Tax Notwithstanding any exemption granted by any law or
other special law, the province may impose a tax on businesses enjoying a
franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the
gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction. In the case of a newly started
business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the
capital investment. In the succeeding calendar year, regardless of when the
business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereof, as provided
herein. (Underscoring supplied for emphasis)

Indicative of the legislative intent to carry out the Constitutional mandate of

vesting broad tax powers to local government units, the Local Government Code
has effectively withdrawn under Section 193 thereof, tax exemptions or
incentives theretofore enjoyed by certain entities. This law states:

Section 193 Withdrawal of Tax Exemption Privileges Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (Underscoring supplied for
emphasis)

The Code, in addition, contains a general repealing clause in its Section 534;
thus:

Section 534. Repealing Clause. x x x.

(f) All general and special laws, acts, city charters, decrees, executive orders,
proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby repealed or
modified accordingly. (Underscoring supplied for emphasis)[8]

To exemplify, in Mactan Cebu International Airport Authority vs. Marcos,[9] the

Court upheld the withdrawal of the real estate tax exemption previously enjoyed
by Mactan Cebu International Airport Authority. The Court ratiocinated:

x x x These policy considerations are consistent with the State policy to ensure
autonomy to local governments and the objective of the LGC that they enjoy
genuine and meaningful local autonomy to enable them to attain their fullest
development as self-reliant communities and make them effective partners in the
attainment of national goals. The power to tax is the most effective instrument to
raise needed revenues to finance and support myriad activities of local
government units for the delivery of basic service essential to the promotion of
the general welfare and the enhancement of peace, progress, and prosperity of
the people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and
controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax treatment
of similarly situated enterprises, and there was a need for these entities to share
in the requirements of development, fiscal or otherwise, by paying the taxes and
other charges due from them.[10]

Petitioner in its complaint before the Regional Trial Court cited the ruling of
this Court in Province of Misamis Oriental vs. Cagayan Electric Power and Light
Company, Inc.;[11] thus:
In an earlier case, the phrase shall be in lieu of all taxes and at any time levied,
established by, or collected by any authority found in the franchise of the Visayan
Electric Company was held to exempt the company from payment of the 5% tax
on corporate franchise provided in Section 259 of the Internal Revenue Code
(Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385)

Similarly, we ruled that the provision: shall be in lieu of all taxes of every name
and nature in the franchise of the Manila Railroad (Subsection 12, Section 1, Act
No. 1510) exempts the Manila Railroad from payment of internal revenue tax for
its importations of coal and oil under Act No. 2432 and the Amendatory Acts of
the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act
No. 1497) justified the exemption of the Philippine Railway Company from
payment of the tax on its corporate franchise under Section 259 of the Internal
Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co vs. Collector of
Internal Revenue, 91 Phil. 35).

Those magic words, shall be in lieu of all taxes also excused the Cotabato Light
and Ice Plant Company from the payment of the tax imposed by Ordinance No. 7
of the City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32
SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant
Company when it was required to pay the corporate franchise tax under Section
259 of the Internal Revenue Code as amended by R.A. No. 39 (Carcar Electric & Ice
Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed
out that such exemption is part of the inducement for the acceptance of the
franchise and the rendition of public service by the grantee.[12]

In the recent case of the City Government of San Pablo, etc., et al. vs. Hon.
Bienvenido V. Reyes, et al.,[13] the Court has held that the phrase in lieu of all
taxes have to give way to the peremptory language of the Local Government
Code specifically providing for the withdrawal of such exemptions, privileges, and
that upon the effectivity of the Local Government Code all exemptions except
only as provided therein can no longer be invoked by MERALCO to disclaim
liability for the local tax. In fine, the Court has viewed its previous rulings as
laying stress more on the legislative intent of the amendatory law whether the
tax exemption privilege is to be withdrawn or not rather than on whether the
law can withdraw, without violating the Constitution, the tax exemption or not.
While the Court has, not too infrequently, referred to tax exemptions
contained in special franchises as being in the nature of contracts and a part of
the inducement for carrying on the franchise, these exemptions, nevertheless, are
far from being strictly contractual in nature. Contractual tax exemptions, in the
real sense of the term and where the non-impairment clause of the Constitution
can rightly be invoked, are those agreed to by the taxing authority in contracts,
such as those contained in government bonds or debentures, lawfully entered
into by them under enabling laws in which the government, acting in its private
capacity, sheds its cloak of authority and waives its governmental
immunity. Truly, tax exemptions of this kind may not be revoked without
impairing the obligations of contracts.[14] These contractual tax exemptions,
however, are not to be confused with tax exemptions granted under franchises. A
franchise partakes the nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution.[15]Indeed, Article XII, Section 11, of the
1987 Constitution, like its precursor provisions in the 1935 and the 1973
Constitutions, is explicit that no franchise for the operation of a public utility shall
be granted except under the condition that such privilege shall be subject to
amendment, alteration or repeal by Congress as and when the common good so
requires.
WHEREFORE, the instant petition is hereby DISMISSED. No costs.
SO ORDERED.
Romero, Panganiban, Purisima, and Gonzaga-Reyes, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 180651 July 30, 2014

NURSERY CARE CORPORATION; SHOEMART, INC.; STAR APPLIANCE CENTER,

INC.; H&B, INC.; SUPPLIES STATION, INC.; and HARDWARE WORKSHOP,
INC., Petitioners,
vs.
ANTHONY ACEVEDO, in his capacity as THE TREASURER OF MANILA; and THE
CITY OF MANILA,Respondents.

DECISION

BERSAMIN, J.:

The issue here concerns double taxation. There is double taxation when the same
taxpayer is taxed twice when he should be taxed only once for the same purpose
by the same taxing authority within the same jurisdiction during the same taxing
period, and the taxes are of the same kind or character. Double taxation is
obnoxious.

The Case

Under review are the resolution promulgated in CA-G.R. SP No. 72191 on June 18,
2007,1 whereby the Court of Appeals (CA) denied petitioners' appeal for lack of
jurisdiction; and the resolution promulgated on November 14, 2007,2 whereby
the CA denied their motion for reconsideration for its lack of merit.

Antecedents

The City of Manila assessed and collected taxes from the individual petitioners
pursuant to Section 15 (Tax on Wholesalers, Distributors, or Dealers) and Section
17 (Tax on Retailers) of the Revenue Code of Manila.3 At the same time, the City
of Manila imposed additional taxes upon the petitioners pursuant to Section 21
ofthe Revenue Code of Manila,4 as amended, as a condition for the renewal of
their respective business licenses for the year 1999. Section 21 of the Revenue
Code of Manila stated:

Section 21. Tax on Business Subject to the Excise, Value-Added or Percentage

Taxes under the NIRC - On any of the following businesses and articles of
commerce subject to the excise, value-added or percentage taxes under the
National Internal Revenue Code, hereinafter referred to as NIRC, as amended, a
tax of FIFTY PERCENT (50%) OF ONE PERCENT (1%) per annum on the gross sales
or receipts of the preceding calendar year is hereby imposed:
A) On person who sells goods and services in the course of trade or businesses; x
x x PROVIDED, that all registered businesses in the City of Manila already paying
the aforementioned tax shall be exempted from payment thereof.

To comply with the City of Manila’s assessmentof taxes under Section 21, supra,
the petitioners paid under protest the following amounts corresponding to the
first quarter of 1999,5 to wit:

(a) Nursery Care Corporation ₱595,190.25

(b) Shoemart Incorporated ₱3,283,520.14

(c) Star Appliance Center ₱236,084.03

(d) H & B, Inc. ₱1,271,118.74

(e) Supplies Station, Inc. ₱239,501.25

(f) Hardware Work Shop, Inc. ₱609,953.24

By letter dated March 1, 1999, the petitioners formally requested the Office of
the City Treasurer for the tax credit or refund of the local business taxes paid
under protest.6 However, then City Treasurer Anthony Acevedo (Acevedo) denied
the request through his letter of March 10, 1999.7

On April 8, 1999, the petitioners, through their representative, Cecilia R. Patricio,

sought the reconsideration of the denial of their request.8 Still, the City Treasurer
did not reconsider.9 In the meanwhile, Liberty Toledo succeeded Acevedo as the
City Treasurer of Manila.10

On April 29, 1999, the petitioners filed their respective petitions for certiorariin
the Regional Trial Court (RTC) in Manila. The petitions, docketed as Civil Cases
Nos. 99-93668 to 99-93673,11 were initially raffled to different branches, but were
soon consolidated in Branch 34.12 After the presiding judge of Branch 34
voluntarily inhibited himself, the consolidated cases were transferred to Branch
23,13 but were again re-raffled to Branch 19 upon the designation of Branch 23 as
a special drugs court.14
The parties agreed on and jointly submitted the following issues for the
consideration and resolution of the RTC, namely:

(a) Whether or not the collection of taxes under Section 21 of Ordinance

No. 7794, as amended, constitutes double taxation.

(b) Whether or not the failure of the petitioners to avail of the statutorily
provided remedy for their tax protest on the ground of unconstitutionality,
illegality and oppressiveness under Section 187 of the Local Government
Code renders the present action dismissible for non-exhaustion of
administrative remedy.15

Decision of the RTC

On April 26, 2002, the RTC rendered its decision, holding thusly:

The Court perceives of no instance of the constitutionally proscribed double

taxation, in the strict, narrow or obnoxious sense, imposed upon the petitioners
under Section 15 and 17, on the one hand, and under Section 21, on the other, of
the questioned Ordinance. The tax imposed under Section 15 and 17, as against
that imposed under Section 21, are levied against different tax objects or subject
matter. The tax under Section 15 is imposed upon wholesalers, distributors or
dealers, while that under Section 17 is imposedupon retailers. In short, taxes
imposed under Section 15 and 17 is a tax on the business of wholesalers,
distributors, dealers and retailers. On the other hand, the tax imposed upon
herein petitioners under Section 21 is not a tax against the business of the
petitioners (as wholesalers, distributors, dealers or retailers)but is rather a tax
against consumers or end-users of the articles sold by petitioners. This is plain
from a reading of the modifying paragraph of Section 21 which says:

"The tax shall be payable by the person paying for the services rendered and shall
be paid to the person rendering the services who is required to collect and pay
the tax within twenty (20) days after the end of each quarter." (Underscoring
supplied)

In effect, the petitioners only act as the collection or withholding agent of the City
while the ones actually paying the tax are the consumers or end-users of the
articles being sold by petitioners. The taxes imposed under Sec. 21 represent
additional amounts added by the business establishment to the basic prices of its
goods and services which are paid by the end-users to the businesses. It is actually
not taxes on the business of petitioners but on the consumers. Hence, there is no
double taxation in the narrow, strict or obnoxious sense,involved in the
imposition of taxes by the City of Manila under Sections 15, 17 and 21 of the
questioned Ordinance. This in effect resolves infavor of the constitutionality of
the assailed sections of Ordinance No. 7807 of the City of Manila.

Petitioners, likewise, pray the Court to direct respondents to cease and desist
from implementing Section 21 of the questioned Ordinance. That the Court
cannot do, without doing away with the mandatory provisions of Section 187 of
the Local Government Code which distinctly commands that an appeal
questioning the constitutionality or legality of a tax ordinance shall not have the
effectof suspending the effectivity of the ordinance and the accrual and payment
of the tax, fee or charge levied therein. This is so because an ordinance carries
with it the presumption of validity.

xxx

With the foregoing findings, petitioners’ prayer for the refund of the amounts
paid by them under protest must, likewise, fail.

Wherefore, the petitions are dismissed. Without pronouncement as to costs.

SO ORDERED.16

The petitioners appealed to the CA.17

Ruling of the CA

On June 18, 2007, the CA deniedthe petitioners’ appeal, ruling as follows:

The six (6) cases were consolidated on a common question of fact and law, that is,
whether the act ofthe City Treasurer of Manila of assessing and collecting
business taxes under Section 21of Ordinance 7807, on top of other business taxes
alsoassessed and collected under the previous sections of the same ordinance is a
violation of the provisions of Section 143 of the Local Government Code.

Clearly, the disposition of the present appeal in these consolidated cases does not
necessitate the calibration of the whole evidence as there is no question or doubt
as to the truth or the falsehood of the facts obtaining herein, as both parties
agree thereon. The present case involves a question of law that would not lend
itself to an examination or evaluation by this Court of the probative value of the
evidence presented.

Thus the Court is constrained todismiss the instant petition for lack of jurisdiction
under Section 2,Rule 50 of the 1997 Rules on Civil Procedure which states:

"Sec. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal under

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

An appeal erroneously taken tothe Court of Appeals shall not be transferred to

the appropriate court but shall be dismissed outright.

WHEREFORE, the foregoing considered, the appeal is DISMISSED.

SO ORDERED.18

The petitioners moved for reconsideration, but the CA denied their motion
through the resolution promulgated on November 14, 2007.19

Issues

The petitioners now appeal, raising the following grounds, to wit:

A.

THE COURT OF APPEALS, IN DISMISSING THE APPEAL OF THE PETITIONERS AND

DENYING THEIR MOTION FOR RECONSIDERATION, ERRED INRULING THAT THE
ISSUE INVOLVED IS A PURELY LEGAL QUESTION.

B.

THE COURT OF APPEALS ERRED IN NOT REVERSING THE DECISION OF BRANCH 19

OF THE REGIONAL TRIAL COURT OF MANILA DATED 26 APRIL 2002 DENYING
PETITIONERS’ PRAYER FOR REFUND OF THE AMOUNTS PAID BY THEM UNDER
PROTEST AND DISMISSING THE PETITION FOR CERTIORARI FILED BY THE
PETITIONERS.

C.

THE COURT OF APPEALS ERRED IN NOT RULING THAT THE ACT OF THE CITY
TREASURER OF MANILA IN IMPOSING, ASSESSING AND COLLECTING THE
ADDITIONAL BUSINESS TAX UNDER SECTION 21 OFORDINANCE NO. 7794, AS
AMENDED BY ORDINANCE NO. 7807, ALSO KNOWN AS THE REVENUE CODE OF
THE CITY OFMANILA, IS CONSTITUTIVE OF DOUBLE TAXATION AND VIOLATIVE OF
THE LOCAL GOVERNMENT CODE OF 1991.20

The main issues for resolution are, therefore, (1) whether or not the CA properly
denied due course to the appeal for raising pure questions of law; and (2)
whether or not the petitioners were entitled to the tax credit or tax refund for the
taxes paid under Section 21, supra.

Ruling

The appeal is meritorious.

1.

The CA did not err in dismissing the appeal;

but the rules should be liberally applied
for the sake of justice and equity

The Rules of Courtprovides three modes of appeal from the decisions and final
orders of the RTC, namely: (1) ordinary appeal or appeal by writ of error under
Rule 41, where the decisionsand final orders were rendered in civil or criminal
actions by the RTC in the exercise of original jurisdiction; (2) petition for review
under Rule 42, where the decisions and final orders were rendered by the RTC in
the exerciseof appellate jurisdiction; and (3) petition for review on certiorarito the
Supreme Court under Rule 45.21 The first mode of appeal is taken to the CA on
questions of fact, or mixed questions of fact and law. The second mode of appeal
is brought to the CA on questions of fact, of law, or mixed questions of fact and
law.22 The third mode of appeal is elevated to the Supreme Court only on
questions of law.23
The distinction between a question oflaw and a question of fact is well
established. On the one hand, a question of law ariseswhen there is doubt as to
what the law is on a certain state of facts; on the other, there is a question of fact
when the doubt arises asto the truth or falsity of the alleged facts.24 According to
Leoncio v. De Vera:25

x x x For a question to beone of law, the same must not involve an examination of
the probative value ofthe evidence presented by the litigants or any of them. The
resolution of the issue must restsolely on what the law provides on the given set
of circumstances. Once it is clear that the issue invites a review of the evidence
presented, the question posed is one of fact. Thus, the test of whether a question
isone of law or offact is not the appellation given to such question by the party
raising the same; rather, it is whether the appellate court can determine the issue
raised without reviewing or evaluating the evidence, in which case, it is a question
oflaw; otherwise it is a question of fact.26

The nature of the issues to be raised on appeal can be gleaned from the
appellant’s notice of appeal filed in the trial court, and from the appellant’s brief
submitted to the appellate court.27 In this case, the petitioners filed a notice of
appeal in which they contended that the April 26, 2002 decision and the order of
July 17, 2002 issued by the RTC denying their consolidated motion for
reconsideration were contrary to the facts and law obtaining in the consolidated
cases.28 In their consolidated memorandum filed in the CA, they essentially
assailed the RTC’s ruling that the taxes imposed on and collected from the
petitioners under Section 21 of the Revenue Code of Manila constituted double
taxation in the strict, narrow or obnoxious sense. Considered together, therefore,
the notice of appeal and consolidated memorandum evidently did notraise issues
that required the reevaluation of evidence or the relevance of surrounding
circumstances.

The CA rightly concluded that the petitioners thereby raised only a question of
law. The dismissal of their appeal was proper, strictly speaking, because Section 2,
Rule 50 of the Rules of Court provides that an appeal from the RTC to the CA
raising only questions of law shall be dismissed;

and that an appeal erroneously taken to the CA shall be outrightly dismissed.29

2.
Collection of taxes pursuant to Section 21 of the
Revenue Code of Manila constituted double taxation

The foregoing notwithstanding, the Court, given the circumstances obtaining

herein and in light of jurisprudence promulgated subsequent to the filing of the
petition, deems it fitting and proper to adopt a liberal approach in order to render
a justand speedy disposition of the substantive issue at hand. Hence, we resolve,
bearing inmind the following pronouncement in Go v. Chaves:30

Our rules of procedure are designed to facilitate the orderly disposition of cases
and permit the prompt disposition of unmeritorious cases which clog the court
dockets and do little more than waste the courts’ time. These technical and
procedural rules, however, are intended to ensure, rather than suppress,
substantial justice. A deviation from their rigid enforcement may thus be allowed,
as petitioners should be given the fullest opportunity to establish the merits of
their case, rather than lose their property on mere technicalities. We held in Ong
Lim Sing, Jr. v. FEB Leasing and Finance Corporation that:

Courts have the prerogative to relax procedural rules of even the most mandatory
character, mindful of the duty to reconcile both the need to speedily put an end
to litigation and the parties' right to due process.In numerous cases, this Court
has allowed liberal construction of the rules when to do so would serve the
demands of substantial justice and equity.

The petitioners point out that although Section 21 of the Revenue Code of Manila
was not itself unconstitutional or invalid, its enforcement against the petitioners
constituted double taxation because the local business taxes under Section 15
and Section 17 of the Revenue Code of Manila were already being paid by
them.31 They contend that the proviso in Section 21 exempted all registered
businesses in the City of Manila from paying the tax imposed under Section
21;32 and that the exemption was more in accord with Section 143 of the Local
Government Code,33 the law that vested in the municipal and city governments
the power to impose business taxes.

The respondents counter, however, that double taxation did not occur from the
imposition and collection of the tax pursuant to Section 21 of the Revenue Code
of Manila;34 that the taxes imposed pursuant to Section 21 were in the concept of
indirect taxes upon the consumers of the goods and services sold by a business
establishment;35 and that the petitioners did not exhaust their administrative
remedies by first appealing to the Secretary of Justice to challenge the
constitutionalityor legality of the tax ordinance.36

In resolving the issue of double taxation involving Section 21 of the Revenue Code
of Manila, the Court is mindful of the ruling in City of Manila v. Coca-Cola Bottlers
Philippines, Inc.,37 which has been reiterated in Swedish Match Philippines, Inc. v.
The Treasurer of the City of Manila.38 In the latter, the Court has held:

x x x [T]he issue of double taxation is not novel, as it has already been settled by
this Court in The City of Manila v. Coca-Cola Bottlers Philippines, Inc.,in this wise:

Petitioners obstinately ignore the exempting proviso in Section 21 of Tax

Ordinance No. 7794, to their own detriment.1âwphi1 Said exempting proviso was
precisely included in said section so as to avoid double taxation.

Double taxation means taxingthe same property twice when it should be taxed
only once; that is, "taxing the same person twice by the same jurisdictionfor the
same thing." It is obnoxious when the taxpayer is taxed twice, when it should be
but once. Otherwise described as "direct duplicate taxation," the two taxes must
be imposed on the same subject matter, for the same purpose, by the same
taxing authority, within the same jurisdiction, during the same taxing period; and
the taxes must be of the same kind or character.

Using the aforementioned test, the Court finds that there is indeed double
taxation if respondent is subjected to the taxes under both Sections 14 and 21 of
Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject
matter – the privilege of doing business in the City of Manila; (2) for the same
purpose – to make persons conducting business within the City of Manila
contribute tocity revenues; (3) by the same taxing authority – petitioner Cityof
Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction
of the City of Manila; (5) for the same taxing periods – per calendar year; and (6)
of the same kind or character – a local business tax imposed on gross sales or
receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14
and 21 of Tax Ordinance No. 7794 is specious. The Court revisits Section 143 of
the LGC, the very source of the power of municipalities and cities to impose a
local business tax, and to which any local business tax imposed by petitioner City
of Manila must conform. It is apparent from a perusal thereof that when a
municipality or city has already imposed a business tax on manufacturers, etc.of
liquors, distilled spirits, wines, and any other article of commerce, pursuant to
Section 143(a) of the LGC, said municipality or city may no longer subject the
same manufacturers, etc.to a business tax under Section 143(h) of the same
Code. Section 143(h) may be imposed only on businesses that are subject to
excise tax, VAT, or percentagetax under the NIRC, and that are "not otherwise
specified in preceding paragraphs." In the same way, businesses such as
respondent’s, already subject to a local business tax under Section 14 of Tax
Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer
be made liable for local business tax under Section 21 of the same Tax Ordinance
[which is based on Section 143(h) of the LGC].

Based on the foregoing reasons, petitioner should not have been subjected to
taxes under Section 21 of the ManilaRevenue Code for the fourth quarter of 2001,
considering thatit had already been paying local business tax under Section 14 of
the same ordinance.

xxxx

Accordingly, respondent’s assessment under both Sections 14 and 21 had no

basis. Petitioner is indeed liable to pay business taxes to the City of Manila;
nevertheless, considering that the former has already paid these taxes under
Section 14 of the Manila Revenue Code, it is exempt from the same payments
under Section 21 of the same code. Hence, payments made under Section 21
must be refunded in favor of petitioner.

It is undisputed thatpetitioner paid business taxes based on Sections 14 and 21

for the fourth quarter of 2001 in the total amount of ₱470,932.21. Therefore, it is
entitled to a refund of ₱164,552.04 corresponding to the payment under Section
21 of the Manila Revenue Code.

On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and Swedish
Match Philippines, Inc., the Court now holds that all the elements of double
taxation concurred upon the Cityof Manila’s assessment on and collection from
the petitioners of taxes for the first quarter of 1999 pursuant to Section 21 of the
Revenue Code of Manila.
Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a
person who sold goods and services in the course of trade or business based on a
certain percentage ofhis gross sales or receipts in the preceding calendar year,
while Section 15 and Section 17 likewise imposed the tax on a person who sold
goods and services in the course of trade or business but only identified such
person with particularity, namely, the wholesaler, distributor or dealer (Section
15), and the retailer (Section 17), all the taxes – being imposed on the privilege of
doing business in the City of Manila in order to make the taxpayers contributeto
the city’s revenues – were imposed on the same subject matter and for the same
purpose.

Secondly, the taxes were imposed by the same taxing authority (the City of
Manila) and within the same jurisdiction in the same taxing period (i.e., per
calendar year).

Thirdly, the taxes were all in the nature of local business taxes.

We note that although Coca-Cola Bottlers Philippines, Inc. and Swedish Match
Philippines, Inc. involved Section 21 vis-à-vis Section 14 (Tax on Manufacturers,
Assemblers and Other Processors)39 of the Revenue Code of Manila, the legal
principlesenunciated therein should similarly apply because Section 15 (Tax on
Wholesalers, Distributors, or Dealers)and Section 17 (Tax on Retailers) of the
Revenue Code of Manila imposed the same nature of tax as that imposed under
Section 14, i.e., local business tax, albeit on a different subject matter or group of
taxpayers.

In fine, the imposition of the tax under Section 21 of the Revenue Code of Manila
constituted double taxation, and the taxes collected pursuant thereto must be
refunded.

WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES
and SETS ASIDE the resolutions promulgated on June 18, 2007 and November 14,
2007 in CA-G.R. SP No. 72191; and DIRECTS the City of Manila to refund the
payments made by the petitioners of the taxes assessed and collected for the first
quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.

No pronouncement on costs of suit.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 127105 June 25, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

GONZAGA-REYES, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to set aside the decision of the Court of Appeals dated November 7, 1996
in CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals in CTA
Case No. 5136.

The antecedent facts as found by the Court of Tax Appeals are not disputed, to
wit:

[Respondent], a domestic corporation organized and operating under

the Philippine laws, entered into a license agreement with SC
Johnson and Son, United States of America (USA), a non-resident
foreign corporation based in the U.S.A. pursuant to which the
[respondent] was granted the right to use the trademark, patents
and technology owned by the latter including the right to
manufacture, package and distribute the products covered by the
Agreement and secure assistance in management, marketing and
production from SC Johnson and Son, U. S. A.
 The said License Agreement was duly registered with the Technology
Transfer Board of the Bureau of Patents, Trade Marks and
Technology Transfer under Certificate of Registration No. 8064 (Exh.
"A").

For the use of the trademark or technology, [respondent] was

obliged to pay SC Johnson and Son, USA royalties based on a
percentage of net sales and subjected the same to 25% withholding
tax on royalty payments which [respondent] paid for the period
covering July 1992 to May 1993 in the total amount of P1,603,443.00
(Exhs. "B" to "L" and submarkings).

On October 29, 1993, [respondent] filed with the International Tax

Affairs Division (ITAD) of the BIR a claim for refund of overpaid
withholding tax on royalties arguing that, "the antecedent facts
attending [respondent's] case fall squarely within the same
circumstances under which said MacGeorge and Gillete rulings were
issued. Since the agreement was approved by the Technology
Transfer Board, the preferential tax rate of 10% should apply to the
[respondent]. We therefore submit that royalties paid by the
[respondent] to SC Johnson and Son, USA is only subject to 10%
withholding tax pursuant to the most-favored nation clause of the
RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the
RP-West Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review
[filed with the Court of Appeals], par. 12). [Respondent's] claim for
there fund of P963,266.00 was computed as follows:

Gross 25% 10%

Month/ Royalty Withholding Withholding

Year Fee Tax Paid Tax Balance

——— ——— ——— ——— ———

July 1992 559,878 139,970 55,988 83,982

August 567,935 141,984 56,794 85,190

 September 595,956 148,989 59,596 89,393

October 634,405 158,601 63,441 95,161

November 620,885 155,221 62,089 93,133

December 383,276 95,819 36,328 57,491

Jan 1993 602,451 170,630 68,245 102,368

February 565,845 141,461 56,585 84,877

March 547,253 136,813 54,725 82,088

April 660,810 165,203 66,081 99,122

May 603,076 150,769 60,308 90,461

———— ———— ———— ———

P6,421,770 P1,605,443 P642,177 P963,2661

======== ======== ======== ========

The Commissioner did not act on said claim for refund. Private respondent S.C.
Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the
Court of Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to
claim a refund of the overpaid withholding tax on royalty payments from July
1992 to May 1993.

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C.
Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit
certificate in the amount of P963,266.00 representing overpaid withholding tax
on royalty payments, beginning July, 1992 to May, 1993.2

The Commissioner of Internal Revenue thus filed a petition for review with the
Court of Appeals which rendered the decision subject of this appeal on November
7, 1996 finding no merit in the petition and affirming in toto the CTA ruling.3
This petition for review was filed by the Commissioner of Internal Revenue raising
the following issue:

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND

SON, USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE
OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN
RELATION TO THE RP-WEST GERMANY TAX TREATY.

Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which
is known as the "most favored nation" clause, the lowest rate of the Philippine tax
at 10% may be imposed on royalties derived by a resident of the United States
from sources within the Philippines only if the circumstances of the resident of
the United States are similar to those of the resident of West Germany. Since the
RP-US Tax Treaty contains no "matching credit" provision as that provided under
Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-
US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-
West Germany Tax Treaty. Even assuming that the phrase "paid under similar
circumstances" refers to the payment of royalties, and not taxes, as held by the
Court of Appeals, still, the "most favored nation" clause cannot be invoked for the
reason that when a tax treaty contemplates circumstances attendant to the
payment of a tax, or royalty remittances for that matter, these must necessarily
refer to circumstances that are tax-related. Finally, petitioner argues that since
S.C. Johnson's invocation of the "most favored nation" clause is in the nature of a
claim for exemption from the application of the regular tax rate of 25% for
royalties, the provisions of the treaty must be construed strictly against it.

In its Comment, private respondent S.C. Johnson avers that the instant petition
should be denied (1) because it contains a defective certification against forum
shopping as required under SC Circular No. 28-91, that is, the certification was not
executed by the petitioner herself but by her counsel; and (2) that the "most
favored nation" clause under the RP-US Tax Treaty refers to royalties paid under
similar circumstances as those royalties subject to tax in other treaties; that the
phrase "paid under similar circumstances" does not refer to payment of the tax
but to the subject matter of the tax, that is, royalties, because the "most favored
nation" clause is intended to allow the taxpayer in one state to avail of more
liberal provisions contained in another tax treaty wherein the country of
residence of such taxpayer is also a party thereto, subject to the basic condition
that the subject matter of taxation in that other tax treaty is the same as that in
the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax
Treaty speaks of "royalties of the same kind paid under similar circumstances".
S.C. Johnson also contends that the Commissioner is estopped from insisting on
her interpretation that the phrase "paid under similar circumstances" refers to
the manner in which the tax is paid, for the reason that said interpretation is
embodied in Revenue Memorandum Circular ("RMC") 39-92 which was already
abandoned by the Commissioner's predecessor in 1993; and was expressly
revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American
licensor are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the
RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said ruling
should be given retroactive effect except if such is prejudicial to the taxpayer
pursuant to Section 246 of the National Internal Revenue Code.

Petitioner filed Reply alleging that the fact that the certification against forum
shopping was signed by petitioner's counsel is not a fatal defect as to warrant the
dismissal of this petition since Circular No. 28-91 applies only to original actions
and not to appeals, as in the instant case. Moreover, the requirement that the
certification should be signed by petitioner and not by counsel does not apply to
petitioner who has only the Office of the Solicitor General as statutory counsel.
Petitioner reiterates that even if the phrase "paid under similar circumstances"
embodied in the most favored nation clause of the RP-US Tax Treaty refers to the
payment of royalties and not taxes, still the presence or absence of a "matching
credit" provision in the said RP-US Tax Treaty would constitute a material
circumstance to such payment and would be determinative of the said clause's
application.1âwphi1.nêt

We address first the objection raised by private respondent that the certification
against forum shopping was not executed by the petitioner herself but by her
counsel, the Office of the Solicitor General (O.S.G.) through one of its Solicitors,
Atty. Tomas M. Navarro.

SC Circular No. 28-91 provides:

SUBJECT: ADDITIONAL
REQUISITES FOR PETITIONS
FILED WITH THE SUPREME
COURT AND THE COURT OF
APPEALS TO PREVENT FORUM
 SHOPPING OR MULTIPLE
FILING OF PETITIONS AND
COMPLAINTS

TO: xxx xxx xxx

The attention of the Court has been called to the filing of multiple
petitions and complaints involving the same issues in the Supreme
Court, the Court of Appeals or other tribunals or agencies, with the
result that said courts, tribunals or agencies have to resolve the same
issues.

(1) To avoid the foregoing, in every petition filed with the Supreme
Court or the Court of Appeals, the petitioner aside from complying
with pertinent provisions of the Rules of Court and existing circulars,
must certify under oath to all of the following facts or undertakings:
(a) he has not theretofore commenced any other action or
proceeding involving the same issues in the Supreme Court, the
Court of Appeals, or any tribunal or
agency; . . .

(2) Any violation of this revised Circular will entail the following
sanctions: (a) it shall be a cause for the summary dismissal of the
multiple petitions or complaints; . . .

The circular expressly requires that a certificate of non-forum shopping should be

attached to petitions filed before this Court and the Court of Appeals. Petitioner's
allegation that Circular No. 28-91 applies only to original actions and not to
appeals as in the instant case is not supported by the text nor by the obvious
intent of the Circular which is to prevent multiple petitions that will result in the
same issue being resolved by different courts.

Anent the requirement that the party, not counsel, must certify under oath that
he has not commenced any other action involving the same issues in this Court or
the Court of Appeals or any other tribunal or agency, we are inclined to accept
petitioner's submission that since the OSG is the only lawyer for the petitioner,
which is a government agency mandated under Section 35, Chapter 12, title III,
Book IV of the 1987 Administrative Code4 to be represented only by the Solicitor
General, the certification executed by the OSG in this case constitutes substantial
compliance with Circular No. 28-91.

With respect to the merits of this petition, the main point of contention in this
appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty
regarding the rate of tax to be imposed by the Philippines upon royalties received
by a non-resident foreign corporation. The provision states insofar as pertinent
that —

1) Royalties derived by a resident of one of the

Contracting States from sources within the other
Contracting State may be taxed by both Contracting
States.

2) However, the tax imposed by that Contracting State

shall not exceed.

a) In the case of the United States, 15

percent of the gross amount of the
royalties, and

b) In the case of the Philippines, the least

of:

(i) 25 percent of the gross

amount of the royalties;

(ii) 15 percent of the gross

amount of the royalties, where
the royalties are paid by a
corporation registered with the
Philippine Board of
Investments and engaged in
preferred areas of activities;
and

(iii) the lowest rate of

Philippine tax that may be
imposed on royalties of the
 same kind paid under similar
circumstances to a resident of a
third State.

xxx xxx xxx

(emphasis supplied)

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted
provision, it is entitled to the concessional tax rate of 10 percent on royalties
based on Article 12 (2) (b) of the RP-Germany Tax Treaty which provides:

(2) However, such royalties may also be taxed in the

Contracting State in which they arise, and according to
the law of that State, but the tax so charged shall not
exceed:

xxx xxx xxx

b) 10 percent of the gross amount of

royalties arising from the use of, or the right
to use, any patent, trademark, design or
model, plan, secret formula or process, or
from the use of or the right to use,
industrial, commercial, or scientific
equipment, or for information concerning
industrial, commercial or scientific
experience.

For as long as the transfer of technology, under Philippine law, is

subject to approval, the limitation of the tax rate mentioned under b)
shall, in the case of royalties arising in the Republic of the Philippines,
only apply if the contract giving rise to such royalties has been
approved by the Philippine competent authorities.

Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20
percent of the gross amount of such royalties against German income and
corporation tax for the taxes payable in the Philippines on such royalties where
the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-
Germany Tax Treaty states —

1) Tax shall be determined in the case of a resident of

the Federal Republic of Germany as follows:

xxx xxx xxx

b) Subject to the provisions of German tax

law regarding credit for foreign tax, there
shall be allowed as a credit against German
income and corporation tax payable in
respect of the following items of income
arising in the Republic of the Philippines,
the tax paid under the laws of the
Philippines in accordance with this
Agreement on:

xxx xxx xxx

dd) royalties, as defined in

paragraph 3 of Article 12;

xxx xxx xxx

c) For the purpose of the credit referred in

subparagraph; b) the Philippine tax shall be
deemed to be

xxx xxx xxx

cc) in the case of royalties for

which the tax is reduced to 10
or 15 per cent according to
paragraph 2 of Article 12, 20
percent of the gross amount of
such royalties.

xxx xxx xxx

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are
not paid under circumstances similar to those in the RP-West Germany Tax Treaty
since there is no provision for a 20 percent matching credit in the former
convention and private respondent cannot invoke the concessional tax rate on
the strength of the most favored nation clause in the RP-US Tax Treaty.
Petitioner's position is explained thus:

Under the foregoing provision of the RP-West Germany Tax Treaty,

the Philippine tax paid on income from sources within the Philippines
is allowed as a credit against German income and corporation tax on
the same income. In the case of royalties for which the tax is reduced
to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-
West Germany Tax Treaty, the credit shall be 20% of the gross
amount of such royalty. To illustrate, the royalty income of a German
resident from sources within the Philippines arising from the use of,
or the right to use, any patent, trade mark, design or model, plan,
secret formula or process, is taxed at 10% of the gross amount of said
royalty under certain conditions. The rate of 10% is imposed if credit
against the German income and corporation tax on said royalty is
allowed in favor of the German resident. That means the rate of 10%
is granted to the German taxpayer if he is similarly granted a credit
against the income and corporation tax of West Germany. The clear
intent of the "matching credit" is to soften the impact of double
taxation by different jurisdictions.

The RP-US Tax Treaty contains no similar "matching credit" as that

provided under the RP-West Germany Tax Treaty. Hence, the tax on
royalties under the RP-US Tax Treaty is not paid under similar
circumstances as those obtaining in the RP-West Germany Tax
Treaty. Therefore, the "most favored nation" clause in the RP-West
Germany Tax Treaty cannot be availed of in interpreting the
provisions of the RP-US Tax Treaty.5

The petition is meritorious.

We are unable to sustain the position of the Court of Tax Appeals, which was
upheld by the Court of Appeals, that the phrase "paid under similar circumstances
in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted to refer to
payment of royalty, and not to the payment of the tax, for the reason that the
phrase "paid under similar circumstances" is followed by the phrase "to a resident
of a third state". The respondent court held that "Words are to be understood in
the context in which they are used", and since what is paid to a resident of a third
state is not a tax but a royalty "logic instructs" that the treaty provision in
question should refer to royalties of the same kind paid under similar
circumstances.

The above construction is based principally on syntax or sentence structure but

fails to take into account the purpose animating the treaty provisions in point. To
begin with, we are not aware of any law or rule pertinent to the payment of
royalties, and none has been brought to our attention, which provides for the
payment of royalties under dissimilar circumstances. The tax rates on royalties
and the circumstances of payment thereof are the same for all the recipients of
such royalties and there is no disparity based on nationality in the circumstances
of such payment.6On the other hand, a cursory reading of the various tax treaties
will show that there is no similarity in the provisions on relief from or avoidance
of double taxation7 as this is a matter of negotiation between the contracting
parties.8 As will be shown later, this dissimilarity is true particularly in the treaties
between the Philippines and the United States and between the Philippines and
West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the
Philippines has entered into for the avoidance of double taxation.9 The purpose of
these international agreements is to reconcile the national fiscal legislations of
the contracting parties in order to help the taxpayer avoid simultaneous taxation
in two different jurisdictions. 10 More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical double taxation,
which is defined as the imposition of comparable taxes in two or more states on
the same taxpayer in respect of the same subject matter and for identical
periods. 11 The apparent rationale for doing away with double taxation is of
encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating
robust and dynamic economies. 12 Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a contracting
state and derives income from, or owns capital in, the other contracting state and
both states impose tax on that income or capital. In order to eliminate double
taxation, a tax treaty resorts to several methods. First, it sets out the respective
rights to tax of the state of source or situs and of the state of residence with
regard to certain classes of income or capital. In some cases, an exclusive right to
tax is conferred on one of the contracting states; however, for other items of
income or capital, both states are given the right to tax, although the amount of
tax that may be imposed by the state of source is limited. 14

The second method for the elimination of double taxation applies whenever the
state of source is given a full or limited right to tax together with the state of
residence. In this case, the treaties make it incumbent upon the state of residence
to allow relief in order to avoid double taxation. There are two methods of relief
— the exemption method and the credit method. In the exemption method, the
income or capital which is taxable in the state of source or situs is exempted in
the state of residence, although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayer's remaining income or
capital. On the other hand, in the credit method, although the income or capital
which is taxed in the state of source is still taxable in the state of residence, the
tax paid in the former is credited against the tax levied in the latter. The basic
difference between the two methods is that in the exemption method, the focus
is on the income or capital itself, whereas the credit method focuses upon the
tax. 15

In negotiating tax treaties, the underlying rationale for reducing the tax rate is
that the Philippines will give up a part of the tax in the expectation that the tax
given up for this particular investment is not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase "royalties paid
under similar circumstances" in the most favored nation clause of the US-RP Tax
Treaty necessarily contemplated "circumstances that are tax-related".

In the case at bar, the state of source is the Philippines because the royalties are
paid for the right to use property or rights, i.e. trademarks, patents and
technology, located within the Philippines. 17 The United States is the state of
residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under
the RP-US Tax Treaty, the state of residence and the state of source are both
permitted to tax the royalties, with a restraint on the tax that may be collected by
the state of source. 18 Furthermore, the method employed to give relief from
double taxation is the allowance of a tax credit to citizens or residents of the
United States (in an appropriate amount based upon the taxes paid or accrued to
the Philippines) against the United States tax, but such amount shall not exceed
the limitations provided by United States law for the taxable year. 19 Under Article
13 thereof, the Philippines may impose one of three rates — 25 percent of the
gross amount of the royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in
preferred areas of activities; or the lowest rate of Philippine tax that may be
imposed on royalties of the same kind paid under similar circumstances to a
resident of a third state.

Given the purpose underlying tax treaties and the rationale for the most favored
nation clause, the concessional tax rate of 10 percent provided for in the RP-
Germany Tax Treaty should apply only if the taxes imposed upon royalties in the
RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar
circumstances. This would mean that private respondent must prove that the RP-
US Tax Treaty grants similar tax reliefs to residents of the United States in respect
of the taxes imposable upon royalties earned from sources within the Philippines
as those allowed to their German counterparts under the RP-Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not contain similar
provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra,
expressly allows crediting against German income and corporation tax of 20% of
the gross amount of royalties paid under the law of the Philippines. On the other
hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with
respect to relief for double taxation, does not provide for similar crediting of 20%
of the gross amount of royalties paid. Said Article 23 reads:

Article 23

Relief from double taxation

Double taxation of income shall be avoided in the following manner:

1) In accordance with the provisions and subject to the

limitations of the law of the United States (as it may be
amended from time to time without changing the
general principle thereof), the United States shall allow
 to a citizen or resident of the United States as a credit
against the United States tax the appropriate amount of
taxes paid or accrued to the Philippines and, in the case
of a United States corporation owning at least 10
percent of the voting stock of a Philippine corporation
from which it receives dividends in any taxable year,
shall allow credit for the appropriate amount of taxes
paid or accrued to the Philippines by the Philippine
corporation paying such dividends with respect to the
profits out of which such dividends are paid. Such
appropriate amount shall be based upon the amount of
tax paid or accrued to the Philippines, but the credit
shall not exceed the limitations (for the purpose of
limiting the credit to the United States tax on income
from sources within the Philippines or on income from
sources outside the United States) provided by United
States law for the taxable year. . . .

The reason for construing the phrase "paid under similar circumstances" as used
in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored
upon a logical reading of the text in the light of the fundamental purpose of such
treaty which is to grant an incentive to the foreign investor by lowering the tax
and at the same time crediting against the domestic tax abroad a figure higher
than what was collected in the Philippines.

In one case, the Supreme Court pointed out that laws are not just mere
compositions, but have ends to be achieved and that the general purpose is a
more important aid to the meaning of a law than any rule which grammar may lay
down. 20 It is the duty of the courts to look to the object to be accomplished, the
evils to be remedied, or the purpose to be subserved, and should give the law a
reasonable or liberal construction which will best effectuate its purpose. 21 The
Vienna Convention on the Law of Treaties states that a treaty shall be interpreted
in good faith in accordance with the ordinary meaning to be given to the terms of
the treaty in their context and in the light of its object and
purpose. 22

As stated earlier, the ultimate reason for avoiding double taxation is to encourage
foreign investors to invest in the Philippines — a crucial economic goal for
developing countries. 23 The goal of double taxation conventions would be
thwarted if such treaties did not provide for effective measures to minimize, if not
completely eliminate, the tax burden laid upon the income or capital of the
investor. Thus, if the rates of tax are lowered by the state of source, in this case,
by the Philippines, there should be a concomitant commitment on the part of the
state of residence to grant some form of tax relief, whether this be in the form of
a tax credit or exemption. 24 Otherwise, the tax which could have been collected
by the Philippine government will simply be collected by another state, defeating
the object of the tax treaty since the tax burden imposed upon the investor would
remain unrelieved. If the state of residence does not grant some form of tax relief
to the investor, no benefit would redound to the Philippines, i.e., increased
investment resulting from a favorable tax regime, should it impose a lower tax
rate on the royalty earnings of the investor, and it would be better to impose the
regular rate rather than lose much-needed revenues to another country.

At the same time, the intention behind the adoption of the provision on "relief
from double taxation" in the two tax treaties in question should be considered in
light of the purpose behind the most favored nation clause.

The purpose of a most favored nation clause is to grant to the contracting party
treatment not less favorable than that which has been or may be granted to the
"most favored" among other countries. 25 The most favored nation clause is
intended to establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting nations may enjoy the
privileges accorded by either party to those of the most favored nation. 26 The
essence of the principle is to allow the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to which the country of residence
of such taxpayer is also a party provided that the subject matter of taxation, in
this case royalty income, is the same as that in the tax treaty under which the
taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of
the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the
use of trademark, patent, and technology. The entitlement of the 10% rate by U.S.
firms despite the absence of a matching credit (20% for royalties) would derogate
from the design behind the most grant equality of international treatment since
the tax burden laid upon the income of the investor is not the same in the two
countries. The similarity in the circumstances of payment of taxes is a condition
for the enjoyment of most favored nation treatment precisely to underscore the
need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not
give a matching tax credit of 20 percent for the taxes paid to the Philippines on
royalties as allowed under the RP-West Germany Tax Treaty, private respondent
cannot be deemed entitled to the 10 percent rate granted under the latter treaty
for the reason that there is no payment of taxes on royalties under similar
circumstances.

It bears stress that tax refunds are in the nature of tax exemptions. As such they
are regarded as in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming the
exemption. 27 The burden of proof is upon him who claims the exemption in his
favor and he must be able to justify his claim by the clearest grant of organic or
statute law. 28 Private respondent is claiming for a refund of the alleged
overpayment of tax on royalties; however, there is nothing on record to support a
claim that the tax on royalties under the RP-US Tax Treaty is paid under similar
circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision
dated May 7, 1996 of the Court of Tax Appeals and the decision dated November
7, 1996 of the Court of Appeals are hereby SET ASIDE.

SO ORDERED.

Vitug, Panganiban and Purisima, JJ., concur.

Romero, J., abroad, on official business leave.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-18860 November 30, 1963

CARLOS AVENDAÑO, petitioner,

vs.
HON. LADISLAO PASICOLAN, Judge of the Court of First Instance of Pampanga,
LORETO SALONGA and ABELARDO SALONGA, respondents.
Lorenzo P. Navarro for petitioner.
Rafael Arcebido for respondents.

PAREDES, J.:

On October 25, 1956, the Justice of the Peace of Lubao, Pampanga, rendered
judgment in Civil Case No. 145 (Unlawful Detainer), entitled "Tomasa D. Salonga v.
Carlos Avendaño, et al., the dispositive portion of which reads —

WHEREFORE, the defendant Carlos Avendaño is hereby ordered to vacate

the premises in question and to restore the possession thereof to the
plaintiff Tomasa D. Salonga.

It is further ordered that the defendant Carlos Avendaño pay to the plaintiff
Tomasa D. Salonga the Sum of Two Thousand Pesos (P2,000) Philippine
Currency, per annum, from March 1, 1955 up to the restitution of the
premises to the plaintiff, as reasonable compensation for the use and
occupation of the premises, and costs.

The above judgment was appealed to the CFI of Pampanga and docketed as Civil
Case No. 1152. In order to stay the execution of the judgment, a yearly deposit of
P2,000.00 was made by petitioner, with the Clerk of the CFI of Pampanga, on the
following dates;

a. Nov. 14, 1956, for the agricultural year, 1955-1956;

b. Jan. 23, 1958, for the agricultural year, 1956-1957;

c. March 19, 1958, for the agricultural year, 1957-1958;

d. March 30, 1959, for the agricultural year, 1958-1959;

e. March 14, 1960, for the agricultural year, 1959-1960;

f. March 29, 1961, for the agricultural year, 1960-1961;

Under the date of March 19, 1958, the respondents (Salongas), claiming that
petitioner failed to deposit the annual rentals pertaining to the agricultural year
1957-1958, presented with the lower court a motion for immediate execution of
the judgment of the JP Court. An opposition was presented by petitioner, alleging
among others, that said amount was deposited and while it was not made during
the first ten (10) days of March, as required by Section 8, Rule 72, is of no
moment, since said Rule does not apply to cases of unlawful detainer involving
agricultural lands, including fishponds, when rentals are on the yearly basis. The
Court resolving the point, said —

. . . the motion dated March 19, 1958 which was set for hearing on March
22, same year, asking for the immediate execution of the judgment on the
ground that the defendants did not make deposits for the year 1958, and it
appearing from the answer of defendant Carlos Avendaño dated March 31,
1958 that he has already made a deposit in the sum of P2,000.00 for March
1, 1957 to March 1, 1958, as shown by Official Receipt No. 4502957, the
said motion for immediate execution is hereby denied. (Order on May 23,
1958).

Upon the authority of the above Order, the respondent Salongas withdrew from
the Clerk the sum of P2,000.00.

On March 24, 1959, respondents again petitioned for the immediate execution of
the judgment, claiming that the rentals for the agricultural year 1958-1959 had
not been deposited during the first ten (10) days of March, 1959. Petitioner again
opposed the motion, invoking the same grounds that he interposed in his
opposition to the first motion for immediate execution. On April 13, 1959,
respondent Judge issued an Order of the following tenor —

This is a motion for execution under section 8, Rule 72 of the Rules of

Court.

It appears that the yearly deposit of P2,000.00 was made on March 30,
1959, as evidenced by the certificate of the cashier, Annex "A", instead of
on or before March 10, 1959 (See decision of the Justice of the Peace dated
October 25, 1956).

Considering that the property is a fishpond and considering further the fact
that the motion for execution was filed on March 30, 1959, the court
believes that the provisions of section 8, alluded to above, have been
substantially complied with.
 Motion denied. Hereafter, the defendant shall deposit the said yearly rental
of P2,000.00 during the first ten (10) days of March of every year until this
case shall have been finally adjudged and decided.

On March 15, 1961, the Salongas presented with the lower court an Urgent
Motion for Immediate Execution of the judgment, for failure of the petitioner to
deposit the annual rent of P2,000.00 for the agricultural year 1960-1961 within
the first ten (10) days of March, 1961. A corresponding opposition was filed by
petitioner, reiterating, once more, his contention that Sec. 8, of Rule 72, do not
apply, since the agricultural year 1960-1961 ended in the month of March, 1961,
the rental need not be deposited within the first ten (10) days of said month.

On June 7, 1961, respondent Judge issued an Order, pertinent portions of which

are reproduced below —

Upon the facts, it is clear that this is a case where the Justice of the Peace
has determined the amount to be paid and the period within which it must
be paid, if an immediate execution is to be stayed, that is, P2,000.00 per
annum from March 1, 1955 up to the restitution of the fishpond.

Considering the period of ten (10) days fixed in Section 8, Rule 72, is a
reasonable period, and considering further that the defendant has been
admonished under order of April 13, 1959 to pay the annual rental within
ten (10) days from March 1 of every year.

It is hereby adjudged that the deposit made on March 29, 1961 is a direct
violation of Section 8, Rule 72, the judgment of the Justice of the Peace
Court quoted above, and the order of April 13, 1959.

The argument that the agricultural year of the fishpond in question expired
on March 31, 1961, is untenable. As aforestated, the date of payment has
been specifically fixed in the judgment of the justice of the peace, and said
date and no other date, shall prevail.

The case of Cruz v. Judge Dollete has no application as the facts are entirely
different.

WHEREFORE, let a writ of execution issue immediately upon the judgment

of the justice of the peace rendered in this case, dated October 25, 1956.
A writ of execution was correspondingly issued, but the effects thereof were
suspended per order of respondent Judge dated June 13, 1961. On July 17, 1961,
petitioner presented a Motion for Reconsideration against the Order of June 7,
1961, which was denied on August 31, 1961.

Petitioner claiming that the Order of June 7, 1961 constitutes a violation of his
rights and that the implementation thereof would work grave and irreparable
injury to him; that it had been issued with grave abuse of discretion, for which
there is no other plain, adequate and speedy remedy in the ordinary course of
law, he brought the matter to this Court, on a petition for Certiorari with
Preliminary Injunction. The petition was given due course and ordered the
issuance of a writ of preliminary injunction upon the posting of a P2,000.00 bond.
Respondents answering the petition, drew the attention of this Court, to the fact
that during the pendency of the instant proceedings in this court, the CFI of
Pampanga rendered judgment in Civil CaseNo. 1152 on July 19, 1961 (petition was
submitted on September 13, 1961), ordering petitioner herein to vacate the
fishpond and to pay P2,000.00 from March 1, 1960 until he leaves the premises.
The appeal of petitioner with the Pampanga CFI was dismissed for having been
filed out of the regelementary period. The motion for reconsideration directed
against the dismissal of the appeal was also denied on January 22, 1962, and the
corresponding writ of execution based upon a final judgment was issued by
respondent Court. Respondents maintain, under the a set of facts, that the issue
raised in the petition propriety of the writ of execution pending appeal), has come
moot and academic and that hearing on the petition would be but an empty
gesture and waste of time. Petitioners did not file any pleading to counteract
these allegations of the answer, and did not appear during the hearing set on
June 18, 1962, thus showing lack of interest on his part to further prosecute this
case.

We do not believe that the JP Court, in ordering the plaintiff should pay the
respondents, rentals in amount of P2,000.00 per year, "from March 1, 1955, to
the restitution of the premises", that it intended the payments should be made
on the first ten (10) days of month of March. Such date, in our opinion, is merely
starting point of petitioner's liability to pay. Moreover, section 8, Rule 72, insofar
as execution of judgments unlawful detainer cases, involvingfishponds, is concern
finds no application. We said —
 . . . From this rule it appears clear that the immediate execution of the
judgment can only be demanded if the defendant fails to pay on or before
the tenth day of each calendar month the reasonable value of the use and
occupation of the premises for the preceding month at the rate determined
by the judgment." This rule contemplates payment of a monthly rental the
failure of which would give rise to execution, and not payment of rental in
any other manner. In the present case the rental fixed by the justice of the
peace court is not monthly but yearly, and this is understandable
considering the that the property subject of the lease is a fishpond. The
court can take judicial notice that fishpond is operated on a yearly basis
because by its very nature the harvest accrues only on a year with rare
exceptions and generally the rental is computed on a yearly basis. It is for
this reason that the justice of the peace court fixed a rental of P2,750.00 a
year as the reasonable value of the use and occupation of the fishpond in
litigation. Such being the case, it is our opinion that Section Rule 72 cannot
be invoked as basis for the execution of the judgment of the justice of the
peace court. As it now appears the rental fixed by the court is not yet due
and, therefore, the order of execution issued by the respondent judge is
premature. (De la Cruz v. Hon. Dollete, et al., G.R. No. L-8183; 51 0. G., p.
1826, April 1955).

As the facts obtaining in the case at bar come within the purview of the
abovequoted legal pronouncements, We hold that the lower court erred in having
ordered the immediate execution of the judgment of the JP Court.

However, inasmuch as our ruling will no longer benefit the petitioner, since a final
judgment on the merits of the case had been rendered by the lower court which
ordered his ejectment from the premises in question, and for which a writ of
execution has been correspondingly issued.

The petition is hereby dismissed, without pronouncement to costs.

Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Barrera and Makalintal,

JJ., concur.

Republic of the Philippines

 Supreme Court
Manila

SECOND DIVISION

MANUEL N. MAMBA, G.R. No. 165109

RAYMUND P. GUZMAN and
LEONIDES N. FAUSTO,
Petitioners,

- versus -

EDGAR R. LARA, Present:

JENERWIN C. BACUYAG,
WILSON O. PUYAWAN, CARPIO,* J., Chairperson,
ALDEGUNDO Q. CAYOSA, JR., CARPIO-MORALES,*
NORMAN A. AGATEP, LEONARDO-DE CASTRO,*
ESTRELLA P. FERNANDEZ, DEL CASTILLO, and
VILMER V. VILORIA, ABAD, JJ.
BAYLON A. CALAGUI,
CECILIA MAEVE T. LAYOS,
PREFERRED VENTURES CORP.,
ASSET BUILDERS CORP.,
RIZAL COMMERCIAL BANKING
CORPORATION, MALAYAN
INSURANCE CO., and LAND BANK
OF THE PHILIPPINES, Promulgated:
Respondents. December 14, 2009
x-------------------------------------------------------------------x

DECISION

DEL CASTILLO, J.:

The decision to entertain a taxpayers suit is discretionary upon the Court. It can choose

to strictly apply the rule or take a liberal stance depending on the controversy

involved. Advocates for a strict application of the rule believe that leniency would open

floodgates to numerous suits, which could hamper the government from performing its

job. Such possibility, however, is not only remote but also negligible compared to what

is at stake - the lifeblood of the State. For this reason, when the issue hinges on the

illegal disbursement of public funds, a liberal approach should be preferred as it is more

in keeping with truth and justice.

This Petition for Review on Certiorari with prayer for a Temporary Restraining

Order/Writ of Preliminary Injunction, under Rule 45 of the Rules of Court, seeks to set

aside the April 27, 2004 Order[1]of the Regional Trial Court (RTC), Branch 5, Tuguegarao

City, dismissing the Petition for Annulment of Contracts and Injunction with prayer for

the issuance of a Temporary Restraining Order/Writ of Preliminary

Injunction,[2] docketed as Civil Case No. 6283. Likewise assailed in this Petition is

the August 20, 2004 Resolution[3] of RTC, Branch 1, Tuguegarao City denying the Motion

for Reconsideration of the dismissal.

Factual Antecedents

On November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed

Resolution No. 2001-272[4] authorizing Governor Edgar R. Lara (Gov. Lara) to engage the

services of and appoint Preferred Ventures Corporation as financial advisor or

consultant for the issuance and flotation of bonds to fund the priority projects of the

governor without cost and commitment.

On November 19, 2001, the Sangguniang Panlalawigan, through Resolution No.

290-2001,[5] ratified the Memorandum of Agreement (MOA)[6] entered into by Gov. Lara

and Preferred Ventures Corporation. The MOA provided that the provincial government

of Cagayan shall pay Preferred Ventures Corporation a one-time fee of 3% of the

amount of bonds floated.

On February 15, 2002, the Sangguniang Panlalawigan approved Resolution No.

2002-061-A[7] authorizing Gov. Lara to negotiate, sign and execute contracts or

agreements pertinent to the flotation of the bonds of the provincial government in an

amount not to exceed P500 million for the construction and improvement of priority

projects to be approved by the Sangguniang Panlalawigan.

On May 20, 2002, the majority of the members of the Sangguniang

Panlalawigan of Cagayan approved Ordinance No. 19-2002,[8] authorizing the bond

flotation of the provincial government in an amount not to exceed P500 million to fund

the construction and development of the new Cagayan Town Center. The Resolution

likewise granted authority to Gov. Lara to negotiate, sign and execute contracts and

agreements necessary and related to the bond flotation subject to the approval and

ratification by the Sangguniang Panlalawigan.

 On October 20, 2003, the Sangguniang Panlalawigan approved Resolution No.

350-2003[9] ratifying the Cagayan Provincial Bond Agreements entered into by the

provincial government, represented by Gov. Lara, to wit:

a. Trust Indenture with the Rizal Commercial Banking Corporation

(RCBC) Trust and Investment Division and Malayan Insurance
Company, Inc. (MICO).

b. Deed of Assignment by way of security with the RCBC and the

Land Bank of the Philippines (LBP).

c. Transfer and Paying Agency Agreement with the RCBC Trust and
Investment Division.

d. Guarantee Agreement with the RCBC Trust and Investment

Division and MICO.

e. Underwriting Agreement with RCBC Capital Corporation.

On even date, the Sangguniang Panlalawigan also approved Resolution No. 351-

2003,[10] ratifying the Agreement for the Planning, Design, Construction, and Site

Development of the New Cagayan Town Center[11] entered into by the provincial

government, represented by Gov. Lara and Asset Builders Corporation, represented by

its President, Mr. Rogelio P. Centeno.

 On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders

Corporation, giving to the latter the planning, design, construction and site

development of the town center project for a fee of P213,795,732.39.[12]

Proceedings before the Regional Trial Court

On December 12, 2003, petitioners Manuel N. Mamba, Raymund P. Guzman and

Leonides N. Fausto filed a Petition for Annulment of Contracts and Injunction with

prayer for a Temporary Restraining Order/Writ of Preliminary Injunction[13] against

Edgar R. Lara, Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa,

Jr., Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui, Cecilia

Maeve T. Layos, Preferred Ventures Corporation, Asset Builders Corporation, RCBC,

MICO and LBP.

At the time of the filing of the petition, Manuel N. Mamba was the

Representative of the 3rd Congressional District of the province of Cagayan[14] while

Raymund P. Guzman and Leonides N. Fausto were members of the Sangguniang

Panlalawigan of Cagayan.[15]

Edgar R. Lara was sued in his capacity as governor of Cagayan,[16] while Jenerwin

C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P.

Fernandez, Vilmer V. Viloria, Baylon A. Calagui and Cecilia Maeve T. Layos were sued as
members of the Sangguniang Panlalawigan of Cagayan.[17] Respondents Preferred

Ventures Corporation, Asset Builders Corporation, RCBC, MICO and LBP were all

impleaded as indispensable or necessary parties.

Respondent Preferred Ventures Corporation is the financial advisor of

the province of Cagayan regarding the bond flotation undertaken by the

province.[18] Respondent Asset Builders Corporation was awarded the right to plan,

design, construct and develop the proposed town center.[19] Respondent RCBC, through

its Trust and Investment Division, is the trustee of the seven-year bond flotation

undertaken by the province for the construction of the town center,[20] while

respondent MICO is the guarantor.[21] Lastly, respondent LBP is the official depositary

bank of the province.[22]

In response to the petition, public respondents filed an Answer with Motion to

Dismiss,[23] raising the following defenses: a) petitioners are not the proper parties or

they lack locus standi in court; b) the action is barred by the rule on state immunity from

suit and c) the issues raised are not justiciable questions but purely political.

For its part, respondent Preferred Ventures Corporation filed a Motion to

Dismiss[24] on the following grounds: a) petitioners have no cause of action for

injunction; b) failure to join an indispensable party; c) lack of personality to sue and d)

lack of locus standi. Respondent MICO likewise filed a Motion to Dismiss[25] raising the

grounds of lack of cause of action and legal standing. Respondent RCBC similarly argued

in its Motion to Dismiss[26] that: a) petitioners are not the real parties-in-interest or have

no legal standing to institute the petition; b) petitioners have no cause of action as the

flotation of the bonds are within the right and power of both respondent RCBC and the

province of Cagayan and c) the viability of the construction of a town center is not a

justiciable question but a political question.

Respondent Asset Builders Corporation, on the other hand, filed an

Answer[27] interposing special and affirmative defenses of lack of legal standing and

cause of action. Respondent LBP also filed an Answer[28] alleging in the main that

petitioners have no cause of action against it as it is not an indispensable party or a

necessary party to the case.

Two days after the filing of respondents respective memoranda on the issues

raised during the hearing of the special and/or affirmative defenses, petitioners filed a

Motion to Admit Amended Petition[29] attaching thereto the amended petition.[30] Public

respondents opposed the motion for the following reasons: 1) the motion was belatedly

filed; 2) the Amended Petition is not sufficient in form and in substance; 3) the motion is

patently dilatory and 4) the Amended Petition was filed to cure the defect in the original

petition.[31]
 Petitioners also filed a Consolidated Opposition to the Motion to

Dismiss[32] followed by supplemental pleadings[33] in support of their prayer for a writ of

preliminary injunction.

On April 27, 2004, the RTC issued the assailed Order denying the Motion to

Admit Amended Petition and dismissing the petition for lack of cause of action. It ruled

that:

The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil

Procedure dealing on the filing of an amended pleading is quite clear. As
such, the Court rules that the motion was belatedly filed. The granting of
leave to file amended pleadings is a matter peculiarly within the sound
discretion of the trial court. But the rule allowing amendments to
pleadings is subject to the general but inflexible limitation that the cause
of action or defense shall not be substantially changed or the theory of the
case altered to the prejudice of the other party (Avecilla vs. Yatcvo, 103
Phil. 666).

On the assumption that the controversy presents justiciable issues

which this Court may take cognizance of, petitioners in the present case
who presumably presented legitimate interests in the controversy are not
parties to the questioned contract. Contracts produce effect as between
the parties who execute them. Only a party to the contract can maintain
an action to enforce the obligations arising under said contract (Young vs.
CA, 169 SCRA 213). Since a contract is binding only upon the parties
thereto, a third person cannot ask for its rescission if it is in fraud of his
rights. One who is not a party to a contract has no rights under such
contract and even if the contrary may be voidable, its nullity can be
asserted only by one who is a party thereto; a third person would have
absolutely no personality to ask for the annulment (Wolfson vs. Estate of
Martinez, 20 Phil. 340; Ibaez vs. Hongkong & Shanghai Bank, 22 Phil. 572;
Ayson vs. CA, G.R. Nos. L-6501 & 6599, May 21, 1955).

It was, however, held that a person who is not a party obliged

principally or subsidiarily in a contract may exercise an action for nullity of
the contract if he is prejudiced in his rights with respect to one of the
contracting parties and can show the detriment which would positively
result to him from the contract in which he had no intervention (Baez vs.
CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA 110, 112-113; Leodovica vs.
CA, 65 SCRA 154-155). In the case at bar, petitioners failed to show that
they were prejudiced in their rights [or that a] detriment x x x would
positively result to them. Hence, they lack locus standi in court.

xxxx

To the mind of the Court, procedural matters in the present

controversy may be dispensed with, stressing that the instant case is a
political question, a question which the court cannot, in any manner, take
judicial cognizance. Courts will not interfere with purely political questions
because of the principle of separation of powers (Taada vs. Cuenco, 103
Phil. 1051). Political questions are those questions which, under the
Constitution, are to be decided by the people in their sovereign capacity or
in regard to which full discretionary authority has been delegated to the
legislative or [to the] executive branch of the government (Nuclear Free
Phils. Coalition vs. NPC, 141 SCRA 307 (1986); Torres vs. Gonzales, 152
SCRA 272; Citizens Alliance for Consumer Protection vs. Energy Regulatory
Board, G.R. No. 78888-90, June 23, 1988).

The citation made by the provincial government[, to] which this

Court is inclined to agree, is that the matter falls under the discretion of
another department, hence the decision reached is in the category of a
political question and consequently may not be the subject of judicial
jurisdiction (Cruz in Political Law, 1998 Ed., page 81) is correct.

It is [a] well-recognized principle that purely administrative and

discretionary functions may not be interfered with by the courts (Adm.
Law Test & Cases, 2001 Ed., De Leon, De Leon, Jr.).
 The case therefore calls for the doctrine of ripeness for judicial
review. This determines the point at which courts may review
administrative action. The basic principle of ripeness is that the judicial
machinery should be conserved for problems which are real and present
or imminent and should not be squandered on problems which are future,
imaginary or remote. This case is not ripe for judicial determination since
there is no imminently x x x substantial injury to the petitioners.

In other words, the putting up of the New Cagayan Town Center by

the province over the land fully owned by it and the concomitant
contracts entered into by the same is within the bounds of its corporate
power, an undertaking which falls within the ambit of its discretion and
therefore a purely political issue which is beyond the province of the court
x x x. [Consequently, the court cannot,] in any manner, take judicial
cognizance over it. The act of the provincial government was in pursuance
of the mandate of the Local Government Code of 1991.

xxxx

Indeed, adjudication of the procedural issues presented for

resolution by the present action would be a futile exercise in exegesis.

What defeats the plea of the petitioners for the issuance of a writ of
preliminary injunction is the fact that their averments are merely
speculative and founded on conjectures. An injunction is not intended to
protect contingent or future rights nor is it a remedy to enforce an
abstract right (Cerebo vs. Dictado, 160 SCRA 759; Ulang vs. CA, 225 SCRA
637). An injunction, whether preliminary or final, will not issue to protect a
right not in in esse and which may never arise, or to restrain an act which
does not give rise to a cause of action. The complainants right on title,
moreover, must be clear and unquestioned [since] equity, as a rule, will
not take cognizance of suits to establish title and will not lend its
preventive aid by injunction where the complainants title or right is
doubtful or disputed. The possibility of irreparable damage, without proof
of violation of an actual existing right, is no ground for injunction being a
 mere damnum, absque injuria (Talisay-Silay Milling Company, Inc. vs. CFI
of Negros Occidental, et. al. 42 SCRA 577, 582).

xxxx
For lack of cause of action, the case should be dismissed.

The facts and allegations [necessarily] suggest also that this court
may dismiss the case for want of jurisdiction.

The rule has to be so because it can motu propio dismiss it as its

only jurisdiction is to dismiss it if it has no jurisdiction. This is in line with
the ruling in Andaya vs. Abadia, 46 SCAD 1036, G.R. No. 104033, Dec. 27,
1993 where the court may dismiss a complaint even without a motion to
dismiss or answer.

Upon the foregoing considerations, the case is hereby dismissed

without costs.

SO ORDERED.[34]

Petitioners filed a Motion for Reconsideration[35] to which respondents filed their

respective Oppositions.[36] Petitioners then filed a Motion to Inhibit, which the court

granted. Accordingly, the case was re-raffled to Branch 1 of the RTC of Tuguegarao

City.[37]

On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a Resolution

denying petitioners plea for reconsideration. The court found the motion to be a mere

scrap of paper as thenotice of hearing was addressed only to the Clerk of Court in

violation of Section 5, Rule 15 of the Rules of Court. As to the merits, the court sustained
the findings of Branch 5 that petitioners lack legal standing to sue and that the issue

involved is political.

Issues

Hence, the present recourse where petitioners argue that:

A. The lower court decided a question of substance in a

way not in accord with law and with the applicable decision of the
Supreme Court, and

B. The lower court has so far departed from the

accepted and usual course of judicial proceedings as to call for an
exercise of the power of supervision in that:

I. It denied locus standi to petitioners;

II. [It] determined that the matter of

contract entered into by the provincial government is
in the nature of a political question;

III. [It] denied the admission of Amended

Petition; and

IV. [It] found a defect of substance in the

petitioners Motion for Reconsideration.[38]

Our Ruling

The petition is partially meritorious.

Petitioners have legal standing to sue
as taxpayers

A taxpayer is allowed to sue where there is a claim that public funds are illegally

disbursed, or that the public money is being deflected to any improper purpose, or that

there is wastage of public funds through the enforcement of an invalid or

unconstitutional law.[39] A person suing as a taxpayer, however, must show that the act

complained of directly involves the illegal disbursement of public funds derived from

taxation.[40] He must also prove that he has sufficient interest in preventing the illegal

expenditure of money raised by taxation and that he will sustain a direct injury because

of the enforcement of the questioned statute or contract.[41] In other words, for a

taxpayers suit to prosper, two requisites must be met: (1) public funds derived from

taxation are disbursed by a political subdivision or instrumentality and in doing so, a law

is violated or some irregularity is committed and (2) the petitioner is directly affected by

the alleged act.[42]

In light of the foregoing, it is apparent that contrary to the view of the RTC,

a taxpayer need not be a party to the contract to challenge its validity.[43] As long as

taxes are involved, people have a right to question contracts entered into by the

government.
 In this case, although the construction of the town center would be primarily

sourced from the proceeds of the bonds, which respondents insist are not taxpayers

money, a government support in the amount of P187 million would still be spent for

paying the interest of the bonds.[44] In fact, a Deed of Assignment[45] was executed by

the governor in favor of respondent RCBC over the Internal Revenue Allotment (IRA)

and other revenues of the provincial government as payment and/or security for the

obligations of the provincial government under the Trust Indenture Agreement

dated September 17, 2003. Records also show that on March 4, 2004, the governor

requested the Sangguniang Panlalawigan to appropriate an amount of P25 million for

the interest of the bond.[46] Clearly, the first requisite has been met.

As to the second requisite, the court, in recent cases, has relaxed the stringent direct

injury test bearing in mind that locus standi is a procedural technicality.[47] By invoking

transcendental importance, paramount public interest, or far-reaching implications,

ordinary citizens and taxpayers were allowed to sue even if they failed to show direct

injury.[48] In cases where serious legal issues were raised or where public expenditures of

millions of pesos were involved, the court did not hesitate to give standing to

taxpayers.[49]

We find no reason to deviate from the jurisprudential trend.

To begin with, the amount involved in this case is substantial. Under the various

agreements entered into by the governor, which were ratified by the Sangguniang

Panlalawigan, the provincial government of Cagayan would incur the following costs:[50]

Compensation to Preferred Ventures - P 6,150,000.00

(3% of P205M)[51] Resolution No. 290-2001
Management and Underwriting Fees - 3,075,000.00
(1.5% of P205M)[52]

Documentary Tax - 1,537,500.00

(0.75% of P205M)[53]
Guarantee Fee[54] - 7,350,000.00

Construction and Design of town center[55] - 213,795,732.39

Total Cost - P231,908,232.39

What is more, the provincial government would be shelling out a total amount of P187

million for the period of seven years by way of subsidy for the interest of the

bonds. Without a doubt, the resolution of the present petition is of paramount

importance to the people of Cagayan who at the end of the day would bear the brunt of

these agreements.

Another point to consider is that local government units now possess more powers,

authority and resources at their disposal,[56] which in the hands of unscrupulous officials

may be abused and misused to the detriment of the public. To protect the interest of

the people and to prevent taxes from being squandered or wasted under the guise of
government projects, a liberal approach must therefore be adopted in

determining locus standi in public suits.

In view of the foregoing, we are convinced that petitioners have sufficient standing to

file the present suit. Accordingly, they should be given the opportunity to present their

case before the RTC.

Having resolved the core issue, we shall now proceed to the remaining issues.

The controversy involved is justiciable

A political question is a question of policy, which is to be decided by the people in

their sovereign capacity or by the legislative or the executive branch of the government

to which full discretionary authority has been delegated.[57]

In filing the instant case before the RTC, petitioners seek to restrain public

respondents from implementing the bond flotation and to declare null and void all

contracts related to the bond flotation and construction of the town center. In the

petition before the RTC, they alleged grave abuse of discretion and clear violations of

law by public respondents. They put in issue the overpriced construction of the town

center; the grossly disadvantageous bond flotation; the irrevocable assignment of the

provincial governments annual regular income, including the IRA, to respondent RCBC
to cover and secure the payment of the bonds floated; and the lack of consultation and

discussion with the community regarding the proposed project, as well as a proper and

legitimate bidding for the construction of the town center.

Obviously, the issues raised in the petition do not refer to the wisdom but to the

legality of the acts complained of. Thus, we find the instant controversy within the

ambit of judicial review.Besides, even if the issues were political in nature, it would still

come within our powers of review under the expanded jurisdiction conferred upon us

by Section 1, Article VIII of the Constitution, which includes the authority to determine

whether grave abuse of discretion amounting to excess or lack of jurisdiction has been

committed by any branch or instrumentality of the government.[58]

The Motion to Admit Amended Petition

was properly denied

However, as to the denial of petitioners Motion to Admit Amended Petition, we find no

reason to reverse the same. The inclusion of the province of Cagayan as a petitioner

would not only change the theory of the case but would also result in an absurd

situation. The provincial government, if included as a petitioner, would in effect be suing

itself considering that public respondents are being sued in their official capacity.
 In any case, there is no need to amend the petition because petitioners, as we

have said, have legal standing to sue as taxpayers.

Section 5, Rule 15 of the Rules of Court

was substantially complied with

This brings us to the fourth and final issue.

A perusal of the Motion for Reconsideration filed by petitioners would show that

the notice of hearing was addressed only to the Clerk of Court in violation of Section 5,

Rule 15 of the Rules of Court, which requires the notice of hearing to be addressed to all

parties concerned. This defect, however, did not make the motion a mere scrap of

paper. The rule is not a ritual to be followed blindly.[59] The purpose of a notice of

hearing is simply to afford the adverse parties a chance to be heard before a motion is

resolved by the court.[60] In this case, respondents were furnished copies of the motion,

and consequently, notified of the scheduled hearing. Counsel for public respondents in

fact moved for the postponement of the hearing, which the court granted.[61] Moreover,

respondents were afforded procedural due process as they were given sufficient time to

file their respective comments or oppositions to the motion. From the foregoing, it is

clear that the rule requiring notice to all parties was substantially complied with.[62] In

effect, the defect in the Motion for Reconsideration was cured.

 We cannot overemphasize that procedural rules are mere tools to aid the courts

in the speedy, just and inexpensive resolution of cases.[63] Procedural defects or lapses, if

negligible, should be excused in the higher interest of justice as technicalities should not

override the merits of the case. Dismissal of cases due to technicalities should also be

avoided to afford the parties the opportunity to present their case. Courts must be

reminded that the swift unclogging of the dockets although a laudable objective must

not be done at the expense of substantial justice.[64]

WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27, 2004

Order of Branch 5 and the August 20, 2004 Resolution of Branch 1 of the Regional Trial

Court of Tuguegarao City are hereby REVERSED and SET ASIDE insofar as the dismissal

of the petition is concerned. Accordingly, the case is hereby REMANDED to the court a

quo for further proceedings.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned
decision of the Intermediate Appellate Court, to set aside the auction sale of his
property which took place on December 5, 1977, and to allow him to recover a
203 square meter lot which was, sold at public auction to Ho Fernandez and
ordered titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house
built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City,
Metro Manila. The lot, with an area of about 328 square meters, is described and
covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds
of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was
expropriated by the Republic of the Philippines for the sum of P4,116.00
representing the estimated amount equivalent to the assessed value of the
aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus,
on December 5, 1977, his property was sold at public auction by the City
Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464
known as the Real Property Tax Code in order to satisfy a tax delinquency of
P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that
time helping his uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In
re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking
the cancellation of TCT No. 4739 (37795) and the issuance in his name of a new
certificate of title. Upon verification through his lawyer, Francia discovered that a
Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on
December 11, 1978. The auction sale and the final bill of sale were both
annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later
amended his complaint on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of
which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered

dismissing the amended complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new

Transfer Certificate of Title in favor of the defendant Ho
Fernandez over the parcel of land including the
improvements thereon, subject to whatever
encumbrances appearing at the back of TCT No. 4739
(37795) and ordering the same TCT No. 4739 (37795)
cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum

of P1,000.00 as attorney's fees. (p. 30, Record on
Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of
law:

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF

LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR
SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00
WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.
II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND

SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND
DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE
ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A

SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE
PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY
INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A
DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND
CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21,
Rollo)

We gave due course to the petition for a more thorough inquiry into the
petitioner's allegations that his property was sold at public auction without notice
to him and that the price paid for the property was shockingly inadequate,
amounting to fraud and deprivation without due process of law.

A careful review of the case, however, discloses that Mr. Francia brought the
problems raised in his petition upon himself. While we commiserate with him at
the loss of his property, the law and the facts militate against the grant of his
petition. We are constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by
legal compensation. He claims that the government owed him P4,116.00 when a
portion of his land was expropriated on October 15, 1977. Hence, his tax
obligation had been set-off by operation of law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of

persons, who in their own right are reciprocally debtors and creditors of each
other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do
not satisfy the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be
at the same time a principal creditor of the other;
 xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently

ruled that there can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a lawsuit
against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled
that Internal Revenue Taxes can not be the subject of set-off or compensation.
We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as

is allowed to be set-off under the statutes of set-off, which are
construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality
to one who is liable to the state or municipality for taxes. Neither are
they a proper subject of recoupment since they do not arise out of
the contract or transaction sued on. ... (80 C.J.S., 7374). "The general
rule based on grounds of public policy is well-settled that no set-off
admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is
based, is that taxes are not in the nature of contracts between the
party and party but grow out of duty to, and are the positive acts of
the government to the making and enforcing of which, the personal
consent of individual taxpayers is not required. ..."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the
collector because he has a claim against the governmental body not included in
the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we
stated that: "... internal revenue taxes can not be the subject of compensation:
Reason: government and taxpayer are not mutually creditors and debtors of each
other' under Article 1278 of the Civil Code and a "claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The tax
was due to the city government while the expropriation was effected by the
national government. Moreover, the amount of P4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the
Philippine National Bank long before the sale at public auction of his remaining
property. Notice of the deposit dated September 28, 1977 was received by the
petitioner on September 30, 1977. The petitioner admitted in his testimony that
he knew about the P4,116.00 deposited with the bank but he did not withdraw it.
It would have been an easy matter to withdraw P2,400.00 from the deposit so
that he could pay the tax obligation thus aborting the sale at public auction.

Petitioner had one year within which to redeem his property although, as well be
shown later, he claimed that he pocketed the notice of the auction sale without
reading it.

Petitioner contends that "the auction sale in question was made without
complying with the mandatory provisions of the statute governing tax sale. No
evidence, oral or otherwise, was presented that the procedure outlined by law on
sales of property for tax delinquency was followed. ... Since defendant Ho
Fernandez has the affirmative of this issue, the burden of proof therefore rests
upon him to show that plaintiff was duly and properly notified ... .(Petition for
Review, Rollo p. 18; emphasis supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the
auction sale, has the burden of proof to show that there was compliance with all
the prescribed requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be

established by proof and the general rule is that the purchaser of a
tax title is bound to take upon himself the burden of showing the
regularity of all proceedings leading up to the sale. (emphasis
supplied)
There is no presumption of the regularity of any administrative action which
results in depriving a taxpayer of his property through a tax sale. (Camo v. Riosa
Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This is actually
an exception to the rule that administrative proceedings are presumed to be
regular.

But even if the burden of proof lies with the purchaser to show that all legal
prerequisites have been complied with, the petitioner can not, however, deny
that he did receive the notice for the auction sale. The records sustain the lower
court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted

that he was not properly notified of the auction sale. Surprisingly,
however, he admitted in his testimony that he received the letter
dated November 21, 1977 (Exhibit "I") as shown by his signature
(Exhibit "I-A") thereof. He claimed further that he was not present on
December 5, 1977 the date of the auction sale because he went to
Iligan City. As long as there was substantial compliance with the
requirements of the notice, the validity of the auction sale can not be
assailed ... .

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I

for Ho Fernandez notified you that the property in
question shall be sold at public auction to the highest
bidder on December 5, 1977 pursuant to Sec. 74 of PD
464. Will you tell the Court whether you received the
original of this letter?

A. I just signed it because I was not able to read the

same. It was just sent by mail carrier.

Q. So you admit that you received the original of Exhibit

I and you signed upon receipt thereof but you did not
read the contents of it?

A. Yes, sir, as I was in a hurry.

 Q. After you received that original where did you place
it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his
part when he ignored such notice. By his very own admission that he received the
notice, his now coming to court assailing the validity of the auction sale loses its
force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule,
gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567;
Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v.
Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of
Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not
material when the law gives the owner the right to redeem as when a sale is
made at public auction, upon the theory that the lesser the price, the easier it is
for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this
Court held:

... [R]espondent treasurer now claims that the prices for which the
lands were sold are unconscionable considering the wide divergence
between their assessed values and the amounts for which they had
been actually sold. However, while in ordinary sales for reasons of
equity a transaction may be invalidated on the ground of inadequacy
of price, or when such inadequacy shocks one's conscience as to
justify the courts to interfere, such does not follow when the law
gives to the owner the right to redeem, as when a sale is made at
public auction, upon the theory that the lesser the price the easier it
is for the owner to effect the redemption. And so it was aptly said:
"When there is the right to redeem, inadequacy of price should not
be material, because the judgment debtor may reacquire the
property or also sell his right to redeem and thus recover the loss he
claims to have suffered by reason of the price obtained at the
auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux.
v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
 If mere inadequacy of price is held to be a valid objection to a sale for
taxes, the collection of taxes in this manner would be greatly
embarrassed, if not rendered altogether impracticable. In Black on
Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: "where
land is sold for taxes, the inadequacy of the price given is not a valid
objection to the sale." This rule arises from necessity, for, if a fair
price for the land were essential to the sale, it would be useless to
offer the property. Indeed, it is notorious that the prices habitually
paid by purchasers at tax sales are grossly out of proportion to the
value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P.
367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v.
Bean, et al. (267 P. 555):

Like most cases of this character there is here a certain element of

hardship from which we would be glad to relieve, but do so would
unsettle long-established rules and lead to uncertainty and difficulty
in the collection of taxes which are the life blood of the state. We are
convinced that the present rules are just, and that they bring
hardship only to those who have invited it by their own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has
greatly appreciated in value. Precisely because of the widening of Buendia Avenue
in Pasay City, which necessitated the expropriation of adjoining areas, real estate
values have gone up in the area. However, the price quoted by the petitioner for
a 203 square meter lot appears quite exaggerated. At any rate, the foregoing
reasons which answer the petitioner's claims lead us to deny the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable
grounds, there are no strong considerations of substantial justice in his favor. Mr.
Francia failed to pay his taxes for 14 years from 1963 up to the date of the auction
sale. He claims to have pocketed the notice of sale without reading it which, if
true, is still an act of inexplicable negligence. He did not withdraw from the
expropriation payment deposited with the Philippine National Bank an amount
sufficient to pay for the back taxes. The petitioner did not pay attention to
another notice sent by the City Treasurer on November 3, 1978, during the period
of redemption, regarding his tax delinquency. There is furthermore no showing of
bad faith or collusion in the purchase of the property by Mr. Fernandez. The
petitioner has no standing to invoke equity in his attempt to regain the property
by belatedly asking for the annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED.

The decision of the respondent court is affirmed.

SO ORDERED.

Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 125704 August 28, 1998

PHILEX MINING CORPORATION, petitioner,

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

ROMERO, J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals
promulgated on April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax
Appeals decision in CTA Case No. 4872 dated March 16, 1995 2 ordering it to pay
the amount of P110,677,668.52 as excise tax liability for the period from the 2nd
quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August
6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.

The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to
settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st
and 2nd quarter of 1992 in the total amount of P123,821.982.52 computed as
follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE

TAX DUE

2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91

3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60

4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

————— ————— —————— ——————

47,312,353.94 11,828,088.48 8,988,362.97

68,128,805.39

————— ————— —————— ——————

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25

2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

————— ————— —————— ——————

43,013,541.70 10,753,385.43 1,926,250.00

55,693,177.13

————— ————— —————— ——————

90,325,895.64 22,581,473.91 10,914,612.97

123,821,982.52 3

========= ========= ========= =========

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of
the tax liabilities stating that it has pending claims for VAT input credit/refund for
the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02
plus interest. Therefore these claims for tax credit/refund should be applied
against the tax liabilities, citing our ruling in Commissioner of Internal Revenue v.
Itogon-Suyoc Mines, Inc. 5

In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's
position. Since these pending claims have not yet been established or determined
with certainty, it follows that no legal compensation can take place. Hence, the
BIR reiterated its demand that Philex settle the amount plus interest within 30
days from the receipt of the letter.

In view of the BIR's denial of the offsetting of Philex's claim for VAT input
credit/refund against its excise tax obligation, Philex raised the issue to the Court
of Tax Appeals on November 6, 1992. 7 In the course of the proceedings, the BIR
issued Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which,
applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered
the latter's tax obligation to P110,677,688.52.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the
remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:

Thus, for legal compensation to take place, both obligations must

be liquidated and demandable. "Liquidated" debts are those where
the exact amount has already been determined (PARAS, Civil Code of
the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the
instant case, the claims of the Petitioner for VAT refund is still
pending litigation, and still has to be determined by this Court (C.T.A.
Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the
government cannot, therefore, be set-off against the unliquidated
claim which Petitioner conceived to exist in its favor (see Compañia
General de Tabacos vs. French and Unson, No. 14027, November 8,
1918, 39 Phil. 34). 8

Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off
on compensation since claim for taxes is not a debt or contract." 9 The dispositive
portion of the CTA decision 10 provides:

In all the foregoing, this Petition for Review is hereby DENIED for lack
of merit and Petitioner is hereby ORDERED to PAY the Respondent
the amount of P110,677,668.52 representing excise tax liability for
the period from the 2nd quarter of 1991 to the 2nd quarter of 1992
 plus 20% annual interest from August 6, 1994 until fully paid
pursuant to Section 248 and 249 of the Tax Code, as amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals
docketed as CA-GR. CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of
Appeals a Affirmed the Court of Tax Appeals observation. The pertinent portion of
which reads: 12

WHEREFORE, the appeal by way of petition for review is hereby

DISMISSED and the decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a

Resolution dated July 11, 1996. 13

However, a few days after the denial of its motion for reconsideration, Philex was
able to obtain its VAT input credit/refund not only for the taxable year 1989 to
1991 but also for 1992 and 1994, computed as follows: 14

Period Covered Tax Credit Date

By Claims For Certificate of

VAT refund/credit Number Issue Amount

1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01

1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61

1989 007732 11 July 1996 P37,322,799.19

1990-1991 007751 16 July 1996 P84,662,787.46

1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the
same should, ipso jure, off-set its excise tax liabilities 15 since both had already
become "due and demandable, as well as fully liquidated;" 16 hence, legal
compensation can properly take place.

We see no merit in this contention.

In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple
reason that the government and the taxpayer are not creditors and debtors of
each other. 17 There is a material distinction between a tax and debt. Debts are
due to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. 18 We find no cogent reason to deviate from
the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we

categorically held that taxes cannot be subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes

against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that
the government owes him an amount equal to or greater than the
tax being collected. The collection of a tax cannot await the results of
a lawsuit against the government.

The ruling in Francia has been applied to the subsequent case of Caltex
Philippines, Inc. v. Commission on Audit, 20which reiterated that:

. . . a taxpayer may not offset taxes due from the claims that he may
have against the government. Taxes cannot be the subject of
compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is
not such a debt, demand, contract or judgment as is allowed to be
set-off.

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v.

Itogon-Suyoc Mines Inc., wherein we ruled that a pending refund may be set off
against an existing tax liability even though the refund has not yet been approved
by the Commissioner, 21 is no longer without any support in statutory law.

It is important to note, that the premise of our ruling in the aforementioned case
was anchored on Section 51 (d) of the National Revenue Code of 1939. However,
when the National Internal Revenue Code of 1977 was enacted, the same
provision upon which the Itogon-Suyoc pronouncement was based was
omitted. 22 Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be
invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it asserts that
the imposition of surcharge and interest for the non-payment of the excise taxes
within the time prescribed was unjustified. Philex posits the theory that it had no
obligation to pay the excise tax liabilities within the prescribed period since, after
all, it still has pending claims for VAT input credit/refund with BIR. 23

We fail to see the logic of Philex's claim for this is an outright disregard of the
basic principle in tax law that taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance. 24 Evidently, to countenance
Philex's whimsical reason would render ineffective our tax collection system. Too
simplistic, it finds no support in law or in jurisprudence.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on
the ground that it has a pending tax claim for refund or credit against the
government which has not yet been granted. It must be noted that a
distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If
any taxpayer can defer the payment of taxes by raising the defense that it still has
a pending claim for refund or credit, this would adversely affect the government
revenue system. A taxpayer cannot refuse to pay his taxes when they fall due
simply because he has a claim against the government or that the collection of
the tax is contingent on the result of the lawsuit it filed against the
government. 27 Moreover, Philex's theory that would automatically apply its VAT
input credit/refund against its tax liabilities can easily give rise to confusion and
abuse, depriving the government of authority over the manner by which
taxpayers credit and offset their tax liabilities.

Corollarily, the fact that Philex has pending claims for VAT input claim/refund with
the government is immaterial for the imposition of charges and penalties
prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of
the surcharge is mandatory and the BIR is not vested with any authority to waive
the collection thereof. 28 The same cannot be condoned for flimsy
reasons, 29 similar to the one advanced by Philex in justifying its non-payment of
its tax liabilities.

Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National
Internal Revenue Code of 1977, which requires the refund of input taxes within 60
days, 31 when it took five years for the latter to grant its tax claim for VAT input
credit/refund. 32

In this regard, we agree with Philex. While there is no dispute that a claimant has
the burden of proof to establish the factual basis of his or her claim for tax credit
or refund, 33 however, once the claimant has submitted all the required
documents it is the function of the BIR to assess these documents with purposeful
dispatch. After all, since taxpayers owe honestly to government it is but just that
government render fair service to the taxpayers. 34

In the instant case, the VAT input taxes were paid between 1989 to 1991 but the
refund of these erroneously paid taxes was only granted in 1996. Obviously, had
the BIR been more diligent and judicious with their duty, it could have granted the
refund earlier. We need not remind the BIR that simple justice requires the
speedy refund of wrongly-held taxes. 35 Fair dealing and nothing less, is expected
by the taxpayer from the BIR in the latter's discharge of its function. As aptly held
in Roxas v. Court of Tax Appeals: 36

The power of taxation is sometimes called also the power to destroy.

Therefore it should be exercised with caution to minimize injury to
the proprietary rights of a taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill the "hen that lays the
golden egg" And, in order to maintain the general public's trust and
confidence in the Government this power must be used justly and
not treacherously.

Despite our concern with the lethargic manner by which the BIR handled Philex's
tax claim, it is a settled rule that in the performance of governmental function,
the State is not bound by the neglect of its agents and officers. Nowhere is this
more true than in the field of taxation. 37 Again, while we understand Philex's
predicament, it must be stressed that the same is not a valid reason for the non-
payment of its tax liabilities.

To be sure, this is not to state that the taxpayer is devoid of remedy against public
servants or employees, especially BIR examiners who, in investigating tax claims
are seen to drag their feet needlessly. First, if the BIR takes time in acting upon
the taxpayer's claim for refund, the latter can seek judicial remedy before the
Court of Tax Appeals in the manner prescribed by law. 38 Second, if the inaction
can be characterized as willful neglect of duty, then recourse under the Civil Code
and the Tax Code can also be availed of.

Art. 27 of the Civil Code provides:

Art. 27. Any person suffering material or moral loss because a public
servant or employee refuses or neglects, without just cause, to
perform his official duty may file an action for damages and other
relief against the latter, without prejudice to any disciplinary action
that may be taken.

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997
states:

xxx xxx xxx

(c) Wilfully neglecting to give receipts, as by law required for any sum
collected in the performance of duty or wilfully neglecting to
perform, any other duties enjoyed by law.

Simply put, both provisions abhor official inaction, willful neglect and
unreasonable delay in the performance of official duties. 39 In no uncertain terms
must we stress that every public employee or servant must strive to render
service to the people with utmost diligence and efficiency. Insolence and delay
have no place in government service. The BIR, being the government collecting
arm, must and should do no less. It simply cannot be apathetic and laggard in
rendering service to the taxpayer if it wishes to remain true to its mission of
hastening the country's development. We take judicial notice of the taxpayer's
generally negative perception towards the BIR; hence, it is up to the latter to
prove its detractors wrong.

In sum, while we can never condone the BIR's apparent callousness in performing
its duties, still, the same cannot justify Philex's non-payment of its tax liabilities.
The adage "no one should take the law into his own hands" should have guided
Philex's action.

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

The assailed decision of the Court of Appeals dated April 8, 1996 is hereby
AFFIRMED.
SO ORDERED.

Narvasa, C.J., Kapunan and Purisima, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-18994 June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First
Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late
Walter Scott Price, respondents.

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.

Benedicto and Martinez for respondents.

LABRADOR, J.:

This is a petition for certiorari and mandamus against the Judge of the Court of
First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul
certain orders of the court and for an order in this Court directing the respondent
court below to execute the judgment in favor of the Government against the
estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-
14674, January 30, 1960, this Court declared as final and executory the order for
the payment by the estate of the estate and inheritance taxes, charges and
penalties, amounting to P40,058.55, issued by the Court of First Instance of Leyte
in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the
Late Walter Scott Price." In order to enforce the claims against the estate the
fiscal presented a petition dated June 21, 1961, to the court below for the
execution of the judgment. The petition was, however, denied by the court which
held that the execution is not justifiable as the Government is indebted to the
estate under administration in the amount of P262,200. The orders of the court
below dated August 20, 1960 and September 28, 1960, respectively, are as
follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K.

Price, Administratrix of the estate of her late husband Walter Scott Price
and Director Zoilo Castrillo of the Bureau of Lands dated September 19,
1956 and acknowledged before Notary Public Salvador V. Esguerra, legal
adviser in Malacañang to Executive Secretary De Leon dated December 14,
1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo
dated August 2, 1958, directing the latter to pay to Mrs. Price the sum
ofP368,140.00, and an extract of page 765 of Republic Act No. 2700
appropriating the sum of P262.200.00 for the payment to the Leyte
Cadastral Survey, Inc., represented by the administratrix Simeona K. Price,
as directed in the above note of the President. Considering these facts, the
Court orders that the payment of inheritance taxes in the sum of
P40,058.55 due the Collector of Internal Revenue as ordered paid by this
Court on July 5, 1960 in accordance with the order of the Supreme Court
promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the
amount of P262,200.00 due and payable to the Administratrix Simeona K.
Price, in this estate, the balance to be paid by the Government to her
without further delay. (Order of August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and
it orders that the payment of the claim of the Collector of Internal Revenue
be deferred until the Government shall have paid its accounts to the
administratrix herein amounting to P262,200.00. It may not be amiss to
repeat that it is only fair for the Government, as a debtor, to its accounts to
its citizens-creditors before it can insist in the prompt payment of the
latter's account to it, specially taking into consideration that the amount
due to the Government draws interests while the credit due to the present
state does not accrue any interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the
execution of the claim of the Government against the estate must be denied for
lack of merit. The ordinary procedure by which to settle claims of indebtedness
against the estate of a deceased person, as an inheritance tax, is for the claimant
to present a claim before the probate court so that said court may order the
administrator to pay the amount thereof. To such effect is the decision of
this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No.
L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of

Court for the payment of debts and expenses of administration. The proper
procedure is for the court to order the sale of personal estate or the sale or
mortgage of real property of the deceased and all debts or expenses of
administrator and with the written notice to all the heirs legatees and
devisees residing in the Philippines, according to Rule 89, section 3, and
Rule 90, section 2. And when sale or mortgage of real estate is to be made,
the regulations contained in Rule 90, section 7, should be complied
with.1äwphï1.ñët

Execution may issue only where the devisees, legatees or heirs have
entered into possession of their respective portions in the estate prior to
settlement and payment of the debts and expenses of administration and it
is later ascertained that there are such debts and expenses to be paid, in
which case "the court having jurisdiction of the estate may, by order for
that purpose, after hearing, settle the amount of their several liabilities,
and order how much and in what manner each person shall contribute, and
may issue execution if circumstances require" (Rule 89, section 6; see
also Rule 74, Section 4; Emphasis supplied.) And this is not the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate
proceedings to settle the estate of a deceased person, the properties belonging to
the estate are under the jurisdiction of the court and such jurisdiction continues
until said properties have been distributed among the heirs entitled thereto.
During the pendency of the proceedings all the estate is in custodia legis and the
proper procedure is not to allow the sheriff, in case of the court judgment, to
seize the properties but to ask the court for an order to require the administrator
to pay the amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the
court having jurisdiction of the estate had found that the claim of the estate
against the Government has been recognized and an amount of P262,200 has
already been appropriated for the purpose by a corresponding law (Rep. Act No.
2700). Under the above circumstances, both the claim of the Government for
inheritance taxes and the claim of the intestate for services rendered have
already become overdue and demandable is well as fully liquidated.
Compensation, therefore, takes place by operation of law, in accordance with the
provisions of Articles 1279 and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguished both
debts to the concurrent amount, eventhough the creditors and debtors are
not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the
judgment for taxes against the estate of the deceased Walter Scott Price.
Furthermore, the petition for certiorari and mandamus is not the proper remedy
for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs.

Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and

Makalintal, JJ., concur.
Bengzon, C.J., took no part.

January 11, 2016

G.R. No. 169507

AIR CANADA, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONEN, J.:

An offline international air carrier selling passage tickets in the Philippines,

through a general sales agent, is a resident foreign corporation doing business in
the Philippines. As such, it is taxable under Section 28(A)(l), and not Section
28(A)(3) of the 1997 National Internal Revenue Code, subject to any applicable tax
treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic
of the Philippines-Canada Tax Treaty, Air Canada may only be imposed a
maximum tax of 1 ½% of its gross revenues earned from the sale of its tickets in
the Philippines.

This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court
of Tax Appeals En Banc, which in turn affirmed the December 22, 2004
Decision3 and April 8, 2005 Resolution4 of the Court of Tax Appeals First Division
denying Air Canada’s claim for refund.

Air Canada is a "foreign corporation organized and existing under the laws of
Canada[.]"5 On April 24, 2000, it was granted an authority to operate as an offline
carrier by the Civil Aeronautics Board, subject to certain conditions, which
authority would expire on April 24, 2005.6 "As an off-line carrier, [Air Canada]
does not have flights originating from or coming to the Philippines [and does not]
operate any airplane [in] the Philippines[.]"7

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel)
as its general sales agent in the Philippines.8 Aerotel "sells *Air Canada’s+ passage
documents in the Philippines."9

For the period ranging from the third quarter of 2000 to the second quarter of
2002, Air Canada, through Aerotel, filed quarterly and annual income tax returns
and paid the income tax on Gross Philippine Billings in the total amount of
₱5,185,676.77,10 detailed as follows:

1âwphi1
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29, 2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August 29, 2001 1,033,423.34
3rd Qtr 2001 November 29, 2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
 1st Qtr 2002 May 30, 2002 594,850.13
2nd Qtr 2002 August 29, 2002 1,164,664.11
11
TOTAL P 5,185,676.77

On November 28, 2002, Air Canada filed a written claim for refund of alleged
erroneously paid income taxes amounting to ₱5,185,676.77 before the Bureau of
Internal Revenue,12 Revenue District Office No. 47-East Makati.13It found basis
from the revised definition14 of Gross Philippine Billings under Section 28(A)(3)(a)
of the 1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in

the Philippines shall pay a tax of two and onehalf percent (2 1/2%) on
its ‘Gross Philippine Billings’ as defined hereunder:

(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the

amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale
or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or point in
the Philippines: Provided, further, That for a flight which originates
from the Philippines, but transshipment of passenger takes place at
any port outside the Philippines on another airline, only the aliquot
portion of the cost of the ticket corresponding to the leg flown from
the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)
To prevent the running of the prescriptive period, Air Canada filed a Petition for
Review before the Court of Tax Appeals on November 29, 2002.15 The case was
docketed as C.T.A. Case No. 6572.16

On December 22, 2004, the Court of Tax Appeals First Division rendered its
Decision denying the Petition for Review and, hence, the claim for refund.17 It
found that Air Canada was engaged in business in the Philippines through a local
agent that sells airline tickets on its behalf. As such, it should be taxed as a
resident foreign corporation at the regular rate of 32%.18 Further, according to the
Court of Tax Appeals First Division, Air Canada was deemed to have established a
"permanent establishment"19 in the Philippines under Article V(2)(i) of the
Republic of the Philippines-Canada Tax Treaty20 by the appointment of the local
sales agent, "in which [the] petitioner uses its premises as an outlet where sales
of [airline] tickets are made[.]"21

Air Canada seasonably filed a Motion for Reconsideration, but the Motion was
denied in the Court of Tax Appeals First Division’s Resolution dated April 8, 2005
for lack of merit.22 The First Division held that while Air Canada was not liable for
tax on its Gross Philippine Billings under Section 28(A)(3), it was nevertheless
liable to pay the 32% corporate income tax on income derived from the sale of
airline tickets within the Philippines pursuant to Section 28(A)(1).23

On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc.24 The
appeal was docketed as CTA EB No. 86.25

In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed
the findings of the First Division.26 The En Banc ruled that Air Canada is subject to
tax as a resident foreign corporation doing business in the Philippines since it sold
airline tickets in the Philippines.27 The Court of Tax Appeals En Banc disposed
thus:

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE

COURSE, and accordingly, DISMISSED for lack of merit.28

Hence, this Petition for Review29 was filed.

The issues for our consideration are:

First, whether petitioner Air Canada, as an offline international carrier selling
passage documents through a general sales agent in the Philippines, is a resident
foreign corporation within the meaning of Section 28(A)(1) of the 1997 National
Internal Revenue Code;

Second, whether petitioner Air Canada is subject to the 2½% tax on Gross
Philippine Billings pursuant to Section 28(A)(3). If not, whether an offline
international carrier selling passage documents through a general sales agent can
be subject to the regular corporate income tax of 32%30 on taxable income
pursuant to Section 28(A)(1);

Third, whether the Republic of the Philippines-Canada Tax Treaty applies,

specifically:

a. Whether the Republic of the Philippines-Canada Tax Treaty is

enforceable;

b. Whether the appointment of a local general sales agent in the Philippines

falls under the definition of "permanent establishment" under Article
V(2)(i) of the Republic of the Philippines-Canada Tax Treaty; and

Lastly, whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77

pertaining allegedly to erroneously paid tax on Gross Philippine Billings from the
third quarter of 2000 to the second quarter of 2002.

Petitioner claims that the general provision imposing the regular corporate
income tax on resident foreign corporations provided under Section 28(A)(1) of
the 1997 National Internal Revenue Code does not apply to "international
carriers,"31 which are especially classified and taxed under Section 28(A)(3).32 It
adds that the fact that it is no longer subject to Gross Philippine Billings tax as
ruled in the assailed Court of Tax Appeals Decision "does not render it ipso
facto subject to 32% income tax on taxable income as a resident foreign
corporation."33 Petitioner argues that to impose the 32% regular corporate
income tax on its income would violate the Philippine government’s covenant
under Article VIII of the Republic of the Philippines-Canada Tax Treaty not to
impose a tax higher than 1½% of the carrier’s gross revenue derived from sources
within the Philippines.34 It would also allegedly result in "inequitable tax
treatment of on-line and off-line international air carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in
the Philippines was income from services and not income from sales of personal
property.36 Petitioner cites the deliberations of the Bicameral Conference
Committee on House Bill No. 9077 (which eventually became the 1997 National
Internal Revenue Code), particularly Senator Juan Ponce Enrile’s statement,37 to
reveal the "legislative intent to treat the revenue derived from air carriage as
income from services, and that the carriage of passenger or cargo as the activity
that generates the income."38 Accordingly, applying the principle on the situs of
taxation in taxation of services, petitioner claims that its income derived "from
services rendered outside the Philippines [was] not subject to Philippine income
taxation."39

Petitioner further contends that by the appointment of Aerotel as its general sales
agent, petitioner cannot be considered to have a "permanent establishment"40 in
the Philippines pursuant to Article V(6) of the Republic of the Philippines-Canada
Tax Treaty.41 It points out that Aerotel is an "independent general sales agent that
acts as such for . . . other international airline companies in the ordinary course of
its business."42 Aerotel sells passage tickets on behalf of petitioner and receives a
commission for its services.43 Petitioner states that even the Bureau of Internal
Revenue—through VAT Ruling No. 003-04 dated February 14, 2004—has
conceded that an offline international air carrier, having no flight operations to
and from the Philippines, is not deemed engaged in business in the Philippines by
merely appointing a general sales agent.44 Finally, petitioner maintains that its
"claim for refund of erroneously paid Gross Philippine Billings cannot be denied
on the ground that [it] is subject to income tax under Section 28 (A) (1)"45 since it
has not been assessed at all by the Bureau of Internal Revenue for any income tax
liability.46

On the other hand, respondent maintains that petitioner is subject to the 32%
corporate income tax as a resident foreign corporation doing business in the
Philippines. Petitioner’s total payment of ₱5,185,676.77 allegedly shows that
petitioner was earning a sizable income from the sale of its plane tickets within
the Philippines during the relevant period.47 Respondent further points out that
this court in Commissioner of Internal Revenue v. American Airlines, Inc.,48 which
in turn cited the cases involving the British Overseas Airways Corporation and Air
India, had already settled that "foreign airline companies which sold tickets in the
Philippines through their local agents . . . [are] considered resident foreign
corporations engaged in trade or business in the country."49 It also cites Revenue
Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing
business in the Philippines" as including "regular sale of tickets in the Philippines
by offline international airlines either by themselves or through their agents."50

Respondent further contends that petitioner is not entitled to its claim for refund
because the amount of ₱5,185,676.77 it paid as tax from the third quarter of 2000
to the second quarter of 2001 was still short of the 32% income tax due for the
period.51 Petitioner cannot allegedly claim good faith in its failure to pay the right
amount of tax since the National Internal Revenue Code became operative on
January 1, 1998 and by 2000, petitioner should have already been aware of the
implications of Section 28(A)(3) and the decided cases of this court’s ruling on the
taxability of offline international carriers selling passage tickets in the
Philippines.52

At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an
offline international carrier with no landing rights in the Philippines, is not liable
to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997 National
Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. –

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the Philippines

shall pay a tax of two and one-half percent (2 1/2%) on its ‘Gross Philippine
Billings’ as defined hereunder:

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the

amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale
or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or point in
 the Philippines: Provided, further, That for a flight which originates
from the Philippines, but transshipment of passenger takes place at
any port outside the Philippines on another airline, only the aliquot
portion of the cost of the ticket corresponding to the leg flown from
the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)

Under the foregoing provision, the tax attaches only when the carriage of
persons, excess baggage, cargo, and mail originated from the Philippines in a
continuous and uninterrupted flight, regardless of where the passage documents
were sold.

Not having flights to and from the Philippines, petitioner is clearly not liable for
the Gross Philippine Billings tax.

II

Petitioner, an offline carrier, is a resident foreign corporation for income tax

purposes. Petitioner falls within the definition of resident foreign corporation
under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it may
be subject to 32%53 tax on its taxable income:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation

organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be subject to an
income tax equivalent to thirty-five percent (35%) of the taxable income derived
in the preceding taxable year from all sources within the Philippines: Provided,
That effective January 1, 1998, the rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and
effective January 1, 2000 and thereafter, the rate shall be thirty-two percent
(32%54). (Emphasis supplied)

The definition of "resident foreign corporation" has not substantially changed

throughout the amendments of the National Internal Revenue Code. All versions
refer to "a foreign corporation engaged in trade or business within the
Philippines."

Commonwealth Act No. 466, known as the National Internal Revenue Code and
approved on June 15, 1939, defined "resident foreign corporation" as applying to
"a foreign corporation engaged in trade or business within the Philippines or
having an office or place of business therein."55

Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic

Act No. 6110, approved on August 4, 1969, reads:

Sec. 24. Rates of tax on corporations. — . . .

(b) Tax on foreign corporations. — . . .

(2) Resident corporations. — A corporation organized, authorized, or existing

under the laws of any foreign country, except a foreign life insurance
company, engaged in trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net income received in
the preceding taxable year from all sources within the Philippines.56 (Emphasis
supplied)

Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain
sections of the 1939 National Internal Revenue Code. Section 24(b)(2) on foreign
resident corporations was amended, but it still provides that "[a] corporation
organized, authorized, or existing under the laws of any foreign country, engaged
in trade or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the preceding
taxable year from all sources within the Philippines[.]"57

As early as 1987, this court in Commissioner of Internal Revenue v. British

Overseas Airways Corporation58declared British Overseas Airways Corporation, an
international air carrier with no landing rights in the Philippines, as a resident
foreign corporation engaged in business in the Philippines through its local sales
agent that sold and issued tickets for the airline company.59 This court discussed
that:

There is no specific criterion as to what constitutes "doing" or "engaging in" or

"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally incident to,
and in progressive prosecution of commercial gain or for the purpose and object
of the business organization. "In order that a foreign corporation may be
regarded as doing business within a State, there must be continuity of conduct
and intention to establish a continuous business, such as the appointment of a
local agent, and not one of a temporary character.["]

BOAC, during the periods covered by the subject-assessments, maintained a

general sales agent in the Philippines. That general sales agent, from 1959 to
1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole
trip into series of trips — each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and (4) consequently
allocating to the various airline companies on the basis of their participation in
the services rendered through the mode of interline settlement as prescribed by
Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were
in exercise of the functions which are normally incident to, and are in progressive
pursuit of, the purpose and object of its organization as an international air
carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of
the airline business, the generation of sales being the paramount objective. There
should be no doubt then that BOAC was "engaged in" business in the Philippines
through a local agent during the period covered by the assessments. Accordingly,
it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the
Philippines.60 (Emphasis supplied, citations omitted)

Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides
guidance with its definition of "doing business" with regard to foreign
corporations. Section 3(d) of the law enumerates the activities that constitute
doing business:

d. the phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totalling one hundred eighty (180)
days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other
act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase "doing business" shall not be
deemed to include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise of
rights as such investor; nor having a nominee director or officer to represent its
interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its
own account[.]61 (Emphasis supplied)

While Section 3(d) above states that "appointing a representative or distributor

domiciled in the Philippines which transacts business in its own name and for its
own account" is not considered as "doing business," the Implementing Rules and
Regulations of Republic Act No. 7042 clarifies that "doing business" includes
"appointing representatives or distributors, operating under full control of the
foreign corporation, domiciled in the Philippines or who in any calendar year stay
in the country for a period or periods totaling one hundred eighty (180) days or
more[.]"62

An offline carrier is "any foreign air carrier not certificated by the [Civil
Aeronautics] Board, but who maintains office or who has designated or appointed
agents or employees in the Philippines, who sells or offers for sale any air
transportation in behalf of said foreign air carrier and/or others, or negotiate for,
or holds itself out by solicitation, advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such transportation."63

"Anyone desiring to engage in the activities of an off-line carrier [must] apply to

the [Civil Aeronautics] Board for such authority."64 Each offline carrier must file
with the Civil Aeronautics Board a monthly report containing information on the
tickets sold, such as the origin and destination of the passengers, carriers
involved, and commissions received.65

Petitioner is undoubtedly "doing business" or "engaged in trade or business" in

the Philippines.
Aerotel performs acts or works or exercises functions that are incidental and
beneficial to the purpose of petitioner’s business. The activities of Aerotel bring
direct receipts or profits to petitioner.66 There is nothing on record to show that
Aerotel solicited orders alone and for its own account and without interference
from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter
into any contract on behalf of [petitioner Air Canada] without the express written
consent of [the latter,]"67 and it must perform its functions according to the
standards required by petitioner.68 Through Aerotel, petitioner is able to engage
in an economic activity in the Philippines.

Further, petitioner was issued by the Civil Aeronautics Board an authority to

operate as an offline carrier in the Philippines for a period of five years, or from
April 24, 2000 until April 24, 2005.69

Petitioner is, therefore, a resident foreign corporation that is taxable on its

income derived from sources within the Philippines. Petitioner’s income from sale
of airline tickets, through Aerotel, is income realized from the pursuit of its
business activities in the Philippines.

III

However, the application of the regular 32% tax rate under Section 28(A)(1) of the
1997 National Internal Revenue Code must consider the existence of an effective
tax treaty between the Philippines and the home country of the foreign air
carrier.

In the earlier case of South African Airways v. Commissioner of Internal

Revenue,70 this court held that Section 28(A)(3)(a) does not categorically exempt
all international air carriers from the coverage of Section 28(A)(1). Thus, if Section
28(A)(3)(a) is applicable to a taxpayer, then the general rule under Section
28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not apply, an
international air carrier would be liable for the tax under Section 28(A)(1).71

This court in South African Airways declared that the correct interpretation of
these provisions is that: "international air carrier[s] maintain[ing] flights to and
from the Philippines . . . shall be taxed at the rate of 2½% of its Gross Philippine
Billings[;] while international air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other activities in the country [like
sale of airline tickets] will be taxed at the rate of 32% of such [taxable] income."72
In this case, there is a tax treaty that must be taken into consideration to
determine the proper tax rate.

A tax treaty is an agreement entered into between sovereign states "for purposes
of eliminating double taxation on income and capital, preventing fiscal evasion,
promoting mutual trade and investment, and according fair and equitable tax
treatment to foreign residents or nationals."73 Commissioner of Internal Revenue
v. S.C. Johnson and Son, Inc.74 explained the purpose of a tax treaty:

The purpose of these international agreements is to reconcile the national fiscal

legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions. More precisely, the tax
conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes
in two or more states on the same taxpayer in respect of the same subject matter
and for identical periods.

The apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and
dynamic economies. Foreign investments will only thrive in a fairly predictable
and reasonable international investment climate and the protection against
double taxation is crucial in creating such a climate.75 (Emphasis in the original,
citations omitted)

Observance of any treaty obligation binding upon the government of the

Philippines is anchored on the constitutional provision that the Philippines
"adopts the generally accepted principles of international law as part of the law of
the land[.]"76 Pacta sunt servanda is a fundamental international law principle
that requires agreeing parties to comply with their treaty obligations in good
faith.77

Hence, the application of the provisions of the National Internal Revenue Code
must be subject to the provisions of tax treaties entered into by the Philippines
with foreign countries.

In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this

court stressed the binding effects of tax treaties. It dealt with the issue of
"whether the failure to strictly comply with [Revenue Memorandum Order] RMO
No. 1-200079 will deprive persons or corporations of the benefit of a tax
treaty."80 Upholding the tax treaty over the administrative issuance, this court
reasoned thus:

Our Constitution provides for adherence to the general principles of international

law as part of the law of the land. The time-honored international principle of
pacta sunt servanda demands the performance in good faith of treaty obligations
on the part of the states that enter into the agreement. Every treaty in force is
binding upon the parties, and obligations under the treaty must be performed by
them in good faith. More importantly, treaties have the force and effect of law in
this jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in
two different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that
"tax conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes
in two or more states on the same taxpayer in respect of the same subject matter
and for identical periods. The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and services and the movement of
capital, technology and persons between countries, conditions deemed vital in
creating robust and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate and the
protection against double taxation is crucial in creating such a climate." Simply
put, tax treaties are entered into to minimize, if not eliminate the harshness of
international juridical double taxation, which is why they are also known as
double tax treaty or double tax agreements.

"A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of
the obligations undertaken." Thus, laws and issuances must ensure that the reliefs
granted under tax treaties are accorded to the parties entitled thereto. The BIR
must not impose additional requirements that would negate the availment of the
reliefs provided for under international agreements. More so, when the
RPGermany Tax Treaty does not provide for any pre-requisite for the availment of
the benefits under said agreement.

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

The obligation to comply with a tax treaty must take precedence over the
objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has
negative implications on international relations, and unduly discourages foreign
investors. While the consequences sought to be prevented by RMO No. 1-2000
involve an administrative procedure, these may be remedied through other
system management processes, e.g., the imposition of a fine or penalty. But we
cannot totally deprive those who are entitled to the benefit of a treaty for failure
to strictly comply with an administrative issuance requiring prior application for
tax treaty relief.81 (Emphasis supplied, citations omitted)

On March 11, 1976, the representatives82 for the government of the Republic of
the Philippines and for the government of Canada signed the Convention
between the Philippines and Canada for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income (Republic of the
Philippines-Canada Tax Treaty). This treaty entered into force on December 21,
1977.

Article V83 of the Republic of the Philippines-Canada Tax Treaty defines

"permanent establishment" as a "fixed place of business in which the business of
the enterprise is wholly or partly carried on."84

Even though there is no fixed place of business, an enterprise of a Contracting

State is deemed to have a permanent establishment in the other Contracting
State if under certain conditions there is a person acting for it.

Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty

states that "[a] person acting in a Contracting State on behalf of an enterprise of
the other Contracting State (other than an agent of independent status to whom
paragraph 6 applies) shall be deemed to be a permanent establishment in the
first-mentioned State if . . . he has and habitually exercises in that State an
authority to conclude contracts on behalf of the enterprise, unless his activities
are limited to the purchase of goods or merchandise for that enterprise[.]" The
provision seems to refer to one who would be considered an agent under Article
186885 of the Civil Code of the Philippines.

On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting
State shall not be deemed to have a permanent establishment in the other
Contracting State merely because it carries on business in that other State
through a broker, general commission agent or any other agent of an
independent status, where such persons are acting in the ordinary course of their
business."

Considering Article XV86 of the same Treaty, which covers dependent personal
services, the term "dependent" would imply a relationship between the principal
and the agent that is akin to an employer-employee relationship.

Thus, an agent may be considered to be dependent on the principal where the

latter exercises comprehensive control and detailed instructions over the means
and results of the activities of the agent.87

Section 3 of Republic Act No. 776, as amended, also known as The Civil
Aeronautics Act of the Philippines, defines a general sales agent as "a person, not
a bonafide employee of an air carrier, who pursuant to an authority from an
airline, by itself or through an agent, sells or offers for sale any air transportation,
or negotiates for, or holds himself out by solicitation, advertisement or otherwise
as one who sells, provides, furnishes, contracts or arranges for, such air
transportation."88 General sales agents and their property, property rights,
equipment, facilities, and franchise are subject to the regulation and control of
the Civil Aeronautics Board.89 A permit or authorization issued by the Civil
Aeronautics Board is required before a general sales agent may engage in such an
activity.90

Through the appointment of Aerotel as its local sales agent, petitioner is deemed
to have created a "permanent establishment" in the Philippines as defined under
the Republic of the Philippines-Canada Tax Treaty.

Petitioner appointed Aerotel as its passenger general sales agent to perform the
sale of transportation on petitioner and handle reservations, appointment, and
supervision of International Air Transport Associationapproved and petitioner-
approved sales agents, including the following services:

ARTICLE 7
GSA SERVICES

The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the
following services:

a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit
of AC in every matter relating to this Agreement;

....

c) Promotion of passenger transportation on AC;

....

e) Without the need for endorsement by AC, arrange for the reissuance, in the
Territory of the GSA [Philippines], of traffic documents issued by AC outside the
said territory of the GSA [Philippines], as required by the passenger(s);

....

h) Distribution among passenger sales agents and display of timetables, fare

sheets, tariffs and publicity material provided by AC in accordance with the
reasonable requirements of AC;

....

j) Distribution of official press releases provided by AC to media and reference of

any press or public relations inquiries to AC;

....

o) Submission for AC’s approval, of an annual written sales plan on or before a

date to be determined by AC and in a form acceptable to AC;

....
q) Submission of proposals for AC’s approval of passenger sales agent incentive
plans at a reasonable time in advance of proposed implementation.

r) Provision of assistance on request, in its relations with Governmental and other

authorities, offices and agencies in the Territory [Philippines].

....

u) Follow AC guidelines for the handling of baggage claims and customer

complaints and, unless otherwise stated in the guidelines, refer all such claims
and complaints to AC.91

Under the terms of the Passenger General Sales Agency Agreement, Aerotel will
"provide at its own expense and acceptable to [petitioner Air Canada], adequate
and suitable premises, qualified staff, equipment, documentation, facilities and
supervision and in consideration of the remuneration and expenses payable[,]
[will] defray all costs and expenses of and incidental to the Agency."92 "[I]t is the
sole employer of its employees and . . . is responsible for [their] actions . . . or
those of any subcontractor."93 In remuneration for its services, Aerotel would be
paid by petitioner a commission on sales of transportation plus override
commission on flown revenues.94 Aerotel would also be reimbursed "for all
authorized expenses supported by original supplier invoices."95

Aerotel is required to keep "separate books and records of account, including

supporting documents, regarding all transactions at, through or in any way
connected with [petitioner Air Canada] business."96

"If representing more than one carrier, [Aerotel must] represent all carriers in an
unbiased way."97 Aerotel cannot "accept additional appointments as General
Sales Agent of any other carrier without the prior written consent of [petitioner
Air Canada]."98

The Passenger General Sales Agency Agreement "may be terminated by either

party without cause upon [no] less than 60 days’ prior notice in writing*.+"99 In
case of breach of any provisions of the Agreement, petitioner may require Aerotel
"to cure the breach in 30 days failing which [petitioner Air Canada] may terminate
[the] Agreement[.]"100

The following terms are indicative of Aerotel’s dependent status:

First, Aerotel must give petitioner written notice "within 7 days of the date [it]
acquires or takes control of another entity or merges with or is acquired or
controlled by another person or entity[.]"101 Except with the written consent of
petitioner, Aerotel must not acquire a substantial interest in the ownership,
management, or profits of a passenger sales agent affiliated with the
International Air Transport Association or a non-affiliated passenger sales agent
nor shall an affiliated passenger sales agent acquire a substantial interest in
Aerotel as to influence its commercial policy and/or management
decisions.102 Aerotel must also provide petitioner "with a report on any interests
held by [it], its owners, directors, officers, employees and their immediate
families in companies and other entities in the aviation industry or . . . industries
related to it[.]"103 Petitioner may require that any interest be divested within a set
period of time.104

Second, in carrying out the services, Aerotel cannot enter into any contract on
behalf of petitioner without the express written consent of the latter;105 it must
act according to the standards required by petitioner;106 "follow the terms and
provisions of the [petitioner Air Canada] GSA Manual [and all] written instructions
of [petitioner Air Canada;]"107 and "[i]n the absence of an applicable provision in
the Manual or instructions, [Aerotel must] carry out its functions in accordance
with [its own] standard practices and procedures[.]"108

Third, Aerotel must only "issue traffic documents approved by [petitioner Air
Canada] for all transportation over [its] services[.]"109 All use of petitioner’s name,
logo, and marks must be with the written consent of petitioner and according to
petitioner’s corporate standards and guidelines set out in the Manual.110

Fourth, all claims, liabilities, fines, and expenses arising from or in connection with
the transportation sold by Aerotel are for the account of petitioner, except in the
case of negligence of Aerotel.111

Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger

General Sales Agency Agreement executed between the parties. It has the
authority or power to conclude contracts or bind petitioner to contracts entered
into in the Philippines. A third-party liability on contracts of Aerotel is to
petitioner as the principal, and not to Aerotel, and liability to such third party is
enforceable against petitioner. While Aerotel maintains a certain independence
and its activities may not be devoted wholly to petitioner, nonetheless, when
representing petitioner pursuant to the Agreement, it must carry out its functions
solely for the benefit of petitioner and according to the latter’s Manual and
written instructions. Aerotel is required to submit its annual sales plan for
petitioner’s approval.

In essence, Aerotel extends to the Philippines the transportation business of

petitioner. It is a conduit or outlet through which petitioner’s airline tickets are
sold.112

Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax
Treaty, the "business profits" of an enterprise of a Contracting State is "taxable
only in that State[,] unless the enterprise carries on business in the other
Contracting State through a permanent establishment[.]"113 Thus, income
attributable to Aerotel or from business activities effected by petitioner through
Aerotel may be taxed in the Philippines. However, pursuant to the last
paragraph114 of Article VII in relation to Article VIII115 (Shipping and Air Transport)
of the same Treaty, the tax imposed on income derived from the operation of
ships or aircraft in international traffic should not exceed 1½% of gross revenues
derived from Philippine sources.

IV

While petitioner is taxable as a resident foreign corporation under Section

28(A)(1) of the 1997 National Internal Revenue Code on its taxable
income116 from sale of airline tickets in the Philippines, it could only be taxed at a
maximum of 1½% of gross revenues, pursuant to Article VIII of the Republic of the
Philippines-Canada Tax Treaty that applies to petitioner as a "foreign corporation
organized and existing under the laws of Canada[.]"117

Tax treaties form part of the law of the land,118 and jurisprudence has applied the
statutory construction principle that specific laws prevail over general ones.119

The Republic of the Philippines-Canada Tax Treaty was ratified on December 21,
1977 and became valid and effective on that date. On the other hand, the
applicable provisions120 relating to the taxability of resident foreign corporations
and the rate of such tax found in the National Internal Revenue Code became
effective on January 1, 1998.121 Ordinarily, the later provision governs over the
earlier one.122 In this case, however, the provisions of the Republic of the
Philippines-Canada Tax Treaty are more specific than the provisions found in the
National Internal Revenue Code.

These rules of interpretation apply even though one of the sources is a treaty and
not simply a statute.

Article VII, Section 21 of the Constitution provides:

SECTION 21. No treaty or international agreement shall be valid and effective

unless concurred in by at least two-thirds of all the Members of the Senate.

This provision states the second of two ways through which international
obligations become binding. Article II, Section 2 of the Constitution deals with
international obligations that are incorporated, while Article VII, Section 21 deals
with international obligations that become binding through ratification.

"Valid and effective" means that treaty provisions that define rights and duties as
well as definite prestations have effects equivalent to a statute. Thus, these
specific treaty provisions may amend statutory provisions. Statutory provisions
may also amend these types of treaty obligations.

We only deal here with bilateral treaty state obligations that are not international
obligations erga omnes. We are also not required to rule in this case on the effect
of international customary norms especially those with jus cogens character.

The second paragraph of Article VIII states that "profits from sources within a
Contracting State derived by an enterprise of the other Contracting State from the
operation of ships or aircraft in international traffic may be taxed in the first-
mentioned State but the tax so charged shall not exceed the lesser of a) one and
one-half per cent of the gross revenues derived from sources in that State; and b)
the lowest rate of Philippine tax imposed on such profits derived by an enterprise
of a third State."

The Agreement between the government of the Republic of the Philippines and
the government of Canada on Air Transport, entered into on January 14, 1997,
reiterates the effectivity of Article VIII of the Republic of the Philippines-Canada
Tax Treaty:
 ARTICLE XVI
(Taxation)

The Contracting Parties shall act in accordance with the provisions of Article VIII of
the Convention between the Philippines and Canada for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income,
signed at Manila on March 31, 1976 and entered into force on December 21,
1977, and any amendments thereto, in respect of the operation of aircraft in
international traffic.123

Petitioner’s income from sale of ticket for international carriage of passenger is

income derived from international operation of aircraft. The sale of tickets is
closely related to the international operation of aircraft that it is considered
incidental thereto.

"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have
our right to tax limited to a certain extent[.]"124 Thus, we are bound to extend to a
Canadian air carrier doing business in the Philippines through a local sales agent
the benefit of a lower tax equivalent to 1½% on business profits derived from sale
of international air transportation.

Finally, we reject petitioner’s contention that the Court of Tax Appeals erred in
denying its claim for refund of erroneously paid Gross Philippine Billings tax on
the ground that it is subject to income tax under Section 28(A)(1) of the National
Internal Revenue Code because (a) it has not been assessed at all by the Bureau of
Internal Revenue for any income tax liability;125 and (b) internal revenue taxes
cannot be the subject of set-off or compensation,126citing Republic v. Mambulao
Lumber Co., et al.127 and Francia v. Intermediate Appellate Court.128

In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we

have ruled that "[i]n an action for the refund of taxes allegedly erroneously paid,
the Court of Tax Appeals may determine whether there are taxes that should
have been paid in lieu of the taxes paid."130 The determination of the proper
category of tax that should have been paid is incidental and necessary to resolve
the issue of whether a refund should be granted.131 Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to
6% capital gains tax or other taxes at the first instance. The Court of Tax Appeals
has no power to make an assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In

stating that petitioner’s transactions are subject to capital gains tax, however, the
Court of Tax Appeals was not making an assessment. It was merely determining
the proper category of tax that petitioner should have paid, in view of its claim
that it erroneously imposed upon itself and paid the 5% final tax imposed upon
PEZA-registered enterprises.

The determination of the proper category of tax that petitioner should have paid
is an incidental matter necessary for the resolution of the principal issue, which is
whether petitioner was entitled to a refund.

The issue of petitioner’s claim for tax refund is intertwined with the issue of the
proper taxes that are due from petitioner. A claim for tax refund carries the
assumption that the tax returns filed were correct. If the tax return filed was not
proper, the correctness of the amount paid and, therefore, the claim for refund
become questionable. In that case, the court must determine if a taxpayer
claiming refund of erroneously paid taxes is more properly liable for taxes other
than that paid.

In South African Airways v. Commissioner of Internal Revenue, South African

Airways claimed for refund of its erroneously paid 2½% taxes on its gross
Philippine billings. This court did not immediately grant South African’s claim for
refund. This is because although this court found that South African Airways was
not subject to the 2½% tax on its gross Philippine billings, this court also found
that it was subject to 32% tax on its taxable income.

In this case, petitioner’s claim that it erroneously paid the 5% final tax is an
admission that the quarterly tax return it filed in 2000 was improper. Hence, to
determine if petitioner was entitled to the refund being claimed, the Court of Tax
Appeals has the duty to determine if petitioner was indeed not liable for the 5%
final tax and, instead, liable for taxes other than the 5% final tax. As in South
African Airways, petitioner’s request for refund can neither be granted nor denied
outright without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final
tax, the amount of the taxpayer’s liability should be computed and deducted from
the refundable amount.

Any liability in excess of the refundable amount, however, may not be collected in
a case involving solely the issue of the taxpayer’s entitlement to refund. The
question of tax deficiency is distinct and unrelated to the question of petitioner’s
entitlement to refund. Tax deficiencies should be subject to assessment
procedures and the rules of prescription. The court cannot be expected to
perform the BIR’s duties whenever it fails to do so either through neglect or
oversight. Neither can court processes be used as a tool to circumvent laws
protecting the rights of taxpayers.132

Hence, the Court of Tax Appeals properly denied petitioner’s claim for refund of
allegedly erroneously paid tax on its Gross Philippine Billings, on the ground that
it was liable instead for the regular 32% tax on its taxable income received from
sources within the Philippines. Its determination of petitioner’s liability for the
32% regular income tax was made merely for the purpose of ascertaining
petitioner’s entitlement to a tax refund and not for imposing any deficiency tax.

In this regard, the matter of set-off raised by petitioner is not an issue. Besides,
the cases cited are based on different circumstances. In both cited cases,133 the
taxpayer claimed that his (its) tax liability was off-set by his (its) claim against the
government.

Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber

contended that the amounts it paid to the government as reforestation charges
from 1947 to 1956, not having been used in the reforestation of the area covered
by its license, may be set off or applied to the payment of forest charges still due
and owing from it.134Rejecting Mambulao’s claim of legal compensation, this court
ruled:

[A]ppellant and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial
court correctly observed:

Under Article 1278, NCC, compensation should take place when two persons in
their own right are creditors and debtors of each other. With respect to the forest
charges which the defendant Mambulao Lumber Company has paid to the
government, they are in the coffers of the government as taxes collected, and the
government does not owe anything to defendant Mambulao Lumber Company.
So, it is crystal clear that the Republic of the Philippines and the Mambulao
Lumber Company are not creditors and debtors of each other, because
compensation refers to mutual debts. * * *.

And the weight of authority is to the effect that internal revenue taxes, such as
the forest charges in question, can not be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed
to be set-off under the statutes of set-off, which are construed uniformly, in the
light of public policy, to exclude the remedy in an action or any indebtedness of
the state or municipality to one who is liable to the state or municipality for taxes.
Neither are they a proper subject of recoupment since they do not arise out of
the contract or transaction sued on. * * *. (80 C.J.S. 73–74.)

The general rule, based on grounds of public policy is well-settled that no set-off
is admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in
the nature of contracts between the party and party but grow out of a duty to,
and are the positive acts of the government, to the making and enforcing of
which, the personal consent of individual taxpayers is not required. * * * If the
taxpayer can properly refuse to pay his tax when called upon by the Collector,
because he has a claim against the governmental body which is not included in
the tax levy, it is plain that some legitimate and necessary expenditure must be
curtailed. If the taxpayer’s claim is disputed, the collection of the tax must await
and abide the result of a lawsuit, and meanwhile the financial affairs of the
government will be thrown into great confusion. (47 Am. Jur. 766–
767.)135 (Emphasis supplied)

In Francia, this court did not allow legal compensation since not all requisites of
legal compensation provided under Article 1279 were present.136 In that case, a
portion of Francia’s property in Pasay was expropriated by the national
government,137 which did not immediately pay Francia. In the meantime, he failed
to pay the real property tax due on his remaining property to the local
government of Pasay, which later on would auction the property on account of
such delinquency.138 He then moved to set aside the auction sale and argued,
among others, that his real property tax delinquency was extinguished by legal
compensation on account of his unpaid claim against the national
government.139 This court ruled against Francia:

There is no legal basis for the contention. By legal compensation, obligations of

persons, who in their own right are reciprocally debtors and creditors of each
other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do
not satisfy the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently

ruled that there can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a lawsuit
against the government.

....

There are other factors which compel us to rule against the petitioner. The tax
was due to the city government while the expropriation was effected by the
national government. Moreover, the amount of ₱4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the
Philippine National Bank long before the sale at public auction of his remaining
property. Notice of the deposit dated September 28, 1977 was received by the
petitioner on September 30, 1977. The petitioner admitted in his testimony that
he knew about the ₱4,116.00 deposited with the bank but he did not withdraw it.
It would have been an easy matter to withdraw ₱2,400.00 from the deposit so
that he could pay the tax obligation thus aborting the sale at public auction.140
The ruling in Francia was applied to the subsequent cases of Caltex Philippines,
Inc. v. Commission on Audit141 and Philex Mining Corporation v. Commissioner of
Internal Revenue.142 In Caltex, this court reiterated:

[A] taxpayer may not offset taxes due from the claims that he may have against
the government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other
and a claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off.143 (Citations omitted)

Philex Mining ruled that "[t]here is a material distinction between a tax and debt.
Debts are due to the Government in its corporate capacity, while taxes are due to
the Government in its sovereign capacity."144 Rejecting Philex Mining’s assertion
that the imposition of surcharge and interest was unjustified because it had no
obligation to pay the excise tax liabilities within the prescribed period since, after
all, it still had pending claims for VAT input credit/refund with the Bureau of
Internal Revenue, this court explained:

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on
the ground that it has a pending tax claim for refund or credit against the
government which has not yet been granted. It must be noted that a
distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any
tax payer can defer the payment of taxes by raising the defense that it still has a
pending claim for refund or credit, this would adversely affect the government
revenue system. A taxpayer cannot refuse to pay his taxes when they fall due
simply because he has a claim against the government or that the collection of
the tax is contingent on the result of the lawsuit it filed against the government.
Moreover, Philex’s theory that would automatically apply its VAT input
credit/refund against its tax liabilities can easily give rise to confusion and abuse,
depriving the government of authority over the manner by which taxpayers credit
and offset their tax liabilities.145 (Citations omitted)

In sum, the rulings in those cases were to the effect that the taxpayer cannot
simply refuse to pay tax on the ground that the tax liabilities were off-set against
any alleged claim the taxpayer may have against the government. Such would
merely be in keeping with the basic policy on prompt collection of taxes as the
lifeblood of the government.1âwphi1
Here, what is involved is a denial of a taxpayer’s refund claim on account of the
Court of Tax Appeals’ finding of its liability for another tax in lieu of the Gross
Philippine Billings tax that was allegedly erroneously paid.

Squarely applicable is South African Airways where this court rejected similar
arguments on the denial of claim for tax refund:

Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the

offsetting of a tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying
petitioner’s supplemental motion for reconsideration alleging bringing to said
court’s attention the existence of the deficiency income and business tax
assessment against Citytrust. The fact of such deficiency assessment is intimately
related to and inextricably intertwined with the right of respondent bank to claim
for a tax refund for the same year. To award such refund despite the existence of
that deficiency assessment is an absurdity and a polarity in conceptual effects.
Herein private respondent cannot be entitled to refund and at the same time be
liable for a tax deficiency assessment for the same year.

The grant of a refund is founded on the assumption that the tax return is valid,
that is, the facts stated therein are true and correct. The deficiency assessment,
although not yet final, created a doubt as to and constitutes a challenge against
the truth and accuracy of the facts stated in said return which, by itself and
without unquestionable evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was
the applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion
of the Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall
be recovered by any suits unless it is proved that the said list, statement, or
return was not false nor fraudulent and did not contain any understatement or
undervaluation; but this provision shall not apply to statements or returns made
or to be made in good faith regarding annual depreciation of oil or gas wells and
mines."

Moreover, to grant the refund without determination of the proper assessment

and the tax due would inevitably result in multiplicity of proceedings or suits. If
the deficiency assessment should subsequently be upheld, the Government will
be forced to institute anew a proceeding for the recovery of erroneously
refunded taxes which recourse must be filed within the prescriptive period of ten
years after discovery of the falsity, fraud or omission in the false or fraudulent
return involved. This would necessarily require and entail additional efforts and
expenses on the part of the Government, impose a burden on and a drain of
government funds, and impede or delay the collection of much-needed revenue
for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is

both logically necessary and legally appropriate that the issue of the deficiency
tax assessment against Citytrust be resolved jointly with its claim for tax refund,
to determine once and for all in a single proceeding the true and correct amount
of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be
only just and fair that the taxpayer and the Government alike be given equal
opportunities to avail of remedies under the law to defeat each other’s claim and
to determine all matters of dispute between them in one single case. It is
important to note that in determining whether or not petitioner is entitled to the
refund of the amount paid, it would [be] necessary to determine how much the
Government is entitled to collect as taxes. This would necessarily include the
determination of the correct liability of the taxpayer and, certainly, a
determination of this case would constitute res judicata on both parties as to all
the matters subject thereof or necessarily involved therein.

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997
NIRC. The above pronouncements are, therefore, still applicable today.

Here, petitioner's similar tax refund claim assumes that the tax return that it filed
was correct. Given, however, the finding of the CTA that petitioner, although not
liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(l), the
correctness of the return filed by petitioner is now put in doubt. As such, we
cannot grant the prayer for a refund.146 (Emphasis supplied, citation omitted)

In the subsequent case of United Airlines, Inc. v. Commissioner of Internal

Revenue, 147 this court upheld the denial of the claim for refund based on the
Court of Tax Appeals' finding that the taxpayer had, through erroneous
deductions on its gross income, underpaid its Gross Philippine Billing tax on cargo
revenues for 1999, and the amount of underpayment was even greater than the
refund sought for erroneously paid Gross Philippine Billings tax on passenger
revenues for the same taxable period.148

In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was
computed at the rate of 1 ½% of its gross revenues amounting to
P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002.
It is quite apparent that the tax imposable under Section 28(A)(l) of the 1997
National Internal Revenue Code [32% of t.axable income, that is, gross income
less deductions] will exceed the maximum ceiling of 1 ½% of gross revenues as
decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty.
Hence, no refund is forthcoming.

WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and
Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 204429 February 18, 2014

SMART COMMUNICATIONS, INC., Petitioner,

vs.
MUNICIPALITY OF MALVAR, BATANGAS, Respondent.

DECISION

CARPIO, J.:

The Case
This petition for review1 challenges the 26 June 2012 Decision2 and 13 November
2012 Resolution3 of the Court of Tax. Appeals (CTA) En Banc.

Th e CTA En Banc affirmed the 17 December 2010 Decision4 and 7 April 2011
Resolution5 of the CTA First Division, which in turn affirmed the 2 December 2008
Decision6 and 21 May 2009 Order7 of the Regional Trial Court of Tanauan City,
Batangas, Branch 6. The trial court declared void the assessment imposed by
respondent Municipality of Malvar, Batangas against petitioner Smart
Communications, Inc. for its telecommunications tower for 2001 to July 2003 and
directed respondent to assess petitioner only for the period starting 1 October
2003.

The Facts

Petitioner Smart Communications, Inc. (Smart) is a domestic corporation engaged

in the business of providing telecommunications services to the general public
while respondent Municipality of Malvar, Batangas (Municipality) is a local
government unit created by law.

In the course of its business, Smart constructed a telecommunications tower

within the territorial jurisdiction of the Municipality. The construction of the
tower was for the purpose of receiving and transmitting cellular communications
within the covered area.

On 30 July 2003, the Municipality passed Ordinance No. 18, series of 2003,
entitled "An Ordinance Regulating the Establishment of Special Projects."

On 24 August 2004, Smart received from the Permit and Licensing Division of the
Office of the Mayor of the Municipality an assessment letter with a schedule of
payment for the total amount of ₱389,950.00 for Smart’s telecommunications
tower. The letter reads as follows:

This is to formally submit to your good office your schedule of payments in the
Municipal Treasury of the Local Government Unit of Malvar, province of Batangas
which corresponds to the tower of your company built in the premises of the
municipality, to wit:

TOTAL PROJECT COST: PHP

 11,000,000.00
For the Year 2001-2003
50% of 1% of the total project cost Php55,000.00
Add: 45% surcharge 24,750.00

Php79,750.00
Multiply by 3 yrs. (2001, 2002, 2003) Php239,250.00
For the year 2004
1% of the total project cost Php110,000.00
37% surcharge 40,700.00
==========
Php150,700.00
TOTAL Php389,950.00

Hoping that you will give this matter your preferential attention.8

Due to the alleged arrears in the payment of the assessment, the Municipality
also caused the posting of a closure notice on the telecommunications tower.

On 9 September 2004, Smart filed a protest, claiming lack of due process in the
issuance of the assessment and closure notice. In the same protest, Smart
challenged the validity of Ordinance No. 18 on which the assessment was based.

In a letter dated 28 September 2004, the Municipality denied Smart’s protest.

On 17 November 2004, Smart filed with Regional Trial Court of Tanauan City,
Batangas, Branch 6, an "Appeal/Petition" assailing the validity of Ordinance No.
18. The case was docketed as SP Civil Case No. 04-11-1920.

On 2 December 2008, the trial court rendered a Decision partly granting Smart’s
Appeal/Petition. The trial court confined its resolution of the case to the validity
of the assessment, and did not rule on the legality of Ordinance No. 18. The trial
court held that the assessment covering the period from 2001 to July 2003 was
void since Ordinance No. 18 was approved only on 30 July 2003. However, the
trial court declared valid the assessment starting 1 October 2003, citing Article 4
of the Civil Code of the Philippines,9 in relation to the provisions of Ordinance No.
18 and Section 166 of Republic Act No. 7160 or the Local Government Code of
1991 (LGC).10 The dispositive portion of the trial court’s Decision reads:

WHEREFORE, in light of the foregoing, the Petition is partly GRANTED. The

assessment dated August 24, 2004 against petitioner is hereby declared null and
void insofar as the assessment made from year 2001 to July 2003 and respondent
is hereby prohibited from assessing and collecting, from petitioner, fees during
the said period and the Municipal Government of Malvar, Batangas is directed to
assess Smart Communications, Inc. only for the period starting October 1, 2003.

No costs.

SO ORDERED.11

The trial court denied the motion for reconsideration in its Order of 21 May 2009.

On 8 July 2009, Smart filed a petition for review with the CTA First Division,
docketed as CTA AC No. 58.

On 17 December 2010, the CTA First Division denied the petition for review. The
dispositive portion of the decision reads:

WHEREFORE, the Petition for Review is hereby DENIED, for lack of merit.
Accordingly, the assailed Decision dated December 2, 2008 and the Order dated
May 21, 2009 of Branch 6 of the Regional Trial Court of Tanauan City, Batangas in
SP. Civil Case No. 04-11-1920 entitled "Smart Communications, Inc. vs.
Municipality of Malvar, Batangas" are AFFIRMED.

SO ORDERED.12

On 7 April 2011, the CTA First Division issued a Resolution denying the motion for
reconsideration.

Smart filed a petition for review with the CTA En Banc, which affirmed the CTA
First Division’s decision and resolution. The dispositive portion of the CTA En
Banc’s 26 June 2012 decision reads:
WHEREFORE, premises considered, the present Petition for Review is hereby
DISMISSED for lack of merit.1âwphi1

Accordingly, the assailed Decision dated December 17, 2010 and Resolution dated
April 7, 2011 are hereby AFFIRMED.

SO ORDERED.13

The CTA En Banc denied the motion for reconsideration.

Hence, this petition.

The Ruling of the CTA En Banc

The CTA En Banc dismissed the petition on the ground of lack of jurisdiction. The
CTA En Banc declared that it is a court of special jurisdiction and as such, it can
take cognizance only of such matters as are clearly within its jurisdiction. Citing
Section 7(a), paragraph 3, of Republic Act No. 9282, the CTA En Banc held that the
CTA has exclusive appellate jurisdiction to review on appeal, decisions, orders or
resolutions of the Regional Trial Courts in local tax cases originally resolved by
them in the exercise of their original or appellate jurisdiction. However, the same
provision does not confer on the CTA jurisdiction to resolve cases where the
constitutionality of a law or rule is challenged.

The Issues

The petition raises the following arguments:

1. The [CTA En Banc Decision and Resolution] should be reversed and set
aside for being contrary to law and jurisprudence considering that the CTA
En Banc should have exercised its jurisdiction and declared the Ordinance
as illegal.

2. The [CTA En Banc Decision and Resolution] should be reversed and set
aside for being contrary to law and jurisprudence considering that the
doctrine of exhaustion of administrative remedies does not apply in [this
case].
 3. The [CTA En Banc Decision and Resolution] should be reversed and set
aside for being contrary to law and jurisprudence considering that the
respondent has no authority to impose the so-called "fees" on the basis of
the void ordinance.14

The Ruling of the Court

The Court denies the petition.

On whether the CTA has jurisdiction over the present case

Smart contends that the CTA erred in dismissing the case for lack of jurisdiction.
Smart maintains that the CTA has jurisdiction over the present case considering
the "unique" factual circumstances involved.

The CTA refuses to take cognizance of this case since it challenges the
constitutionality of Ordinance No. 18, which is outside the province of the CTA.

Jurisdiction is conferred by law. Republic Act No. 1125, as amended by Republic

Act No. 9282, created the Court of Tax Appeals. Section 7, paragraph (a), sub-
paragraph (3)15 of the law vests the CTA with the exclusive appellate jurisdiction
over "decisions, orders or resolutions of the Regional Trial Courts in local tax cases
originally decided or resolved by them in the exercise of their original or appellate
jurisdiction."

The question now is whether the trial court resolved a local tax case in order to
fall within the ambit of the CTA’s appellate jurisdiction This question, in turn,
depends ultimately on whether the fees imposed under Ordinance No. 18 are in
fact taxes.

Smart argues that the "fees" in Ordinance No. 18 are actually taxes since they are
not regulatory, but revenue-raising. Citing Philippine Airlines, Inc. v. Edu,16 Smart
contends that the designation of "fees" in Ordinance No. 18 is not controlling.

The Court finds that the fees imposed under Ordinance No. 18 are not taxes.

Section 5, Article X of the 1987 Constitution provides that "each local government
unit shall have the power to create its own sources of revenues and to levy taxes,
fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the local government."

Consistent with this constitutional mandate, the LGC grants the taxing powers to
each local government unit. Specifically, Section 142 of the LGC grants
municipalities the power to levy taxes, fees, and charges not otherwise levied by
provinces. Section 143 of the LGC provides for the scale of taxes on business that
may be imposed by municipalities17 while Section 14718 of the same law provides
for the fees and charges that may be imposed by municipalities on business and
occupation.

The LGC defines the term "charges" as referring to pecuniary liability, as rents or
fees against persons or property, while the term "fee" means "a charge fixed by
law or ordinance for the regulation or inspection of a business or activity."19

In this case, the Municipality issued Ordinance No. 18, which is entitled "An
Ordinance Regulating the Establishment of Special Projects," to regulate the
"placing, stringing, attaching, installing, repair and construction of all gas mains,
electric, telegraph and telephone wires, conduits, meters and other apparatus,
and provide for the correction, condemnation or removal of the same when
found to be dangerous, defective or otherwise hazardous to the welfare of the
inhabitant[s]."20 It was also envisioned to address the foreseen "environmental
depredation" to be brought about by these "special projects" to the
Municipality.21 Pursuant to these objectives, the Municipality imposed fees on
various structures, which included telecommunications towers.

As clearly stated in its whereas clauses, the primary purpose of Ordinance No. 18
is to regulate the "placing, stringing, attaching, installing, repair and construction
of all gas mains, electric, telegraph and telephone wires, conduits, meters and
other apparatus" listed therein, which included Smart’s telecommunications
tower. Clearly, the purpose of the assailed Ordinance is to regulate the
enumerated activities particularly related to the construction and maintenance of
various structures. The fees in Ordinance No. 18 are not impositions on the
building or structure itself; rather, they are impositions on the activity subject of
government regulation, such as the installation and construction of the
structures.22
Since the main purpose of Ordinance No. 18 is to regulate certain construction
activities of the identified special projects, which included "cell sites" or
telecommunications towers, the fees imposed in Ordinance No. 18 are primarily
regulatory in nature, and not primarily revenue-raising. While the fees may
contribute to the revenues of the Municipality, this effect is merely incidental.
Thus, the fees imposed in Ordinance No. 18 are not taxes.

In Progressive Development Corporation v. Quezon City,23 the Court declared that

"if the generating of revenue is the primary purpose and regulation is merely
incidental, the imposition is a tax; but if regulation is the primary purpose, the
fact that incidentally revenue is also obtained does not make the imposition a
tax."

In Victorias Milling Co., Inc. v. Municipality of Victorias,24 the Court reiterated that
the purpose and effect of the imposition determine whether it is a tax or a fee,
and that the lack of any standards for such imposition gives the presumption that
the same is a tax.

We accordingly say that the designation given by the municipal authorities does
not decide whether the imposition is properly a license tax or a license fee. The
determining factors are the purpose and effect of the imposition as may be
apparent from the provisions of the ordinance. Thus, "[w]hen no police
inspection, supervision, or regulation is provided, nor any standard set for the
applicant to establish, or that he agrees to attain or maintain, but any and all
persons engaged in the business designated, without qualification or hindrance,
may come, and a license on payment of the stipulated sum will issue, to do
business, subject to no prescribed rule of conduct and under no guardian eye, but
according to the unrestrained judgment or fancy of the applicant and licensee,
the presumption is strong that the power of taxation, and not the police power, is
being exercised."

Contrary to Smart’s contention, Ordinance No. 18 expressly provides for the

standards which Smart must satisfy prior to the issuance of the specified permits,
clearly indicating that the fees are regulatory in nature.

These requirements are as follows:

SECTION 5. Requirements and Procedures in Securing Preliminary Development

Permit.
The following documents shall be submitted to the SB Secretary in triplicate:

a) zoning clearance

b) Vicinity Map

c) Site Plan

d) Evidence of ownership

e) Certificate true copy of NTC Provisional Authority in case of Cellsites,

telephone or telegraph line, ERB in case of gasoline station, power plant,
and other concerned national agencies

f) Conversion order from DAR is located within agricultural zone.

g) Radiation Protection Evaluation.

h) Written consent from subdivision association or the residence of the

area concerned if the special projects is located within the residential zone.

i) Barangay Council Resolution endorsing the special projects.

SECTION 6. Requirement for Final Development Permit – Upon the expiration of

180 days and the proponents of special projects shall apply for final [development
permit] and they are require[d] to submit the following:

a) evaluation from the committee where the Vice Mayor refers the special
project

b) Certification that all local fees have been paid.

Considering that the fees in Ordinance No. 18 are not in the nature of local taxes,
and Smart is questioning the constitutionality of the ordinance, the CTA correctly
dismissed the petition for lack of jurisdiction. Likewise, Section 187 of the
LGC,25 which outlines the procedure for questioning the constitutionality of a tax
ordinance, is inapplicable, rendering unnecessary the resolution of the issue on
non-exhaustion of administrative remedies.
On whether the imposition of the fees in Ordinance No. 18 is ultra vire Smart
argues that the Municipality exceeded its power to impose taxes and fees as
provided in Book II, Title One, Chapter 2, Article II of the LGC. Smart maintains
that the mayor’s permit fees in Ordinance No. 18 (equivalent to 1% of the project
cost) are not among those expressly enumerated in the LGC.

As discussed, the fees in Ordinance No.18 are not taxes. Logically, the imposition
does not appear in the enumeration of taxes under Section 143 of the LGC.

Moreover, even if the fees do not appear in Section 143 or any other provision in
the LGC, the Municipality is empowered to impose taxes, fees and charges, not
specifically enumerated in the LGC or taxed under the Tax Code or other
applicable law. Section 186 of the LGC, granting local government units wide
latitude in imposing fees, expressly provides:

Section 186. Power To Levy Other Taxes, Fees or Charges. - Local government
units may exercise the power to levy taxes, fees or charges on any base or subject
not otherwise specifically enumerated herein or taxed under the provisions of the
National Internal Revenue Code, as amended, or other applicable laws: Provided,
That the taxes, fees, or charges shall not be unjust, excessive, oppressive,
confiscatory or contrary to declared national policy: Provided, further, That the
ordinance levying such taxes, fees or charges shall not be enacted without any
prior public hearing conducted for the purpose.

Smart further argues that the Municipality is encroaching on the regulatory

powers of the National Telecommunications Commission (NTC). Smart cites
Section 5(g) of Republic Act No. 7925 which provides that the National
Telecommunications Commission (NTC), in the exercise of its regulatory powers,
shall impose such fees and charges as may be necessary to cover reasonable costs
and expenses for the regulation and supervision of the operations of
telecommunications entities. Thus, Smart alleges that the regulation of
telecommunications entities and all aspects of its operations is specifically lodged
by law on the NTC.

To repeat, Ordinance No. 18 aims to regulate the "placing, stringing, attaching,

installing, repair and construction of all gas mains, electric, telegraph and
telephone wires, conduits, meters and other apparatus" within the Municipality.
The fees are not imposed to regulate the administrative, technical, financial, or
marketing operations of telecommunications entities, such as Smart’s; rather, to
regulate the installation and maintenance of physical structures – Smart’s cell
sites or telecommunications tower. The regulation of the installation and
maintenance of such physical structures is an exercise of the police power of the
Municipality. Clearly, the Municipality does not encroach on NTC’s regulatory
powers.

The Court likewise rejects Smart’s contention that the power to fix the fees for
the issuance of development permits and locational clearances is exercised by the
Housing and Land Use Regulatory Board (HLURB). Suffice it to state that the
HLURB itself recognizes the local government units’ power to collect fees related
to land use and development. Significantly, the HLURB issued locational
guidelines governing telecommunications infrastructure.1âwphi1Guideline No. VI
relates to the collection of locational clearance fees either by the HLURB or the
concerned local government unit, to wit:

VI. Fees

The Housing and Land Use Regulatory Board in the performance of its functions
shall collect the locational clearance fee based on the revised schedule of fees
under the special use project as per Resolution No. 622, series of 1998 or by the
concerned LGUs subject to EO 72.26

On whether Ordinance No. 18 is valid and constitutional

Smart contends that Ordinance No. 18 violates Sections 130(b)(3)27 and 186 of the
LGC since the fees are unjust, excessive, oppressive and confiscatory. Aside from
this bare allegation, Smart did not present any evidence substantiating its claims.
In Victorias Milling Co., Inc. v. Municipality of Victorias,28 the Court rejected the
argument that the fees imposed by respondent therein are excessive for lack of
evidence supporting such claim, to wit:

An ordinance carries with it the presumption of validity. The question of

reasonableness though is open to judicial inquiry. Much should be left thus to the
discretion of municipal authorities. Courts will go slow in writing off an ordinance
as unreasonable unless the amount is so excessive as to be prohibitive, arbitrary,
unreasonable, oppressive, or confiscatory. A rule which has gained acceptance is
that factors relevant to such an inquiry are the municipal conditions as a whole
and the nature of the business made subject to imposition.
Plaintiff, has however not sufficiently proven that, taking these factors together,
the license taxes are unreasonable. The presumption of validity subsists. For,
plaintiff has limited itself to insisting that the amounts levied exceed the cost of
regulation and the municipality has adequate funds for the alleged purposes as
evidenced by the municipality’s cash surplus for the fiscal year ending 1956.

On the constitutionality issue, Smart merely pleaded for the declaration of

unconstitutionality of Ordinance No. 18 in the Prayer of the Petition, without any
argument or evidence to support its plea. Nowhere in the body of the Petition
was this issue specifically raised and discussed. Significantly, Smart failed to cite
any constitutional provision allegedly violated by respondent when it issued
Ordinance No. 18.

Settled is the rule that every law, in this case an ordinance, is presumed valid. To
strike down a law as unconstitutional, Smart has the burden to prove a clear and
unequivocal breach of the Constitution, which Smart miserably failed to do. In
Lawyers Against Monopoly and Poverty (LAMP) v. Secretary of Budget and
Management,29 the Court held, thus:

To justify the nullification of the law or its implementation, there must be a clear
and unequivocal, not a doubtful, breach of the Constitution. In case of doubt in
the sufficiency of proof establishing unconstitutionality, the Court must sustain
legislation because "to invalidate [a law] based on xx x baseless supposition is an
affront to the wisdom not only of the legislature that passed it but also of the
executive which approved it." This presumption of constitutionality can be
overcome only by the clearest showing that there was indeed an infraction of the
Constitution, and only when such a conclusion is reached by the required majority
may the Court pronounce, in the discharge of the duty it cannot escape, that the
challenged act must be struck down.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
G.R. No. 203754 June 16, 2015

FILM DEVELOPMENT COUNCIL OF THE PHILIPPINES, Petitioner,

vs.
COLON HERITAGE REALTY CORPORATION, operator of Oriente Group Theaters,
represented by ISIDORO A. CANIZARES, Respondent.

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

FILM DEVELOPMENT COUNCIL OF THE PHILIPPINES, Petitioner,

vs.
CITY OF CEBU and SM PRIME HOLDINGS, INC., Respondents.

DECISION

VELASCO, JR., J.:

The Constitution is the basic law to which all laws must conform; no act shall be
valid if it conflicts with the Constitution. In the discharge of their defined functions,
the three departments of government have no choice but to yield obedience to the
commands of the Constitution. Whatever limits it imposes must be observed.1

The Case

Once again, We are called upon to resolve a clash between the Inherent taxing
power of the legislature and the constitutionally-delegated power to tax of local
governments in these consolidated Petitions for Review on Certiorari under Rule
45 of the Rules of Court seeking the reversal of the Decision dated September 25,
2012 of the Regional Trial Court (RTC), Branch 5 in Cebu City, in Civil Case No. CEB-
35601, entitled Colon Heritage Realty Corp., represented by Isidoro Canizares v.
Film Development Council of the' Philippines, and Decision dated October 24,
2012 of the RTC, Branch 14 in Cebu City, in Civil Case No. CEB-35529, entitled City
of Cebu v. Film Development Council of the Philippines, collectively declaring
Sections 13 and 14 of Republic Act No. (RA) 9167 invalid and unconstitutional.

The Facts

The facts are simple and undisputed.

Sometime in 1993, respondent City of Cebu, in its exercise of its power to impose
amusement taxes under Section 140 of the Local Government Code2 (LGC)
anchored on the constitutional policy on local autonomy,3 passed City Ordinance
No. LXIX otherwise known as the "Revised Omnibus Tax Ordinance of the City of
Cebu (tax ordinance)." Central to the case at bar are Sections 42 and 43, Chapter
XI thereof which require proprietors, lessees or operators of theatres, cinemas,
concert halls, circuses, boxing stadia, and other places of amusement, to pay an
amusement tax equivalent to thirty percent (30%) of the gross receipts of
admission fees to the Office of the City Treasurer of Cebu City. Said provisions
read:

CHAPTER XI - Amusement Tax

Section 42. Rate of Tax. - There shall be paid to the Office of the City Treasurer by
the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses,
boxing stadia and other places of amusement, an amusement tax at the rate of
thirty percent (30%) of the gross receipts from admission fees.4

Section 43. Manner of Payment. - In the case of theaters or cinemas, the tax shall
first be deducted and withheld by their proprietors, lessees, or operators and paid
to the city treasurer before the gross receipts are divided between said
proprietor, lessees, operators, and the distributors of the cinematographic films.

Almost a decade later, or on June 7, 2002, Congress passed RA 9167,5 creating the
Film Development Council qf the Philippines (FDCP) and abolishing the Film
Development Foundation of the Philippines, Inc. and the Film Rating Board. Secs.
13 and 14 of RA 9167 provided for the tax treatment of certain graded films as
follows:

Section 13. Privileges of Graded Films. - Films which have obtained an "A" or "B"
grading from the Council pursuant to Sections 11 and 12 of this Act shall be
entitled to the following privileges:

a. Amusement tax reward. - A grade "A" or "B" film shall entitle its producer to an
incentive equivalent to the amusement tax imposed and collected on the graded
films by cities and municipalities in Metro Manila and other highly urbanized and
independent component cities in the Philippines pursuant to Sections 140 to 151
of Republic Act No. 7160 at the following rates:
 1. For grade "A" films - 100% of the amusement tax collected on such
film; and

2. For grade "B" films - 65% of the amusement tax collected on such
films. The remaining thirty-five (35%) shall accrue to the funds of the
Council.

Section 14. Amusement Tax Deduction and Remittance. - All revenue from the
amusement tax on the graded film which may otherwise accrue to the cities and
municipalities in Metropolitan Manila and highly urbanized and independent
component cities in the Philippines pursuant to Section 140 of Republic Act. No.
7160 during the period the graded film is exhibited, shall be deducted and
withheld by the proprietors, operators or lessees of theaters or cinemas and
remitted within thirty (30) days from the termination of the exhibition to the
Council which shall reward the corresponding amusement tax to the producers of
the graded film within fifteen (15) days from receipt thereof.

Proprietors, operators and lessees of theaters or cinemas who fail to remit the
amusement tax proceeds within the prescribed period shall be liable to a
surcharge equivalent to five percent (5%) of the amount due for each month of
delinquency which shall be paid to the Council. (emphasis added)

According to petitioner, from the time RA 9167 took effect up to the present, all
the cities and municipalities in Metro Manila, as well as urbanized and
independent component cities, with the sole exception of Cebu City, have
complied with the mandate of said law.

Accordingly, petitioner, through the Office of the Solicitor General, sent on

January 2009 demand letters for unpaid amusement tax reward (with 5%
surcharge for each month of delinquency) due to the producers of the Grade "A"
or "B" films to the following cinema proprietors and operators in Cebu City:

Amusement
Tax Reward Number
Cinema (with 5% of CEB
Period Covered
Proprietor/Operator surcharge for Graded
each moth of Films
delinquency)
 SM Prime Holdings 76,836,807.08 89 Sept. 11, 2003 - Nov. 4,
Inc. 2008
Ayala Center Cinemas 43,435,718.23 70 May 14, 2003 - Nov. 4,
2008
Colon Heritage Realty 8,071,267.00 50 Aug. 11, 2004-Nov. 4,
Corp. 2008
Eden Theater 428,938.25 4 May 5, 2005 - Sept. 2,
2008
Cinema Theater 3,100,354.80 22 Feb. 18, 2004-Oct. 7,
2008
Visaya Cineplex Corp. 17,582,521.89 86 June 25, 2005 - Oct. 21,
2008
Ultra Vistarama 68,821.60 2 July 2 - 22, 2008
Cinema
Cebu Central Realty 9,853,559.69 48 Jan. 1, 2004 - Oct. 21,
Corp. 2008

In said letters, the proprietors and cinema operators, including private

respondent Colon Heritage Realty Corp. (Colon Heritage), operator of the Oriente
theater, were given ten (10) days from receipt thereof to pay the aforestated
amounts to FDCP. The demand, however, fell on deaf ears.

Meanwhile, on March 25, 2009, petitioner received a letter from Regal

Entertainment, Inc., inquiring on the status of its receivables for tax rebates in
Cebu cinemas for all their A and B rate films along with those which it co-
produced with GMA films. This was followed by a letter from

Star Cinema ABS-CBN Film Productions, Inc., requesting the immediate

remittance of its amusement tax rewards for its graded films for the years 2004-
2008.

Because of the persistent refusal of the proprietors and cinema operators to

remit the said amounts as FDCP demanded, on one hand, and Cebu City's
assertion of a claim on the amounts in question, the city finally filed on May 18,
2009 before the RTC, Branch 14 a petition for declaratory relief with application
for a writ of preliminary injunction, docketed as Civil Case No. CEB-35529 (City of
Cebu v. FDCP). In said petition, Cebu City sought the declaration of Secs. 13 and
14 of RA 9167 as invalid and unconstitutional.

Similarly, Colon Heritage filed before the RTC, Branch 5 Civil Case No. CEB-35601
(Colon Heritage v. FDCP), seeking to declare Sec. 14 of RA 9167 as
unconstitutional.

On May 25, 2010, the RTC, Branch 14 issued a temporary restraining order (TRO)
restraining and enjoining FDCP, et al. from, inter alia:

(a) Collecting amusement tax incentive award in the City of Cebu and from
imposing surcharges thereon;

(b) Demanding from the owners, proprietors, and lessees of theaters and
cinemas located and operated within Cebu City, payment of said
amusement tax incentive award which should have been deducted,
withheld, and remitted to FDCP, etc. by the owners, etc., or being operated
within Cebu City and imposing surcharges on the unpaid amount; and

(c) Filing any suit due to or arising from the failure of the owners, etc., of
theaters or cinemas within Cebu City, to deduct, withhold, and remit the
incentive to FDCP.

Meanwhile, on August 13, 2010, SM Prime Holdings, Inc. moved for leave to file
and admit attached comment-in-intervention and was later granted.6

Rulings of the Trial Courts

In City of Cebu v. FDCP, the RTC, Branch 14 issued the challenged

Decision7 declaring Secs. 13 and 14 of RA 9167 unconstitutional, disposing as
follows:

WHEREFORE, in view of all the disquisitions, judgment is rendered in favor of

petitioner City of Cebu against respondent Film Development Council of the
Philippines, as follows:

1. Declaring Sections 13 and 14 of the (sic) Republic Act No. 9167 otherwise
known as an Act Creating the Film Development Council of the Philippines,
 Defining its Powers and Functions, Appropriating Funds Therefor and for
other purposes, as violative of Section 5 Article X of the 1997 (sic) Philippine
Constitution; Consequently

2. Declaring that defendant Film Development Council of the Philippines

(FDCP) cannot collect under Sections 13 and 14 of R.A. 9167 as of the
finality of the decision in G.R. Nos. 203754 and 204418;

3. Declaring that Intervenor SM Cinema Corporation has the obligation to

remit the amusement taxes, withheld on graded cinema films to
respondent FDCP under Sections 13 and 14 of R.A. 9167 for taxes due prior
to the finality of the decision in G.R. Nos. 203754 and 204418;

4. Declaring that after the finality of the decision in G.R. Nos. 203 754 and
204418, all amusement taxes withheld and those which may be collected
by Intervenor SM on graded films shown in SM Cinemas in Cebu City shall
be remitted to petitioner Cebu City pursuant to City Ordinance LXIX,
Chapter XI, Section 42.

As to the sum of PhP 76,836,807.08 remitted by the Intervenor SM to petitioner

City of Cebu, said amount shall be remitted by the City of Cebu to petitioner FDCP
within thirty (30) days from finality of this decision in G.R. Nos. 203754 and
204418 without interests and surcharges.

SO ORDERED.

According to the court, what RA 9167 seeks to accomplish is the segregation of

the amusement taxes raised and collected by Cebu City and its subsequent
transfer to FDCP. The court concluded that this arrangement cannot be classified
as a tax exemption but is a confiscatory measure where the national government
extracts money from the local government's coffers and transfers it to FDCP, a
private agency, which in turn, will award the money to private persons, the film
producers, for having produced graded films.

The court further held that Secs. 13 and 14 of RA 9167 are contrary to the basic
policy in local autonomy that all taxes, fees, and charges imposed by the LGUs
shall accrue exclusively to them, as articulated in A1iicle X,. Sec. 5 of the 1987
Constitution. This edict, according to the court, is a limitation upon the rule-
making power of Congress when it provides guidelines and limitations on the local
government unit's (LGU's) power of taxation. Therefore, when Congress passed
this "limitation," if went beyond its legislative authority, rendering the questioned
provisions unconstitutional.

By the same token, in Colon Heritage v. FDCP, the RTC, Branch 5, in its Decision of
September 25, 2012, also ruled against the constitutionality of said Secs. 13 and
14 of RA 9167 for the following reasons: (a) while Congress, through the
enactment of RA 9167, may have amended Secs. 140(a)8 and 1519 of the LGC, in
the exercise of its plenary power to amend laws, such power must be exercised
within constitutional parameters; (b) the assailed provision violates the
constitutional directive that taxes should accrue exclusively to the LGU
concerned; (c) the Constitution, through its Art. X, Sec. 5,10 directly conferred
LGUs with authority to levy taxes-the power is no longer delegated by the
legislature; (d) In CIR v. SM Prime Holdings,11 the Court ruled that amusement tax
on cinema/theater operators or proprietors remain with the LGU, amusement
tax, being, by nature, a local tax. The fallo of the questioned judgment reads:

WHEREFORE, in view of all the foregoing, Judgment is hereby rendered in favor of

petitioner, as follows:

(1) Declaring Republic Act No. 9167 as invalid and unconstitutional;

(2) The obligation to remit amusement taxes for the graded films to
respondent is ordered extinguished;

(3) Directing respondent to refund all the amounts paid by petitioner, by

way of amusement tax, plus the legal rate of interest thereof, until the
whole amount is paid in full.

Notify parties and counsels of this order.

SO ORDERED.

The Issue

Undeterred by two defeats, petitioner has come directly to this Court, presenting
the singular issue: whether or not the RTC (Branches 5 and 14) gravely erred in
declaring Secs. 13 and 14 of RA 9167 invalid for being unconstitutional.
Anent Sec. 13,12 FDCP concedes that the amusement taxes assessed in RA 9167
are to be given to the producers of graded films who are private persons.
Nevertheless, according to FDCP, this particular tax arrangement is not a violation
of the rule on the use of public funds for RA 9167 was enacted for a public
purpose, that is, the promotion and support of the "development and growth of
the local film industry as a medium for the upliftment of aesthetic, cultural, and
social values for the better understanding and appreciation of the Filipino
identity" as well as the "encouragement of the production of quality films that will
promote the growth and development' of the local film industry."13 Moreover,
FDCP suggests that "even if the resultant effect would be a certain loss of
revenue, [LGUs] do not feel deprived nor bitter for they realize that the benefits
for the film industry, the fortification of our values system, and the cultural boost
for the nation as a whole, far outweigh the pecuniary cost they would shoulder by
backing this law."14 Finally, in support of its stance, FDCP invites attention to the
following words of former Associate Justice Isagani A. Cruz: "[t]he mere fact that
the tax will be directly enjoyed by a private individual does not make it invalid so
long as some link to the public welfare is established."15

As regards Sec. 1416 of RA 9167, FDCP is of the position that Sec. 5, Article X of the
Constitution does not change the doctrine that municipal corporations only
possess delegated, not inherent, powers of taxation and that the power to tax is
still primarily vested in the Congress. Thus, wielding its power to impose
limitations on this delegated power, Congress further restricted the LGU's power
to impose amusement taxes via Secs. 13 and 14 of RA 9167-an express and real
intention of Congress to further contain the LGU's delegated taxing power. It,
therefore, cannot be construed as an undue limitation since it is well within the
power of Congress to make such restriction. Furthermore, the LGC is a mere
statute which Congress can amend, which it in fact did when it enacted RA
916417 and, later, the questioned law, RA 9167.18

This, according to FDCP, evinces the overriding intent of Congress to remove from
the LGU' s delegated taxing power all revenues from amusement taxes on grade
"A" or "B" films which would otherwise accrue to the cities and municipalities in
Metropolitan Manila and highly urbanized and independent component cities in
the Philippines pursuant to Secs. 140 and 151 of the LGC.

In fine, it is petitioner's posture that the inclusion in RA 9167 of the questioned

provisions was a valid exercise of the legislature's power to amend laws and an
assertion of its constitutional authority to set limitations on the LGU' s authority
to tax.

The Court's Ruling

We find no reason to disturb the assailed rulings.

Local fiscal autonomy and the constitutionally-delegated power to tax

The power of taxation, being an essential and inherent attribute of sovereignty,

belongs, as a matter of right, to every independent government, and needs no
express conferment by the people before it can be exercised. It is purely
legislative and, thus, cannot be delegated to the executive and judicial branches
of government without running afoul to the theory of separation of powers. It,
however, can be delegated to municipal corporations, consistent with the
principle that legislative powers may be delegated to local governments in
respect of matters of local concern.19 The authority of provinces, cities, and
municipalities to create their own sources of revenue and to levy taxes, therefore,
is not inherent and may be exercised only to the extent that such power might be
delegated to them either by the basic law or by statute.20 Under the regime of the
1935 Constitution, there was no constitutional provision on the delegation of the
power to tax to municipal corporations. They only derived such under a limited
statutory authority, outside of which, it was deemed withheld.21 Local
governments, thus, had very restricted taxing powers which they derive from
numerous tax laws. This highly-centralized government structure was later seen
to have arrested the growth and efficient operations of LG Us, paving the way for
the adoption of a more decentralized system which granted LGUs local autonomy,
both administrative and fiscal autonomy.22

Material to the case at bar is the concept and scope of local fiscal autonomy. In
Pimentel v. Aguirre,23 fiscal autonomy was defined as "the power [of LGUs] to
create their own sources of revenue in addition to their equitable share in the
national taxes released by the national government, as well as the power to
allocate their resources in accordance with their own priorities. It extends to the
preparation of their budgets, and local officials in tum have to work within the
constraints thereof."

With the adoption of the 1973 Constitution,24 and later the 1987 Constitution,
municipal corporations were granted fiscal autonomy via a general delegation of
the power to tax.25 Section 5, Article XI of the 1973 Constitution gave LGUs the
"power to create its own sources of revenue and to levy taxes, subject to such
limitations as may be provided by law.'' This authority was further strengthened
in the 1987 Constitution, through the inclusion in Section 5, Article X thereof of
the condition that " [s]uch taxes, fees, and charges shall accrue exclusively to local
governments."26

Accordingly, under the present Constitution, where there is neither a grant nor a
prohibition by statute, the tax power of municipal corporations must be deemed
to exist although Congress may provide statutory limitations and guidelines.27 The
basic rationale for the current rule on local fiscal autonomy is the strengthening
of LGUs and the safeguarding of their viability and self-sufficiency through a direct
grant of general and broad tax powers. Nevertheless, the fundamental law did not
intend the delegation to be absolute and unconditional. The legislature must still
see to it that (a) the taxpayer will not be over-burdened or saddled with multiple
and unreasonable impositions; (b) each LGU will have its fair share of available
resources; ( c) the resources of the national government will not be unduly
disturbed; and ( d) local taxation will be fair, uniform, and just.28

In conformity to the dictate of the fundamental law for the legislature to "enact a
local government code which shall provide for a more responsive and accountable
local government structure instituted through a system of
decentralization,"29 consistent with the basic policy of local autonomy, Congress
enacted the LGC, Book II of which governs local taxation and fiscal matters and
sets forth the guidelines and limitations for the exercise of this power. In Pelizloy
Realty Corporation v. The Province of Benguet,30 the Court alluded to the
fundamental principles governing the taxing powers of LGUs as laid out in Section
130 of the LGC, to wit:

1. Taxation shall be uniform in each LGU.

2. Taxes, fees, charges and other impositions shall:

a. be equitable and based as far as practicable on the taxpayer's

ability to pay;

b. be levied and collected only for public purposes;

c. not be unjust, excessive, oppressive, or confiscatory;

 d. not be contrary to law, public policy, national economic policy, or
in the restraint of trade.

3. The collection of local taxes, fees, charges and other impositions shall in
no case be let to any private person.

4. The revenue collected pursuant to the provisions of the LGC shall inure
solely to the benefit of, and be subject to the disposition by, the LGU
levying the tax, fee, charge or other imposition unless otherwise specifically
provided by the LGC.

5. Each LGU shall, as far as practicable, evolve a progressive system of

taxation.

It is in the application of the adverted fourth rule, that is-all revenue collected
pursuant to the provisions of the LGC shall inure solely to the benefit of, and be
subject to the disposition by, the LGU levying the tax, fee, charge or other
imposition unless otherwise specifically provided by the LGC-upon which the
present controversy grew.

RA 9167 violates local fiscal autonomy

It is beyond cavil that the City of Cebu had the authority to issue its City
Ordinance No. LXIX and impose an amusement tax on cinemas pursuant to Sec.
140 in relation to Sec. 151 of the LGC. Sec. 140 states, among other things, that a
"province may levy an amusement tax to be collected from the proprietors,
lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia,
and other places of amusement at a rate of not more than thirty percent (30%) of
the gross receipts from admission fees." By operation of said Sec. 151,31 extending
to them the authority of provinces and municipalities to levy certain taxes, fees,
and charges, cities, such as respondent city government, may therefore validly
levy amusement taxes subject to the parameters set forth under the law. Based
on this authority, the City of Cebu passed, in 1993, its Revised Omnibus Tax
Ordinance,32 Chapter XI, Secs. 42 and 43 of which reads:

CHAPTER XI - Amusement Tax

Section 42. Rate of Tax. - There shall be paid to the Office of the City Treasurer by
the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses,
boxing stadia and other places of amusement, an amusement tax at the rate of
thirty percent (30%) of the gross receipts from admission fees.33

Section 43. Manner of Payment. - In the case of theaters or cinemas, the tax shall
first be deducted and withheld by their proprietors, lessees, or operators and paid
to the city treasurer before the gross receipts are divided between said
proprietor, lessees, operators, and the distributors of the cinematographic films.

Then, after almost a decade of cities reaping benefits from this imposition,
Congress, through RA 9167, amending Section 140 of the LGC,34 among others,
transferred this income from the cities and municipalities in Metropolitan Manila
and highly urbanized and independent component cities, such as respondent City
of Cebu, to petitioner FDCP, which proceeds will ultimately be rewarded to the
producers of graded films. We reproduce anew Secs. 13 and 14 of RA 9167, thus:

Section 13. Privileges of Graded Films. - Films which have obtained an "A" or "B"
grading from the Council pursuant to Sections 11 and 12 of this Act shall be
entitled to the following privileges: a. Amusement tax reward. - A grade "A" or "B"
film shall entitle its producer to an incentive equivalent to the amusement tax
imposed and collected on the graded films by cities and municipalities in Metro
Manila and other highly urbanized and independent component cities in the
Philippines pursuant to Sections 140 to 151 of Republic Act No. 7160 at the
following rates:

1. For grade "A" films - 100% of the amusement tax collected on such film;
and

2. For grade "B" films - 65% of the amusement tax collected on such films.
The remaining thirty-five (35%) shall accrue to the funds of the Council.

Section 14. Amusement Tax Deduction and Remittance. -All revenue from the
amusement tax on the graded film which may otherwise accrue to the cities and
municipalities in Metropolitan Manila and highly urbanized and independent
component cities in the Philippines pursuant to Section 140 of Republic Act. No.
7160 during the period the graded film is exhibited, shall be deducted and
withheld by the proprietors, operators or lessees of theaters or cinemas and
remitted within thirty (30) days from the termination of the exhibition to the
Council which shall reward the corresponding amusement tax to the producers of
the graded film within fifteen (15) days from receipt thereof.
Proprietors, operators and lessees of theaters or cinemas who fail to remit the
amusement tax proceeds within the prescribed period shall be liable to a
surcharge equivalent to five percent (5%) of the amount due for each month of
delinquency which shall be paid to the Council.

Considering the amendment, the present rule is that ALL amusement taxes levied
by covered cities and municipalities shall be 2iven by proprietors, operators or
lessees of theatres and cinemas to FDCP, which shall then reward said amount to
the producers of graded films in this wise:

1. For grade "A" films, ALL amusement taxes collected by ALL covered LGUs
on said films shall be given to the producer thereof. The LGU, therefore, is
entitled to NOTHING from its own imposition.

2. For grade "B" films, SIXTY FIVE PERCENT (65%) of ALL amusement taxes
derived by ALL covered LGUs on said film shall be given to the producer
thereof. In this case, however, the LGU is still NOT entitled to any portion of
the imposition, in view of Sec. 16 of RA 9167 which provides that the
remaining 35% may be expended for the Council's operational expenses.
Thus: Section 16. Funding. - The Executive Secretary shall immediately
include in the Office of the President's program the implementation of this
Act, the funding of which shall be included in the annual General
Appropriations Act.

To augment the operational expenses of the Council, the Council may:

a. Utilize the remaining thirty-five (35%) percent of the amusement tax collected
during the period of grade "B" film is exhibited, as provided under Sections 13 and
14 hereof x x x.

For petitioner, the amendment is a valid legislative manifestation of the intention

to remove from the grasp of the taxing power of the covered LGUs all revenues
from amusement taxes on grade "A" or "B" films which would otherwise accrue to
them. An evaluation of the provisions in question, however, compels Us to
disagree.

RA 9167, Sec. 14 states:

Section 14. Amusement Tax Deduction and Remittance. - All revenue from the
amusement tax on the graded film which may otherwise accrue to the cities and
municipalities in Metropolitan Manila and highly urbanized and independent
component cities in the Philippines pursuant to Section 140 of Republic Act. No.
7160 during the period the graded film is exhibited, shall be deducted and
withheld by the proprietors, operators or lessees of theaters or cinemas and
remitted within thirty (30) days from the termination of the exhibition to the
Council which shall reward the corresponding amusement tax to the producers of
the graded film within fifteen (15) days from receipt thereof.

A reading of the challenged provision reveals that the power to impose

amusement taxes was NOT removed from the covered LGUs, unlike what
Congress did for the taxes enumerated in Sec. 133, Article X of the LGC,35 which
lays down the common limitations on the taxing powers of LGUs. Thus:

Section 133. Common Limitations on the Taxing Powers of Local Government

Units. -Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:

(a) Income tax, except when levied on banks and other financial
institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions

mortis causa, except as otherwise provided herein;

(d) Customs duties, registration fees of vessel and wharfage on wharves,

tonnage dues, and all other kinds of customs fees, charges and dues except
wharfage on wharves constructed and maintained by the local government
unit concerned;

(e) Taxes, fees, and charges and other impositions upon goods carried into
or out of, or passing through, the territorial jurisdictions of local
government units in the guise of charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees, or charges in any form whatsoever upon
such goods or merchandise;
 (f) Taxes, fees or charges on agricultural and aquatic products when sold by
marginal farmers or fishermen;

(g) Taxes on business enterprises certified to by the Board of Investments

as pioneer or non-pioneer for a period of six (6) and four (4) years,
respectively from the date of registration;

(h) Excise taxes on articles enumerated under the national Internal Revenue
Code, as amended, and taxes, fees or charges on petroleum products;

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or

similar transactions on goods or services except as otherwise provided
herein;

(j) Taxes on the gross receipts of transportation contractors and persons

engaged in the transportation of passengers or freight by hire and common
carriers by air, land or water, except as provided in this Code;

(k) Taxes on premiums paid by way or reinsurance or retrocession;

(l) Taxes, fees or charges for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof, except
tricycles;

(m) Taxes, fees, or other charges on Philippine products actually exported,

except as otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business

Enterprises and cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the "Cooperative Code of the Philippines" respectively;
and

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

From the above, the difference between Sec. 133 and the questioned amendment
of Sec. 140 of the LGC by RA 9167 is readily revealed. In Sec. · 133, what Congress
did was to prohibit the levy by LGUs of the enumerated taxes. For RA 9167,
however, the covered LGUs were deprived of the income which they will
otherwise be collecting should they impose amusement taxes, or, in petitioner's
own words, "Section 14 of [RA 9167] can be viewed as an express and real
intention on the part of Congress to remove from the LGU's delegated taxing
power, all revenues from the amusement taxes on graded films which would
otherwise accrue to [them] pursuant to Section 140 of the [LGC]."36

In other words, per RA 9167, covered LGUs still have the power to levy
amusement taxes, albeit at the end of the day, they will derive no revenue
therefrom. The same, however, cannot be said for FDCP and the producers of
graded films since the amounts thus levied by the LGUs which should rightfully
accrue to them, they being the taxing authority-will be going to their coffers. As a
matter of fact, it is only through the exercise by the LGU of said power that the
funds to be used for the amusement tax reward can be raised. Without said
imposition, the producers of graded films will receive nothing from the owners,
proprietors and lessees of cinemas operating within the territory of the covered
LGU.

Taking the resulting scheme into consideration, it is apparent that what Congress
did in this instance was not to exclude the authority to levy amusement taxes
from the taxing power of the covered LGUs, but to earmark, if not altogether
confiscate, the income to be received by the LGU from the taxpayers in favor of
and for transmittal to FDCP, instead of the taxing authority. This, to Our mind, is
in clear contravention of the constitutional command that taxes levied by LGUs
shall accrue exclusively to said LGU and is repugnant to the power of LGUs to
apportion their resources in line with their priorities.

It is a basic precept that the inherent legislative powers of Congress, broad as

they may be, are limited and confined within the four walls of the
Constitution.37 Accordingly, whenever the legislature exercises its power to enact,
amend, and repeal laws, it should do so without going beyond the parameters
wrought by the organic law.

In the case at bar, through the application and enforcement of Sec. 14 of RA 9167,
the income from the amusement taxes levied by the covered LGUs did not and
will under no circumstance accrue to them, not even partially, despite being the
taxing authority therefor. Congress, therefore, clearly overstepped its plenary
legislative power, the amendment being violative of the fundamental law's
guarantee on local autonomy, as echoed in Sec. 130(d) of the LGC, thus: Section
130. Fundamental Principles. - The following fundamental principles shall govern
the exercise of the taxing and other revenue-raising powers of local government
units:

xxxx

(d) The revenue collected pursuant to the provisions of this Code shall inure solely
to the benefit of, and be subject to the disposition by, the local government unit
levying the tax, fee, charge or other imposition unless otherwise specifically
provided herein x x x.

Moreover, in Pimentel,38 the Court elucidated that local fiscal autonomy includes
the power of LGUs to allocate their resources in accordance with their own
priorities. By earmarking the income on amusement taxes imposed by the LGUs in
favor of FDCP and the producers of graded films, the legislature appropriated and
distributed the LGUs' funds-as though it were legally within its control-under the
guise of setting a limitation on the LGUs' exercise of their delegated taxing power.
This, undoubtedly, is a usurpation of the latter's exclusive prerogative to
apportion their funds, an impermissible intrusion into the LGUs' constitutionally-
protected domain which puts to naught the guarantee of fiscal autonomy to
municipal corporations enshrined in our basic law.

Grant of amusement tax reward incentive:

not a tax exemption

It was argued that subject Sec. 13 is a grant by Congress of an exemption from

amusement taxes in favor of producers of graded films. Without question, this
Court has previously upheld the power of Congress to grant exemptions over the
power of LGUs to impose taxes.39 This amusement tax reward, however, is not, as
the lower court posited, a tax exemption. Exempting a person or entity from tax is
to relieve or to excuse that person or entity from the burden of the imposition.
Here, however, it cannot be said that an exemption from amusement taxes was
granted by Congress to the producers of graded films. Take note that the burden
of paying the amusement tax in question is on the proprietors, lessors, and
operators of the theaters and cinemas that showed the graded films. Thus, per
City Ordinance No. LXIX: CHAPTER XI - Amusement Tax
Section 42. Rate of Tax. - There shall be paid to the Office of the City Treasurer by
the proprietors, lessees, or operators of theaters, cinemas, concert halls,,
circuses, boxing stadia and other places of amusement, an amusement tax at the
rate of thirty percent (30%) of the gross receipts from admission fees.

Section 43. Manner of Payment. - In the case of theaters or cinemas, the tax shall
first be deducted and withheld by their proprietors, lessees, or operators and paid
to the city treasurer before the gross receipts are divided between said
proprietor, lessees, operators, and the distributors of the cinematographic films.

Similarly, the LGC provides as follows:

Section 140. Amusement Tax. –

(a) The province may levy an amusement tax to be collected from the
proprietors, lessees, or operators of theaters, cinemas, concert halls,
circuses, boxing stadia, and other places of amusement at a rate of not
more than thirty percent (30%) of the gross receipts from admission fees.

(b) In the case of theaters or cinemas, the tax shall first be deducted and
withheld by their proprietors, lessees, or operators and paid to the
provincial treasurer before the gross receipts are divided between said
proprietors, lessees, or operators and the distributors of the
cinematographic films.

Simply put, both the burden and incidence of the amusement tax are borne by
the proprietors, lessors, and operators, not by the producers of the graded films.
The transfer of the amount to the film producers is actually a monetary reward
given to them for having produced a graded film, the funding for which was taken
by the national government from the coffers of the covered LGUs. Without a
doubt, this is not an exemption from payment of tax.

Declaration by the RTC, Branch 5 of the

entire RA 9167 as unconstitutional

Noticeably, the RTC, Branch 5, in its September 25, 2012 Decision in Colon
Heritage v. FDCP, ruled against the constitutionality of the entire law, not just the
assailed Sec. 14. The fallo of the judgment reads:
WHEREFORE, in view of all the foregoing, Judgment is hereby rendered in favor of
petitioner, as follows:

(1) Declaring Republic Act No. 9167 as invalid and unconstitutional;

(2) The obligation to remit amusement taxes for the graded films to
respondent is ordered extinguished;

(3) Directing respondent to refund all the amounts paid by petitioner, by

way of amusement tax, plus the legal rate of interest thereof, until the
whole amount is paid in full.

In this regard, it is well to emphasize that if it appears that the rest of the law is
free from the taint of unconstitutionality, then it should remain in force and effect
if said law contains a separability clause. A separability clause is a legislative
expression of intent that the nullity of one provision shall not invalidate the other
provisions of the act. Such a clause is not, however, controlling and the courts, in
spite of it, may invalidate the whole statute where what is left, after the void part,
is not complete and workable.40

In this case, not only does RA 9167 have a separability clause, contained in
Section 23 thereof which reads:

Section 23. Separability Clause. -If, for any reason, any provision of this Act, or any
part thereof, is declared invalid or unconstitutional, all other sections or
provisions not affected thereby shall remain in force and effect.

it is also true that the constitutionality of the entire law was not put m question in
any of the said cases.

Moreover, a perusal of RA 9167 easily reveals that even with the removal of Secs.
13 and 14 of the law, the remaining provisions can survive as they mandate other
matters like a cinema evaluation system, an incentive and reward system, and
local and international film festivals and activities that "will promote the growth
and development of the local film industry and promote its participation in both
domestic and foreign markets," and to "enhance the skills and expertise of
Filipino talents."41
Where a part of a statute is void as repugnant to the Constitution, while another
part is valid, the valid portion, if separable from the invalid, may stand-and be
enforced. The exception to this is when the parts of a statute are so mutually
dependent and connected, as conditions, considerations, inducements, or
compensations for each other, as to warrant a belief that the legislature intended
them as a whole, in which case, the nullity of one part will vitiate the rest.42

Here, the constitutionality of the rest of the provisions of RA 9167 was never put
in question. Too, nowhere in the assailed judgment of the RTC was it explicated
why the entire law was being declared as unconstitutional.

It is a basic tenet that courts cannot go beyond the issues in a case,43 which the
RTC, Branch 5 did when it declared RA 9167 unconstitutional. This being the case,
and in view of the elementary rule that every statute is presumed valid,44 the
declaration by the R TC, Branch 5 of the entirety of RA 9167 as unconstitutional, is
improper.

Amounts paid by Colon Heritage

need not be returned

Having ruled that the questioned provisions are unconstitutional, the RTC, Branch
5, in Colon Heritage v. FDCP, ordered the return of all amounts paid by
respondent Colon Heritage to FDCP by way of amusement tax. Thus:

WHEREFORE, in view of all the foregoing, Judgment is hereby rendered in favor of

petitioner, as follows:

(1) Declaring Republic Act No. 9167 as invalid and unconstitutional;

(2) The obligation to remit amusement taxes for the graded films to
respondent is ordered extinguished;

(3) Directing respondent to refund all the amounts paid by petitioner, by

way of amusement tax, plus the legal rate of interest thereof, until the
whole amount is paid in full.

As regards the refund, the Court cannot subscribe to this position.

It is a well-settled rule that an unconstitutional act is not a law; it . confers no
rights; it imposes no duties; it affords no protection; it creates no office; it is
inoperative as if it has not been passed at all. Applying this principle, the logical
conclusion would be to order the return of all the amounts remitted to FDCP and
given to the producers of graded films, by all of the covered cities, which actually
amounts to hundreds of millions, if not billions. In fact, just for Cebu City, the
aggregate deficiency claimed by FDCP is ONE HUNDRED FIFTY NINE MILLION
THREE HUNDRED SEVENTY SEVEN THOUSAND NINE HUNDRED EIGHTY-EIGHT
PESOS AND FIFTY FOUR CENTAVOS (₱159,377,988.54). Again, this amount
represents the unpaid amounts to FDCP by eight cinema operators or proprietors
in only one covered city.

An exception to the above rule, however, is the doctrine of operative fact, which
applies as a matter of equity and fair play. This doctrine nullifies the effects of an
unconstitutional law or an executive act by recognizing that the existence of a
statute prior to a determination of unconstitutionality is an operative fact and
may have consequences that cannot always be ignored. It applies when a
declaration of unconstitutionality will impose an undue burden on those who
have relied on the invalid law.45

In Hacienda Luisita v. PARC, the Court elucidated the meaning and scope of the
operative fact doctrine, viz:

The "operative fact" doctrine is embodied in De Agbayani v. Court of Appeals,

wherein it is stated that a legislative or executive act, prior to its being declared as
unconstitutional by the courts, is valid and must be complied with, thus:

xxx xxx xxx

This doctrine was reiterated in the more recent case of City of Makati v. Civil
Service Commission, wherein we ruled that:

Moreover, we certainly cannot nullify the City Government's order of suspension,

as we have no reason to do so, much less retroactively apply such nullification to
deprive private respondent of a compelling and valid reason for not filing the
leave application. For as we have held, a void act though in law a mere scrap of
paper nonetheless confers legitimacy upon past acts or omissions done in reliance
thereof. Consequently, the existence of a statute or executive order prior to its
being adjudged void is an operative fact to which legal consequences are
attached. It would indeed be ghastly unfair to prevent private respondent from
relying upon the order of suspension in lieu of a formal leave application.

The applicability of the operative fact doctrine to executive acts was further
explicated by this Court in Rieta v. People, thus:

Petitioner contends that his arrest by virtue of Arrest . Search and Seizure Order
(ASSO) No. 4754 was invalid, as the law upon which it was predicated-General
Order No. 60, issued by then President Ferdinand E. Marcos - was subsequently
declared by the Court, in Tanada v. Tuvera, 33 to have no force and effect. Thus,
he asserts, any evidence obtained pursuant thereto is inadmissible in evidence.

We do not agree. In Tanada, the Court addressed the possible effects of its
declaration of the invalidity of various presidential issuances.1a\^/phi1 Discussing
therein how such a declaration might affect acts done on a presumption of their
validity, the Court said:

" ... In similar situations in the past this Court had taken the pragmatic and
realistic course set forth in Chicot County Drainage District vs. Baxter Bank to wit:

'The courts below have proceeded on the theory that the Act of Congress, having
been found to be unconstitutional, was not a law; that it was inoperative,
conferring no rights and imposing no duties, and hence affording no basis for the
challenged decree. . . . It is quite clear, however, that such broad statements as to
the effect of a determination of unconstitutionality must be taken with
qualifications. The actual existence of a statute, prior to [the determination of its
invalidity], is an operative fact and may have consequences which cannot justly be
ignored. The past cannot always be erased by a new judicial declaration. The
effect of the subsequent ruling as to invalidity may have to be considered in
various aspects – with respect to particular conduct, private and official.
Questions of rights claimed to have become vested, of status, of prior
determinations deemed to have finality and acted upon accordingly, of public
policy in the light of the nature both of the statute and of its previous application,
demand examination. These questions are among the most difficult of those
which have engaged the attention of courts, state and federal, and it is manifest
from numerous decisions that an all-inclusive statement of a principle of absolute
retroactive invalidity cannot be justified.'

xxx xxx xxx

"Similarly, the implementation/ enforcement of presidential decrees prior to their
publication in the Official Gazette is 'an operative fact which may have
consequences which cannot be justly ignored. The past cannot always be erased
by a new judicial declaration ... that an all-inclusive statement of a principle of
absolute retroactive invalidity cannot be justified."

The Chicot doctrine cited in Tanada advocates that, prior to the nullification of a
statute, there is an imperative necessity of taking into account its actual existence
as an operative fact negating the acceptance of "a principle of absolute
retroactive invalidity." Whatever was done while the legislative or the executive
act was in operation should be duly recognized and presumed to be valid in all
respects. The ASSO that was issued in 1979 under General Order No. 60 - long
before our Deeision n Taiiada and the arrest of petitioner - is an operative fact
that can no longer be disturbed or simply ignored. (citations omitted; emphasis in
the original.)

Bearing in mind that PARC Resolution No. 89-12-2-an executive act-was declared
invalid in the instant case, the operative fact doctrine is clearly applicable.46

Here, to order FDCP and the producers of graded films which may have already
received the amusement tax incentive reward pursuant to the questioned
provisions of RA 9167, to return the amounts received to the respective taxing
authorities would certainly impose a heavy, and possibly crippling, financial
burden upon them who merely, and presumably in good faith, complied with the
legislative fiat subject of this case. For these reasons, We are of the considered
view that the application of the doctrine of operative facts in the case at bar is
proper so as not to penalize FDCP for having complied with the legislative
command in RA 9167, and the producers of graded films who have already
received their tax cut prior to this Decision for having produced top-quality films.

With respect to the amounts retained by the cinema proprietors due to petitioner
FDCP, said proprietors are required under the law to remit the same to petitioner.
Obeisance to the rule of law must always be protected and preserved at all times
and the unjustified refusal of said proprietors cannot be tolerated. The operative
fact doctrine equally applies to the non-remittance by said proprietors since the
law produced legal effects prior to the declaration of the nullity of Secs. 13 and 14
in these instant petitions. It can be surmised, however, that the proprietors were
at a loss whether or not to remit said amounts to FDCP considering the position of
the City of Cebu for them to remit the amusement taxes directly to the local
government. For this reason, the proprietors shall not be liable for surcharges.

In view of the declaration of nullity of unconstitutionality of Secs. 13 and 14 of RA

9167, all amusement taxes remitted to petitioner FDCP prior to the date of the
finality of this decision shall remain legal and valid under the operative fact
doctrine. Amusement taxes due to petitioner but unremitted up to the finality of
this decision shall be remitted to petitioner within thirty (30) days from date of
finality. Thereafter, amusement taxes previously covered by RA 9167 shall be
remitted to the local governments.

WHEREFORE, premises considered, the consolidated petitions are hereby

PARTIALLY GRANTED. The questioned Decision of the RTC, Branch 5 of Cebu City
in Civil Case No. CEB-35601 dated September 25, 2012 and that of the R TC,
Branch 14, Cebu City in Civil Case No. CEB-35529 dated October 24, 2012,
collectively declaring Sections 13 and 14 of Republic Act No. 9167 invalid and
unconstitutional, are hereby AFFIRMED with MODIFICATION.

As modified, the decisions of the lower courts shall read:

1. Civil Case No. CEB-35601 entitled Colon Heritage Realty Corp. v. Film
Development Council of the Philippines:

WHEREFORE, in view of all the foregoing, Judgment is hereby rendered in favor of

Colon Heritage Realty Corp. and against the Film Development council of the
Philippines, as follows: 1. Declaring Sections 13 and 14 of Republic Act No. 9167
otherwise known as an Act Creating the Film Development Council of the
Philippines, Defining its Powers and Functions, Appropriating Funds therefor arid
for other purposes, as invalid and unconstitutional;

2. Declaring that the Film Development Council of the Philippines cannot

collect under Sections 13 and 14 of R.A. 9167 as of the finality of the
decision in G.R. Nos. 203754 and 204418;

3. Declaring that Colon Heritage Realty Corp. has the obligation to remit the
amusement taxes withheld on graded cinema films to FDCP under Sections
13 and 14 of R.A. 9167 for taxes due prior to the finality of this Decision,
without surcharges;
 4. Declaring that upon the finality of this decision, all amusement taxes
withheld and those which may be collected by Colon Heritage Realty Corp.
on graded films shown in its cinemas in Cebu City shall be remitted to Cebu
City pursuant to City Ordinance LXIX, Chapter XI, Section 42.

2. Civil Case No. CEB-35529 entitled City of Cebu v. Film Development Council of
the Philippines:

WHEREFORE, in view of all the disquisitions, judgment is rendered in favor of the

City of Cebu against the Film development Council of the Philippines, as follows:

1. Declaring Sections 13 and 14 of Republic Act No. 9167 otherwise known

as an Act Creating the Film Development Council of the Philippines,
Defining its Powers and Functions, Appropriating Funds therefor and for
other purposes, void and unconstitutional;

2. Declaring that the Film Development Council of the Philippines cannot

collect under Sections 13 and 14 of R.A. 9167 as of the finality of this
Decision;

3. Declaring that Intervenor SM Cinema Corporation has the obligation to

remit the amusement taxes, withheld on graded cinema films to
respondent FDCP under Sections 13 and 14 of R.A. 9167 for taxes due prior
to the finality of this Decision, without surcharges;

4. Declaring that after the finality of this Decision, all amusement taxes
withheld and those which may be collected by Intervenor SM on graded
films shown in SM Cinemas in Cebu City shall be remitted to petitioner
Cebu City pursuant to City Ordinance LXIX, Chapter XI, Section 42.

As to the sum of PhP 76,836,807.08 remitted by the Intervenor SM to petitioner

City of Cebu, said amount shall be remitted by the City of Cebu to petitioner FDCP
within thirty (30) days from finality of this decision in G.R. Nos. 203754 and
204418 without interests and surcharges. Since Sections 13 and 14 of Republic Act
No. 9167 were declared void and unconstitutional, all remittances of amusement
taxes pursuant to said Sections 13 and 14 of said law prior to the date of finality
of this Decision shall remain valid and legal. Cinema proprietors who failed to
remit said amusement taxes to petitioner FDCP prior to the date of finality of this
Decision are obliged to remit the same, without surcharges, to petitioner FDCP
under the doctrine of operative fact.

SO ORDERED.

G. R. No. L-9319

FELIX, J.:

The City of Tacloban and the Treasurer thereof appeal from a decision of the
Court of First Instance of Leyte rendered in Civil Case No. 1767 declaring
Ordinances Nos. 13 and 18, series of 1949, and Nos. 34 and 42, series of 1952,
null and void. The facts of the case are as follows:

On March 26, 1954, AgustIn Panaligan, Casimiro Sebolino, Epifania Udtujan,

Valentin Camposano, Angeles Guantero, Esteban Juntilla, Ciriaca de Galagar,
Marcos Samson, Ramon Hernandez or Arandes, Epifanio Pabilona and Pedro
Rodriguez, all residents; of the City of Tacloban, filed a petition for mandamus
With the Court of First Instance of Leyte. The petition alleged that pursuant to
Ordinance No. 13, as amended by Ordinance No. 18, series of 1999, and further
amended by Ordinances Nos. 34 and 42, series of 1952, imposing inspection fees
for every head of hog, cattle and carabao that was shipped or transported
between the months of April and December, 1952, from Tacloban to other
places, respondents City of Tacloban and the Treasurer thereof collected from
petitioners, duly receipted, the following amounts, to wit:

1. AGUSTlN PAMALIGAN:

Date Amount

March 20, 1952 P143.00

April 21 1952 90.00
April 21, 1952 116.00
April 21, 1952 44.00
May 3 1952 110.00
May 10, 1952 102.00
May 12, 1952 86.00
May 17, 1952 92.00
May 24, 1952 122.00
May 31, 1952 122.00
June 7, 1952 120.00
Oct. 1952 60.00
Nov. 18 1952 35.00
Dec. 2, 1952 30.00
_________
P1,418.00

2. CASIMIRO SEBOLINO:

Date Amount

May 7, 1952 P140.00

June 30 1952 38.00
Aug. 18 1952 280.00
Sept. 10, 1952 20.00
Sept. 27 1952 140.00
Oct. 10, 1952 160.00
Nov. 29, 1952 80.00
_________
P1,200.00

1. EPIFANlA UDTUJAN:

Date Amount

July 26, 1952 P120.00

Aug. 16, 1952 800.00
Sept. 5, 1952 . 300.00
Sept. 11, 1952 220.00
Sept. 22 1952 100.00
Oct. 13 1952 160.00
Oct. 22 1952 100.00
 _________
P1,800.00

4. VAIENTlH CAMPOSANO:

Date Amount

May 5, 1952 P240.00

5. ANGELES GUANTERO:

Date Amount

Oct. 7, 19?2 P200.00

Nov.. 18, 1952 100.00
________
P300.00

6. ESIEBAN JUNTILLA: .

Date Amount

5 May 19, 1952 P200.00

7. CIRIACA DE GALAGAR:

Date Amount

May 8, 1952 P100.00

8. MARCOS SAMSON:

Date Amount

Apr. 21, 1952 P180.00

June 2, 1952 180.00
________
 P360.00

9. RAMON HERNANDEZ OR ARANDES:

Date Amount

Apr. 8, 1952 P240.00

June 25, 19?2 300.00
________
P540

10. BRIFARIO PABILONA:

Date Amount

April 3, 1952 P100.00

11. 'PEDRO RODRIGUEZ:

Date Amount

July 23, 1952 P168.00

July 23, 1952 140.00
July 29, 1952 134.00
___________
GRAND TOTAL P6,700.00;
that the so-called "inspection fee" imposed by said ordinances in reality partook
of the nature of an export tax which under Section 2287 of the Administrative
Code a municipal council it cannot impose; that for this reason and in virtue of
the Department of Finance provincial circular dated April 17, 1947, implementing
the aforesaid section of the Administrative Code, the Undersecretary of Finance,
in answer to a query by one of the petitioners, rendered an opinion holding that
the fees thus collected were illegal and same must be refunded to the
taxpayers; ''that notwithstanding the fact that this view was subscribed to by the
City Treasurer and City Attorney of Tacloban, respondents failed to refund the
same to petitioners. Petitioners, therefore, prayed that the ordinances in
question be declared null and void; that respondents be ordered to refund to
petitioners the respective amounts due them; that every petitioner be awarded
moral damages in the amount of P5,000.00 and attorney's fees in the sum of
P3,000.00; for costs and for such other relief as may be deemed just and
equitable in the premises.

On April 6, 1954, respondents filed a motion to dismiss contending that an action

for mandamus was not proper in the case at bar for although administrative
officials as the Secretary of Finance, the City Treasurer and the City Attorney
formed opinions that the collections made in accordance with the ordinances
were null and void, still unless the same were declared illegal by the courts,
petitioners acquired no specific, clear and certain legal rights which could be
enforced by a special civil action, and that petitioners could have prosecuted the
same by means of an ordinary civil case.

This motion was denied by the lower Court on the ground that the Supreme Court
had ruled that the question of the constitutionality of a law or order could be
entertained in a mandamus proceedings and respondents were thus required to
answer the petition in five days from receipt of the order of denial.

Within the prescribed period, respondents filed their answer contending, among
other things, that petitioners had not exhausted all the administrative and judicial
remedies in the ordinary course of law before resorting to a special civil action;
that respondents were willing to make a refund of the amounts collected from
petitioners when ordered by the Court to do so, and that the Municipal Board of
the City of Tacloban was an indispensable party to the action which should be
made a party respondent.

The records show that the parties entered into a stipulation of facts which reads
as follows:

1. That the parties-petitioners are all of age and residents of the City of
Tacloban, represented by Atty. Antonio C. Veloso, and the respondents are
the City of Tacloban, represented by the City Mayor, and the City Treasurer,
both represented by the City Attorney;

2. That the collection of the alleged illegal taxes has been collected and
effected by the defunct municipality of Tacloban through the Municipal
 Treasurer of said municipality, which amounted to P6,700.00, all,
supported, by official receipts and (showing) the respective dates of
issuance thereof;

3. That a demand has been made by the petitioners in person and through
their counsel asking for the refund of the alleged illegal taxes, but which the
City Treasurer could not properly effect such refund for lack of
appropriation;

4. That the City Treasurer and the City Mayor, in line with their respective
duties enjoined upon them by law which is to approve and effect the
refund up to the present the Municipal Board of the City of Tacloban has
not appropriated an amount to cover up the refund of the claim of the
petitioners and for which reason no refund up to the present has been
made;

5. That the parties through their respective counsel are willing to submit to
the court the determination of the legality of municipal ordinances Nos. 18
and 135 both series of 1952, municipal ordinance No.34, series of 1949,
and municipal ordinance No. 42 series of 1949, and the latest ordinance
on the matter Which is ordinance No. 18, series of 1952, approved on
March 25, 1952, on the basis of the pleadings and the supporting papers
thereto, copies of which are hereto attached as Annexes "A", "B", "C", and
"D".

6. That the parties-petitioners are willing to forego all claims for damages and
attorney's fees as contained in paragraph 8 of the petition."

Based.on the foregoing stipulation the trial Court rendered decision dated May
27, 1954, declaring the ordinances in question, as last amended by Ordinance
No. 18, series of 1952, illegal because they contravened the provisions of
Section 2287 of the Revised Administrative Code and, consequently, ordered
respondents to provide for the necessary funds with ¦which to reimburse
petitioners of the amounts collected from them.

After their motion for reconsideration was denied, respondents brought the
matter on appeal to the Court of Appeals but the latter certified the case to Us
on the ground that as it involves the validity of Ordinances Nos. 34, 42, 13 and
18 of the City of Tacloban, the appeal should properly be taken to this Court
pursuant to Section 14( 1) of the Judiciary Act of 1948.

Ordinance No. 18, the latest amendment to Ordinance No. 34 (s-1949) of the
City of Tacloban which was approved on March 25, 1952, reads as follows:

MUNICIPAL ORDINANCE NO. 18

AN ORDINANCE AMENDING MUNICIPAL ORDINANCES NOS. 34 and 42, SERIES OF

1949, AND MUNICIPAL ORDINANCE NO. 13, SERIES OF 1952, IMPOSING
INSPECTION FEES OF TWO PESOS FOR EACH HOG, TEN PESOS FOR EACH CATTLE
AND TWENTY PESOS FOR EACH CARABAO TRANSPORTED TO OTHER PLACES AND
PENALTIES FOR THE VIOLATION THEREFOR.
Be it ordained by authority of the Municipal Council of Tacloban, that:

Section 1. No person, commercial firm or corporation shall transport, ship, carry

or transfer cattle, carabao, or carabaos, and hog or hogs to any other places from
the Port of Tacloban or from any place "within the jurisdiction of the municipality
of Tacloban, without first submitting said animals for inspection by the Municipal
Mayor or his authorized representative of Tacloban and the Veterinary Officer or
Inspector, showing the number of cattle, carabaos or hogs, males or females,
their corresponding weights, age and condition and the place where same are to
be transported.

Section 2. There will be collected an "inspection fee" of ten pesos for each head of
cattle, twenty pesos for each head of carabao and two pesos for each head of hog
by the Municipal Treasurer of Tacloban, or his legal representative to be
transported, shipped, carried or transferred to other places for which the
inspection certificate is issued.

Section 3. Any person, firm or corporation who violates any of the provisions
hereof, shall be punished upon, conviction by a fine of not exceeding two
hundred pesos., or imprisonment of not exceeding three months, or both, at the
discretion of the Court. In the case of a firm or corporation, the President or
Manager, or the person in charge shall be held personally liable and criminally
responsible for the violation of this ordinance.
Section 4. This ordinance shall take effect immediately upon its,approval.

APPROVED, March 25, 1952.

Section 2287 of the Revised Administrative Code prescribes:

SEC. 2287. FUNDAMENTAL PRINCIPLES GOVERNING MUNICIPAL TAXATION. - x

x x.
It shall not be in the power of the municipal council to impose a tax in any form
whatever upon goods and merchandise carried into the municipality, or out of the
Same; and any attempt to impose an import or export tax upon such goods in
the guise of an unreasonable charge for wharfage, use of bridges or
otherwise, shall be void. x x.
Considering the provisions of this section, the issue in the instant case is
whether the municipal council of Tacloban, which became a city in June, 1952,
can impose an "inspection fee" on certain animals shipped or transported from
said place to another, and consequently whether or not * the ordinances
imposing such "inspection fee" are valid.

Respondents-appellants, treating the amounts collected in the case at bar

as license fees, assert that in the determination of the reasonableness, of a
license fee, it must be remembered that there are 3 classes of licenses, each
with distinct characteristics: (1) licenses for the regulation of useful
occupations or enterprises; (2) licenses for the regulation or restriction of non-
useful occupations or enterprises; and (3) licenses for revenue (purposes)
only. The first 2 classes are based on the exercise of police power and although
there are conflict of authority on this point, the better rule on the matter seems
to be that the conferred power to regulate and to issue such licenses carries
with it the fc right to fix a license fee (Cu Unjieng vs. Patstone, 42 Phil. 818).
Respondents maintain that the fees in question fall under the first class of
licenses they being required purely as a regulatory measure enacted in the
exercise of the police power of the municipal corporation, and the most that the
courts can do is merely to reduce the amount of fees if they are deemed
excessive, but not to declare the same as illegal.

Granting arguendo that the respondent City enacted the questioned ordinances
in virtue of its police power and that in the exercise of the same a municipal
corporation has the right to grant licenses and impose license fees (City of
Birmingham vs. Hood-McPherson Realty Co., 172 So. 114 108 ALR 1140), yet
such power may be restricted by statutory provisions, and nowhere in the Charter
of the City of Tacloban (Republic Act No. 760, enacted long after the effectivity of
the Revised Administrative Code), can be found; any specific provision bestowing
on the Municipal Board the power to impose tax or fees of any kind on goods,
merchandise or commodities destined to be exported from that City to other
parts of the country. Therefore, Section 2287 of the Revised Administrative Code
aforequoted, which takes away from the municipal council (or board) the power
to impose export taxes, remains to be the rule on the matter. While it is true
that Section 14 (e) of Republic Act No. 760 confers on the Municipal Board the
power

(e) To fix the tariff of fees and charges for all services rendered by the city, or any
of its department, branches or officials,
a close scrutiny of the ordinances complained of reveals that the fees therein
imposed are not by reason of the services performed by the Mayor or the
Veterinary Officer, but as an imposition on every head of the specified animals to
be transported. The fact that the ordinances in question make no reference to
the purpose for which they were enacted, and that such purpose was to
preserve the public health or welfare of the residents.and people of the City of
Tacloban is a clear indication that leads Us to believe that the fees exacted were
not as "a regulatory measure in the: exercise of its police power, but for the
purpose of raising revenue under the guise of license or inspection fees.

In order that an act or ordinance imposing an excise or license tax may be

sustained as a valid exercise of the police .power, it must be intended to promote
or be sufficiently related to the public health, morals, safety or welfare. An act
or ordinance imposing a license or license tax under the police power as a means
of regulation .is valid only when it is within the limits of such power and is
intended for regula- tion, otherwise, it is invalid as where the license or tax is
unnecessarily imposed on an occupation or business not inherently subject to
police regulation (Southwest Utility Ice Co. vs. Liebmann, 52 P. 2d 349), for an
act' or ordinance imposing a license or license tax for revenue purposes, under
the guise of a police or regulatory measure, is invalid (Southern Fruit Co. vs.
Porter, 199 S.E. 537).

WHEREFORE and on the strength of the foregoing considerations, the decision

appealed from is hereby affirmed, without pronouncement as to costs.

IT IS SO ORDERED.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., and Endencia, JJ., concur.

THIRD DIVISION

[G.R. No. 152492. October 16, 2003]

PALMA DEVELOPMENT CORPORATION, petitioner, vs. MUNICIPALITY OF

MALANGAS, ZAMBOANGA DEL SUR, respondent.

DECISION
PANGANIBAN, J.:

In accordance with the Local Government Code of 1991, a municipal

ordinance imposing fees on goods that pass through the issuing municipalitys
territory is null and void.

The Case

The Petition for Review[1]before us assails the August 31, 2001 Decision[2]and
the February 6, 2002 Resolution[3]of the Court of Appeals (CA) in CA-GR CV No.
56477. The dispositive portion of the challenged Decision reads as follows:

UPON THE VIEW WE TAKE OF THIS CASE, THUS, the assailed Decision
is VACATED and SET ASIDE, and this case is ordered REMANDED to the court a
quo for the reception of evidence of the parties on the matter or point delineated
in the final sentence above-stated.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

 The Facts

The facts are undisputed. Petitioner Palma Development Corporation is

engaged in milling and selling rice and corn to wholesalers in Zamboanga City. It
uses the municipal port of Malangas,Zamboanga del Sur as transshipment point
for its goods. The port, as well as the surrounding roads leading to it, belong to
and are maintained by the Municipality of Malangas, Zamboanga del Sur.
On January 16, 1994, the municipality passed Municipal Revenue Code No. 09,
Series of 1993, which was subsequently approved by
the Sangguniang Panlalawigan of Zamboanga del Sur in Resolution No. 1330
dated August 4, 1994. Section 5G.01 of the ordinance reads:

Section 5G.01. Imposition of fees. There shall be collected service fee for its use of
the municipal road[s] or streets leading to the wharf and to any point along the
shorelines within the jurisdiction of the municipality and for police surveillance on
all goods and all equipment harbored or sheltered in the premises of the wharf
and other within the jurisdiction of this municipality in the following schedule:

a) Vehicles and Equipment: rate of fee

1. Automatic per unit P10.00

2. Ford Fiera P10.00

3. Trucks P10.00

xxxxxxxxx

b) Other Goods, Construction Material products:

1. Bamboo craft P20.00

2. Bangus/Kilo 0.30

xxxxxxxxx

41. Rice and corn grits/sack 0.50[5]

 Accordingly, the service fees imposed by Section 5G.01 of the ordinance was
paid by petitioner under protest. It contended that under Republic Act No. 7160,
otherwise known as the Local Government Code of 1991, municipal governments
did not have the authority to tax goods and vehicles that passed through their
jurisdictions. Thereafter, before the Regional Trial Court (RTC) of Pagadian City,
petitioner filed against the Municipality of Malangas on November 20, 1995, an
action for declaratory relief assailing the validity of Section 5G.01 of the municipal
ordinance.
On the premise that the case involved the validity of a municipal ordinance,
the RTC directed respondent to secure the opinion of the Office of the Solicitor
General. The trial court likewise ordered that the opinions of the Departments of
Finance and of Justice be sought. As these opinions were still unavailable as
of October 17, 1996, petitioners counsel filed, without objection from
respondent, a Manifestation seeking the submission of the case for
the RTCs decision on a pure question of law.
In due time, the trial court rendered its November 13, 1996 Decision declaring
the entire Municipal Revenue Code No. 09 as ultra vires and, hence, null and void.

Ruling of the Court of Appeals

The CA held that local government units already had revenue-raising powers
as provided for under Sections 153 and 155 of RA No. 7160. It ruled as well that
within the purview of these provisions -- and therefore valid -- is Section 5G.01,
which provides for a service fee for the use of the municipal road or streets
leading to the wharf and to any point along the shorelines within the jurisdiction
of the municipality and for police surveillance on all goods and all equipment
harbored or sheltered in the premises of the wharf and other within the
jurisdiction of this municipality.
However, since both parties had submitted the case to the trial court for
decision on a pure question of law without a full-blown trial on the merits, the CA
could not determine whether the facts of the case were within the ambit of
the aforecited sections of RA No. 7160. The appellate court ruled that petitioner
still had to adduce evidence to substantiate its allegations that the assailed
ordinance had imposed fees on the movement of goods within
the Municipality of Malangas in the guise of a toll fee for the use of municipal
roads and a service fee for police surveillance. Thus, the CA held that the absence
of such evidence necessitated the remand of the case to the trial court.
Hence, this Petition.[6]

Issues

Petitioner raises the following issues for our consideration:

1. Whether or not the Court of Appeals erred when it ordered that the
extant case be remanded to the lower court for reception of evidence.
2. Whether or not the Court of Appeals erred when it ruled that a full
blown trial on the merits is necessary and that plaintiff-appellee, now
petitioner, has to adduce evidence to substantiate its thesis that the
assailed municipal ordinance, in fact, imposes fees on the movement of
goods within the jurisdiction of the defendant and that this imposition
is merely in the guise of a toll fee for the use of municipal roads and
service fee for police surveillance.
3. Whether or not the Court of Appeals erred when it did not rule that the
questioned municipal ordinance is contrary to the provisions of R.A. No.
7160 or the Local Government Code of the Philippines.[7]
In brief, the issues boil down to the following: 1) whether Section 5G.01 of
Municipal Revenue Code No. 09 is valid; and 2) whether the remand of the case
to the trial court is necessary.

The Courts Ruling

The Petition is meritorious.

First Issue:
Validity of the Imposed Fees

Petitioner argues that while respondent has the power to tax or impose fees
on vehicles using its roads, it cannot tax the goods that are transported by the
vehicles. The provision of the ordinance imposing a service fee for police
surveillance on goods is allegedly contrary to Section 133(e) of RA No. 7160,
which reads:

Section 133. Common Limitations on the Taxing Powers of Local Government

Units. Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:

xxxxxxxxx

e) Taxes, fees and charges and other impositions upon goods carried into and out
of, or passing through, the territorial jurisdictions of local government units in the
guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees
or charges in any form whatsoever upon such goods or merchandise;

On the other hand, respondent maintains that the subject fees are intended
for services rendered, the use of municipal roads and police surveillance. The fees
are supposedly not covered by the prohibited impositions under Section 133(e) of
RA No. 7160.[8] It further contends that it was empowered by the express
mandate of Sections 153 and 155 of RA No. 7160 to enact Section 5G.01 of the
ordinance. The pertinent provisions of this statute read as follows:

Section 153. Service Fees and Charges. -- Local government units may impose and
collect such reasonable fees and charges for services rendered.

xxxxxxxxx

Section 155. Toll Fees or Charges. -- The sanggunian concerned may prescribe the
terms and conditions and fix the rates for the imposition of toll fees or charges for
the use of any public road, pier or wharf, waterway, bridge, ferry or
telecommunication system funded and constructed by the local government unit
concerned: Provided, That no such toll fees or charges shall be collected from
officers and enlisted men of the Armed Forces of the Philippines and members of
the Philippine National Police on mission, post office personnel delivering mail,
physically-handicapped, and disabled citizens who are sixty-five (65) years or
older.
When public safety and welfare so requires, the sanggunian concerned may
discontinue the collection of the tolls, and thereafter the said facility shall be free
and open for public use.

Respondent claims that there is no proof that the P0.50 fee for every sack of
rice or corn is a fraudulent legislation enacted to subvert the limitation imposed
by Section 133(e) of RA No. 7160.Moreover, it argues that allowing petitioner to
use its roads without paying the P0.50 fee for every sack of rice or corn would
contravene the principle of unjust enrichment.
By express language of Sections 153 and 155 of RA No. 7160, local
government units, through their Sanggunian, may prescribe the terms and
conditions for the imposition of toll fees or charges for the use of any public road,
pier or wharf funded and constructed by them. A service fee imposed on vehicles
using municipal roads leading to the wharf is thus valid. However, Section 133(e)
of RA No. 7160 prohibits the imposition, in the guise of wharfage, of fees -- as well
as all other taxes or charges in any form whatsoever -- on goods or
merchandise. It is therefore irrelevant if the fees imposed are actually for police
surveillance on the goods, because any other form of imposition on goods passing
through the territorial jurisdiction of the municipality is clearly prohibited by
Section 133(e).
Under Section 131(y) of RA No. 7160, wharfage is defined as a fee assessed
against the cargo of a vessel engaged in foreign or domestic trade based on
quantity, weight, or measure received and/or discharged by vessel. It is apparent
that a wharfage does not lose its basic character by being labeled as a service fee
for police surveillance on all goods.
Unpersuasive is the contention of respondent that petitioner would unjustly
be enriched at the formers expense. Though the rules thereon apply equally well
to the government,[9]for unjust enrichment to be deemed present, two conditions
must generally concur: (a) a person is unjustly benefited, and (b) such benefit is
derived at anothers expense or damage.[10]
In the instant case, the benefits from the use of the municipal roads and the
wharf were not unjustly derived by petitioner. Those benefits resulted from the
infrastructure that the municipality was mandated by law to provide.[11] There is
no unjust enrichment where the one receiving the benefit has a legal right or
entitlement thereto, or when there is no causal relation between ones
enrichment and the others impoverishment.[12]
 Second Issue:
Remand of the Case

Petitioner asserts that the remand of the case to the trial court for further
reception of evidence is unnecessary, because the facts are undisputed by both
parties. It has already been clearly established, without need for further evidence,
that petitioner transports rice and corn on board trucks that pass through the
municipal roads leading to the wharf. Under protest, it paid the service fees, a
fact that respondent has readily admitted without qualification.
Respondent, on the other hand, is silent on the issue of the remand of the
case to the trial court. The former merely defends the validity of the ordinance,
arguing neither for nor against the remand.
We rule against the remand. Not only is it frowned upon by the Rules of
Court;[13]it is also unnecessary on the basis of the facts established by the
admissions of the parties. Besides, the fact sought to be established with the
reception of additional evidence is irrelevant to the due settlement of the case.
The pertinent portion of the assailed CA Decision reads:

To be stressed is the fact that local government units now have the following
common revenue raising powers under the Local Government Code:

Section 153. Service Fees and Charges. -- Local government units may impose and
collect such reasonable fees and charges for services rendered.

xxxxxxxxx

Section 155. Toll Fees or Charges. -- The Sanggunian concerned may prescribe the
terms and conditions and fix the rates for the imposition of toll fees or charges for
the use of any public road, pier or wharf, waterway, bridge, ferry or
telecommunication system funded and constructed by the local government unit
concerned: Provided, That no such toll fees or charges shall be collected from
officers and enlisted men of the Armed Forces of the Philippines and members of
the Philippine National Police on mission, post office personnel delivering mail,
physically-handicapped, and disabled citizens who are sixty-five (65) years or
older.
When public safety and welfare so requires, the Sanggunian concerned may
discontinue the collection of the tolls, and thereafter the said facility shall be free
and open for public use. x x x

As we see it, the disputed municipal ordinance, which provides for a service
fee for the use of the municipal road or streets leading to the wharf and to any
point along the shorelines within the jurisdiction of the municipality and for police
surveillance on all goods and all equipment harbored or sheltered in the premises
of the wharf and other within the jurisdiction of this municipality, seems to fall
within the compass of the above cited provisions of R.A. No. 7160. As elsewhere
indicated, the parties in this case, nonetheless, chose to submit the issue to the
Trial Court on a pure question of law, without a full-blown trial on the merits:
consequently, we are not prepared to say, at this juncture, that the facts of the
case inevitably call for the application, and/or that these make out a clear-cut
case within the ambit and purview, of the aforecited section. The plaintiff, thus,
has to adduce evidence to substantiate its thesis that the assailed municipal
ordinance, in fact, imposes fees on the movement of goods within the jurisdiction
of the defendant, and that this imposition is merely in the guise of a toll fee for
the use of municipal roads and service fee for police surveillance. Competent
evidence upon this score must, thus, be presented.[14]

We note that Section 5G.01 imposes two types of service fees: 1) one for
the use of the municipal roads and 2) another for police surveillance on all goods
and equipment sheltered in the premises of the wharf. The amount of service
fees, however, is based on the type of vehicle that passes through the road and
the type of goods being transported.
While both parties admit that the service fees imposed are for the use of the
municipal roads, petitioner maintains that the service fee for police surveillance
on goods harbored on the wharf is in the guise of a wharfage,[15]a prohibited
imposition under Section 133(e) of RA No. 7160.
Thus, the CA held that the case should be remanded to the trial court in order
to resolve this factual dispute. The appellate court noted that under Section 155
of RA No. 7160, municipalities apparently now have the power to impose fees for
the use of municipal roads.
Nevertheless, a remand is still unnecessary even if the service fee charged
against the goods are for police surveillance, because Section 133(e) of RA No.
7160 expressly prohibits the imposition of all other taxes, fees or charges in any
form whatsoever upon the merchandise or goods that pass through the territorial
jurisdiction of local government units. It is therefore immaterial to the instant
case whether the service fee on the goods is for police surveillance or not, since
the subject provision of the revenue ordinance is invalid. Reception of further
evidence to establish this fact would not legalize the imposition of such fee in any
way.
Furthermore, neither party disputes any of the other material facts of the
case. From their respective Briefs before the CA and their Memoranda before this
Court, they do not dispute the fact that petitioner, from its principal place of
business, transports rice and corn on board trucks bound for respondents
wharf. The trucks traverse the municipal roads en route to the wharf, where the
sacks of rice and corn are manually loaded into marine vessels bound
for Zamboanga City. Likewise undisputed is the fact that respondent imposed and
collected fees under the ordinance from petitioner.The former admits that it has
been collecting, in addition to the fees on vehicles, P0.50 for every sack of rice or
corn that the latter has been shipping through the wharf.[16]
The foregoing allegations are formal judicial admissions that are conclusive
upon the parties making them. They require no further proof in accordance with
Section 4 of Rule 129 of the Rules of Court, which reads:

SEC. 4. Judicial admissions. An admission, verbal or written, made by a party in

the course of the proceedings in the same case, does not require proof. The
admission may be contradicted only by showing that it was made through
palpable mistake or that no such admission was made.

Judicial admissions made by parties in the pleadings, in the course of the trial,
or in other proceedings in the same case are conclusive. No further evidence is
required to prove them. Moreover, they cannot be contradicted unless it is shown
that they have been made through palpable mistake, or that they have not been
made at all.[17]
WHEREFORE, the Petition is GRANTED. The assailed Decision and Resolution
of the Court of Appeals are hereby SET ASIDE. The imposition of a service fee for
police surveillance on all goods harbored or sheltered in the premises of the
municipal port of Malangas under Sec. 5G.01 of the Malangas Municipal Revenue
Code No. 09, series of 1993, is declared NULL AND VOID for being violative of
Republic Act No. 7160.
 SO ORDERED.
Puno, (Chairman), Sandoval-Gutierrez and Carpio-Morales, JJ., concur.
Corona, J., on leave.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 72841 January 29, 1987

PROVINCE OF CEBU, petitioner,

vs.
HONORABLE INTERMEDIATE APPELLATE COURT and ATTY. PABLO P.
GARCIA, respondents.

GUTIERREZ, JR., J.:

This is a petition to review the decision of the respondent Intermediate Appellate

Court in A.C. G.R. CV No. 66502 entitled "Governor Rene Espina, et. at v. Mayor
Sergio Osmeña, Jr., et. al, Atty. Pablo P. Garcia v. Province of Cebu" 1 affirming
with modification the order of the Court of First Instance of Cebu, Branch VII,
granting respondent Pablo P. Garcia's claim for compensation for services
rendered as counsel in behalf of the respondent Province of Cebu.

The facts of the case are not in dispute. On February 4, 1964, while then
incumbent Governor Rene Espina was on official business in Manila, the Vice-
Governor, Priscillano Almendras and three (3) members of the Provincial Board
enacted Resolution No. 188, donating to the City of Cebu 210 province. owned
lots all located in the City of Cebu, with an aggregate area of over 380 hectares,
and authorizing the Vice-Governor to sign the deed of donation on behalf of the
province. The deed of donation was immediately executed in behalf of the
Province of Cebu by Vice-Governor Almendras and accepted in behalf of the City
of Cebu by Mayor Sergio Osmeña, Jr. The document of donation was prepared
and notarized by a private lawyer. The donation was later approved by the Office
of the President through Executive Secretary Juan Cancio.

According to the questioned deed of donation the lots donated were to be sold by
the City of Cebu to raise funds that would be used to finance its public
improvement projects. The City of Cebu was given a period of one (1) year from
August 15, 1964 within which to dispose of the donated lots.

Upon his return from Manila, Governor Espina denounced as Legal and immoral
the action of his colleagues in donating practically all the patrimonial property of
the province of Cebu, considering that the latter's income was less than one.
fourth (1/4) of that of the City of Cebu.

To prevent the sale or disposition of the lots, the officers and members of the
Cebu Mayor's League (in behalf of their respective municipalities) along with
some taxpayers, including Atty. Garcia, filed a case seeking to have the donation
declared illegal, null and void. It was alleged in the complaint that the plaintiffs
were filing it for and in behalf of the Province of Cebu in the nature of a derivative
suit. Named defendants in the suit were the City of Cebu, City Mayor Sergio
Osmeña, Jr. and the Cebu provincial officials responsible for the donation of the
province-owned lots. The case was docketed as Civil Case No. R-8669 of the Court
of First Instance of Cebu and assigned to Branch VI thereof.

Defendants City of Cebu and City Mayor Osmeña, Jr. filed a motion to dismiss the
case on the ground that plaintiffs did not have the legal capacity to sue.

Subsequently, in an order, dated May, 1965, the court dismissed Case No. R-8669
on the ground that plaintiffs were not the real parties in interest in the case.
Plaintiffs filed a motion for reconsideration of the order of dismissal. This motion
was denied by the Court.

Meanwhile, Cebu City Mayor Sergio Osmeña, Jr. announced that he would borrow
funds from the Philippine National Bank (PNB) and would use the donated lots as
collaterals. In July, 1965, the City of Cebu advertised the sale of an the lots
remaining unsold. Thereupon, Governor Espina, apprehensive that the lots would
be irretrievably lost by the Province of Cebu, decided to go to court. He engaged
the services of respondent Garcia in filing and prosecuting the case in his behalf
and in behalf of the Province of Cebu.
Garcia filed the complaint for the annulment of the deed of donation with an
application for the issuance of a writ of preliminary injunction, which application
was granted on the same day, August 6, 1965.

The complaint was later amended to implead Cebu City Mayor Carlos P. Cuizon as
additional defendant in view of Fiscal Numeriano Capangpangan's manifestation
stating that on September 9, 1965, Sergio Osmeña, Jr. filed his certificate of
Candidacy for senator, his position/office having been assumed by City Mayor
Carlos P. Cuizon.

Sometime in 1972, the Provincial Board passed a resolution authorizing the

Provincial Attorney, Alfredo G. Baguia, to enter his appearance for the Province of
Cebu and for the incumbent Governor, Vice-Governor and members of the
Provincial Board in this case.

On January 30, 1973, Alfredo G. Baguia, Provincial Attorney of the Province of

Cebu, entered his appearance as additional counsel for the Province of Cebu and
as counsel for Governor Osmundo Rama, Vice-Governor Salutario Fernandez and
Board Members Leonardo Enad, Guillermo Legazpi, and Rizalina Migallos.

On January 31, 1973, Atty. Baguia filed a complaint in intervention stating that
intervenors Province of Cebu and Provincial Board of Cebu were joining or uniting
with original plaintiff, former Governor of Cebu, Rene Espina. They adopted his
causes of action, claims, and position stated in the original complaint filed before
the court on August 6, 1965.

On June 25, 1974, a compromise agreement was reached between the province
of Cebu and the city of Cebu. On July 15, 1974, the court approved the
compromise agreement and a decision was rendered on its basis.

On December 4, 1974, the court issued an order directing the issuance of a writ of
execution to implement the decision dated July 15, 1974, to wit:

1. Ordering the City of Cebu to return and deliver to the Province of

Cebu all the lots enumerated in the second paragraph hereof;

2. Ordering the Province of Cebu to pay the amount of One Million

Five Hundred Thousand Pesos (P1,500,000.00) to the City of Cebu for
 and in consideration of the return by the latter to the former of the
aforesaid lots;

3. Declaring the retention by the City of Cebu of the eleven (11) lots
mentioned in paragraph No. 1 of the compromise agreement,
namely, Lot Nos. 1141, 1261, 1268, 1269, 1272, 1273, 917, 646-A,
646A-4-0 and 10107-C;

4. Ordering the City of Cebu or the City Treasurer to turn over to the
Province of Cebu the amount of P187948.93 mentioned in Annex "A"
of the defendants manifestation dated October 21, 1974;

5. Declaring the City of Cebu and an its present and past officers
completely free from liabilities to third persons in connection with
the aforementioned lots, which liabilities if any, shall be assumed by
the Province of Cebu;

6. Ordering the Register of Deeds of the City of Cebu to cancel the

certification of titles in the name of the City of Cebu covering the lots
enumerated in the second paragraph of this order and to issue new
ones in lieu thereof in the name of the Province of Cebu.

For services rendered in Civil Case no. 238-BC, CFI of Cebu, respondent Pablo P.
Garcia filed through counsel a Notice of Attorney's Lien, dated April 14, 1975,
praying that his statement of claim of attorney's lien in said case be entered upon
the records thereof, pursuant to Section 37, Rule 138 of the Rules of Court.

To said notice, petitioner Province of Cebu filed through counsel, its opposition
dated April 23, 1975, stating that the payment of attorney's fees and
reimbursement of incidental expenses are not allowed by law and settled
jurisprudence to be paid by the Province. A rejoinder to this opposition was filed
by private respondent Garcia.

After hearing, the Court of First Instance of Cebu, then presided over by Judge
Alfredo Marigomen, rendered judgment dated May 30, 1979, in favor of private
respondent and against petitioner Province of Cebu, declaring that the former is
entitled to recover attorney's fees on the basis of quantum meruit and fixing the
amount thereof at P30,000.00.
Both parties appealed from the decision to the Court of Appeals. In the case of
private respondent, however, he appealed only from that portion of the decision
which fixed his attorney's fees at P30,000.00 instead of at 30% of the value of the
properties involved in the litigation as stated in his original claim

On October 18, 1985, the Intermediate Appellate Court rendered a decision

affirming the findings and conclusions of the trial court that the private
respondent is entitled to recover attorney's fees but fixing the amount of such
fees at 5% of the market value of the properties involved in the litigation as of the
date of the filing of the claim in 1975. The dispositive portion of the decision
reads:

WHEREFORE, except for the aforementioned modification that the

compensation for the services rendered by the Claimant Atty. Pablo
P. Garcia is fixed at five percent (5%) of the total fair market value of
the lots in question, the order appealed from is hereby affirmed in all
other respects.

Both parties went to the Supreme Court with private respondent questioning the
fixing of his attorney's fees at 5% instead of 30% of the value of the properties in
litigations as prayed for in his claims. However, the private respondent later
withdrew his petition in G.R. No. 72818 with the following explanation:

That after a long and serious reflection and reassessment of his

position and intended course of action and, after seeking the views
of his friends, petitioner has come to the definite conclusion that
prosecuting his appeal would only result in further delay in the final
disposition of his claim (it has been pending for the last 10 years 4 in
the CFI and 6 in the Court of Appeals, later Intermediate Appellate
Court) and that it would be more prudent and practicable to accept
in full the decision of the Intermediate Appellate Court.

Hence, only the petition of the Province of Cebu is pending before this Court.

The matter of representation of a municipality by a private attorney has been

settled in Ramos v. Court of Appeals(108 SCRA 728). Collaboration of a private law
firm with the fiscal and the municipal attorney is not allowed. Section 1683 of the
Revised Administrative Code provides:
 .Section 1683. Duty of fiscal to represent provinces and provincial
subdivisions in litigation. — The provincial fiscal shall represent the
province and any municipality, or municipal district thereof in any
court, except in cases whereof original jurisdiction is vested in the
Supreme Court or in cases where the municipality, or municipal
district in question is a party adverse to the provincial government or
to some other municipality, or municipal district in the same
province. When the interests of a provincial government and of any
political division thereof are opposed, the provincial fiscal shall act on
behalf of the province.

When the provincial fiscal is disqualified to serve any municipality or

other political subdivision of a province, a special attorney may be
employed by its council

The above provision, complemented by Section 3 of the Local Autonomy Law, is

clear in providing that only the provincial fiscal and the municipal attorney can
represent a province or municipality in its lawsuits. The provision is mandatory.
The municipality's authority to employ a private lawyer is expressly limited only to
situations where the provincial fiscal is disqualified to represent it (De Guia v. The
Auditor General 44 SCRA 169; Municipality of Bocaue, et. al. v. Manotok, 93 Phil.
173; Enriquez, Sr., v. Honorable Gimenez, 107 Phil. 932) as when he represents
the province against a municipality.

The lawmaker, in requiring that the local government should be represented in its
court cases by a government lawyer, like its municipal attorney and the provincial
fiscal intended that the local government should not be burdened with the
expenses of hiring a private lawyer. The lawmaker also assumed that the interests
of the municipal corporation would be best protected if a government lawyer
handles its litigations. It is to be expected that the municipal attorney and the
fiscal would be faithful and dedicated to the corporation's interests, and that, as
civil service employees, they could be held accountable for any misconduct or
dereliction of duty (See Ramos v. Court of Appeals, supra).

However, every rule is not without an exception, Ibi quid generaliter conceditur;
inest haec exceptio, si non aliquid sit contra jus fasque (Where anything is granted
generally, this exception is implied; that nothing shall be contrary to law and
right). Indeed, equity, as well as the exceptional situation facing us in the case at
bar, require a departure from the established rule.

The petitioner anchors its opposition to private respondent's claim for

compensation on the grounds that the employment of claimant as counsel for the
Province of Cebu by then Governor Rene Espina was unauthorized and violative of
Section 1681 to 1683 in relation to Section 1679 of the Revised Administrative
Code and that the claim for attorney's fees is beyond the purview of Section 37,
Rule 138 of the Rules of Court.

It is argued that Governor Espina was not authorized by the Provincial Board,
through a board resolution, to employ Atty. Pablo P. Garcia as counsel of the
Province of Cebu.

Admittedly, this is so.

However, the circumstances obtaining in the case at bar are such that the rule
cannot be applied. The Provincial Board would never have given such
authorization. The decision of the respondent court elucidates the matter thus:

... The provisions of Sections 1681 to 1683 of the Revised

Administrative Code contemplate a normal situation where the
adverse party of the province is a third person as in the case
of Enriquez v. Auditor General, 107 Phil 932. In the present case, the
controversy involved an intramural fight between the Provincial
Governor on one hand and the members of the Provincial Board on
the other hand. Obviously it is unthinkable for the Provincial Board to
adopt a resolution authorizing the Governor to employ Atty. Garcia
to act as counsel for the Province of Cebu for the purpose of filing
and prosecuting a case against the members to the same Provincial
Board According to the claimant Atty. Garcia, how can Governor
Espina be expected to secure authority from the Provincial Board to
employ claimant as counsel for the Province of Cebu when the very
officials from whom authority is to be sought are the same officials to
be sued, It is simply impossible that the Vice-Governor and the
members of the Provincial Board would pass a resolution authorizing
Governor Espina to hire a lawyer to file a suit against themselves.

xxx xxx xxx

 Under Section 2102 of the Revised Administrative Code it is the
Provincial Board upon whom is vested the authority "to direct, in its
discretion, the bringing or defense of civil suits on behalf of the
Provincial Governor ___." Considering that the members of the
Provincial Board are the very ones involved in this case, they cannot
be expected to directed the Provincial Fiscal the filing of the suit on
behalf of the provincial government against themselves. Moreover,
as argued by the claimant, even if the Provincial Fiscal should side
with the Governor in the bringing of this suit, the Provincial Board
whose members are made defendants in this case, can simply
frustrate his efforts by directing him to dismiss the case or by
refusing to appropriate funds for the expenses of the litigation.

... Consequently, there could have been no occasion for the exercise
by the Provincial Fiscal of his powers and duties since the members
of the Provincial Board would not have directed him to file a suit
against them.

A situation obtains, therefore, where the Provincial Governor, in behalf of the

Province of Cebu, seeks redress against the very members of the body, that is, the
Provincial Board, which, under the law, is to provide it with legal assistance. A
strict application of the provisions of the Revise Administrative Code on the
matter would deprive the plaintiffs in the court below of redress for a valid
grievance. The provincial board authorization required by law to secure the
services of special counsel becomes an impossibility. The decision of the
respondent court is grounded in equity — a correction applied to law, where on
account of the general comprehensiveness of the law, particular exceptions not
being provided against, something is wanting to render it perfect.

It is also argued that the employment of claimant was violative of sections 1681
to 1683 of the Revised Administrative Code because the Provincial Fiscal who was
the only competent official to file this case was not disqualified to act for the
Province of Cebu.

Respondent counsel's representation of the Province of Cebu became necessary

because of the Provincial Board's failure or refusal to direct the bringing of the
action to recover the properties it had donated to the City of Cebu. The Board
more effectively disqualified the Provincial Fiscal from representing the Province
of Cebu when it directed the Fiscal to appear for its members in Civil Case No. R-
8669 filed by Atty. Garcia, and others, to defend its actuation in passing and
approving Provincial Board Resolution No. 186. The answer of the Provincial Fiscal
on behalf of the Vice-Governor and the Provincial Board members filed in Civil
Case No. R-8669; (Exhibit "K") upholds the validity and legality of the donation.
How then could the Provincial Fiscal represent the Province of Cebu in the suit to
recover the properties in question? How could Governor Espina be represented
by the Provincial Fiscal or seek authorization from the Provincial Board to employ
special counsel? Nemo tenetur ad impossibile (The law obliges no one to perform
an impossibility).lwphl@itç Neither could a prosecutor be designated by the
Department of Justice. Malacañang had already approved the questioned
donation

Anent the question of liability for respondent counsel's services, the general rule
that an attorney cannot recover his fees from one who did not employ him or
authorize his employment, is subject to its own exception.

Until the contrary is clearly shown an attorney is presumed to be acting under

authority of the litigant whom he purports to represent (Azotes v. Blanco, 78 Phil.
739) His authority to appear for and represent petitioner in litigation, not having
been questioned in the lower court, it will be presumed on appeal that counsel
was properly authorized to file the complaint and appear for his client. (Republic
v. Philippine Resources Development Corporation, 102 Phil. 960) Even where an
attorney is employed by an unauthorized person to represent a client, the latter
will be bound where it has knowledge of the fact that it is being represented by
an attorney in a particular litigation and takes no prompt measure to repudiate
the assumed authority. Such acquiescence in the employment of an attorney as
occurred in this case is tantamount to ratification (Tan Lua v. O' Brien, 55 Phil. 53).
The act of the successor provincial board and provincial officials in allowing
respondent Atty. Pablo P. Garcia to continue as counsel and in joining him in the
suit led the counsel to believe his services were still necessary.

We apply a rule in the law of municipal corporations: "that a municipality may

become obligated upon an implied contract to pay the reasonable value of the
benefits accepted or appropriated by it as to which it has the general power to
contract. The doctrine of implied municipal liability has been said to apply to all
cases where money or other property of a party is received under such
circumstances that the general law, independent of express contract implies an
obligation upon the municipality to do justice with respect to the same." (38 Am
Jur. Sec. 515, p. 193):

The obligation of a municipal corporation upon the doctrine of an

implied contract does not connote an enforceable obligation. Some
specific principle or situation of which equity takes cognizance must
be the foundation of the claim. The principle of liability rests upon
the theory that the obligation implied by law to pay does not
originate in the unlawful contract, but arises from considerations
outside it. The measure of recovery is the benefit received by the
municipal corporation. The amount of the loan, the value of the
property or services, or the compensation specified in the contract, is
not the measure. If the price named in the invalid contract is shown
to be entirely fair and reasonable not only in view of the labor done,
but also in reference to the benefits conferred, it may be taken as the
true measure of recovery.

The petitioner can not set up the plea that the contract was ultra vires and still
retain benefits thereunder. Having regarded the contract as valid for purposes of
reaping some benefits, the petitioner is estopped to question its validity for the
purposes of denying answerability.

The trial court discussed the services of respondent Garcia as follows:

... Thus because of his effort in the filing of this case and in securing
the issuance of the injunction preventing the City of Cebu and Sergio
Osmeña, Jr., from selling or disposing the lots to third parties, on the
part of the members of the Provincial Board from extending the date
of the automatic reversion beyond August 15, 1965, on the part of
the Register of Deeds — from effecting the transfer of title of any of
the donated lots to any vendee or transferee, the disposition of these
lots by the City of Cebu to third parties was frustrated and thus:
saved these lots for their eventual recovery by the province of Cebu.

Actually it was Governor Espina who filed the case against Cebu City and Mayor
Osmeña. Garcia just happened to be the lawyer, Still Atty. Garcia is entitled to
compensation. To deny private respondent compensation for his professional
services would amount to a deprivation of property without due process of law
(Cristobal v. Employees' Compensation Commission, 103 SCRA 329).

The petitioner alleges that although they do not deny Atty. Garcia's services for
Governor Espina (who ceased to be such Governor of Cebu on September 13,
1969) and the original plaintiffs in the case, "it cannot be said with candor and
fairness that were it not for his services the lots would have already been lost to
the province forever, because the donation itself he was trying to enjoin and
annul in said case was subject to a reversion clause under which lots remaining
undisposed of by the City as of August 15, 1965 automatically reverted to the
province and only about 17 lots were disposed of by August 15, 1965." We quote
respondent counsel's comment with approval:

xxx xxx xxx

While it is true that the donation was subject to a reversion clause,

the same clause gave the Provincial Board the discretion to extend
the period of reversion beyond August 15, 1965 (see paragraph 3 of
donation).

With the known predisposition of the majority of the members of the

Provincial Board, there would have been no impediment to the
extension of the reversion date to beyond August 15, 1965. Once the
date of reversion is extended, the disposition of an the donated lots
would be only a matter of course.

We have carefully reviewed the records of this case and conclude that 30% or
even 5% of properties already worth (P120,000,000.00) in 1979 as compensation
for the private respondent's services is simply out of the question. The case
handled by Atty. Garcia was decided on the basis of a compromise agreement
where he no longer participated. The decision was rendered after pre-trial and
without any hearing on the merits.

The factual findings and applicable law in this petition are accurately discussed in
the exhaustive and well-written Order of then Trial Judge, now Court of Appeals
Justice Alfredo Marigomen We agree with his determination of reasonable fees
for the private lawyer on the basis of quantum meruit. The trial court fixed the
compensation at P30,000.00 and ordered reimbursement of actual expenses in
the amount of P289.43.
WHEREFORE, the questioned October 18, 1985 decision of the Intermediate
Appellate Court is set aside. The Order of the Trial Court dated May 30, 1979 is
REINSTATED.

SO ORDERED.

Fernan (Chairman), Alampay, Paras and Padilla JJ., concur.

Bidin J., took no part

. THIRD DIVISION

G.R. No. 187631, July 08, 2015

BATANGAS CITY, MARIA TERESA GERON, IN HER CAPACITY AS CITY TREASURER

OF BATANGAS CITY AND TEODULFO A. DEGUITO, IN HIS CAPACITY AS CITY
LEGAL OFFICER OF BATANGAS CITY, Petitioners, v. PILIPINAS SHELL PETROLEUM
CORPORATION, Respondent.

DECISION

PERALTA, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court assailing the Decision1 dated January 22, 2009 and Resolution2 dated
April 13, 2009 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 350
which affirmed in toto the Amended Decision3 dated July 31, 2007 and
Resolution4 dated November 21, 2007 of the CTA Second Division in CTA AC Case
No. 10.

The facts follow.

Petitioner Batangas City is a local government unit (LGU) with the capacity to sue
and be sued under its Charter and Section 22(a)(2) of the Local Government Code
(LGC) of 1991. Petitioners Teodulfo A. Deguito and Benjamin E. Pargas are the City
Legal Officer and City Treasurer, respectively, of Batangas City.

Respondent Pilipinas Shell Petroleum Corporation operates an oil refinery and

depot in Tabagao, Batangas City, which manufactures and produces petroleum
products that are distributed nationwide.

In 2002, respondent was only paying the amount of P98,964.71 for fees and other
charges which include the amount of P1,180.34 as Mayor's Permit. However, on
February 20, 2001, petitioner Batangas City, through its City Legal Officer, sent a
notice of assessment to respondent demanding the payment of P92,373,720.50
and P312,656,253.04 as business taxes for its manufacture and distribution of
petroleum products. In addition, respondent was also required and assessed to
pay the amount of P4,299,851.00 as Mayor's Permit Fee based on the gross sales
of its Tabagao Refinery. The assessment was allegedly pursuant of Section 134 of
the LGC of 1991 and Section 23 of its Batangas City Tax Code of 2002.

In response, respondent filed a protest on April 17, 2002 contending among

others that it is not liable for the payment of the local business tax either as a
manufacturer or distributor of petroleum products. It further argued that the
Mayor's Permit Fees are exorbitant, confiscatory, arbitrary, unreasonable and not
commensurable with the cost of issuing a license.

On May 13, 2002, petitioners denied respondent's protest and declared that
under Section 14 of the Batangas City Tax Code of 2002, they are empowered to
withhold the issuance of the Mayor's Permit for failure of respondent to pay the
business taxes on its manufacture and distribution of petroleum products.

On June 17, 2002, respondent filed a Petition for Review pursuant to Section 195
of the LGC of 1991 before the Regional Trial Court (RTC) of Batangas City.

In its petition, respondent maintained that petitioners have no authority to

impose the said taxes and fees, and argued that the levy of local business taxes on
the business of manufacturing and distributing gasoline and other petroleum
products is contrary to law and against national policy. It further contended that
the Mayor's Permit Fee levied by petitioners were unreasonable and confiscatory.

In its Answer, petitioners contended that the City of Batangas can legally impose
taxes on the business of manufacturing and distribution of petroleum products,
including the Mayor's Permit Fees upon respondent.

Trial thereafter ensued.

In the interim, respondent paid under protest the Mayor's Permit Fees for the
year 2003 amounting to P774,840.50 as manufacturer and P3,525,010.50 as
distributor. When respondent applied for the issuance of the Mayor's Permit in
2004, it offered the amount of PI50,000.00 as compromise Mayor's Permit Fee
without prejudice to the outcome of the case then pending, which was rejected
by petitioners.

On October 29, 2004, the RTC of Batangas City rendered a Decision5 sustaining
the imposition of business taxes by petitioners upon the manufacture and
distribution of petroleum products by respondent. However, the RTC withheld the
imposition of Mayor's Permit Fee in deference to the provisions of Section 147 of
the LGC, in relation to Section 143(h) of the same Code, which imposed a limit to
the power of petitioners to collect the said business taxes. The fallo of said
decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, in view of the foregoing premises, this Court hereby renders
judgment as follows:

1. The taxes on the privilege of engaging in the business of manufacturing,

distribution or dealing in petroleum products in the amount of
P92,373,750.50 and P312,656,253.04, respectively, imposed by Batangas
City on Pilipinas Shell, is VALID.

2. Declaring the Mayor's Permit Fee in the amount of P4,299,851.00 based on

gross receipts/sales as grossly excessive and unreasonable considering the
aforesaid business taxes.

ACCORDINGLY, THE PETITIONER, PILIPINAS SHELL PETROLEUM CORPORATION

(PSPC), IS HEREBY ORDERED TO PAY THE AMOUNT OF PHP405,030,003.54 AS TAX
ON ITS BUSINESS OF ENGAGING IN THE MANUFACTURE AND DISTRIBUTION OF
PETROLEUM PRODUCTS, WHILE THE ASSESSMENT OF PHP4,299,851.00 AS
MAYOR'S PERMIT FEE IS HEREBY ORDERED REVOKED WITHOUT PREJUDICE TO ITS
MODIFICATION BY THE RESPONDENTS, BATANGAS CITY, ET AL.

SO ORDERED.6
Unsatisfied, respondent filed a "Motion for Partial Reconsideration."

In an Order7 dated February 28, 2005, the RTC denied respondent's motion for
lack of merit.

Hence, respondent filed a Petition for Review with Extremely Urgent Application
for a Temporary Restraining Order and/or a Writ of Preliminary Injunction with
the CTA Second Division on April 27, 2005.

Considering the urgency of the resolution of respondent's Application for the

Issuance of a Writ of Preliminary Injunction, the CTA Second Division granted the
said application and ordered petitioners to hold in abeyance the collection of the
questioned manufacturer and distributor's taxes, conditioned upon the filing of
respondent of a surety bond in the amount of P500,000,000.00.

In a Decision dated June 21, 2007, the CTA Second Division granted respondent's
petition. It held that respondent is not subject to the business taxes on the
manufacture and distribution of petroleum products because of the express
limitation provided under Section 133(h) of the LGC. The dispositive portion of
said Decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the judgment/order of the RTC Branch II of
Batangas City is hereby MODIFIED. As to the business taxes on the manufacture
and distribution of petroleum products, We find the [respondent] not liable for
the same. As to the Mayor's permit, We find that it is excessive. Accordingly, the
[petitioner] is hereby (a) declared legally proscribed from imposing business taxes
on the manufacture and distribution of petroleum products and (b) to refund in
the form of tax credit the excessive mayor's permit in the amount of THREE
MILLION FIVE HUDNRED TWENTY-FIVE THOUSAND TEN PESOS and FIFTY
CENTAVOS (P3,525,010.50)

SO ORDERED.8
On July 13, 2007, respondent filed a "Motion for Clarification" on the exact
amount to be refunded by petitioners as regards the Mayor's Permit Fees. After a
perusal of the "Motion for Clarification," the CTA Second Division found the
motion partly meritorious. Thus:chanRoblesvirtualLawlibrary
Indeed, there is a discrepancy in the amount to be refunded and to clarify, the
amount should be P3,870,860.00 as written in the body of the decisions as
follows:chanRoblesvirtualLawlibrary
Since [petitioners] failed to modify the computation of the mayor's permit fee
and based on justice and equity, [respondent] should be refunded with the
mayor's permit fees ordered revoked by the court a quo.

The details of the additional amount of P4,299,851.00 mayor's permit fees are as
follows:chanRoblesvirtualLawlibrary
Manufacturer Distributor
Mayor's Permit Fee P704,305.00 P3,166,555.00
License Fee 70,535.50
Prof. Fee Res/Bus 25,000.00 Fire Insp. Fee 1,000.00
Occ./Prof.Tax San Permit & San Insp. Fee 12,000.00
Fire Code Fee 320,455.00
Total Amount P774,840.50 P3,525,010.50
The amount to be refunded is not the full amount of P4,299,851.00 but the
excessive mayor's permit for manufacturing and distributing in the amount of
P704,305.00 and P3,166,555.00, respectively, or in the total amount of
P3,870,860.00.
To conform to this aforequoted pronouncement, the dispositive portion of the
assailed decision should be amended so that the exact amount of the Mayor's
Permit Fees to be refunded be changed from P3,525,010.50 to P3,870.860.00.

Section 2, Rule 36 of the Rules of Court reads as

follows:chanRoblesvirtualLawlibrary
SEC. 2. Entry of Judgments and final orders.- If no appeal or motion for new trial
or reconsideration is filed within the time provided in these Rules, the judgment
or final order shall forthwith be entered by the clerk in the book of entries of
judgments. The date of finality of the judgment or final order shall be deemed to
be the date of its entry.
In this case, PSPC received the Decision on June 28, 2007 and it filed its motion for
clarification (treated as a motion for reconsideration) on July 13, 2007 which is
within the period allowed by law. In effect, our Decision has not yet become final
and executory. Hence, our Decision may be amended.

Moreover, pursuant to Section 5(g), Rule 135 of the Revised Rules of Court that
every court shall have the power to amend or control its process and orders so as
to make them conformable to law and justice, the Second Division of this Court
resolves to amend its Decision dated June 21, 2007 by making the necessary
corrections.
WHEREFORE, in view of the foregoing, [respondent] 's Motion for Clarification is
partly GRANTED. Accordingly, the dispositive portion of this Court's Decision
dated June 21, 2007 is hereby AMENDED as follows:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the judgment/order of the RTC Branch II of
Batangas City is hereby MODIFIED. As to the business taxes on the manufacture
and distribution of petroleum products, We find the [respondent] not liable for
the same. As to the mayor's permit, We find that it is excessive. Accordingly, the
[petitioner] is hereby (a) declared legally proscribed from imposing business taxes
on the manufacture and distribution of petroleum products and (b) to refund in
the form of tax credit the excessive mayor's permit in the amount of THREE
MILLION EIGHT HUNDRED SEVENTY THOUSAND EIGHT HUDNRED SIXTY PESOS
(P3,870,860.00)

SO ORDERED.
SO ORDERED.9
Petitioners filed a motion for reconsideration against said decision but the same
was denied by the CTA Second Division in a Resolution dated November 21, 2007.

Not satisfied, petitioners filed a Petition for Review praying for the reversal of the
Amended Decision and Resolution of the CTA Second Division.

On January 22, 2009, the CTA En Banc promulgated a Decision affirming in

toto the Amended Decision of the CTA Second Division. The CTA En Banc found no
cogent reason to disturb the findings and conclusions of the CTA Second Division.
The dispositive portion of said Decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and
DISMISSED for lack of merit. Accordingly, the July 31, 2007 Amended Decision and
November 21, 2007 Resolution of the CTA Second Division in CTA AC Case No. 10
entitled, "PILIPINAS SFIELL PETROLEUM CORPORATION, petitioner vs. BATANGAS
CITY, BENJAMIN E. PARGAS in his capacity as CITY TREASURER and TEODULFO A.
DEGUITO in his capacity as CITY LEGAL OFFICER OF BATANGAS CITY, [petitioners],"
are hereby AFFIRMED in toto.

SO ORDERED.10
Unfazed, petitioners filed a motion for reconsideration.

In a Resolution dated April 13, 2009, the CTA En Bane denied petitioners' motion
for reconsideration for lace of merit.

Hence, this petition.

Petitioner raises the following assignment of errors:chanRoblesvirtualLawlibrary

1. THE COURT OF TAX APPEALS EN BANC ERRED IN NOT RULING THAT THE
POWER OF LOCAL GOVERNMENT UNITS TO TAX BUSINESS IS SOLELY
GOVERNED BY SEC. 143 AND 143(h) OF THE LOCAL GOVENRMENT CODE OF
1991.

2. THE COURT OF TAX APPEALS EN BANC ERRED IN NOT RULING THAT THE
WORD "TAXES" IN SEC. 133(h) DOES NOT INCLUDE BUSINESS TAXES.

3. THE COURT OF TAX APPEALS EN BANC ERRED IN DISREGARDING THE

DISTINCTION BETWEEN TAXES ON ARTICLES AND TAXES ON BUSINESS.

4. THE COURT OF TAX APPEALS EN BANC INCORRECTLY CONSTRUED A CLEAR

PROVISION OF LAW, SPECIFICALLY SECTION 133(h) OF THE LOCAL
GOVERNMENT CODE OF 1991, AS AN EXPRESS LIMITATION ON THE POWER
OF LOCAL GOVENRMENT UNITS TO IMPOSE TAXES ON THE BUSINESS OF
MANUFACTURE AND DISTRIBUTION OF PETROLEUM PRODUCTS."11

In essence, the issue is whether a LGU is empowered under the LGC to impose
business taxes on persons or entities engaged in the business of manufacturing
and distribution of petroleum products.

It its petition, petitioners assert that any activity that involves the production or
manufacture and the distribution or selling of any kind or nature as a means of
livelihood or with a view to profit can be taxed by the LGUs. They posit that the
authority granted to them by Section 143(h) of the LGC is so broad that it
practically covers any business that the sanggunian concerned may deem proper
to tax, even including businesses which are already subject to excise, value-added
or percentage tax under the National Internal Revenue Code (NIRC) provided that
the same shall not exceed two percent of the gross sales or receipts of the
preceding calendar year.

We do not agree.
At the outset, it must be emphasized that although the power to tax is inherent in
the State, the same is not true for LGUs because although the mandate to impose
taxes granted to LGUs is categorical and long established in the 1987 Philippine
Constitution, the same is not all encompassing as it is subject to limitations as
explicitly stated in Section 5, Article X of the 1987
Constitution, viz.:chanRoblesvirtualLawlibrary
SECTION 5. Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to such guidelines
and limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments.
In the consolidated cases of City of Manila, et al. v. Hon. Colet and Malaysian
Airline system; Maersk-Filipinas, Inc., et al. v. City of Manila, et al,; Eastern
Shipping Lines, Inc. v. City Council of Manila, et al; William Lines, Inc., et al. v.
Regional Trial Court of Manila, et al.; PNOC Shipping and Transport Corporation v.
Hon. Nabong, et al.; Maersk-Filipinas, Inc., et al. v. City of Manila, et al, and with
Intervenors William Lines, Inc., et al; Cosco Container Lines and HEUNG-A Shipping
Co., Ltd., et al. v. City of Manila; Sulpicio Lines, Inc. v. Regional Trial Court of
Manila, et al; Association of International Shipping Lines, Inc. v. City of Manila, et
al; Dongnama Shipping Co., Ltd., et al. v. Court of Appeals, et al.,12 this Court
expounded that the LGUs' power to tax is subject to the limitations set forth
under Section 133 of the LGC. Thus:chanRoblesvirtualLawlibrary
It is already well-settled that although the power to tax is inherent in the State,
the same is not true for the LGUs to whom the power must be delegated by
Congress and must be exercised within the guidelines and limitations that
Congress may provide. The Court expounded in Pelizloy Realty Corporation v. The
Province of Benguet that:chanRoblesvirtualLawlibrary
The power to tax "is an attribute of sovereignty," and as such, inheres in the
State. Such, however, is not true for provinces, cities, municipalities and
barangays as they are not the sovereign; rather, there are mere "territorial and
political subdivisions of the Republic of the Philippines."
The rule governing the taxing power of provinces, cities, municipalities and
barangays is summarized in Icard v. City Council of
Baguio:chanRoblesvirtualLawlibrary
It is settled that a municipal corporation unlike a sovereign state is clothed with
no inherent power of taxation. The charter or statute must plainly show an intent
to confer that power or the municipality, cannot assume it. And the power when
granted is to be construed in strictissimi juris. Any doubt or ambiguity arising out
of the term used in granting that power must be resolved against the
municipality. Inferences, implication, deductions - all these- have no place in the
interpretation of the taxing power of a municipal corporation.
Therefore, the power of a province to tax is limited to the extent that such power
is delegated to it either by the Constitution or by statute. Section 5, Article X of
the 1987 Constitution is clear on this point:ChanRoblesVirtualawlibrary

xxxx

Per Section 5, Article X of the 1987 Constitution, "the power to tax is no longer
vested exclusively on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges." Nevertheless, such authority is
"subject to such guidelines and limitations as the Congress may provide."

In conformity with Section 3, Article X of the 1987 Constitution, Congress enacted

Republic Act No. 7160, otherwise known as the local Government Code of 1991.
Book II of the LGC governs local taxation and fiscal matters.

Relevant provisions of Book II of the LGC establish the parameters of the taxing
powers of LGUs found below.

First, Section 130 provides for the following fundamental principles governing the
taxing powers of LGUs:

1. Taxation shall be uniform in each LGU.

2. Taxes, fees, charges and other impositions shall:
a. be equitable and based as far as practicable on the taxpayer's ability
to pay;
b. be levied and collected only for public purposes;
c. not be unjust, excessive, oppressive orconfiscatory;
d. not be contrary to law, public policy, national economic policy, or
in the restraint of trade.
 3. The collection of local taxes, fees, charges and other impositions shall in no
case be left to any private person.
4. The revenue collected pursuant to the provisions of the LGC shall inure
solely to the benefit of, and be subject to the disposition by, the LGU
levying the tax, fee, charge or other imposition unless otherwise specifically
provided by the LGC.
5. Each LGU shall, as far as practicable, evolve a progressive system of
taxation.

Second, Section 133 provides for the common limitations on the taxing powers of
LGUs.
Among the common limitations on the taxing powers of LGUs under Section 133
of the LGC is paragraph (h) which states:chanRoblesvirtualLawlibrary
SECTION 133. Common Limitations on the Taxing Powers of Local Government
Units. - Unless otherwise provided herein, the exercise of taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:chanRoblesvirtualLawlibrary
XXXX

(h) Excise taxes on articles enumerated under the National Internal Revenue
Code, as amended, and taxes, fees or charges on petroleum products.;13
From the foregoing, Section 133(h) clearly specifies the two kinds of taxes which
cannot be imposed by LGUs: (1) excise taxes on articles enumerated under the
NIRC, as amended; and (2) taxes, fees or charges on petroleum products.

Indisputably, the power of LGUs to impose business taxes derives from Section
14314 of the LGC. However, the same is subject to the explicit

statutory impediment provided for under Section 133(h) of the same Code which
prohibits LGUs from imposing "taxes, fees or charges on petroleum products." It
can, therefore, be deduced that although petroleum products are subject to
excise tax, the same is specifically excluded from the broad power granted to
LGUs under Section 143(h) of the LGC to impose business taxes.

Additionally, Section 133(h) of the LGC makes plain that the prohibition with
respect to petroleum products extends not only to excise taxes thereon, but all
"taxes, fees or charges." The earlier reference in paragraph 143(h) to excise taxes
comprehends a wider range of subject of taxation: all articles already covered by
excise taxation under the NIRC, such as alcohol products, tobacco products,
mineral products, automobiles, and such non-essential goods as jewelry, goods
made of precious metals, perfumes, and yachts and other vessels intended for
pleasure or sports. In contrast, the later reference to "taxes, fees and charges"
pertains only to one class of articles of the many subjects of excise taxes,
specifically, "petroleum products." While LGUs are authorized to burden all such
other class of goods with "taxes, fees and charges," excepting excise taxes, a
specific prohibition is imposed barring the levying of any other type of taxes with
respect to petroleum products.15chanrobleslaw

It is likewise irrefutable that the specific exemption provided under Section 133 of
the LGC prevails over Section 143 of the same Code.

First, Section 133 of the LGC is a specific provision that explicitly withhold from
LGUs the power to impose taxes, fees and charges on petroleum products.

Strictly speaking, as long as the subject matter of the taxing powers of the LGUs is
the petroleum products per se or even the activity or privilege related to the
petroleum products, such as manufacturing and distribution of said products, it is
covered by the said limitation and thus, no levy can be imposed.16chanrobleslaw

On the contrary, Section 143 of the LGC defines the general power of LGUs to tax
businesses within its jurisdiction. Thus, the omnibus grant of power to LGUs under
Section 143(h) of the LGC cannot overcome the specific exception or exemption in
Section 133(h) of the same Code. This is in accord with the rule on statutory
construction that specific provisions must prevail over general ones. A special and
specific provision prevails over a general provision irrespective of their relative
positions in the statute. Generalia specialibus non derogant. Where there is in the
same statute a particular enactment and also a general one which in its most
comprehensive sense would include what is embraced in the former, the
particular enactment must be operative, and the general enactment must be
taken to affect only such cases within its general language as are not within the
provisions of the particular enactment.17chanrobleslaw

Second, Article 232(h) of the Implementing Rules and Regulations (IRR) of the LGC
of 1991 states:chanRoblesvirtualLawlibrary
ARTICLE 232. Tax on Business. - The Municipality may impose taxes on the
following businesses:ChanRoblesVirtualawlibrary

xxxx

(h) On any business not otherwise specified in the preceding paragraphs

which the sanggunian concerned may deem proper to tax provided that
that on any business subject to the excise tax. VAT or percentage tax
under the NIRC, as amended, the rate of tax shall not exceed two percent
(2%) of gross sales or receipts of the preceding calendar year
and provided further, that in line with existing national policy, any
business engaged in the production, manufacture, refining, distribution
or sale of oil, gasoline, and other petroleum products shall not be
subject to any local tax imposed in this Article.18
Article 232 defines with more particularity the capacity of a municipality to
impose taxes on businesses. However, it admits of certain exceptions, specifically,
that businesses engaged in the production, manufacture, refining, distribution or
sale of oil, gasoline, and other petroleum products, shall not be subject to any
local tax imposed by Article 232.

WHEREFORE, in view of the foregoing, the Court hereby resolves to DENY present
petition. The Decision dated January 22, 2009 and Resolution dated April 13, 2009
of the Court of Tax Appeals En Banc in CTAEB No. 350 are AFFIRMED.

SO ORDERED.cralawlawlibrary

Leonardo-De Castro,*Villarama, Jr., Perez,** and Perlas-Bernabe,****JJ., concur.

Peralta,**J., Acting Chairperson,

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.

Sabido, Sabido & Associates for appellant.

Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol
and Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes
for appellees.

MARTIN, J.:

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil
Case No. 3294, which was certified to Us by the Court of Appeals on October 6,
1969, as involving only pure questions of law, challenging the power of taxation
delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264,
as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the

Philippines, Inc., commenced a complaint with preliminary injunction before the
Court of First Instance of Leyte for that court to declare Section 2 of Republic Act
No. 2264.1 otherwise known as the Local Autonomy Act, unconstitutional as an
undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and
27, series of 1962, of the municipality of Tanauan, Leyte, null and void.

On July 23, 1963, the parties entered into a Stipulation of Facts, the material
portions of which state that, first, both Ordinances Nos. 23 and 27 embrace or
cover the same subject matter and the production tax rates imposed therein are
practically the same, and second, that on January 17, 1963, the acting Municipal
Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the
Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the
latter of the provisions of said Ordinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on

September 25, 1962, levies and collects "from soft drinks producers and
manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft
drink corked." 2 For the purpose of computing the taxes due, the person, firm,
company or corporation producing soft drinks shall submit to the Municipal
Treasurer a monthly report, of the total number of bottles produced and corked
during the month. 3

On the other hand, Municipal Ordinance No. 27, which was approved on October
28, 1962, levies and collects "on soft drinks produced or manufactured within the
territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of
computing the taxes due, the person, fun company, partnership, corporation or
plant producing soft drinks shall submit to the Municipal Treasurer a monthly
report of the total number of gallons produced or manufactured during the
month. 5

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal

production tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment

"dismissing the complaint and upholding the constitutionality of [Section 2,
Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and
constitutional; ordering the plaintiff to pay the taxes due under the oft the said
Ordinances; and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the
Court of Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of
the Judiciary Act of 1948, as amended.

There are three capital questions raised in this appeal:

1. — Is Section 2, Republic Act No. 2264 an undue delegation of

power, confiscatory and oppressive?

2. — Do Ordinances Nos. 23 and 27 constitute double taxation and

impose percentage or specific taxes?

3. — Are Ordinances Nos. 23 and 27 unjust and unfair?

1. The power of taxation is an essential and inherent attribute of sovereignty,

belonging as a matter of right to every independent government, without being
expressly conferred by the people. 6 It is a power that is purely legislative and
which the central legislative body cannot delegate either to the executive or
judicial department of the government without infringing upon the theory of
separation of powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply. Legislative powers may be
delegated to local governments in respect of matters of local concern. 7 This is
sanctioned by immemorial practice. 8 By necessary implication, the legislative
power to create political corporations for purposes of local self-government
carries with it the power to confer on such local governmental agencies the
power to tax. 9 Under the New Constitution, local governments are granted the
autonomous authority to create their own sources of revenue and to levy taxes.
Section 5, Article XI provides: "Each local government unit shall have the power to
create its sources of revenue and to levy taxes, subject to such limitations as may
be provided by law." Withal, it cannot be said that Section 2 of Republic Act No.
2264 emanated from beyond the sphere of the legislative power to enact and
vest in local governments the power of local taxation.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-
appellant's pretense, would not suffice to invalidate the said law as confiscatory
and oppressive. In delegating the authority, the State is not limited 6 the exact
measure of that which is exercised by itself. When it is said that the taxing power
may be delegated to municipalities and the like, it is meant that there may be
delegated such measure of power to impose and collect taxes as the legislature
may deem expedient. Thus, municipalities may be permitted to tax subjects which
for reasons of public policy the State has not deemed wise to tax for more general
purposes. 10 This is not to say though that the constitutional injunction against
deprivation of property without due process of law may be passed over under the
guise of the taxing power, except when the taking of the property is in the lawful
exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the
rule on uniformity of taxation is observed; (3) either the person or property taxed
is within the jurisdiction of the government levying the tax; and (4) in the
assessment and collection of certain kinds of taxes notice and opportunity for
hearing are provided. 11 Due process is usually violated where the tax imposed is
for a private as distinguished from a public purpose; a tax is imposed on property
outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive
methods are used in assessing and collecting taxes. But, a tax does not violate the
due process clause, as applied to a particular taxpayer, although the purpose of
the tax will result in an injury rather than a benefit to such taxpayer. Due process
does not require that the property subject to the tax or the amount of tax to be
raised should be determined by judicial inquiry, and a notice and hearing as to the
amount of the tax and the manner in which it shall be apportioned are generally
not necessary to due process of law. 12

There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the
delegating authority specifies the limitations and enumerates the taxes over
which local taxation may not be exercised. 13 The reason is that the State has
exclusively reserved the same for its own prerogative. Moreover, double taxation,
in general, is not forbidden by our fundamental law, since We have not adopted
as part thereof the injunction against double taxation found in the Constitution of
the United States and some states of the Union.14 Double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity 15 or by the same jurisdiction for the same purpose, 16 but
not in a case where one tax is imposed by the State and the other by the city or
municipality. 17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double

taxation, because these two ordinances cover the same subject matter and
impose practically the same tax rate. The thesis proceeds from its assumption
that both ordinances are valid and legally enforceable. This is not so. As earlier
quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or
collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of
a centavo for .every bottle corked, irrespective of the volume contents of the
bottle used. When it was discovered that the producer or manufacturer could
increase the volume contents of the bottle and still pay the same tax rate, the
Municipality of Tanauan enacted Ordinance No. 27, approved on October 28,
1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces,
U.S.) of volume capacity. The difference between the two ordinances clearly lies
in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of a
centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on
each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the
Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23, and operates as a
repeal of the latter, even without words to that effect. 18 Plaintiff-appellant in its
brief admitted that defendants-appellees are only seeking to enforce Ordinance
No. 27, series of 1962. Even the stipulation of facts confirms the fact that the
Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the
plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962. The
aforementioned admission shows that only Ordinance No. 27, series of 1962 is
being enforced by defendants-appellees. Even the Provincial Fiscal, counsel for
defendants-appellees admits in his brief "that Section 7 of Ordinance No. 27,
series of 1962 clearly repeals Ordinance No. 23 as the provisions of the latter are
inconsistent with the provisions of the former."

That brings Us to the question of whether the remaining Ordinance No. 27

imposes a percentage or a specific tax. Undoubtedly, the taxing authority
conferred on local governments under Section 2, Republic Act No. 2264, is broad
enough as to extend to almost "everything, accepting those which are mentioned
therein." As long as the text levied under the authority of a city or municipal
ordinance is not within the exceptions and limitations in the law, the same comes
within the ambit of the general rule, pursuant to the rules of exclucion
attehus and exceptio firmat regulum in cabisus non excepti 19 The limitation
applies, particularly, to the prohibition against municipalities and municipal
districts to impose "any percentage tax or other taxes in any form based
thereon nor impose taxes on articles subject to specific tax except gasoline, under
the provisions of the National Internal Revenue Code." For purposes of this
particular limitation, a municipal ordinance which prescribes a set ratio between
the amount of the tax and the volume of sale of the taxpayer imposes a sales tax
and is null and void for being outside the power of the municipality to
enact. 20 But, the imposition of "a tax of one centavo (P0.01) on each gallon (128
fluid ounces, U.S.) of volume capacity" on all soft drinks produced or
manufactured under Ordinance No. 27 does not partake of the nature of a
percentage tax on sales, or other taxes in any form based thereon. The tax is
levied on the produce (whether sold or not) and not on the sales. The volume
capacity of the taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is not set ratio
between the volume of sales and the amount of the tax.21

Nor can the tax levied be treated as a specific tax. Specific taxes are those
imposed on specified articles, such as distilled spirits, wines, fermented liquors,
products of tobacco other than cigars and cigarettes, matches firecrackers,
manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil,
cinematographic films, playing cards, saccharine, opium and other habit-forming
drugs. 22 Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity on all softdrinks, produced or manufactured, or an equivalent of 1-½
centavos per case, 23 cannot be considered unjust and unfair. 24 an increase in
the tax alone would not support the claim that the tax is oppressive, unjust and
confiscatory. Municipal corporations are allowed much discretion in determining
the reates of imposable taxes. 25 This is in line with the constutional policy of
according the widest possible autonomy to local governments in matters of local
taxation, an aspect that is given expression in the Local Tax Code (PD No. 231, July
1, 1973). 26 Unless the amount is so excessive as to be prohibitive, courts will go
slow in writing off an ordinance as unreasonable. 27 Reluctance should not deter
compliance with an ordinance such as Ordinance No. 27 if the purpose of the law
to further strengthen local autonomy were to be realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but
not more than ten crowners or P2,000.00 with ten but not more than twenty
crowners imposed on manufacturers, producers, importers and dealers of soft
drinks and/or mineral waters under Ordinance No. 54, series of 1964, as amended
by Ordinance No. 41, series of 1968, of defendant Municipality, 29 appears not to
affect the resolution of the validity of Ordinance No. 27. Municipalities are
empowered to impose, not only municipal license taxes upon persons engaged in
any business or occupation but also to levy for public purposes, just and uniform
taxes. The ordinance in question (Ordinance No. 27) comes within the second
power of a municipality.

ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264,

otherwise known as the Local Autonomy Act, as amended, is hereby upheld and
Municipal Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962,
re-pealing Municipal Ordinance No. 23, same series, is hereby declared of valid
and legal effect. Costs against petitioner-appellant.

SO ORDERED.

Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz Palma,

Aquino and Concepcion, Jr., JJ., concur.
Separate Opinions

FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly
and comprehensive character. Insofar as it shows adherence to tried and tested
concepts of the law of municipal taxation, I am only in agreement. If I limit myself
to concurrence in the result, it is primarily because with the article on Local
Autonomy found in the present Constitution, I feel a sense of reluctance in
restating doctrines that arose from a different basic premise as to the scope of
such power in accordance with the 1935 Charter. Nonetheless it is well-nigh
unavoidable that I do so as I am unable to share fully what for me are the nuances
and implications that could arise from the approach taken by my brethren.
Likewise as to the constitutional aspect of the thorny question of double taxation,
I would limit myself to what has been set forth in City of Baguio v. De Leon.1

1. The present Constitution is quite explicit as to the power of taxation vested in

local and municipal corporations. It is therein specifically provided: "Each local
government unit shall have the power to create its own sources of revenue and to
levy taxes subject to such limitations as may be provided by law. 2 That was not
the case under the 1935 Charter. The only limitation then on the authority,
plenary in character of the national government, was that while the President of
the Philippines was vested with the power of control over all executive
departments, bureaus, or offices, he could only . It exercise general supervision
over all local governments as may be provided by law ... 3As far as legislative
power over local government was concerned, no restriction whatsoever was
placed on the Congress of the Philippines. It would appear therefore that the
extent of the taxing power was solely for the legislative body to decide. It is true
that in 1939, there was a statute that enlarged the scope of the municipal taxing
power. 4 Thereafter, in 1959 such competence was further expanded in the Local
Autonomy Act. 5 Nevertheless, as late as December of 1964, five years after its
enactment of the Local Autonomy Act, this Court, through Justice Dizon, in Golden
Ribbon Lumber Co. v. City of Butuan, 6 reaffirmed the traditional concept in these
words: "The rule is well-settled that municipal corporations, unlike sovereign
states, after clothed with no power of taxation; that its charter or a statute must
clearly show an intent to confer that power or the municipal corporation cannot
assume and exercise it, and that any such power granted must be construed
strictly, any doubt or ambiguity arising from the terms of the grant to be resolved
against the municipality."7

Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of

Pagbilao,8 "is an attribute of sovereignty which municipal corporations do not
enjoy." 9 That case left no doubt either as to weakness of a claim "based merely
by inferences, implications and deductions, [as they have no place in the
interpretation of the power to tax of a municipal corporation." 10 As the
conclusion reached by the Court finds support in such grant of the municipal
taxing power, I concur in the result. 2. As to any possible infirmity based on an
alleged double taxation, I would prefer to rely on the doctrine announced by this
Court in City of Baguio v. De Leon. 11 Thus: "As to why double taxation is not
violative of due process, Justice Holmes made clear in this language: 'The
objection to the taxation as double may be laid down on one side. ... The 14th
Amendment [the due process clause) no more forbids double taxation than it
does doubling the amount of a tax, short of (confiscation or proceedings
unconstitutional on other grouse With that decision rendered at a time when
American sovereignty in the Philippines was recognized, it possesses more than
just a persuasive effect. To some, it delivered the coup justice to the bogey of
double taxation as a constitutional bar to the exercise of the taxing power. It
would seem though that in the United States, as with us, its ghost, as noted by an
eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we
quoted with approval this excerpt from a leading American decision: 'Where, as
here, Congress has clearly expressed its intention, the statute must be sustained
even though double taxation results. 12

So I would view the issues in this suit and accordingly concur in the result.

Separate Opinions

FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly
and comprehensive character. Insofar as it shows adherence to tried and tested
concepts of the law of municipal taxation, I am only in agreement. If I limit myself
to concurrence in the result, it is primarily because with the article on Local
Autonomy found in the present Constitution, I feel a sense of reluctance in
restating doctrines that arose from a different basic premise as to the scope of
such power in accordance with the 1935 Charter. Nonetheless it is well-nigh
unavoidable that I do so as I am unable to share fully what for me are the nuances
and implications that could arise from the approach taken by my brethren.
Likewise as to the constitutional aspect of the thorny question of double taxation,
I would limit myself to what has been set forth in City of Baguio v. De Leon.1

1. The present Constitution is quite explicit as to the power of taxation vested in

local and municipal corporations. It is therein specifically provided: "Each local
government unit shall have the power to create its own sources of revenue and to
levy taxes subject to such limitations as may be provided by law. 2 That was not
the case under the 1935 Charter. The only limitation then on the authority,
plenary in character of the national government, was that while the President of
the Philippines was vested with the power of control over all executive
departments, bureaus, or offices, he could only . It exercise general supervision
over all local governments as may be provided by law ... 3As far as legislative
power over local government was concerned, no restriction whatsoever was
placed on the Congress of the Philippines. It would appear therefore that the
extent of the taxing power was solely for the legislative body to decide. It is true
that in 1939, there was a statute that enlarged the scope of the municipal taxing
power. 4 Thereafter, in 1959 such competence was further expanded in the Local
Autonomy Act. 5 Nevertheless, as late as December of 1964, five years after its
enactment of the Local Autonomy Act, this Court, through Justice Dizon, in Golden
Ribbon Lumber Co. v. City of Butuan, 6 reaffirmed the traditional concept in these
words: "The rule is well-settled that municipal corporations, unlike sovereign
states, after clothed with no power of taxation; that its charter or a statute must
clearly show an intent to confer that power or the municipal corporation cannot
assume and exercise it, and that any such power granted must be construed
strictly, any doubt or ambiguity arising from the terms of the grant to be resolved
against the municipality."7

Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of

Pagbilao,8 "is an attribute of sovereignty which municipal corporations do not
enjoy." 9 That case left no doubt either as to weakness of a claim "based merely
by inferences, implications and deductions, [as they have no place in the
interpretation of the power to tax of a municipal corporation." 10 As the
conclusion reached by the Court finds support in such grant of the municipal
taxing power, I concur in the result. 2. As to any possible infirmity based on an
alleged double taxation, I would prefer to rely on the doctrine announced by this
Court in City of Baguio v. De Leon. 11 Thus: "As to why double taxation is not
violative of due process, Justice Holmes made clear in this language: 'The
objection to the taxation as double may be laid down on one side. ... The 14th
Amendment [the due process clause) no more forbids double taxation than it
does doubling the amount of a tax, short of (confiscation or proceedings
unconstitutional on other grouse With that decision rendered at a time when
American sovereignty in the Philippines was recognized, it possesses more than
just a persuasive effect. To some, it delivered the coup justice to the bogey of
double taxation as a constitutional bar to the exercise of the taxing power. It
would seem though that in the United States, as with us, its ghost, as noted by an
eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we
quoted with approval this excerpt from a leading American decision: 'Where, as
here, Congress has clearly expressed its intention, the statute must be sustained
even though double taxation results. 12

So I would view the issues in this suit and accordingly concur in the result.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-28138 August 13, 1986

MATALIN COCONUT CO., INC., petitioner-appellee,

vs.
THE MUNICIPAL COUNCIL OF MALABANG, LANAO DEL SUR, AMIR M.
BALINDONG and HADJI PANGILAMUN MANALOCON, MUNICIPAL MAYOR and
MUNICIPAL TREASURER OF MALABANG, LANAO DEL SUR, respondents-
appellants. PURAKAN PLANTATION COMPANY, intervenor-appellee.

YAP, J.:
On August 24, 1966, the Municipal Council of Malabang, Lanao del Sur, invoking
the authority of Section 2 of Republic Act No. 2264, otherwise known as the Local
Autonomy Act, enacted Municipal Ordinance No. 45-46, entitled "AN ORDINANCE
IMPOSING A POLICE INSPECTION FEE OF P.30 PER SACK OF CASSAVA STARCH
PRODUCED AND SHIPPED OUT OF THE MUNICIPALITY OF MALABANG AND
IMPOSING PENALTIES FOR VIOLATIONS THEREOF." The ordinance made it
unlawful for any person, company or group of persons "to ship out of the
Municipality of Malabang, cassava starch or flour without paying to the Municipal
Treasurer or his authorized representatives the corresponding fee fixed by (the)
ordinance." It imposed a "police inspection fee" of P.30 per sack of cassava starch
or flour, which shall be paid by the shipper before the same is transported or
shipped outside the municipality. Any person or company or group of individuals
violating the ordinance "is liable to a fine of not less than P100.00, but not more
than P1,000.00, and to pay Pl.00 for every sack of flour being illegally shipped
outside the municipality, or to suffer imprisonment of 20 days, or both, in the
discretion of the court.

The validity of the ordinance was challenged by the Matalin Coconut, Inc. in a
petition for declaratory relief filed with the then Court of First Instance of Lanao
del Sur against the Municipal Council, the Municipal Mayor and the Municipal
Treasurer of Malabang, Lanao del Sur. Alleging among others that the ordinance is
not only ultra vires, being violative of Republic Act No. 2264, but also
unreasonable, oppressive and confiscatory, the petitioner prayed that the
ordinance be declared null and void ab initio, and that the respondent Municipal
Treasurer be ordered to refund the amounts paid by petitioner under the
ordinance. The petitioner also prayed that during the pendency of the action, a
preliminary injunction be issued enjoining the respondents from enforcing the
ordinance. The application for preliminary injunction, however, was denied by the
trial court; instead respondent Municipal Treasurer was ordered to allow
payment of the taxes imposed by the ordinance under protest.

Claiming that it was also adversely affected by the ordinance, Purakan Plantation
Company was granted leave to intervene in the action. The intervenor alleged
that while its cassava flour factory was situated in another municipality, i.e.,
Balabagan, Lanao del Sur, it had to transport the cassava starch and flour it
produced to the seashore through the Municipality of Malabang for loading in
coastwise vessels; that the effect of the enactment of Ordinance No. 45-46, is that
intervenor had to refrain from transporting its products through the Municipality
of Malabang in order to ship them by sea to other places.

After trial, the Court a quo rendered a decision declaring the municipal ordinance
in question null and void; ordering the respondent Municipal Treasurer to refund
to the petitioner the payments it made under the said ordinance from September
27, 1966 to May 2, 1967, amounting to P 25,500.00, as well as all payments made
subsequently thereafter; and enjoining and prohibiting the respondents, their
agents or deputies, from collecting the tax of P.30 per bag on the cassava flour or
starch belonging to intervenor, Purakan Plantation Company, manufactured or
milled in the Municipality of Balabagan, but shipped out through the Municipality
of Malabang.

After the promulgation of the decision, the Trial Court issued a writ of preliminary
mandatory injunction, upon motion of petitioner, requiring the respondent
Municipal Treasurer to deposit with the Philippine National Bank, Iligan Branch, in
the name of the Municipality of Malabang, whatever amounts the petitioner had
already paid or shall pay pursuant to the ordinance in question up to and until
final termination of the case; the deposit was not to be withdrawn from the said
bank without any order from the court. On motion for reconsideration by
respondents, the writ was subsequently modified on July 20, 1967, to require the
deposit only of amounts paid from the effectivity of the writ up to and until the
final termination of the suit.

From the decision of the trial court, the respondents appealed to this Court.

A motion to dismiss appeal filed by petitioner-appellee, was denied by this court

in its resolution of October 31, 1967. Subsequently, respondents-appellants filed a
motion to dissolve the writ of preliminary mandatory injunction issued by the trial
court on July 20, 1967. This motion was also denied by this Court on January 10,
1968.

Of the assignments of error raised by the appellants in their Brief, only the
following need be discussed: (1) that the trial court erred in adjudicating the
money claim of the petitioner in an action for declaratory relief; and (2) that the
trial court erred in declaring the municipal ordinance in question null and void.

The respondents-appellants maintain that it was error for the trial court, in an
action for declaratory relief, to order the refund to petitioner-appellee of the
amounts paid by the latter under the municipal ordinance in question. It is the
contention of respondents-appellants that in an action for declaratory relief, all
the court can do is to construe the validity of the ordinance in question and
declare the rights of those affected thereby. The court cannot declare the
ordinance illegal and at the same time order the refund to petitioner of the
amounts paid under the ordinance, without requiring petitioner to file an
ordinary action to claim the refund after the declaratory relief judgment has
become final. Respondents maintain that under Rule 64 of the Rules of Court, the
court may advise the parties to file the proper pleadings and convert the hearing
into an ordinary action, which was not done in this case.

We find no merit in such contention. Under Sec. 6 of Rule 64, the action for
declaratory relief may be converted into an ordinary action and the parties
allowed to file such pleadings as may be necessary or proper, if before the final
termination of the case "a breach or violation of an...ordinance, should take
place." In the present case, no breach or violation of the ordinance occurred. The
petitioner decided to pay "under protest" the fees imposed by the ordinance.
Such payment did not affect the case; the declaratory relief action was still proper
because the applicability of the ordinance to future transactions still remained to
be resolved, although the matter could also be threshed out in an ordinary suit
for the recovery of taxes paid (Shell Co. of the Philippines, Ltd. vs. Municipality of
Sipocot, L-12680, March 20, 1959). In its petition for declaratory relief, petitioner-
appellee alleged that by reason of the enforcement of the municipal ordinance by
respondents it was forced to pay under protest the fees imposed pursuant to the
said ordinance, and accordingly, one of the reliefs prayed for by the petitioner
was that the respondents be ordered to refund all the amounts it paid to
respondent Municipal Treasurer during the pendency of the case. The inclusion of
said allegation and prayer in the petition was not objected to by the respondents
in their answer. During the trial, evidence of the payments made by the petitioner
was introduced. Respondents were thus fully aware of the petitioner's claim for
refund and of what would happen if the ordinance were to be declared invalid by
the court.

Respondents' contention, if sustained, would in effect require a separate suit for

the recovery of the fees paid by petitioner under protest. Multiplicity of suits
should not be allowed or encouraged and, in the context of the present case, is
clearly uncalled for and unnecessary.
The main issue to be resolve in this case whether not Ordinance No. 45-66
enacted by respondent Municipal Council of Malabang, Lanao del Sur, is valid. The
respondents-appellants contend that the municipality has the power and
authority to approve the ordinance in question pursuant to Section 2 of the Local
Autonomy Act (Republic Act No. 2264).

Since the enactment of the Local Autonomy Act, a liberal rule has been followed
by this Court in construing municipal ordinances enacted pursuant to the taxing
power granted under Section 2 of said law. This Court has construed the grant of
power to tax under the above-mentioned provision as sufficiently plenary to
cover "everything, excepting those which are mentioned" therein, subject only to
the limitation that the tax so levied is for public purposes, just and uniform (Nin
Bay Mining Company vs. Municipality of Roxas, Province of Palawan, 14 SCRA 661;
C.N. Hodges vs. Municipal Board, Iloilo City, et al., 19 SCRA 28).

We agree with the finding of the trial court that the amount collected under the
ordinance in question partakes of the nature of a tax, although denominated as
"police inspection fee" since its undeniable purpose is to raise revenue. However,
we cannot agree with the trial court's finding that the tax imposed by the
ordinance is a percentage tax on sales which is beyond the scope of the
municipality's authority to levy under Section 2 of the Local Autonomy Act. Under
the said provision, municipalities and municipal districts are prohibited from
imposing" any percentage tax on sales or other taxes in any form based thereon. "
The tax imposed under the ordinance in question is not a percentage tax on sales
or any other form of tax based on sales. It is a fixed tax of P.30 per bag of cassava
starch or flour "shipped out" of the municipality. It is not based on sales.

However, the tax imposed under the ordinance can be stricken down on another
ground. According to Section 2 of the abovementioned Act, the tax levied must be
"for public purposes, just and uniform" (Emphasis supplied.) As correctly held by
the trial court, the so-called "police inspection fee" levied by the ordinance is
"unjust and unreasonable." Said the court a quo:

... It has been proven that the only service rendered by the
Municipality of Malabang, by way of inspection, is for the policeman
to verify from the driver of the trucks of the petitioner passing by at
the police checkpoint the number of bags loaded per trip which are
to be shipped out of the municipality based on the trip tickets for the
purpose of computing the total amount of tax to be collect (sic) and
for no other purpose. The pretention of respondents that the police,
aside from counting the number of bags shipped out, is also
inspecting the cassava flour starch contained in the bags to find out if
the said cassava flour starch is fit for human consumption could not
be given credence by the Court because, aside from the fact that said
purpose is not so stated in the ordinance in question, the policemen
of said municipality are not competent to determine if the cassava
flour starch are fit for human consumption. The further pretention of
respondents that the trucks of the petitioner hauling the bags of
cassava flour starch from the mill to the bodega at the beach of
Malabang are escorted by a policeman from the police checkpoint to
the beach for the purpose of protecting the truck and its cargoes
from molestation by undesirable elements could not also be given
credence by the Court because it has been shown, beyond doubt,
that the petitioner has not asked for the said police protection
because there has been no occasion where its trucks have been
molested, even for once, by bad elements from the police checkpoint
to the bodega at the beach, it is solely for the purpose of verifying
the correct number of bags of cassava flour starch loaded on the
trucks of the petitioner as stated in the trip tickets, when unloaded at
its bodega at the beach. The imposition, therefore, of a police
inspection fee of P.30 per bag, imposed by said ordinance is unjust
and unreasonable.

The Court finally finds the inspection fee of P0.30 per bag, imposed
by the ordinance in question to be excessive and confiscatory. It has
been shown by the petitioner, Matalin Coconut Company, Inc., that it
is merely realizing a marginal average profit of P0.40, per bag, of
cassava flour starch shipped out from the Municipality of Malabang
because the average production is P15.60 per bag, including
transportation costs, while the prevailing market price is P16.00 per
bag. The further imposition, therefore, of the tax of P0.30 per bag, by
the ordinance in question would force the petitioner to close or stop
its cassava flour starch milling business considering that it is
maintaining a big labor force in its operation, including a force of
security guards to guard its properties. The ordinance, therefore, has
an adverse effect on the economic growth of the Municipality of
 Malabang, in particular, and of the nation, in general, and is contrary
to the economic policy of the government.

Having found the ordinance in question to be invalid, we find it unnecessary to

rule on the other errors assigned by the appellants.

WHEREFORE, petition is dismissed. The decision of the court a quo is hereby

affirmed. No costs.

SO ORDERED.

Narvasa, Melencio-Herrera, Cruz and Paras, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 176422 March 20, 2013

MARIA MENDOZA, in her own capacity and as Attorney-in-fact of DEOGRACIAS,

MARCELA, DIONISIA, ADORA CION, all surnamed MENDOZA, REMEDIOS
MONTILLA, FELY BAUTISTA, JULIANA GUILALAS and ELVIRA
MENDOZA, Petitioners,
vs.
JULIA POLl CARPIO DELOS SANTOS, substituted by her heirs, CARMEN P. DELOS
SANTOS, ROSA BUENA VENTURA, ZENAIDA P. DELOS SANTOS VDA. DE MATEO,
LEONILA P. DELOS SANTOS, ELVIRA P. DELOS SANTOS VDA. DE JOSE, TERESITA P.
DELOS SANTOS-CABUHAT, MERCEDITA P. DELOS SANTOS, LYDIA P. DELOS
SANTOS VDA. DE HILARIO, PERFECTO P. DELOS SANTOS, JR., and CECILIA M.
MENDOZA,Respondents.

DECISION

REYES, J.:

Reserva troncal is a special rule designed primarily to assure the return of a

reservable property to the third degree relatives belonging to the line from which
the property originally came, and avoid its being dissipated into and by the
relatives of the inheriting ascendant.1

The Facts

The properties subject in the instant case are three parcels of land located in Sta.
Maria, Bulacan: (1) Lot 1681-B, with an area of 7,749 square meters;2 (2) Lot 1684,
with an area of 5,667 sq m;3 and (3) Lot No. 1646-B, with an area of 880 sq m.4 Lot
Nos. 1681-B and 1684 are presently in the name of respondent Julia Delos
Santos5(respondent). Lot No. 1646-B, on the other hand, is also in the name of
respondent but co-owned by Victoria Pantaleon, who bought one-half of the
property from petitioner Maria Mendoza and her siblings.

Petitioners are grandchildren of Placido Mendoza (Placido) and Dominga

Mendoza (Dominga). Placido and Dominga had four children: Antonio, Exequiel,
married to Leonor, Apolonio and Valentin. Petitioners Maria, Deogracias, Dionisia,
Adoracion, Marcela and Ricardo are the children of Antonio. Petitioners Juliana,
Fely, Mercedes, Elvira and Fortunato, on the other hand, are Valentin’s children.
Petitioners alleged that the properties were part of Placido and Dominga’s
properties that were subject of an oral partition and subsequently adjudicated to
Exequiel. After Exequiel’s death, it passed on to his spouse Leonor and only
daughter, Gregoria. After Leonor’s death, her share went to Gregoria. In 1992,
Gregoria died intestate and without issue. They claimed that after Gregoria’s
death, respondent, who is Leonor’s sister, adjudicated unto herself all these
properties as the sole surviving heir of Leonor and Gregoria. Hence, petitioners
claim that the properties should have been reserved by respondent in their behalf
and must now revert back to them, applying Article 891 of the Civil Code on
reserva troncal.

Respondent, however, denies any obligation to reserve the properties as these

did not originate from petitioners’ familial line and were not originally owned by
Placido and Dominga. According to respondent, the properties were bought by
Exequiel and Antonio from a certain Alfonso Ramos in 1931. It appears, however,
that it was only Exequiel who was in possession of the properties.6

The Regional Trial Court (RTC) of Malolos, Bulacan, Branch 6, found merit in
petitioners’ claim and granted their action for Recovery of Possession by Reserva
Troncal, Cancellation of TCT and Reconveyance. In its Decision dated November 4,
2002, the RTC disposed as follows:

WHEREFORE, premised from the foregoing judgment is hereby rendered:

1. Ordering respondents (heirs of Julia Policarpio) to reconvey the three (3)

parcels of land subject of this action in the name of the plaintiffs
enumerated in the complaint including intervenor Maria Cecilia M.
Mendoza except one-half of the property described in the old title, TCT No.
T-124852(M) which belongs to Victorina Pantaleon;

2. Ordering the Register of Deeds of Bulacan to cancel the titles in the name
of Julia Policarpio, TCT No. T-149033(M), T-183631(M) and T-149035(M)
and reconvey the same to the enumerated plaintiffs; and

3. No pronouncement as to claims for attorney’s fees and damages and

costs.

SO ORDERED.7

On appeal, the Court of Appeals (CA) reversed and set aside the RTC decision and
dismissed the complaint filed by petitioners. The dispositive portion of the CA
Decision dated November 16, 2006 provides:

WHEREFORE, premises considered, the November 4, 2002 Decision of the

Regional Trial Court, Br. 6, Third Judicial Region, Malolos, Bulacan, is REVERSED
and SET ASIDE. The Third Amended Complaint in Civil Case No. 609-M-92 is
hereby DISMISSED. Costs against the Plaintiffs-Appellants.

SO ORDERED.8

Petitioners filed a motion for reconsideration but the CA denied the same per
Resolution9 dated January 17, 2007.

In dismissing the complaint, the CA ruled that petitioners failed to establish that
Placido and Dominga owned the properties in dispute.10 The CA also ruled that
even assuming that Placido and Dominga previously owned the properties, it still
cannot be subject to reserva troncal as neither Exequiel predeceased Placido and
Dominga nor did Gregoria predecease Exequiel.11
Now before the Court, petitioners argue that:

A.

THE HONORABLE [CA] GRIEVOUSLY ERRED IN HOLDING THAT THE SUBJECT

PROPERTIES ARE NOT RESERVABLE PROPERTIES, COMING AS THEY DO
FROM THE FAMILY LINE OF THE PETITIONERS MENDOZAS.

B.

THE HONORABLE [CA] GRIEVOUSLY ERRED IN HOLDING THAT THE

PETITIONERS MENDOZAS DO NOT HAVE A RIGHT TO THE SUBJECT
PROPERTIES BY VIRTUE OF THE LAW ON RESERVA TRONCAL.12

Petitioners take exception to the ruling of the CA, contending that it is sufficient
that the properties came from the paternal line of Gregoria for it to be subject to
reserva troncal. They also claim the properties in representation of their own
predecessors, Antonio and Valentin, who were the brothers of Exequiel.13

Ruling of the Court

This petition is one for review on certiorari under Rule 45 of the Rules of Court.
The general rule in this regard is that it should raise only questions of law. There
are, however, admitted exceptions to this rule, one of which is when the CA’s
findings are contrary to those of the trial court.14 This being the case in the
petition at hand, the Court must now look into the differing findings and
conclusion of the RTC and the CA on the two issues that arise – one, whether the
properties in dispute are reservable properties and two, whether petitioners are
entitled to a reservation of these properties.

Article 891 of the Civil Code on reserva troncal

The principle of reserva troncal is provided in Article 891 of the Civil Code:

Art. 891. The ascendant who inherits from his descendant any property which the
latter may have acquired by gratuitous title from another ascendant, or a brother
or sister, is obliged to reserve such property as he may have acquired by
operation of law for the benefit of relatives who are within the third degree and
belong to the line from which said property came. (Emphasis ours)
There are three (3) lines of transmission in reserva troncal. The first transmission
is by gratuitous title, whether by inheritance or donation, from an
ascendant/brother/sister to a descendant called the prepositus. The second
transmission is by operation of law from the prepositus to the other ascendant or
reservor, also called the reservista. The third and last transmission is from the
reservista to the reservees or reservatarios who must be relatives within the third
degree from which the property came.15

The lineal character of the

reservable property is reckoned
from the ascendant from whom the
prepositus received the property by
gratuitous title

Based on the circumstances of the present case, Article 891 on reserva troncal is
not applicable.

The fallacy in the CA’s resolution is that it proceeded from the erroneous premise
that Placido is the ascendant contemplated in Article 891 of the Civil Code. From
thence, it sought to trace the origin of the subject properties back to Placido and
Dominga, determine whether Exequiel predeceased Placido and whether
Gregoria predeceased Exequiel.

The persons involved in reserva troncal are:

 (1) The ascendant or brother or sister from whom the property was
received by the descendant by lucrative or gratuitous title;

(2) The descendant or prepositus (propositus) who received the property;

(3) The reservor (reservista), the other ascendant who obtained the
property from the prepositus by operation of law; and

(4) The reservee (reservatario) who is within the third degree from the
prepositus and who belongs to the (linea o tronco) from which the property
came and for whom the property should be reserved by the reservor.16

It should be pointed out that the ownership of the properties should be reckoned
only from Exequiel’s as he is the ascendant from where the first transmission
occurred, or from whom Gregoria inherited the properties in dispute. The law
does not go farther than such ascendant/brother/sister in determining the lineal
character of the property.17It was also immaterial for the CA to determine
whether Exequiel predeceased Placido and Dominga or whether Gregoria
predeceased Exequiel. What is pertinent is that Exequiel owned the properties
and he is the ascendant from whom the properties in dispute originally came.
Gregoria, on the other hand, is the descendant who received the properties from
Exequiel by gratuitous title.

Moreover, Article 891 simply requires that the property should have been
acquired by the descendant or prepositus from an ascendant by gratuitous or
lucrative title. A transmission is gratuitous or by gratuitous title when the
recipient does not give anything in return.18 At risk of being repetitious, what was
clearly established in this case is that the properties in dispute were owned by
Exequiel (ascendant). After his death, Gregoria (descendant/prepositus) acquired
the properties as inheritance.

Ascendants, descendants and

collateral relatives under Article
964 of the Civil Code

Article 891 provides that the person obliged to reserve the property should be an
ascendant (also known as the reservor/reservista) of the descendant/prepositus.
Julia, however, is not Gregoria’s ascendant; rather, she is Gregoria’s collateral
relative.
Article 964 of the Civil Code provides for the series of degrees among ascendants
and descendants, and those who are not ascendants and descendants but come
from a common ancestor, viz:

Art. 964. A series of degrees forms a line, which may be either direct or
collateral.1âwphi1 A direct line is that constituted by the series of degrees among
ascendants and descendants.

A collateral line is that constituted by the series of degrees among persons who
are not ascendants and descendants, but who come from a common ancestor.
(Emphasis and italics ours)

Gregoria’s ascendants are her parents, Exequiel and Leonor, her grandparents,
great-grandparents and so on. On the other hand, Gregoria’s descendants, if she
had one, would be her children, grandchildren and great-grandchildren. Not being
Gregoria’s ascendants, both petitioners and Julia, therefore, are her collateral
relatives. In determining the collateral line of relationship, ascent is made to the
common ancestor and then descent to the relative from whom the computation
is made. In the case of Julia’s collateral relationship with Gregoria, ascent is to be
made from Gregoria to her mother Leonor (one line/degree), then to the
common ancestor, that is, Julia and Leonor’s parents (second line/degree), and
then descent to Julia, her aunt (third line/degree). Thus, Julia is Gregoria’s
collateral relative within the third degree and not her ascendant.

First cousins of the

descendant/prepositus are fourth
degree relatives and cannot be
considered reservees/reservatarios

Moreover, petitioners cannot be considered reservees/reservatarios as they are

not relatives within the third degree of Gregoria from whom the properties came.
The person from whom the degree should be reckoned is the
descendant/prepositus―the one at the end of the line from which the property
came and upon whom the property last revolved by descent.19 It is Gregoria in
this case. Petitioners are Gregoria’s fourth degree relatives, being her first
cousins. First cousins of the prepositus are fourth degree relatives and are not
reservees or reservatarios.20
They cannot even claim representation of their predecessors Antonio and
Valentin as Article 891 grants a personal right of reservation only to the relatives
up to the third degree from whom the reservable properties came. The only
recognized exemption is in the case of nephews and nieces of the prepositus, who
have the right to represent their ascendants (fathers and mothers) who are the
brothers/sisters of the prepositus and relatives within the third degree.21 In
Florentino v. Florentino,22 the Court stated:

Following the order prescribed by law in legitimate succession, when there are
relatives of the descendant within the third degree, the right of the nearest
relative, called reservatario, over the property which the reservista (person
holding it subject to reservation) should return to him, excludes that of the one
more remote. The right of representation cannot be alleged when the one
claiming same as a reservatario of the reservable property is not among the
relatives within the third degree belong to the line from which such property
came, inasmuch as the right granted by the Civil Code in Article 811 now Article
891 is in the highest degree personal and for the exclusive benefit of the
designated persons who are the relatives, within the third degree, of the person
from whom the reservable property came. Therefore, relatives of the fourth and
the succeeding degrees can never be considered as reservatarios, since the law
does not recognize them as such.

x x x Nevertheless there is right of representation on the part of reservatarios who

are within the third degree mentioned by law, as in the case of nephews of the
deceased person from whom the reservable property came. x x x.23 (Emphasis and
underscoring ours)

The conclusion, therefore, is that while it may appear that the properties are
reservable in character, petitioners cannot benefit from reserva troncal. First,
because Julia, who now holds the properties in dispute, is not the other
ascendant within the purview of Article 891 of the Civil Code and second, because
petitioners are not Gregoria’s relatives within the third degree. Hence, the CA’s
disposition that the complaint filed with the RTC should be dismissed, only on this
point, is correct. If at all, what should apply in the distribution of Gregoria’s estate
are Articles 1003 and 1009 of the Civil Code, which provide:
Art. 1003. If there are no descendants, ascendants, illegitimate children, or a
surviving spouse, the collateral relatives shall succeed to the entire estate of the
deceased in accordance with the following articles.

Art. 1009. Should there be neither brothers nor sisters, nor children of brothers or
sisters, the other collateral relatives shall succeed to the estate.

The latter shall succeed without distinction of lines or preference among them by
reason of relationship by the whole blood.

Nevertheless, the Court is not in the proper position to determine the proper
distribution of Gregoria’s estate at this point as the cause of action relied upon by
petitioners in their complaint filed with the RTC is based solely on reserva troncal.
Further, any determination would necessarily entail reception of evidence on
Gregoria’s entire estate and the heirs entitled thereto, which is best accomplished
in an action filed specifically for that purpose.

A reservista acquires ownership of

the reservable property until the
reservation takes place or is
extinguished

Before concluding, the Court takes note of a palpable error in the RTC’s
disposition of the case. In upholding the right of petitioners over the properties,
the RTC ordered the reconveyance of the properties to petitioners and the
transfer of the titles in their names. What the RTC should have done, assuming for
argument’s sake that reserva troncal is applicable, is have the reservable nature
of the property registered on respondent’s titles. In fact, respondent, as
reservista, has the duty to reserve and to annotate the reservable character of the
property on the title.24 In reserva troncal, the reservista who inherits from a
prepositus, whether by the latter’s wish or by operation of law, acquires the
inheritance by virtue of a title perfectly transferring absolute ownership. All the
attributes of ownership belong to him exclusively.25

The reservor has the legal title and dominion to the reservable property but
subject to the resolutory condition that such title is extinguished if the reservor
predeceased the reservee. The reservor is a usufructuary of the reservable
property. He may alienate it subject to the reservation. The transferee gets the
revocable and conditional ownership of the reservor. The transferee’s rights are
revoked upon the survival of the reservees at the time of the death of the
reservor but become indefeasible when the reservees predecease the
reservor.26 (Citations omitted)

It is when the reservation takes place or is extinguished,27 that a reservatario

becomes, by operation of law, the owner of the reservable property.28 In any
event, the foregoing discussion does not detract from the fact that petitioners are
not entitled to a reservation of the properties in dispute.

WHEREFORE, the petition is DENIED. The Decision dated November 16, 2006 and
Resolution dated January 17, 2007 of the Court of Appeals in CA-G.R. CV No.
77694 insofar as it dismissed the Third Amended Complaint in Civil Case No. 609-
M-92 are AFFIRMED. This Decision is without prejudice to any civil action that the
heirs of Gregoria

Mendoza may file for the settlement of her estate or for the determination of
ownership of the properties in question.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 125948 December 29, 1998

FIRST PHILIPPINE INDUSTRIAL CORPORATION, petitioner,

vs.
COURT OF APPEALS, HONORABLE PATERNO V. TAC-AN, BATANGAS CITY and
ADORACION C. ARELLANO, in her official capacity as City Treasurer of Batangas,
respondents.
MARTINEZ, J.:

This petition for review on certiorari assails the Decision of the Court of Appeals
dated November 29, 1995, in CA-G.R. SP No. 36801, affirming the decision of the
Regional Trial Court of Batangas City, Branch 84, in Civil Case No. 4293, which
dismissed petitioners' complaint for a business tax refund imposed by the City
of Batangas.

Petitioner is a grantee of a pipeline concession under Republic Act No. 387, as

amended, to contract, install and operate oil pipelines. The original pipeline
concession was granted in 19671 and renewed by the Energy Regulatory Board
in 1992. 2

Sometime in January 1995, petitioner applied for a mayor's permit with the
Office of the Mayor of Batangas City. However, before the mayor's permit could
be issued, the respondent City Treasurer required petitioner to pay a local tax
based on its gross receipts for the fiscal year 1993 pursuant to the Local
Government Code3. The respondent City Treasurer assessed a business tax on
the petitioner amounting to P956,076.04 payable in four installments based on
the gross receipts for products pumped at GPS-1 for the fiscal year 1993 which
amounted to P181,681,151.00. In order not to hamper its operations, petitioner
paid the tax under protest in the amount of P239,019.01 for the first quarter of
1993.

On January 20, 1994, petitioner filed a letter-protest addressed to the

respondent City Treasurer, the pertinent portion of which reads:

Please note that our Company (FPIC) is a pipeline operator with a

government concession granted under the Petroleum Act. It is
engaged in the business of transporting petroleum products from
the Batangas refineries, via pipeline, to Sucat and JTF Pandacan
Terminals. As such, our Company is exempt from paying tax on
gross receipts under Section 133 of the Local Government Code of
1991 . . . .

Moreover, Transportation contractors are not included in the

enumeration of contractors under Section 131, Paragraph (h) of the
Local Government Code. Therefore, the authority to impose tax "on
contractors and other independent contractors" under Section 143,
 Paragraph (e) of the Local Government Code does not include the
power to levy on transportation contractors.

The imposition and assessment cannot be categorized as a mere fee

authorized under Section 147 of the Local Government Code. The
said section limits the imposition of fees and charges on business to
such amounts as may be commensurate to the cost of regulation,
inspection, and licensing. Hence, assuming arguendo that FPIC is
liable for the license fee, the imposition thereof based on gross
receipts is violative of the aforecited provision. The amount of
P956,076.04 (P239,019.01 per quarter) is not commensurate to the
cost of regulation, inspection and licensing. The fee is already a
revenue raising measure, and not a mere regulatory imposition.4

On March 8, 1994, the respondent City Treasurer denied the protest contending
that petitioner cannot be considered engaged in transportation business, thus it
cannot claim exemption under Section 133 (j) of the Local Government Code.5

On June 15, 1994, petitioner filed with the Regional Trial Court of Batangas City
a complaint6 for tax refund with prayer for writ of preliminary injunction against
respondents City of Batangas and Adoracion Arellano in her capacity as City
Treasurer. In its complaint, petitioner alleged, inter alia, that: (1) the imposition
and collection of the business tax on its gross receipts violates Section 133 of
the Local Government Code; (2) the authority of cities to impose and collect a
tax on the gross receipts of "contractors and independent contractors" under
Sec. 141 (e) and 151 does not include the authority to collect such taxes on
transportation contractors for, as defined under Sec. 131 (h), the term
"contractors" excludes transportation contractors; and, (3) the City Treasurer
illegally and erroneously imposed and collected the said tax, thus meriting the
immediate refund of the tax paid.7

Traversing the complaint, the respondents argued that petitioner cannot be

exempt from taxes under Section 133 (j) of the Local Government Code as said
exemption applies only to "transportation contractors and persons engaged in
the transportation by hire and common carriers by air, land and water."
Respondents assert that pipelines are not included in the term "common
carrier" which refers solely to ordinary carriers such as trucks, trains, ships and
the like. Respondents further posit that the term "common carrier" under the
said code pertains to the mode or manner by which a product is delivered to its
destination.8

On October 3, 1994, the trial court rendered a decision dismissing the

complaint, ruling in this wise:

. . . Plaintiff is either a contractor or other independent contractor.

. . . the exemption to tax claimed by the plaintiff has become

unclear. It is a rule that tax exemptions are to be strictly construed
against the taxpayer, taxes being the lifeblood of the government.
Exemption may therefore be granted only by clear and unequivocal
provisions of law.

Plaintiff claims that it is a grantee of a pipeline concession under

Republic Act 387. (Exhibit A) whose concession was lately renewed
by the Energy Regulatory Board (Exhibit B). Yet neither said law nor
the deed of concession grant any tax exemption upon the plaintiff.

Even the Local Government Code imposes a tax on franchise

holders under Sec. 137 of the Local Tax Code. Such being the
situation obtained in this case (exemption being unclear and
equivocal) resort to distinctions or other considerations may be of
help:

1. That the exemption granted under Sec.

133 (j) encompasses only common
carriers so as not to overburden the riding
public or commuters with taxes. Plaintiff is
not a common carrier, but a special carrier
extending its services and facilities to a
single specific or "special customer" under
a "special contract."

2. The Local Tax Code of 1992 was basically

enacted to give more and effective local
autonomy to local governments than the
previous enactments, to make them
economically and financially viable to
 serve the people and discharge their
functions with a concomitant obligation to
accept certain devolution of powers, . . .
So, consistent with this policy even
franchise grantees are taxed (Sec. 137) and
contractors are also taxed under Sec. 143
(e) and 151 of the Code.9

Petitioner assailed the aforesaid decision before this Court via a petition for
review. On February 27, 1995, we referred the case to the respondent Court of
Appeals for consideration and adjudication. 10 On November 29, 1995, the
respondent court rendered a decision 11 affirming the trial court's dismissal of
petitioner's complaint. Petitioner's motion for reconsideration was denied on
July 18, 1996. 12

Hence, this petition. At first, the petition was denied due course in a Resolution
dated November 11, 1996. 13Petitioner moved for a reconsideration which was
granted by this Court in a Resolution 14 of January 22, 1997. Thus, the petition
was reinstated.

Petitioner claims that the respondent Court of Appeals erred in holding that (1)
the petitioner is not a common carrier or a transportation contractor, and (2)
the exemption sought for by petitioner is not clear under the law.

There is merit in the petition.

A "common carrier" may be defined, broadly, as one who holds himself out to
the public as engaged in the business of transporting persons or property from
place to place, for compensation, offering his services to the public generally.

Art. 1732 of the Civil Code defines a "common carrier" as "any person,
corporation, firm or association engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public."

The test for determining whether a party is a common carrier of goods is:

1. He must be engaged in the business of

carrying goods for others as a public
 employment, and must hold himself out as
ready to engage in the transportation of
goods for person generally as a business
and not as a casual occupation;

2. He must undertake to carry goods of the

kind to which his business is confined;

3. He must undertake to carry by the

method by which his business is conducted
and over his established roads; and

4. The transportation must be for hire. 15

Based on the above definitions and requirements, there is no doubt that

petitioner is a common carrier. It is engaged in the business of transporting or
carrying goods, i.e. petroleum products, for hire as a public employment. It
undertakes to carry for all persons indifferently, that is, to all persons who
choose to employ its services, and transports the goods by land and for
compensation. The fact that petitioner has a limited clientele does not exclude
it from the definition of a common carrier. In De Guzman vs. Court of
Appeals 16we ruled that:

The above article (Art. 1732, Civil Code) makes no

distinction between one whose principal business
activity is the carrying of persons or goods or both, and
one who does such carrying only as an ancillary activity
(in local idiom, as a "sideline"). Article 1732 . . . avoids
making any distinction between a person or enterprise
offering transportation service on
a regular or scheduled basis and one offering such
service on an occasional, episodic or unscheduled basis.
Neither does Article 1732 distinguish between a carrier
offering its services to the "general public," i.e., the
general community or population, and one who offers
services or solicits business only from a narrow
segment of the general population. We think that
 Article 1877 deliberately refrained from making such
distinctions.

So understood, the concept of "common carrier" under

Article 1732 may be seen to coincide neatly with the
notion of "public service," under the Public Service Act
(Commonwealth Act No. 1416, as amended) which at
least partially supplements the law on common carriers
set forth in the Civil Code. Under Section 13, paragraph
(b) of the Public Service Act, "public service" includes:

every person that now or hereafter may

own, operate. manage, or control in the
Philippines, for hire or compensation, with
general or limited clientele, whether
permanent, occasional or accidental, and
done for general business purposes, any
common carrier, railroad, street railway,
traction railway, subway motor vehicle,
either for freight or passenger, or both,
with or without fixed route and whatever
may be its classification, freight or carrier
service of any class, express service,
steamboat, or steamship line, pontines,
ferries and water craft, engaged in the
transportation of passengers or freight or
both, shipyard, marine repair shop, wharf
or dock, ice plant, ice-refrigeration plant,
canal, irrigation system gas, electric light
heat and power, water supply andpower
petroleum, sewerage system, wire or
wireless communications systems, wire or
wireless broadcasting stations and other
similar public services. (Emphasis Supplied)

Also, respondent's argument that the term "common carrier" as used in Section
133 (j) of the Local Government Code refers only to common carriers
transporting goods and passengers through moving vehicles or vessels either by
land, sea or water, is erroneous.

As correctly pointed out by petitioner, the definition of "common carriers" in

the Civil Code makes no distinction as to the means of transporting, as long as it
is by land, water or air. It does not provide that the transportation of the
passengers or goods should be by motor vehicle. In fact, in the United States, oil
pipe line operators are considered common carriers. 17

Under the Petroleum Act of the Philippines (Republic Act 387), petitioner is
considered a "common carrier." Thus, Article 86 thereof provides that:

Art. 86. Pipe line concessionaire as common carrier. —

A pipe line shall have the preferential right to utilize
installations for the transportation of petroleum
owned by him, but is obligated to utilize the remaining
transportation capacity pro rata for the transportation
of such other petroleum as may be offered by others
for transport, and to charge without discrimination
such rates as may have been approved by the Secretary
of Agriculture and Natural Resources.

Republic Act 387 also regards petroleum operation as a public utility. Pertinent
portion of Article 7 thereof provides:

that everything relating to the exploration for and

exploitation of petroleum . . . and everything relating
to the manufacture, refining, storage, or transportation
by special methods of petroleum, is hereby declared to
be a public utility. (Emphasis Supplied)

The Bureau of Internal Revenue likewise considers the petitioner a "common

carrier." In BIR Ruling No. 069-83, it declared:

. . . since [petitioner] is a pipeline concessionaire that is

engaged only in transporting petroleum products, it is
considered a common carrier under Republic Act No.
387 . . . . Such being the case, it is not subject to
 withholding tax prescribed by Revenue Regulations No.
13-78, as amended.

From the foregoing disquisition, there is no doubt that petitioner is a "common

carrier" and, therefore, exempt from the business tax as provided for in Section
133 (j), of the Local Government Code, to wit:

Sec. 133. Common Limitations on the Taxing Powers of

Local Government Units. — Unless otherwise provided
herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to
the levy of the following:

xxx xxx xxx

(j) Taxes on the gross receipts

of transportation contractors
and persons engaged in the
transportation of passengers
or freight by hire and common
carriers by air, land or water,
except as provided in this
Code.

The deliberations conducted in the House of Representatives on the Local

Government Code of 1991 are illuminating:

MR. AQUINO (A). Thank you, Mr. Speaker.

Mr. Speaker, we would like to proceed to page 95, line

1. It states: "SEC. 121 [now Sec. 131]. Common

Limitations on the Taxing Powers of Local Government
Units." . . .

MR. AQUINO (A.). Thank you Mr. Speaker.

Still on page 95, subparagraph 5, on taxes on the

business of transportation. This appears to be one of
 those being deemed to be exempted from the taxing
powers of the local government units. May we know
the reason why the transportation business is being
excluded from the taxing powers of the local
government units?

MR. JAVIER (E.). Mr. Speaker, there is an exception

contained in Section 121 (now Sec. 131), line 16,
paragraph 5. It states that local government units may
not impose taxes on the business of transportation,
except as otherwise provided in this code.

Now, Mr. Speaker, if the Gentleman would care to go

to page 98 of Book II, one can see there that provinces
have the power to impose a tax on business enjoying a
franchise at the rate of not more than one-half of 1
percent of the gross annual receipts. So, transportation
contractors who are enjoying a franchise would be
subject to tax by the province. That is the exception,
Mr. Speaker.

What we want to guard against here, Mr. Speaker, is

the imposition of taxes by local government units on
the carrier business. Local government units may
impose taxes on top of what is already being imposed
by the National Internal Revenue Code which is the so-
called "common carriers tax." We do not want a
duplication of this tax, so we just provided for an
exception under Section 125 [now Sec. 137] that a
province may impose this tax at a specific rate.

MR. AQUINO (A.). Thank you for that clarification, Mr.

Speaker. . . . 18

It is clear that the legislative intent in excluding from the taxing power of the
local government unit the imposition of business tax against common carriers is
to prevent a duplication of the so-called "common carrier's tax."
Petitioner is already paying three (3%) percent common carrier's tax on its gross
sales/earnings under the National Internal Revenue Code. 19 To tax petitioner
again on its gross receipts in its transportation of petroleum business would
defeat the purpose of the Local Government Code.

WHEREFORE, the petition is hereby GRANTED. The decision of the respondent

Court of Appeals dated November 29, 1995 in CA-G.R. SP No. 36801 is REVERSED
and SET ASIDE.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 120051 December 10, 2014

CITY OF MANILA, HON. ALFREDO S. LIM, as Mayor of the City of Manila, and
ANTHONY Y. ACEVEDO, City Treasurer, Petitioners,
vs.
HON. ANGEL VALERA COLET, as Presiding Judge, Regional Trial Court of Manila
(Br. 43), and MALAYSIAN AIRLINE SYSTEM, Respondents.

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

G.R. No. 121613

MAERSK-FILIPINAS, INC., AMERICAN PRESIDENT LINES, LTD., FLAGSHIP TANKERS

CORP., CORE INDO MARITIME CORP., and CORE MARITIME CORP., Petitioners,
vs.
CITY OF MANILA, MAYOR ALFREDO LIM, VICE MAYOR LITO
ATIENZA,1 SANGGUNIANG PANLUNGSOD and CITY TREASURER ANTHONY
ACEVEDO, Respondents.

x-----------------------x
G.R. No. 121675

EASTERN SHIPPING LINES, INC., Petitioner,

vs.
CITY COUNCIL OF MANILA, THE MAYOR OF MANILA and THE CITY OF
MANILA, Respondents.

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

G.R. No. 121704

WILLIAM LINES, INC., NEGROS NAVIGATION CO., INC., LORENZO SHIPPING

CORPORATION, CARLOS A. GOTHONG LINES, INC., ABOITIZ SHIPPING
CORPORATION, ABOITIZ AIR TRANSPORT CORPORATION, ABOITIZ HAULERS,
INC., and SOLID SHIPPING LINES CORPORATION, Petitioners,
vs.
REGIONAL TRIAL COURT OF MANILA, BRANCH 32, CITY OF MANILA, MAYOR
ALFREDO LIM, VICE MAYOR LITO ATIENZA, SANGGUNIANG PANLUNGSOD, and
CITY TREASURER ANTHONY ACEVEDO, Respondents.

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

G.R. Nos. 121720-28

PNOC SHIPPING AND TRANSPORT CORPORATION, Petitioner,

vs.
HON. JUAN T. NABONG, JR., Presiding Judge, Regional Trial Court of Manila,
Branch 32; THE CITY OF MANILA; MAYOR ALFREDO LIM; VICE MAYOR LITO
ATIENZA; SANGGUNIANG PANLUNGSOD, and CITY TREASURER ANTHONY
ACEVEDO, Respondents.

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

G.R. Nos. 121847-55

MAERSK-FILIPINAS, INC., AMERICAN PRESIDENT LINES, SEA-LAND SERVICES,

INC., OVERSEAS FREIGHTERS SHIPPING, INC., DONGNAMA SHIPPING CO., LTD.,
FLAGSHIP TANKERS, CORE INDO MARITIME CORP., CORE MARITIME CORP., and
EASTERN SHIPPING LINES, INC., Petitioners,
vs.
CITY OF MANILA, HON. MAYOR ALFREDO S. LIM, HON. VICE MAYOR LITO
ATIENZA, JR., SANGGUNIANG PANLUNGSOD NG MAYNILA, and CITY TREASURER
ANTHONY Y. ACEBEDO and their agents or representatives, and HON. JUDGE
JUAN C. NABONG, JR., Branch 32, Regional Trial Court of Manila,Respondents,

WILLIAM LINES, INC., NEGROS NAVIGATION CO., INC., LORENZO SHIPPING

CORPORATION, CARLOS A. GOTHONG LINES, INC., ABOITIZ SHIPPING
CORPORATION, ABOITIZ AIR TRANSPORT CORPORATION, ABOITIZ HAULERS,
INC., SOLID SHIPPING LINES CORPORATION and PNOC SHIPPING & TRANSPORT
CORPORATION, Intervenors.

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

G.R. No. 122333

COSCO CONTAINER LINES and HEUNG-A SHIPPING CO., LTD., both represented
by their Resident Agent, Wallem Philippines Shipping, Inc.; DSR SENATOR LINES,
COMPANIA SUD AMERICANA DE VAPORES S.A., and ARIMURA SANGYO
COMPANY, LTD., all represented by theirResident Agent, C.F. Sharp Shipping
Agencies, Incorporated; PACIFIC INTERNATIONAL LINES (PTE) LTD. and PACIFIC
EAGLE LINES (PTE) LTD., both represented by their Resident Agent, TMS Ship
Agencies, Inc.; COMPAGNIE MARITIME D' AFFRETEMENT (CMA), represented by
its Resident Agent, Inchcape Shipping Services; EVERETT ORIENT LINES, INC.,
represented by its Resident Agent, Everett Steamship Corporation; YANGMING
MARINE TRANSPORT CORP., represented by its Resident Agent, Sky
International, Inc.; NIPON YUSEN KAISHA, represented by its Resident Agent, Fil-
Japan Shipping Corporation; HYUNDAI MERCHANT MARINE CO. LTD.,
represented by its Resident Agent, Citadel Lines; MALAYSIAN INTERNATIONAL
SHIPPING CORPORATION BERHAD, represented by its Resident Agent, Royal
Cargo Agencies, Inc.; BOLT ORIENT LINE, represented by its Resident Agent,
FILSOV Shipping Company, Inc.; MITSUI-O.S.K. LINES, LTD., represented by its
Resident Agent, Magsaysay Agencies, Inc.; PHILS., MICRONESIA & ORIENT
NAVIGATION CO. (PMSO LINE), represented by its Resident Agent, Van
Transport Company, Inc.; LLOYD TRIESTINO DI NAVIGAZIONE S.P.A.N. and
COMPAGNIE GENERALE MARITIME, both represented by their Resident Agent,
F.E. Zuellig (M), Inc.; and MADRIGAL-WAN HAI LINES, Petitioners,
vs.
CITY OF MANILA, MAYOR ALFREDO LIM, VICE MAYOR LITO ATIENZA,
SANGGUNIANG PANLUNGSOD and City Treasurer ANTHONY Y.
ACEBEDO, Respondents,

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

G.R. No. 122335

SULPICIO LINES, INC., Petitioner,

vs.
REGIONAL TRIAL COURT OF MANILA, BRANCH 32, CITY OF MANILA MAYOR
ALFREDO LIM, VICE MAYOR LITO ATIENZA, SANGGUNIANG PANLUNGSOD and
CITY TREASURER ANTHONY ACEVEDO, Respondents.

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

G.R. No. 122349

ASSOCIATION OF INTERNATIONAL SHIPPING LINES, INC., in its own behalf and in

representation of its Members, Petitioner,
vs.
CITY OF MANILA, MAYOR ALFREDO LIM, VICE MAYOR LITO ATIENZA,
SANGGUNIANG PANLUNGSOD and CITY TREASURER ANTHONY
ACEVEDO, Respondents.

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

G.R. No. 124855

DONGNAMA SHIPPING CO., LTD. and KYOWA SHIPPING LTD. herein represented
by SKY INTERNATIONAL, INC., Petitioners,
vs.
COURT OF APPEALS, CITY OF MANILA MAYOR ALFREDO LIM, VICE MAYOR LITO
ATIENZA, CITY COUNCIL OF MANILA, and CITY TREASURER ANTHONY
ACEVEDO, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

Before the Court are 10 consolidated Petitions, the issue at the crux of which is
the constitutionality and/or validity of Section 21(B) of Ordinance No. 7794 of the
City of Manila, otherwise known as the Revenue Code of the City of Manila
(Manila Revenue Code), as amended by Ordinance No. 7807.2

ANTECEDENT FACTS

The Manila Revenue Code was enacted on June 22, 1993 by the City Council of
Manila and approved on June 29, 1993 by then Manila Mayor Alfredo S. Lim (Lim).
Section 21(B) of said Code originally provided:

Section 21. Tax on Businesses Subject to the Excise, Value-Added or Percentage

Taxes Under the NIRC. - On any of the following businesses and articles of
commerce subject to the excise, value-added or percentage taxes under the
National Internal Revenue Code, hereinafter referred to as NIRC, as amended, a
tax of three percent (3%) per annum on the gross sales or receipts of the
preceding calendar year is hereby imposed:

xxxx

B) On the gross receipts of keepers of garages, cars for rent or hire driven by the
lessee, transportation contractors, persons who transport passenger or freight for
hire, and common carriers by land, air or water, except owners of bancas and
owners of animal-drawn two-wheel vehicle.

Shortly thereafter, Ordinance No. 7807 was enacted by the City Council of Manila
on September 27, 1993 and approved by Mayor Lim on September 29, 1993,
already amending several provisions of the Manila Revenue Code. Section 21 of
the Manila Revenue Code, as amended, imposed a lower tax rate on the
businesses that fell under it, and paragraph (B) thereof read as follows:

Section 21. Tax on Business Subject to the Excise, Value-Added or Percentage

Taxes Under the NIRC – On any of the following businesses and articles of
commerce subject to the excise, value-added or percentage taxes under the
National Internal Revenue Code hereinafter referred to as NIRC, as amended, a
tax of FIFTY PERCENT (50%) OF ONE PERCENT (1%) per annum on the gross sales
or receipts of the preceding calendar year is hereby imposed:
 xxxx

B) On the gross receipts of keepers of garages, cars for rent or hire driven by the
lessee, transportation contractors, persons who transport passenger or freight for
hire, and common carriers by land, air or water, except owners of bancas and
owners of animal-drawn two-wheel vehicle.

The City of Manila, through its City Treasurer, began imposing and collecting the
business tax under Section 21(B) of the Manila Revenue Code, as amended,
beginning January 1994.

G.R. No. 120051

Malaysian Airline System (MAS) isa foreign corporation organized and existing
under the laws of Malaysia. It is licensed to engage in business in the Philippines
by the Securities and Exchange Commission (SEC), particularly in the airline
business which involves the transportation of passengers and cargo for hire. Its
principal office and place of business in the Philippines is located in the City of
Manila.

As MAS was renewing its business permit for 1994, it was assessed by the City
Treasurer of Manila on January 17, 1994 for the following taxes and fees:

Mayor’s permit and regulatory fees P 10,307.50

Municipal license tax or business tax 1,100,000.00
3
Total P 1,110,307.50

MAS, believing that it was exempt from the municipal license tax or business tax,
tendered, via Far East Bank and Trust Company (FEBTC) Check No. 06564 dated
January 19, 1994,only the amount of ₱10,307.50 for the mayor’s permit and
regulatory fees. The City Treasurer of Manila refused to accept FEBTC Check No.
06564.

Consequently, on January 20, 1994,MAS instituted Civil Case No. 94-69052, to

consign with the trial court the amount of ₱10,307.50 for mayor’s permit and
regulatory fees; to challenge the assessment against it by the City Treasurer of
Manila in the amount of ₱1,100,000.00 for municipal license tax or business tax;
and to have Section 21(B) of the Manila Revenue Code, as amended, on which
said assessment for municipal license tax or business tax was based, be declared
invalid or null and void. Civil Case No. 94-69052 was assigned to the Regional Trial
Court (RTC) of Manila, Branch 43.

On April 3, 1995, RTC-Branch 43 rendered a Decision4 in favor of MAS. The

dispositive portion of said Decision reads:

WHEREFORE, the foregoing disquisitions considered, judgment is hereby

rendered in favor of the plaintiff against the defendants:

1. Declaring the consignation valid and made in accordance with law;

2. Ordering defendants to issue to plaintiff the mayor’s permit or permit to

operate for 1994, the necessary certificates and official receipts evidencing
payment of *plaintiff’s+ liabilities for mayor’s permit fee and other
regulatory fees for 1994; and,

3. Declaring Section 21(B) of Ordinance No. 7794, as amended by

Ordinance No. 7807, of the City of Manila as invalid or null and void insofar
as it imposes a business tax on transportation contractors, persons engaged
in the transportation of passengers or freight by hire and common carriers
by air, land or water, or that plaintiff is exempt from the tax imposed by
said section 21(B).

4. Declaring plaintiff’s obligation to the defendant City of Manila for

mayor’s permit fee and other regulatory fees for 1994 as having been paid
and extinguished without any liability for surcharges, interests or any
additional amount whatsoever.

Not having been proven, the prayer for the payment of attorney’s fees is denied.
No pronouncement as to costs.5

The City of Manila, Mayor Lim, and City Treasurer Anthony Y. Acevedo (Acevedo)
filed with the Court a Petition for Review on Certiorari,6 assailing the Decision
dated April 3, 1995 of RTC-Branch 43 in Civil Case No. 94-69052 based on pure
questions of law. They assigned the following errors on the part of RTC-Branch 43:
 4.1. That the trial court erred in declaring Section 21(B) of [the Manila
Revenue Code, as amended,]as invalid or null and void.

4.2. That the trial court erred indeclaring the consignation valid and made
in accordance with law.7

The City of Manila, Mayor Lim, and City Treasurer Acevedo prayed in their
Petition that the Court (1) reverse and set aside the assailed RTC Decision; and (2)
affirm the constitutionality and validity of Section 21(B) of the Manila Revenue
Code, as amended. The Petition was docketed as G.R. No. 120051.

MAS filed its Comment,8 to which the City of Manila, Mayor Lim, and City
Treasurer Acevedo filed their Reply.9

G.R. No. 121613

Because they were assessed and/or compelled to pay business taxes pursuant to
Section 21(B) of the Manila Revenue Code, as amended, before they were issued
their business permits for 1994, several corporations, with principal offices in
Manila and operating as "transportation contractors, persons who transport
passenger or freight for hire, and common carriers by land, air or water," filed
their respective petitions before the Manila RTC against the City of Manila, Mayor
Lim, Vice Mayor Lito Atienza (Atienza), the City Council of Manila/Sangguniang
Panlungsod ng Maynila, and City Treasurer Acevedo. Said petitions were
separately docketed and raffled to different RTC Branches, to wit:

Civil Case Petitioner RTC-Branch

No. No.
94-68861 Maersk Filipinas, Inc. (Maersk) 32
94-68862 American President Lines, Ltd. (APL) 33
94-68863 Sea-Land Services, Inc. (SeaLand) 34
94-68919 Overseas Freighters Shipping, Inc. (OFSI) 55
94-68936 Dongnama Shipping Co., Ltd. (Dongnama) and 47
Kyowa Shipping, Ltd. (Kyowa)
94-68939 Flagship Tankers Corp. (Flagship Tankers) 21
 94-68940 Core Indo Maritime Corp. (CIMC) 21
94-68941 Core Maritime Corp. (CMC) 21
94-6902810 Eastern Shipping Lines, Inc. (Eastern Shipping)

All of the aforementioned cases were later consolidated before RTCBranch 32.

Several more corporations with principal offices in Manila and engaged in the
same line of business as the above-named petitioner corporations filed
petitions/complaints-in-intervention in the pending cases, namely: William Lines,
Inc. (William Lines); Negros Navigation Co., Inc. (Negros Navigation); Lorenzo
Shipping Corp. (Lorenzo Shipping); Carlos A. Gothong Lines, Inc. (Gothong Lines);
Aboitiz Shipping Corp., Aboitiz Air Transport Corp., and Aboitiz Haulers, Inc.
(collectively referred to as the Aboitiz Group); Solid Shipping Lines Corp. (Solid
Shipping); and PNOC Shipping & Transport Corp. (PSTC).

Petitioner and intervenor corporations essentially sought the (1) declaration of

Section 21(B) of the Manila Revenue Code, as amended, as void/invalid for being
contrary to the Constitution and the Local Government Code (LGC) of 1991; (2)
refund of the business taxes that the petitioner and intervenor corporations paid
under protest; and (3) the issuance of a temporary restraining order (TRO), writ of
preliminary injunction, writ of prohibition, and/or writ of permanent injunction to
enjoin the implementation of Section 21(B) of the Manila Revenue Code, as
amended.

RTC-Branch 32 issued a TRO11 on January 14, 1994 in favor of petitioners Maersk,

APL, Flagship Tankers, CIMC, and CMC. The TRO was effective for 20 days and
ordered respondent City of Manila and local officials to cease and desist from
implementing Section 21(B) of the Manila Revenue Code, as amended, while the
prayer for a writ of preliminary injunction was scheduled for presentation of
evidence. On February 3, 1992, after hearing, RTC-Branch 32 issued an Order
granting the prayer of petitioners Maersk, APL, Flagship Tankers, CIMC, CMC, and
OFSI for the issuance of a Writ of Preliminary Injunction,12 with the condition that
each of said petitioner corporations should post an injunction bond in the amount
of ₱50,000.00. The Writ of Preliminary Injunction enjoined respondent City of
Manila and local officials from: (1) imposing, enforcing, assessing, and collecting
the taxes under Section 21(B) of the Manila Revenue Code, as amended; and (2)
denying to petitioners Maersk, APL, Flagship Tankers, CIMC, CMC, and OFSI their
business permits and licenses for 1994. In another Order dated April 22, 1994,
RTC-Branch 32 granted the prayer of intervenor corporations for the issuance of a
similar Writ of Preliminary Injunction.

In its Decision13 dated August 28, 1995 in Civil Case Nos. 94-68861, 94-68862, 94-
68863, 94-68919, 94-68936, 94-68939,94-68940, 94-68941, and 94-69028, RTC-
Branch 32 upheld the power of the respondent City of Manila, as a local
government unit (LGU), to levy the business tax under Section 21(B) of the Manila
Revenue Code, as amended, consistent with the basic policy of local autonomy.
Ultimately, RTC-Branch 32 decreed:

WHEREFORE, the petitions, the supplemental petitions, and the petitions or

complaints in intervention in all these cases are DISMISSED.

All temporary restraining orders are cancelled, all writs of preliminary injunction
are recalled and dissolved, and the injunction bonds cancelled.14

Maersk, APL, Flagship Tankers, CIMC, and CMC (collectively referred to herein as
Maersk, et al.), filed a direct appeal before the Court. Initially, Maersk, et al., filed
a motion for extension of time to file their petition for review on certiorari. Upon
filing of said motion, they were assessed docket and legal fees in the amount of
₱420.00, which they fully paid. The motion for extension of time was granted by
the Court in a Resolution15 dated October 4, 1995. Within the extended period,
Maersk, et al., filed their Petition for Review on Certiorari with prayer for issuance
of a writ of preliminary injunction and TRO,16 docketed as G.R. No. 121613,
naming RTC-Branch 32, the City ofManila, Mayor Lim, Vice Mayor Atienza, the
Sangguniang Panlungsod ng Maynila, and City Treasurer Acevedo, as respondents.
Maersk, et al., submitted for resolution by the Court a lone question of law, viz.:

Whether or not Section 21(B) of Ordinance No. 7794, otherwise known as the
Revenue Code of the City of Manila, as amended by Section 1(G) of Ordinance No.
7807, is valid and constitutional.17

Meanwhile, Maersk, et al., also filed with RTC-Branch 32 a Motion to Stay or

Restore Writ of Preliminary Injunction, presenting a Memorandum issued by City
Treasurer Acevedo already ordering the collection of the business tax under
Section 21(B) of the Manila Revenue Code, as amended. In an Order18 dated
October 16, 1995, RTC-Branch 32 granted the Motion of Maersk, et al., after
finding the same to be meritorious and in conformity with Rule 39, Section 4 of
the Rules of Court, on the condition that Maersk, et al., would increase their
injunction bond from ₱50,000.00 each to ₱800,000.00 each, or for a total of
₱4,000,000.00. With this latest development, Maersk, et al., filed with the Court a
Supplemental Petition and Motion praying for the confirmation of the RTC Order
dated October 16, 1995 restoring the Writ of Preliminary Injunction and deletion
of the name of RTC-Branch 32 from the caption of the Petition in G.R. No. 121613
as the trial court is not a necessary party.

On October 23, 1995 though, the Court issued a Resolution19 in G.R. No. 121613 in
which it resolved as follows:

On the basis of the foregoing, the Court RESOLVED to DISMISS the petition for
review on certiorari for non-compliance with the above mentioned requirement
no. 1, *Maersk, et al.,+ having failed to remit the amount of ₱202.00 as payment
for the balance of the prescribed legal fees. Accordingly, the supplemental
petition and motion of [Maersk, et al.,] dated October 17, 1995 praying that the
lower court’s order restoring the Writ of Preliminary Injunction be confirmed and
that the Regional Trial Court of Manila, Branch 32, be deleted from the caption of
the petition for not being a necessary party is NOTED WITHOUT ACTION.

Maersk, et al., filed a Motion for Reconsideration20 of the foregoing Resolution

dated October 23, 1995 of the Court. Maersk, et al., argued that the dismissal of
their Petition by minute resolution would deprive them of their property rights on
mere technical grounds. Maersk, et al., had no intention of not paying the amount
of ₱202.00, which consisted of sheriff’s fee of ₱200.00 and clerk’s commission of
₱2.00, charged in connection with their prayer for the issuance of a preliminary
injunction and TRO. While Maersk, et al., did include such a prayer in their
Petition, the same had already become moot and academic after RTC-Branch 32
issued the Order dated October 16, 1995 restoring and reinstating the Writ of
Preliminary Injunction in favor of Maersk, et al. In their Supplemental Petition and
Motion in G.R. No. 121613, Maersk, et al., was then only seeking the confirmation
by the Court of the Order dated October 16, 1995 of RTC-Branch 32 and, in effect,
withdrawing their prayer for the issuance of a writ of preliminary injunction and
TRO by the Court. Besides, Maersk, et al., submitted that the sheriff’s fee of
₱200.00 and clerk’s commission of ₱2.00 were not part of the "legal fees"
required for perfecting an appeal from the decision of the Court of Appeals or the
RTC. The sheriff’s fee and clerk’s commission would merely be "deposited" with
the Court, which implied that said amounts would be "refunded" to Maersk, et
al., in case the Court decided not to issue the TRO prayed for. In fact, when
Maersk, et al., filed their motion for extension of time tofile their petition for
review on certiorari, they fully paid the docket and legal fees as computed by the
cashier of the Court; and when they actually filed their Petition for Review on
Certiorari with prayer for issuance of a writ of preliminary injunction and TRO,
they were not assessed and required to pay additional legal fees. In any event,
Maersk, et al., had already deposited with the Cashier’s Office of the Court the
amount of ₱202.00. Maersk, et al., asserted that their case is meritorious and that
dismissal is discretionary for the appellate court and discretion must be exercised
wisely and prudently, never capriciously, with a view to substantial justice.
Consequently, Maersk, et al., prayed that the Court reconsider its Resolution
dated October 23, 1995 and give due course to and squarely resolve their Petition
and Supplemental Petition and Motion in G.R. No. 121613.

Counsel for Maersk, et al., subsequently submitted a joint Memorandum21 for the
petitioners in G.R. Nos. 121613, 122333, and 122349.

G.R. No. 121675

Eastern Shipping was the petitioner in Civil Case No. 94-69028, which was
consolidated with Civil Case Nos. 94-68861, 94-68862, 94-68863, 94-68919, 94-
68936, 94-68939, 94-68940, and 94-68941, before RTC-Branch 32.

Since the Decision dated August 28,1995 of RTC-Branch 32 in the consolidated

cases was contrary to its interest, Eastern Shipping appealed the same before the
Court through a Petition for Review on Certiorari with Prayer for Preliminary
Injunction and/or Temporary Restraining Order,22 with the City Council of Manila,
the Mayor of Manila, and the City of Manila, as respondents. In its Petition,
docketed as G.R. No. 121675, Eastern Shipping raised pure questionsof law and
argued two fundamental issues:

I.

WHETHER OR NOT SECTION 21 OF [THE MANILA REVENUE CODE, AS AMENDED,]

IS VALID AND CONSTITUTIONAL.

II.
IN THE REMOTE POSSIBILITYTHAT THE QUESTIONED ORDINANCE IS DECLARED
VALID AND CONSTITUTIONAL, WHETHER OR NOT [EASTERN SHIPPING] IS LIABLE
TO PAY THE BUSINESS TAX BASED ON GROSS RECEIPTS DERIVED FROM
INCOMING FREIGHTS ONLY OR OUTGOING FREIGHTS ONLY OR BOTH.23

The Office of the City Legal Officer, on behalf of the City of Manila, Mayor Lim,
Vice Mayor Atienza, the City Council of Manila/Sangguniang Panlungsod ng
Maynila, and City Treasurer Acevedo, filed a joint Comment24 on the Petitions in
G.R. Nos. 121675, 121720-28, and 121847-55. Eastern Shipping later on filed its
Memorandum.25

G.R. No. 121704

William Lines, Negros Navigation, Lorenzo Shipping, Gothong Lines, the Aboitiz
Group, and Solid Shipping (collectively referred to herein as William Lines, et al.)
are duly organized domestic corporations principally engaged in the business of
operating domestic shipping vessels for the transportation of cargoes and
passengers, except Aboitiz Air Transport Corp., which is engaged in the
transportation of cargoes by air, and Aboitiz Haulers, Inc. which is engaged in the
business of domestic freight and hauling by land. William Lines, et al., all have
principal addresses in Manila.

William Lines, et al., paid under protest to the City of Manila the business taxes
assessed against them for the first quarter of 1994, based on Section 21(B) of the
Manila RevenueCode, as amended. They were intervenors in Civil Case Nos. 94-
68861, 94-68862, 94-68863, 94-68919, 94-68936, 94-68939, 94-68940, 94-68941,
and 94-69028, before RTCBranch 32.

William Lines, et al., challenged the Decision dated August 28, 1995 rendered by
RTC-Branch 32 in said civil cases through a Petition for Review on Certiorari with
Prayer for Issuance of a Preliminary Injunction and for a Temporary Restraining
Order,26 docketed as G.R. No. 121704. They identified as respondents the City
ofManila, Mayor Lim, Vice Mayor Atienza, City Treasurer Acevedo, the
Sangguniang Panlungsod ng Maynila, and RTC-Branch 32 Presiding Judge Juan C.
Nabong, Jr. (Nabong). William Lines, et al., assigned three major errors urportedly
committed by RTC-Branch 32:
A. The RTC erred in failing to declare the aforecited Section 21(B) of [the Manila
Revenue Code, as amended, as] ultra vires and therefore null and void because
such sections violate the Provisions of the LGC x x x.

xxxx

B. The RTC erred in holding that Sec. 143(h) which is an omnibus grant of power
couched in general terms is the exception referred or adverted to in Section 133(j)
of the LGC.

C. The RTC erred in holding that there are only four basic requirements for a valid
exercise of the power of the City of Manila to levy tax.27

In their Memorandum,28 William Lines, et al., focused their discussion on the

following issues: I. IS COMPLIANCE WITH THE GUIDELINES AND LIMITATIONS SET
FORTH IN BOOK II TITLE I OF THE LOCAL GOVERNMENT [CODE](LGC) NECESSARY
FOR THE VALIDITY OF SEC. 21(B)OF [THE MANILA REVENUE CODE, AS AMENDED]?

II. DID SEC. 21(B) OF [THE MANILA REVENUE CODE, AS AMENDED] VIOLATE
SUCH GUIDELINES AND LIMITATIONS OF THE LGC?

III. IS SEC. 21(B) OF [THE MANILA REVENUE CODE, AS AMENDED,] INVALID,

ULTRA VIRES AND UNLAWFUL?29

G.R. Nos. 121720-28

PSTC is a government owned and controlled corporation engaged in the business

of shipping, tinkering, lighterage, barging, towing, transport, and shipment of
goods, chattels, petroleum and other products, marine, and maritime commerce
in general.

Pursuant to Section 21(B) of the Manila Revenue Code, as amended, PSTC was
assessed by the City of Manilafor business tax in the amount of ₱2,233,994.35,
representing 50% of 1% of the gross receipts earned by PSTC in the year 1993
which amounted to ₱446,798,871.87. The total amount of business tax due was
payable infour equal parts every quarter of 1994. PSTC paid under protest on
January 19, 1994 the business tax for the first quarter of 1994 in the amount of
₱558,498.59, and on April 20, 1994 the business tax for the second quarter of
1994 in the amount of ₱558,498.59, evidenced by Municipal License Receipt Nos.
003483 and 0057675, respectively. PSTC claimed it had no other recourse but to
pay to the City of Manila the assessed local business tax, considering the latter
had threatened to cancel its license to operate if said taxes were not paid. PSTC,
by way of letters dated February 21, 1994 and April 27, 1994, filed protests or
claims for refund with the City Treasurer of Manila, but the letters were not acted
upon.

PSTC intervened in Civil Case Nos. 94-68861, 94-68862, 94-68863, 94-68919, 94-
68936, 94-68939, 94-68940, 94-68941, and 94-69028 before RTC-Branch 32.

Unsatisfied with the Decision dated August 28, 1995 rendered by RTC-Branch 32
in the said civil cases, PSTC filed with the Court a Petition for Review on Certiorari
with Prayer for Temporary Restraining Order and/or Preliminary
Injunction,30 against Presiding Judge Nabong of RTC Branch 32, the City of Manila,
Mayor Lim, Vice Mayor Atienza, City Treasurer Acevedo, and the Sangguniang
Panlungsod ng Maynila. In its Petition, docketed as G.R. No. 121720-28, PSTC
maintained that RTCBranch 32 erred thus:

IN FAILING TO REALIZE AND CONSIDER THAT THE RESPONDENT CITY OF MANILA,

A MERE MUNICIPAL CORPORATION, HAS NO INHERENT POWER OF TAXATION.

II

EVEN ASSUMING ARGUENDO THAT SUCH POWER IS CATEGORICALLY GRANTED

BY STATUTE, THE SAME IS SUBJECT TO SUCH GUIDELINES AND LIMITATIONS
PROVIDED BY CONGRESS UNDER SECTION 133 OF THE LOCAL GOVERNMENT
CODE OF 1991 AND, AS TO WHICH, NONE WAS GIVEN TO RESPONDENT CITY OF
MANILA.

III

IN FAILING TO REALIZE AND CONSIDER THAT AN ORDINANCE WHICH AMENDS,

ENLARGES OR LIMITS THE PROVISIONS OF A STATUTE CONSTITUTES AN
UNCONSTITUTIONAL AND ILLEGAL DEROGATION OF LEGISLATIVE POWER, HENCE,
THE ORDINANCE IS INVALID AND VOID AB-INITIO.

IV
IN FAILING TO REALIZE AND CONSIDER THAT THE RESPONDENT CITY OF MANILA’S
[REVENUE CODE, AS AMENDED, PARTICULARLY SECTION 21(B) THEREOF] WHICH
IMPOSES 50% OF 1% OF THE GROSS SALES OR RECEIPT OF THE NEXT PRECEDING
YEAR, ON TOP OF THE NATIONAL INTERNAL REVENUE TAXES ALREADY IMPOSED
UNDER THE NATIONAL INTERNAL REVENUE CODE, IS UNREASONABLE, UNJUST,
UNFAIR OR OPPRESSIVE, CONFISCATORY, AND CONTRAVENES THE CONSTITUTION
OR STATUTE,HENCE, THE ORDINANCE IS INVALID AND NULL AND VOID AB-INITIO.

IN FAILING TO REALIZE AND CONSIDER THAT THE TAX IMPOSED UNDER SECTION
21(B) OF [THE MANILA REVENUE CODE, AS AMENDED,] PARTAKES THE NATURE
OF A SALES TAX OR A PERCENTAGE TAX BEYOND THE TAXING POWER OF THE
RESPONDENT CITY OF MANILA TO IMPOSE, HENCE, UNENFORCEABLE BY
RESPONDENT CITY OFFICIALS.

VI

IN FAILING TO REALIZE AND CONSIDER THAT [PSTC] IS SPECIFICALLY EXEMPTED

FROM LOCAL GOVERNMENT TAXES IMPOSED UNDER THE LOCAL GOVERNMENT
CODE OF 1991, PURSUANT TO SECTION 115 OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED BY REPUBLIC ACT 7761.31

As mentioned previously, the Officeof the City Legal Officer, on behalf of the City
of Manila, MayorLim, Vice Mayor Atienza, the City Council of Manila/Sangguniang
Panlungsod ng Maynila, and City Treasurer Acevedo, filed a joint Comment on the
Petitions in G.R. Nos. 121675, 121720-28, and 121847-55.

PSTC filed its Memorandum,32 summing up its issues and arguments, to wit:

ISSUES SUBMITTED FOR RESOLUTION

1. WHETHER OR NOT SECTION 21(B) OF [THE MANILA REVENUE

CODE, AS AMENDED,] IS VALID AND CONSTITUTIONAL.

2. IN THE NEGATIVE[,] WHETHER OR NOT RESPONDENTS CAN BE

COMPELLED TO REFUND THE TAXES WRONGFULLY AND
ERRONEOUSLY COLLECTED UNDER THE ASSAILED ORDINANCE.
ARGUMENTS IN SUPPORT OF THE MEMORANDUM

I. THE ASSAILED ORDINANCE ISA CLEAR USURPATION OF LEGISLATIVE

POWER, HENCE,UNCONSTITUTIONAL AND VOID AB-INITIO.

II. THE ASSAILED ORDINANCE IN ITSELF IS UNJUST, UNFAIR, OR

EXCESSIVE, CONFISCATORY AND IN RESTRAINT OF TRADE AND IN
EFFECT CONSTITUTES AN UNLAWFUL TAKING OF PROPERTY
WITHOUT DUE PROCESS OF LAW.33

G.R. Nos. 121847-55

OFSI is a domestic corporation engaged in business as a transportation contractor.

It also represents, as a general agent in the Philippines, ZIM Israel Navigation Co.,
Ltd. and Gold Star Line, Hong Kong, which are engaged in the transport by
common carrier of export/import goods to and from the Philippines. Its offices
are located in Intramuros, Manila.

OFSI questioned the legality of Section 21(B) of the Manila Revenue Code, as
amended, in a Petition for Declaratory Relief with Prayer for Preliminary
Injunction and/or Temporary Restraining Order, which was docketed as Civil Case
No. 94-68919 and originally raffled to RTC-Branch 55. Civil Case No. 94-68919 was
eventually consolidated with Civil Case Nos. 94-68861, 94-68862,94-68863, 94-
68936, 94-68939, 94-68940, 94-68941, and 94-69028 before RTC-Branch32.
During the pendency of said civil cases, OFSI paid under protest on January 20,
1994 the business tax for the first quarter of 1994 amounting to ₱181,928.97.
Pursuant to Section 196 of the Local Government Code (LGC),OFSI wrote the City
Treasurer of Manila a letter dated March 1, 1994 claiming refund of the business
tax it had paid. The letter was received by the City Treasurer’s Office of Manila on
March 3, 1994. The City Treasurer’s Office of Manila had seven days from receipt
of the letter to refund the amount paid, but more than two months had passed
and OFSI received no response from the City Treasurer. To avoid multiplicity of
suits, OFSI filed a Supplemental Petition in Civil Case No. 94-68919 to incorporate
its claim for refund of the business tax it had paid for the first quarter of 1994.

Aggrieved by the Decision dated August 28, 1995 of RTC-Branch 32 in Civil Case
Nos. 94-68861, 94-68862,94-68863, 94-68919, 94-68936, 94-68939, 94-68940,
94-68941, and 94-69028, OFSI sought recourse from the Court by filing a Petition
for Review by Certiorari with Prayer for the Issuance of a Preliminary Injunction
and/or Temporary Restraining Order,34 naming as respondents the City of Manila,
Mayor Lim, Vice Mayor Atienza, the City Council of Manila, City Treasurer
Acevedo, and Presiding Judge Nabong of RTC-Branch 32. The Petition of OFSI,
docketed as G.R. Nos. 121847-55, presented for consideration and resolution of
the Court the following:

Assignment of Errors

THE RESPONDENT HONORABLE JUDGE ERRED IN HIS FINDING THAT SECTION

21(B) OF [THE MANILA REVENUE CODE, AS AMENDED,] IS VALID AND
CONSTITUTIONAL.

Legal Issues Involved In This Petition

WHETHER OR NOT SECTION 21(B) OF [THE MANILA REVENUE CODE, AS

AMENDED,] IS VALID AND CONSTITUTIONAL.

WHETHER OR NOT A WRIT OF PRELIMINARY INJUNCTION AND/OR TEMPORARY

RESTRAINING ORDER MAY BE ISSUED BY THE HONORABLE COURT.35

In a subsequent Manifestation,36 OFSI informed the Court that RTCBranch 32

issued an Order dated October 26, 1995 granting its Motion to Restore Injunction
Pending Appeal; reinstating and restoring the Writ of Preliminary Injunction lifted
on August 28, 1995; and requiring OFSI to post a bond in the increased amount of
₱300,000.00.

A joint Comment on the Petitions in G.R. Nos. 121675, 121720-28, and 121847-55
was filed by the Office of the City Legal Officer, on behalf of the City of Manila,
MayorLim, Vice Mayor Atienza, the City Council of Manila/Sangguniang
Panlungsod ng Maynila, and City Treasurer Acevedo.

The Reply37 of OFSI was the last pleading filed in G.R. Nos. 121847-55.

G.R. No. 122333

After RTC-Branch 32 rendered its Decision in Civil Case Nos. 94-68861, 94-68862,
94-68863,94-68919, 94-68936, 94-68939, 94-68940, 94-68941, and 94-69028 on
August 28, 1995, upholding the constitutionality and validity of Section 21(B) of
the Manila Revenue Code, as amended, and lifting the Writs of Preliminary
Injunction issued in said cases, the City of Manila and its officials resumed the
enforcement of the local business tax in question. City Treasurer Acevedo issued a
Memorandum dated September 7, 1995, instructing Oscar S. Dizon, Acting Chief,
License Division, City Treasurer’s Office of Manila, to prepare the complete staff
work "for the collection of the unpaid taxes, plus interests" imposed by Section
21(B) of the Manila Revenue Code, as amended, against shipping companies and
other common carriers.

A Petition for Prohibition with Temporary Restraining Order and/or Preliminary

Injunction38 was jointly filed before the Court by several foreign and domestic
corporations doing business in Manila as shipping companies and/or common
carriers, namely: Cosco Container Lines (Cosco) and Heung-A Shipping Co., LTD.,
both represented by their resident agent, Wallem Philippines Shipping, Inc.; DSR
Senator Lines, Compania Sud Americana de Vapores S.A., and Arimura Sangyo
Company, Ltd., all represented by their resident agent, C.F. Sharp Shipping
Agencies, Inc.; Pacific International Lines (PTE) Ltd. and Pacific Eagle Lines (PTE)
Ltd., both represented by their resident agent, TMS Ship Agencies, Inc.;
Compagnie Maritime D’ Affretement (CMA), represented by its resident Agent,
Inchcape Shipping Services; Everett Orient Lines, Inc., represented by it resident
agent, Everett Steamship Corporation; Yangming Marine Transport Corp.,
represented by its resident agent, Sky International, Inc.; Nipon Yusen Kaisha,
represented by its resident agent, Fil-Japan Shipping Corporation; Hyundai
Merchant Marine Co., Ltd., represented by its resident agent, Citadel Lines;
Malaysian International Shipping Corporation Berhad, represented by its resident
agent, Royal Cargo Agencies, Inc.; Bolt Orient Line, represented by its resident
agent, FILSOV Shipping Company, Inc.; Mitsui-O.S.K. Lines, Ltd., represented by its
resident agent, Magsaysay Agencies, Inc.; Phils., Micronesia & Orient Navigation
Co. (PMSO Line), represented by its resident agent, Van Transport Company, Inc.;
Lloyd Triestino di Navigazione S.P.A.N. and Compagnie Generale Maritime, both
represented by their resident agent, F.E. Zuellig (M), Inc.; and MadrigalWan Hai
Lines (collectively referred to herein as Cosco, et al.).

The Petition of Cosco, et al., was docketed as G.R. No. 122333. In their Petition,
Cosco, et al., presented for resolution of the Court the principal issue of whether
or not Section 21(B) of the Manila Revenue Code, as amended, is constitutional.
Cosco, et al., posited that Section 21(B) of the Manila Revenue Code, as amended,
is unconstitutional and void ab initio because it was enacted by the Sangguniang
Panlungsod ng Maynila, which was presided over by Vice Mayor Atienza,
approved by Mayor Lim, and implemented and enforced by City Treasurer
Acevedo, ultra viresand in violation of constitutional and statutory limitations on
the taxing power of LGUs. Hence, Cosco, et al., prayed for the issuance of a writ of
prohibition to restrain, enjoin, and prohibit respondents City of Manila, Mayor
Lim, Vice Mayor Atienza, Sangguniang Panlungsod, and City Treasurer Acevedo,
from enforcing Section 21(B) of the Manila Revenue Code, as amended.

A joint Memorandum was filed on behalf of the petitioners in G.R. Nos. 121613,
122333, and 122349.

G.R. No. 122335

Sulpicio Lines, Inc. (Sulpicio Lines) is a domestic corporation, holding office in

North Harbor, Manila, whose principal business is the operation of domestic
shipping vessels for the transportation of cargoes and passengers.

Sulpicio Lines and Gothong Lines jointly filed a complaint for declaratory relief
with prayer for the issuance of a writ of preliminary injunction, which was
docketed as Civil Case No. 94-69141 and raffled to RTC-Branch 44. Sulpicio Lines
and Gothong Lines asked the trial court to determine the validity of Section
21(B)of the Manila Revenue Code, as amended, as well as the rights and duties of
said shipping companies thereunder. However, after being informed that Maersk
already filed a similar case, i.e., Civil Case No. 94-68861 before RTC-Branch 32,
Gothong Lines decided to withdraw as complainant in Civil Case No. 94-69141 and
simply intervene in Civil Case No. 94-68861. As a result, Sulpicio Lines became the
sole complainant in Civil Case No. 94-69141. Sulpicio Lines then filed a Motion to
Consolidate Civil Case No. 94-69141 with Civil Case No. 94-68861 which was
granted.

On August 28, 1995, RTC-Branch 32 rendered a Decision in Civil Case Nos. 94-
68861, 94-68862, 94-68863, 94-68919, 94-68936, 94-68939, 94-68940, 94-68941,
and 94-69028. Civil Case No. 94-69141 was not included in the caption of the
Decision,although the complaint of Sulpicio Lines was mentioned in the body of
the same Decision.

Sulpicio Lines did not formally receive a copy of the aforementioned Decision
dated August 28, 1995 of RTC-Branch 32 and was merely informed of the same by
the petitioners/intervenors in the other civil cases. This prompted Sulpicio Lines
to file with RTC-Branch 32 a Motion for Clarificatory Order seeking to verifyif said
Decision included and was binding on Sulpicio Lines. Acting on the Motion of
Sulpicio Lines, RTC-Branch 32 issued an Order39 on October 16, 1995, which reads:

Although Civil Case No. 94-64191 is not included in the caption of the above
Decision, the Decision against all the petitioners, intervenors, most specifically
against intervenor Carlos A. Gothong Lines, Inc. is binding and enforceable against
Sulpicio Lines, Inc. because Civil Case No. 94-64191 had been consolidated with
Civil Case No. 94-68861.

WHEREFORE, the Decision and the dispositive portion of the Decision rendered on
August 28, 1995, shall apply to and binds Sulpicio Lines, Inc. x x x.

After Sulpicio Lines confirmed that the Decision dated August 28, 1995 of RTC-
Branch 32 in Civil Case Nos. 94-68861, 94-68862, 94-68863, 94-68919, 94-68936,
94-68939, 94-68940, 94-68941, and 94-69028, was also applicable to and binding
upon it,it filed with the Court a Petition for Review on Certiorari with Prayer for
Issuance ofa Preliminary Injunction and for a Temporary Restraining
Order,40 against the City of Manila, Mayor Lim, Vice Mayor Atienza, City Treasurer
Acevedo, the Sangguniang Panlungsod ng Maynila, and Presiding Judge Nabong of
RTC-Branch 32. The appeal of Sulpicio Lines was docketed as G.R. No. 122335.

The assignment of errors in the Petition of Sulpicio Lines was the same as that in
the Petition of William Lines, et al., in G.R. No. 121704, viz.:

A. The RTC erred in failing to declare that the aforecited Section 21(B) of
[the Manila Revenue Code, as amended, as] ultra vires and therefore null
and void because such sections of the Ordinances of the City of Manila
violate the Provisions of the LGC x x x

xxxx

B. The RTC erred in holding that Sec. 143(h) which is an omnibus grant of
power couched in general terms is the exception referred or adverted to in
Section 133(j) of the LGC.

C. The RTC erred in holding that there are only four basic requirements for
a valid exercise of the power of the City of Manila to levy tax.41
On January 31, 1996, the Court issued a Resolution42 referring the Petition of
Sulpicio Lines in G.R. No. 122335 to the Court of Appeals for proper determination
and disposition pursuant to Section 9, paragraph 3 of Batas Pambansa Blg. 129,
which granted the Court of Appeals "exclusive appellate jurisdiction over all final
judgments, decisions, resolutions, orders or awards of Regional Trial Courts and
quasi-judicial agencies, instrumentalities, boards or commission." At the Court of
Appeals, the Petition of Sulpicio Lines was docketed as CA-G.R. SP No. 39973. In a
Resolution43 dated April 12, 1996, the appellate court directed the respondents
City of Manila, Mayor Lim, Vice Mayor Atienza, City Treasurer Acevedo, the
Sangguniang Panlungsod ng Maynila, and Presiding Judge Nabong of RTC-Branch
32, to file their Comments.

In the meantime, Sulpicio Lines filed with the Court in G.R. No. 122335 a Motion
for Reconsideration of the Resolution dated January 31, 1996 and for
Consolidation.44 Sulpicio Lines prayed that the Resolution dated January 31, 1996
of the Court inG.R. No. 122335 be withdrawn; that the rolloof G.R. No. 122335 be
transmitted back to the Court; and that G.R. No. 122335 be consolidated with the
other cases pending before the Court en banc questioning the Decision dated
August 28, 1995 of RTC-Branch 32 which upheld the constitutionality and validity
of Section 21(B) of the Manila Revenue Code, as amended.

After several copies of its Resolutions were returned unserved on the

respondents in G.R. Nos. 122335, 122349, and 124855, the Court issued a
Resolution45 on December 2, 1997 dispensing with the filing of a Comment by the
respondents in the three cases.

G.R. No. 122349

The Association of International Shipping Lines, Inc. (AISL) is a nonstock domestic

corporation the members of which are mostly foreign corporations duly licensed
to do business in the Philippines, specifically: American Transport Lines, Inc.,
represented by its resident agent, Anchor International Shipping Agency, Inc.;
Australian National Line, Fleet Trans International, and United Arab Shipping Co.,
all represented by their resident agent, Jardine Davies Transport; Dongnama
Shipping Co., Ltd., represented by its resident agent, Uni-Ship Incorporated;
Hanjin Shipping Company, Ltd., represented by its resident agent, MOF Company,
Inc.; Hapag-Lloyd A/G, represented by its resident agent, Hapag-Lloyd Phils., Inc.;
Kawasaki Kisen Kaisha, represented by its resident agent, Transmar Agencies, Inc.;
Knutsen Line, represented by its resident agent, AWB Trade International; Kyowa
Line, represented by its resident agent, Sky International, Inc.; NeptuneOrient
Line, represented by its resident agent, Overseas Agency Services, Inc.; Orient
Overseas Container Line, represented by its resident agent, OOCL (Philippines),
Inc.; P&O Containers, Ltd., P&O Swire Containersand WILH Wilhelmsen Line A/S,
all represented by their resident agent, Soriamont Steamship Agencies; Regional
Container Lines (Pte) Ltd., represented by its resident agent, South China Lines
Phils., Inc.; Senator Line Bremen Germany, represented by its resident agent, C.F.
Sharp & Company; Tokyo Senpaku Kaisha, Ltd., represented by its resident agent,
Fil-Japan Shipping Corporation; Uniglory Line, represented by its resident agent,
Don Tim Shipping Corporation; Wan Hai Lines, Ltd., represented by its resident
agent, Eastern Shipping Agencies, Inc.; Westwind Line, represented by its resident
agent, Westwind Shipping Corporation; Zim Israel Navigation Co., Ltd.,
represented by its resident agent, Overseas Freighters Shipping, Inc.; Eastern
Shipping Lines, Inc.; Nedlloyd Lines, Inc.; Philippine President Lines, Ltd.; and Sea-
Land Service, Inc.

After RTC-Branch 32 rendered its Decision dated August 28, 1995 in Civil Case
Nos. 94-68861, 94-68862, 94-68863, 94-68919, 94-68936, 94-68939, 94-68940,
94-68941,and 94-69028, upholding the constitutionality and validity of Section
21(B) of the Manila Revenue Code, as amended; and City Treasurer Acevedo
issued the Memorandum dated September 7, 1995 ordering the collection of the
business tax under the questioned provision of the local tax ordinance, AISL, for
itself and on behalf and for the benefit of its above-named members, filed before
the Court a Petition for Prohibition with Temporary Restraining Order and/or
Preliminary Injunction46 against the City of Manila, Mayor Lim, Vice Mayor
Atienza, City Treasurer Acevedo, and the Sangguniang Panlungsod ng Maynila.
The Petition of AISL, docketed as G.R. No. 122349, was substantially similar to the
Petition of Cosco, et al., in G.R. No. 122333.

In its Resolution dated December 2, 1997, the Court dispensed with the filing of a
Comment by the respondents in G.R. Nos. 122335, 122349, and 124855.

The only other pleading in G.R. No. 122349 is a joint Memorandum filed on behalf
of the petitioners inG.R. Nos. 121613, 122333, and 122349.

G.R. No. 124855

Dongnama and Kyowa are foreign corporations, organized and existing under the
laws of the Republic of Korea and Japan, respectively. Both shipping companies
are doing business in the Philippines through their resident agent, Sky
International, Inc.(Sky International), with office in Binondo, Manila.

Dongnama and Kyowa, through Sky International, lodged a petition to declare

unconstitutional Section 21(B)of the Manila Revenue Code, as amended, with
prayer for a writ ofpreliminary injunction and TRO, docketed as Civil Case No. 94-
68936 and initially raffled to RTC-Branch 47, but later consolidated with Civil Case
Nos. 94-68861, 94-68862, 94-68863, 94-68919, 94-68939, 94-68940, 94-68941,
and 94-69028 before RTC Branch 32. On August 28, 1995, RTC-Branch 32
rendered its Decision in the consolidated civil cases upholding the
constitutionality and validity of Section 21(B) of the Manila Revenue Code, as
amended.

Dongnama and Kyowa then filed with the Court a Petition for Certiorari with
Urgent Prayer for Restraining Order, seeking the annulment or modification of the
foregoing Decision of RTC-Branch 32. The Petition was docketed as G.R. No.
122120. Instead of consolidating G.R. No. 122120 with the other pending cases
that challenge the constitutionality and validity of Section 21(B) of the Manila
Revenue Code, as amended, the Court issued a Resolution dated October 23,
1995 referring the Petition in G.R. No. 122120 to the Court of Appeals for the
following reason:

Considering that under Section 19(sic), paragraph (1) of Batas Pambansa Blg. 129,
the Court of Appeals now exercises original jurisdiction to issue writs of
mandamus, prohibitions, certiorari, habeas corpus, and quo warranto, and
auxiliary writs or processes, whether or not in aid of its appellate jurisdiction, the
Court resolved to REFER this case to the Court of Appeals, for disposition.47

The Petition for Certiorariof Dongnama and Kyowa was docketed as CA-G.R. SP
No. 39188 before the Court ofAppeals. The Court of Appeals rendered its
Decision48 in CA-G.R. SP No. 39188 on March 29, 1996, finding no merit in the
Petition of Dongnama and Kyowa as RTC-Branch 32 did not act with grave abuse
of discretion when it ruled in its Decision dated August 28, 1995 that Section
21(B) of the Manila Revenue Code, as amended, is valid and in clear conformity
with the law and the Constitution. In the end, the appellate court adjudged:
WHEREFORE, IN VIEW OF THE FOREGOING, the instant petition is hereby DENIED
for lack of merit.49

Dongnama and Kyowa went back before the Court "by way of Petition for Review
on Certiorari under Rule 65 of the Rules of Court," docketed as G.R. No. 124355,
based on a lone assignment of error:

RESPONDENT COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN

ASSUMING JURISDICTION OVER SUPREME COURT G.R. NO. 122120 ENTITLED
"DONGNAMA SHIPPING CO. LTD., AND KYOWA SHIPPING LTD. HEREIN
REPRESENTED BY SKY INTERNATIONAL INC. VS. HON. JUDGE JUAN C. NABONG JR.,
CITY OF MANILA, MAYOR ALFREDO LIM, VICE MAYOR LITO ATIENZA, CITY
COUNCIL OF MANILA, AND CITY TREASURER ANTHONY ACEVEDO" WHEN IN FACT
AS PER SUPREME COURT’S RESOLUTION DATED 23 OCTOBER 1995 IN RELATION
[TO] SECTION 9, PARAGRAPH (1) BATAS PAMBANSA BLG. 129, THE ORIGINAL
JURISDICTION PERTAINING TO THE COURT OF APPEALS REFERS TO THE ISSUANCE
OF WRIT OF CERTIORARI, AMONG OTHERS AND NOT TO PETITION FOR
CERTIORARI ON THE GROUND OF GRAVE ABUSE OF DISCRETION WHICH THE HON.
SUPREME COURT HAS EXCLUSIVE JURISDICTION.50

Dongnama and Kyowa specifically prayed:

1. That this petition be given due course;

2. That the Decision dated 29 March 1996 be annulled and set aside
pending the resolution of the sameto be decided together with other
related cases by this Court;

3. That respondent’s Court of Appeals jurisdiction over the instant case be

limited to the issue on the propriety of the prayer for preliminary injunction
and restraining order in relation to the assailed Decision dated 28 August
1995 by RTC-Manila, Branch 32.51

The Court, in a Resolution dated December 2, 1997, dispensed with the filing of a
Comment by the respondents in G.R. Nos. 122335, 122349, and 124855.

Dongnama and Kyowa eventually filed a Memorandum.52

Consolidation of the 10 Petitions

The foregoing 10 cases were consolidated at different times and stages.53

On December 2, 1997, the Court issued a Resolution54 giving due course to the
Petitions and requiring the parties to simultaneously file their Memoranda within
20 days from notice. Among the parties to the 10 Petitions, Maersk, et al.; Eastern
Shipping; William Lines, et al.; PSTC; Cosco, et al.; AISL; and Dongnama and Kyowa
(petitioners in G.R. Nos.121613, 121675, 121704, 121720-28, 122333, 122349,
and 124855, respectively) complied with the Resolution dated December 2, 1997
and submitted their Memoranda.

In a Resolution55 dated April 23, 2002, the Court resolved to consider the cases
submitted for deliberation.

The Court issued a Resolution56 on July 5, 2011 requiring the parties to the 10
cases to move in the premises.

A copy of the Resolution dated July 5, 2011 was served upon and received by Atty.
Renato G. Dela Cruz (Dela Cruz), City Legal Officer of Manila, on behalf of the City
of Manila, Mayor Lim, Vice Mayor Atienza, the City Council of
Manila/Sangguniang Panlungsod ng Maynila, and City Treasurer Acevedo, the
petitioners in G.R. No. 120051 and respondents in the other nine
cases.1âwphi1 Atty. Dela Cruz filed a Manifestation57 informing the Court that
despite exerting effort, he could no longer locate the records for the 10 cases. The
former lawyers who handled the cases had long ceased to be connected with the
City of Manila and both were already deceased. Thus, Atty. Dela Cruz prayed that
he be furnished copies of the petitions and pleadings in the cases and be given a
freshperiod of 10 days from receipt thereof to submit his compliance with the
Resolution dated July 5, 2011. The Court granted Atty. Cruz’s prayer in a
Resolution58 dated April 24, 2012. Atty. Dela Cruz once more moved for an
extension of time to comply with the Resolution dated July 5, 2011, which the
Court granted in a Resolution59 dated November 20, 2012.

In a Resolution60 dated July 16, 2013, the Court took notice that Atty. Dela Cruz
failed to comply with the Resolution dated July 5, 2011 within the extended
period which expired on November 8, 2012. Resultantly, the Court resolved to
require Atty. Dela Cruz to(a) show cause why he should not be disciplinarily dealt
with or held in contempt for such failure; and (b) comply with the Resolution
dated July 5, 2011, both within 10 days from notice.
Atty. Sitro G. Tajonera (Tajonera) of the Office of the City Legal Officer of Manila
filed a Manifestation and Motion for Leave to Withdraw Petition in G.R. No.
12005161 dated August 12, 2013. Atty. Tajonera moved for the withdrawal of the
Petition inG.R. No. 120051 on the ground that the issues therein had been
rendered mootand academic by the Decisions of the Court in Coca-Cola Bottlers
Philippines, Inc. v. City of Manila62 and City of Manila v. Coca-Cola Bottlers
Philippines, Inc.63 (Coca-Cola cases), which declared with finality the
unconstitutionality of Section 21 of the Manila Revenue Code, as amended.

Atty. Dela Cruz likewise filed a Compliance with the Court’s Show Cause
Resolution dated July 16, 2013. According to Atty. Dela Cruz, he already resigned
as City Legal Officerof Manila effective May 31, 2013. Still, Atty. Dela Cruz
explained:

c. Due to the multifarious duties that undersigned attended to and the many legal
problems that confronted the Mayor whom he had to assist in resolving them, he
inadvertently overlooked the deadline set for submission of his compliance of the
Court’s directive which in fact lapsed without him having been reminded by Atty.
Karen Peralta of the unfulfilled obligation to this Honorable Court.

d. For this, he acknowledges thathe was remiss in his duty to the Court and in
delegating it to another.

*e.+ Undersigned begs the Court’s clemency on his inability to submit the pleading
required of him and his fault in relying on his subordinate-lawyer to assist him in
complying with the Court’s directive.

[f.] Undersigned assures the Court that henceforth, he shall not commit the same
mistake or any neglect of duty or lack of respect to the Court.64

II

ARGUMENTS OF THE PARTIES

There is only one vital issue in all the 10 cases: Whether or not Section 21(B) of
the Manila Revenue Code, as amended, was in conformity with the Constitution
and the laws and, therefore, valid.
There are two fundamental and opposing positions on the issue. Presented below
are summaries of the arguments in support of each.

Section 21(B) of the Manila Revenue

Code, as amended, was

constitutional and valid.

The City of Manila, Mayor Lim, Vice Mayor Atienza, the Sangguniang Panlungsod
ng Maynila, and City Treasurer Acevedo argued that Section 21(B) was
constitutional and valid. RTC-Branch 32, in its Decision dated August 28, 1995 in
Civil Case Nos. 94-68861, 94-68862, 94-68863, 94-68919, 94-68936, 94-68939, 94-
68940, 94-68941, and 94-69028, and the Court of Appeals, in its Decision dated
March 29, 1996 in CA-G.R. SP No. 39188, adopted the same position.

The 1987 Constitution granted LGUs the power to create their own sources of
revenue and tolevy taxes, fees, and charges subject to the guidelines and
limitations provided by Congress, consistent with the policy of local autonomy.
This grant was reiterated in Section 129 of the LGC and the scope of tax powers of
a city such as Manila is described in Section 151 also of the LGC. Hence, the
Constitution and Congress, through the LGC, expressly granted LGUs the general
power to tax.

The enactment of Section 21(B) of the Manila Revenue Code, as amended, is

statutorily ingrained. It is based on the exempting clause at the beginning of
Section 133, in conjunction with Section 143(h), of the LGC. The relevant
provisions of the Code are reproduced below: SEC. 133. Common Limitations on
the Taxing Powers of Local Government Units.– Unless otherwise provided
herein,the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:

xxxx

(j) Taxes on the gross receipts of transportation contractors and persons engaged
in the transportation of passengers or freight by hire and common carriers by air,
land or water,except as provided in this Code;

SEC. 143. Tax on Business.– The municipality may impose taxes on the following
businesses:
 xxxx

(h) On any business, not otherwise specified in the preceding paragraphs, which
the sanggunian concerned may deem proper to tax: Provided, That on any
business subject to the excise, value-added or percentage tax under the National
Internal Revenue Code, as amended,the rate of tax shall not exceedtwo percent
(2%) of gross sales or receipts of the preceding calendar year.

The sanggunian concerned may prescribe a schedule of graduated tax rates but in
no case to exceed the rates prescribed herein. (Emphases supplied.)

Inasmuch as "transportation contractors, persons who transport passenger or

freight for hire, and common carriers by land, air or water," are engaged in
business subject to excise, value added, or percentage tax under the National
Internal Revenue Code (NIRC), as amended, then the City of Manila could lawfully
levy local business tax under Section 21(B) of the Manila Revenue Code, as
amended. It is irrelevant which of Sections 133(j) and 143(h) of the LGC is the
special orgeneral provision since there is an exempting clause in Section 133, that
is, "Unless otherwise provided herein," which means that even if the businesses
enumerated therein are exempted from the levy of local tax, if there is a provision
to the contrary, such as Section 143(h), the Sanggunian concerned could still
impose the local tax. As an alternative argument, Section 133(j) of the LGC is the
general provision on the limitations on the taxing power of the LGUs, while
Section 143(h) of the LGC is the specific provision on the businesses which the
LGUs could tax; and per the rules of statutory construction, the latter prevails
over the former. To rule otherwise and adopt the construction put forward by the
opposing parties would render Section 143(h) of the LGC a hollow decorative
provision with no subject to tax.

Moreover, the business tax imposed by Section 21(B) of the Manila Revenue
Code, as amended, complied with the limitations and conditions in the LGC for a
valid local tax: (1) The rate of tax did not exceed 2% of gross sales or receipts of
the preceding calendar year; (2) The tax is consistent with the basic policy of local
autonomy; (3) The tax is not unjust, excessive, oppressive, confiscatory, or
contrary to declared national policy; and (4) That a prior public hearing was
conducted for the purpose of enacting the Manila Revenue Code, as amended.
Section 21(B) of the Manila Revenue Code, as amended, also enjoyed the
presumption of constitutionality and validity. This presumption can only be
overridden by overwhelming evidence to the contrary. In Drilon v. Lim,65 the
Court already declared the Manila Revenue Code as valid given that the
procedural requirements for the enactment of the same had been observed.
Lastly, taxes are the lifeblood of the nation. Tax exemptions are construed strictly
against the taxpayer, and the burden is upon the person claiming exemption from
the tax to show a clear grant of exemption by organic law or statute.

Section 21(B) of the Manila Revenue

Code, as amended, was null and void
for being contrary to the Constitution
and the LGC.

On the other end of the spectrum, MAS; Maersk, et al.; Eastern Shipping; William
Lines, et al.; PSTC; OFSI; Cosco, et al.; Sulpicio Lines; AISL; and Dongnama and
Kyowa, asserted that Section 21(B) of the Manila Revenue Code, as amended, was
null and void because it violated the Constitution and the LGC. It was the position
affirmed by RTC-Branch 43 in its Decision dated April 3, 1995 in Civil Case No. 94-
69052.

Under the Philippine system of government, the power of taxation, while inherent
in the State in view of its sovereign prerogatives, is not inherent in municipal
corporations or LGUs. LGUs may exercise the power only if and to the extent that
it is delegated to them. One of the common limitations on the power to tax of
LGUs is Section 133(j) of the LGC, carried over from the Local Tax Code of 1973.

Section 133(j) expressly states that the taxing powers of the LGUs shall not extend
to the transportation business. Section 133(j) of the LGC is a special provision,
which prevails over Section 143(h) of the same Code, a general provision. This
interpretation would give effect to both Sections 133(j) and 143(h) of the LGC,
and contrary to the assertion of the City of Manila and its public officials, would
not render Section 143(h) useless, meaningless, and nugatory. There are other
businesses which the LGUs may tax under Section 143(h). Besides, incase of any
doubt, any tax ordinance or revenue measure shall be construed strictly against
the LGU enacting it and liberally in favor of the taxpayer, for taxes, being burdens,
are not to be presumed beyond what the applicable statute expressly and clearly
declares.
In addition, although Section 21(B) of the Manila Revenue Code, as amended,
imposed what was denominated as a "business tax," in reality it was a percentage
or sales tax. Business tax is imposed on the privilege of doing business, though it
may be computed as a percentage of gross sales. For business tax, there is no set
ratio between volume of sales and the amount of tax. Cities and municipalities
are given the power to impose business tax under Section 143(h) of the LGC. In
contrast, percentage or sales tax is based on gross sales or receipts. The
percentage bears a direct relationship to the sales or receipts generated by a
business, without regard for the extent of operation or size of the business. Cities
and municipalities may validly impose a tax on business, but consonant with the
limitations on local taxation, they may not impose percentage or sales tax on top
of what is already imposed in the NIRC. Section 21(B) of the Manila Revenue
Code, as amended, imposing on "transportation contractors, persons who
transport passenger or freight for hire, and common carriers by land, air or
water," a tax of 50% of 1% of the gross sales orreceipts from the preceding year
on top of the national taxes already imposed by the NIRC was unjust, unfair,
excessive, confiscatory, and in restraint of economic trade.

And finally, Section 21(B) of the Manila Revenue Code, as amended, violated the
rule on uniformity in taxation. Uniformity in taxation should not be construed in a
pure geographical sense, i.e., that the questioned tax was imposed with the same
force and effect on all businesses located in Manila. Shipping companies should
be differentiated from other businesses. Aside from the risks and responsibilities
the shipping companies shoulder, their services are not confined within the
territorial limits of Manila alone but extend to other parts of the world. It is not
uniformity for the shipping companies to be classed and taxed under the same
category with other common carriers domiciled and plying Manila territory 24
hours a day.

III
RULING OF THE COURT

Resolution of pending incidents in

several cases.

Before delving into the merits of the 10 cases, there are pending incidents in
three cases that first need to be addressed:
(1) G.R. No. 120051: The City Legal Officerof Manila, as counsel for the City of
Manila, Mayor Lim, and City Treasurer Acevedo, petitioners in G.R. No. 120051,
filed a Manifestation and Motion for Leave to Withdraw Petition in G.R. No.
120051, onthe ground that the issues therein had been rendered moot and
academic by the Decisions of the Court in the Coca-Cola cases, which declared
with finality the unconstitutionality of Section 21 of the Manila Revenue Code, as
amended.

The Court resolves to deny the motion to withdraw.

There already had been an exchange of pleadings between the parties in G.R. No.
120051, i.e., Petition, Comment, and Reply. In a Resolution dated December 2,
1997, the Court also already considered G.R. No. 120051 and all the other nine
consolidated cases submitted for deliberation. At this stage, the decision to grant
or not to grant the motion to withdraw is fully within the discretion of the Court.66

The Court denies the motion to withdraw because the assertion by the City Legal
Officer of Manila that the Coca-Cola cases already rendered the issues in G.R. No.
120051 moot and academic is erroneous. The Court did not declare in the Coca-
Cola cases that Section 21 of the Manila Revenue Code, as amended, was
unconstitutional. What the Court held in the two Coca-Cola cases was that
Ordinance Nos. 7988 and 8011 (approved by then Mayor Atienza on February 25,
2000 and February 22, 2001, respectively), amending Section 21 of the Manila
Revenue Code, werenull and void for (a) failure to comply with the publication
requirement for tax ordinances under Section 188 of the LGC; and (b) deletion of
an exempting proviso found in Section 143(h) of the LGC and the prior Section 21
of the Manila Revenue Code, which opened the door to the double taxation of
Coca-Cola. Section 21 of the Manila Revenue Code, as it was amended by
Ordinance No. 7807, and more specifically, paragraph (B) thereof, was not the
subject of a constitutional review by the Court in the Coca-Cola cases.

As for Atty. Dela Cruz’s Compliance with the Court’s Show Cause Resolution, the
Court finds the same satisfactory, although he is reminded to be more
conscientious of his duties as legal counsel in the future, despite the heavy
volume of his work load.

(2) G.R. No. 121613: In a Resolution dated October 23, 1995, the Court dismissed
the Petition of Maersk, et al., for the latter’s failure to deposit sheriff’s fee and
clerk’s commission in the total amount of ₱202.00; and in light of said dismissal,
noted without action the Supplemental Petition and Motion of Maersk, et al.,
praying for the confirmation of the Writ of Preliminary Injunction restored by
RTC-Branch 32 and deletion of RTC Branch 32 from the caption of G.R. No. 121613
for not being a necessary party. In their pending Motion for Reconsideration of
the Resolution dated October 23, 1995, Maersk, et al., prayed that the Court give
due course to and squarely resolve their Petition and Supplemental Petition and
Motion.

The Court resolves to grant the Motion for Reconsideration of Maersk, et al. It
sets aside the Resolution dated October 23, 1995; reinstates the Petition of
Maersk, et al., in G.R. No. 121613; and gives due course to the Petition and
Supplemental Petition and Motion of Maersk, et al., in the said case.

Of particular relevance to the plight of Maersk, et al., herein is the following

discussion of the Court in Ayala Land, Inc. v. Carpo67:

To be sure, the remedy of appeal is a purely statutory right and one who seeks to
avail thereof must comply with the statute or rule. For this reason, payment of
the full amount of the appellate court docket and other lawful fees within the
reglementary period is mandatory and jurisdictional. However, as we have ruled
in Aranas v. Endona, the strict application of the jurisdictional nature of the above
rule on payment of appellate docket fees may be mitigated under exceptional
circumstances to better serve the interest of justice. As early as 1946, in the case
of Segovia v. Barrios, we ruled that where an appellant in good faith paid less than
the correct amount for the docket fee because that was the amount he was
required to pay by the clerk of court, and he promptly paid the balance, it is error
to dismiss his appeal because – every citizen has the right to assume and trust
that a public officer charged by law with certain duties knows his duties and
performs them in accordance with law. To penalize such citizen for relying upon
said officer in all good faith is repugnant to justice.

The ruling in Segoviawas applied by this Court in subsequent cases where an

appellant’s right to appeal was threatened by the mistake of public officers in
computing the correct amount of docket fee. Respondents draw attention to Rule
41, §4 of the 1997 Rules of Civil Procedure which provides that the appellate
court docket and other lawful fees must be paid in full to the clerk of the court
which rendered the judgment or final order appealed from within the period for
taking the appeal. They argue that this Rule has overruled the decision in Segovia.

This contention is untenable. Rule41, §4 must be read in relation to Rule 50, §1(c)
which provides that:

An appeal may be dismissed by the Court of Appeals, on its own motion oron that
of the appellee, on the following grounds:

xxxx

(c) Failure of the appellant to pay the docket and other lawful fees as provided in
Section 4 of Rule 41.

xxxx

With the exception of §1(b), which refers to the failure to file notice of appeal or
the record on appeal within the period prescribed by these Rules, the grounds
enumerated in Rule 50, §1 are merely directory and not mandatory. This is plain
from the use of the permissive "may" in the text of the statute. Despite the
jurisdictional nature of the rule on payment of docket fee, therefore, the
appellate court still has the discretion to relax the rule in meritorious cases. The
ruling in Segoviais still good law which the appellate court, in the exercise of its
discretion, must apply in circumstances such as that in the present case where an
appellant was, from the start, ready and willing to pay the correct amount of
docket fee, but was unable to do so due to the error of an officer of the court in
computing the correct amount. To hold otherwise would be unjust and
unwarranted. (Citations omitted.)

The Court notes that Revised Circular No. 1-88, effective July 1, 1991, which was
cited in the Resolution dated October 23, 1995 as basis for the dismissal of the
Petition of Maersk, et al., also used the word "may" in the first paragraph thereof:

(1) Payment of docketing and other fees.– Section 1 of Rule 45 requires that
petitions for review be filed and the required fees paid within the prescribed
period. Unless exempted by law or rule, such fees must be fully paid in
accordance with this Circular; otherwise, the Court maydeny the petition
outright.The same rule shall govern petitions under Rule 65. (Emphasis supplied.)
Hence, denial of the petition for review outright for failure to pay docketing and
other fees within the prescribed period was also directory and not mandatory
upon the Court under Revised Circular No. 1-88.

In the exercise of its discretion, the Court determines that there was meritorious
reason why Maersk, et al., paid docket and other legal fees within the prescribed
period, but short of the ₱202.00 for sheriff’s fee and clerk’s commission. Maersk,
et al., were already assessed and required to pay the docket and legal fees when
they filed their Motion for Extension of Time to File Petition for Review on
Certiorari. The Motion did not yet indicate that the intended Petition would
include a prayer for a TRO, so the receiving clerk did not assess Maersk, et al., for
sheriff’s fee and clerk’s commission. When Maersk, et al., actually filed their
Petition with prayer for the issuance of a writ of preliminary injunction and TRO,
they were no longer assessed additional fees by the receiving clerk. Maersk, et al.,
found out about the deficiency in their legal fees upon their receipt of the
Resolution dated October 23, 1995 already dismissing their Petition and noting
without action their Supplemental Petition and Motion. Maersk, et al.,
immediately filed a Motion for Reconsideration of said Resolution, and also
deposited their balance of ₱202.00 with the Court.

Given the circumstances, Maersk, et al., cannot be faulted for their failure to pay
the required legal fees for such failure was clearly not a dilatory tactic nor
intended to circumvent the Rules of Court. On the contrary, the subsequent
payment by Maersk, et al., of the ₱202.00 deficiency even before the Court had
passed upon their Motion for Reconsideration was indicative of their good faith
and willingness to comply with the Rules.68

Acting on the Supplemental Petition and Motion of Maersk, et al., the Court
further resolves to NOTE WITHOUT ACTION the prayer to confirm the Writ of
Preliminary Injunction restored by RTC-Branch 32 in light of the present
judgment, and to GRANTthe prayer to delete RTCBranch 32 from the caption of
the caseas it was not a necessary party.

(3) G.R. No. 122335: In a Resolution dated January 31, 1996, the Court referred
the Petition of Sulpicio Lines to the Court of Appeals. There is a pending Motion
for Reconsideration of the Resolution dated January 31, 1996 filed by Sulpicio
Lines seeking the withdrawal of the Resolution dated January 31, 1996 and
transmittal of the rolloof G.R. No. 122335 from the Court of Appeals back to the
Court.
The Court resolves to grant the Motion for Reconsideration of Sulpicio Lines. It
sets aside the Resolution dated January 31, 1996 and gives due course to the
Petition of Sulpicio Lines in G.R. No. 122335.

The Petition for Review on Certiorari of Sulpicio Lines, filed under Rule 42 of the
old Rules of Court, should not have been referred to the Court of Appeals. It is
true that under Section 9, paragraph (3) of Batas Pambansa Blg. 129, the Court of
Appeals has "(e)xclusive appellate jurisdiction over all final judgments,
resolutions, orders orawards of Regional Trial Courts x x x." However, Rule 42 of
the old Rules of Court, then in effect, allowed an appeal straight from the RTC
(formerly called Court of First Instance) to the Supreme Court when the appeal
raised pure questions of law:

RULE 42
APPEAL FROM COURTS OF FIRST INSTANCE
TO SUPREME COURT

Section 1. Procedure.– The procedure of appeal to the Supreme Court from

Courts of First Instance shall be governed by the same rules governing appeals to
the Court of Appeals, except as hereinafter provided.

Section 2. Appeals on pure question of law.– Where the appellant states in his
notice of appeal or record on appeal that he will raise only questions of law, no
other question shall be allowed, and the evidence need not be elevated.

A cursory reading of the Petition for Review on Certiorariof Sulpicio Lines would
readily reveal that it appealed the Decision dated August 28, 1995 of RTC-Branch
32 in Civil Case Nos. 94-68861, 94-68862, 94-68863, 94-68919, 94-68936, 94-
68939, 94-68940, 94-68941,and 94-69028 based only on questions of law. The
Petition did not raise any question of fact and did not require the presentation or
elevation of evidence.

In G.R. No. 124855, Dongnama and Kyowa questioned the Resolution dated
October 23, 1995, which similarly referred their original Petition for Certiorari,
docketed as G.R. No. 122120, to the Court of Appeals, where it was docketed as
CA-G.R. SP No. 39188. The Resolution dated October 23, 1995 cited as basis for
the referral Section 9, paragraph (1) of Batas Pambansa Blg. 129 which gave the
Court of Appeals "[o]riginal jurisdiction to issue writs of mandamus, prohibition,
certiorari, habeas corpus,and quo warranto,and auxiliary writs or processes,
whether or not in aid of its appellate jurisdiction." The Court, however, will no
longer address the propriety of the referral of the original Petition of Dongnama
and Kyowa to the Court of Appeals since said issue has become moot and
academic after the appellate court rendered its Decision in CA-G.R. SP No. 39188
on March 29, 1996. The Court will simply treat the Petition in G.R. No. 124855 as
an appeal of the Decision dated March 29,1996 of the Court of Appeals in CAG.R.
SP No. 39188.

Ruling on the merits of the 10 Petitions.

The Court rules in favor of MAS; Maersk, et al.; Eastern Shipping; William Lines, et
al.; PSTC; OFSI; Cosco, et al.; Sulpicio Lines; AISL; and Dongnama and Kyowa.
Section 21(B) of the Manila Revenue Code, as amended, was null and void for
being beyond the power of the City of Manila and its public officials to enact,
approve, and implement under the LGC.

It is already well-settled that although the power to tax is inherent in the State,
the same is not true for the LGUs to whom the power must be delegated by
Congress and must be exercised within the guidelines and limitations that
Congress may provide. The Court expounded in Pelizloy Realty Corporation v. The
Province of Benguet69 that:

The power to tax "is an attribute of sovereignty," and as such, inheres in the
State. Such, however, is not true for provinces, cities, municipalities and
barangays as they are not the sovereign; rather, they are mere "territorial and
political subdivisions of the Republic of the Philippines".

The rule governing the taxing power of provinces, cities, municipalities and
barangays is summarized in Icard v. City Council of Baguio:

It is settled that a municipal corporation unlike a sovereign state is clothed with

no inherent power of taxation. The charter or statute must plainly show an intent
to confer that power or the municipality, cannot assume it. And the power when
granted is to be construed in strictissimi juris. Any doubt or ambiguity arising out
of the term used in granting that power must be resolved against the
municipality. Inferences, implications, deductions – all these – have no place in
the interpretation of the taxing power of a municipal corporation.
Therefore, the power of a province to tax is limited to the extent that such power
is delegated to it either by the Constitution or by statute. Section 5, Article X of
the 1987 Constitution is clear on this point:

Section 5. Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees and charges subject to such guidelines
and limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments.

Per Section 5, Article X of the 1987 Constitution, "the power to tax is no longer
vested exclusively on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges." Nevertheless, such authority is
"subject to such guidelines and limitations as the Congress may provide".

In conformity with Section 3, Article X of the 1987 Constitution, Congress enacted

Republic Act No. 7160, otherwise known as the Local Government Code of 1991.
Book II of the LGC governs local taxation and fiscal matters.

Relevant provisions of Book II of the LGC establish the parameters of the taxing
powers of LGUs found below.

First, Section 130 provides for the following fundamental principles governing the
taxing powers of LGUs:

1. Taxation shall be uniform in each LGU.

2. Taxes, fees, charges and other impositions shall:

a. be equitable and based asfar as practicable on the taxpayer’s

ability to pay;

b. be levied and collected only for public purposes;

c. not be unjust, excessive, oppressive, or confiscatory;

d. not be contrary to law, public policy, national economic policy, or

in the restraint of trade.
 3. The collection of local taxes, fees, charges and other impositions shall in
no case be let to any private person.

4. The revenue collected pursuant to the provisions of the LGC shall inure
solely to the benefit of, and be subject to the disposition by, the LGU
levying the tax, fee, charge or other imposition unless otherwise specifically
provided by the LGC.

5. Each LGU shall, as far as practicable, evolve a progressive system of

taxation.

Second, Section 133 provides for the common limitations on the taxing powers of
LGUs. x x x. (Underscoring and citations omitted.)

Among the common limitations on the taxing power of LGUs is Section 133(j) of
the LGC, which states that "[u]nless otherwise provided herein," the taxing power
of LGUs shall not extend to "[t]axes on the gross receipts of transportation
contractors and persons engaged in the transportation of passengers or freight by
hire and common carriers by air, land or water, except as provided in this Code[.]"

Section 133(j) of the LGC clearly and unambiguously proscribes LGUs from
imposing any tax on the gross receipts of transportation contractors, persons
engaged in the transportation of passengers or freight by hire, and common
carriers by air, land, orwater. Yet, confusion arose from the phrase "unless
otherwise provided herein," found at the beginning of the said provision. The City
of Manila and its public officials insisted that said clause recognized the power of
the municipality or city, under Section 143(h) of the LGC, to impose tax "on any
business subject to the excise, value-added or percentage tax under the National
Internal Revenue Code, as amended." And it was pursuant to Section 143(h) of
the LGC that the City of Manila and its public officials enacted, approved,and
implemented Section 21(B) of the Manila Revenue Code, as amended.

The Court is not convinced. Section 133(j) of the LGC prevails over Section 143(h)
of the same Code, and Section 21(B) of the Manila Revenue Code, as amended,
was manifestly in contravention of the former.

First, Section 133(j) of the LGC is a specific provision that explicitly withholds from
any LGU, i.e., whether the province, city, municipality, or barangay, the power to
tax the gross receipts of transportation contractors, persons engaged in the
transportation of passengers or freight by hire, and common carriers by air, land,
or water.

In contrast, Section 143 of the LGC defines the general power of the municipality
(as well as the city, if read in relation to Section 15170 of the same Code) to tax
businesses within its jurisdiction. While paragraphs (a) to (g) thereof identify the
particular businesses and fix the imposable tax rates for each, paragraph (h) is
apparently the "catch-all provision" allowing the municipality to impose tax "on
any business, not otherwise specified in the preceding paragraphs, which the
sanggunian concerned may deem proper to tax[.]"

The succeeding proviso of Section 143(h) of the LGC, viz., "Provided, That on any
business subject to the excise, value-added or percentage tax under the National
Internal Revenue Code, as amended, the rate of tax shall not exceed two percent
(2%) of gross sales or receipts of the preceding calendar year[,]" is not a specific
grant of power to the municipality or city to impose business tax on the gross
sales or receipts of such a business. Rather, the proviso only fixes a maximum rate
of imposable business tax in case the business taxed under Section 143(h) of the
LGC happens to be subject to excise, value added, or percentage tax under the
NIRC.

The omnibus grant of power to municipalities and cities under Section 143(h) of
the LGC cannot overcome the specific exception/exemption in Section 133(j) of
the same Code. This is in accord with the rule on statutory construction that
specific provisions must prevail over general ones.71 A special and specific
provision prevails over a general provision irrespective of their relative positions
in the statute. Generalia specialibus non derogant. Where there is in the same
statute a particular enactment and also a general one which in its most
comprehensive sense would include what is embraced in the former, the
particular enactmentmust be operative, and the general enactment must be
taken to affect only such cases within its general language as are not within the
provisions of the particular enactment.72

In the case at bar, the sanggunian of the municipality or city cannot enact an
ordinance imposing business tax on the gross receipts of transportation
contractors, persons engaged in the transportation of passengers or freight by
hire, and common carriers by air, land, or water, when said sanggunian was
already specifically prohibited from doing so. Any exception to the express
prohibition under Section 133(j) of the LGC should be just as specific and
unambiguous. Second, the construction adopted by the Court gives effect to both
Sections 133(j) and 143(h) of the LGC. In construing a law, care should be taken
that every part thereof be given effect and a construction that could render a
provision inoperative should be avoided, and inconsistent provisions should be
reconciled whenever possible as parts of a harmonious whole.73

As pointed out by William Lines, et al., in their Petition, despite the prohibition
against LGUs imposing tax on the gross receipts of transportation contractors,
persons engaged in the transportation of passengers or freight by hire, and
common carriers by air, land, or water, under Section 133(j) of the LGC, there are
still other multiple businesses subject to excise, value added, or percentage tax
under the NIRC, which the municipalities and cities can still tax pursuant to
Section 143(h) of the LGC, such as:

1) Hotels and motels under Sec. 113 of the NIRC;

2) Caterers, taxed under Sec. 114 of the NIRC;

3) Dealers in securities, taxed under Sec. 116 of the NIRC;

4) Franchise holders, taxed under Sec. 117 of the NIRC;

5) Senders of overseas dispatch, message or communication originating in

the Philippines, taxed under Sec. 118 of the NIRC;

6) Banks and non-bank financial intermediaries, taxed under Sec. 119 of the
NIRC;

7) Finance companies, taxed under Sec. 120 of the NIRC; 8) Agents of

foreign insurance companies, taxed under Sec. 122 of the NIRC;

9) Amusement places, taxed under Sec. 123 of the NIRC;

10) Winners in horse races, taxed under Sec. 124 of the NIRC; and

11) Those who sell, barter, or exchange shares of stocks, taxed under Sec.
124-A of the NIRC.74
Thus, Section 143(h) of the LGC would not be "a hollow decorative provision with
no subject to tax." On the contrary, it would be Section 133(j) of the LGC which
would become inoperative should the Court accept the construction proffered by
the City of Manila and its public officials, because then, there would be no
instance at all when the gross receipts of the transportation contractors, persons
engaged in the transportation of passengers or freight by hire, and common
carriers by air, land, or water, would not be subject to tax by the LGUs.

Third, Section 5(b) of the LGC itself, on Rules of Interpretation, provides:

SEC. 5. Rules of Interpretation.– In the interpretation of the provisions of this

Code, the following rules shall apply:

xxxx

(b) In case of doubt, any tax ordinance or revenue measure shall be construed
strictly against the local government unit enacting it, and liberally in favor of the
taxpayer. Any tax exemption, incentive or relief granted by any local government
unit pursuant to the provisions of this Code shall be construed strictly against the
person claiming it[.]

The Court strictly construes Section 21(B) of the Manila Revenue Code, as
amended, against the City ofManila and its public officials and liberally in favor of
the transportation contractors, persons engaged in the transportation of
passengers or freight by hire, and common carriers by air, land, or water. Strictly
assessed against the guidelines and limitations set forth in the LGC, Section 21(B)
of the Manila Revenue Code, as amended, was enacted ultra vires.

And fourth, the construction adopted by the Court is in accordance with the
consistent intention of the laws to withhold from the LGUs the power to tax
transportation contractors,persons engaged in the transportation of passengers
or freight by hire, and common carriers by air, land, or water.

Even prior to Section 133(j) of the LGC, Section 5(e) of Presidential Decree No.
231, otherwise known as The Local Tax Code, as amended, already limited the
taxing powers of LGUs as follows:
SEC. 5. Common limitations on the taxing powers of local government. – The
exercise of the taxing powers of provinces, cities, municipalities and barrios shall
not extend to the imposition of the following:

xxxx

(e) Taxes on the business of transportation contractors and persons engaged in

the transportation of passengers or freight by hire and common carries by air,
land or water except as otherwise provided in this Code, and taxes or fees for the
registration of motor vehicles and for the issuance of all kinds of licenses or
permits for the driving thereof;

The Court, in First Philippine Industrial Corp. v. Court of Appeals,75 expounded on

the lawmakers’ reason for exempting the gross receipts of common carriers from
the taxing powers of the LGUs:

From the foregoing disquisition, there is no doubt that petitioner is a "common

carrier" and, therefore, exempt from the business tax as provided for in Section
133 (j), of the Local Government Code x x x

xxxx

The deliberations conducted in the House of Representatives on the Local

Government Code of 1991 are illuminating:

"MR. AQUINO (A). Thank you, Mr. Speaker.

Mr. Speaker, we would like to proceed to page 95, line 1. It states: "SEC. 121 (now
Sec. 131). Common Limitations on the Taxing Powers of Local Government Units."
...

MR. AQUINO (A.). Thank you Mr. Speaker.

Still on page 95, subparagraph 5, on taxes on the business of transportation. This

appears to be one of those being deemed to be exempted from the taxing powers
of the local government units. May we know the reason why the transportation
business is being excluded from the taxing powers of the local government units?
MR. JAVIER (E.). Mr. Speaker, there is an exception contained in Section 121 (now
Sec. 131), line 16, paragraph 5. It states that local government units may not
impose taxes on the business of transportation, except as otherwise provided in
this code.

Now, Mr. Speaker, if the Gentleman would care to go to page 98 of Book II, one
can see there that provinces have the power to impose a tax on business enjoying
a franchise at the rate of not more than one-half of 1 percent of the gross annual
receipts. So, transportation contractors who are enjoying a franchise would be
subject to tax by the province. That is the exception, Mr. Speaker.

What we want to guard against here, Mr. Speaker is the imposition of taxes by
local government units on the carrier business.1âwphi1 Local government units
may impose taxes on top of what is already being imposed by the National
Internal Revenue Code which is the so-called "common carriers tax." We do not
want a duplication of this tax, so we just provided for an exception under Section
125 (now Section 137) that a province may impose this tax at a specific rate.

MR. AQUINO (A.). Thank you for that clarification, Mr. Speaker. . . .

It is clear that the legislative intent in excluding from the taxing power of the local
government unit the imposition of business tax against common carriers is to
prevent a duplication of the so-called "common carrier’s tax."

Petitioner is already paying three (3%) percent common carrier's tax on its gross
sales/earnings under the National Internal Revenue Code. To tax petitioner again
on its gross receipts in its transportation of petroleum business would defeat the
purpose of the Local Government Code. (Citations omitted.)

Consistent with the foregoing legislative intent, Republic Act No. 7716, more
popularly known as the Expanded Value-Added Tax (E-VAT) Law, which took
effect after the LGC on May 28, 1994, expressly amended the NIRC of 1977 and
added to Section 115 of the latter on "Percentage tax on carriers and keepers of
garages," the following proscription: "The gross receipts of common carriers
derived from their incoming and outgoing freight shall not be subjected to the
local taxes imposed under Republic Act No. 7160, otherwise known as the Local
Government Code of 1991."
 IV
DISPOSITIVE PORTION

WHEREFORE, in view of the foregoing, the Court hereby RESOLVES:

1. In G.R. No. 120051: (a) to DENY the Motion to Withdraw the Petition
filed by the Office of the City Legal Officer on behalf of the City of Manila,
Mayor Atienza, and City Treasurer Acevedo; and (b) to DECLARE as
SATISFACTORY the Compliance submitted by Atty. Dela Cruz;

2. In G.R. No. 121613: (a) to GRANT the Motion for Reconsideration of

Maersk, et al.; (b) to SET ASIDE the Resolution dated October 23, 1995; (c)
to REINSTATE the Petition of Maersk, et al.; (d) to GIVE DUE COURSE to the
Petition and the Supplemental Petition and Motion of Maersk, et al.; ( e) as
regards the Supplemental Petition and Motion of Maersk, et al., to NOTE
WITHOUT ACTION the prayer to confirm the Writ of Preliminary Injunction
restored by RTC-Branch 32 in light of the present judgment, and to GRANT
the prayer to delete RTC Branch 32 from the caption of the case for not
being a necessary party; and

3. In G.R. No. 122335: (a) to GRANT the Motion for Reconsideration of

Sulpicio Lines; (b) to SET ASIDE the Resolution dated January 31, 1996; and
(c) to GIVE DUE COURSE to the Petition of Sulpicio Lines.

Furthermore, the Court hereby DECIDES:

1. To DECLARE Section 21(B) of the Manila Revenue Code, as amended, null

and void for being in violation of the guidelines and limitations on the
taxing powers of the LGUs under the LGC;

2. In G.R. No. 120051: (a) to DENY the Petition of the City of Manila, Mayor
Lim, and City Treasurer Acevedo; and (b) to AFFIRM the Decision dated
April 3, 1995 of RTC-Branch 43 in Civil Case No. 94-69052; and

3. In G.R. Nos. 121613, 121675, 121704, 121720-28, 121847-55, 122333,

122335, 122349, and 124855: (a) to GRANT the Petitions of Maersk, et al.;
Eastern Shipping; William Lines, et al.; PSTC; OFSI; Cosco, et al.; Sulpicio
Lines; AISL; and Dongnama and Kyowa, respectively; (b) to REVERSE and
SET ASIDE the Decision dated August 28, 1995 of RTC Branch 32 in Civil Case
 Nos. 94-68861, 94-68862, 94-68863, 94-68919, 94-68936, 94-68939, 94-
68940, 94-68941, and 94-69028, and the Decision dated March 29, 1996 of
the Court of Appeals in CA-G.R. SP No. 39188; (c) to ORDER the City of
Manila to refund to Maersk, et al.; Eastern Shipping; William Lines, et al.;
PSTC; OFSI; Cosco, et al.; Sulpicio Lines; AISL; and Dongnama and Kyowa the
business taxes assessed and collected against said corporations under
Section 21 (B) of the Manila Revenue Code, as amended; and ( d) to MAKE
PERMANENT the Writs of Preliminary Injunction restored by RTC-Branch 32
during the pendency of the Petitions at bar.

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

THIRD DIVISION

[G. R. No. 131512. January 20, 2000]

LAND TRANSPORTATION OFFICE [LTO], represented by Assistant Secretary

Manuel F. Bruan, LTO Regional Office, Region X represented by its Regional
Director, Timoteo A. Garcia; and LTO Butuan represented by Rosita G. Sadiaga,
its Registrar, petitioners, vs. CITY OF BUTUAN, represented in this case by
Democrito D. Plaza II, City Mayor, respondents.

DECISION

VITUG, J.:

The 1987 Constitution enunciates the policy that the territorial and political
subdivisions shall enjoy local autonomy.[1] In obedience to that, mandate of the
fundamental law, Republic Act ("R.A.") No.7160, otherwise known as the Local
Government Code,[2] expresses that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy in order to enable them
to attain their fullest development as self-reliant communities and make them
more effective partners in the attainment of national goals, and that it is a basic
aim of the State to provide for a more responsive and accountable local
government structure instituted through a system of decentralization whereby
local government units shall be given more powers, authority, responsibilities and
resources.

While the Constitution seeks to strengthen local units and ensure their viability,
clearly, however, it has never been the intention of that organic law to create
an imperium in imperio and install an intra sovereign political subdivision
independent of a single sovereign state.

The Court is asked in this instance to resolve the issue of whether under the
present set up the power of the Land Registration Office ("LTO") to register,
tricycles in particular, as well as to issue licenses for the driving thereof, has
likewise devolved to local government units.

The Regional Trial Court (Branch 2) of Butuan City held:[3] that the authority to
register tricycles, the grant of the corresponding franchise, the issuance of tricycle
drivers' license, and the collection of fees therefor had all been vested in the Local
Government Units ("LGUs"). Accordingly, it decreed the issuance of a permanent
writ of injunction against LTO, prohibiting and enjoining LTO, as well as its
employees and other persons acting in its behalf, from (a) registering tricycles and
(b) issuing licenses to drivers of tricycles. The Court of Appeals, on appeal to it,
sustained the trial court.

The adverse rulings of both the court a quo and the appellate court prompted the
LTO to file the instant petition for review on certiorari to annul and set aside the
decision,[4] dated 17 November 1997, of the Court of Appeals affirming the
permanent injunctive writ order of the Regional Trial Court (Branch 2) of Butuan
City.

Respondent City of Butuan asserts that one of the salient provisions introduced
by the Local Government Code is in the area of local taxation which allows LGUs
to collect registration fees or charges along with, in its view, the corresponding
issuance of all kinds of licenses or permits for the driving of tricycles.

The 1987 Constitution provides:

"Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to
such guidelines and limitations as the Congress may provide,
 consistent with the basic policy of local autonomy. Such taxes, fees,
and charges shall accrue exclusively to the local governments."[5]

Section 129 and Section 133 of the Local Government Code read:

"SEC. 129. Power to Create Sources of Revenue. - Each local

government unit shall exercise its power to create its own sources of
revenue and to levy taxes, fees, and charges subject to the provisions
herein, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local
government units."

"SEC. 133. Common Limitations on the Taxing Powers of Local

Government Units. - Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:

"xxx.......xxx.......xxx.

"(I) Taxes, fees or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the driving
thereof, except tricycles."

Relying on the foregoing provisions of the law, the Sangguniang

Panglungsod ("SP") of Butuan, on 16 August 1992, passed SP Ordinance No.916-
92 entitled "An Ordinance Regulating the Operation of Tricycles-for-Hire,
providing mechanism for the issuance of Franchise, Registration and Permit, and
Imposing Penalties for Violations thereof and for other Purposes." The ordinance
provided for, among other things, the payment of franchise fees for the grant of
the franchise of tricycles-for-hire, fees for the registration of the vehicle, and fees
for the issuance of a permit for the driving thereof.

Petitioner LTO explains that one of the functions of the national government that,
indeed, has been transferred to local government units is the franchising
authority over tricycles-for-hire of the Land Transportation Franchising and
Regulatory Board ("LTFRB") but not, it asseverates, the authority of LTO to
register all motor vehicles and to issue to qualified persons of licenses to drive
such vehicles.
In order to settle the variant positions of the parties, the City of Butuan,
represented by its City Mayor Democrito D. Plaza, filed on 28 June 1994 with the
trial court a petition for "prohibition, mandamus, injunction with a prayer for
preliminary restraining order ex-parte" seeking the declaration of the validity of
SP Ordinance No.962-93 and the prohibition of the registration of tricycles-for-
hire and the issuance of licenses for the driving thereof by the LTO.

LTO opposed the prayer in the petition.

On 20 March 1995, the trial court rendered a resolution; the dispositive portion
read:

"In view of the foregoing, let a permanent injunctive writ be issued

against the respondent Land Transportation Office and the other
respondents, prohibiting and enjoining them, their employees,
officers, attorney's or other persons acting in their behalf from
forcing or compelling Tricycles to be registered with, and drivers to
secure their licenses from respondent LTO or secure franchise from
LTFRB and from collecting fees thereon. It should be understood that
the registration, franchise of tricycles and driver's license/permit
granted or issued by the City of Butuan are valid only within the
territorial limits of Butuan City.

"No pronouncement as to costs."[6]

Petitioners timely moved for a reconsideration of the above resolution but it was
to no avail. Petitioners then appealed to the Court of Appeals. In its now assailed
decision, the appellate court, on 17 November 1997, sustained the trial court. It
ruled:

"WHEREFORE, the petition is hereby DISMISSED and the questioned

permanent injunctive writ issued by the court a quo dated March 20,
1995 AFFIRMED."[7]

Coming up to this Court, petitioners raise this sole assignment of error, to

wit:

"The Court of Appeals [has] erred in sustaining the validity of the writ
of injunction issued by the trial court which enjoined LTO from (1)
 registering tricycles-for-hire and (2) issuing licenses for the driving
thereof since the Local Government Code devolved only the
franchising authority of the LTFRB. Functions of the LTO were not
devolved to the LGU's."[8]

The petition is impressed with merit.

The Department of Transportation and Communications[9] ("DOTC"), through the

LTO and the LTFRB, has since been tasked with implementing laws pertaining to
land transportation. The LTO is a line agency under the DOTC whose powers and
functions, pursuant to Article III, Section 4 (d) (1),[10] of R.A. No.4136, otherwise
known as Land Transportation and Traffic Code, as amended, deal primarily with
the registration of all motor vehicles and the licensing of drivers thereof. The
LTFRB, upon the other hand, is the governing body tasked by E.O. No. 202, dated
19 June 1987, to regulate the operation of public utility or "for hire" vehicles and
to grant franchises or certificates of public convenience ("CPC").[11] Finely put,
registration and licensing functions are vested in the LTO
while franchising and regulatory responsibilities had been vested in the LTFRB.

Under the Local Government Code, certain functions of the DOTC were
transferred to the LGUs, thusly:

"SEC. 458. Powers, Duties, Functions and Compensation. - 

"xxx.......xxx.......xxx

"(3) Subject to the provisions of Book II of this Code, enact

ordinances granting franchises and authorizing the issuance of
permits or licenses, upon such conditions and for such purposes
intended to promote the general welfare of the inhabitants of the
city and pursuant to this legislative authority shall:

"xxx.......xxx.......xxx.

"(VI) Subject to the guidelines prescribed by the Department of

Transportation and Communications, regulate the operation of
tricycles and grant franchises for the operation thereof within the
territorial jurisdiction of the city." (Emphasis supplied)
LGUs indubitably now have the power to regulate the operation of tricycles-for-
hire and to grant franchises for the operation thereof. "To regulate" means to fix,
establish, or control; to adjust by rule, method, or established mode; to direct by
rule or restriction; or to subject to governing principles or laws.[12] A franchise is
defined to be a special privilege to do certain things conferred by government on
an individual or corporation, and which does not belong to citizens generally of
common right.[13] On the other hand, "to register" means to record formally and
exactly, to enroll, or to enter precisely in a list or the like,[14] and a "driver's
license" is the certificate or license issued by the government which authorizes a
person to operate a motor vehicle.[15] The devolution of the functions of the
DOTC, performed by the LTFRB, to the LGUs, as so aptly observed by the Solicitor
General, is aimed at curbing the alarming increase of accidents in national
highways involving tricycles. It has been the perception that local governments
are in good position to achieve the end desired by the law-making body because
of their proximity to the situation that can enable them to address that serious
concern better than the national government.

It may not be amiss to state, nevertheless, that under Article 458 (a)[3-VI] of the
Local Government Code, the power of LGUs to regulate the operation of tricycles
and to grant franchises for the operation thereof is still subject to the guidelines
prescribed by the DOTC. In compliance therewith, the Department of
Transportation and Communications ("DOTC") issued "Guidelines to Implement
the Devolution of LTFRBs Franchising Authority over Tricycles-For-Hire to Local
Government units pursuant to the Local Government Code." Pertinent provisions
of the guidelines state:

"In lieu of the Land Transportation Franchising and Regulatory Board

(LTFRB) in the DOTC, the Sangguniang Bayan/Sangguniang
Panglungsod (SB/SP) shall perform the following:

"(a) Issue, amend, revise, renew, suspend, or cancel MTOP and

prescribe the appropriate terms and conditions therefor;

"xxx.......xxx.......xxx.

"Operating Conditions:

"1. For safety reasons, no tricycles should operate on national

highways utilized by 4 wheel vehicles greater than 4 tons and where
 normal speed exceed 40 KPH. However, the SB/SP may provide
exceptions if there is no alternative routs.

"2. Zones must be within the boundaries of the municipality/city.

However, existing zones within more than one municipality/city shall
be maintained, provided that operators serving said zone shall secure
MTOP's from each of the municipalities/cities having jurisdiction over
the areas covered by the zone.

"3. A common color for tricycles-for-hire operating in the same zone

may be imposed. Each unit shall be assigned and bear an
identification number, aside from its LTO license plate number.

"4. An operator wishing to stop service completely, or to suspend

service for more than one month, should report in writing such
termination or suspension to the SB/SP which originally granted the
MTOP prior thereto. Transfer to another zone may be permitted
upon application.

"5. The MTOP shall be valid for three (3) years, renewable for the
same period. Transfer to another zone, change of ownership of unit
or transfer of MTOP shall be construed as an amendment to an
MTOP and shall require appropriate approval of the SB/SP.

"6. Operators shall employ only drivers duly licensed by LTO for
tricycles-for-hire.

"7. No tricycle-for-hire shall be allowed to carry more passengers

and/or goods than it is designed for.

"8. A tricycle-for-hire shall be allowed to operate like a taxi service,

i.e., service is rendered upon demand and without a fixed route
within a zone."[16]

Such as can be gleaned from the explicit language of the statute, as well as the
corresponding guidelines issued by DOTC, the newly delegated powers pertain to
the franchising and regulatory powers theretofore exercised by the LTFRB and
not to the functions of the LTO relative to the registration of motor vehicles and
issuance of licenses for the driving thereof. Clearly unaffected by the Local
Government Code are the powers of LTO under R.A. No.4136 requiring the
registration of all kinds of motor vehicles "used or operated on or upon any public
highway" in the country. Thus -

"SEC. 5. All motor vehicles and other vehicles must be registered. -

(a) No motor vehicle shall be used or operated on or upon any public
highway of the Philippines unless the same is properly registered for
the current year in accordance with the provisions of this Act (Article
1, Chapter II, R.A. No. 4136).

The Commissioner of Land Transportation and his deputies are empowered at

anytime to examine and inspect such motor vehicles to determine whether said
vehicles are registered, or are unsightly, unsafe, improperly marked or equipped,
or otherwise unfit to be operated on because of possible excessive damage to
highways, bridges and other infrastructures.[17] The LTO is additionally charged
with being the central repository and custodian of all records of all motor
vehicles.[18]

The Court shares the apprehension of the Solicitor General if the above functions
were to likewise devolve to local government units; he states:

"If the tricycle registration function of respondent LTO is

decentralized, the incidence of theft of tricycles will most certainly go
up, and stolen tricycles registered in one local government could be
registered in another with ease. The determination of ownership
thereof will also become very difficult.

"Fake driver's licenses will likewise proliferate. This likely scenario

unfolds where a tricycle driver, not qualified by petitioner LTO's
testing, could secure a license from one municipality, and when the
same is confiscated, could just go another municipality to secure
another license.

"Devolution will entail the hiring of additional personnel charged

with inspecting tricycles for road worthiness, testing drivers, and
documentation. Revenues raised from tricycle registration may not
be enough to meet salaries of additional personnel and incidental
costs for tools and equipment."[19]
The reliance made by respondents on the broad taxing power of local government
units, specifically under Section 133 of the Local Government Code, is tangential.
Police power and taxation, along with eminent domain, are inherent powers of
sovereignty which the State might share with local government units by
delegation given under a constitutional or a statutory fiat. All these inherent
powers are for a public purpose and legislative in nature but the similarities just
about end there. The basic aim of police power is public good and welfare.
Taxation, in its case, focuses on the power of government to raise revenue in
order to support its existence and carry out its legitimate objectives. Although
correlative to each other in many respects, the grant of one does not necessarily
carry with it the grant of the other. The two powers are, by tradition and
jurisprudence, separate and distinct powers, varying in their respective concepts,
character, scopes and limitations. To construe the tax provisions of Section 133(1)
indistinctively would result in the repeal to that extent of LTO's regulatory power
which evidently has not been intended. If it were otherwise, the law could have
just said so in Section 447 and 458 of Book III of the Local Government Code in
the same manner that the specific devolution of LTFRB's power on franchising of
tricycles has been provided. Repeal by implication is not favored.[20] The power
over tricycles granted under Section 458(a)(3)(VI) of the Local Government Code
to LGUs is the power to regulate their operation and to grant franchises for the
operation thereof. The exclusionary clause contained in the tax provisions of
Section 133(1) of the Local Government Code must not be held to have had the
effect of withdrawing the express power of LTO to cause the registration of all
motor vehicles and the issuance of licenses for the driving thereof. These
functions of the LTO are essentially regulatory in nature, exercised pursuant to
the police power of the State, whose basic objectives are to achieve road safety
by insuring the road worthiness of these motor vehicles and the competence of
drivers prescribed by R. A. 4136. Not insignificant is the rule that a statute must
not be construed in isolation but must be taken in harmony with the extant body
of laws.[21] 

The Court cannot end this decision without expressing its own serious concern
over the seeming laxity in the grant of franchises for the operation of tricycles-
for-hire and in allowing the indiscriminate use by such vehicles on public
highways and principal thoroughfares. Senator Aquilino C. Pimentel, Jr., the
principal author, and sponsor of the bill that eventually has become to be known
as the Local Government Code, has aptly remarked:
 "Tricycles are a popular means of transportation, specially in the
countryside. They are, unfortunately, being allowed to drive along
highways and principal thoroughfares where they pose hazards to
their passengers arising from potential collisions with buses, cars
and jeepneys.

"The operation of tricycles within a municipality may be regulated

by the Sangguniang Bayan. In this connection,
the Sangguniang concerned would do well to consider prohibiting
the operation of tricycles along or across highways invite collisions
with faster and bigger vehicles and impede the flow of traffic."[22]

The need for ensuring public safety and convenience to commuters and
pedestrians alike is paramount. It might be well, indeed, for public officials
concerned to pay heed to a number of provisions in our laws that can warrant in
appropriate cases an incurrence of criminal and civil liabilities. Thus -

The Revised Penal Code -

"Art. 208. Prosecution of offenses; negligence and tolerance. - The

penalty of prision correccional in its minimum period and suspension
shall be imposed upon any public officer, or officer of the law, who,
in dereliction of the duties of his office, shall maliciously refrain from
instituting prosecution for the punishment of violators of the law, or
shall tolerate the commission of offenses."

The Civil Code -

"Art. 27. Any person suffering material or moral loss because a public
servant or employee refuses or neglects, without just cause, to
perform his official duty may file an action for damages and other
relief against the latter, without prejudice to any disciplinary
administrative action that may be taken."

"Art. 34. When a member of a city or municipal police force refuses

or fails to render aid or protection to any person in case of danger to
life or property, such peace officer shall be primarily liable for
damages, and the city or municipality shall be subsidiarily responsible
therefor. The civil action herein recognized shall be independent of
 any criminal, proceedings, and a preponderance of evidence shall
suffice to support such action."

"Art. 2189. Provinces, cities and municipalities shall be liable for

damages for the death of, or injuries suffered by, any person by
reason of the defective condition of roads, streets, bridges, public
buildings, and other public works under their control or supervision."

The Local Government Code -

"Sec. 24. Liability for Damages. - Local government units and their
officials are not exempt from liability for death or injury to persons or
damage to property."

WHEREFORE, the assailed decision which enjoins the Land Transportation Office
from requiring the due registration of tricycles and a license for the driving
thereof is REVERSED and SET ASIDE.

No pronouncements on costs.

Let copies of this decision be likewise furnished the Department of Interior and
Local Governments, the Department of Public Works and Highways and the
Department of Transportation and Communication.

SO ORDERED.

Melo, (Chairman), Panganiban, Purisima, and Gonzaga-Reyes, JJ., concur. 

THIRD DIVISION

PHILIPPINE FISHERIES G.R. No. 169836

DEVELOPMENT AUTHORITY,
Petitioner, Present:
Ynares-Santiago, J. (Chairperson),
- versus - Austria-Martinez,
Chico-Nazario, and
Nachura, JJ.
COURT OF APPEALS, OFFICE OF
THE PRESIDENT, DEPARTMENT
OF FINANCE and the CITY OF Promulgated:
ILOILO,
Respondents. July 31, 2007

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

DECISION

YNARES-SANTIAGO, J.:

Assailed in this petition for review is the June 21, 2005 Decision[1] of the Court of

Appeals in CA-G.R. SP No. 81228, which held that petitioner Philippine Fisheries

Development Authority (hereafter referred to as Authority) is liable to pay real

property taxes on the land and buildings of the Iloilo Fishing Port Complex (IFPC)

which are owned by the Republic of the Philippines but operated and governed by

the Authority.

The facts are not disputed.

On August 11, 1976, then President Ferdinand E. Marcos issued Presidential

Decree No. 977 (PD 977) creating the Authority and placing it under the direct
control and supervision of the Secretary of Natural Resources. On February 8,
1982, Executive Order No. 772 (EO 772) was issued amending PD 977, and
renaming the Authority as the now Philippine Fisheries Development Authority,
and attaching said agency to the Ministry of Natural Resources. Upon the
effectivity of the Administrative Code (EO 292), the Authority became an attached
agency of the Department of Agriculture.[2]

Meanwhile, beginning October 31, 1981, the then Ministry of Public Works and
Highways reclaimed from the sea a 21-hectare parcel of land in Barangay Tanza,
Iloilo City, and constructed thereon the IFPC, consisting of breakwater, a landing
quay, a refrigeration building, a market hall, a municipal shed, an administration
building, a water and fuel oil supply system and other port related facilities and
machineries. Upon its completion, the Ministry of Public Works and Highways
turned over IFPC to the Authority, pursuant to Section 11 of PD 977, which places
fishing port complexes and related facilities under the governance and operation
of the Authority. Notwithstanding said turn over, title to the land and buildings of
the IFPC remained with the Republic.

The Authority thereafter leased portions of IFPC to private firms and individuals
engaged in fishing related businesses.

Sometime in May 1988, the City of Iloilo assessed the entire IFPC for real property
taxes. The assessment remained unpaid until the alleged total tax delinquency of
the Authority for the fiscal years 1988 and 1989 amounted to P5,057,349.67,
inclusive of penalties and interests. To satisfy the tax delinquency, the City
of Iloilo scheduled on August 30, 1990, the sale at public auction of the IFPC.

The Authority filed an injunction case with the Regional Trial Court. At the pre-
trial, the parties agreed to avail of administrative proceedings, i.e., for the
Authority to file a claim for tax exemption with the Iloilo City Assessors Office. The
latter, however, denied the claim for exemption, hence, the Authority elevated
the case to the Department of Finance (DOF).

In its letter-decision[3] dated March 6, 1992, the DOF ruled that the Authority is
liable to pay real property taxes to the City of Iloilo because it enjoys the
beneficial use of the IFPC. The DOF added, however, that in satisfying the amount
of the unpaid real property taxes, the property that is owned by the Authority
shall be auctioned, and not the IFPC, which is a property of the Republic.[4]

The Authority filed a petition before the Office of the President but it was
dismissed.[5] It also denied the motion for reconsideration filed by the Authority.[6]

On petition with the Court of Appeals, the latter affirmed the decision of the
Office of the President. It opined, however, that the IFPC may be sold at public
auction to satisfy the tax delinquency of the Authority.[7] The dispositive portion
thereof, reads:

WHEREFORE, premises considered, the instant Petition for Review is

DENIED, and accordingly the June 30, 2003 Decision and December 3,
2003 Order of the Office of the President are hereby AFFIRMED.

SO ORDERED.[8]
Hence, this petition.

The issues are as follows: Is the Authority liable to pay real property tax to
the City of Iloilo? If the answer is in the affirmative, may the IFPC be sold at public
auction to satisfy the tax delinquency?
To resolve said issues, the Court has to determine (1) whether the Authority is a
government owned or controlled corporation (GOCC) or an instrumentality of the
national government; and (2) whether the IFPC is a property of public dominion.

The Court rules that the Authority is not a GOCC but an instrumentality of
the national government which is generally exempt from payment of real
property tax. However, said exemption does not apply to the portions of the IFPC
which the Authority leased to private entities. With respect to these properties,
the Authority is liable to pay real property tax. Nonetheless, the IFPC, being a
property of public dominion cannot be sold at public auction to satisfy the tax
delinquency.

In Manila International Airport Authority (MIAA) v. Court of Appeals,[9] the

Court made a distinction between a GOCC and an instrumentality. Thus:

Section 2(13) of the Introductory Provisions of the Administrative

Code of 1987 defines a government-owned or controlled corporation
as follows:

SEC. 2. General Terms Defined. x x x

(13) Government-owned or controlled

corporation refers to any agency organized as a stock or
non-stock corporation, vested with functions relating to
public needs whether governmental or proprietary in
nature, and owned by the Government directly or
through its instrumentalities either wholly, or, where
applicable as in the case of stock corporations, to the
 extent of at least fifty-one (51) percent of its capital
stock: x x x (Emphasis supplied)

A government-owned or controlled corporation must

be organized as a stock or non-stock corporation. MIAA is not
organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into
shares. MIAA has no stockholders or voting shares.

xxxx

Section 3 of the Corporation Code defines a stock corporation

as one whose capital stock is divided into shares and x x x authorized
to distribute to the holders of such shares dividends x x x. MIAA has
capital but it is not divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is not a stock
corporation.

MIAA is also not a non-stock corporation because it has no

members. Section 87 of the Corporation Code defines a non-stock
corporation as one where no part of its income is distributable as
dividends to its members, trustees or officers. A non-stock
corporation must have members. Even if we assume that the
Government is considered as the sole member of MIAA, this will not
make MIAA a non-stock corporation. Non-stock corporations cannot
distribute any part of their income to their members. Section 11 of
the MIAA Charter mandates MIAA to remit 20% of its annual gross
operating income to the National Treasury. This prevents MIAA from
qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock

corporations are organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry,
agriculture and like chambers. MIAA is not organized for any of these
purposes. MIAA, a public utility, is organized to operate an
international and domestic airport for public use.
 Since MIAA is neither a stock nor a non-stock corporation, MIAA
does not qualify as a government-owned or controlled
corporation.[10] (Emphasis supplied)

Thus, for an entity to be considered as a GOCC, it must either be organized

as a stock or non-stock corporation. Two requisites must concur before one may
be classified as a stock corporation, namely: (1) that it has capital stock divided
into shares, and (2) that it is authorized to distribute dividends and allotments of
surplus and profits to its stockholders. If only one requisite is present, it cannot be
properly classified as a stock corporation. As for non-stock corporations, they
must have members and must not distribute any part of their income to said
members.[11]

On the basis of the parameters set in the MIAA case, the Authority should
be classified as an instrumentality of the national government. As such, it is
generally exempt from payment of real property tax, except those portions which
have been leased to private entities.

In the MIAA case, petitioner Philippine Fisheries Development

Authority was cited as among the instrumentalities of the national
government. Thus

Some of the national government instrumentalities vested by

law with juridical personalities are: Bangko Sentral ng
Pilipinas, Philippine Rice Research Institute, Laguna Lake
Development Authority, Fisheries Development Authority, Bases
Conversion Development Authority, Philippine Ports Authority,
 Cagayan de Oro Port Authority, San Fernando Port Authority, Cebu
Port Authority, and Philippine National Railways.

Indeed, the Authority is not a GOCC but an instrumentality of the

government. The Authority has a capital stock but it is not divided into shares of

stocks.[12] Also, it has no stockholders or voting shares. Hence, it is not a stock

corporation. Neither it is a non-stock corporation because it has no members.

The Authority is actually a national government instrumentality which is

defined as an agency of the national government, not integrated within the

department framework, vested with special functions or jurisdiction by

law, endowed with some if not all corporate powers, administering special funds,

and enjoying operational autonomy, usually through a charter.[13] When the law

vests in a government instrumentality corporate powers, the instrumentality does

not become a corporation. Unless the government instrumentality is organized as

a stock or non-stock corporation, it remains a government instrumentality

exercising not only governmental but also corporate powers.

Thus, the Authority which is tasked with the special public function to carry

out the governments policy to promote the development of the countrys fishing

industry and improve the efficiency in handling, preserving, marketing, and

distribution of fish and other aquatic products, exercises the governmental

powers of eminent domain,[14] and the power to levy fees and charges.[15] At the

same time, the Authority exercises the general corporate powers conferred by

laws upon private and government-owned or controlled corporations.[16]

The MIAA case held[17] that unlike GOCCs, instrumentalities of the national

government, like MIAA, are exempt from local taxes pursuant to Section 133(o) of

the Local Government Code. This exemption, however, admits of

an exception with respect to real property taxes. Applying Section 234(a) of the

Local Government Code, the Court ruled that when an instrumentality of the

national government grants to a taxable person the beneficial use of a real

property owned by the Republic, said instrumentality becomes liable to pay real

property tax. Thus, while MIAA was held to be an instrumentality of the national

government which is generally exempt from local taxes, it was at the same time

declared liable to pay real property taxes on the airport lands and buildings which

it leased to private persons. It was held that the real property tax assessments

and notices of delinquencies issued by the City of Pasay to MIAA are

void except those pertaining to portions of the airport which are leased to private

parties. Pertinent portions of the decision, reads:

Section 193 of the Local Government Code expressly withdrew the

tax exemption of all juridical persons [u]nless otherwise provided in
this Code. Now, Section 133(o) of the Local Government
Code expressly provides otherwise, specifically prohibiting local
governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing

Powers of Local Government Units. Unless otherwise
provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall
not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the

National Government, its agencies
and instrumentalities, and local government units.

By express mandate of the Local Government Code, local

governments cannot impose any kind of tax on national government
instrumentalities like the MIAA. Local governments are devoid of
power to tax the national government, its agencies and
instrumentalities. The taxing powers of local governments do not
extend to the national government, its agencies and
instrumentalities, [u]nless otherwise provided in this Code as stated
in the saving clause of Section 133. x x x

xxxx

The saving clause in Section 133 refers to the exception to the

exemption in Section 234(a) of the Code, which makes the national
government subject to real estate tax when it gives the beneficial
use of its real properties to a taxable entity. Section 234(a) of the
Local Government Code provides:

SEC. 234. Exemptions from Real Property Tax The

following are exempted from payment of the real
property tax:
 (a) Real property owned by the Republic of the
Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.

x x x[18] (Emphasis supplied)

WHEREFORE, we GRANT the petition. We SET ASIDE the

assailed Resolutions of the Court of Appeals of 5 October
2001 and 27 September 2002 in CA-G.R. SP No.
66878. We DECLARE the Airport Lands and Buildings of the Manila
International Airport Authority EXEMPT from the real estate tax
imposed by the City of Paraaque. We declare VOID all the real estate
tax assessments, including the final notices of real estate tax
delinquencies, issued by the City of Paraaque on
the Airport Lands and Buildings of the Manila International Airport
Authority, except for the portions that
the Manila International Airport Authority has leased to private
parties. We also declare VOID the assailed auction sale, and all its
effects, of the Airport Lands and Buildings of the Manila International
Airport Authority.

x x x x.[19] (Emphasis added)

In light of the foregoing, the Authority should be classified as an

instrumentality of the national government which is liable to pay taxes only with

respect to the portions of the property, the beneficial use of which were vested in

private entities. When local governments invoke the power to tax on national

government instrumentalities, such power is construed strictly against local

governments. The rule is that a tax is never presumed and there must be clear

language in the law imposing the tax. Any doubt whether a person, article or
activity is taxable is resolved against taxation. This rule applies with greater force

when local governments seek to tax national government instrumentalities.[20]

Thus, the real property tax assessments issued by the City of Iloilo should
be upheld only with respect to the portions leased to private persons. In case the
Authority fails to pay the real property taxes due thereon, said portions cannot be
sold at public auction to satisfy the tax delinquency. In Chavez v. Public Estates
Authority it was held that reclaimed lands are lands of the public domain and
cannot, without Congressional fiat, be subject of a sale, public or private, thus:[21]

The salient provisions of CA No. 141, on government

reclaimed, foreshore and marshy lands of the public domain, are as
follows:

Sec. 59. The lands disposable under this title shall be classified
as follows:

(a) Lands reclaimed by the Government by dredging,

filling, or other means;
(b) Foreshore;
(c) Marshy lands or lands covered with water bordering
upon the shores or banks of navigable lakes or rivers;
(d) Lands not included in any of the foregoing classes.

xxxx

Sec. 61. The lands comprised in classes (a), (b), and (c) of
section fifty-nine shall be disposed of to private parties by lease
only and not otherwise, as soon as the President, upon
recommendation by the Secretary of Agriculture, shall declare that
the same are not necessary for the public service and are open to
disposition under this chapter. The lands included in class (d) may be
 disposed of by sale or lease under the provisions of this
Act. (Emphasis supplied)

xxxx

Since then and until now, the only way the government can
sell to private parties government reclaimed and marshy disposable
lands of the public domain is for the legislature to pass a law
authorizing such sale. CA No. 141 does not authorize the President to
reclassify government reclaimed and marshy lands into other non-
agricultural lands under Section 59 (d). Lands classified under Section
59 (d) are the only alienable or disposable lands for non-agricultural
purposes that the government could sell to private parties. (Emphasis
supplied)

In the same vein, the port built by the State in the Iloilo fishing complex is a
property of the public dominion and cannot therefore be sold at public
auction. Article 420 of the Civil Code, provides:

ARTICLE 420. The following things are property of public

dominion:

(1) Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks, shores,
roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public
use, and are intended for some public service or for the
development of the national wealth.

The Iloilo fishing port which was constructed by the State for public use

and/or public service falls within the term port in the aforecited provision. Being a
property of public dominion the same cannot be subject to execution or

foreclosure sale.[22] In like manner, the reclaimed land on which the IFPC is built

cannot be the object of a private or public sale without Congressional

authorization. Whether there are improvements in the fishing

port complex that should not be construed to be embraced within the term port,

involves evidentiary matters that cannot be addressed in the present case. As for

now, considering that the Authority is a national government instrumentality, any

doubt on whether the entire IFPC may be levied upon to satisfy the tax

delinquency should be resolved against the City of Iloilo.

In sum, the Court finds that the Authority is an instrumentality of the

national government, hence, it is liable to pay real property taxes assessed by the
City of Iloilo on the IFPC only with respect to those portions which are leased to
private entities. Notwithstanding said tax delinquency on the leased portions of
the IFPC, the latter or any part thereof, being a property of public domain, cannot
be sold at public auction. This means that the City of Iloilo has to satisfy the tax
delinquency through means other than the sale at public auction of the IFPC.

WHEREFORE, the petition is GRANTED and the June 21, 2005 Decision of

the Court of Appeals in CA-G.R. SP No. 81228 is SET ASIDE. The real property tax

assessments issued by the City Iloilo on the land and buildings of the Iloilo Fishing

Port Complex, is declared VOID EXCEPT those pertaining to the portions leased to
private parties. The City of Iloilo is DIRECTED to refrain from levying on the Iloilo

Fishing Port Complex to satisfy the payment of the real property tax delinquency.

No costs.

SO ORDERED.

[Syllabus]
THIRD DIVISION

[G.R. No. 120082. September 11, 1996]

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. HON.

FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the
Regional Trial Court, Branch 20, Cebu City, THE CITY OF CEBU, represented
by its Mayor, HON. TOMAS R. OSMEA, and EUSTAQUIO B.
CESA, respondents.

DECISION
DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are
the decision of 22 March 1995[1] of the Regional Trial Court (RTC) of Cebu City,
Branch 20, dismissing the petition for declaratory relief in Civil Case No. CEB-
16900, entitled Mactan Cebu International Airport Authority vs. City of Cebu, and
its order of 4 May 1995[2]denying the motion to reconsider the decision.
We resolved to give due course to this petition for it raises issues dwelling on
the scope of the taxing power of local government units and the limits of tax
exemption privileges of government-owned and controlled corporations.
 The uncontradicted factual antecedents are summarized in the instant
petition as follows:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by

virtue of Republic Act No. 6958, mandated to principally undertake the
economical, efficient and effective control, management and supervision of the
Mactan International Airport in the Province of Cebu and the Lahug Airport in
Cebu City, x x x and such other airports as may be established in the Province of
Cebu x x x (Sec. 3, RA 6958). It is also mandated to:

a) encourage, promote and develop international and domestic air traffic in the
Central Visayas and Mindanao regions as a means of making the regions centers
of international trade and tourism, and accelerating the development of the
means of transportation and communication in the country; and,

b) upgrade the services and facilities of the airports and to formulate

internationally acceptable standards of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of
exemption from payment of realty taxes in accordance with Section 14 of its
Charter:

Sec. 14. Tax Exemptions. -- The Authority shall be exempt from realty taxes
imposed by the National Government or any of its political subdivisions, agencies
and instrumentalities x x x.

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of

the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-
A), located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total
amount of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified,

claiming in its favor the aforecited Section 14 of RA 6958 which exempts it from
payment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing Section 133 of the Local
Government Code of 1991 which puts limitations on the taxing powers of local
government units:
Section 133. Common Limitations on the Taxing Powers of Local Government
Units. -- Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:

a) x x x

xxx

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

Respondent City refused to cancel and set aside petitioners realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax
exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the
Local Government Code that took effect on January 1, 1992:

Section 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under RA
No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (underscoring supplied)

xxx

Section 234. Exemptions from Real Property Taxes. x x x

(a) x x x

xxx

(e) x x x

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account under protest and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of
Cebu, Branch 20, on December 29, 1994. MCIAA basically contended that the
taxing powers of local government units do not extend to the levy of taxes or fees
of any kind on an instrumentality of the national government. Petitioner insisted
that while it is indeed a government-owned corporation, it nonetheless stands on
the same footing as an agency or instrumentality of the national government by
the very nature of its powers and functions.

Respondent City, however, asserted that MCIAA is not an instrumentality of the

government but merely a government-owned corporation performing proprietary
functions. As such, all exemptions previously granted to it were deemed
withdrawn by operation of law, as provided under Sections 193 and 234 of the
Local Government Code when it took effect on January 1, 1992.[3]

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995,[4] the trial court dismissed the petition in light
of its findings, to wit:

A close reading of the New Local Government Code of 1991 or RA 7160 provides
the express cancellation and withdrawal of exemption of taxes by government-
owned and controlled corporation per Sections after the effectivity of said Code
on January 1, 1992, to wit: [proceeds to quote Sections 193 and 234]

Petitioners claimed that its real properties assessed by respondent City

Government of Cebu are exempted from paying realty taxes in view of the
exemption granted under RA 6958 to pay the same (citing Section 14 of RA 6958).

However, RA 7160 expressly provides that All general and special laws, acts, city
charters, decrees [sic], executive orders, proclamations and administrative
regulations, or part of parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified accordingly. (/f/, Section
534, RA 7160).

With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly
repealed by the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

This Courts ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more
effective partners in the attainment of national goals. Toward this end, the State
shall provide for a more responsive and accountable local government structure
instituted through a system of decentralization whereby local government units
shall be given more powers, authority, responsibilities, and resources. The
process of decentralization shall proceed from the national government to the
local government units. x x x[5]

Its motion for reconsideration having been denied by the trial court in its 4
May 1995 order, the petitioner filed the instant petition based on the following
assignment of errors:
I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER
IS VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH
PLACE IT IN THE SAME CATEGORY AS AN INSTRUMENTALITY OR
AGENCY OF THE GOVERNMENT.
II. RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO
PAY REAL PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although it is a
government-owned or controlled corporation, it is mandated to perform
functions in the same category as an instrumentality of Government. An
instrumentality of Government is one created to perform governmental functions
primarily to promote certain aspects of the economic life of the
people.[6]Considering its task not merely to efficiently operate and manage the
Mactan-Cebu International Airport, but more importantly, to carry out the
Government policies of promoting and developing the Central Visayas and
Mindanao regions as centers of international trade and tourism, and accelerating
the development of the means of transportation and communication in the
country,[7] and that it is an attached agency of the Department of Transportation
and Communication (DOTC),[8] the petitioner may stand in [sic] the same footing
as an agency or instrumentality of the national government. Hence, its tax
exemption privilege under Section 14 of its Charter cannot be considered
withdrawn with the passage of the Local Government Code of 1991
(hereinafter LGC) because Section 133 thereof specifically states that the `taxing
powers of local government units shall not extend to the levy of taxes or fees or
charges of any kind on the national government, its agencies and
instrumentalities.
As to the second assigned error, the petitioner contends that being an
instrumentality of the National Government, respondent City of Cebu has no
power nor authority to impose realty taxes upon it in accordance with the
aforesaid Section 133 of the LGC, as explained in Basco vs. Philippine Amusement
and Gaming Corporation:[9]

Local governments have no power to tax instrumentalities of the National

Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stock are owned by the National
Government. . . .

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role
is governmental, which places it in the category of an agency or instrumentality of
the Government. Being an instrumentality of the Government, PAGCOR should be
and actually is exempt from local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by a mere Local government.

The states have no power by taxation or otherwise, to retard, impede, burden or

in any manner control the operation of constitutional laws enacted by Congress
to carry into execution the powers vested in the federal
government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the supremacy of the National Government over
local governments.

Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at
least, the instrumentalities of the United States (Johnson v. Maryland, 254 US 51)
and it can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them.
(Antieau, Modern Constitutional Law, Vol. 2, p. 140)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activities
or enterprise using the power to tax as a tool for regulation (U.S. v. Sanchez, 340
US 42). The power to tax which was called by Justice Marshall as the power to
destroy (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power to
wield it.(underscoring supplied)

It then concludes that the respondent Judge cannot therefore correctly say
that the questioned provisions of the Code do not contain any distinction
between a government corporation performing governmental functions as
against one performing merely proprietary ones such that the exemption privilege
withdrawn under the said Code would apply to all government corporations.For it
is clear from Section 133, in relation to Section 234, of the LGC that the legislature
meant to exclude instrumentalities of the national government from the taxing
powers of the local government units.
In its comment, respondent City of Cebu alleges that as a local government
unit and a political subdivision, it has the power to impose, levy, assess, and
collect taxes within its jurisdiction. Such power is guaranteed by the
Constitution[10] and enhanced further by the LGC. While it may be true that under
its Charter the petitioner was exempt from the payment of realty taxes,[11] this
exemption was withdrawn by Section 234 of the LGC. In response to the
petitioners claim that such exemption was not repealed because being an
instrumentality of the National Government, Section 133 of the LGC prohibits
local government units from imposing taxes, fees, or charges of any kind on it,
respondent City of Cebu points out that the petitioner is likewise a government-
owned corporation, and Section 234 thereof does not distinguish between
government-owned or controlled corporations performing governmental and
purely proprietary functions. Respondent City of Cebu urges this Court to apply by
analogy its ruling that the Manila International Airport Authority is a government-
owned corporation,[12] and to reject the application of Basco because it was
promulgated . . . before the enactment and the signing into law of R.A. No. 7160,
and was not, therefore, decided in the light of the spirit and intention of the
framers of the said law.
As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so that security
against its abuse is to be found only in the responsibility of the legislature which
imposes the tax on the constituency who are to pay it. Nevertheless, effective
limitations thereon may be imposed by the people through their
Constitutions.[13]Our Constitution, for instance, provides that the rule of taxation
shall be uniform and equitable and Congress shall evolve a progressive system of
taxation.[14] So potent indeed is the power that it was once opined that the power
to tax involves the power to destroy.[15] Verily, taxation is a destructive power
which interferes with the personal and property rights of the people and takes
from them a portion of their property for the support of the
government. Accordingly, tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer.[16] But since taxes are what we
pay for civilized society,[17] or are the lifeblood of the nation, the law frowns
against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayer and liberally in favor of the taxing
authority.[18] A claim of exemption from tax payments must be clearly shown and
based on language in the law too plain to be mistaken.[19] Elsewise stated, taxation
is the rule, exemption therefrom is the exception.[20] However, if the grantee of
the exemption is a political subdivision or instrumentality, the rigid rule of
construction does not apply because the practical effect of the exemption is
merely to reduce the amount of money that has to be handled by the
government in the course of its operations.[21]
The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer merely by
virtue of a valid delegation as before, but pursuant to direct authority conferred
by Section 5, Article X of the Constitution.[22] Under the latter, the exercise of the
power may be subject to such guidelines and limitations as the Congress may
provide which, however, must be consistent with the basic policy of local
autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the
petitioner is exempt from the payment of realty taxes imposed by the National
Government or any of its political subdivisions, agencies, and
instrumentalities. Nevertheless, since taxation is the rule and exemption
therefrom the exception, the exemption may thus be withdrawn at the pleasure
of the taxing authority. The only exception to this rule is where the exemption
was granted to private parties based on material consideration of a mutual
nature, which then becomes contractual and is thus covered by the non-
impairment clause of the Constitution.[23]
 The LGC, enacted pursuant to Section 3, Article X of the Constitution, provides
for the exercise by local government units of their power to tax, the scope thereof
or its limitations, and the exemptions from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing
powers of local government units as follows:

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

(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on wharves,
tonnage dues, and all other kinds of customs fees, charges and dues
except wharfage on wharves constructed and maintained by the local
government unit concerned;
(e) Taxes, fees and charges and other impositions upon goods carried into
or out of, or passing through, the territorial jurisdictions of local
government units in the guise of charges for wharfage, tolls for bridges
or otherwise, or other taxes, fees or charges in any form whatsoever
upon such goods or merchandise;
(f) Taxes, fees or charges on agricultural and aquatic products when sold
by marginal farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of Investments
as pioneer or non-pioneer for a period of six (6) and four (4) years,
respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal
Revenue Code, as amended, and taxes, fees or charges on petroleum
products;
 (i) Percentage or value-added tax (VAT) on sales, barters or exchanges or
similar transactions on goods or services except as otherwise provided
herein;
(j) Taxes on the gross receipts of transportation contractors and persons
engaged in the transportation of passengers or freight by hire and
common carriers by air, land or water, except as provided in this Code;
(k) Taxes on premiums paid by way of reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof,
except, tricycles;
(m) Taxes, fees, or other charges on Philippine products actually exported,
except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprises and cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the Cooperatives Code of the Philippines
respectively; and
(o) TAXES, FEES OR CHARGES OF ANY KIND ON THE NATIONAL
GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL
GOVERNMENT UNITS. (emphasis supplied)
Needless to say, the last item (item o) is pertinent to this case. The taxes, fees or
charges referred to are of any kind; hence, they include all of these, unless
otherwise provided by the LGC. The term taxes is well understood so as to need
no further elaboration, especially in light of the above enumeration. The term
fees means charges fixed by law or ordinance for the regulation or inspection of
business or activity,[24] while charges are pecuniary liabilities such as rents or fees
against persons or property.[25]
Among the taxes enumerated in the LGC is real property tax, which is
governed by Section 232. It reads as follows:

SEC. 232. Power to Levy Real Property Tax. A province or city or a municipality
within the Metropolitan Manila Area may levy an annual ad valorem tax on real
property such as land, building, machinery, and other improvements not
hereafter specifically exempted.
 Section 234 of the LGC provides for the exemptions from payment of real
property taxes and withdraws previous exemptions therefrom granted to natural
and juridical persons, including government-owned and controlled corporations,
except as provided therein. It provides:

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

(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof had been
granted, for consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, nonprofit or religious cemeteries and all lands,
buildings and improvements actually, directly, and exclusively used for
religious, charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for
under R.A. No. 6938; and
(e) Machinery and equipment used for pollution control and
environmental protection.

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

These exemptions are based on the ownership, character, and use of the
property. Thus:
(a) Ownership Exemptions. Exemptions from real property taxes on the
basis of ownership are real properties owned by: (i) the Republic, (ii) a
province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi)
registered cooperatives.
 (b) Character Exemptions. Exempted from real property taxes on the basis
of their character are: (i) charitable institutions, (ii) houses and temples
of prayer like churches, parsonages or convents appurtenant thereto,
mosques, and (iii) non-profit or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the basis of
the actual, direct and exclusive use to which they are devoted are: (i) all
lands, buildings and improvements which are actually directly and
exclusively used for religious, charitable or educational purposes; (ii) all
machineries and equipment actually, directly and exclusively used by
local water districts or by government-owned or controlled
corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power; and (iii) all machinery
and equipment used for pollution control and environmental
protection.

To help provide a healthy environment in the midst of the modernization of the

country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.

2. Other Exemptions Withdrawn. All other exemptions previously granted to

natural or juridical persons including government-owned or controlled
corporations are withdrawn upon the effectivity of the Code.[26]

Section 193 of the LGC is the general provision on withdrawal of tax

exemption privileges. It provides:

SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code.

On the other hand, the LGC authorizes local government units to grant tax
exemption privileges. Thus, Section 192 thereof provides:
SEC. 192. Authority to Grant Tax Exemption Privileges.-- Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or
reliefs under such terms and conditions as they may deem necessary.

The foregoing sections of the LGC speak of: (a) the limitations on the taxing
powers of local government units and the exceptions to such limitations; and (b)
the rule on tax exemptions and the exceptions thereto. The use
of exceptions or provisos in these sections, as shown by the following clauses:
(1) unless otherwise provided herein in the opening paragraph of Section
133;
(2) Unless otherwise provided in this Code in Section 193;
(3) not hereafter specifically exempted in Section 232; and
(4) Except as provided herein in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in Section 133 seems to be inaccurately worded. Instead
of the clause unless otherwise provided herein, with the herein to mean, of
course, the section, it should have used the clause unless otherwise provided in
this Code. The former results in absurdity since the section itself enumerates
what are beyond the taxing powers of local government units and, where
exceptions were intended, the exceptions are explicitly indicated in the next. For
instance, in item (a) which excepts income taxes when levied on banks and other
financial institutions; item (d) which excepts wharfage on wharves constructed
and maintained by the local government unit concerned; and item (1) which
excepts taxes, fees and charges for the registration and issuance of licenses or
permits for the driving of tricycles. It may also be observed that within the body
itself of the section, there are exceptions which can be found only in other parts
of the LGC, but the section interchangeably uses therein the clause except as
otherwise provided herein as in items (c) and (i), or the clause except as provided
in this Code in item (j). These clauses would be obviously unnecessary or mere
surplusages if the opening clause of the section were Unless otherwise provided
in this Code instead of Unless otherwise provided herein. In any event, even if the
latter is used, since under Section 232 local government units have the power to
levy real property tax, except those exempted therefrom under Section 234, then
Section 232 must be deemed to qualify Section 133.
 Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude
that as a general rule, as laid down in Section 133, the taxing powers of local
government units cannot extend to the levy of, inter alia, taxes, fees and charges
of any kind on the National Government, its agencies and instrumentalities, and
local government units; however, pursuant to Section 232, provinces, cities, and
municipalities in the Metropolitan Manila Area may impose the real property tax
except on, inter alia, real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person, as provided in item
(a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural
or juridical persons, including government-owned and controlled corporations,
Section 193 of the LGC prescribes the general rule, viz., they are withdrawn upon
the effectivity of the LGC, except those granted to local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, and unless otherwise provided in the
LGC. The latter proviso could refer to Section 234 which enumerates the
properties exempt from real property tax. But the last paragraph of Section 234
further qualifies the retention of the exemption insofar as real property taxes are
concerned by limiting the retention only to those enumerated therein; all others
not included in the enumeration lost the privilege upon the effectivity of the
LGC. Moreover, even as to real property owned by the Republic of the Philippines
or any of its political subdivisions covered by item (a) of the first paragraph of
Section 234, the exemption is withdrawn if the beneficial use of such property has
been granted to a taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the
effectivity of the LGC, exemptions from payment of real property taxes granted to
natural or juridical persons, including government-owned or controlled
corporations, except as provided in the said section, and the petitioner is,
undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958, has
been withdrawn. Any claim to the contrary can only be justified if the petitioner
can seek refuge under any of the exceptions provided in Section 234, but not
under Section 133, as it now asserts, since, as shown above, the said section is
qualified by Sections 232 and 234.
 In short, the petitioner can no longer invoke the general rule in Section 133
that the taxing powers of the local government units cannot extend to the levy of:

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

It must show that the parcels of land in question, which are real property, are any
one of those enumerated in Section 234, either by virtue of ownership, character,
or use of the property. Most likely, it could only be the first, but not under any
explicit provision of the said section, for none exists. In light of the petitioners
theory that it is an instrumentality of the Government, it could only be within the
first item of the first paragraph of the section by expanding the scope of the term
Republic of the Philippines to embrace its instrumentalities and agencies. For
expediency, we quote:

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

This view does not persuade us. In the first place, the petitioners claim that it
is an instrumentality of the Government is based on Section 133(o), which
expressly mentions the word instrumentalities; and, in the second place, it fails to
consider the fact that the legislature used the phrase National Government, its
agencies and instrumentalities in Section 133(o), but only the phrase Republic of
the Philippines or any of its political subdivisions in Section 234(a).
The terms Republic of the Philippines and National Government are not
interchangeable. The former is broader and synonymous with Government of the
Republic of the Philippines which the Administrative Code of 1987 defines as the
corporate governmental entity through which the functions of government are
exercised throughout the Philippines, including, save as the contrary appears from
the context, the various arms through which political authority is made affective
in the Philippines, whether pertaining to the autonomous regions, the provincial,
city, municipal or barangay subdivisions or other forms of local
government.[27] These autonomous regions, provincial, city, municipal or barangay
subdivisions are the political subdivisions.[28]
On the other hand, National Government refers to the entire machinery of
the central government, as distinguished from the different forms of local
governments.[29] The National Government then is composed of the three great
departments: the executive, the legislative and the judicial.[30]
An agency of the Government refers to any of the various units of the
Government, including a department, bureau, office, instrumentality, or
government-owned or controlled corporation, or a local government or a distinct
unit therein;[31] while an instrumentality refers to any agency of the National
Government, not integrated within the department framework, vested with
special functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy, usually
through a charter. This term includes regulatory agencies, chartered institutions
and government-owned and controlled corporations.[32]
If Section 234(a) intended to extend the exception therein to the withdrawal
of the exemption from payment of real property taxes under the last sentence of
the said section to the agencies and instrumentalities of the National Government
mentioned in Section 133(o), then it should have restated the wording of the
latter. Yet, it did not. Moreover, that Congress did not wish to expand the scope
of the exemption in Section 234(a) to include real property owned by other
instrumentalities or agencies of the government including government-owned
and controlled corporations is further borne out by the fact that the source of this
exemption is Section 40(a) of P.D. No. 464, otherwise known as The Real Property
Tax Code, which reads:

SEC. 40. Exemptions from Real Property Tax. The exemption shall be as follows:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions and any government-owned or controlled corporation so exempt by
its charter: Provided, however, That this exemption shall not apply to real
property of the above-mentioned entities the beneficial use of which has been
granted, for consideration or otherwise, to a taxable person.

Note that as reproduced in Section 234(a), the phrase and any government-
owned or controlled corporation so exempt by its charter was excluded. The
justification for this restricted exemption in Section 234(a) seems obvious: to limit
further tax exemption privileges, especially in light of the general provision on
withdrawal of tax exemption privileges in Section 193 and the special provision on
withdrawal of exemption from payment of real property taxes in the last
paragraph of Section 234. These policy considerations are consistent with the
State policy to ensure autonomy to local governments[33] and the objective of the
LGC that they enjoy genuine and meaningful local autonomy to enable them to
attain their fullest development as self-reliant communities and make them
effective partners in the attainment of national goals.[34] The power to tax is the
most effective instrument to raise needed revenues to finance and support
myriad activities of local government units for the delivery of basic services
essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. It may also be relevant to recall that the
original reasons for the withdrawal of tax exemption privileges granted to
government-owned and controlled corporations and all other units of
government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and there was a
need for these entities to share in the requirements of development, fiscal or
otherwise, by paying the taxes and other charges due from them.[35]
The crucial issues then to be addressed are: (a) whether the parcels of land in
question belong to the Republic of the Philippines whose beneficial use has been
granted to the petitioner, and (b) whether the petitioner is a taxable person.
Section 15 of the petitioners Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works or air operations,
including all equipment which are necessary for the operations of air navigation,
aerodrome control towers, crash, fire, and rescue facilities are hereby transferred
to the Authority: Provided, however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways
communication, the approach control office, and the area control center shall be
retained by the Air Transportation Office. No equipment, however, shall be
removed by the Air Transportation Office from Mactan without the concurrence
of the Authority. The Authority may assist in the maintenance of the Air
Transportation Office equipment.

The airports referred to are the Lahug Air Port in Cebu City and the Mactan
International Airport in the Province of Cebu,[36] which belonged to the Republic
of the Philippines, then under the Air Transportation Office (ATO).[37]
 It may be reasonable to assume that the term lands refer to lands in Cebu City
then administered by the Lahug Air Port and includes the parcels of land the
respondent City of Cebu seeks to levy on for real property taxes. This section
involves a transfer of the lands, among other things, to the petitioner and not just
the transfer of the beneficial use thereof, with the ownership being retained by
the Republic of the Philippines.
This transfer is actually an absolute conveyance of the ownership thereof
because the petitioners authorized capital stock consists of, inter alia, the value of
such real estate owned and/or administered by the airports.[38] Hence, the
petitioner is now the owner of the land in question and the exception in Section
234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a taxable person
under its Charter. It was only exempted from the payment of real property
taxes. The grant of the privilege only in respect of this tax is conclusive proof of
the legislative intent to make it a taxable person subject to all taxes, except real
property tax.
Finally, even if the petitioner was originally not a taxable person for purposes
of real property tax, in light of the foregoing disquisitions, it had already become,
even if it be conceded to be an agency or instrumentality of the Government, a
taxable person for such purpose in view of the withdrawal in the last paragraph of
Section 234 of exemptions from the payment of real property taxes, which, as
earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance
on Basco vs. Philippine Amusement and Gaming Corporation[39] is unavailing since
it was decided before the effectivity of the LGC. Besides, nothing can prevent
Congress from decreeing that even instrumentalities or agencies of the
Government performing governmental functions may be subject to tax. Where it
is done precisely to fulfill a constitutional mandate and national policy, no one can
doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and
order of the Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900
are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
 Narvasa, C.J., (Chairman), Melo, Francisco, and Panganiban, JJ., concur.

EN BANC

MANILA INTERNATIONAL G.R. No. 155650

AIRPORT AUTHORITY,

Petitioner, Present:

PANGANIBAN, C.J.,

PUNO,

QUISUMBING,

YNARES-SANTIAGO,

SANDOVAL-GUTIERREZ,

- versus - CARPIO,

AUSTRIA-MARTINEZ,

CORONA,

CARPIO MORALES,

CALLEJO, SR.,

AZCUNA,

COURT OF APPEALS, CITY OF TINGA,

PARAAQUE, CITY MAYOR OF CHICO-NAZARIO,

PARAAQUE, SANGGUNIANG GARCIA, and

PANGLUNGSOD NG PARAAQUE, VELASCO, JR., JJ.

CITY ASSESSOR OF PARAAQUE,

and CITY TREASURER OF Promulgated:

PARAAQUE,

Respondents. July 20, 2006

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D E C I S I ON

CARPIO, J.:

The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates

the Ninoy Aquino International Airport (NAIA) Complex in Paraaque City under

Executive Order No. 903, otherwise known as the Revised Charter of the Manila

International Airport Authority (MIAA Charter). Executive Order No. 903 was

issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently,

Executive Order Nos. 909[1] and 298[2] amended the MIAA Charter.
 As operator of the international airport, MIAA administers the land,

improvements and equipment within the NAIA Complex. The MIAA Charter

transferred to MIAA approximately 600 hectares of land,[3] including the runways

and buildings (Airport Lands and Buildings) then under the Bureau of Air

Transportation.[4] The MIAA Charter further provides that no portion of the land

transferred to MIAA shall be disposed of through sale or any other mode unless

specifically approved by the President of the Philippines.[5]

On 21 March 1997, the Office of the Government Corporate Counsel

(OGCC) issued Opinion No. 061. The OGCC opined that the Local Government

Code of 1991 withdrew the exemption from real estate tax granted to MIAA

under Section 21 of the MIAA Charter. Thus, MIAA negotiated with respondent

City of Paraaque to pay the real estate tax imposed by the City. MIAA then paid

some of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax

Delinquency from the City of Paraaque for the taxable years 1992 to

2001. MIAAs real estate tax delinquency is broken down as follows:

TAX TAXABLEYE TAX DUE PENALTY TOTAL
DECLARATI AR
ON

E-016- 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20

01370

E-016- 1992-2001 111,689,424.9 68,149,479.59 179,838,904.4

01374 0 9

E-016- 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00

01375

E-016- 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00

01376

E-016- 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24

01377

E-016- 1992-2001 111,107,950.4 67,794,681.59 178,902,631.9

01378 0 9

E-016- 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00

01379

E-016- 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00

01380

*E-016-013- 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50

85

*E-016- 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00

 01387

*E-016- 1998-2001 75,240.00 33,858.00 109,098.00

01396

GRAND P392,435,861. P232,070,863. P 624,506,725.

TOTAL 95 47 42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102

for P4,207,028.75

#9476101 for P28,676,480.00

#9476103 for P49,115.00[6]

On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of

levy and warrants of levy on the Airport Lands and Buildings. The Mayor of the

City of Paraaquethreatened to sell at public auction the Airport Lands and

Buildings should MIAA fail to pay the real estate tax delinquency. MIAA thus

sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC

Opinion No. 061. The OGCC pointed out that Section 206 of the Local

Government Code requires persons exempt from real estate tax to show proof
 of exemption. The OGCC opined that Section 21 of the MIAA Charter is the

proof that MIAA is exempt from real estate tax.

On 1 October 2001, MIAA filed with the Court of Appeals an original

petition for prohibition and injunction, with prayer for preliminary injunction or

temporary restraining order.The petition sought to restrain the City

of Paraaque from imposing real estate tax on, levying against, and auctioning

for public sale the Airport Lands and Buildings. The petition was docketed as

CA-G.R. SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA

filed it beyond the 60-day reglementary period. The Court of Appeals also denied

on 27 September 2002MIAAs motion for reconsideration and supplemental

motion for reconsideration. Hence, MIAA filed on 5 December 2002 the present

petition for review.[7]

Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale

at the Barangay Halls of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in

the public market of Barangay La Huerta; and in the main lobby of

the Paraaque City Hall. The City of Paraaque published the notices in the 3 and 10

January 2003 issues of the Philippine Daily Inquirer, a newspaper of general

circulation in the Philippines. The notices announced the public auction sale of

the Airport Lands and Buildings to the highest bidder on 7 February 2003, 10:00

a.m., at the Legislative Session Hall Building of Paraaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed

before this Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a

Temporary Restraining Order. The motion sought to restrain respondents the City

of Paraaque, City Mayor of Paraaque, Sangguniang Panglungsod ng Paraaque,

City Treasurer of Paraaque, and the City Assessor of Paraaque (respondents) from

auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order

(TRO) effective immediately. The Court ordered respondents to cease and

desist from selling at public auction the Airport Lands and

Buildings. Respondents received the TRO on the same day that the Court issued

it. However, respondents received the TRO only at 1:25 p.m. or three hours

after the conclusion of the public auction.

On 10 February 2003, this Court issued a Resolution confirming nunc pro

tunc the TRO.

On 29 March 2005, the Court heard the parties in oral arguments. In compliance

with the directive issued during the hearing, MIAA, respondent City of Paraaque,

and the Solicitor General subsequently submitted their respective Memoranda.

MIAA admits that the MIAA Charter has placed the title to

the Airport Lands and Buildings in the name of MIAA. However, MIAA points

out that it cannot claim ownership over these properties since the real owner

of the Airport Lands and Buildings is the Republic of the Philippines. The MIAA

Charter mandates MIAA to devote the Airport Lands and Buildings for the

benefit of the general public. Since the Airport Lands and Buildings are devoted

to public use and public service, the ownership of these properties remains

with the State. The Airport Lands and Buildings are thus inalienable and are not

subject to real estate tax by local governments.

MIAA also points out that Section 21 of the

MIAA Charter specifically exempts MIAA from the payment of real estate

tax. MIAA insists that it is also exempt from real estate tax under Section 234 of

the Local Government Code because the Airport Lands and Buildings are owned

by the Republic. To justify the exemption, MIAA invokes the principle that the
 government cannot tax itself. MIAA points out that the reason for tax

exemption of public property is that its taxation would not inure to any public

advantage, since in such a case the tax debtor is also the tax creditor.

Respondents invoke Section 193 of the Local Government Code, which expressly

withdrew the tax exemption privileges of government-owned and-controlled

corporations upon the effectivity of the Local Government Code. Respondents

also argue that a basic rule of statutory construction is that the express mention

of one person, thing, or act excludes all others. An international airport is not

among the exceptions mentioned in Section 193 of the Local Government

Code. Thus, respondents assert that MIAA cannot claim that

the Airport Lands and Buildings are exempt from real estate tax.

Respondents also cite the ruling of this Court in Mactan International

Airport v. Marcos[8] where we held that the Local Government Code has

withdrawn the exemption from real estate tax granted to international

airports. Respondents further argue that since MIAA has already paid some of the

real estate tax assessments, it is now estopped from claiming that

the Airport Lands and Buildings are exempt from real estate tax.
 The Issue

This petition raises the threshold issue of whether the Airport Lands and

Buildings of MIAA are exempt from real estate tax under existing laws. If so

exempt, then the real estate tax assessments issued by the City of Paraaque,

and all proceedings taken pursuant to such assessments, are void. In such

event, the other issues raised in this petition become moot.

The Courts Ruling

We rule that MIAAs Airport Lands and Buildings are exempt from real estate tax

imposed by local governments.

First, MIAA is not a government-owned or controlled corporation but

an instrumentality of the National Government and thus exempt from local

taxation. Second, the real properties of MIAA are owned by the Republic of

the Philippines and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled

corporation, is not exempt from real estate tax. Respondents claim that the

deletion of the phrase any government-owned or controlled so exempt by its

charter in Section 234(e) of the Local Government Code withdrew the real

estate tax exemption of government-owned or controlled corporations. The

deleted phrase appeared in Section 40(a) of the 1974 Real Property Tax Code

enumerating the entities exempt from real estate tax.

There is no dispute that a government-owned or controlled corporation is

not exempt from real estate tax. However, MIAA is not a government-owned or

controlled corporation.Section 2(13) of the Introductory Provisions of the

Administrative Code of 1987 defines a government-owned or controlled

corporation as follows:

SEC. 2. General Terms Defined. x x x x

 (13) Government-owned or controlled corporation refers to any
agency organized as a stock or non-stock corporation, vested with
functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or
through its instrumentalities either wholly, or, where applicable as in
the case of stock corporations, to the extent of at least fifty-one (51)
percent of its capital stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be organized as a

stock or non-stock corporation. MIAA is not organized as a stock or non-stock

corporation. MIAA is not a stock corporation because it has no capital stock

divided into shares. MIAA has no stockholders or voting shares. Section 10 of the

MIAA Charter[9] provides:

SECTION 10. Capital. The capital of the Authority to be

contributed by the National Government shall be increased from Two
and One-half Billion (P2,500,000,000.00) Pesos to Ten Billion
(P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways

and equipment and such other properties, movable and
immovable[,] which may be contributed by the National Government
 or transferred by it from any of its agencies, the valuation of which
shall be determined jointly with the Department of Budget and
Management and the Commission on Audit on the date of such
contribution or transfer after making due allowances for depreciation
and other deductions taking into account the loans and other
liabilities of the Authority at the time of the takeover of the assets
and other properties;

(b) That the amount of P605 million as of December 31, 1986

representing about seventy percentum (70%) of the unremitted
share of the National Government from 1983 to 1986 to be remitted
to the National Treasury as provided for in Section 11 of E. O. No. 903
as amended, shall be converted into the equity of the National
Government in the Authority. Thereafter, the Government
contribution to the capital of the Authority shall be provided in the
General Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into

shares.

Section 3 of the Corporation Code[10] defines a stock corporation as one

whose capital stock is divided into shares and x x x authorized to distribute to

the holders of such shares dividends x x x. MIAA has capital but it is not divided

into shares of stock. MIAA has no stockholders or voting shares. Hence, MIAA is

not a stock corporation.

 MIAA is also not a non-stock corporation because it has no

members. Section 87 of the Corporation Code defines a non-stock corporation

as one where no part of its income is distributable as dividends to its members,

trustees or officers. A non-stock corporation must have members. Even if we

assume that the Government is considered as the sole member of MIAA, this

will not make MIAA a non-stock corporation. Non-stock corporations cannot

distribute any part of their income to their members. Section 11 of the MIAA

Charter mandates MIAA to remit 20% of its annual gross operating income to

the National Treasury.[11] This prevents MIAA from qualifying as a non-stock

corporation.

Section 88 of the Corporation Code provides that non-stock corporations

are organized for charitable, religious, educational, professional, cultural,

recreational, fraternal, literary, scientific, social, civil service, or similar

purposes, like trade, industry, agriculture and like chambers. MIAA is not

organized for any of these purposes. MIAA, a public utility, is organized to

operate an international and domestic airport for public use.

 Since MIAA is neither a stock nor a non-stock corporation, MIAA does not

qualify as a government-owned or controlled corporation. What then is the

legal status of MIAA within the National Government?

MIAA is a government instrumentality vested with corporate powers to

perform efficiently its governmental functions. MIAA is like any other

government instrumentality, the only difference is that MIAA is vested with

corporate powers. Section 2(10) of the Introductory Provisions of the

Administrative Code defines a government instrumentality as follows:

SEC. 2. General Terms Defined. x x x x

(10) Instrumentality refers to any agency of the National

Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with
some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter.
x x x (Emphasis supplied)

When the law vests in a government instrumentality corporate powers, the

instrumentality does not become a corporation. Unless the government

instrumentality is organized as a stock or non-stock corporation, it remains a

government instrumentality exercising not only governmental but also corporate

powers. Thus, MIAA exercises the governmental powers of eminent

domain,[12] police authority[13] and the levying of fees and charges.[14] At the same

time, MIAA exercises all the powers of a corporation under the Corporation Law,

insofar as these powers are not inconsistent with the provisions of this Executive

Order.[15]

Likewise, when the law makes a government instrumentality operationally

autonomous, the instrumentality remains part of the National Government

machinery although not integrated with the department framework. The MIAA

Charter expressly states that transforming MIAA into a separate and autonomous

body[16] will make its operation more financially viable.[17]

Many government instrumentalities are vested with corporate powers but

they do not become stock or non-stock corporations, which is a necessary

condition before an agency or instrumentality is deemed a government-owned or

controlled corporation. Examples are the Mactan International Airport Authority,

the Philippine Ports Authority, the University of

the Philippines and Bangko Sentral ng Pilipinas. All these government

instrumentalities exercise corporate powers but they are not organized as stock
or non-stock corporations as required by Section 2(13) of the Introductory

Provisions of the Administrative Code. These government instrumentalities are

sometimes loosely called government corporate entities. However, they are not

government-owned or controlled corporations in the strict sense as understood

under the Administrative Code, which is the governing law defining the legal

relationship and status of government entities.

A government instrumentality like MIAA falls under Section 133(o) of the

Local Government Code, which states:

SEC. 133. Common Limitations on the Taxing Powers of Local

Government Units. Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kind on the National Government,

its agencies and instrumentalities and local government
units. (Emphasis and underscoring supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax

the national government, which historically merely delegated to local

governments the power to tax. While the 1987 Constitution now includes taxation

as one of the powers of local governments, local governments may only exercise

such power subject to such guidelines and limitations as the Congress may

provide.[18]

When local governments invoke the power to tax on national

government instrumentalities, such power is construed strictly against local

governments. The rule is that a tax is never presumed and there must be clear

language in the law imposing the tax. Any doubt whether a person, article or

activity is taxable is resolved against taxation. This rule applies with greater

force when local governments seek to tax national government

instrumentalities.

Another rule is that a tax exemption is strictly construed against the

taxpayer claiming the exemption. However, when Congress grants an exemption

to a national government instrumentality from local taxation, such exemption is

construed liberally in favor of the national government instrumentality. As this

Court declared in Maceda v. Macaraig, Jr.:

 The reason for the rule does not apply in the case of
exemptions running to the benefit of the government itself or its
agencies. In such case the practical effect of an exemption is merely
to reduce the amount of money that has to be handled by
government in the course of its operations. For these reasons,
provisions granting exemptions to government agencies may be
construed liberally, in favor of non tax-liability of such agencies.[19]

There is, moreover, no point in national and local governments taxing each other,

unless a sound and compelling policy requires such transfer of public funds from

one government pocket to another.

There is also no reason for local governments to tax national government

instrumentalities for rendering essential public services to inhabitants of local

governments. The only exception is when the legislature clearly intended to tax

government instrumentalities for the delivery of essential public services for

sound and compelling policy considerations. There must be express language in

the law empowering local governments to tax national government

instrumentalities. Any doubt whether such power exists is resolved against local

governments.
 Thus, Section 133 of the Local Government Code states that unless

otherwise provided in the Code, local governments cannot tax national

government instrumentalities. As this Court held in Basco v. Philippine

Amusements and Gaming Corporation:

The states have no power by taxation or

otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by
Congress to carry into execution the powers vested in
the federal government. (MC Culloch v. Maryland, 4
Wheat 316, 4 L Ed. 579)

This doctrine emanates from the supremacy of the National

Government over local governments.

Justice Holmes, speaking for the Supreme Court,

made reference to the entire absence of power on the
part of the States to touch, in that way (taxation) at
least, the instrumentalities of the United States (Johnson
v. Maryland, 254 US 51) and it can be agreed that no
state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them.
(Antieau, Modern Constitutional Law, Vol. 2, p. 140,
emphasis supplied)
 Otherwise, mere creatures of the State can defeat National
policies thru extermination of what local authorities may perceive to
be undesirable activities or enterprise using the power to tax as a
tool for regulation (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the

power to destroy (Mc Culloch v. Maryland, supra) cannot be allowed
to defeat an instrumentality or creation of the very entity which has
the inherent power to wield it. [20]

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public

dominion and therefore owned by the State or the Republic of

the Philippines. The Civil Code provides:

 ARTICLE 419. Property is either of public dominion or of private
ownership.

ARTICLE 420. The following things are property of public

dominion:

(1) Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks, shores,
roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public
use, and are intended for some public service or for the development
of the national wealth. (Emphasis supplied)

ARTICLE 421. All other property of the State, which is not of

the character stated in the preceding article, is patrimonial property.

ARTICLE 422. Property of public dominion, when no longer

intended for public use or for public service, shall form part of the
patrimonial property of the State.
 No one can dispute that properties of public dominion mentioned in Article

420 of the Civil Code, like roads, canals, rivers, torrents, ports and bridges

constructed by the State, are owned by the State. The term ports includes

seaports and airports. The MIAA Airport Lands and Buildings constitute

a port constructed by the State. Under Article 420 of the Civil Code,

the MIAA Airport Lands and Buildings are properties of public dominion and thus

owned by the State or the Republic of the Philippines.

The Airport Lands and Buildings are devoted to public use because they

are used by the public for international and domestic travel and

transportation. The fact that the MIAA collects terminal fees and other charges

from the public does not remove the character of the Airport Lands and Buildings

as properties for public use. The operation by the government of a tollway does

not change the character of the road as one for public use. Someone must pay for

the maintenance of the road, either the public indirectly through the taxes they

pay the government, or only those among the public who actually use the road

through the toll fees they pay upon using the road. The tollway system is even a

more efficient and equitable manner of taxing the public for the maintenance of

public roads.
 The charging of fees to the public does not determine the character of

the property whether it is of public dominion or not. Article 420 of the Civil

Code defines property of public dominion as one intended for public use. Even

if the government collects toll fees, the road is still intended for public use if

anyone can use the road under the same terms and conditions as the rest of

the public. The charging of fees, the limitation on the kind of vehicles that can

use the road, the speed restrictions and other conditions for the use of the

road do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA

charges to airlines, constitute the bulk of the income that maintains the

operations of MIAA. The collection of such fees does not change the character of

MIAA as an airport for public use. Such fees are often termed users tax. This

means taxing those among the public who actually use a public facility instead of

taxing all the public including those who never use the particular public facility. A

users tax is more equitable a principle of taxation mandated in the 1987

Constitution.[21]

The Airport Lands and Buildings of MIAA, which its Charter calls the principal

airport of the Philippines for both international and domestic air traffic,[22] are

properties of public dominion because they are intended for public use. As
properties of public dominion, they indisputably belong to the State or the

Republic of the Philippines.

b. Airport Lands and Buildings are Outside the Commerce of Man

The Airport Lands and Buildings of MIAA are devoted to public use and thus

are properties of public dominion. As properties of public dominion,

the Airport Lands and Buildings are outside the commerce of man. The Court has

ruled repeatedly that properties of public dominion are outside the commerce of

man. As early as 1915, this Court already ruled in Municipality of Cavite v.

Rojas that properties devoted to public use are outside the commerce of man,

thus:

According to article 344 of the Civil Code: Property for public

use in provinces and in towns comprises the provincial and town
roads, the squares, streets, fountains, and public waters, the
promenades, and public works of general service supported by said
towns or provinces.

The said Plaza Soledad being a promenade for public use, the
municipal council of Cavite could not in 1907 withdraw or exclude
from public use a portion thereof in order to lease it for the sole
 benefit of the defendant Hilaria Rojas. In leasing a portion of said
plaza or public place to the defendant for private use the plaintiff
municipality exceeded its authority in the exercise of its powers by
executing a contract over a thing of which it could not dispose, nor is
it empowered so to do.

The Civil Code, article 1271, prescribes that everything which is

not outside the commerce of man may be the object of a contract,
and plazas and streets are outside of this commerce, as was decided
by the supreme court of Spain in its decision of February 12, 1895,
which says: Communal things that cannot be sold because they are
by their very nature outside of commerce are those for public use,
such as the plazas, streets, common lands, rivers, fountains, etc.
(Emphasis supplied) [23]

Again in Espiritu v. Municipal Council, the Court declared that properties of

public dominion are outside the commerce of man:

xxx Town plazas are properties of public dominion, to be

devoted to public use and to be made available to the public in
general. They are outside the commerce of man and cannot be
disposed of or even leased by the municipality to private parties.
While in case of war or during an emergency, town plazas may be
occupied temporarily by private individuals, as was done and as was
tolerated by the Municipality of Pozorrubio, when the emergency has
ceased, said temporary occupation or use must also cease, and the
town officials should see to it that the town plazas should ever be
kept open to the public and free from encumbrances or illegal private
constructions.[24] (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the

commerce of man, cannot be the subject of an auction sale.[25]

Properties of public dominion, being for public use, are not subject to

levy, encumbrance or disposition through public or private sale. Any

encumbrance, levy on execution or auction sale of any property of public

dominion is void for being contrary to public policy. Essential public services

will stop if properties of public dominion are subject to encumbrances,

foreclosures and auction sale. This will happen if the City of Paraaque can

foreclose and compel the auction sale of the 600-hectare runway of the MIAA

for non-payment of real estate tax.

Before MIAA can encumber[26] the Airport Lands and Buildings, the

President must first withdraw from public use the Airport Lands and

Buildings. Sections 83 and 88 of the Public Land Law or Commonwealth Act No.

141, which remains to this day the existing general law governing the

classification and disposition of lands of the public domain other than timber and

mineral lands,[27] provide:

 SECTION 83. Upon the recommendation of the Secretary of
Agriculture and Natural Resources, the President may designate by
proclamation any tract or tracts of land of the public domain as
reservations for the use of the Republic of the Philippines or of any of
its branches, or of the inhabitants thereof, in accordance with
regulations prescribed for this purposes, or for quasi-public uses or
purposes when the public interest requires it, including reservations
for highways, rights of way for railroads, hydraulic power sites,
irrigation systems, communal pastures or lequas communales, public
parks, public quarries, public fishponds, working mens village and
other improvements for the public benefit.

SECTION 88. The tract or tracts of land reserved under the

provisions of Section eighty-three shall be non-alienable and shall
not be subject to occupation, entry, sale, lease, or other disposition
until again declared alienable under the provisions of this Act or by
proclamation of the President. (Emphasis and underscoring
supplied)

Thus, unless the President issues a proclamation withdrawing

the Airport Lands and Buildings from public use, these properties remain

properties of public dominion and are inalienable.Since the Airport Lands and

Buildings are inalienable in their present status as properties of public dominion,

they are not subject to levy on execution or foreclosure sale. As long as

the Airport Lands and Buildings are reserved for public use, their ownership

remains with the State or the Republic of the Philippines.

The authority of the President to reserve lands of the public domain for

public use, and to withdraw such public use, is reiterated in Section 14, Chapter

4, Title I, Book III of the Administrative Code of 1987, which states:

SEC. 14. Power to Reserve Lands of the Public and Private

Domain of the Government. (1) The President shall have the power
to reserve for settlement or public use, and for specific public
purposes, any of the lands of the public domain, the use of which is
not otherwise directed by law. The reserved land shall thereafter
remain subject to the specific public purpose indicated until
otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)

There is no question, therefore, that unless the Airport Lands and Buildings are

withdrawn by law or presidential proclamation from public use, they are

properties of public dominion, owned by the Republic and outside the commerce

of man.
c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for

the Republic. Section 48, Chapter 12, Book I of the Administrative Code allows

instrumentalities like MIAA to hold title to real properties owned by the

Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. Whenever

real property of the Government is authorized by law to be
conveyed, the deed of conveyance shall be executed in behalf of the
government by the following:

(1) For property belonging to and titled in the name of the

Republic of the Philippines, by the President, unless the
authority therefor is expressly vested by law in another officer.

(2) For property belonging to the Republic of

the Philippines but titled in the name of any political subdivision or
of any corporate agency or instrumentality, by the executive head of
the agency or instrumentality. (Emphasis supplied)
 In MIAAs case, its status as a mere trustee of the Airport Lands and

Buildings is clearer because even its executive head cannot sign the deed of

conveyance on behalf of the Republic. Only the President of the Republic can sign

such deed of conveyance.[28]

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to

the Airport Lands and Buildings from the Bureau of Air Transportation of the

Department of Transportation and Communications. The MIAA Charter

provides:

SECTION 3. Creation of
the Manila International Airport Authority. x x x x

The land where the Airport is presently located as well as the

surrounding land area of approximately six hundred hectares, are
hereby transferred, conveyed and assigned to the ownership and
administration of the Authority, subject to existing rights, if any.
The Bureau of Lands and other appropriate government agencies
shall undertake an actual survey of the area transferred within one
 year from the promulgation of this Executive Order and the
corresponding title to be issued in the name of the Authority. Any
portion thereof shall not be disposed through sale or through any
other mode unless specifically approved by the President of
the Philippines. (Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible

Assets. All existing public airport facilities, runways, lands, buildings
and other property, movable or immovable, belonging to the
Airport, and all assets, powers, rights, interests and
privileges belonging to the Bureau of Air Transportation relating to
airport works or air operations, including all equipment which are
necessary for the operation of crash fire and rescue facilities, are
hereby transferred to the Authority. (Emphasis supplied)

SECTION 25. Abolition of the Manila International Airport as a

Division in the Bureau of Air Transportation and Transitory
Provisions. The Manila International Airport including
the ManilaDomestic Airport as a division under the Bureau of Air
Transportation is hereby abolished.

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without

the Republic receiving cash, promissory notes or even stock since MIAA is not a

stock corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of

the Airport Lands and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal

airport of the Philippines for both international and domestic air
traffic, is required to provide standards of airport accommodation
and service comparable with the best airports in the world;

WHEREAS, domestic and other terminals, general aviation and other

facilities, have to be upgraded to meet the current and future air
traffic and other demands of aviation in Metro Manila;

WHEREAS, a management and organization study has indicated

that the objectives of providing high standards of accommodation
and service within the context of a financially viable operation, will
best be achieved by a separate and autonomous body; and

WHEREAS, under Presidential Decree No. 1416, as amended by

Presidential Decree No. 1772, the President of the Philippines is given
continuing authority to reorganize the National Government, which
authority includes the creation of new entities, agencies and
instrumentalities of the Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air

Transportation to MIAA was not meant to transfer beneficial ownership of these

assets from the Republic to MIAA. The purpose was merely to reorganize a

division in the Bureau of Air Transportation into a separate and autonomous

body. The Republic remains the beneficial owner of the Airport Lands and

Buildings. MIAA itself is owned solely by the Republic. No party claims any

ownership rights over MIAAs assets adverse to the Republic.

The MIAA Charter expressly provides that the Airport Lands and

Buildings shall not be disposed through sale or through any other mode unless

specifically approved by the President of the Philippines. This only means that

the Republic retained the beneficial ownership of the Airport Lands and Buildings

because under Article 428 of the Civil Code, only the owner has the right to

x x x dispose of a thing. Since MIAA cannot dispose of the Airport Lands and

Buildings, MIAA does not own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to

the Airport Lands and Buildings without the Republic paying MIAA any

consideration. Under Section 3 of the MIAA Charter, the President is the only

one who can authorize the sale or disposition of the Airport Lands and

Buildings. This only confirms that the Airport Lands and Buildings belong to the

Republic.
e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate

tax any [r]eal property owned by the Republic of the Philippines. Section

234(a) provides:

SEC. 234. Exemptions from Real Property Tax. The following

are exempted from payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or

any of its political subdivisions except when the beneficial use
thereof has been granted, for consideration or otherwise, to a
taxable person;

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the

same Code, which prohibits local governments from imposing [t]axes, fees or

charges of any kind on the National Government, its agencies

and instrumentalities x x x. The real properties owned by the Republic are

 titled either in the name of the Republic itself or in the name of agencies or

instrumentalities of the National Government. The Administrative Code allows

real property owned by the Republic to be titled in the name of agencies or

instrumentalities of the national government. Such real properties remain

owned by the Republic and continue to be exempt from real estate tax.

The Republic may grant the beneficial use of its real property to an agency

or instrumentality of the national government. This happens when title of the real

property is transferred to an agency or instrumentality even as the Republic

remains the owner of the real property. Such arrangement does not result in the

loss of the tax exemption. Section 234(a) of the Local Government Code states

that real property owned by the Republic loses its tax exemption only if the

beneficial use thereof has been granted, for consideration or otherwise, to

a taxable person. MIAA, as a government instrumentality, is not a taxable person

under Section 133(o) of the Local Government Code. Thus, even if we assume that

the Republic has granted to MIAA the beneficial use of the Airport Lands and

Buildings, such fact does not make these real properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to

private entities are not exempt from real estate tax. For example, the land area

occupied by hangars that MIAA leases to private corporations is subject to real

estate tax. In such a case, MIAA has granted the beneficial use of such land area

for a consideration to a taxable person and therefore such land area is subject to

real estate tax. In Lung Center of the Philippines v. Quezon City, the Court ruled:

Accordingly, we hold that the portions of the land leased to

private entities as well as those parts of the hospital leased to private
individuals are not exempt from such taxes. On the other hand, the
portions of the land occupied by the hospital and portions of the
hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.[29]

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax

because Section 193 of the Local Government Code of 1991 withdrew the tax

exemption of all persons, whether natural or juridical upon the effectivity of the

Code. Section 193 provides:

 SEC. 193. Withdrawal of Tax Exemption Privileges Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational
institutions are hereby withdrawn upon effectivity of this
Code. (Emphasis supplied)

The minority states that MIAA is indisputably a juridical person. The

minority argues that since the Local Government Code withdrew the tax

exemption of all juridical persons, then MIAA is not exempt from real estate

tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local

Government Code that the withdrawn exemptions from realty tax
cover not just GOCCs, but all persons. To repeat, the provisions lay
down the explicit proposition that the withdrawal of realty tax
exemption applies to all persons. The reference to or the inclusion
of GOCCs is only clarificatory or illustrative of the explicit provision.

The term All persons encompasses the two classes of persons

recognized under our laws, natural and juridical persons. Obviously,
MIAA is not a natural person. Thus, the determinative test is not
just whether MIAA is a GOCC, but whether MIAA is a juridical
person at all. (Emphasis and underscoring in the original)
 The minority posits that the determinative test whether MIAA is exempt

from local taxation is its status whether MIAA is a juridical person or not. The

minority also insists that Sections 193 and 234 may be examined in isolation

from Section 133(o) to ascertain MIAAs claim of exemption.

The argument of the minority is fatally flawed. Section 193 of the Local

Government Code expressly withdrew the tax exemption of all juridical

persons [u]nless otherwise provided in this Code. Now, Section 133(o) of the

Local Government Code expressly provides otherwise,

specifically prohibiting local governments from imposing any kind of tax on

national government instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local

Government Units. Unless otherwise provided herein, the exercise of
the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National

Government, its agencies and instrumentalities, and local
government units. (Emphasis and underscoring supplied)
 By express mandate of the Local Government Code, local

governments cannot impose any kind of tax on national government

instrumentalities like the MIAA. Local governments are devoid of power to tax

the national government, its agencies and instrumentalities. The taxing powers

of local governments do not extend to the national government, its agencies and

instrumentalities, [u]nless otherwise provided in this Code as stated in the saving

clause of Section 133. The saving clause refers to Section 234(a) on the exception

to the exemption from real estate tax of real property owned by the Republic.

The minority, however, theorizes that unless exempted in Section 193

itself, all juridical persons are subject to tax by local governments. The minority

insists that the juridical persons exempt from local taxation are limited to the

three classes of entities specifically enumerated as exempt in Section 193. Thus,

the minority states:

x x x Under Section 193, the exemption is limited to (a) local water

districts; (b) cooperatives duly registered under Republic Act No.
6938; and (c) non-stock and non-profit hospitals and educational
institutions. It would be belaboring the obvious why the MIAA does
not fall within any of the exempt entities under Section
193. (Emphasis supplied)
 The minoritys theory directly contradicts and completely negates Section

133(o) of the Local Government Code. This theory will result in gross

absurdities. It will make the national government, which itself is a juridical

person, subject to tax by local governments since the national government is not

included in the enumeration of exempt entities in Section 193. Under this theory,

local governments can impose any kind of local tax, and not only real estate tax,

on the national government.

Under the minoritys theory, many national government instrumentalities

with juridical personalities will also be subject to any kind of local tax, and not

only real estate tax. Some of the national government instrumentalities vested

by law with juridical

personalities are: Bangko Sentral ng Pilipinas,[30] Philippine Rice Research

Institute,[31] Laguna Lake

Development Authority,[32] Fisheries Development Authority,[33] Bases Conversion

Development Authority,[34] Philippine Ports Authority,[35] Cagayan de Oro Port

Authority,[36]San Fernando Port Authority,[37] Cebu Port Authority,[38] and

Philippine National Railways.[39]

 The minoritys theory violates Section 133(o) of the Local Government Code

which expressly prohibits local governments from imposing any kind of tax on

national government instrumentalities. Section 133(o) does not distinguish

between national government instrumentalities with or without juridical

personalities. Where the law does not distinguish, courts should not

distinguish. Thus, Section 133(o) applies to all national government

instrumentalities, with or without juridical personalities. The determinative

test whether MIAA is exempt from local taxation is not whether MIAA is a

juridical person, but whether it is a national government instrumentality under

Section 133(o) of the Local Government Code.Section 133(o) is the specific

provision of law prohibiting local governments from imposing any kind of tax on

the national government, its agencies and instrumentalities.

Section 133 of the Local Government Code starts with the saving clause

[u]nless otherwise provided in this Code. This means that unless the Local

Government Code grants an express authorization, local governments have no

power to tax the national government, its agencies and instrumentalities. Clearly,

the rule is local governments have no power to tax the national government, its

agencies and instrumentalities. As an exception to this rule, local governments

may tax the national government, its agencies and instrumentalities only if the

Local Government Code expressly so provides.

 The saving clause in Section 133 refers to the exception to the exemption in

Section 234(a) of the Code, which makes the national government subject to real

estate tax when it gives the beneficial use of its real properties to a taxable

entity. Section 234(a) of the Local Government Code provides:

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

(a) Real property owned by the Republic of the Philippines or

any of its political subdivisions except when the beneficial use
thereof has been granted, for consideration or otherwise, to a
taxable person.

x x x. (Emphasis supplied)

Under Section 234(a), real property owned by the Republic is exempt from real

estate tax. The exception to this exemption is when the government gives the

beneficial use of the real property to a taxable entity.

The exception to the exemption in Section 234(a) is the only

instance when the national government, its agencies and instrumentalities are
subject to any kind of tax by local governments. The exception to the exemption

applies only to real estate tax and not to any other tax. The justification for the

exception to the exemption is that the real property, although owned by the

Republic, is not devoted to public use or public service but devoted to the private

gain of a taxable person.

The minority also argues that since Section 133 precedes Section 193 and 234 of

the Local Government Code, the later provisions prevail over Section 133. Thus,

the minority asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and

234. Following an accepted rule of construction, in case of conflict
the subsequent provisions should prevail. Therefore, MIAA, as a
juridical person, is subject to real property taxes, the general
exemptions attaching to instrumentalities under Section 133(o) of
the Local Government Code being qualified by Sections 193 and 234
of the same law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between

Section 133 on one hand, and Sections 193 and 234 on the other. No one has

urged that there is such a conflict, much less has any one presented a persuasive

argument that there is such a conflict. The minoritys assumption of an

irreconcilable conflict in the statutory provisions is an egregious error for two

reasons.

First, there is no conflict whatsoever between Sections 133 and 193

because Section 193 expressly admits its subordination to other provisions of

the Code when Section 193 states [u]nless otherwise provided in this Code. By

its own words, Section 193 admits the superiority of other provisions of the Local

Government Code that limit the exercise of the taxing power in Section

193. When a provision of law grants a power but withholds such power on certain

matters, there is no conflict between the grant of power and the withholding of

power. The grantee of the power simply cannot exercise the power on matters

withheld from its power.

Second, Section 133 is entitled Common Limitations on the Taxing Powers of

Local Government Units. Section 133 limits the grant to local governments of the

power to tax, and not merely the exercise of a delegated power to tax. Section

133 states that the taxing powers of local governments shall not extend to the

levy of any kind of tax on the national government, its agencies and

instrumentalities. There is no clearer limitation on the taxing power than this.

 Since Section 133 prescribes the common limitations on the taxing powers

of local governments, Section 133 logically prevails over Section 193 which grants

local governments such taxing powers. By their very meaning and purpose, the

common limitations on the taxing power prevail over the grant or exercise of

the taxing power. If the taxing power of local governments in Section 193 prevails

over the limitations on such taxing power in Section 133, then local governments

can impose any kind of tax on the national government, its agencies and

instrumentalities a gross absurdity.

Local governments have no power to tax the national government, its

agencies and instrumentalities, except as otherwise provided in the Local

Government Code pursuant to the saving clause in Section 133 stating

[u]nless otherwise provided in this Code. This exception which is an exception

to the exemption of the Republic from real estate tax imposed by local

governments refers to Section 234(a) of the Code. The exception to the

exemption in Section 234(a) subjects real property owned by the Republic,

whether titled in the name of the national government, its agencies or

instrumentalities, to real estate tax if the beneficial use of such property is

given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the

phrase government-owned or controlled corporation is not controlling. The

minority points out that Section 2 of the Introductory Provisions of the

Administrative Code admits that its definitions are not controlling when it

provides:

SEC. 2. General Terms Defined. Unless the specific words of the

text, or the context as a whole, or a particular statute, shall require a
different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is

flawed.

The minoritys argument is a non sequitur. True, Section 2 of the Administrative

Code recognizes that a statute may require a different meaning than that defined

in the Administrative Code. However, this does not automatically mean that the

definition in the Administrative Code does not apply to the Local Government

Code. Section 2 of the Administrative Code clearly states that unless the specific
words x x x of a particular statute shall require a different meaning, the

definition in Section 2 of the Administrative Code shall apply. Thus, unless there is

specific language in the Local Government Code defining the phrase government-

owned or controlled corporation differently from the definition in the

Administrative Code, the definition in the Administrative Code prevails.

The minority does not point to any provision in the Local Government Code

defining the phrase government-owned or controlled corporation differently from

the definition in the Administrative Code. Indeed, there is none. The Local

Government Code is silent on the definition of the phrase government-owned

or controlled corporation. The Administrative Code, however, expressly defines

the phrase government-owned or controlled corporation. The inescapable

conclusion is that the Administrative Code definition of the phrase government-

owned or controlled corporation applies to the Local Government Code.

The third whereas clause of the Administrative Code states that the

Code incorporates in a unified document the major structural, functional and

procedural principles and rules of governance. Thus, the Administrative Code is

the governing law defining the status and relationship of government

departments, bureaus, offices, agencies and instrumentalities. Unless a statute

expressly provides for a different status and relationship for a specific

government unit or entity, the provisions of the Administrative Code prevail.

The minority also contends that the phrase government-owned or controlled

corporation should apply only to corporations organized under the Corporation

Code, the general incorporation law, and not to corporations created by special

charters. The minority sees no reason why government corporations with special

charters should have a capital stock. Thus, the minority declares:

I submit that the definition of government-owned or

controlled corporations under the Administrative Code refer to those
corporations owned by the government or its instrumentalities which
are created not by legislative enactment, but formed and organized
under the Corporation Code through registration with the Securities
and Exchange Commission. In short, these are GOCCs without
original charters.

xxxx

It might as well be worth pointing out that there is no point in

requiring a capital structure for GOCCs whose full ownership is
limited by its charter to the State or Republic. Such GOCCs are not
empowered to declare dividends or alienate their capital shares.
The contention of the minority is seriously flawed. It is not in accord with the

Constitution and existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase government-owned or

controlled corporation does not distinguish between one incorporated under the

Corporation Code or under a special charter. Where the law does not distinguish,

courts should not distinguish.

Second, Congress has created through special charters several government-

owned corporations organized as stock corporations. Prime examples are the

Land Bank of the Philippinesand the Development Bank of the Philippines. The

special charter[40] of the Land Bank of the Philippines provides:

SECTION 81. Capital. The authorized capital stock of the Bank

shall be nine billion pesos, divided into seven hundred and eighty
million common shares with a par value of ten pesos each, which
shall be fully subscribed by the Government, and one hundred and
twenty million preferred shares with a par value of ten pesos each,
which shall be issued in accordance with the provisions of Sections
seventy-seven and eighty-three of this Code. (Emphasis supplied)

Likewise, the special charter[41] of the Development Bank of

the Philippines provides:

 SECTION 7. Authorized Capital Stock Par value. The capital
stock of the Bank shall be Five Billion Pesos to be divided into Fifty
Million common shares with par value of P100 per share. These
shares are available for subscription by the National Government.
Upon the effectivity of this Charter, the National Government shall
subscribe to Twenty-Five Million common shares of stock worth Two
Billion Five Hundred Million which shall be deemed paid for by the
Government with the net asset values of the Bank remaining after
the transfer of assets and liabilities as provided in Section 30
hereof. (Emphasis supplied)

Other government-owned corporations organized as stock corporations

under their special charters are the Philippine Crop Insurance

Corporation,[42] Philippine International Trading Corporation,[43] and the Philippine

National Bank[44] before it was reorganized as a stock corporation under the

Corporation Code. All these government-owned corporations organized under

special charters as stock corporations are subject to real estate tax on real

properties owned by them. To rule that they are not government-owned or

controlled corporations because they are not registered with the Securities and

Exchange Commission would remove them from the reach of Section 234 of the

Local Government Code, thus exempting them from real estate tax.
 Third, the government-owned or controlled corporations created through

special charters are those that meet the two conditions prescribed in Section 16,

Article XII of the Constitution. The first condition is that the government-owned or

controlled corporation must be established for the common good. The second

condition is that the government-owned or controlled corporation must meet

the test of economic viability. Section 16, Article XII of the 1987 Constitution

provides:

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

The Constitution expressly authorizes the legislature to create government-

owned or controlled corporations through special charters only if these entities

are required to meet the twin conditions of common good and economic

viability. In other words, Congress has no power to create government-owned or

controlled corporations with special charters unless they are made to comply

with the two conditions of common good and economic viability. The test of

economic viability applies only to government-owned or controlled corporations

that perform economic or commercial activities and need to compete in the

market place. Being essentially economic vehicles of the State for the common

good meaning for economic development purposes these government-owned or

controlled corporations with special charters are usually organized as stock

corporations just like ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers

and performing governmental or public functions need not meet the test of

economic viability. These instrumentalities perform essential public services for

the common good, services that every modern State must provide its

citizens. These instrumentalities need not be economically viable since the

government may even subsidize their entire operations. These

instrumentalities are not the government-owned or controlled corporations

referred to in Section 16, Article XII of the 1987 Constitution.

Thus, the Constitution imposes no limitation when the legislature creates

government instrumentalities vested with corporate powers but performing

essential governmental or public functions. Congress has plenary authority to

create government instrumentalities vested with corporate powers provided

these instrumentalities perform essential government functions or public

services. However, when the legislature creates through special charters

corporations that perform economic or commercial activities, such entities known

as government-owned or controlled corporations must meet the test of economic

viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the

Development Bank of the Philippines and similar government-owned or

controlled corporations, which derive their income to meet operating expenses

solely from commercial transactions in competition with the private sector. The

intent of the Constitution is to prevent the creation of government-owned or

controlled corporations that cannot survive on their own in the market place

and thus merely drain the public coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability,

explained to the Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is

really that when the government creates a corporation, there is a
sense in which this corporation becomes exempt from the test of
 economic performance. We know what happened in the past. If a
government corporation loses, then it makes its claim upon the
taxpayers money through new equity infusions from the government
and what is always invoked is the common good. That is the reason
why this year, out of a budget of P115 billion for the entire
government, about P28 billion of this will go into equity infusions to
support a few government financial institutions. And this is all
taxpayers money which could have been relocated to agrarian
reform, to social services like health and education, to augment the
salaries of grossly underpaid public employees. And yet this is all
going down the drain.

Therefore, when we insert the phrase ECONOMIC VIABILITY

together with the common good, this becomes a restraint on future
enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable.
And so, Madam President, I reiterate, for the committees
consideration and I am glad that I am joined in this proposal by
Commissioner Foz, the insertion of the standard of ECONOMIC
VIABILITY OR THE ECONOMIC TEST, together with the common
good.[45]

Father Joaquin G. Bernas, a leading member of the Constitutional

Commission, explains in his textbook The 1987 Constitution of the Republic of the

Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional
Commission. The significant addition, however, is the phrase in the
interest of the common good and subject to the test of economic
 viability. The addition includes the ideas that they must show
capacity to function efficiently in business and that they should not
go into activities which the private sector can do better. Moreover,
economic viability is more than financial viability but also includes
capability to make profit and generate benefits not quantifiable in
financial terms.[46] (Emphasis supplied)

Clearly, the test of economic viability does not apply to government

entities vested with corporate powers and performing essential public

services. The State is obligated to render essential public services regardless of

the economic viability of providing such service. The non-economic viability of

rendering such essential public service does not excuse the State from

withholding such essential services from the public.

However, government-owned or controlled corporations with special

charters, organized essentially for economic or commercial objectives, must

meet the test of economic viability. These are the government-owned or

controlled corporations that are usually organized under their special charters

as stock corporations, like the Land Bank of the Philippinesand the

Development Bank of the Philippines. These are the government-owned or

controlled corporations, along with government-owned or controlled

corporations organized under the Corporation Code, that fall under the

definition of government-owned or controlled corporations in Section 2(10) of

the Administrative Code.

The MIAA need not meet the test of economic viability because the

legislature did not create MIAA to compete in the market place. MIAA does not

compete in the market place because there is no competing international

airport operated by the private sector. MIAA performs an essential public

service as the primary domestic and international airport of

the Philippines. The operation of an international airport requires the presence

of personnel from the following government agencies:

1. The Bureau of Immigration and Deportation, to document the arrival

and departure of passengers, screening out those without visas or travel

documents, or those with hold departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on

prohibited importations;
 3. The quarantine office of the Department of Health, to enforce health

measures against the spread of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the

spread of plant and animal diseases into the country;

5. The Aviation Security Command of the Philippine National Police, to

prevent the entry of terrorists and the escape of criminals, as well as to

secure the airport premises from terrorist attack or seizure;

6. The Air Traffic Office of the Department of Transportation and

Communications, to authorize aircraft to enter or leave Philippine airspace,

as well as to land on, or take off from, the airport; and

7. The MIAA, to provide the proper premises such as runway and

buildings for the government personnel, passengers, and airlines, and to

manage the airport operations.

All these agencies of government perform government functions essential to

the operation of an international airport.

 MIAA performs an essential public service that every modern State must

provide its citizens. MIAA derives its revenues principally from the mandatory

fees and charges MIAA imposes on passengers and airlines. The terminal fees

that MIAA charges every passenger are regulatory or administrative fees[47] and

not income from commercial transactions.

MIAA falls under the definition of a government instrumentality under

Section 2(10) of the Introductory Provisions of the Administrative Code, which

provides:

SEC. 2. General Terms Defined. x x x x

(10) Instrumentality refers to any agency of the National

Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with
some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter.
x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA

a government-owned or controlled corporation. Without a change in its capital

structure, MIAA remains a government instrumentality under Section 2(10) of the

Introductory Provisions of the Administrative Code. More importantly, as long as

MIAA renders essential public services, it need not comply with the test of

economic viability. Thus, MIAA is outside the scope of the phrase government-

owned or controlled corporations under Section 16, Article XII of the 1987

Constitution.

The minority belittles the use in the Local Government Code of the phrase

government-owned or controlled corporation as merely clarificatory or

illustrative. This is fatal. The 1987 Constitution prescribes explicit conditions for

the creation of government-owned or controlled corporations. The Administrative

Code defines what constitutes a government-owned or controlled corporation. To

belittle this phrase as clarificatory or illustrative is grave error.

To summarize, MIAA is not a government-owned or controlled

corporation under Section 2(13) of the Introductory Provisions of the

Administrative Code because it is not organized as a stock or non-stock

corporation. Neither is MIAA a government-owned or controlled corporation

under Section 16, Article XII of the 1987 Constitution because MIAA is not

required to meet the test of economic viability. MIAA is a government

 instrumentality vested with corporate powers and performing essential public

services pursuant to Section 2(10) of the Introductory Provisions of the

Administrative Code. As a government instrumentality, MIAA is not subject to

any kind of tax by local governments under Section 133(o) of the Local

Government Code. The exception to the exemption in Section 234(a) does not

apply to MIAA because MIAA is not a taxable entity under the Local

Government Code. Such exception applies only if the beneficial use of real

property owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to

public use and thus are properties of public dominion. Properties of public

dominion are owned by the State or the Republic. Article 420 of the Civil Code

provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks, shores,
roadsteads, and others of similar character;
 (2) Those which belong to the State, without being for public
use, and are intended for some public service or for the
development of the national wealth. (Emphasis supplied)

The term ports x x x constructed by the State includes airports and

seaports. The Airport Lands and Buildings of MIAA are intended for public use,

and at the very least intended for public service. Whether intended for public use

or public service, the Airport Lands and Buildings are properties of public

dominion. As properties of public dominion, the Airport Lands and Buildings are

owned by the Republic and thus exempt from real estate tax under Section 234(a)

of the Local Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative

Code, which governs the legal relation and status of government units, agencies

and offices within the entire government machinery, MIAA is a

government instrumentality and not a government-owned or controlled

corporation. Under Section 133(o) of the Local Government Code, MIAA as a

government instrumentality is not a taxable person because it is not subject to

[t]axes, fees or charges of any kind by local governments. The only exception is

when MIAA leases its real property to a taxable person as provided in Section

234(a) of the Local Government Code, in which case the specific real property

leased becomes subject to real estate tax.Thus, only portions of

the Airport Lands and Buildings leased to taxable persons like private parties are

subject to real estate tax by the City of Paraaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA,

being devoted to public use, are properties of public dominion and thus owned

by the State or the Republic of the Philippines. Article 420 specifically

mentions ports x x x constructed by the State, which includes public airports and

seaports, as properties of public dominion and owned by the Republic. As

properties of public dominion owned by the Republic, there is no doubt

whatsoever that the Airport Lands and Buildings are expressly exempt from real

estate tax under Section 234(a) of the Local Government Code. This Court has also

repeatedly ruled that properties of public dominion are not subject to execution

or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed

Resolutions of the Court of Appeals of 5 October 2001 and 27 September 2002 in

CA-G.R. SP No. 66878.We DECLARE the Airport Lands and Buildings of the Manila

International Airport Authority EXEMPT from the real estate tax imposed by the

City of Paraaque. We declare VOID all the real estate tax assessments, including

the final notices of real estate tax delinquencies, issued by the City

of Paraaque on the Airport Lands and Buildings of the Manila International Airport

Authority, except for the portions that the Manila International Airport Authority

has leased to private parties. We also declare VOID the assailed auction sale, and

all its effects, of the Airport Lands and Buildings of the Manila International

Airport Authority.

No costs.

SO ORDERED.

Rpt

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-50466 May 31, 1982

CALTEX (PHILIPPINES) INC., petitioner,

vs.
CENTRAL BOARD OF ASSESSMENT APPEALS and CITY ASSESSOR OF
PASAY, respondents.
AQUINO, J.:

This case is about the realty tax on machinery and equipment installed by Caltex
(Philippines) Inc. in its gas stations located on leased land.

The machines and equipment consists of underground tanks, elevated tank,

elevated water tanks, water tanks, gasoline pumps, computing pumps, water
pumps, car washer, car hoists, truck hoists, air compressors and tireflators. The
city assessor described the said equipment and machinery in this manner:

A gasoline service station is a piece of lot where a building or shed is

erected, a water tank if there is any is placed in one corner of the lot,
car hoists are placed in an adjacent shed, an air compressor is
attached in the wall of the shed or at the concrete wall fence.

The controversial underground tank, depository of gasoline or crude

oil, is dug deep about six feet more or less, a few meters away from
the shed. This is done to prevent conflagration because gasoline and
other combustible oil are very inflammable.

This underground tank is connected with a steel pipe to the gasoline

pump and the gasoline pump is commonly placed or constructed
under the shed. The footing of the pump is a cement pad and this
cement pad is imbedded in the pavement under the shed, and
evidence that the gasoline underground tank is attached and
connected to the shed or building through the pipe to the pump and
the pump is attached and affixed to the cement pad and pavement
covered by the roof of the building or shed.

The building or shed, the elevated water tank, the car hoist under a
separate shed, the air compressor, the underground gasoline tank,
neon lights signboard, concrete fence and pavement and the lot
where they are all placed or erected, all of them used in the
pursuance of the gasoline service station business formed the entire
gasoline service-station.
 As to whether the subject properties are attached and affixed to the
tenement, it is clear they are, for the tenement we consider in this
particular case are (is) the pavement covering the entire lot which
was constructed by the owner of the gasoline station and the
improvement which holds all the properties under question, they are
attached and affixed to the pavement and to the improvement.

The pavement covering the entire lot of the gasoline service station,
as well as all the improvements, machines, equipments and
apparatus are allowed by Caltex (Philippines) Inc. ...

The underground gasoline tank is attached to the shed by the steel

pipe to the pump, so with the water tank it is connected also by a
steel pipe to the pavement, then to the electric motor which electric
motor is placed under the shed. So to say that the gasoline pumps,
water pumps and underground tanks are outside of the service
station, and to consider only the building as the service station is
grossly erroneous. (pp. 58-60, Rollo).

The said machines and equipment are loaned by Caltex to gas station operators
under an appropriate lease agreement or receipt. It is stipulated in the lease
contract that the operators, upon demand, shall return to Caltex the machines
and equipment in good condition as when received, ordinary wear and tear
excepted.

The lessor of the land, where the gas station is located, does not become the
owner of the machines and equipment installed therein. Caltex retains the
ownership thereof during the term of the lease.

The city assessor of Pasay City characterized the said items of gas station
equipment and machinery as taxable realty. The realty tax on said equipment
amounts to P4,541.10 annually (p. 52, Rollo). The city board of tax appeals ruled
that they are personalty. The assessor appealed to the Central Board of
Assessment Appeals.

The Board, which was composed of Secretary of Finance Cesar Virata as chairman,
Acting Secretary of Justice Catalino Macaraig, Jr. and Secretary of Local
Government and Community Development Jose Roño, held in its decision of June
3, 1977 that the said machines and equipment are real property within the
meaning of sections 3(k) & (m) and 38 of the Real Property Tax Code, Presidential
Decree No. 464, which took effect on June 1, 1974, and that the definitions of real
property and personal property in articles 415 and 416 of the Civil Code are not
applicable to this case.

The decision was reiterated by the Board (Minister Vicente Abad Santos took
Macaraig's place) in its resolution of January 12, 1978, denying Caltex's motion for
reconsideration, a copy of which was received by its lawyer on April 2, 1979.

On May 2, 1979 Caltex filed this certiorari petition wherein it prayed for the
setting aside of the Board's decision and for a declaration that t he said machines
and equipment are personal property not subject to realty tax (p. 16, Rollo).

The Solicitor General's contention that the Court of Tax Appeals has exclusive
appellate jurisdiction over this case is not correct. When Republic act No. 1125
created the Tax Court in 1954, there was as yet no Central Board of Assessment
Appeals. Section 7(3) of that law in providing that the Tax Court had jurisdiction to
review by appeal decisions of provincial or city boards of assessment appeals had
in mind the local boards of assessment appeals but not the Central Board of
Assessment Appeals which under the Real Property Tax Code has appellate
jurisdiction over decisions of the said local boards of assessment appeals and is,
therefore, in the same category as the Tax Court.

Section 36 of the Real Property Tax Code provides that the decision of the Central
Board of Assessment Appeals shall become final and executory after the lapse of
fifteen days from the receipt of its decision by the appellant. Within that fifteen-
day period, a petition for reconsideration may be filed. The Code does not provide
for the review of the Board's decision by this Court.

Consequently, the only remedy available for seeking a review by this Court of the
decision of the Central Board of Assessment Appeals is the special civil action of
certiorari, the recourse resorted to herein by Caltex (Philippines), Inc.

The issue is whether the pieces of gas station equipment and machinery already
enumerated are subject to realty tax. This issue has to be resolved primarily under
the provisions of the Assessment Law and the Real Property Tax Code.

Section 2 of the Assessment Law provides that the realty tax is due "on real
property, including land, buildings, machinery, and other improvements" not
specifically exempted in section 3 thereof. This provision is reproduced with some
modification in the Real Property Tax Code which provides:

SEC. 38. Incidence of Real Property Tax.— There shall be levied,

assessed and collected in all provinces, cities and municipalities an
annual ad valorem tax on real property, such as land, buildings,
machinery and other improvements affixed or attached to real
property not hereinafter specifically exempted.

The Code contains the following definitions in its section 3:

k) Improvements — is a valuable addition made to property or an

amelioration in its condition, amounting to more than mere repairs
or replacement of waste, costing labor or capital and intended to
enhance its value, beauty or utility or to adapt it for new or further
purposes.

m) Machinery — shall embrace machines, mechanical contrivances,

instruments, appliances and apparatus attached to the real estate. It
includes the physical facilities available for production, as well as the
installations and appurtenant service facilities, together with all
other equipment designed for or essential to its manufacturing,
industrial or agricultural purposes (See sec. 3[f], Assessment Law).

We hold that the said equipment and machinery, as appurtenances to the gas
station building or shed owned by Caltex (as to which it is subject to realty tax)
and which fixtures are necessary to the operation of the gas station, for without
them the gas station would be useless, and which have been attached or affixed
permanently to the gas station site or embedded therein, are taxable
improvements and machinery within the meaning of the Assessment Law and the
Real Property Tax Code.

Caltex invokes the rule that machinery which is movable in its nature only
becomes immobilized when placed in a plant by the owner of the property or
plant but not when so placed by a tenant, a usufructuary, or any person having
only a temporary right, unless such person acted as the agent of the owner
(Davao Saw Mill Co. vs. Castillo, 61 Phil 709).
That ruling is an interpretation of paragraph 5 of article 415 of the Civil Code
regarding machinery that becomes real property by destination. In the Davao Saw
Mills case the question was whether the machinery mounted on foundations of
cement and installed by the lessee on leased land should be regarded as real
property for purposes of execution of a judgment against the lessee. The sheriff
treated the machinery as personal property. This Court sustained the sheriff's
action. (Compare with Machinery & Engineering Supplies, Inc. vs. Court of
Appeals, 96 Phil. 70, where in a replevin case machinery was treated as realty).

Here, the question is whether the gas station equipment and machinery
permanently affixed by Caltex to its gas station and pavement (which are
indubitably taxable realty) should be subject to the realty tax. This question is
different from the issue raised in the Davao Saw Mill case.

Improvements on land are commonly taxed as realty even though for some
purposes they might be considered personalty (84 C.J.S. 181-2, Notes 40 and 41).
"It is a familiar phenomenon to see things classed as real property for purposes of
taxation which on general principle might be considered personal property"
(Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630, 633).

This case is also easily distinguishable from Board of Assessment Appeals vs.
Manila Electric Co., 119 Phil. 328, where Meralco's steel towers were considered
poles within the meaning of paragraph 9 of its franchise which exempts its poles
from taxation. The steel towers were considered personalty because they were
attached to square metal frames by means of bolts and could be moved from
place to place when unscrewed and dismantled.

Nor are Caltex's gas station equipment and machinery the same as tools and
equipment in the repair shop of a bus company which were held to be personal
property not subject to realty tax (Mindanao Bus Co. vs. City Assessor, 116 Phil.
501).

The Central Board of Assessment Appeals did not commit a grave abuse of
discretion in upholding the city assessor's is imposition of the realty tax on
Caltex's gas station and equipment.

WHEREFORE, the questioned decision and resolution of the Central Board of

Assessment Appeals are affirmed. The petition for certiorari is dismissed for lack
of merit. No costs.
SO ORDERED.

Barredo (Chairman), Guerrero, De Castro and Escolin, JJ., concur.

Concepcion, Jr. and Abad Santos, JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-47943 May 31, 1982

MANILA ELECTRIC COMPANY, petitioner,

vs.
CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF ASSESSMENT APPEALS
OF BATANGAS and PROVINCIAL ASSESSOR OF BATANGAS, respondents.

AQUINO, J.:

This case is about the imposition of the realty tax on two oil storage tanks
installed in 1969 by Manila Electric Company on a lot in San Pascual, Batangas
which it leased in 1968 from Caltex (Phil.), Inc. The tanks are within the Caltex
refinery compound. They have a total capacity of 566,000 barrels. They are used
for storing fuel oil for Meralco's power plants.

According to Meralco, the storage tanks are made of steel plates welded and
assembled on the spot. Their bottoms rest on a foundation consisting of
compacted earth as the outermost layer, a sand pad as the intermediate layer and
a two-inch thick bituminous asphalt stratum as the top layer. The bottom of each
tank is in contact with the asphalt layer,

The steel sides of the tank are directly supported underneath by a circular wall
made of concrete, eighteen inches thick, to prevent the tank from sliding. Hence,
according to Meralco, the tank is not attached to its foundation. It is not anchored
or welded to the concrete circular wall. Its bottom plate is not attached to any
part of the foundation by bolts, screws or similar devices. The tank merely sits on
its foundation. Each empty tank can be floated by flooding its dike-inclosed
location with water four feet deep. (pp. 29-30, Rollo.)

On the other hand, according to the hearing commissioners of the Central Board
of Assessment Appeals, the area where the two tanks are located is enclosed with
earthen dikes with electric steel poles on top thereof and is divided into two parts
as the site of each tank. The foundation of the tanks is elevated from the
remaining area. On both sides of the earthen dikes are two separate concrete
steps leading to the foundation of each tank.

Tank No. 2 is supported by a concrete foundation with an asphalt lining about an

inch thick. Pipelines were installed on the sides of each tank and are connected to
the pipelines of the Manila Enterprises Industrial Corporation whose buildings and
pumping station are near Tank No. 2.

The Board concludes that while the tanks rest or sit on their foundation, the
foundation itself and the walls, dikes and steps, which are integral parts of the
tanks, are affixed to the land while the pipelines are attached to the tanks. (pp.
60-61, Rollo.) In 1970, the municipal treasurer of Bauan, Batangas, on the basis of
an assessment made by the provincial assessor, required Meralco to pay realty
taxes on the two tanks. For the five-year period from 1970 to 1974, the tax and
penalties amounted to P431,703.96 (p. 27, Rollo). The Board required Meralco to
pay the tax and penalties as a condition for entertaining its appeal from the
adverse decision of the Batangas board of assessment appeals.

The Central Board of Assessment Appeals (composed of Acting Secretary of

Finance Pedro M. Almanzor as chairman and Secretary of Justice Vicente Abad
Santos and Secretary of Local Government and Community Development Jose
Roño as members) in its decision dated November 5, 1976 ruled that the tanks
together with the foundation, walls, dikes, steps, pipelines and other
appurtenances constitute taxable improvements.

Meralco received a copy of that decision on February 28, 1977. On the fifteenth
day, it filed a motion for reconsideration which the Board denied in its resolution
of November 25, 1977, a copy of which was received by Meralco on February 28,
1978.
On March 15, 1978, Meralco filed this special civil action of certiorari to annul the
Board's decision and resolution. It contends that the Board acted without
jurisdiction and committed a grave error of law in holding that its storage tanks
are taxable real property.

Meralco contends that the said oil storage tanks do not fall within any of the kinds
of real property enumerated in article 415 of the Civil Code and, therefore, they
cannot be categorized as realty by nature, by incorporation, by destination nor by
analogy. Stress is laid on the fact that the tanks are not attached to the land and
that they were placed on leased land, not on the land owned by Meralco.

This is one of those highly controversial, borderline or penumbral cases on the

classification of property where strong divergent opinions are inevitable. The
issue raised by Meralco has to be resolved in the light of the provisions of the
Assessment Law, Commonwealth Act No. 470, and the Real Property Tax Code,
Presidential Decree No. 464 which took effect on June 1, 1974.

Section 2 of the Assessment Law provides that the realty tax is due "on real
property, including land, buildings, machinery, and other improvements" not
specifically exempted in section 3 thereof. This provision is reproduced with some
modification in the Real Property Tax Code which provides:

Sec. 38. Incidence of Real Property Tax. — They shall be levied,

assessed and collected in all provinces, cities and municipalities an
annual ad valorem tax on real property, such as land, buildings,
machinery and other improvements affixed or attached to real
property not hereinafter specifically exempted.

The Code contains the following definition in its section 3:

k) Improvements — is a valuable addition made to property or an

amelioration in its condition, amounting to more than mere repairs
or replacement of waste, costing labor or capital and intended to
enhance its value, beauty or utility or to adapt it for new or further
purposes.

We hold that while the two storage tanks are not embedded in the land, they
may, nevertheless, be considered as improvements on the land, enhancing its
utility and rendering it useful to the oil industry. It is undeniable that the two
tanks have been installed with some degree of permanence as receptacles for the
considerable quantities of oil needed by Meralco for its operations.

Oil storage tanks were held to be taxable realty in Standard Oil Co. of New Jersey
vs. Atlantic City, 15 Atl. 2nd 271.

For purposes of taxation, the term "real property" may include things which
should generally be regarded as personal property(84 C.J.S. 171, Note 8). It is a
familiar phenomenon to see things classed as real property for purposes of
taxation which on general principle might be considered personal property
(Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630, 633).

The case of Board of Assessment Appeals vs. Manila Electric Company, 119 Phil.
328, wherein Meralco's steel towers were held not to be subject to realty tax, is
not in point because in that case the steel towers were regarded as poles and
under its franchise Meralco's poles are exempt from taxation. Moreover, the steel
towers were not attached to any land or building. They were removable from
their metal frames.

Nor is there any parallelism between this case and Mindanao Bus Co. vs. City
Assessor, 116 Phil. 501, where the tools and equipment in the repair, carpentry
and blacksmith shops of a transportation company were held not subject to realty
tax because they were personal property.

WHEREFORE, the petition is dismissed. The Board's questioned decision and

resolution are affirmed. No costs.

SO ORDERED.

Barredo (Chairman), Guerrero, De Castro and Escolin, JJ., concur.

Concepcion, Jr., J., is on leave.

Justice Abad Santos, J., took no part.

FIRST DIVISION

G.R. No. 166102, August 05, 2015

 MANILA ELECTRIC COMPANY, Petitioner, v. THE CITY ASSESSOR AND CITY
TREASURER OF LUCENA CITY, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court filed by Manila Electric Company (MERALCO), seeking the reversal of the
Decision1 dated May 13, 2004 and Resolution2dated November 18, 2004 of the
Court of Appeals in CA-G.R. SP No. 67027. The appellate court affirmed the
Decision3 dated May 3, 2001 of the Central Board of Assessment Appeals (CBAA)
in CBAA Case No. L-20-98, which, in turn, affirmed with modification the
Decision4 dated June 17, 19985 of the Local Board of Assessment Appeals (LBAA)
of Lucena City, Quezon Province, as regards Tax Declaration Nos. 019-6500 and
019-7394, ruling that MERALCO is liable for real property tax on its transformers,
electric posts (or poles), transmission lines, insulators, and electric meters,
beginning 1992.

MERALCO is a private corporation organized and existing under Philippine laws to

operate as a public utility engaged in electric distribution. MERALCO has been
successively granted franchises to operate in Lucena City beginning 1922 until
present time, particularly, by: (1) Resolution No. 366 dated May 15, 1922 of the
Municipal Council of Lucena; (2) Resolution No. 1087 dated July 1, 1957 of the
Municipal Council of Lucena; (3) Resolution No. 26798 dated June 13, 1972 of the
Municipal Board of Lucena City;9(4) Certificate of Franchise10 dated October 28,
1993 issued by the National Electrification Commission; and (5) Republic Act No.
920911 approved on June 9, 2003 by Congress.12

On February 20, 1989, MERALCO received from the City Assessor of Lucena a copy
of Tax Declaration No. 019-650013 covering the following electric facilities,
classified as capital investment, of the company: (a) transformer and electric post;
(b) transmission line; (c) insulator; and (d) electric meter, located in Quezon Ave.
Ext., Brgy. Gulang-Gulang, Lucena City. Under Tax Declaration No. 019-6500,
these electric facilities had a market value of P81,811,000.00 and an assessed
value of P65,448,800.00, and were subjected to real property tax as of 1985.

MERALCO appealed Tax Declaration No. 019-6500 before the LBAA of Lucena City,
which was docketed as LBAA-89-2. MERALCO claimed that its capital investment
consisted only of its substation facilities, the true and correct value of which was
only P9,454,400.00; and that MERALCO was exempted from payment of real
property tax on said substation facilities.

The LBAA rendered a Decision14 in LBAA-89-2 on July 5, 1989, finding that under
its franchise, MERALCO was required to pay the City Government of Lucena a tax
equal to 5% of its gross earnings, and "[s]aid tax shall be due and payable
quarterly and shall be in lieu of any and all taxes of any kind, nature, or
description levied, established, or collected x x x, on its poles, wires, insulators,
transformers and structures, installations, conductors, and accessories, x x x, from
which taxes the grantee (MERALCO) is hereby expressly exempted."15 As regards
the issue of whether or not the poles, wires, insulators, transformers, and electric
meters of MERALCO were real properties, the LBAA cited the 1964 case of Board
of Assessment Appeals v. Manila Electric Company16 (1964 MERALCO case) in
which the Court held that: (1) the steel towers fell within the term "poles"
expressly exempted from taxes under the franchise of MERALCO; and (2) the steel
towers were personal properties under the provisions of the Civil Code and,
hence, not subject to real property tax. The LBAA lastly ordered that Tax
Declaration No. 019-6500 would remain and the poles, wires, insulators,
transformers, and electric meters of MERALCO would be continuously assessed,
but the City Assessor would stamp on the said Tax Declaration the word
"exempt." The LBAA decreed in the end:cralawlawlibrary

WHEREFORE, from the evidence adduced by the parties, the Board overrules the
claim of the [City Assessor of Lucena] and sustain the claim of [MERALCO].

Further, the Appellant (Meralco) is hereby ordered to render an accounting to the

City Treasurer of Lucena and to pay the City Government of Lucena the amount
corresponding to the Five (5%) per centum of the gross earnings in compliance
with paragraph 13 both Resolutions 108 and 2679, respectively, retroactive from
November 9, 1957 to date, if said tax has not yet been paid.17chanrobleslaw

The City Assessor of Lucena filed an appeal with the CBAA, which was docketed
as CBAA Case No. 248.In its Decision18 dated April 10, 1991, the CBAA affirmed
the assailed LBAA judgment. Apparently, the City Assessor of Lucena no longer
appealed said CBAA Decision and it became final and executory.
Six years later, on October 29, 1997, MERALCO received a letter19 dated October
16, 1997 from the City Treasurer of Lucena, which stated that the company was
being assessed real property tax delinquency on its machineries beginning 1990,
in the total amount of P17,925,117.34, computed as
follows:chanRoblesvirtualLawlibrary

TAX ASSESSED COVERED TAX DUE PENALTY TOTAL

DEC. # VALUE PERIOD
019-6500 P65,448,800.00 1990-94 P3,272,440.00 P2,356,156.80 P5,628,596.80
019-7394 78,538,560.00 1995 785,385.60 534,062.21 1,319,447.81
1996 785,385.60 345,569.66 1,130,955.26
st rd
l -3 /1997 589,039.20 117,807.84 706,847.04
th
4 1997 196,346.40 (19,634.64) 176,711.76
BASIC---- P8,962,558.67
SEF---- 8,962,558.67
TOTAL TAX DELINQUENCY---- P17,925,117.34

The City Treasurer of Lucena requested that MERALCO settle the payable amount
soon to avoid accumulation of penalties. Attached to the letter were the following
documents: (a) Notice of Assessment20 dated October 20, 1997 issued by the City
Assessor of Lucena, pertaining to Tax Declaration No. 019-7394, which increased
the market value and assessed value of the machinery; (b) Property Record
Form;21 and (c) Tax Declaration No. 019-6500.22

MERALCO appealed Tax Declaration Nos. 019-6500 and 019-7394 before the LBAA
of Lucena City on December 23, 1997 and posted a surety bond23 dated December
10, 1997 to guarantee payment of its real property tax delinquency. MERALCO
asked the LBAA to cancel and nullify the Notice of Assessment dated October 20,
1997 and declare the properties covered by Tax Declaration Nos. 019-6500 and
019-7394 exempt from real property tax.

In its Decision dated June 17, 1998 regarding Tax Declaration Nos. 019-6500 and
019-7394, the LBAA declared that Sections 234 and 534(f) of the Local
Government Code repealed the provisions in the franchise of MERALCO and
Presidential Decree No. 55124 pertaining to the exemption of MERALCO from
payment of real property tax on its poles, wires, insulators, transformers, and
meters. The LBAA refused to apply as res judicata its earlier judgment in LBAA-89-
2, as affirmed by the CBAA, because it involved collection of taxes from 1985 to
1989, while the present case concerned the collection of taxes from 1989 to 1997;
and LBAA is only an administrative body, not a court or quasi-judicial body. The
LBAA though instructed that the computation of the real property tax for the
machineries should be based on the prevailing 1991 Schedule of Market Values,
less the depreciation cost allowed by law. The LBAA ultimately
disposed:cralawlawlibrary

WHEREFORE, in view of the foregoing, it is hereby ordered

that:chanRoblesvirtualLawlibrary

1) MERALCO's appeal be dismissed for lack of merit;ChanRoblesVirtualawlibrary

2) MERALCO be required to pay the realty tax on the questioned properties,

because they are not exempt by law, same to be based on the 1991 level of
assessment, less depreciation cost allowed by law.25chanrobleslaw

MERALCO went before the CBAA on appeal, which was docketed as CBAA Case
No. L-20-98. The CBAA, in its Decision dated May 3, 2001, agreed with the LBAA
that MERALCO could no longer claim exemption from real property tax on its
machineries with the enactment of Republic Act No. 7160, otherwise known as
the Local Government Code of 1991, thus:cralawlawlibrary

Indeed, the Central Board of Assessment Appeals has had the opportunity of
ruling in [MERALCO's] favor in connection with this very same issue. The matter
was settled on April 10, 1991 where this Authority ruled that "wires, insulators,
transformers and electric meters which are mounted on poles and can be
separated from the poles and moved from place to place without breaking the
material or causing [the] deterioration of the object, are deemed movable or
personal property". The same position of MERALCO would have been tenable and
that decision may have stood firm prior to the enactment of R.A. 7160 but not
anymore in this jurisdiction. The Code provides and now sets a more stringent yet
broadened concept of machinery, x x x:chanRoblesvirtualLawlibrary

xxxx

The pivotal point where the difference lie between the former and the current
case is that by the very wordings of [Section 199(0)], the ground being anchored
upon by MERALCO concerning the properties in question being personal in nature
does not hold anymore for the sole reason that these come now within the
purview and new concept of Machineries. The new law has treated these in an
unequivocal manner as machineries in the sense that they are instruments,
mechanical contrivances or apparatus though not attached permanently to the
real properties of [MERALCO] are actually, directly and exclusively used to meet
their business of distributing electricity.

xxxx

Clearly, [Section 234 of the Local Government Code] lists down the instances of
exemption in real property taxation and very apparent is the fact that the
enumeration is exclusive in character in view of the wordings in the last
paragraph. Applying the maxim "Expressio Unius est Exclusio Alterius", we can say
that "Where the statute enumerates those who can avail of the exemption, it is
construed as excluding all others not mentioned therein". Therefore, the above-
named company [had] lost its previous exemptions under its franchise because of
non-inclusion in the enumeration in Section 234. Furthermore, all tax exemptions
being enjoyed by all persons, whether natural or juridical, including all
government-owned or controlled corporations are expressly withdrawn, upon
effectivity of R.A. 7160.

In the given facts, it has been manifested that the Municipal Board of Lucena
passed Resolution No. 108 on July 1, 1957 extending the franchise of MERALCO to
operate in Lucena city an electric light system for thirty-five years, which should
have expired on November 9, 1992 and under Resolution No. 2679 passed on
June 13, 1972 by the City Council of Lucena City awarding [MERALCO] a franchise
to operate for twenty years an electric light, heat and power system in Lucena
City, also to expire in the year 1992. Under those franchises, they were only
bound to pay franchise taxes and nothing more.

Now, granting arguendo that there is no express revocation of the exemption

under the franchise of [MERALCO] since, unquestionably [MERALCO] is a recipient
of another franchise granted this time by the National Electrification Commission
as evidenced by a certificate issued on October 28, 1993, such conferment does
not automatically include and/or award exemption from taxes, nor does it
impliedly give the franchisee the right to continue the privileges like exemption
granted under its previous franchise. It is just a plain and simple franchise. In
countless times, the Supreme Court has ruled that exemption must be clear in the
language of the law granting such exemption for it is strictly construed and
favored against the person invoking it. In addition, a franchise though in the form
of a contract is also a privilege that must yield to the sublime yet inherent powers
of the state, one of these is the power of taxation.

Looking into the law creating the National Electrification Administration

(Commission), P.D. 269 as amended by P.D. 1645, nowhere in those laws can we
find such authority to bestow upon the grantee any tax exemption of whatever
nature except those of cooperatives. This we believe is basically in consonance
with the provisions of the Local Government Code more particularly Section 234.

Furthermore, Section 534(f) of R.A. 7160 which is taken in relation to Section 234
thereof states that "All general and special laws, acts, city charters, decrees,
executive orders, proclamations and administrative regulations or part or parts
thereof which are inconsistent with any of the provisions of this Code are hereby
repealed or modified accordingly". Anent this unambiguous mandate, P.D. 551 is
mandatorily repealed due to its contradictory and irreconcilable provisions with
R.A. 7160.26
chanrobleslaw

Yet, the CBAA modified the ruling of the LBAA by excluding from the real property
tax deficiency assessment the years 1990 to 1991, considering
that:cralawlawlibrary

In the years 1990 and 1991, the exemption granted to MERALCO under its
franchise which incidentally expired upon the effectivity of the Local Government
Code of 1991 was very much in effect and the decision rendered by the Central
Board of Assessment Appeals (CBAA) classifying its poles, wires, insulators,
transformers and electric meters as personal property was still controlling as the
law of the case. So, from 1990 to 1991, it would be inappropriate and illegal to
make the necessary assessment on those properties, much more to impose any
penalty for nonpayment of such.

But, assessments made beginning 1992 until 1997 by the City Government of
Lucena is legal, both procedurally and substantially. When R.A. 7160, which
incorporated amended provisions of the Real Property Tax Code, took effect on
January 1, 1992, as already discussed, the nature of the aforecited questioned
properties considered formerly as personal metamorphosed to machineries and
the exemption being invoked by [MERALCO] was automatically withdrawn
pursuant to the letter and spirit of the law. x x x.27chanrobleslaw

Resultantly, the decretal portion of said CBAA Decision reads:cralawlawlibrary

WHEREFORE, in view of the foregoing, the Decision appealed from is hereby

modified. The City Assessor of Lucena City is hereby directed to make a new
assessment on the subject properties to retroact from the year 1992 and the City
Treasurer to collect the tax liabilities in accordance with the provisions of the
cited Section 222 of the Local Government Code.28chanrobleslaw

The CBAA denied the Motion for Reconsideration of MERALCO in a

Resolution29 dated August 16, 2001.

Disgruntled, MERALCO sought recourse from the Court of Appeals by filing a

Petition for Review under Rule 43 of the Rules of Court, which was docketed as
CA-G.R. SP No. 67027.

The Court of Appeals rendered a Decision on May 13, 2004 rejecting all
arguments proffered by MERALCO. The appellate court found no deficiency in the
Notice of Assessment issued by the City Assessor of Lucena:cralawlawlibrary

It was not disputed that [MERALCO] failed to provide the [City Assessor and City
Treasurer of Lucena] with a sworn statement declaring the true value of each of
the subject transformer and electric post, transmission line, insulator and electric
meter which should have been made the basis of the fair and current market
value of the aforesaid property and which would enable the assessor to identify
the same for assessment purposes. [MERALCO] merely claims that the
assessment made by the [City Assessor and City Treasurer of Lucena] was
incorrect but did not even mention in their pleading the true and correct
assessment of the said properties. Absent any sworn statement given by
[MERALCO], [the City Assessor and City Treasurer of Lucena] were constrained to
make an assessment based on the materials within [their reach].30chanrobleslaw

The Court of Appeals further ruled that there was no more basis for the real
property tax exemption of MERALCO under the Local Government Code and that
the withdrawal of said exemption did not violate the non-impairment clause of
the Constitution, thus:cralawlawlibrary

Although it could not be denied that [MERALCO] was previously granted a

Certificate of Franchise by the National Electrification Commission on October 28,
1993 x x x, such conferment does not automatically include an exemption from
the payment of realty tax, nor does it impliedly give the franchisee the right to
continue the privileges granted under its previous franchise considering that Sec.
534(f) of the Local Government Code of 1991 expressly repealed those provisions
which are inconsistent with the Code.

At the outset, the Supreme Court has held that "Section 193 of the LGC prescribes
the general rule, viz., tax exemptions or incentives granted to or presently
enjoyed by natural or juridical persons are withdrawn upon the effectivity of the
LGC except with respect to those entities expressly enumerated. In the same vein,
We must hold that the express withdrawal upon effectivity of the LGC of all
exemptions except only as provided therein, can no longer be invoked by
MERALCO to disclaim liability for the local tax." (City Government of San Pablo,
Laguna vs. Reyes, 305 SCRA 353, 362-363)

In fine, [MERALCO's] invocation of the non-impairment clause of the Constitution

is accordingly unavailing. The LGC was enacted in pursuance of the constitutional
policy to ensure autonomy to local governments and to enable them to attain
fullest development as self-reliant communities. The power to tax is primarily
vested in Congress. However, in our jurisdiction, it may be exercised by local
legislative bodies, no longer merely by virtue of a valid delegation as before, but
pursuant to [a] direct authority conferred by Section 5, Article X of the
Constitution. The important legal effect of Section 5 is that henceforth, in
interpreting statutory provisions on municipal fiscal powers, doubts will be
resolved in favor of the municipal corporations. (Ibid. pp. 363-
365)31chanrobleslaw

MERALCO similarly failed to persuade the Court of Appeals that the transformers,
transmission lines, insulators, and electric meters mounted on the electric posts
of MERALCO were not real properties. The appellate court invoked the definition
of "machinery" under Section 199(o) of the Local Government Code and then
wrote that:cralawlawlibrary
We firmly believe and so hold that the wires, insulators, transformers and electric
meters mounted on the poles of [MERALCO] may nevertheless be considered as
improvements on the land, enhancing its utility and rendering it useful in
distributing electricity. The said properties are actually, directly and exclusively
used to meet the needs of [MERALCO] in the distribution of electricity.

In addition, "improvements on land are commonly taxed as realty even though for
some purposes they might be considered personalty. It is a familiar personalty
phenomenon to see things classed as real property for purposes of taxation which
on general principle might be considered personal property." (Caltex (Phil) Inc. vs.
Central Board of Assessment Appeals, 114 SCRA 296, 301-302)32chanrobleslaw

Lastly, the Court of Appeals agreed with the CBAA that the new assessment of the
transformers, electric posts, transmission lines, insulators, and electric meters of
MERALCO shall retroact to 1992.

Hence, the Court of Appeals adjudged:cralawlawlibrary

WHEREFORE, premises considered, the assailed Decision [dated] May 3, 2001

and Resolution dated August 16, 2001 are hereby AFFIRMED in toto and the
present petition is hereby DENIED DUE COURSE and accordingly DISMISSED for
lack of merit.33
chanrobleslaw

In a Resolution dated November 18, 2004, the Court of Appeals denied the
Motion for Reconsideration of MERALCO.

MERALCO is presently before the Court via the instant Petition for Review
on Certiorari grounded on the following lone assignment of error:cralawlawlibrary

THE COURT OF APPEALS COMMITTED A GRAVE REVERSIBLE ERROR IN AFFIRMING

IN TOTO THE DECISION OF THE CENTRAL BOARD OF ASSESSMENT APPEALS
WHICH HELD THAT THE SUBJECT PROPERTIES ARE REAL PROPERTIES SUBJECT TO
REAL PROPERTY TAX; AND THAT ASSESSMENT ON THE SUBJECT PROPERTIES
SHOULD BE MADE TO TAKE EFFECT RETROACTIVELY FROM 1992 UNTIL 1997,
WITH PENALTIES; THE SAME BEING UNJUST, WHIMSICAL AND NOT IN ACCORD
WITH THE LOCAL GOVERNMENT CODE.34chanrobleslaw
MERALCO argues that its transformers, electric posts, transmission lines,
insulators, and electric meters are not subject to real property tax, given that: (1)
the definition of "machinery" under Section 199(o) of the Local Government
Code, on which real property tax is imposed, must still be within the
contemplation of real or immovable property under Article 415 of the Civil Code
because it is axiomatic that a statute should be construed to harmonize with
other laws on the same subject matter as to form a complete, coherent, and
intelligible system; (2) the Decision dated April 10, 1991 of the CBAA in CBAA Case
No. 248, which affirmed the Decision dated July 5, 1989 of the LBAA in LBAA-89-2,
ruling that the transformers, electric posts, transmission lines, insulators, and
electric meters of MERALCO are movable or personal properties, is conclusive and
binding; and (3) the electric poles are not exclusively used to meet the needs of
MERALCO alone since these are also being utilized by other entities such as cable
and telephone companies.

MERALCO further asserts that even if it is assumed for the sake of argument that
the transformers, electric posts, transmission lines, insulators, and electric meters
are real properties, the assessment of said properties by the City Assessor in 1997
is a patent nullity. The collection letter dated October 16, 1997 of the City
Treasurer of Lucena, Notice of Assessment dated October 20, 1997 of the City
Assessor of Lucena, the Property Record Form dated October 20, 1997, and Tax
Declaration No. 019-6500 simply state a lump sum market value for all the
transformers, electric posts, transmission lines, insulators, and electric meters
covered and did not provide an inventory/list showing the actual number of said
properties, or a schedule of values presenting the fair market value of each
property or type of property, which would have enabled MERALCO to verify the
correctness and reasonableness of the valuation of its properties. MERALCO was
not furnished at all with a copy of Tax Declaration No. 019-7394, and while it
received a copy of Tax Declaration No. 019-6500, said tax declaration did not
contain the requisite information regarding the date of operation of MERALCO
and the original cost, depreciation, and market value for each property covered.
For the foregoing reasons, the assessment of the properties of MERALCO in 1997
was arbitrary, whimsical, and without factual basis - in patent violation of the
right to due process of MERALCO. MERALCO additionally explains that it cannot
be expected to make a declaration of its transformers, electric posts, transmission
lines, insulators, and electric meters, because all the while, it was of the
impression that the said properties were personal properties by virtue of the
Decision dated July 5, 1989 of the LBAA in LBAA-89-2 and the Decision dated April
10, 1991 of the CBAA in CBAA Case No. 248.

Granting that the assessment of its transformers, electric posts, transmission

lines, insulators, and electric meters by the City Assessor of Lucena in 1997 is
valid, MERALCO alternatively contends that: (1) under Sections 22135 and 22236 of
the Local Government Code, the assessment should take effect only on January 1,
1998 and not retroact to 1992; (2) MERALCO should not be held liable for
penalties and interests since its nonpayment of real property tax on its properties
was in good faith; and (3) if interest may be legally imposed on MERALCO, it
should only begin to run on the date it received the Notice of Assessment on
October 29, 1997 and not all the way back to 1992.

At the end of its Petition, MERALCO prays:cralawlawlibrary

WHEREFORE, it is respectfully prayed of this Honorable Court that the appealed

Decision dated May 13, 2004 of the Court of Appeals, together with its Resolution
dated November 18, 2004 be reversed and set aside, and judgment be rendered x
x x nullifying and cancel[l]ing the Notice of Assessment, dated October 20, 1997,
issued by respondent City Assessor, and the collection letter dated October 16,
1997 of respondent City Treasurer.

Petitioner also prays for such other relief as may be deemed just and equitable in
the premises.37
chanrobleslaw

The City Assessor and City Treasurer of Lucena counter that: (1) MERALCO was
obliged to pay the real property tax due, instead of posting a surety bond, while
its appeal was pending, because Section 231 of the Local Government Code
provides that the appeal of an assessment shall not suspend the collection of the
real property taxes; (2) the cases cited by MERALCO can no longer be applied to
the case at bar since they had been decided when Presidential Decree No. 464,
otherwise known as the Real Property Tax Code, was still in effect; (3) under the
now prevailing Local Government Code, which expressly repealed the Real
Property Tax Code, the transformers, electric posts, transmission lines, insulators,
and electric meters of MERALCO fall within the new definition of "machineries,"
deemed as real properties subject to real property tax; and (4) the Notice of
Assessment dated October 20, 1997 covering the transformers, electric posts,
transmission lines, insulators, and electric meters of MERALCO only retroacts to
1992, which is less than 10 years prior to the date of initial assessment, so it is in
compliance with Section 222 of the Local Government Code, and since MERALCO
has yet to pay the real property taxes due on said assessment, then it is just right
and appropriate that it also be held liable to pay for penalties and interests from
1992 to present time. Ultimately, the City Assessor and City Treasurer of Lucena
seek judgment denying the instant Petition and ordering MERALCO to pay the real
property taxes due.

The Petition is partly meritorious.

The Court finds that the transformers, electric posts, transmission lines,
insulators, and electric meters of MERALCO are no longer exempted from real
property tax and may qualify as "machinery" subject to real property tax under
the Local Government Code. Nevertheless, the Court declares null and void the
appraisal and assessment of said properties of MERALCO by the City Assessor in
1997 for failure to comply with the requirements of the Local Government Code
and, thus, violating the right of MERALCO to due process.

By posting a surety bond before

filing its appeal of the assessment with
the LBAA, MERALCO substantially complied
with the requirement of payment under
protest in Section 252 of the Local
Government Code.

Section 252 of the Local Government Code mandates that "[n]o protest shall be
entertained unless the taxpayer first pays the tax." It is settled that the
requirement of "payment under protest" is a condition sine qua non before an
appeal may be entertained.38 Section 231 of the same Code also dictates that
"[a]ppeal on assessments of real property x x x shall, in no case, suspend the
collection of the corresponding realty taxes on the property involved as assessed
by the provincial or city assessor, without prejudice to subsequent adjustment
depending upon the final outcome of the appeal." Clearly, under the Local
Government Code, even when the assessment of the real property is appealed,
the real property tax due on the basis thereof should be paid to and/or collected
by the local government unit concerned.

In the case at bar, the City Treasurer of Lucena, in his letter dated October 16,
1997, sought to collect from MERALCO the amount of P17,925,l 17.34 as real
property taxes on its machineries, plus penalties, for the period of 1990 to 1997,
based on Tax Declaration Nos. 019-6500 and 019-7394 issued by the City Assessor
of Lucena. MERALCO appealed Tax Declaration Nos. 019-6500 and 019-7394 with
the LBAA, but instead of paying the real property taxes and penalties due, it
posted a surety bond in the amount of PI 7,925,117.34.

By posting the surety bond, MERALCO may be considered to have substantially

complied with Section 252 of the Local Government Code for the said bond
already guarantees the payment to the Office of the City Treasurer of Lucena of
the total amount of real property taxes and penalties due on Tax Declaration Nos.
019-6500 and 019-7394. This is not the first time that the Court allowed a surety
bond as an alternative to cash payment of the real property tax before
protest/appeal as required by Section 252 of the Local Government Code.
In Camp John Hay Development Corporation v. Central Board of Assessment
Appeals39 the Court affirmed the ruling of the CBAA and the Court of Tax Appeals
en bane applying the "payment under protest" requirement in Section 252 of the
Local Government Code and remanding the case to the LBAA for "further
proceedings subject to a full and up-to-date payment, either in cash or surety, of
realty tax on the subject properties x x x."

Accordingly, the LBAA herein correctly took cognizance of and gave due course to
the appeal of Tax Declaration Nos. 019-6500 and 019-7394 filed by MERALCO.

Beginning January 1, 1992,

MERALCO can no longer claim
exemption from real property tax of
its transformers, electric posts,
transmission lines, insulators, and
electric meters based on its
franchise.

MERALCO relies heavily on the Decision dated April 10, 1991 of the CBAA in CBAA
Case No. 248, which affirmed the Decision dated July 5, 1989 of the LBAA in LBAA-
89-2. Said decisions of the CBAA and the LBAA, in turn, cited Board of Assessment
Appeals v. Manila Electric Co.,40 which was decided by the Court way back in 1964
(1964 MERALCO case). The decisions in CBAA Case No. 248 and the 1964
MERALCO case recognizing the exemption from real property tax of the
transformers, electric posts, transmission lines, insulators, and electric meters of
MERALCO are no longer applicable because of subsequent developments that
changed the factual and legal milieu for MERALCO in the present case.

In the 1964 MERALCO case, the City Assessor of Quezon City considered the steel
towers of MERALCO as real property and required MERALCO to pay real property
taxes for the said steel towers for the years 1952 to 1956. MERALCO was
operating pursuant to the franchise granted under Ordinance No. 44 dated March
24, 1903 of the Municipal Board of Manila, which it acquired from the original
grantee, Charles M. Swift. Under its franchise, MERALCO was expressly granted
the following tax exemption privilege:cralawlawlibrary

Par 9. The grantee shall be liable to pay the same taxes upon its real estate,
buildings, plant (not including poles, wires, transformers, and insulators),
machinery and personal property as other persons are or may be hereafter
required by law to pay. x x x Said percentage shall be due and payable at the
times stated in paragraph nineteen of Part One hereof, x x x and shall be in lieu of
all taxes and assessments of whatsoever nature, and by whatsoever authority
upon the privileges, earnings, income, franchise, and poles, wires, transformers,
and insulators of the grantee from which taxes and assessments the grantee is
hereby expressly exempted, x x x.41chanrobleslaw

Given the express exemption from taxes and assessments of the "poles, wires,
transformers, and insulators" of MERALCO in the aforequoted paragraph, the sole
issue in the 1964 MERALCO case was whether or not the steel towers of
MERALCO qualified as "poles" which were exempted from real property tax. The
Court ruled in the affirmative, ratiocinating that:cralawlawlibrary

Along the streets, in the City of Manila, may be seen cylindrical metal poles,
cubical concrete poles, and poles of the PLDT Co. which are made of two steel
bars joined together by an interlacing metal rod. They are called "poles"
notwithstanding the fact that they are not made of wood. It must be noted from
paragraph 9, above quoted, that the concept of the "poles" for which exemption
is granted, is not determined by their place or location, nor by the character of
the electric current it carries, nor the material or form of which it is made, but the
use to which they are dedicated. In accordance with the definitions, a pole is not
restricted to a long cylindrical piece of wood or metal, but includes "upright
standards to the top of which something is affixed or by which something is
supported." As heretofore described, respondent's steel supports consist of a
framework of four steel bars or strips which are bound by steel cross-arms atop of
which are cross-arms supporting five high voltage transmission wires (See Annex
A) and their sole function is to support or carry such wires.

The conclusion of the CTA that the steel supports in question are embraced in the
term "poles" is not a novelty. Several courts of last resort in the United States
have called these steel supports "steel towers", and they have denominated these
supports or towers, as electric poles. In their decisions the words "towers" and
"poles" were used interchangeably, and it is well understood in that jurisdiction
that a transmission tower or pole means the same thing.

xxxx

It is evident, therefore, that the word "poles", as used in Act No. 484 and
incorporated in the petitioner's franchise, should not be given a restrictive and
narrow interpretation, as to defeat the very object for which the franchise was
granted. The poles as contemplated thereon, should be understood and taken as
a part of the electric power system of the respondent Meralco, for the
conveyance of electric current from the source thereof to its consumers, x x
x.42chanrobleslaw

Similarly, it was clear that under the 20-year franchise granted to MERALCO by
the Municipal Board of Lucena City through Resolution No. 2679 dated June 13,
1972, the transformers, electric posts, transmission lines, insulators, and electric
meters of MERALCO were exempt from real property tax. Paragraph 13 of
Resolution No. 2679 is quoted in full below:cralawlawlibrary

13. The grantee shall be liable to pay the same taxes upon its real estate, building,
machinery, and personal property (not including poles, wires, transformers, and
insulators) as other persons are now or may hereafter be required by law to pay.
In consideration of the franchise and rights hereby granted, the grantee shall pay
into the City Treasury of Lucena a tax equal to FIVE (5%) PER CENTUM of the
gross earnings received from electric current sold or supplied under this
franchise. Said tax shall be due and payable quarterly and shall be in lieu of any
and all taxes of any kind, nature or description levied, established, or
collected by any authority whatsoever, municipal, provincial, or national, now or
in the future, on its poles, wires, insulators, switches, transformers and
structures, installations, conductors, and accessories, placed in and over and
under all the private and/or public property, including public streets and
highways, provincial roads, bridges, and public squares, and on its franchise
rights, privileges, receipts, revenues and profits, from which taxes the grantee is
hereby expressly exempted. (Emphases supplied.)chanrobleslaw

In CBAA Case No. 248 (and LBAA-89-2), the City Assessor assessed the
transformers, electric posts, transmission lines, insulators, and electric meters of
MERALCO located in Lucena City beginning 1985 under Tax Declaration No. 019-
6500. The CBAA in its Decision dated April 10, 1991 in CBAA Case No. 248
sustained the exemption of the said properties of MERALCO from real property
tax on the basis of paragraph 13 of Resolution No. 2679 and the 1964 MERALCO
case.

Just when the franchise of MERALCO in Lucena City was about to expire, the Local
Government Code took effect on January 1, 1992, Sections 193 and 234 of which
provide:cralawlawlibrary

Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided

in this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and nonprofit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code.

Section 234. Exemptions from Real Property Tax. - The following are exempted
from payment of the real property tax:chanRoblesvirtualLawlibrary

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

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

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

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

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

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

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

The Local Government Code, in addition, contains a general repealing clause

under Section 534(f) which states that "[a]ll general and special laws, acts, city
charters, decrees, executive orders, proclamations and administrative regulations,
or part or parts thereof which are inconsistent with any of the provisions of this
Code are hereby repealed or modified accordingly."

Taking into account the above-mentioned provisions, the evident intent of the
Local Government Code is to withdraw/repeal all exemptions from local taxes,
unless otherwise provided by the Code. The limited and restrictive nature of the
tax exemption privileges under the Local Government Code is consistent with the
State policy to ensure autonomy of local governments and the objective of the
Local Government Code to grant genuine and meaningful autonomy to enable
local government units to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national
goals. The obvious intention of the law is to broaden the tax base of local
government units to assure them of substantial sources of revenue.43

Section 234 of the Local Government Code particularly identifies the exemptions
from payment of real property tax, based on the ownership, character, and use of
the property, viz.:cralawlawlibrary

(a) Ownership Exemptions. Exemptions from real property taxes on the basis of
ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city,
(iv) a municipality, (v) a barangay, and (vi) registered cooperatives.

(b) Character Exemptions. Exempted from real property taxes on the basis of their
character are: (i) charitable institutions, (ii) houses and temples of prayer like
churches, parsonages or convents appurtenant thereto, mosques, and (iii)
nonprofit or religious cemeteries.

(c) Usage exemptions. Exempted from real property taxes on the basis of the
actual, direct and exclusive use to which they are devoted are: (i) all lands,
buildings and improvements which are actually directly and exclusively used for
religious, charitable or educational purposes; (ii) all machineries and equipment
actually, directly and exclusively used by local water districts or by government-
owned or controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power; and (iii) all machinery and
equipment used for pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the

country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.

2. Other Exemptions Withdrawn. All other exemptions previously granted to

natural or juridical persons including government-owned or controlled
corporations are withdrawn upon the effectivity of the Code.44chanrobleslaw

The last paragraph of Section 234 had unequivocally withdrawn, upon the
effectivity of the Local Government Code, exemptions from payment of real
property taxes granted to natural or juridical persons, including government-
owned or controlled corporations, except as provided in the same section.

MERALCO, a private corporation engaged in electric distribution, and its

transformers, electric posts, transmission lines, insulators, and electric meters
used commercially do not qualify under any of the ownership, character, and
usage exemptions enumerated in Section 234 of the Local Government Code. It is
a basic precept of statutory construction that the express mention of one person,
thing, act, or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius.45 Not being among the recognized
exemptions from real property tax in Section 234 of the Local Government Code,
then the exemption of the transformers, electric posts, transmission lines,
insulators, and electric meters of MERALCO from real property tax granted under
its franchise was among the exemptions withdrawn upon the effectivity of the
Local Government Code on January 1, 1998.

It is worthy to note that the subsequent franchises for operation granted to

MERALCO, i.e., under the Certificate of Franchise dated October 28, 1993 issued
by the National Electrification Commission and Republic Act No. 9209 enacted on
June 9, 2003 by Congress, are completely silent on the matter of exemption from
real property tax of MERALCO or any of its properties.

It is settled that tax exemptions must be clear and unequivocal. A taxpayer

claiming a tax exemption must point to a specific provision of law conferring on
the taxpayer, in clear and plain terms, exemption from a common burden. Any
doubt whether a tax exemption exists is resolved against the taxpayer.46MERALCO
has failed to present herein any express grant of exemption from real property
tax of its transformers, electric posts, transmission lines, insulators, and electric
meters that is valid and binding even under the Local Government Code.

The transformers, electric posts,

transmission lines, insulators, and electric
meters of MERALCO may qualify as
"machinery" under the Local Government
Code subject to real property tax.

Through the years, the relevant laws have consistently considered "machinery" as
real property subject to real property tax. It is the definition of "machinery" that
has been changing and expanding, as the following table will
show:chanRoblesvirtualLawlibrary

Real Property
Incidence of Real Property Tax Definition of Machinery47
Tax Law
The Assessment Section 2. Incidence of real Section 3. Property exempt
 Law property tax.- Except in
(Commonwealth chartered cities, there shall be
Act No. 470) levied, assessed, and collected,
an annual ad valorem tax on
Effectivity: real property, including land,
January 1, 1940 buildings, machinery, and other
improvements not hereinafter
specifically exempted.
Real Property Section 38. Incidence of Real
Tax Code Property Tax. - There shall be
levied, assessed and collected
Effectivity: June in all provinces, cities and
1, 1974 municipalities an annual ad
valorem tax on real property,
such as land, buildings,
machinery and other
improvements affixed or
attached to real property not
hereinafter specifically
exempted.
Real Property Section 38. Incidence of Real
Tax Code, as Property Tax. - There shall be
amended by levied, assessed and collected
Presidential in all provinces, cities and
Decree No. 1383 municipalities an annual ad
valorem tax on real property,
from tax. - The exemptions
shall be as follows:
xxxx
(f) Machinery, which term shall
embrace machines, mechanical
contrivances, instruments,
appliances, and apparatus
attached to the real estate,
used for industrial agricultural
or manufacturing purposes,
during the first five years of the
operation of the machinery.
Section 3. Definition of Terms. -
When used in this Code -
xxxx
(m) Machinery - shall embrace
machines, mechanical
contrivances, instruments,
appliances and apparatus
attached to the real estate. It
includes the physical facilities
available for production, as well
as the installations and
appurtenant service facilities,
together with all other
equipment designed for or
essential to its manufacturing,
industrial or agricultural
purposes.
Section 3. Definition of Terms.
When used in this Code -
xxxx
(m) Machinery - shall embrace
machines, equipment,
Effectivity: May such as land, buildings,
25, 1978 machinery and other
improvements affixed or
attached to real property not
hereinafter specifically
exempted.
Local Section 232. Power to Levy Real
Government Property Tax. — A province or
Code city or a municipality within the
Metropolitan Manila Area may
Effectivity: levy an annual ad valorem
January 1, 1992 tax on real property such as
land, building, machinery, and
other improvement not
hereinafter specifically
exempted.
mechanical contrivances,
instruments, appliances and
apparatus attached to the real
estate. It shall include the
physical facilities available for
production, as well as the
installations and appurtenant
service facilities, together with
all those not permanently
attached to the real estate but
are actually, directly and
essentially used to meet the
needs of the particular
industry, business, or works,
which by their very nature and
purpose are designed for, or
essential to manufacturing,
commercial, mining, industrial
or agricultural purposes.
Section 199. Definitions. -
When used in this Title:
xxxx
(o) "Machinery" embraces
machines, equipment,
mechanical contrivances,
instruments, appliances or
apparatuswhich may or may
not be attached, permanently
or temporarily, to the real
property. It includes the
physical facilities for
production, the installations
and appurtenant service
facilities, those which are
mobile, self-powered or self-
propelled, and those not
 permanently attached to the
real property which are
actually, directly, and
exclusively used to meet the
needs of the particular
industry, business or activity
and which by their very nature
and purpose are designed for,
or necessary to its
manufacturing, mining,logging,
commercial, industrial or
agricultural purposes[.]

MERALCO is a public utility engaged in electric distribution, and its transformers,

electric posts, transmission lines, insulators, and electric meters constitute the
physical facilities through which MERALCO delivers electricity to its consumers.
Each may be considered as one or more of the following: a
"machine,"48 "equipment,"49 "contrivance,"50 "instrument,"51 "appliance,"52 "appa
ratus,"53 or "installation."54

The Court highlights that under Section 199(o) of the Local Government Code,
machinery, to be deemed real property subject to real property tax, need no
longer be annexed to the land or building as these "may or may not be attached,
permanently or temporarily to the real property," and in fact, such machinery
may even be "mobile."55 The same provision though requires that to be
machinery subject to real property tax, the physical facilities for production,
installations, and appurtenant service facilities, those which are mobile, self-
powered or self-propelled, or not permanently attached to the real property (a)
must be actually, directly, and exclusively used to meet the needs of the
particular industry, business, or activity; and (2) by their very nature and purpose,
are designed for, or necessary for manufacturing, mining, logging, commercial,
industrial, or agricultural purposes. Thus, Article 290(o) of the Rules and
Regulations Implementing the Local Government Code of 1991 recognizes the
following exemption:cralawlawlibrary
Machinery which are of general purpose use including but not limited to office
equipment, typewriters, telephone equipment, breakable or easily damaged
containers (glass or cartons), microcomputers, facsimile machines, telex
machines, cash dispensers, furnitures and fixtures, freezers, refrigerators, display
cases or racks, fruit juice or beverage automatic dispensing machines which are
not directly and exclusively used to meet the needs of a particular industry,
business or activity shall not be considered within the definition of machinery
under this Rule. (Emphasis supplied.)chanrobleslaw

The 1964 MERALCO case was decided when The Assessment Law was still in
effect and Section 3(f) of said law still required that the machinery be attached to
the real property. Moreover, as the Court pointed out earlier, the ruling in
the 1964 MERALCO case - that the electric poles (including the steel towers) of
MERALCO are not subject to real property tax - was primarily based on the
express exemption granted to MERALCO under its previous franchise. The
reference in said case to the Civil Code definition of real property was only an
alternative argument:cralawlawlibrary

Granting for the purpose of argument that the steel supports or towers in
question are not embraced within the term poles, the logical question posited is
whether they constitute real properties, so that they can be subject to a real
property tax. The tax law does not provide for a definition of real property;
but Article 415 of the Civil Code does, by stating the following are immovable
property:cralawlawlibrary

(1) Land, buildings, roads, and constructions of all kinds adhered to the
soil;ChanRoblesVirtualawlibrary

xxxx

(3) Everything attached to an immovable in a fixed manner, in such a way that it

cannot be separated therefrom without breaking the material or deterioration of
the object;ChanRoblesVirtualawlibrary

xxxx

(5) Machinery, receptacles, instruments or implements intended by the owner of

the tenement for an industry or works which may be carried in a building or on a
piece of land, and which tends directly to meet the needs of the said industry or
works;ChanRoblesVirtualawlibrary

xxxx
The steel towers or supports in question, do not come within the objects
mentioned in paragraph 1, because they do not constitute buildings or
constructions adhered to the soil. They are not constructions analogous to
buildings nor adhering to the soil. As per description, given by the lower court,
they are removable and merely attached to a square metal frame by means of
bolts, which when unscrewed could easily be dismantled and moved from place
to place. They can not be included under paragraph 3, as they are not attached to
an immovable in a fixed manner, and they can be separated without breaking the
material or causing deterioration upon the object to which they are attached.
Each of these steel towers or supports consists of steel bars or metal strips, joined
together by means of bolts, which can be disassembled by unscrewing the bolts
and reassembled by screwing the same. These steel towers or supports do not
also fall under paragraph 5, for they are not machineries or receptacles,
instruments or implements, and even if they were, they are not intended for
industry or works on the land. Petitioner is not engaged in an industry or works
on the land in which the steel supports or towers are constructed.56(Emphases
supplied.)chanrobleslaw

The aforequoted conclusions of the Court in the 1964 MERALCO case do not hold
true anymore under the Local Government Code.

While the Local Government Code still does not provide for a specific definition of
"real property," Sections 199(o) and 232 of the said Code, respectively, gives an
extensive definition of what constitutes "machinery" and unequivocally subjects
such machinery to real property tax. The Court reiterates that the machinery
subject to real property tax under the Local Government Code "may or may not
be attached, permanently or temporarily to the real property;" and the physical
facilities for production, installations, and appurtenant service facilities, those
which are mobile, self-powered or self-propelled, or are not permanently
attached must (a) be actually, directly, and exclusively used to meet the needs of
the particular industry, business, or activity; and (2) by their very nature and
purpose, be designed for, or necessary for manufacturing, mining, logging,
commercial, industrial, or agricultural purposes.
Article 415, paragraph (1) of the Civil Code declares as immovables or real
properties "[l]and, buildings, roads and constructions of all kinds adhered to the
soil." The land, buildings, and roads are immovables by nature "which cannot be
moved from place to place," whereas the constructions adhered to the soil are
immovables by incorporation "which are essentially movables, but are attached
to an immovable in such manner as to be an integral part thereof."57 Article 415,
paragraph (3) of the Civil Code, referring to "[ejverything attached to an
immovable in a fixed manner, in such a way that it cannot be separated
therefrom without breaking the material or deterioration of the object," are
likewise immovables by incorporation. In contrast, the Local Government Code
considers as real property machinery which "may or may not be attached,
permanently or temporarily to the real property," and even those which are
"mobile."

Article 415, paragraph (5) of the Civil Code considers as immovables or real
properties "[machinery, receptacles, instruments or implements intended by the
owner of the tenement for an industry or works which may be carried on in a
building or on a piece of land, and which tend directly to meet the needs of the
said industry or works." The Civil Code, however, does not define "machinery."

The properties under Article 415, paragraph (5) of the Civil Code are immovables
by destination, or "those which are essentially movables, but by the purpose for
which they have been placed in an immovable, partake of the nature of the latter
because of the added utility derived therefrom."58 These properties, including
machinery, become immobilized if the following requisites concur: (a) they are
placed in the tenement by the owner of such tenement; (b) they are destined for
use in the industry or work in the tenement; and (c) they tend to directly meet
the needs of said industry or works.59 The first two requisites are not found
anywhere in the Local Government Code.

MERALCO insists on harmonizing the aforementioned provisions of the Civil Code

and the Local Government Code. The Court disagrees, however, for this would
necessarily mean imposing additional requirements for classifying machinery as
real property for real property tax purposes not provided for, or even in direct
conflict with, the provisions of the Local Government Code.
As between the Civil Code, a general law governing property and property
relations, and the Local Government Code, a special law granting local
government units the power to impose real property tax, then the latter shall
prevail. As the Court pronounced in Disomangcop v. The Secretary of the
Department of Public Works and Highways Simeon A.
Datumanong60:cralawlawlibrary

It is a finely-imbedded principle in statutory construction that a special provision

or law prevails over a general one. Lex specialis derogant generali. As this Court
expressed in the case of Leveriza v. Intermediate Appellate Court, "another basic
principle of statutory construction mandates that general legislation must give
way to special legislation on the same subject, and generally be so interpreted as
to embrace only cases in which the special provisions are not applicable, that
specific statute prevails over a general statute and that where two statutes are of
equal theoretical application to a particular case, the one designed therefor
specially should prevail." (Citations omitted.)chanrobleslaw

The Court also very clearly explicated in Vinzons-Chato v. Fortune Tobacco

Corporation61 that:cralawlawlibrary

A general law and a special law on the same subject are statutes in pah
materia and should, accordingly, be read together and harmonized, if possible,
with a view to giving effect to both. The rule is that where there are two acts, one
of which is special and particular and the other general which, if standing alone,
would include the same matter and thus conflict with the special act, the special
law must prevail since it evinces the legislative intent more clearly than that of a
general statute and must not be taken as intended to affect the more particular
and specific provisions of the earlier act, unless it is absolutely necessary so to
construe it in order to give its words any meaning at all.

The circumstance that the special law is passed before or after the general act
does not change the principle. Where the special law is later, it will be regarded as
an exception to, or a qualification of, the prior general act; and where the general
act is later, the special statute will be construed as remaining an exception to its
terms, unless repealed expressly or by necessary implication. (Citations
omitted.)chanrobleslaw

Furthermore, in Caltex (Philippines), Inc. v. Central Board of Assessment

Appeals,62 the Court acknowledged that "[i]t is a familiar phenomenon to see
things classed as real property for purposes of taxation which on general principle
might be considered personal property[.]"

Therefore, for determining whether machinery is real property subject to real

property tax, the definition and requirements under the Local Government Code
are controlling.

MERALCO maintains that its electric posts are not machinery subject to real
property tax because said posts are not being exclusively used by MERALCO;
these are also being utilized by cable and telephone companies. This, however, is
a factual issue which the Court cannot take cognizance of in the Petition at bar as
it is not a trier of facts. Whether or not the electric posts of MERALCO are actually
being used by other companies or industries is best left to the determination of
the City Assessor or his deputy, who has been granted the authority to take
evidence under Article 304 of the Rules and Regulations Implementing the Local
Government Code of 1991.

Nevertheless, the appraisal and

assessment of the transformers, electric
posts, transmission lines, insulators, and
electric meters of MERALCO as machinery
under Tax Declaration Nos. 019-6500 and
019-7394 were not in accordance with the
Local Government Code and in violation of
the right to due process of MERALCO and,
therefore, null and void.

The Local Government Code defines "appraisal" as the "act or process of

determining the value of property as of a specific date for a specific purpose."
"Assessment" is "the act or process of determining the value of a property, or
proportion thereof subject to tax, including the discovery, listing, classification,
and appraisal of the properties[.]"63 When it comes to machinery, its appraisal
and assessment are particularly governed by Sections 224 and 225 of the Local
Government Code, which read:cralawlawlibrary

Section 224. Appraisal and Assessment of Machinery. - (a) The fair market value of
a brand-new machinery shall be the acquisition cost. In all other cases, the fair
market value shall be determined by dividing the remaining economic life of the
machinery by its estimated economic life and multiplied by the replacement or
reproduction cost.

(b) If the machinery is imported, the acquisition cost includes freight, insurance,
bank and other charges, brokerage, arrastre and handling, duties and taxes, plus
cost of inland transportation, handling, and installation charges at the present
site. The cost in foreign currency of imported machinery shall be converted to
peso cost on the basis of foreign currency exchange rates as fixed by the Central
Bank.

Section 225. Depreciation Allowance for Machinery. - For purposes of assessment,

a depreciation allowance shall be made for machinery at a rate not exceeding five
percent (5%) of its original cost or its replacement or reproduction cost, as the
case may be, for each year of use: Provided, however, That the remaining value
for all kinds of machinery shall be fixed at not less than twenty percent (20%) of
such original, replacement, or reproduction cost for so long as the machinery is
useful and in operation.chanrobleslaw

It is apparent from these two provisions that every machinery must be

individually appraised and assessed depending on its acquisition cost, remaining
economic life, estimated economic life, replacement or reproduction cost, and
depreciation.

Article 304 of the Rules and Regulations Implementing the Local Government
Code of 1991 expressly authorizes the local assessor or his deputy to receive
evidence for the proper appraisal and assessment of the real
property:cralawlawlibrary

Article 304. Authority of Local Assessors to Take Evidence. - For the purpose of
obtaining information on which to base the market value of any real property, the
assessor of the province, city, or municipality or his deputy may summon the
owners of the properties to be affected or persons having legal interest therein
and witnesses, administer oaths, and take deposition concerning the property, its
ownership, amount, nature, and value.
chanrobleslaw
The Local Government Code further mandates that the taxpayer be given a notice
of the assessment of real property in the following manner:cralawlawlibrary

Section 223. Notification of New or Revised Assessment. - When real property is

assessed for the first time or when an existing assessment is increased or
decreased, the provincial, city or municipal assessor shall within thirty (30) days
give written notice of such new or revised assessment to the person in whose
name the property is declared. The notice may be delivered personally or by
registered mail or through the assistance of the punong barangay to the last
known address of the person to served.chanrobleslaw

A notice of assessment, which stands as the first instance the taxpayer is officially
made aware of the pending tax liability, should be sufficiently informative to
apprise the taxpayer the legal basis of the tax.64 In Manila Electric Company v.
Barlis,65 the Court described the contents of a valid notice of assessment of real
property and differentiated the same from a notice of collection:cralawlawlibrary

A notice of assessment as provided for in the Real Property Tax Code should
effectively inform the taxpayer of the value of a specific property, or proportion
thereof subject to tax, including the discovery, listing, classification, and appraisal
of properties. The September 3, 1986 and October 31, 1989 notices do not
contain the essential information that a notice of assessment must specify,
namely, the value of a specific property or proportion thereof which is being
taxed, nor does it state the discovery, listing, classification and appraisal of the
property subject to taxation. In fact, the tenor of the notices bespeaks an
intention to collect unpaid taxes, thus the reminder to the taxpayer that the
failure to pay the taxes shall authorize the government to auction off the
properties subject to taxes x x x.chanrobleslaw

Although the ruling quoted above was rendered under the Real Property Tax
Code, the requirement of a notice of assessment has not changed under the Local
Government Code.

A perusal of the documents received by MERALCO on October 29, 1997 reveals

that none of them constitutes a valid notice of assessment of the transformers,
electric posts, transmission lines, insulators, and electric meters of MERALCO.
The letter dated October 16, 1997 of the City Treasurer of Lucena (which
interestingly precedes the purported Notice of Assessment dated October 20,
1997 of the City Assessor of Lucena) is a notice of collection, ending with the
request for MERALCO to settle the payable amount soon in order to avoid
accumulation of penalties. It only presented in table form the tax declarations
covering the machinery, assessed values in the tax declarations in lump sums for
all the machinery, the periods covered, and the taxes and penalties due again in
lump sums for all the machinery.

The Notice of Assessment dated October 20, 1997 issued by the City Assessor
gave a summary of the new/revised assessment of the "machinery" located in
"Quezon Avenue Ext., Brgy. Gulang-Gulang, Lucena City," covered by Tax
Declaration No. 019-7394, with total market value of P98,173,200.00 and total
assessed value of P78,538,560.00. The Property Record Form basically contained
the same information. Without specific description or identification of the
machinery covered by said tax declaration, said Notice of Assessment and
Property Record Form give the false impression that there is only one piece of
machinery covered.

In Tax Declaration No. 019-6500, the City Assessor reported its findings under
"Building and Improvements" and not "Machinery." Said tax declaration covered
"capital investment-commercial," specifically: (a) Transformer and Electric Post;
(b) Transmission Line, (c) Insulator, and (d) Electric Meter, with a total market
value of P81,811,000.00, assessment level of 80%, and assessed value of
£65,448,800.00. Conspicuously, the table for "Machinery" - requiring the
description, date of operation, replacement cost, depreciation, and market value
of the machinery - is totally blank.

MERALCO avers, and the City Assessor and the City Treasurer of Lucena do not
refute at all, that MERALCO has not been furnished the Owner's Copy of Tax
Declaration No. 019-7394, in which the total market value of the machinery of
MERALCO was increased by PI6,632,200.00, compared to that in Tax Declaration
No. 019-6500.

The Court cannot help but attribute the lack of a valid notice of assessment to the
apparent lack of a valid appraisal and assessment conducted by the City Assessor
of Lucena in the first place. It appears that the City Assessor of Lucena simply
lumped together all the transformers, electric posts, transmission lines,
insulators, and electric meters of MERALCO located in Lucena City under Tax
Declaration Nos. 019-6500 and 019-7394, contrary to the specificity demanded
under Sections 224 and 225 of the Local Government Code for appraisal and
assessment of machinery. The City Assessor and the City Treasurer of Lucena did
not even provide the most basic information such as the number of transformers,
electric posts, insulators, and electric meters or the length of the transmission
lines appraised and assessed under Tax Declaration Nos. 019-6500 and 019-7394.
There is utter lack of factual basis for the assessment of the transformers, electric
posts, transmission lines, insulators, and electric meters of MERALCO.

The Court of Appeals laid the blame on MERALCO for the lack of information
regarding its transformers, electric posts, transmission lines, insulators, and
electric meters for appraisal and assessment purposes because MERALCO failed
to file a sworn declaration of said properties as required by Section 202 of the
Local Government Code. As MERALCO explained, it cannot be expected to file
such a declaration when all the while it believed that said properties were
personal or movable properties not subject to real property tax. More
importantly, Section 204 of the Local Government Code exactly covers such a
situation, thus:cralawlawlibrary

Section 204. Declaration of Real Property by the Assessor. -When any person,
natural or juridical, by whom real property is required to be declared under
Section 202 hereof, refuses or fails for any reason to make such declaration within
the time prescribed, the provincial, city or municipal assessor shall himself declare
the property in the name of the defaulting owner, if known, or against an
unknown owner, as the case may be, and shall assess the property for taxation in
accordance with the provision of this Title. No oath shall be required of a
declaration thus made by the provincial, city or municipal assessor.chanrobleslaw

Note that the only difference between the declarations of property made by the
taxpayer, on one hand, and the provincial/city/municipal assessor, on the other, is
that the former must be made under oath. After making the declaration of the
property himself for the owner, the provincial/city/municipal assessor is still
required to assess the property for taxation in accordance with the provisions of
the Local Government Code.

It is true that tax assessments by tax examiners are presumed correct and made
in good faith, with the taxpayer having the burden of proving otherwise.66 In this
case, MERALCO was able to overcome the presumption because it has clearly
shown that the assessment of its properties by the City Assessor was baselessly
and arbitrarily done, without regard for the requirements of the Local
Government Code.

The exercise of the power of taxation constitutes a deprivation of property under

the due process clause, and the taxpayer's right to due process is violated when
arbitrary or oppressive methods are used in assessing and collecting taxes. 67 The
Court applies by analogy its pronouncements in Commissioner of Internal Revenue
v. United Salvage and Towage (Phils.), Inc.,68 concerning an assessment that did
not comply with the requirements of the National Internal Revenue
Code:cralawlawlibrary

On the strength of the foregoing observations, we ought to reiterate our earlier

teachings that "in balancing the scales between the power of the State to tax and
its inherent right to prosecute perceived transgressors of the law on one side, and
the constitutional rights of a citizen to due process of law and the equal
protection of the laws on the other, the scales must tilt in favor of the individual,
for a citizen's right is amply protected by the Bill of Rights under the
Constitution." Thus, while "taxes are the lifeblood of the government," the power
to tax has its limits, in spite of all its plenitude. Even as we concede the
inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed
procedure. (Citations omitted.)chanrobleslaw

The appraisal and assessment of the transformers, electric posts, transmission

lines, insulators, and electric meters of MERALCO under Tax Declaration Nos. 019-
6500 and 019-7394, not being in compliance with the Local Government Code,
are attempts at deprivation of property without due process of law and,
therefore, null and void.

WHEREFORE, premises considered, the Court PARTLY GRANTS the instant

Petition and AFFIRMS with MODIFICATION the Decision dated May 13, 2004 of
the Court of Appeals in CA-G.R. SP No. 67027, affirming in toto the Decision dated
May 3, 2001 of the Central Board of Assessment Appeals in CBAA Case No. L-20-
98. The Court DECLARES that the transformers, electric posts, transmission lines,
insulators, and electric meters of Manila Electric Company are NOT
EXEMPTED from real property tax under the Local Government Code. However,
the Court also DECLARES the appraisal and assessment of the said properties
under Tax Declaration Nos. 019-6500 and 019-7394 as NULL and VOID for not
complying with the requirements of the Local Government Code and violating the
right to due process of Manila Electric Company,
and ORDERS the CANCELLATION of the collection letter dated October 16, 1997
of the City Treasurer of Lucena and the Notice of Assessment dated October 20,
1997 of the City Assessor of Lucena, but WITHOUT PREJUDICE to the conduct of a
new appraisal and assessment of the same properties by the City Assessor of
Lucena in accord with the provisions of the Local Government Code and
guidelines issued by the Bureau of Local Government Financing.

SO ORDERED.chanroblesvirtuallawlibrary

SECOND DIVISION

G.R. No. 183416, October 05, 2016

PROVINCIAL ASSESSOR OF AGUSAN DEL SUR, Petitioner, v. FILIPINAS PALM OIL

PLANTATION, INC., Respondent.

DECISION

LEONEN, J.:

The exemption from real property taxes given to cooperatives applies regardless
of whether or not the land owned is leased. This exemption benefits the
cooperative's lessee. The characterization of machinery as real property is
governed by the Local Government Code and not the Civil Code.

This Petition1 for review assails the Decision2 dated September 26, 2007 and the
Resolution3 dated May 26, 2008 of the Court of Appeals in CA-G.R. SP No. 74060.
The Court of Appeals affirmed the Decision of the Central Board of Assessment
Appeals (CBAA) exempting Filipinas Palm Oil Plantation Inc. from payment of real
property taxes.4chanrobleslaw

Filipinas Palm Oil Plantation Inc. (Filipinas) is a private organization engaged in

palm oil plantation5 with a total land area of more than 7,000 hectares of National
Development Company (NDC) lands in Agusan del Sur.6 Harvested fruits from oil
palm trees are converted into oil through Filipinas' milling plant in the middle of
the plantation area.7 Within the plantation, there are also three (3) plantation
roads and a number of residential homes constructed by Filipinas for its
employees.8chanrobleslaw

After the Comprehensive Agrarian Reform Law9 was passed, NDC lands were
transferred to Comprehensive Agrarian Reform Law beneficiaries who formed
themselves as the merged NDC-Guthrie Plantations, Inc. - NDC-Guthrie Estates,
Inc. (NGPI-NGEI) Cooperatives.10 Filipinas entered into a lease contract agreement
with NGPI-NGEI.11chanrobleslaw

The Provincial-Assessor of Agusan del Sur (Provincial Assessor) is a government

agency in charge with the assessment of lands under the public domain.12 It
assessed Filipinas' properties found within the plantation area,13 which Filipinas
assailed before the Local Board of Assessment Appeals (LBAA) on the following
grounds:

chanRoblesvirtualLawlibrary

(1.) The [petitioner] Provincial Assessors of Agusan del Sur ERRED in finding that
the Market Value of a single fruit bearing oil palm tree is P207.00 when it should
only be P42.00 pesos per tree;

(2.) The [petitioner] ERRED in finding that the total number of standing and fruit
bearing oil palm tree is PI 10 [sic] trees per hectare when it should be only 92
trees;

(3.) The [petitioner] ERRED in finding that the Market Value[s] of the plantation
roads are:ChanRoblesVirtualawlibrary
A.) P270,000.00 per kilometer for primary roads
B.) P135,000.00 for secondary roads
C.) P67,567.00 for tertiary roads constructed by the company.
It should only be:ChanRoblesVirtualawlibrary
A.) P105,000.00 for primary roads
B.) P52,300.00 for secondary roads
C.) P26,250.00 for tertiary roads
Likewise, bridges, culverts, canals and pipes should not be assessed separately
from plantation roads, the same being components of the roads thereof;
(4.) The [petitioner] ERRED in imposing real property taxes against the petitioner
for roads, bridges, culverts, pipes and canals as these belonged to the
cooperatives;

([5].) The [petitioner] ERRED in finding that the Market Value of NDC service area
is P11,000.00 per hectare when it should only be P6,000.00 per hectare;

([6].) The [petitioner] ERRED in imposing realty taxes on Residential areas built by
[respondent] except for three of them;

([7].) The [petitioner] ERRED when it included haulers and other equipments [sic]
which are unmovable as taxable real properties.14

In its Decision15 dated June 8, 1999, the LBAA found that the P207.00 market
value declared in the assessment by the Provincial Assessor was
unreasonable.16 It found that the market value should not have been more than
P85.00 per oil palm tree.17 The sudden increase of realty tax assessment level
from P42.00 for each oil palm tree in 1993 to P207.00 was
confiscatory.18chanrobleslaw

The LBAA adopted Filipinas' claim that the basis for assessment should only be 98
trees.19 Although one (1) hectare of land can accommodate 124 oil palm trees,
the mountainous terrain of the plantation should be considered.20 Because of the
terrain, not every meter of land can be fully planted with trees.21The LBAA found
that roads of any kind, as well as all their improvements, should not be taxed
since these roads were intermittently used by the public.22 It resolved that the
market valuation should be based on the laws of the Department of Agrarian
Reform since the area is owned by the NDC, a quasi-governmental body of the
Philippines.23chanrobleslaw

The LBAA exempted the low-cost housing units from taxation except those with a
market value of more than P150,000.00 under the Local Government
Code.24 Finally, the LBAA considered the road equipment and mini haulers as
movables that are vital to Filipinas' business.

Filipinas appealed before the CBAA on July 16, 1999.26 On November 21, 2001,
the CBAA rendered a decision, the dispositive portion of which reads:

chanRoblesvirtualLawlibrary
WHEREFORE, this Board has decided to set aside, as it does hereby set aside, the
decision rendered by the Local Board of Assessment Appeals of the Province of
Agusan del Sur on June 8, 1999 in an unnumbered case entitled "[F]ilipinas Palm
Oil Co., Inc. Petitioner, versus the Provincial Assessors Office of Agusan del Sur,
Respondent" and hereby orders as follows:

chanRoblesvirtualLawlibraryA. The market value for each oil palm tree should be
FIFTY- SEVEN & 55/100 PESOS (57.55), effective January 1, 1991. The assessment
for each municipality shall be based on the corresponding number of trees as
listed in Petitioner-Appellee's "Hectarage Statement" discussed hereinabove;

B. Petitioner-Appellee should not be made to pay for the real property taxes due
on the roads starting from January 1, 1991;

C. Petitioner-Appellee is not liable to the Government for real property taxes on

the lands owned by the Multi-purpose Cooperative;

D. The housing units with a market value of PI75,000.00 or less each shall be
subjected to 0% assessment level, starting 1994;

E. Road Equipment and haulers are not real properties and, accordingly,
Petitioner-Appellee is not liable for real property tax thereon;

F. Any real property taxes already paid by Petitioner-Appellee which, by virtue "of
this decision, were not due, shall be applied to future taxes rightfully due from
Petitioner-Appellee.

SO ORDERED.27 (Emphasis supplied)

The CBAA denied the Motion for Reconsideration filed by the Provincial
Assessor.28 The Provincial Assessor filed a Petition for Review before the Court of
Appeals, which, in turn, sustained the CBAA's Decision.29chanrobleslaw

The Court of Appeals held that the land owned by NGPI-NGEI, which Filipinas has
been leasing, cannot be subjected to real property tax since these are owned by
cooperatives that are tax-exempt.30 Section 133(n) of the Local Government Code
provides:

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

(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises

and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered
Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the
"Cooperative Code of the Philippines." (Emphasis supplied)

Section 234(d) of the Local Government Code exempts duly registered

cooperatives, like NGPI-NGEI, from payment of real property taxes:

chanRoblesvirtualLawlibrary
SECTION 234. Exemptions from Real Property Tax. — The following are exempted
from payment of the real property tax:
....

(d) All real property owned by duly registered cooperatives as provided for under
R.A. No. 6938[.] (Emphasis supplied)

The Court of Appeals held that the pertinent provisions "neither distinguishes nor
specifies" that the exemption only applies to real properties used by the
cooperatives.31 It ruled that "[t]he clear absence of any restriction or limitation in
the provision could only mean that the exemption applies to wherever the
properties are situated and to whoever uses them."32 Therefore, the exemption
privilege extends to Filipinas as the cooperatives' lessee.33chanrobleslaw

On the roads constructed by Filipinas, the Court of Appeals held that although it is
undisputed that the roads were built primarily for Filipinas' benefit, the roads
should be tax-exempt since these roads were also being used by the cooperatives
and the public.34 It applied, by analogy, Bislig Bay Lumber Company, Inc. v.
Provincial Government of Surigao:35chanrobleslaw

We are inclined to uphold the theory of appellee. In the first place, it cannot be
disputed that the ownership of the road that was constructed by appellee belongs
to the government by right accession not only because it is inherently
incorporated or attached to the timber land leased to appellee but also because
upon the expiration of the concession, said road would ultimately pass to the
national government. In the second place, while the road was constructed by
appellee primarily for its use and benefit, the privilege is not exclusive, for, under
the lease contract entered into by the appellee and the government and by public
in by the general. Thus, under said lease contract, appellee cannot prevent the
use of portions, of the concession for homesteading purposes. It is also in duty
bound to allow the free use of forest products within the concession for the
personal use of individuals residing in or within the vicinity of the land. . . . In
other words, the government has practically reserved the rights to use the road to
promote its varied activities. Since, as above shown, the road in question cannot
be considered as an improvement which belongs to appellee, although in part is
for its benefit, it is clear that the same cannot be the subject of assessment within
the meaning of section 2 of Commonwealth Act No. 470.36 (Citations omitted)

Furthermore, the Court of Appeals agreed with the CBAA that the roads
constructed by Filipinas had become permanent improvements on the land
owned by NGPI-NGEI.37 Articles 440 and 445 of the Civil Code provide that these
improvements redound to the benefit of the land owner under the right of
accession:38chanrobleslaw

Article 440. The ownership of property gives the right by accession to everything
which is produced thereby, or which is incorporated or attached thereto, either
naturally or artificially.
....

Article 445. Whatever is built, planted or sown on the land of another and the
improvements or repairs made thereon, belong to the owner of the land, subject
to the provisions of the following articles.

On the road equipment and mini haulers as real properties subject to tax, the
Court of Appeals affirmed the CBAA's Decision that these are only
movables.39 Section 199(o) of the Local Government Code provides a definition of
machinery subject to real property taxation:

chanRoblesvirtualLawlibrary
SECTION 199. Definition of Terms. — When used in this Title, the term:
....

(o) "Machinery" embraces machines, equipment, mechanical contrivances,

instruments, appliances or apparatus which may or may not be attached,
permanently or temporarily, to the real property. It includes the physical facilities
for production, the installations and appurtenant service facilities, those which
are mobile, self-powered or self-propelled, and those not permanently attached
to the real property which are actually, directly, and exclusively used to meet the
needs of the particular industry, business or activity and which by their very
nature and purpose are designed for, or necessary to its manufacturing, mining.

The Court of Appeals held that Section 19^(o) of the Local Government Code
should be construed to include machineries covered by the meaning of real
properties provided for under Article 415(5) of the Civil Code:40chanrobleslaw

Article 415. The following are immovable property:

....
(5) Machinery, receptacles, instruments or implements intended by the owner of
the tenement for an industry or works which may be carried on in a building or on
a piece of land, and which tend directly to meet the needs of the said industry or
works[.]

The Court of Appeals cited Davao Sawmill Company v. Castillo,41 where it has
been held that machinery that is movable by nature becomes immobilized only
when placed by the owner of the tenement, but not so when placed by a tenant
or any other person having a temporary right unless this person acts as an agent
of the owner.42 Thus, the mini haulers and other road equipment retain their
nature as movables.43chanrobleslaw

The Provincial Assessor filed before this Court a Petition for Review raising the
following issues:

chanRoblesvirtualLawlibraryFirst, whether the exemption privilege of NGPI-NGEI

from payment of real property tax extends to respondent Filipinas Palm Oil
Plantation Inc. as lessee of the parcel of land owned by cooperatives;
and cralawlawlibrary

Second, whether respondent's road equipment and mini haulers are movable
properties and have not been immobilized by destination for real property
taxation.

Petitioner argues that based on Mactan Cebu International Airport Authority v.

Ferdinand J. Marcos,44cooperatives cannot extend its exemption from real
property tax to taxable persons.45 It argues that Sections 198, 199, 205, and 217
of the Local Government Code provide that real property taxes are assessed
based on actual use.46 Moreover, the exemption of cooperatives applies only
when it is the cooperative that actually, directly, and exclusively uses and
possesses the properties.47 Sections 198, 199, 205, and 217 of the Local
Government Code provide:

chanRoblesvirtualLawlibrary
SECTION 198. Fundamental Principles. — The appraisal, assessment, levy and
collection of real property tax shall be guided by the following fundamental
principles:
....
(b) Real property shall be classified for assessment purposes on the basis of its
actual use[.]
....
SECTION 199. Definition of Terms. — When used in this Title, the term:
....
(b) "Actual Use" refers to the purpose for which the property is principally or
predominantly utilized by the person in possession thereof[.]
....
SECTION 205. Listing of Real Property in the Assessment Rolls. —
....
(d) Real property owned by the Republic of the Philippines, its instrumentalities
and political subdivisions, the beneficial use of which has been granted, for
consideration or otherwise, to a taxable person, shall be listed, valued and
assessed in the name of the possessor, grantee or of the public entity if such
property has been acquired or held for resale or lease.
....

SECTION 217. Actual Use of Real Property as Basis for Assessment. — Real
property shall be classified, valued and assessed on the basis of its actual use
regardless of where located, whoever owns it, and whoever uses it. (Emphasis
supplied)

Petitioner claims that Section 199(o) of the Local Government Code specifically
covers respondent's road equipment and mini haulers since these are directly and
exclusively used to meet the needs of respondent's industry, business, or
activity.48 Article 415(5) of the Civil Code, which defines real property, should not
be made to control the Local Government Code,49 a subsequent legislation that
specifically defines "machinery" for taxation purposes.50chanrobleslaw

In the Resolution51 dated October 13, 2008, this Court denied the Petition for
Review due to procedural missteps, which included the failure to attach legible
duplicate original or certified true copies of the assailed decision and failure to
pay proper fees. On November 25, 2008, petitioner moved for
reconsideration,52 praying for the reversal of the Petition's denial due to mere
technicalities.

On January 26, 2009, this Court granted Petitioner's Motion for

Reconsideration.53 It directed the reinstatement of the Petition and required
respondent to comment.54chanrobleslaw

On November 20, 2009, respondent filed its Comment.55chanrobleslaw

Respondent reiterates the rulings of the CBAA and the Court of Appeals that the
exemption of cooperatives from real property taxes extends to it as the
lessee.56 It asserts that under its lease agreement with NGPI-NGEI, it pays an
Annual Fixed Rental, which includes the payment of taxes.57 It claims that in case
NGPI-NGEI is liable to the local government for real property tax on the land, the
tax should be taken from the Annual Fixed Rental.58 To make respondent pay real
property taxes on the leased land would be equivalent to assessing it twice for the
same property.59chanrobleslaw

On the road equipment and mini haulers being subjected to real property
taxation, respondent maintains that it should be spared from real property tax
since the equipment and mini haulers are movables.60chanrobleslaw

The Petition is granted to modify the Court of Appeals Decision, but only with
respect to the nature of respondent's road equipment and mini haulers.

Under Section 133(n) of the Local Government Code, the taxing power of local
government units shall not extend to the levy of taxes, fees, or charges on duly
registered cooperatives under the Cooperative Code.61 Section 234(d) of the Local
Government Code specifically provides for real property tax exemption to
cooperatives:

chanRoblesvirtualLawlibrary
SECTION 234. Exemptions from Real Property Tax. — The following
are exempted from payment of the real property tax:
....

(d) All real property owned by duly registered cooperatives as provided for under
[Republic Act] No. 6938[.] (Emphasis supplied)

NGPI-NGEI, as the owner of the land being leased by respondent, falls within the
purview of the law. Section 234 of the Local Government Code exempts all real
property owned by cooperatives without distinction. Nothing in the law suggests
that the real property tax exemption only applies when the property is used by
the cooperative itself. Similarly, the instance that the real property is leased to
either an individual or corporation is not a ground for withdrawal of tax
exemption.62chanrobleslaw

In arguing the first issue, petitioner hinges its claim on a misplaced reliance in
Mactan, which refers to the revocation of tax exemption due to the effectivity of
the Local Government Code. However, Mactan does not refer to the tax
exemption extended to cooperatives. The portion that petitioner cited specifically
mentions that the exemption granted to cooperatives has not been withdrawn by
the effectivity of the Local Government Code:

chanRoblesvirtualLawlibrary
[S]ection 232 must be deemed to qualify Section 133.

Thus, reading together Sections 133, 232, and 234 of the L[ocal] G[overnment]
C[ode], we conclude that as a general rule, as laid down in Section 133, the taxing
powers of local government units cannot extend to the levy of, inter alia, "taxes,
fees and charges of any kind on the National Government, its agencies and
instrumentalities, and local government units"; however, pursuant to Section 232,
provinces, cities, and municipalities in the Metropolitan Manila Area may impose
the real property tax except on, inter alia, "real property owned by the Republic
of the Philippines or any of its political subdivisions except when the beneficial
use thereof has been granted, for consideration or otherwise, to a taxable
person," as provided in item (a) of the first paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or

juridical persons, including government-owned and controlled corporations,
Section 193 of the L[ocal] G[overnment] C[ode] prescribes the general rule, viz.,
they are withdrawn upon the effectivity of the L[ocal] G[overnment]
C[ode], except those granted to local water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions, and unless otherwise provided in the L[ocal] Gfovernment] C[ode].
The latter proviso could refer to Section 234 which enumerates the properties
exempt from real property tax. But the last paragraph of Section 234 further
qualifies the retention of the exemption insofar as real property taxes are
concerned by limiting the retention only to those enumerated therein; all others
not included in the enumeration lost the privilege upon the effectivity of the
L[ocal] G[overnment] C[ode]. Moreover, even as to real property owned by the
Republic of the Philippines or any of its political subdivisions covered by item (a) of
the first paragraph of Section 234, the exemption is withdrawn if the beneficial
use of such property has been granted to a taxable person for consideration or
otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon the
effectivity of the L[ocal] G[overnment] C[ode], exemptions from payment of real
property taxes granted to natural or juridical persons, including government-
owned or controlled corporations, except as provided in the said section, and the
petitioner is, undoubtedly, a government-owned corporation, it necessarily
follows that its exemption from such tax granted it in Section 14 of its Charter,
R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be justified
if the petitioner can seek refuge under any of the exceptions provided in Section
234, but not under Section 133, as it now asserts, since, as shown above, the said
section is qualified by Sections 232 and 234.

In short, the petitioner can no longer invoke the general rule in Section 133 that
the taxing powers of the local government units cannot extend to the levy of:

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

It must show that the parcels of land in question, which are real property, are any
one of those enumerated in Section 234, either by virtue of ownership, character,
or use of the property.63 (Emphasis supplied)

The roads that respondent constructed within the leased area should not be
assessed with real property taxes. Bislig Bay finds application here. Bislig Bay
Lumber Company, Inc. (Bislig Bay) was a timber concessionaire of a portion of
public forest in the provinces of Agusan and Surigao.64 To aid in developing its
concession, Bislig Bay built a road at its expense from a barrio leading towards its
area.65 The Provincial Assessor of Surigao assessed Bislig Bay with real property
tax on the constructed road, which was paid by the company under protest.66 It
claimed that even if the road was constructed on public land, it should be
subjected to real property tax because it was built by the company for its own
benefit.67 On the other hand, Bislig Bay asserted that the road should be
exempted from real property tax because it belonged to national government by
right of accession.68 Moreover, the road constructed already became an
inseparable part of the land.69 The records also showed that the road was not
only built for the benefit of Bislig Bay, but also of the public.70 This Court ruled for
Bislig Bay, thus:

chanRoblesvirtualLawlibrary
We are inclined to uphold the theory of appellee. In the first place, it cannot be
disputed that the ownership of the road that was constructed by appellee belongs
to the government by right accession not only because it is inherently
incorporated or attached to the timber land leased to appellee but also because
upon the expiration of the concession, said road would ultimately pass to the
national government. ... In the second place, while the road was constructed by
appellee primarily for its use and benefit, the privilege is not exclusive, for, under
the lease contract entered into by the appellee and the government and by public
in by the general. Thus, under said lease contract, appellee cannot prevent the
use of portions, of the concession for homesteading purposes. ... It is also in duty
bound to allow the free use of forest products within the concession for the
personal use of individuals residing in or within the vicinity of the land. ... In other
words, the government has practically reserved the rights to use the road to
promote its varied activities. Since, as above shown, the road in question cannot
be considered as an improvement which belongs to appellee, although in part is
for its benefit, it is clear that the same cannot be the subject of assessment within
the meaning of section 2 of Commonwealth Act No. 470.71

This was reiterated in Board of Assessment Appeals ofZamboanga del Sur v.

Samar Mining Company, Inc.72 Samar Mining Company, Inc. (Samar Mining) was a
domestic corporation engaged in the mining industry.73 Since Samar Mining's
mining site and mill were in an inland location entailing long distance from its
area to the loading point, Samar Mining was constrained to construct a road for
its convenience.74 Initially, Samar Mining filed miscellaneous lease applications for
a road right of way covering lands under the jurisdiction of the Bureau of Lands
and the Bureau of Forestry where the proposed road would pass
through.75 Samar Mining was given a "temporary permit to occupy and use the
lands applied for by it";76 hence, it was able to build what was eventually known
as the Samico Road. Samar Mining was assessed by the Provincial Assessor of
Zamboanga del Sur with real property taxes on the road, which prompted it to
appeal before the Board of Assessment Appeals.77 Invoking Bislig Bay,Samar
Mining claimed that it should not be assessed with real property tax since the
road was constructed on public land. This Court ruled for Samar Mining, thus:

chanRoblesvirtualLawlibrary
There is no question that the road constructed by respondent Saimar on the
public lands leased to it by the government is an improvement. But as to whether
the same is taxable under the aforequoted provision of the Assessment Law, this
question has already been answered in the negaitive by this Court. In the case of
Bislig Bay Lumber Co., Inc. vs. Provincial Government of Surigao, where a similar
issue was raised. . ..
....

. . . What is emphasized in the Bislig case is that the improvement is exempt from
taxation because it is an integral part of the public land on which it is constructed
and the improvement is the property of the government by right of accession.
Under Section 3(a) of the Assessment Law, all properties owned by the
government, without any distinction, are exempt from taxation.79 (Emphasis
supplied, citations omitted)

The roads that respondent constructed became permanent improvements on the

land owned by the NGPI-NGEI by right of accession under the Civil Code, thus:

chanRoblesvirtualLawlibrary
Article 440. The ownership of property gives the right by accession to everything
which is produced thereby, or which is incorporated or attached thereto, either
naturally or artificially.
....
Article 445. Whatever is built, planted or sown on the land of another and the
improvements or repairs made thereon, belong to the owner of the land[.]

Despite the land being leased by respondent when the roads were constructed,
the ownership of the improvement still belongs to NGPI-NGEI. As provided under
Article 440 and 445 of the Civil Code, the land is owned by the cooperatives at the
time respondent built the roads. Hence, whatever is incorporated in the land,
either naturally or artificially, belongs to the NGPI-NGEI as the landowner.

Although the roads were primarily built for respondent's benefit, the roads were
also being used by the members of NGPI and the public.80 Furthermore, the roads
inured to the benefit of NGPI-NGEI as owners of the land not only by right of
accession but through the express provision in the lease agreement:

chanRoblesvirtualLawlibrary
On March 7, 1990 NGPI Multi-Purpose Cooperative, Inc., as Lessor, and NDC-
Guthrie Plantations, Inc., as Lessee, entered into a "Lease Agreement" . . .
covering the agricultural lands transferred by NDC to the DAR, which lands the
DAR ultimately distributed undivided to qualified workers-beneficiaries. . . .
....
Clause No. 6.3 of the same lease agreement provides that "All taxes due on the
improvements on the Leased Property except those improvements on the Area
that the LESSOR shall have utilized under Clause 1.2 hereof, shall be for the
account of the LESSEE."

Clause No. 9.4 of the same lease agreement provides that ". . . All fixed and
permanent improvements, such as roads and palm trees introduced on the Leased
Property, shall automatically accrue to the LESSOR upon termination of this Lease
Agreement without need of reimbursement."

All the above-cited stipulations in the lease agreement between NGPI Multi-
Purpose Cooperative and NDC-Guthrie Plantations, Inc. were reconfirmed and
reaffirmed in the Addendum to Lease Agreement entered into by and between
NGPI Multi-Purpose Cooperative and Filipinas Palmoil Plantations, Inc. on January
30, 1998. . . . The main subject of the said Addendum was the extension of the
term of the lease agreement up to December 31, 2032, along with economic
benefits to the lessor other than rentals.

There is no dispute that the roads are on the land owned by NGPI Multi-Purpose
Cooperative which leased the same to Petitioner-Appellee. These roads belong to
the Multi-Purpose Cooperative, not only by right of accession but also by express
provisions of the Contract of Lease[.]81

Respondent claims that under its lease agreement with NGPI-NGEI, it pays an
Annual Fixed Rental, which includes the payment of taxes.82 If NGPI-NGEI were
liable to the local government for real property tax on the land, the tax should be
taken from the Annual Fixed Rental:

chanRoblesvirtualLawlibrary
"2.1. In consideration of this Lease Agreement, the LESSEE shall pay the LESSOR
the following annual rentals:ChanRoblesVirtualawlibrary
"1) An annual fixed rental, in the following amount — "SIX HUNDRED THIRTY FIVE
PESOS" (P635.00) PER HECTARE PER ANNUM which would cover the following:

chanRoblesvirtualLawlibrary"(1) All Taxes on the Land

"(2) Administration Charges
"(3) Amortization charges

"It is understood that, if the annual fixed rental of "SIX HUNDRED THIRTY FIVE
PESOS" (p 635.00) is insufficient to pay any increase on the land taxes, the Lessee
shall pay the difference, provided such increase does not exceed ten percent
(10%) of the immediately preceding tax imposed on the land; provided further,
that any increase beyond these percentage shall be borne equally by the LESSOR
and LESSEE.

"The foregoing notwithstanding, it is understood and agreed that at all times,

liability for realty taxes on the Leased Property Primarily and principally lies with
the LESSOR and any reference herein to payment by LESSEE of said taxes is only for
purposes of earmarking the proceeds of the rentals herein agreed upon."
Clause No. 6.3 of the same lease agreement provides that "All taxes due on the
improvements on the Leased Property except those improvements on the Area
that the LESSOR shall have utilized under Clause 1.2 hereof, shall be for the
account of the LESSEE."83 (Emphasis supplied)

Therefore, NGPI-NGEI, as owner of the roads that permanently became part of

the land being leased by respondent, shall be liable for real property taxes, if any.
However, by express provision of the Local Government Code, NGPI-NGEI is
exempted from payment of real property tax.84chanrobleslaw

II

The road equipment and mini haulers shall be considered as real property, subject
to real property tax.

Section 199(o) of the Local Government Code defines "machinery" as real

property subject to real property tax,85 thus:

chanRoblesvirtualLawlibrary
SECTION 199. Definition of Terms. — When used in this Title, the term:
....

(o) "Machinery" embraces machines, equipment, mechanical contrivances,

instruments, appliances or apparatus which may or may not be attached,
permanently or temporarily, to the real property. It includes the physical facilities
for production, the installations and appurtenant service facilities, those which
are mobile, self-powered or self-propelled, and those not permanently attached
to the real property which are actually, directly, and exclusively used to meet the
needs of the particular industry, business or activity and which by their very
nature and purpose are designed for, or necessary to its manufacturing, mining,
logging, commercial, industrial or agricultural purposes[.]

Article 415(5) of the New Civil Code defines "machinery" as that which constitutes
an immovable property:

chanRoblesvirtualLawlibrary
Article 415. The following are immovable property:
....
(5) Machinery, receptacles, instruments or implements intended by the owner of
the tenement for an industry or works which may be carried on in a building or on
a piece of land, and which tend directly to meet the needs of the said industry or
works[.] (Emphasis supplied)

Petitioner contends that the second sentence of Section 199(o) includes the road
equipment and mini haulers since these are directly and exclusively used by
respondent to meet the needs of its operations.86It further claims that Article
415(5) of the New Civil Code should not control the Local Government Code, a
subsequent legislation.87chanrobleslaw

On the other hand, respondent claims that the road equipment and mini haulers
are movables by nature. It asserts that although there may be a difference
between the meaning of "machinery" under the Local Government Code arid that
of immovable property under Article 415(5) of the Civil Code, "the controlling
interpretation of Section 199(o) of [the Local Government Code] is the
interpretation of Article 415(5) of the Civil Code."88chanrobleslaw

In Manila Electric Company v. City Assessor,89 a similar issue of which definition of

"machinery" prevails to warrant the assessment of real property tax on it was
raised.

Manila Electric Company (MERALCO) insisted on harmonizing the provisions of

the Civil Code and the Local Government Code and asserted that "machinery"
contemplated under Section 199(o) of the Local Government must still be within
the contemplation of immovable property under Article 415 of the Civil
Code.90 However, this Court ruled that harmonizing such laws "would necessarily
mean imposing additional requirements for classifying machinery as real property
for real property tax purposes not provided for, or even in direct conflict with, the
provisions of the Local Government Code."91 Thus:

chanRoblesvirtualLawlibrary
While the Local Government Code still does not provide for a specific definition of
"real property," Sections 199(o) and 232 of the said Code, respectively, gives an
extensive definition of what constitutes "machinery" and unequivocally subjects
such machinery to real property tax. The Court reiterates that the machinery
subject to real property tax under the Local Government Code "may or may not
be attached, permanently or temporarily to the real property"; and the physical
facilities for production, installations, and appurtenant service facilities, those
which are mobile, self-powered or self-propelled, or are not permanently
attached must (a) be actually, directly, and exclusively used to meet the needs of
the particular industry, business, or activity; and (b) by their very nature and
purpose, be designed for, or necessary for manufacturing, mining, logging,
commercial, industrial, or agricultural purposes.
....

Article 415, paragraph (5) of the Civil Code considers as immovables or real
properties "[m]achinery, receptacles, instruments or implements intended by the
owner of the tenement for an industry or works which may be carried on in a
building or on a piece of land, and which tend directly to meet the needs of the
said industry or works." The Civil Code, however, does not define "machinery."

The properties under Article 415, paragraph (5) of the Civil Code are immovables
by destination, or "those which are essentially movables, but by the purpose for
which they have been placed in an immovable, partake of the nature of the latter
because of the added utility derived therefrom." These properties,
including machinery, become immobilized if the following requisites concur: (a)
they are placed in the tenement by the owner of such tenement; (b) they are
destined for use in the industry or work in the tenement; and (c) they tend to
directly meet the needs of said industry or works. The first two requisites are not
found anywhere in the Local Government Code.92 (Emphasis supplied, citations
omitted)

Section 199(o) of the Local Government prevails over Article 415(5) of the Civil
Code. In Manila Electric Company:

chanRoblesvirtualLawlibrary
As between the Civil Code, a general law governing property and property
relations, and the Local Government Code, a special law granting local
government units the power to impose real property tax, then the latter shall
prevail. As the Court pronounced in Disomangcop v. The Secretary of the
Department of Public Works and Highways Simeon A.
Datumanong:ChanRoblesVirtualawlibrary
It is a finely-imbedded principle in statutory construction that a special provision
or law prevails over a general one. Lex specialis derogant generali. As this Court
expressed in the case of Leveriza v. Intermediate Appellate Court, "another basic
principle of statutory construction mandates that general legislation must give
way to special legislation on the same subject, and generally be so interpreted as
to embrace only cases in which the special provisions are not applicable, that
specific statute prevails over a general statute and that where two statutes are of
equal theoretical application to a particular case, the one designed therefor
specially should prevail."

The Court also very clearly explicated in Vinzons-Chato v. Fortune Tobacco

Corporationthat:

chanRoblesvirtualLawlibrary
A general law and a special law on the same subject are statutes in pari
materia and should, accordingly, be read together and harmonized, if possible,
with a view to giving effect to both. The rule is that where there are two acts, one
of which is special and particular and the other general which, if standing alone,
would include the same matter and thus conflict with the special act, the special
law must prevail since it evinces the legislative intent more clearly than that of a
general statute and must not be taken as intended to affect the more particular
and specific provisions of the earlier act, unless it is absolutely necessary so to
construe it in order to give its words any meaning at all.
The circumstance that the special law is passed before or after the general act
does not change the principle. Where the special law is later, it will be regarded as
an exception to, or a qualification of, the prior general act; and where the general
act is later, the special statute will be construed as remaining an exception to its
terms, unless repealed expressly or by necessary implication.
Furthermore, in Caltex (Philippines), Inc. v. Central Board of Assessment Appeals,
the Court acknowledged that "[i]t is a familiar phenomenon to see things classed
as real property for purposes of taxation which on general principle might be
considered personal property[.]"

Therefore, for determining whether machinery is real property subject to real

property tax, the definition and requirements under the Local Government Code
are controlling.93(Emphasis supplied, citations omitted)

Respondent is engaged in palm oil plantation.94 Thus, it harvests fruits from palm
trees for oil conversion through its milling plant.95 By the nature of respondent's
business, transportation is indispensable for its operations.

Under the definition provided in Section 199(o) of the Local Government Code,
the road equipment and the mini haulers are classified as machinery, thus:

chanRoblesvirtualLawlibrary
SECTION 199. Definition of Terms. — When used in this Title, the terra:
....

(o) "Machinery" . . . includes the physical facilities for production, the

installations and appurtenant service facilities, those which are mobile, self-
powered or self-propelled, and those not permanently attached to the real
property which are actually, directly, and exclusively used to meet the needs of
the particular industry, business or activity and which by their very nature and
purpose are designed for, or necessary to its manufacturing, mining, logging,
commercial, industrial or agricultural purposes [.] (Emphasis supplied)

Petitioner is correct in claiming that the phrase pertaining to physical facilities for
production is comprehensive enough to include the road equipment and mini
haulers as actually, directly, and exclusively used by respondent to meet the
needs of its operations in palm oil production.96 Moreover, "mini-haulers are farm
tractors pulling attached trailers used in the hauling of seedlings during planting
season and in transferring fresh palm fruits from the farm [or] field to the
processing plant within the plantation area."97 The indispensability of the road
equipment and mini haulers in transportation makes it actually, directly, and
exclusively used in the operation of respondent's business.

In its Comment, respondent claims that the equipment is no longer vital to its
operation because it is currently employing equipment outside the company to
do the task.98 However, respondent never raised this contention before the lower
courts. Hence, this is a factual issue of which this Court cannot take cognizance.
This Court is not a trier of facts.99 Only questions of law are entertained in a
petition for review assailing a Court of Appeals decision.100chanrobleslaw

WHEREFORE, the Petition is PARTLY GRANTED. The Decision of the Court of

Appeals dated September 26, 2007 and the Resolution dated May 26, 2008 in CA-
G.R. SP No. 74060 are AFFIRMED with MODIFICATION, in that the road
equipment and the mini haulers should be assessed with real property taxes.

SO ORDERED.

SECOND DIVISION

G.R. No. 180110, May 30, 2016

CAPITOL WIRELESS, INC., Petitioner, v. THE PROVINCIAL TREASURER OF

BATANGAS, THE PROVINCIAL ASSESSOR OF BATANGAS, THE MUNICIPAL
TREASURER AND ASSESSOR OF NASUGBU, BATANGAS, Respondents.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court seeking to annul and set aside the Court of Appeals' Decision1 dated May
30, 2007 and Resolution2 dated October 8, 2007 in CA-G.R. SP No. 82264, which
both denied the appeal of petitioner against the decision of the Regional Trial
Court.
Below are the facts of the case.

Petitioner Capitol Wireless Inc. (Capwire) is a Philippine corporation in the

business of providing international telecommunications services.3 As such
provider, Capwire has signed agreements with other local and foreign
telecommunications companies covering an international network of submarine
cable systems such as the Asia Pacific Cable Network System (APCN) (which
connects Australia, Thailand, Malaysia, Singapore, Hong Kong, Taiwan, Korea,
Japan, Indonesia and the Philippines); the Brunei-Malaysia-Philippines Cable
Network System (BMP-CNS), the Philippines-Italy (SEA-ME-WE-3 CNS), and the
Guam Philippines (GP-CNS) systems.4 The agreements provide for co-ownership
and other rights among the parties over the network.5

Petitioner Capwire claims that it is co-owner only of the so-called "Wet Segment"
of the APCN, while the landing stations or terminals and Segment E of APCN
located in Nasugbu, Batangas are allegedly owned by the Philippine Long Distance
Telephone Corporation (PLDT).6 Moreover, it alleges that the Wet Segment is laid
in international, and not Philippine, waters.7

Capwire claims that as co-owner, it does not own any particular physical part of
the cable system but, consistent with its financial contributions, it owns the right
to use a certain capacity of the said system.8This property right is allegedly
reported in its financial books as "Indefeasible Rights in Cable Systems."9

However, for loan restructuring purposes, Capwire claims that "it was required to
register the value of its right," hence, it engaged an appraiser to "assess the
market value of the international submarine cable system and the cost to
Capwire."10 On May 15, 2000, Capwire submitted a Sworn Statement of True
Value of Real Properties at the Provincial Treasurer's Office, Batangas City,
Batangas Province, for the Wet Segment of the system, stating:

System Sound Value

APCN P 203,300,000.00

BMP-CNS P 65,662,000.00

SEA-ME-WE-3 CNS P P 7,540,000.00

 GP-CNS P1,789,000.00

Capwire claims that it also reported that the system "interconnects at the PLDT
Landing Station in Nasugbu, Batangas," which is covered by a transfer certificate
of title and tax declarations in the name of PLDT.11

As a result, the respondent Provincial Assessor of Batangas (Provincial Assessor)

issued the following Assessments of Real Property (ARP) against Capwire:

ARP Cable System Assessed Value

019-00967 BMP-CNS P 52,529,600.00

019-00968 APCN P 162,640,000.00

019-00969 SEA-ME-WE3-CNS P 6,032,000.00

019-00970 GP-CNS P 1,431,200.00

In essence, the Provincial Assessor had determined that the submarine cable
systems described in Capwire's Sworn Statement of True Value of Real Properties
are taxable real property, a determination that was contested by Capwire in an
exchange of letters between the company and the public respondent.12 The
reason cited by Capwire is that the cable system lies outside of Philippine
territory, i.e., on international waters.13

On February 7, 2003 and March 4, 2003, Capwire received a Warrant of Levy and
a Notice of Auction Sale, respectively, from the respondent Provincial Treasurer of
Batangas (Provincial Treasurer).14

On March 10, 2003, Capwire filed a Petition for Prohibition and Declaration of
Nullity of Warrant of Levy, Notice of Auction Sale and/or Auction Sale with the
Regional Trial Court (RTC) of Batangas City.15

Alter the filing of the public respondents' Comment,16 on May 5, 2003, the RTC
issued an Order dismissing the petition for failure of the petitioner Capwire to
follow the requisite of payment under protest as well as failure to appeal to the
Local Board of Assessment Appeals (LBAA), as provided for in Sections 206 and
226 of Republic Act (R.A.) No. 7160, or the Local Government Code.17

Capwire filed a Motion for Reconsideration, but the same was likewise dismissed
by the RTC in an Order19dated August 26, 2003. It then filed an appeal to the
Court of Appeals.20

On May 30, 2007, the Court of Appeals promulgated its Decision dismissing the
appeal filed by Capwire and affirming the order of the trial court. The dispositive
portion of the CA's decision states:

WHEREFORE, premises considered, the assailed Orders dated May 5, 2003 and
August 26, 2003 of the Regional Trial Court, Branch 11 of Batangas City, are
AFFIRMED.

SO ORDERED.21

The appellate court held that the trial court correctly dismissed Capwire's petition
because of the latter's failure to comply with the requirements set in Sections 226
and 229 of the Local Government Code, that is, by not availing of remedies before
administrative bodies like the LBAA and the Central Board of Assessment Appeals
(CBAA).22 Although Capwire claims that it saw no need to undergo administrative
proceedings because its petition raises purely legal questions, the appellate court
did not share this view and noted that the case raises questions of fact, such as
the extent to which parts of the submarine cable system lie within the territorial
jurisdiction of the taxing authorities, the public respondents.23 Further, the CA
noted that Capwire failed to pay the tax assessed against it under protest,
another strict requirement under Section 252 of the Local Government Code.24

Hence, the instant petition for review of Capwire.

Petitioner Capwire asserts that recourse to the Local Board of Assessment

Appeals, or payment of the tax under protest, is inapplicable to the case at bar
since there is no question of fact involved, or that the question involved is not the
reasonableness of the amount assessed but, rather, the authority and power of
the assessor to impose the tax and of the treasurer to collect it.25 It contends that
there is only a pure question of law since the issue is whether its submarine cable
system, which it claims lies in international waters, is taxable.26 Capwire holds the
position that the cable system is not subject to tax.27cralawred

Respondents assessors and treasurers of the Province of Batangas ana

Municipality of Nasugbu, Batangas disagree with Capwire and insist that the case
presents questions of fact such as the extent and portion of the submarine cable
system that lies within the jurisdiction of the said local governments, as well as
the nature of the so-called indefeasible rights as property of Capwire.28 Such
questions are allegedly resolvable only before administrative agencies like the
Local Board of Assessment Appeals.29

The Court confronts the following issues: Is the case cognizable by the
administrative agencies and covered by the requirements in Sections 226 and 229
of the Local Government Code which makes the dismissal of Capwire's petition by
the RTC proper? May submarine communications cables be classified as taxable
real property by the local governments?

The petition is denied. No error attended the ruling of the appellate court that the
case involves factual questions that should have been resolved before the
appropriate administrative bodies.

In disputes involving real property taxation, the general rule is to require the
taxpayer to first avail of administrative remedies and pay the tax under protest
before allowing any resort to a judicial action, except when the assessment itself
is alleged to be illegal or is made without legal authority.30 For example, prior
resort to administrative action is required when among the issues raised is an
allegedly erroneous assessment, like when the reasonableness of the amount is
challenged, while direct court action is permitted when only the legality, power,
validity or authority of the assessment itself is in question.31 Stated differently,
the general rule of a prerequisite recourse to administrative remedies applies
when questions of fact are raised, but the exception of direct court action is
allowed when purely questions of law are involved.32

This Court has previously and rather succinctly discussed the difference between
a question of fact and a question of law. In Cosmos Bottling Corporation v.
Nagrama, Jr.,33 it held:

The Court has made numerous dichotomies between questions of law and fact. A
reading of these dichotomies shows that labels attached to law and fact are
descriptive rather than definitive. We are not alone in Our difficult task of clearly
distinguishing questions of feet from questions of law. The United States Supreme
Court has ruled that: "we [do not| yet know of any other rule or principle that will
unerringly distinguish a tactual finding from a legal conclusion."

In Ramos v. Pepsi-Cola Bottling Co. of the P.I., the Court ruled:

There is a question of law in a given case when the doubt or difference arises as
to what the law is on a certain state of facts; there is a question of fact when the
doubt or difference arises as to the truth or the falsehood of alleged facts.

We shall label this the doubt dichotomy.

In Republic v. Sandiganbayan, the Court ruled:

x x x A question of law exists when the doubt or controversy concerns the correct
application of law or jurisprudence to a certain set of facts; or when the issue
docs not call for an examination of the probative value of the evidence presented,
the truth or falsehood of facts being admitted. In contrast, a question of fact
exists when the doubt or difference arises as to the truth or falsehood of facts or
when the query invites calibration of the whole evidence considering mainly the
credibility of the witnesses, the existence and relevancy of specific surrounding
circumstances as well as their relation to each other and to the whole, and the
probability of the situation.

For the sake of brevity, We shall label this the law application and calibration
dichotomy.

In contrast, the dynamic legal scholarship in the United States has birthed many
commentaries on the question of law and question of fact dichotomy. As early as
1944, the law was described as growing downward toward "roots of fact" which
grew upward to meet it. In 1950, the late Professor Louis Jaffe saw fact and law as
a spectrum, with one shade blending imperceptibly into the other. Others have
defined questions of law as those that deal with the general body of legal
principles; questions of fact deal with "all other phenomena x x x." Kenneth Gulp
Davis also weighed in and noted that the difference between fact and law has
been characterized as that between "ought" questions and "is" questions.34
Guided by the quoted pronouncement, the Court sustains the CA's finding that
petitioner's case is one replete with questions of fact instead of pure questions of
law, which renders its filing in a judicial forum improper because it is instead
cognizable by local administrative bodies like the Board of Assessment Appeals,
which are the proper venues for trying these factual issues. Verily, what is alleged
by Capwire in its petition as "the crux of the controversy," that is, "whether or not
an indefeasible right over a submarine cable system that lies in international
waters can be subject to real property tax in the Philippines,"35 is not the genuine
issue that the case presents - as it is already obvious and fundamental that real
property that lies outside of Philippine territorial jurisdiction cannot be subjected
to its domestic and sovereign power of real property taxation - but, rather, such
factual issues as the extent and status of Capwire's ownership of the system, the
actual length of the cable/s that lie in Philippine territory, and the corresponding
assessment and taxes due on the same, because the public respondents imposed
and collected the assailed real property tax on the finding that at least a portion
or some portions of the submarine cable system that Capwire owns or co-owns
lies inside Philippine territory. Capwire's disagreement with such findings of the
administrative bodies presents little to no legal question that only the courts may
directly resolve.

Instead, Capwire argues and makes claims on mere assumptions of certain facts
as if they have been already admitted or established, when they have not, since
no evidence of such have yet been presented in the proper agencies and even in
the current petition. As such, it remains unsettled whether Capwire is a mere co-
owner, not full owner, of the subject submarine cable and, if the former, as to
what extent; whether all or certain portions of the cable are indeed submerged in
water; and whether the waters wherein the cable/s is/are laid are entirely outside
of Philippine territorial or inland waters, i.e., in international waters. More simply,
Capwire argues based on mere legal conclusions, culminating on its claim of
illegality of respondents' acts, but the conclusions are yet unsupported by facts
that should have been threshed out quasi-judicially before the administrative
agencies. It has been held that "a bare characterization in a petition of
unlawfulness, is merely a legal conclusion and a wish of the pleader, and such a
legal conclusion unsubstantiated by facts which could give it life, has no standing
in any court where issues must be presented and determined by facts in ordinary
and concise language."36 Therefore, Capwire's resort to judicial action, premised
on its legal conclusion that its cables (the equipment being taxed) lie entirely on
international waters, without first administratively substantiating such a factual
premise, is improper and was rightly denied. Its proposition that the cables lie
entirely beyond Philippine territory, and therefore, outside of Philippine
sovereignty, is a fact that is not subject to judicial notice since, on the contrary,
and as will be explained later, it is in fact certain that portions of the cable would
definitely lie within Philippine waters. Jurisprudence on the Local Government
Code is clear that facts such as these must be threshed out administratively, as
the courts in these types of cases step in at the first instance only when pure
questions of law are involved.

Nonetheless, We proceed to decide on whether submarine wires or cables used

for communications may be taxed like other real estate.

We hold in the affirmative.

Submarine or undersea communications cables are akin to electric transmission

lines which this Court has recently declared in Manila Electric Company v. City
Assessor and City Treasurer of Lucena City,37 as "no longer exempted from real
property tax" and may qualify as "machinery" subject to real property tax under
the Local Government Code. To the extent that the equipment's location is
determinable to be within the taxing authority's jurisdiction, the Court sees no
reason to distinguish between submarine cables used for communications and
aerial or underground wires or lines used for electric transmission, so that both
pieces of property do not merit a different treatment in the aspect of real
property taxation. Both electric lines and communications cables, in the strictest
sense, are not directly adhered to the soil but pass through posts, relays or
landing stations, but both may be classified under the term "machinery" as real
property under Article 415(5)38 of the Civil Code for the simple reason that such
pieces of equipment serve the owner's business or tend to meet the needs of his
industry or works that are on real estate. Even objects in or on a body of water
may be classified as such, as "waters" is classified as an immovable under Article
415(8)39 of the Code. A classic example is a boathouse which, by its nature, is a
vessel and, therefore, a personal property but, if it is tied to the shore and used as
a residence, and since it floats on waters which is immovable, is considered real
property.40 Besides, the Court has already held that "it is a familiar phenomenon
to see things classed as real property for purposes of taxation which on general
principle might be considered personal property."41

Thus, absent any showing from Capwire of any express grant of an exemption for
its lines and cables from real property taxation, then this interpretation applies
and Capwire's submarine cable may be held subject to real property tax.

Having determined that Capwire is liable, and public respondents have the right
to impose a real property tax on its submarine cable, the issue that is unresolved
is how much of such cable is taxable based on the extent of Capwire's ownership
or co-ownership of it and the length that is laid within respondents' taxing
jurisdiction. The matter, however, requires a factual determination that is best
performed by the Local and Central Boards of Assessment Appeals, a remedy
which the petitioner did not avail of.

At any rate, given the importance of the issue, it is proper to lay down the other
legal bases for the local taxing authorities' power to tax portions of the submarine
cables of petitioner. It is not in dispute that the submarine cable system's Landing
Station in Nasugbu, Batangas is owned by PLDT and not by Capwire. Obviously,
Capwire is not liable for the real property tax on this Landing Station.
Nonetheless, Capwire admits that it co-owns the submarine cable system that is
subject of the tax assessed and being collected by public respondents. As the
Court takes judicial notice that Nasugbu is a coastal town and the surrounding sea
falls within what the United Nations Convention on the Law of the Sea (UNCLOS)
would define as the country's territorial sea (to the extent of 12 nautical miles
outward from the nearest baseline, under Part II, Sections 1 and 2) over which the
country has sovereignty, including the seabed and subsoil, it follows that indeed a
portion of the submarine cable system lies within Philippine territory and thus
falls within the jurisdiction of the said local taxing authorities.42 It easily belies
Capwire's contention that the cable system is entirely in international waters. And
even if such portion does not lie in the 12-nautical-mile vicinity of the territorial
sea but further inward, in Prof. Magallona v. Hon. Ermita, et al.43 this Court held
that "whether referred to as Philippine 'internal waters' under Article I of the
Constitution44 or as 'archipelagic waters' under UNCLOS Part III, Article 49(1, 2,
4),45 the Philippines exercises sovereignty over the body of water lying landward
of (its) baselines, including the air space over it and the submarine areas
underneath." Further, under Part VI, Article 7946 of the UNCLOS, the Philippines
clearly has jurisdiction with respect to cables laid in its territory that are utilized in
support of other installations and structures under its jurisdiction.

And as far as local government units are concerned, the areas described above
are to be considered subsumed under the term "municipal waters" which, under
the Local Government Code, includes "not only streams, lakes, and tidal waters
within the municipality, not being the subject of private ownership and not
comprised within the national parks, public forest, timber lands, forest reserves or
fishery reserves, but also marine waters included between two lines drawn
perpendicularly to the general coastline from points where the boundary lines of
the municipality or city touch the sea at low tide and a third line parallel with the
general coastline and fifteen (15) kilometers from it."47 Although the term
"municipal waters" appears in the Code in the context of the grant of quarrying
and fisheries privileges for a fee by local governments,48 its inclusion in the Code's
Book II which covers local taxation means that it may also apply as guide in
determining the territorial extent of the local authorities' power to levy real
property taxation.

Thus, the jurisdiction or authority over such part of the subject submarine cable
system lying within Philippine jurisdiction includes the authority to tax the same,
for taxation is one of the three basic and necessary attributes of
sovereignty,49 and such authority has been delegated by the national legislature
to the local governments with respect to real property taxation.50

As earlier stated, a way for Capwire to claim that its cable system is not covered
by such authority is by showing a domestic enactment or even contract, or an
international agreement or treaty exempting the same from real property
taxation. It failed to do so, however, despite the fact that the burden of proving
exemption from local taxation is upon whom the subject real property is
declared.51 Under the Local Government Code, every person by or for whom real
property is declared, who shall claim tax exemption for such property from real
property taxation "shall file with the provincial, city or municipal assessor within
thirty (30) days from the date of the declaration of real property sufficient
documentary evidence in support of such claim."52 Capwire omitted to do so. And
even under Capwire's legislative franchise, RA 4387, which amended RA 2037,
where it may be derived that there was a grant of real property tax exemption for
properties that are part of its franchise, or directly meet the needs of its
business,53 such had been expressly withdrawn by the Local Government Code,
which took effect on January 1, 1992, Sections 193 and 234 of which provide:54

Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided

in this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or
controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, nonstock and nonprofit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.

xxxx

Section 234. Exemptions from Real Property Tax. - The following arc exempted
from payment of the real property tax:

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

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

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

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

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

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

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations arc hereby
withdrawn upon the effectivity of this Code.55

Such express withdrawal had been previously held effective upon exemptions
bestowed by legislative franchises granted prior to the effectivity of the Local
Government Code.56 Capwire fails to allege or provide any other privilege or
exemption that were granted to it by the legislature after the enactment of the
Local Government Code. Therefore, the presumption stays that it enjoys no such
privilege or exemption. Tax exemptions are strictly construed against the taxpayer
because taxes are considered the lifeblood of the nation.57

WHEREFORE, the petition is DENIED. The Court of Appeals' Decision dated May
30, 2007 and Resolution dated October 8, 2007 are AFFIRMED.

SO ORDERED.cralawlawlibrary

Velasco, Jr., (Chairperson), Peralta, Perez, and Mendoza,* JJ., concur.

Jardeleza, J., on leave.chanroblesvirtuallawlibrary

THIRD DIVISION
RAFAEL ARSENIO S. DIZON, in his capacity G.R. No. 140944
as the Judicial Administrator of the Estate
of the deceased JOSE P. FERNANDEZ,
Present:
Petitioner,

YNARES-SANTIAGO, J.,

Chairperson,
- versus -
AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

NACHURA, and
COURT OF TAX APPEALS
REYES, JJ.
and COMMISSIONER OF INTERNAL
REVENUE,

Respondents. Promulgated:

April 30, 2008

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

DECISION

NACHURA, J.:
Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the
Rules of Civil Procedure seeking the reversal of the Court of Appeals (CA)
Decision[2] dated April 30, 1999 which affirmed the Decision[3] of the Court of Tax
Appeals (CTA) dated June 17, 1997.[4]

The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the
probate of his will[5] was filed with Branch 51 of the Regional Trial Court (RTC)
of Manila (probate court).[6] The probate court then appointed retired Supreme
Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio
P. Dizon (petitioner) as Special and Assistant Special Administrator, respectively,
of the Estate of Jose (Estate). In a letter[7] dated October 13, 1988, Justice
Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR)
of the special proceedings for the Estate.

Petitioner alleged that several requests for extension of the period to file the
required estate tax return were granted by the BIR since the assets of the estate,
as well as the claims against it, had yet to be collated, determined and identified.
Thus, in a letter[8] dated March 14, 1990, Justice Dizon authorized Atty. Jesus M.
Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required
estate tax return and to represent the same in securing a Certificate of Tax
Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter[9] addressed
to the BIR Regional Director for San Pablo City and filed the estate tax
return[10] with the same BIR Regional Office, showing therein a NIL estate tax
liability, computed as follows:
 COMPUTATION OF TAX

Conjugal Real Property (Sch. 1) P10,855,020.00

Conjugal Personal Property (Sch.2) 3,460,591.34

Taxable Transfer (Sch. 3)

Gross Conjugal Estate 14,315,611.34

Less: Deductions (Sch. 4) 187,822,576.06

Net Conjugal Estate NIL

Less: Share of Surviving Spouse NIL .

Net Share in Conjugal Estate NIL

xxx

Net Taxable Estate NIL .

Estate Tax Due NIL .[11]

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G.
Umali issued Certification Nos. 2052[12] and 2053[13] stating that the taxes due on
the transfer of real and personal properties[14] of Jose had been fully paid and said
properties may be transferred to his heirs. Sometime in August 1990, Justice
Dizon passed away. Thus, on October 22, 1990, the probate court appointed
petitioner as the administrator of the Estate.[15]
 Petitioner requested the probate court's authority to sell several properties
forming part of the Estate, for the purpose of paying its creditors, namely:
Equitable Banking Corporation (P19,756,428.31), Banque de L'Indochine et. de
Suez (US$4,828,905.90 as of January 31, 1988), Manila Banking Corporation
(P84,199,160.46 as of February 28, 1989) and State Investment House, Inc.
(P6,280,006.21). Petitioner manifested that Manila Bank, a major creditor of
the Estate was not included, as it did not file a claim with the probate court since
it had security over several real estate properties forming part of the Estate.[16]

However, on November 26, 1991, the Assistant Commissioner for

Collection of the BIR, Themistocles Montalban, issued Estate Tax Assessment
Notice No. FAS-E-87-91-003269,[17] demanding the payment of P66,973,985.40 as
deficiency estate tax, itemized as follows:

Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

25% surcharge- late filing 7,967,103.62

late payment 7,967,103.62

Interest 19,121,048.68

Compromise-non filing 25,000.00

non payment 25,000.00

no notice of death 15.00

no CPA Certificate 300.00

 Total amount due & collectible P66,973,985.40[18]

In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the
reconsideration of the said estate tax assessment. However, in her
letter[20] dated April 12, 1994, the BIR Commissioner denied the request and
reiterated that the estate is liable for the payment of P66,973,985.40 as
deficiency estate tax. On May 3, 1994, petitioner received the letter of denial.
On June 2, 1994, petitioner filed a petition for review[21] before respondent CTA.
Trial on the merits ensued.

As found by the CTA, the respective parties presented the following pieces of
evidence, to wit:

In the hearings conducted, petitioner did not present testimonial

evidence but merely documentary evidence consisting of the
following:

Nature of Document (sic) Exhibits

1. Letter dated October 13, 1988

from Arsenio P. Dizon addressed

to the Commissioner of Internal

Revenue informing the latter of

the special proceedings for the

settlement of the estate (p. 126,

BIR records); "A"

2. Petition for the probate of the

will and issuance of letter of

administration filed with the

Regional Trial Court (RTC) of

Manila, docketed as Sp. Proc.

No. 87-42980 (pp. 107-108, BIR

records); "B" & "B-1

3. Pleading entitled "Compliance"

filed with the probate Court

submitting the final inventory

of all the properties of the

deceased (p. 106, BIR records); "C"

4. Attachment to Exh. "C" which

is the detailed and complete

listing of the properties of

the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17"

5. Claims against the estate filed

by Equitable Banking Corp. with

the probate Court in the amount

of P19,756,428.31 as of March 31,

1988, together with the Annexes

to the claim (pp. 64-88, BIR records); "D" to "D-24"

6. Claim filed by Banque de L'

Indochine et de Suez with the

probate Court in the amount of

US $4,828,905.90 as of January 31,

1988 (pp. 262-265, BIR records); "E" to "E-3"

7. Claim of the Manila Banking

Corporation (MBC) which as of

November 7, 1987 amounts to

P65,158,023.54, but recomputed

as of February 28, 1989 at a

total amount of P84,199,160.46;

together with the demand letter

from MBC's lawyer (pp. 194-197,

BIR records); "F" to "F-3"

8. Demand letter of Manila Banking

Corporation prepared by Asedillo,

Ramos and Associates Law Offices

addressed to Fernandez Hermanos,

Inc., represented by Jose P.

Fernandez, as mortgagors, in the

total amount of P240,479,693.17

as of February 28, 1989

(pp. 186-187, BIR records); "G" & "G-1"

9. Claim of State Investment

House, Inc. filed with the

RTC, Branch VII of Manila,

docketed as Civil Case No.

86-38599 entitled "State

Investment House, Inc.,

Plaintiff, versus Maritime

Company Overseas, Inc. and/or

Jose P. Fernandez, Defendants,"

(pp. 200-215, BIR records); "H" to "H-16"

10. Letter dated March 14, 1990

of Arsenio P. Dizon addressed

to Atty. Jesus M. Gonzales,

(p. 184, BIR records); "I"

11. Letter dated April 17, 1990

from J.M. Gonzales addressed

to the Regional Director of

BIR in San Pablo City

(p. 183, BIR records); "J"

12. Estate Tax Return filed by

the estate of the late Jose P.

Fernandez through its authorized

representative, Atty. Jesus M.

Gonzales, for Arsenio P. Dizon,

with attachments (pp. 177-182,

BIR records); "K" to "K-5"

13. Certified true copy of the

Letter of Administration

issued by RTC Manila, Branch

51, in Sp. Proc. No. 87-42980

appointing Atty. Rafael S.

Dizon as Judicial Administrator

of the estate of Jose P.

Fernandez; (p. 102, CTA records)

and "L"

14. Certification of Payment of

estate taxes Nos. 2052 and

2053, both dated April 27, 1990,

issued by the Office of the

Regional Director, Revenue

Region No. 4-C, San Pablo

City, with attachments

(pp. 103-104, CTA records.). "M" to "M-5"

Respondent's [BIR] counsel presented on June 26, 1995 one witness

in the person of Alberto Enriquez, who was one of the revenue
examiners who conducted the investigation on the estate tax case
of the late Jose P. Fernandez. In the course of the direct
examination of the witness, he identified the following:
Documents/

Signatures BIR Record

1. Estate Tax Return prepared by

the BIR; p. 138

2. Signatures of Ma. Anabella

Abuloc and Alberto Enriquez,

Jr. appearing at the lower

Portion of Exh. "1"; -do-

3. Memorandum for the Commissioner,

dated July 19, 1991, prepared by

revenue examiners, Ma. Anabella A.

Abuloc, Alberto S. Enriquez and

Raymund S. Gallardo; Reviewed by

Maximino V. Tagle pp. 143-144

4. Signature of Alberto S.

Enriquez appearing at the

lower portion on p. 2 of Exh. "2"; -do-

5. Signature of Ma. Anabella A.

Abuloc appearing at the

lower portion on p. 2 of Exh. "2"; -do-

6. Signature of Raymund S.

Gallardo appearing at the

Lower portion on p. 2 of Exh. "2"; -do-

7. Signature of Maximino V.

Tagle also appearing on

p. 2 of Exh. "2"; -do-

8. Summary of revenue

Enforcement Officers Audit

Report, dated July 19, 1991; p. 139

9. Signature of Alberto

Enriquez at the lower

portion of Exh. "3"; -do-

10. Signature of Ma. Anabella A.

Abuloc at the lower

portion of Exh. "3"; -do-

11. Signature of Raymond S.

Gallardo at the lower

portion of Exh. "3"; -do-

12. Signature of Maximino

V. Tagle at the lower

portion of Exh. "3"; -do-

13. Demand letter (FAS-E-87-91-00),

signed by the Asst. Commissioner

for Collection for the Commissioner

of Internal Revenue, demanding

payment of the amount of

P66,973,985.40; and p. 169

14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's
ruling in Vda. de Oate v. Court of Appeals,[23] the CTA opined that the
aforementioned pieces of evidence introduced by the BIR were admissible in
evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered
as evidence for respondent, considering that respondent has been
declared to have waived the presentation thereof during the hearing
on March 20, 1996, still they could be considered as evidence for
respondent since they were properly identified during the
presentation of respondent's witness, whose testimony was duly
recorded as part of the records of this case. Besides, the documents
marked as respondent's exhibits formed part of the BIR records of
the case.[24]

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it
came up with its own computation of the deficiency estate tax, to wit:

Conjugal Real Property P 5,062,016.00

Conjugal Personal Prop. 33,021,999.93

Gross Conjugal Estate 38,084,015.93

Less: Deductions 26,250,000.00

Net Conjugal Estate P 11,834,015.93

 Less: Share of Surviving Spouse 5,917,007.96

Net Share in Conjugal Estate P 5,917,007.96

Add: Capital/Paraphernal

Properties P44,652,813.66

Less: Capital/Paraphernal

Deductions 44,652,813.66

Net Taxable Estate P 50,569,821.62

============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74

Add: Penalties for-No notice of death 15.00

No CPA certificate 300.00

Total deficiency estate tax P 37,419,493.71

=============

exclusive of 20% interest from due date of its payment until full
payment thereof

[Sec. 283 (b), Tax Code of 1987].[25]

Thus, the CTA disposed of the case in this wise:

 WHEREFORE, viewed from all the foregoing, the Court finds the
petition unmeritorious and denies the same. Petitioner and/or the
heirs of Jose P. Fernandez are hereby ordered to pay to respondent
the amount of P37,419,493.71 plus 20% interest from the due date
of its payment until full payment thereof as estate tax liability of the
estate of Jose P. Fernandez who died on November 7, 1987.

SO ORDERED.[26]

Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for

review.[27]

The CA's Ruling

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's
findings, the CA ruled that the petitioner's act of filing an estate tax return with
the BIR and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive
the BIR Commissioner of her authority to re-examine or re-assess the said return
filed on behalf of the Estate.[28]

On May 31, 1999, petitioner filed a Motion for Reconsideration[29] which the CA
denied in its Resolution[30] dated November 3, 1999.
Hence, the instant Petition raising the following issues:

1. Whether or not the admission of evidence which were not

formally offered by the respondent BIR by the Court of Tax
Appeals which was subsequently upheld by the Court of Appeals
is contrary to the Rules of Court and rulings of this Honorable
Court;

2. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in recognizing/considering the estate tax return prepared
and filed by respondent BIR knowing that the probate court
appointed administrator of the estate of Jose P. Fernandez had
previously filed one as in fact, BIR Certification Clearance Nos.
2052 and 2053 had been issued in the estate's favor;

3. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in disallowing the valid and enforceable claims of creditors
against the estate, as lawful deductions despite clear and
convincing evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in validating erroneous double imputation of values on the
very same estate properties in the estate tax return it prepared
and filed which effectively bloated the estate's assets.[31]
The petitioner claims that in as much as the valid claims of creditors against the
Estate are in excess of the gross estate, no estate tax was due; that the lack of a
formal offer of evidence is fatal to BIR's cause; that the doctrine laid down in Vda.
de Oate has already been abandoned in a long line of cases in which the Court
held that evidence not formally offered is without any weight or value; that
Section 34 of Rule 132 of the Rules on Evidence requiring a formal offer of
evidence is mandatory in character; that, while BIR's witness Alberto Enriquez
(Alberto) in his testimony before the CTA identified the pieces of evidence
aforementioned such that the same were marked, BIR's failure to formally offer
said pieces of evidence and depriving petitioner the opportunity to cross-examine
Alberto, render the same inadmissible in evidence; that assuming arguendo that
the ruling in Vda. de Oate is still applicable, BIR failed to comply with the
doctrine's requisites because the documents herein remained simply part of the
BIR records and were not duly incorporated in the court records; that the BIR
failed to consider that although the actual payments made to the Estate creditors
were lower than their respective claims, such were compromise agreements
reached long after the Estate's liability had been settled by the filing of its estate
tax return and the issuance of BIR Certification Nos. 2052 and 2053; and that the
reckoning date of the claims against the Estate and the settlement of the estate
tax due should be at the time the estate tax return was filed by the judicial
administrator and the issuance of said BIR Certifications and not at the time the
aforementioned Compromise Agreements were entered into with the Estate's
creditors.[32]

On the other hand, respondent counters that the documents, being part of the
records of the case and duly identified in a duly recorded testimony are
considered evidence even if the same were not formally offered; that the filing of
the estate tax return by the Estate and the issuance of BIR Certification Nos. 2052
and 2053 did not deprive the BIR of its authority to examine the return and assess
the estate tax; and that the factual findings of the CTA as affirmed by the CA may
no longer be reviewed by this Court via a petition for review.[33]
 The Issues

There are two ultimate issues which require resolution in this case:

First. Whether or not the CTA and the CA gravely erred in allowing the admission
of the pieces of evidence which were not formally offered by the BIR; and

Second. Whether or not the CA erred in affirming the CTA in the latter's
determination of the deficiency estate tax imposed against the Estate.

The Courts Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described as a court of

record. As cases filed before it are litigated de novo, party-litigants shall prove
every minute aspect of their cases. Indubitably, no evidentiary value can be given
the pieces of evidence submitted by the BIR, as the rules on documentary
evidence require that these documents must be formally offered before the
CTA.[34] Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which
reads:

SEC. 34. Offer of evidence. The court shall consider no evidence

which has not been formally offered. The purpose for which the
evidence is offered must be specified.
 The CTA and the CA rely solely on the case of Vda. de Oate, which
reiterated this Court's previous rulings in People v. Napat-a[35] and People v.
Mate[36] on the admission and consideration of exhibits which were not formally
offered during the trial. Although in a long line of cases many of which were
decided after Vda. de Oate, we held that courts cannot consider evidence which
has not been formally offered,[37] nevertheless, petitioner cannot validly assume
that the doctrine laid down in Vda. de Oate has already been abandoned.
Recently, in Ramos v. Dizon,[38] this Court, applying the said doctrine, ruled that
the trial court judge therein committed no error when he admitted and
considered the respondents' exhibits in the resolution of the case,
notwithstanding the fact that the same
were not formally offered. Likewise, in Far East Bank & Trust Company v.
Commissioner of Internal Revenue,[39] the Court made reference to said doctrine
in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De
Oate still subsists in this jurisdiction. In Vda. de Oate, we held that:

From the foregoing provision, it is clear that for evidence to be

considered, the same must be formally offered. Corollarily, the mere
fact that a particular document is identified and marked as an exhibit
does not mean that it has already been offered as part of the
evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA
385], we had the occasion to make a distinction between
identification of documentary evidence and its formal offer as an
exhibit. We said that the first is done in the course of the trial and is
accompanied by the marking of the evidence as an exhibit while the
second is done only when the party rests its case and not before. A
party, therefore, may opt to formally offer his evidence if he believes
that it will advance his cause or not to do so at all. In the event he
 chooses to do the latter, the trial court is not authorized by the Rules
to consider the same.

However, in People v. Napat-a [179 SCRA 403] citing People v.

Mate [103 SCRA 484], we relaxed the foregoing rule and allowed
evidence not formally offered to be admitted and considered by the
trial court provided the following requirements are present, viz.:
first, the same must have been duly identified by testimony duly
recorded and, second, the same must have been incorporated in
the records of the case.[40]

From the foregoing declaration, however, it is clear that Vda. de Oate is

merely an exception to the general rule. Being an exception, it may be applied
only when there is strict compliance with the requisites mentioned therein;
otherwise, the general rule in Section 34 of Rule 132 of the Rules of Court should
prevail.

In this case, we find that these requirements have not been satisfied. The assailed
pieces of evidence were presented and marked during the trial particularly when
Alberto took the witness stand. Alberto identified these pieces of evidence in his
direct testimony.[41] He was also subjected to cross-examination and re-cross
examination by petitioner.[42] But Albertos account and the exchanges between
Alberto and petitioner did not sufficiently describe the contents of the said pieces
of evidence presented by the BIR. In fact, petitioner sought that the lead
examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as
Alberto was incompetent to answer questions relative to the working
papers.[43] The lead examiner never testified. Moreover, while Alberto's testimony
identifying the BIR's evidence was duly recorded, the BIR documents themselves
were not incorporated in the records of the case.
A common fact threads through Vda. de Oate and Ramos that does not exist at all
in the instant case. In the aforementioned cases, the exhibits were marked at the
pre-trial proceedings to warrant the pronouncement that the same were duly
incorporated in the records of the case. Thus, we held in Ramos:

In this case, we find and so rule that these requirements have been
satisfied. The exhibits in question were presented and marked
during the pre-trial of the case thus, they have been incorporated
into the records. Further, Elpidio himself explained the contents of
these exhibits when he was interrogated by respondents' counsel...

xxxx

But what further defeats petitioner's cause on this issue is that

respondents' exhibits were marked and admitted during the pre-trial
stage as shown by the Pre-Trial Order quoted earlier.[44]

While the CTA is not governed strictly by technical rules of evidence,[45] as rules of
procedure are not ends in themselves and are primarily intended as tools in the
administration of justice, the presentation of the BIR's evidence is not a mere
procedural technicality which may be disregarded considering that it is the only
means by which the CTA may ascertain and verify the truth of BIR's claims against
the Estate.[46] The BIR's failure to formally offer these pieces of evidence, despite
CTA's directives, is fatal to its cause.[47] Such failure is aggravated by the fact that
not even a single reason was advanced by the BIR to justify such fatal omission.
This, we take against the BIR.

Per the records of this case, the BIR was directed to present its evidence[48] in the
hearing of February 21, 1996, but BIR's counsel failed to appear.[49] The CTA
denied petitioner's motion to consider BIR's presentation of evidence as waived,
with a warning to BIR that such presentation would be considered waived if BIR's
evidence would not be presented at the next hearing. Again, in the hearing of
March 20, 1996, BIR's counsel failed to appear.[50] Thus, in its Resolution[51] dated
March 21, 1996, the CTA considered the BIR to have waived presentation of its
evidence. In the same Resolution, the parties were directed to file their respective
memorandum. Petitioner complied but BIR failed to do so.[52] In all of these
proceedings, BIR was duly notified. Hence, in this case, we are constrained to
apply our ruling in Heirs of Pedro Pasag v. Parocha:[53]
A formal offer is necessary because judges are mandated to
rest their findings of facts and their judgment only and strictly upon
the evidence offered by the parties at the trial. Its function is to
enable the trial judge to know the purpose or purposes for which the
proponent is presenting the evidence. On the other hand, this allows
opposing parties to examine the evidence and object to its
admissibility. Moreover, it facilitates review as the appellate court
will not be required to review documents not previously scrutinized
by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court
in Constantino v. Court of Appeals ruled that the formal offer of
one's evidence is deemed waived after failing to submit it within a
considerable period of time. It explained that the court cannot
admit an offer of evidence made after a lapse of three (3) months
because to do so would "condone an inexcusable laxity if not non-
 compliance with a court order which, in effect, would encourage
needless delays and derail the speedy administration of justice."

Applying the aforementioned principle in this case, we find that the

trial court had reasonable ground to consider that petitioners had
waived their right to make a formal offer of documentary or object
evidence. Despite several extensions of time to make their formal
offer, petitioners failed to comply with their commitment and
allowed almost five months to lapse before finally submitting
it. Petitioners' failure to comply with the rule on admissibility of
evidence is anathema to the efficient, effective, and expeditious
dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the

merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the
highest respect and will not be disturbed on appeal unless it is shown that the
lower courts committed gross error in the appreciation of facts.[54] In this case,
however, we find the decision of the CA affirming that of the CTA tainted with
palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been
condoned. As a mode of extinguishing an obligation,[55] condonation or remission
of debt[56] is defined as:
 an act of liberality, by virtue of which, without receiving any
equivalent, the creditor renounces the enforcement of the
obligation, which is extinguished in its entirety or in that part or
aspect of the same to which the remission refers. It is an essential
characteristic of remission that it be gratuitous, that there is no
equivalent received for the benefit given; once such equivalent
exists, the nature of the act changes. It may become dation in
payment when the creditor receives a thing different from that
stipulated; or novation, when the object or principal conditions of
the obligation should be changed; or compromise, when the matter
renounced is in litigation or dispute and in exchange of some
concession which the creditor receives.[57]

Verily, the second issue in this case involves the construction of Section 79[58] of
the National Internal Revenue Code[59] (Tax Code) which provides for the
allowable deductions from the gross estate of the decedent. The specific question
is whether the actual claims of the aforementioned creditors may be fully allowed
as deductions from the gross estate of Jose despite the fact that the said claims
were reduced or condoned through compromise agreements entered into by the
Estate with its creditors.

Claims against the estate, as allowable deductions from the gross estate under
Section 79 of the Tax Code, are basically a reproduction of the deductions allowed
under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466),
otherwise known as the National Internal Revenue Code of 1939, and which was
the first codification of Philippine tax laws.Philippine tax laws were, in turn, based
on the federal tax laws of the United States. Thus, pursuant to established rules of
statutory construction, the decisions of American courts construing the federal
tax code are entitled to great weight in the interpretation of our own tax laws.[60]
It is noteworthy that even in the United States, there is some dispute as to
whether the deductible amount for a claim against the estate is fixed as of the
decedent's death which is the general rule, or the same should be adjusted to
reflect post-death developments, such as where a settlement between the parties
results in the reduction of the amount actually paid.[61] On one hand,
the U.S. court ruled that the appropriate deduction is the value that the claim had
at the date of the decedent's death.[62] Also, as held in Propstra v. U.S., [63] where a
lien claimed against the estate was certain and enforceable on the date of the
decedent's death, the fact that the claimant subsequently settled for lesser
amount did not preclude the estate from deducting the entire amount of the
claim for estate tax purposes. These pronouncements essentially confirm the
general principle that post-death developments are not material in determining
the amount of the deduction.

On the other hand, the Internal Revenue Service (Service) opines that post-
death settlement should be taken into consideration and the claim should be
allowed as a deduction only to the extent of the amount actually
paid.[64] Recognizing the dispute, the Service released Proposed Regulations in
2007 mandating that the deduction would be limited to the actual amount
paid.[65]

In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of
Appeals held:

We are persuaded that the Ninth Circuit's

decision...in Propstra correctly apply the Ithaca Trust date-of-death
valuation principle to enforceable claims against the estate. As we
interpret Ithaca Trust, when the Supreme Court announced the date-
of-death valuation principle, it was making a judgment about the
nature of the federal estate tax specifically, that it is a tax imposed
 on the act of transferring property by will or intestacy and, because
the act on which the tax is levied occurs at a discrete time, i.e., the
instance of death, the net value of the property transferred should
be ascertained, as nearly as possible, as of that time. This analysis
supports broad application of the date-of-death valuation rule.[67]

We express our agreement with the date-of-death valuation rule, made pursuant
to the ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United
States.[68] First. There is no law, nor do we discern any legislative intent in our tax
laws, which disregards the date-of-death valuation principle and particularly
provides that post-death developments must be considered in determining the
net value of the estate. It bears emphasis that tax burdens are not to be imposed,
nor presumed to be imposed, beyond what the statute expressly and clearly
imports, tax statutes being construed strictissimi juris against the
government.[69] Any doubt on whether a person, article or activity is taxable is
generally resolved against taxation.[70] Second. Such construction finds relevance
and consistency in our Rules on Special Proceedings wherein the term "claims"
required to be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature which could have been enforced
against the deceased in his lifetime, or liability contracted by the deceased before
his death.[71] Therefore, the claims existing at the time of death are significant to,
and should be made the basis of, the determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision

dated April 30, 1999 and the Resolution dated November 3, 1999 of the Court of
Appeals in CA-G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of
Internal Revenue's deficiency estate tax assessment against the Estate of Jose P.
Fernandez is hereby NULLIFIED. No costs.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-22734 September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO
PINEDA, respondent.

Office of the Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas,
and 15 children, the eldest of whom is Manuel B. Pineda, a lawyer. Estate
proceedings were had in the Court of First Instance of Manila (Case No. 71129)
wherein the surviving widow was appointed administratrix. The estate was
divided among and awarded to the heirs and the proceedings terminated on June
8, 1948. Manuel B. Pineda's share amounted to about P2,500.00.

After the estate proceedings were closed, the Bureau of Internal Revenue
investigated the income tax liability of the estate for the years 1945, 1946, 1947
and 1948 and it found that the corresponding income tax returns were not filed.
Thereupon, the representative of the Collector of Internal Revenue filed said
returns for the estate on the basis of information and data obtained from the
aforesaid estate proceedings and issued an assessment for the following:

1. Deficiency income tax

1945 P135.83
1946 436.95
 1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly
interest from
November 30,
1953 to April 15,
1957 720.77
Compromise for
late filing 80.00
Compromise for
late payment 40.00

Total amount due P2,707.44

===========
Additional residence P14.50
2.
tax for 1945 ===========
3. Real Estate dealer's
tax for the fourth
quarter of 1946 and
the whole year of P207.50
1947 ===========

Manuel B. Pineda, who received the assessment, contested the same.

Subsequently, he appealed to the Court of Tax Appeals alleging that he was
appealing "only that proportionate part or portion pertaining to him as one of the
heirs."

After hearing the parties, the Court of Tax Appeals rendered judgment reversing
the decision of the Commissioner on the ground that his right to assess and
collect the tax has prescribed. The Commissioner appealed and this Court
affirmed the findings of the Tax Court in respect to the assessment for income tax
for the year 1947 but held that the right to assess and collect the taxes for 1945
and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August
24, 1953; assessments for both taxable years were made within five years
therefrom or on October 19, 1953; and the action to collect the tax was filed
within five years from the latter date, on August 7, 1957. For taxable year 1947,
however, the return was filed on March 1, 1948; the assessment was made on
October 19, 1953, more than five years from the date the return was filed; hence,
the right to assess income tax for 1947 had prescribed. Accordingly, We
remanded the case to the Tax Court for further appropriate proceedings.1

In the Tax Court, the parties submitted the case for decision without additional
evidence.

On November 29, 1963 the Court of Tax Appeals rendered judgment holding
Manuel B. Pineda liable for the payment corresponding to his share of the
following taxes:

Deficiency income tax

P135.8
1945
3
1946 436.95
Real estate
dealer's fixed
tax 4th quarter
of 1946 and
whole year of
1947 P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to

hold Manuel B. Pineda liable for the payment of all the taxes found by the Tax
Court to be due from the estate in the total amount of P760.28 instead of only for
the amount of taxes corresponding to his share in the estate.1awphîl.nèt

Manuel B. Pineda opposes the proposition on the ground that as an heir he is

liable for unpaid income tax due the estate only up to the extent of and in
proportion to any share he received. He relies on Government of the Philippine
Islands v. Pamintuan2 where We held that "after the partition of an estate, heirs
and distributees are liable individually for the payment of all lawful outstanding
claims against the estate in proportion to the amount or value of the property
they have respectively received from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full
amount of the taxes assessed.

Pineda is liable for the assessment as an heir and as a holder-transferee of

property belonging to the estate/taxpayer. As an heir he is individually
answerable for the part of the tax proportionate to the share he received from
the inheritance.3 His liability, however, cannot exceed the amount of his share.4

As a holder of property belonging to the estate, Pineda is liable for he tax up to

the amount of the property in his possession. The reason is that the Government
has a lien on the P2,500.00 received by him from the estate as his share in the
inheritance, for unpaid income taxes4a for which said estate is liable, pursuant to
the last paragraph of Section 315 of the Tax Code, which we quote hereunder:

If any person, corporation, partnership, joint-account (cuenta en

participacion), association, or insurance company liable to pay the income
tax, neglects or refuses to pay the same after demand, the amount shall be
a lien in favor of the Government of the Philippines from the time when the
assessment was made by the Commissioner of Internal Revenue until paid
with interest, penalties, and costs that may accrue in addition thereto upon
all property and rights to property belonging to the taxpayer: . . .

By virtue of such lien, the Government has the right to subject the property in
Pineda's possession, i.e., the P2,500.00, to satisfy the income tax assessment in
the sum of P760.28. After such payment, Pineda will have a right of contribution
from his co-heirs,5 to achieve an adjustment of the proper share of each heir in
the distributable estate.

All told, the Government has two ways of collecting the tax in question. One, by
going after all the heirs and collecting from each one of them the amount of the
tax proportionate to the inheritance received. This remedy was adopted
in Government of the Philippine Islands v. Pamintuan, supra. In said case, the
Government filed an action against all the heirs for the collection of the tax. This
action rests on the concept that hereditary property consists only of that part
which remains after the settlement of all lawful claims against the estate, for the
settlement of which the entire estate is first liable.6 The reason why in case suit is
filed against all the heirs the tax due from the estate is levied proportionately
against them is to achieve thereby two results: first, payment of the tax; and
second, adjustment of the shares of each heir in the distributed estate as lessened
by the tax.

Another remedy, pursuant to the lien created by Section 315 of the Tax Code
upon all property and rights to property belonging to the taxpayer for unpaid
income tax, is by subjecting said property of the estate which is in the hands of an
heir or transferee to the payment of the tax due, the estate. This second remedy
is the very avenue the Government took in this case to collect the tax. The Bureau
of Internal Revenue should be given, in instances like the case at bar, the
necessary discretion to avail itself of the most expeditious way to collect the tax
as may be envisioned in the particular provision of the Tax Code above quoted,
because taxes are the lifeblood of government and their prompt and certain
availability is an imperious need.7 And as afore-stated in this case the suit seeks to
achieve only one objective: payment of the tax. The adjustment of the respective
shares due to the heirs from the inheritance, as lessened by the tax, is left to
await the suit for contribution by the heir from whom the Government recovered
said tax.

WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby

ordered to pay to the Commissioner of Internal Revenue the sum of P760.28 as
deficiency income tax for 1945 and 1946, and real estate dealer's fixed tax for the
fourth quarter of 1946 and for the whole year 1947, without prejudice to his right
of contribution for his co-heirs. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro,

Angeles and Fernando, JJ., concur.

SECOND DIVISION

[G.R. No. 120880. June 5, 1997]

FERDINAND R. MARCOS II, petitioner, vs. COURT OF APPEALS, THE

COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and HERMINIA
D. DE GUZMAN, respondents.

DECISION
TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again

assailed as precipitate and unfair, suffering the basic and oftly implored requisites
of due process of law. Specifically, the petition assails the Decision[1] of the Court
of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where the said
court held:

"In view of all the foregoing, we rule that the deficiency income tax assessments
and estate tax assessment, are already final and (u)nappealable -and- the
subsequent levy of real properties is a tax remedy resorted to by the government,
sanctioned by Section 213 and 218 of the National Internal Revenue Code.This
summary tax remedy is distinct and separate from the other tax remedies (such
as Judicial Civil actions and Criminal actions), and is not affected or precluded by
the pendency of any other tax remedies instituted by the government.

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the

petition for certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to costs.

SO ORDERED."

More than seven years since the demise of the late Ferdinand E. Marcos, the
former President of the Republic of the Philippines, the matter of the settlement
of his estate, and its dues to the government in estate taxes, are still unresolved,
the latter issue being now before this Court for resolution. Specifically, petitioner
Ferdinand R. Marcos II, the eldest son of the decedent, questions the actuations
of the respondent Commissioner of Internal Revenue in assessing, and collecting
through the summary remedy of Levy on Real Properties, estate and income tax
delinquencies upon the estate and properties of his father, despite the pendency
of the proceedings on probate of the will of the late president, which is docketed
as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition
for Certiorari and Prohibition with an application for writ of preliminary injunction
and/or temporary restraining order on June 28, 1993, seeking to -
I. Annul and set aside the Notices of Levy on real property dated February 22,
1993 and May 20, 1993, issued by respondent Commissioner of Internal Revenue;

II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service),
from proceeding with the Auction of the real properties covered by Notices
ofSale.

After the parties had pleaded their case, the Court of Appeals rendered its
Decision[2] on November 29, 1994, ruling that the deficiency assessments for
estate and income tax made upon the petitioner and the estate of the deceased
President Marcos have already become final and unappealable, and may thus be
enforced by the summary remedy of levying upon the properties of the late
President, as was done by the respondent Commissioner of Internal Revenue.

"WHEREFORE, premises considered judgment is hereby rendered DISMISSING the

petition for Certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to cost.

SO ORDERED."

Unperturbed, petitioner is now before us assailing the validity of the appellate

court's decision, assigning the following as errors:
A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY
TAX REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND
PRECLUDED BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE
ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS
PROBATE PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH FORM PART
OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE PROBATE COURT
TO THE EXCLUSION OF ALL OTHER COURTS AND ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT
SINCE THE TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY
BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE
MERITS OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT OF WHETHER
THE TAX ASSESSMENTS HAD ALREADY BECOME FINAL, HOWEVER, PETITIONER
HAS THE RIGHT TO QUESTION THE UNLAWFUL MANNER AND METHOD IN WHICH
TAX COLLECTION IS SOUGHT TO BE ENFORCED BY RESPONDENTS COMMISSIONER
AND DE GUZMAN. THUS, RESPONDENT COURT SHOULD HAVE FAVORABLY
CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE PETITION:

(1) The Notices of Levy on Real Property were issued beyond the period
provided in the Revenue Memorandum Circular No. 38-68.

(2) [a] The numerous pending court cases questioning the late President's
ownership or interests in several properties (both personal and real) make the
total value of his estate, and the consequent estate tax due, incapable of
exact pecuniary determination at this time. Thus, respondents assessment of
the estate tax and their issuance of the Notices of Levy and Sale are
premature, confiscatory and oppressive.

[b] Petitioner, as one of the late President's compulsory heirs, was never
notified, much less served with copies of the Notices of Levy, contrary to the
mandate of Section 213 of the NIRC. As such, petitioner was never given an
opportunity to contest the Notices in violation of his right to due process of
law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT

MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE
RELIEF TO PETITIONER.SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS
POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO
RESTRAIN RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY
METHOD OF COLLECTING THE ALLEGED DEFICIENCY ESTATE AND INCOME TAXES
BY MEANS OF LEVY.
The facts as found by the appellate court are undisputed, and are hereby
adopted:

"On September 29, 1989, former President Ferdinand Marcos died in Honolulu,
Hawaii, USA.

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations
and examinations of the tax liabilities and obligations of the late president, as well
as that of his family, associates and "cronies". Said audit team concluded its
investigation with a Memorandum dated July 26, 1991. The investigation
disclosed that the Marcoses failed to file a written notice of the death of the
decedent, an estate tax returns [sic], as well as several income tax returns
covering the years 1982 to 1986, -all in violation of the National Internal Revenue
Code (NIRC).

Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before
the Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has
penalized under Sections 253 and 254 in relation to Section 252- a & b) of the
National Internal Revenue Code (NIRC).

The Commissioner of Internal Revenue thereby caused the preparation and filing
of the Estate Tax Return for the estate of the late president, the Income Tax
Returns of the Spouses Marcos for the years 1985 to 1986, and the Income Tax
Returns of petitioner Ferdinand 'Bongbong' Marcos II for the years 1982 to 1985.

On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax
assessment no. FAC-2-89-91-002464 (against the estate of the late president
Ferdinand Marcos in the amount of P23,293,607,638.00 Pesos); (2) Deficiency
income tax assessment no. FAC-1-85-91-002452 and Deficiency income tax
assessment no. FAC-1-86-91-002451 (against the Spouses Ferdinand and Imelda
Marcos in the amounts of P149,551.70 and P184,009,737.40 representing
deficiency income tax for the years 1985 and 1986); (3) Deficiency income tax
assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463 (against petitioner
Ferdinand 'Bongbong' Marcos II in the amounts of P258.70 pesos; P9,386.40
Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency income
taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate
and income tax assessments were all personally and constructively served on
August 26, 1991 and September 12, 1991 upon Mrs. Imelda Marcos (through her
caretaker Mr. Martinez) at her last known address at No. 204 Ortega St., San Juan,
M.M. (Annexes 'D' and 'E' of the Petition). Likewise, copies of the deficiency tax
assessments issued against petitioner Ferdinand 'Bongbong' Marcos II were also
personally and constructively served upon him (through his caretaker) on
September 12, 1991, at his last known address at Don Mariano Marcos St. corner
P. Guevarra St., San Juan, M.M. (Annexes 'J' and 'J-1' of the Petition). Thereafter,
Formal Assessment notices were served on October 20, 1992, upon Mrs. Marcos
c/o petitioner, at his office, House of Representatives, Batasan Pambansa, Quezon
City. Moreover, a notice to Taxpayer inviting Mrs. Marcos (or her duly authorized
representative or counsel), to a conference, was furnished the counsel of Mrs.
Marcos, Dean Antonio Coronel - but to no avail.

The deficiency tax assessments were not protested administratively, by Mrs.

Marcos and the other heirs of the late president, within 30 days from service of
said assessments.

On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on
real property against certain parcels of land owned by the Marcoses - to satisfy
the alleged estate tax and deficiency income taxes of Spouses Marcos.

On May 20, 1993, four more Notices of Levy on real property were issued for the
purpose of satisfying the deficiency income taxes.

On May 26, 1993, additional four (4) notices of Levy on real property were again
issued. The foregoing tax remedies were resorted to pursuant to Sections 205 and
213 of the National Internal Revenue Code (NIRC).

In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of
herein petitioner) calling the attention of the BIR and requesting that they be duly
notified of any action taken by the BIR affecting the interest of their client
Ferdinand 'Bongbong Marcos II, as well as the interest of the late president -
copies of the aforesaid notices were served on April 7, 1993 and on June 10, 1993,
upon Mrs. Imelda Marcos, the petitioner, and their counsel of record, 'De Borja,
Medialdea, Ata, Bello, Guevarra and Serapio Law Office'.

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the
City Hall of Tacloban City. The public auction for the sale of the eleven (11) parcels
of land took place on July 5, 1993. There being no bidder, the lots were declared
forfeited in favor of the government.

On June 25, 1993, petitioner Ferdinand 'Bongbong' Marcos II filed the instant
petition for certiorari and prohibition under Rule 65 of the Rules of Court, with
prayer for temporary restraining order and/or writ of preliminary injunction."

It has been repeatedly observed, and not without merit, that the enforcement
of tax laws and the collection of taxes, is of paramount importance for the
sustenance of government. Taxes are the lifeblood of the government and should
be collected without unnecessary hindrance. However, such collection should be
made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved."[3]
Whether or not the proper avenues of assessment and collection of the said
tax obligations were taken by the respondent Bureau is now the subject of the
Court's inquiry.
Petitioner posits that notices of levy, notices of sale, and subsequent sale of
properties of the late President Marcos effected by the BIR are null and void for
disregarding the established procedure for the enforcement of taxes due upon
the estate of the deceased. The case of Domingo vs. Garlitos[4] is specifically cited
to bolster the argument that "the ordinary procedure by which to settle claims of
indebtedness against the estate of a deceased, person, as in an inheritance
(estate) tax, is for the claimant to present a claim before the probate court so that
said court may order the administrator to pay the amount therefor." This remedy
is allegedly, exclusive, and cannot be effected through any other means.
Petitioner goes further, submitting that the probate court is not precluded
from denying a request by the government for the immediate payment of taxes,
and should order the payment of the same only within the period fixed by the
probate court for the payment of all the debts of the decedent. In this regard,
petitioner cites the case of Collector of Internal Revenue vs. The Administratrix of
the Estate of Echarri (67 Phil 502), where it was held that:

"The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal
Revenue (52 Phil 803), relied upon by the petitioner-appellant is good authority
on the proposition that the court having control over the administration
proceedings has jurisdiction to entertain the claim presented by the government
for taxes due and to order the administrator to pay the tax should it find that the
assessment was proper, and that the tax was legal, due and collectible. And the
rule laid down in that case must be understood in relation to the case of Collector
of Customs vs. Haygood, supra., as to the procedure to be followed in a given case
by the government to effectuate the collection of the tax. Categorically stated,
where during the pendency of judicial administration over the estate of a
deceased person a claim for taxes is presented by the government, the court has
the authority to order payment by the administrator; but, in the same way that it
has authority to order payment or satisfaction, it also has the negative authority
to deny the same. While there are cases where courts are required to perform
certain duties mandatory and ministerial in character, the function of the court in
a case of the present character is not one of them; and here, the court cannot be
an organism endowed with latitude of judgment in one direction, and converted
into a mere mechanical contrivance in another direction."

On the other hand, it is argued by the BIR, that the state's authority to collect
internal revenue taxes is paramount. Thus, the pendency of probate proceedings
over the estate of the deceased does not preclude the assessment and collection,
through summary remedies, of estate taxes over the same. According to the
respondent, claims for payment of estate and income taxes due and assessed
after the death of the decedent need not be presented in the form of a claim
against the estate. These can and should be paid immediately. The probate court
is not the government agency to decide whether an estate is liable for payment of
estate of income taxes. Well-settled is the rule that the probate court is a court
with special and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with
limited jurisdiction, as a probate court over estate of deceased individual, is not a
trifling thing. The court's jurisdiction, once invoked, and made effective, cannot
be treated with indifference nor should it be ignored with impunity by the very
parties invoking its authority.
In testament to this, it has been held that it is within the jurisdiction of the
probate court to approve the sale of properties of a deceased person by his
prospective heirs before final adjudication;[5]to determine who are the heirs of
the decedent;[6] the recognition of a natural child;[7] the status of a woman
claiming to be the legal wife of the decedent;[8] the legality of disinheritance of an
heir by the testator;[9] and to pass upon the validity of a waiver of hereditary
rights.[10]
The pivotal question the court is tasked to resolve refers to the authority of
the Bureau of Internal Revenue to collect by the summary remedy of levying
upon, and sale of real properties of the decedent, estate tax deficiencies, without
the cognition and authority of the court sitting in probate over the supposed will
of the deceased.
The nature of the process of estate tax collection has been described as
follows:
"Strictly speaking, the assessment of an inheritance tax does not directly involve
the administration of a decedent's estate, although it may be viewed as an
incident to the complete settlement of an estate, and, under some statutes, it is
made the duty of the probate court to make the amount of the inheritance tax a
part of the final decree of distribution of the estate. It is not against the property
of decedent, nor is it a claim against the estate as such, but it is against the
interest or property right which the heir, legatee, devisee, etc., has in the
property formerly held by decedent. Further, under some statutes, it has been
held that it is not a suit or controversy between the parties, nor is it an adversary
proceeding between the state and the person who owes the tax on the
inheritance.However, under other statutes it has been held that the hearing and
determination of the cash value of the assets and the determination of the tax are
adversary proceedings. The proceeding has been held to be necessarily a
proceeding in rem.[11]

In the Philippine experience, the enforcement and collection of estate tax, is

executive in character, as the legislature has seen it fit to ascribe this task to the
Bureau of Internal Revenue. Section 3 of the National Internal Revenue Code
attests to this:

"Sec. 3. Powers and duties of the Bureau.-The powers and duties of the Bureau of
Internal Revenue shall comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges, and the enforcement of all forfeitures,
penalties, and fines connected therewith, including the execution of judgments in
all cases decided in its favor by the Court of Tax Appeals and the ordinary
courts. Said Bureau shall also give effect to and administer the supervisory and
police power conferred to it by this Code or other laws."

Thus, it was in Vera vs. Fernandez[12] that the court recognized the liberal
treatment of claims for taxes charged against the estate of the decedent. Such
taxes, we said, were exempted from the application of the statute of non-claims,
and this is justified by the necessity of government funding, immortalized in the
maxim that taxes are the lifeblood of the
government. Vectigalia nervi sunt reipublicae - taxes are the sinews of the state.

"Taxes assessed against the estate of a deceased person, after administration is

opened, need not be submitted to the committee on claims in the ordinary
course of administration. In the exercise of its control over the administrator, the
court may direct the payment of such taxes upon motion showing that the taxes
have been assessed against the estate."

Such liberal treatment of internal revenue taxes in the probate proceedings

extends so far, even to allowing the enforcement of tax obligations against the
heirs of the decedent, even after distribution of the estate's properties.

"Claims for taxes, whether assessed before or after the death of the deceased,
can be collected from the heirs even after the distribution of the properties of the
decedent. They are exempted from the application of the statute of non-
claims. The heirs shall be liable therefor, in proportion to their share in the
inheritance."[13]

"Thus, the Government has two ways of collecting the taxes in question. One, by
going after all the heirs and collecting from each one of them the amount of the
tax proportionate to the inheritance received. Another remedy, pursuant to the
lien created by Section 315 of the Tax Code upon all property and rights to
property belong to the taxpayer for unpaid income tax, is by subjecting said
property of the estate which is in the hands of an heir or transferee to the
payment of the tax due the estate. (Commissioner of Internal Revenue vs. Pineda,
21 SCRA 105, September 15, 1967.)

From the foregoing, it is discernible that the approval of the court, sitting in
probate, or as a settlement tribunal over the deceased is not a mandatory
requirement in the collection of estate taxes.It cannot therefore be argued that
the Tax Bureau erred in proceeding with the levying and sale of the properties
allegedly owned by the late President, on the ground that it was required to seek
first the probate court's sanction. There is nothing in the Tax Code, and in the
pertinent remedial laws that implies the necessity of the probate or estate
settlement court's approval of the state's claim for estate taxes, before the same
can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement
court which is bidden not to authorize the executor or judicial administrator of
the decedent's estate to deliver any distributive share to any party interested in
the estate, unless it is shown a Certification by the Commissioner of Internal
Revenue that the estate taxes have been paid. This provision disproves the
petitioner's contention that it is the probate court which approves the
assessment and collection of the estate tax.
 If there is any issue as to the validity of the BIR's decision to assess the estate
taxes, this should have been pursued through the proper administrative and
judicial avenues provided for by law.
Section 229 of the NIRC tells us how:

"Sec. 229. Protesting of assessment.-When the Commissioner of Internal Revenue

or his duly authorized representative finds that proper taxes should be assessed,
he shall first notify the taxpayer of his findings. Within a period to be prescribed
by implementing regulations, the taxpayer shall be required to respond to said
notice. If the taxpayer fails to respond, the Commissioner shall issue an
assessment based on his findings.

Such assessment may be protested administratively by filing a request for

reconsideration or reinvestigation in such form and manner as may be prescribed
by implementing regulations within (30) days from receipt of the assessment;
otherwise, the assessment shall become final and unappealable.

If the protest is denied in whole or in part, the individual, association or

corporation adversely affected by the decision on the protest may appeal to the
Court of Tax Appeals within thirty (30) days from receipt of said decision;
otherwise, the decision shall become final, executory and demandable. (As
inserted by P.D. 1773)"

Apart from failing to file the required estate tax return within the time
required for the filing of the same, petitioner, and the other heirs never
questioned the assessments served upon them, allowing the same to lapse into
finality, and prompting the BIR to collect the said taxes by levying upon the
properties left by President Marcos.
Petitioner submits, however, that "while the assessment of taxes may have
been validly undertaken by the Government, collection thereof may have been
done in violation of the law. Thus, the manner and method in which the latter is
enforced may be questioned separately, and irrespective of the finality of the
former, because the Government does not have the unbridled discretion to
enforce collection without regard to the clear provision of law."[14]
Petitioner specifically points out that applying Memorandum Circular No. 38-
68, implementing Sections 318 and 324 of the old tax code (Republic Act 5203),
the BIR's Notices of Levy on the Marcos properties, were issued beyond the
allowed period, and are therefore null and void:

"...the Notices of Levy on Real Property (Annexes 0 to NN of Annex C of this

Petition) in satisfaction of said assessments were still issued by respondents well
beyond the period mandated in Revenue Memorandum Circular No. 38-68. These
Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at
least seventeen (17) months had already lapsed from the last service of tax
assessment on 12 September 1991. As no notices of distraint of personal property
were first issued by respondents, the latter should have complied with Revenue
Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than
three (3) months nor later than six (6) months from 12 September 1991. In
accordance with the Circular, respondents only had until 12 March 1992 (the last
day of the sixth month) within which to issue these Notices of Levy. The Notices
of Levy, having been issued beyond the period allowed by law, are thus void and
of no effect."[15]

We hold otherwise. The Notices of Levy upon real property were issued within
the prescriptive period and in accordance with the provisions of the present Tax
Code. The deficiency tax assessment, having already become final, executory, and
demandable, the same can now be collected through the summary remedy of
distraint or levy pursuant to Section 205 of the NIRC.
The applicable provision in regard to the prescriptive period for the
assessment and collection of tax deficiency in this instance is Article 223 of the
NIRC, which pertinently provides:

"Sec. 223. Exceptions as to a period of limitation of assessment and collection of

taxes.- (a) In the case of a false or fraudulent return with intent to evade tax or of
a failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time within ten
(10) years after the discovery of the falsity, fraud, or omission: Provided, That, in a
fraud assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection
thereof.

xxx
(c) Any internal revenue tax which has been assessed within the period of
limitation above prescribed, may be collected by distraint or levy or by a
proceeding in court within three years following the assessment of the tax.

xxx
The omission to file an estate tax return, and the subsequent failure to
contest or appeal the assessment made by the BIR is fatal to the petitioner's
cause, as under the above-cited provision, in case of failure to file a return, the
tax may be assessed at any time within ten years after the omission, and any tax
so assessed may be collected by levy upon real property within three years
following the assessment of the tax. Since the estate tax assessment had become
final and unappealable by the petitioner's default as regards protesting the
validity of the said assessment, there is now no reason why the BIR cannot
continue with the collection of the said tax. Any objection against the assessment
should have been pursued following the avenue paved in Section 229 of the NIRC
on protests on assessments of internal revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning
the late president's ownership or interests in several properties (both real and
personal) make the total value of his estate, and the consequent estate tax due,
incapable of exact pecuniary determination at this time. Thus, respondents'
assessment of the estate tax and their issuance of the Notices of Levy and sale are
premature and oppressive." He points out the pendency of Sandiganbayan Civil
Case Nos. 0001-0034 and 0141, which were filed by the government to question
the ownership and interests of the late President in real and personal properties
located within and outside the Philippines. Petitioner, however, omits to allege
whether the properties levied upon by the BIR in the collection of estate taxes
upon the decedent's estate were among those involved in the said cases pending
in the Sandiganbayan. Indeed, the court is at a loss as to how these cases are
relevant to the matter at issue. The mere fact that the decedent has pending
cases involving ill-gotten wealth does not affect the enforcement of tax
assessments over the properties indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total
assessment of P23,292,607,638.00, stating that this amount deviates from the
findings of the Department of Justice's Panel of Prosecutors as per its resolution
of 20 September 1991. Allegedly, this is clear evidence of the uncertainty on the
part of the Government as to the total value of the estate of the late President.
 This is, to our mind, the petitioner's last ditch effort to assail the assessment
of estate tax which had already become final and unappealable.
It is not the Department of Justice which is the government agency tasked to
determine the amount of taxes due upon the subject estate, but the Bureau of
Internal Revenue[16] whose determinations and assessments are presumed
correct and made in good faith.[17] The taxpayer has the duty of proving
otherwise. In the absence of proof of any irregularities in the performance of
official duties, an assessment will not be disturbed. Even an assessment based on
estimates is prima facie valid and lawful where it does not appear to have been
arrived at arbitrarily or capriciously. The burden of proof is upon the complaining
party to show clearly that the assessment is erroneous. Failure to present proof of
error in the assessment will justify the judicial affirmance of said assessment.[18] In
this instance, petitioner has not pointed out one single provision in the
Memorandum of the Special Audit Team which gave rise to the questioned
assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the
assessment bears mainly on the alleged improbable and unconscionable amount
of the taxes charged. But mere rhetoric cannot supply the basis for the charge of
impropriety of the assessments made.
Moreover, these objections to the assessments should have been raised,
considering the ample remedies afforded the taxpayer by the Tax Code, with the
Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier,
and cannot be raised now via Petition for Certiorari, under the pretext of grave
abuse of discretion. The course of action taken by the petitioner reflects his
disregard or even repugnance of the established institutions for governance in the
scheme of a well-ordered society. The subject tax assessments having become
final, executory and enforceable, the same can no longer be contested by means
of a disguised protest. In the main, Certiorari may not be used as a substitute for a
lost appeal or remedy.[19] This judicial policy becomes more pronounced in view of
the absence of sufficient attack against the actuations of government.
On the matter of sufficiency of service of Notices of Assessment to the
petitioner, we find the respondent appellate court's pronouncements sound and
resilient to petitioner's attacks.

"Anent grounds 3(b) and (B) - both alleging/claiming lack of notice - We find, after
considering the facts and circumstances, as well as evidences, that there was
sufficient, constructive and/or actual notice of assessments, levy and sale, sent to
herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs.
Imelda Marcos.

Even if we are to rule out the notices of assessments personally given to the
caretaker of Mrs. Marcos at the latter's last known address, on August 26, 1991
and September 12, 1991, as well as the notices of assessment personally given to
the caretaker of petitioner also at his last known address on September 12, 1991 -
the subsequent notices given thereafter could no longer be ignored as they were
sent at a time when petitioner was already here in the Philippines, and at a place
where said notices would surely be called to petitioner's attention, and received
by responsible persons of sufficient age and discretion.

Thus, on October 20, 1992, formal assessment notices were served upon Mrs.
Marcos c/o the petitioner, at his office, House of Representatives, Batasan
Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210,
Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October
8, 1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was
furnished the counsel of Mrs. Marcos - Dean Antonio Coronel (Annex "B", p. 211,
ibid).Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the
petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and
Serapio Law Office", on April 7, 1993 and June 10, 1993. Despite all of these
Notices, petitioner never lifted a finger to protest the assessments, (upon which
the Levy and sale of properties were based), nor appealed the same to the Court
of Tax Appeals.

There being sufficient service of Notices to herein petitioner (and his mother) and
it appearing that petitioner continuously ignored said Notices despite several
opportunities given him to file a protest and to thereafter appeal to the Court of
Tax Appeals, - the tax assessments subject of this case, upon which the levy and
sale of properties were based, could no longer be contested (directly or indirectly)
via this instant petition for certiorari."[20]

Petitioner argues that all the questioned Notices of Levy, however, must be
nullified for having been issued without validly serving copies thereof to the
petitioner. As a mandatory heir of the decedent, petitioner avers that he has an
interest in the subject estate, and notices of levy upon its properties should have
been served upon him.
 We do not agree. In the case of notices of levy issued to satisfy the delinquent
estate tax, the delinquent taxpayer is the Estate of the decedent, and not
necessarily, and exclusively, the petitioner as heir of the deceased. In the same
vein, in the matter of income tax delinquency of the late president and his
spouse, petitioner is not the taxpayer liable. Thus, it follows that service of notices
of levy in satisfaction of these tax delinquencies upon the petitioner is not
required by law, as under Section 213 of the NIRC, which pertinently states:
"xxx

...Levy shall be effected by writing upon said certificate a description of the

property upon which levy is made. At the same time, written notice of the levy
shall be mailed to or served upon the Register of Deeds of the province or city
where the property is located and upon the delinquent taxpayer, or if he be
absent from the Philippines, to his agent or the manager of the business in
respect to which the liability arose, or if there be none, to the occupant of the
property in question.

xxx"
The foregoing notwithstanding, the record shows that notices of warrants of
distraint and levy of sale were furnished the counsel of petitioner on April 7,
1993, and June 10, 1993, and the petitioner himself on April 12, 1993 at his office
at the Batasang Pambansa.[21] We cannot therefore, countenance petitioner's
insistence that he was denied due process. Where there was an opportunity to
raise objections to government action, and such opportunity was disregarded, for
no justifiable reason, the party claiming oppression then becomes the oppressor
of the orderly functions of government. He who comes to court must come with
clean hands. Otherwise, he not only taints his name, but ridicules the very
structure of established authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The
Decision of the Court of Appeals dated November 29, 1994 is hereby AFFIRMED in
all respects.
SO ORDERED.
Regalado, (Chairman), Romero, Puno, and Mendoza, JJ., concur.

November 9, 2016
G.R. No. 215957

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
FITNESS BY DESIGN, INC., Respondent

DECISION

LEONEN, J.:

To avail of the extraordinary period of assessment in Section 222(a) of the

National Internal Revenue Code, the Commissioner of Internal Revenue should
show that the facts upon which the fraud' is based is communicated to the
taxpayer. The burden of proving that the facts exist in any subsequent proceeding
is with the Commissioner. Furthermore, the Final Assessment Notice is not valid if
it does not contain a definite due date for payment by the taxpayer.

This resolves a Petition for Review on Certiorari1 filed by the Commissioner of

Internal Revenue, which assails the Decision2 dated July 14, 2014 and
Resolution3 dated December 16, 2014 of the Court of Tax Appeals. The Court of
Tax Appeals En Banc affirmed the Decision of the First Division, which declared
the assessment issued against Fitness by Design, Inc. (Fitness) as invalid.4

On April 11, 1996, Fitness filed its Annual Income Tax Return for the taxable year
of 1995.5 According to Fitness, it was still in its pre-operating stage during the
covered period.6

On June 9, 2004, Fitness received a copy of the Final Assessment Notice dated
March 17, 2004.7 The Final Assessment Notice was issued under Letter of
Authority No. 00002953.8 The Final Assessment Notice assessed that Fitness had a
tax deficiency in the amount of ₱10,647,529.69.9 It provides:

FINAL ASSESSMENT NOTICE

March 17, 2004

FITNESS BY DESIGN, INC

169 Aguirre St., BF Homes,
Paranaque City
Gentlemen:

Please be informed that after investigation of your Internal revenue Tax Liabilities
for the year 1995 pursuant to Letter of Authority No. 000029353 dated May 13,
2002, there has been found due deficiency taxes as shown hereunder:

Assessment No. _____________

Income Tax

Taxable Income per return ₱

Add: Unreported Sales 7,156,336.08

Taxable Income per audit 7,156,336.08

Tax Due (35%) 2,504,717.63

Add: Surcharge (50%) ₱ 1,252,358.81

Interest (20%/annum) until 4-15-

4,508,491. 73 5, 760,850.54
04

Deficiency Income Tax ₱ 8,265,568.17

Value Added Tax

Unreported Sales ₱ 7,156,336.08

Output Tax (10%) 715,633.61

Add: Surcharge (50%) ₱ 357,816.80

Interest (20%/ annum) until 4-

1,303,823.60 1,661,640.41
15-04

Deficiency VAT ₱ 2,311,214.02

Documentary Stamp Tax

Subscribe Capital Stock ₱ 375,000.00

DST due (2/200) 3,750.00

Add: Surcharge (25%) 937.50

Deficiency DST ₱ 4,687.50

Total Deficiency Taxes ₱ 10,647,529.69

The complete details covering the aforementioned discrepancies established

during the investigation of this case are shown in the accompanying Annex 1 of
this Notice. The 50% surcharge and 20% interest have been imposed pursuant to
Sections 248 and 249(B) of the [National Internal Revenue Code], as
amended. Please note, however, that the interest and the total amount due will
have to be adjusted if paid prior or beyond April 15, 2004.
In view thereof, you are requested to pay your aforesaid deficiency internal
revenue taxes liabilities through the duly authorized agent bank in which you are
enrolled within the time shown in the enclosed assessment notice.10 (Emphasis in
the original)

Fitness filed a protest to the Final Assessment Notice on June 25, 2004. According
to Fitness, the Commissioner's period to assess had already prescribed. Further,
the assessment was without basis since the company was only incorporated on
May 30, 1995.11

On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or Levy

with Reference No. OCN WDL-95-05-005 dated February 1, 2005 to Fitness.12

Fitness filed before the First Division of the Court of Tax Appeals a Petition for
Review (With Motion to Suspend Collection of Income Tax, Value Added Tax,
Documentary Stamp Tax and Surcharges and Interests) on March 1, 2005.13

On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to

Fitness' Petition and raised special and affirmative defenses.14 The Commissioner
posited that the Warrant of Distraint and/or Levy was issued in accordance with
law.15 The Commissioner claimed that its right to assess had not yet prescribed
under Section 222(a)16 of the National Internal Revenue Code.17 Because the 1995
Income Tax ,Return filed by Fitness was false and fraudulent for its alleged
intentional failure to reflect its true sales, Fitness' respective taxes may be
assessed at any time within 10 years from the discovery of fraud or omission.18

The Commissioner asserted further that the assessment already became final and
executory for Fitness' failure , to file a protest within the reglementary
period.19 The Commissioner denied that there was a protest to the Final
Assessment Notice filed by Fitness on June 25, 2004.20 According to the
Commissioner, the alleged protest was "nowhere to be found in the [Bureau of
Internal Revenue] Records nor reflected in the Record Book of the Legal Division
as normally done by [its]' receiving clerk when she received [sic] any
document."21 Therefore, the Commissioner had sufficient basis to collect the tax
deficiency through the Warrant of Distraint and/or Levy.22

The alleged fraudulent return was discovered through a tip from a confidential
informant.23 The revenue officers' investigation revealed that Fitness had been
operating business with sales operations amounting to ₱7,156,336.08 in 1995,
which it neglected toreport in its income tax return.24 Fitness' failure to report its
income resulted in deficiencies to its income tax and value-added tax of
₱8,265,568.17 and ₱2,377,274.02 respectively, as well as the documentary stamp
tax with regard to capital stock subscription.25

Through the report, the revenue officers recommended the filing of a civil case for
collection of taxes and a criminal case for failure to declare Fitness' purported
sales in its 1995 Income Tax Return.26 Hence, a criminal complaint against Fitness
was filed before the Department of Justice.27

The Court of Tax Appeals First Division granted Fitness' Petition on the ground
that the assessment has already prescribed.28 It cancelled and set aside the Final
Assessment Notice dated March 1 7, 2004 as well as the Warrant of Distraint
and/or Levy issued by the Commissioner.29 It ruled that the Final Assessment
Notice is invalid for failure to comply with the requirements of Section 22830 of
the National Internal Revenue Code. The dispositive portion of the Decision reads:

WHEREFORE, the Petition for Review dated February 24, 2005 filed by petitioner
Fitness by Design, Inc., is hereby GRANTED. Accordingly, the Final Assessment
Notice dated 'March 17, 2004, finding petitioner liable for deficiency income tax,
documentary stamp tax and value-added tax for taxable year 1995 in the total
amount of ₱10,647,529.69 is hereby CANCELLED and SET ASIDE. The Warrant of
Distraint and Levy dated February 1, 2005 is 'likewise CANCELLED and SET ASIDE.

SO ORDERED.31 (Emphasis in the original)

The Commissioner's Motion for Reconsideration and its Supplemental Motion for
Reconsideration were denied by the Court of Tax Appeals First Division.32

Aggrieved, the Commissioner filed an appeal before the Court of Tax Appeals En
Banc.33 The Commissioner asserted ,that it had 10 years to make an assessment
due to the fraudulent income tax return filed by Fitness.34 It also claimed that the
assessment already attained finality due to Fitness' failure to file its protest within
the period provided by law.35

Fitness argued that the Final Assessment Notice issued to it could not be claimed
as a valid deficiency assessment that could justify the issuance of a warrant of
distraint and/or levy.36 It asserted that it was a mere request for payment as it did
not provide the period within which to pay the alleged liabilities.37
The Court of Tax Appeals En Banc ruled in favor of Fitness. It affirmed the Decision
of the Court of Tax Appeals First Division, thus:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit.
Accordingly, both the Decision and Resolution in CTA Case No. 7160 dated July 10,
2012 and November 21, 2012 respectively are AFFIRMED in toto.38 (Emphasis in
the original)

The Commissioner's Motion for Reconsideration was denied by the Court of Tax
Appeals En Banc in the Resolution39 dated December 16, 2014.

Hence, the Commissioner of Internal Revenue filed before this Court a Petition for
Review.

Petitioner Commissioner of Internal Revenue raises the sole issue of whether the
Final Assessment Notice issued against respondent Fitness by Design, Inc. is a
valid assessment under Section 228 of the National Internal Revenue Code and
Revenue Regulations No. 12-99.40

Petitioner argues that the Final Assessment Notice issued to respondent is valid
since it complies with Section 228 of the National Internal Revenue Code and
Revenue Regulations No. 12-99.41 The law states that the taxpayer shall be
informed in writing of the facts, jurisprudence, and law on which the assessment
is based.42 Nothing in the law provides that due date for payment is a substantive
requirement for the validity of a final assessment notice.43

Petitioner further claims that a perusal of the Final Assessment Notice shows that
April 15, 2004 is the due date for payment.44 The pertinent portion of the
assessment reads:

The complete details covering the aforementioned discrepancies established

during the investigation of this case are shown in the accompanying Annex 1 of
this Notice. The 50% surcharge and 20% interest have been imposed pursuant to
Sections 248 and 249(B) of the [National Internal Revenue Code], as amended.
Please note, however, that the interest and the total amount due will have to be
adjusted if paid prior or beyond April 15, 2004.45 (Emphasis supplied)

This Court, through the Resolution46 dated July 22, 2015, required respondent to
comment on the Petition for Review.
In its Comment,47 respondent argues that the Final Assessment Notice issued was
merely a request and not a demand for payment of tax liabilities.48 The Final
Assessment Notice cannot be considered as a final deficiency assessment because
it deprived respondent of due process when it failed to reflect its fixed tax
liabilities.49Moreover, it also gave respondent an indefinite period to pay its tax
liabilities.50

Respondent points out that an assessment should strictly comply with the law for
its validity.51 Jurisprudence provides that "not all documents coming from the
[Bureau of Internal Revenue] containing a computation of the tax liability can be
deemed assessments[,] which can attain finality."52 Therefore, the Warrant of
Distraint and/or Levy cannot be enforced since it is based on an invalid
assessment.53

Respondent likewise claims that since the Final Assessment Notice was allegedly
based on fraud, it must show the details of the fraudulent acts imputed to it as
part of due process.54

The Petition has no merit.

An assessment "refers to the determination of amounts due from a person

obligated to make payments."55 "In the context of national internal revenue
collection, it refers to the determination of the taxes due from a taxpayer under
the National Internal Revenue Code of 1997."56

The assessment process starts with the filing of tax return and payment of tax by
the taxpayer.57 The initial assessment evidenced by the tax return is a self-
assessment of the taxpayer.58 The tax is primarily computed and voluntarily paid
by the taxpayer without need of any demand from government.59 If tax
obligations are properly paid, the Bureau of Internal Revenue may dispense with
its own assessment.60

After filing a return, the Commissioner or his or her representative may allow the
examination of any taxpayer for assessment of proper tax liability.61 The failure of
a taxpayer to file his or her return will not hinder the Commissioner from
permitting the taxpayer's examination.62 The Commissioner can examine records
or other data relevant to his or her inquiry in order to verify the correctness of
any return, or to make a return in case of noncompliance, as well as to determine
and collect tax liability.63

The indispensability of affording taxpayers sufficient written notice of his or her

tax liability is a clear definite requirement.64 Section 228 of the National Internal
Revenue Code and Revenue Regulations No. 12-99, as amended, transparently
outline the procedure in tax assessment.65

Section 3 of Revenue Regulations No. 12-99,66 the then prevailing regulation

regarding the due process requirement in the issuance of a deficiency tax
assessment, requires a notice for informal conference.67 The revenue officer who
audited the taxpayer's records shall state in his or her report whether the
taxpayer concurs with his or her findings of liability for deficiency taxes.68 If the
taxpayer does not agree, based on the revenue officer's report, the taxpayer shall
be informed in writing69 of the discrepancies in his or her payment of internal
revenue taxes for "Informal Conference."70 The informal conference gives the
taxpayer an opportunity to present his or her side of the case.71

The taxpayer is given 15 days from receipt of the notice of informal conference to
respond.72 If the taxpayer fails to respond, he or she will be considered in
default.73 The revenue officer74 endorses the case with the least possible delay to
the Assessment Division of the Revenue Regional Office or the Commissioner or
his or her authorized representative.75 The Assessment Division of the Revenue
Regional Office or the Commissioner or his or her authorized representative is
responsible for the "appropriate review and issuance of a deficiency tax
assessment, if warranted."76

If, after the review conducted, there exists sufficient basis to assess the taxpayer
with deficiency taxes, the officer 'shall issue a preliminary assessment notice
showing in detail the facts, jurisprudence, and law on which the assessment is
based.77 The taxpayer is given 15 days from receipt of the pre-assessment notice
to respond.78 If the taxpayer fails to respond, he or she will be considered in
default, and a formal letter of demand and assessment notice will be issued.79

The formal letter of demand and assessment notice shall state the facts,
jurisprudence, and law on which the assessment was based; otherwise, these
shall be void.80 The taxpayer or the authorized representative may
administratively protest the formal letter of demand and assessment notice
within 30 days from receipt of the notice.81

II

The word "shall" in Section 228 of the National Internal Revenue Code and
Revenue Regulations No. 12-99 means the act of informing the taxpayer of both
the legal and factual bases of the assessment is mandatory.82 The law requires
that the bases be reflected in the formal letter of demand and assessment
notice.83 This cannot be presumed.84 Otherwise, the express mandate of Section
228 and Revenue Regulations No. 12-99 would be nugatory.85 The requirement
enables the taxpayer to make an effective protest or appeal of the assessment or
decision.86

The rationale behind the requirement that taxpayers should be informed of the
facts and the law on which the assessments are based conforms with the
constitutional mandate that no person shall be deprived of his or her property
without due process of law.87 Between the power of the State to tax and an
individual's right to due process, the scale favors the right of the taxpayer to due
process.88

The purpose of the written notice requirement is to aid the taxpayer in making a
reasonable protest, if necessary.89Merely notifying the taxpayer of his or her tax
liabilities without details or particulars is not enough.90

Commissioner of Internal Revenue v. United Salvage and Towage (Phils.),

Inc.91 held that a final assessment notice that only contained a table of taxes with
no other details was insufficient:

In the present case, a mere perusal of the [Final Assessment Notice] for the
deficiency EWT for taxable year 1994 will show that other than a tabulation of the
alleged deficiency taxes due, no further detail regarding the assessment was
provided by petitioner. Only the resulting interest, surcharge and penalty were
anchored with legal basis. Petitioner should have at least attached a detailed
notice of discrepancy or stated an explanation why the amount of P48,461.76 is
collectible against respondent and how the same was arrived at.92

Any deficiency to the mandated content of the assessment or its process will not
be tolerated.93 In Commissioner of Internal Revenue v. Enron,94 an advice of tax
deficiency from the Commissioner of Internal Revenue to an employee of Enron,
including the preliminary five (5)-day letter, were not considered valid substitutes
for the mandatory written notice of the legal and factual basis of the
assessment.95 The required issuance of deficiency tax assessment notice to the
taxpayer is different from the required contents of the notice.96 Thus:

The law requires that the legal and factual bases of the assessment be stated in
the formal letter of demand and assessment notice.1âwphi1 Thus, such cannot be
presumed. Otherwise, the express provisions of Article 228 of the [National
Internal Revenue Code] and [Revenue Regulations] No. 12-99 would be rendered
nugatory. The alleged "factual bases" in the advice, preliminary letter and "audit
working papers" did not suffice. There was no going around the mandate of the
law that the legal and factual bases of the assessment be stated in writing in the
formal letter of demand accompanying the assessment notice.97 (Emphasis
supplied)

However, the mandate of giving the taxpayer a notice of the facts and laws on
which the assessments are based should not be mechanically applied.98 To
emphasize, the purpose of this requirement is to sufficiently inform the taxpayer
of the bases for the assessment to enable him or her to make an intelligent
protest.99

In Samar-I Electric Cooperative v. Commissioner of Internal Revenue,100 substantial

compliance with Section 228 of the National Internal Revenue Code is allowed,
provided that the taxpayer would be later apprised in writing of the factual and
legal bases of the assessment to enable him or her to prepare for an effective
protest.101 Thus:

Although the [Final Assessment Notice] and demand letter issued to petitioner
were not accompanied by a written explanation of the legal and factual bases of
the deficiency taxes assessed against the petitioner, the records showed that
respondent in its letter dated April 10, 2003 responded to petitioner's October 14,
2002 letter-protest, explaining at length the factual and legal bases of the
deficiency tax assessments and denying the protest.

Considering the foregoing exchange of correspondence and documents between

the parties, we find that the requirement of Section 228 was substantially
complied with. Respondent had fully informed petitioner in writing of the factual
and legal bases of the deficiency taxes assessment, which enabled the latter to
file an "effective" protest, much unlike the taxpayer's situation in Enron.
Petitioner's right to due process was thus not violated.102

A final assessment notice provides for the amount of tax due with a demand for
payment.103 This is to determine the amount of tax due to a taxpayer.104 However,
due process requires that taxpayers be informed in writing of the facts and law on
which the assessment is based in order to aid the taxpayer in making a reasonable
protest.105 To immediately ensue with tax collection without initially
substantiating a valid assessment contravenes the principle in administrative
investigations "that taxpayers should be able to present their case and adduce
supporting evidence."106

Respondent filed its income tax return in 1995.107 Almost eight (8) years passed
before the disputed final assessment notice was issued. Respondent pleaded
prescription as its defense when it filed a protest to the Final Assessment Notice.
Petitioner claimed fraud assessment to justify the belated assessment made on
respondent.108If fraud was indeed present, the period of assessment should be
within 10 years.109 It is incumbent upon petitioner to clearly state the allegations
of fraud committed by respondent to serve the purpose of an assessment notice
to aid respondent in filing an effective protest.

III

The prescriptive period in making an assessment depends upon whether a tax

return was filed or whether the tax return filed was either false or
fraudulent.1âwphi1 When a tax return that is neither false nor fraudulent has
been filed, the Bureau of Internal Revenue may assess within three (3) years,
reckoned from the date of actual filing or from the last day prescribed by law for
filing.110 However, in case of a false or fraudulent return with intent to evade tax,
Section 222(a) provides:

Section 222. Exceptions as to Period of Limitation of Assessment and Collection of

Taxes. –

(a) In the case of a false or fraudulent return with intent to evade tax or of failure
to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be filed without assessment, at any time within ten (10)
years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection
thereof. (Emphasis supplied)

In Aznar v. Court of Tax Appeals,111 this Court interpreted Section 332112 (now
Section 222[a] of the National Internal Revenue Code) by dividing it in three (3)
different cases: first, in case of false return; second, in case of a fraudulent return
with intent to evade; and third, in case of failure to file a return.113 Thus:

Our stand that the law should be interpreted to mean a separation of the three
different situations of false return, fraudulent return with intent to evade tax and
failure to file a return is strengthened immeasurably by the last portion of the
provision which aggregates the situations into three different classes, namely
"falsity'', "fraud" and "omission."114

This Court held that there is a difference between "false return" and a "fraudulent
return."115 A false return simply involves a "deviation from the truth, whether
intentional or not" while a fraudulent return "implies intentional or deceitful
entry with intent to evade the taxes due."116

Fraud is a question of fact that should be alleged and duly proven.117 "The willful
neglect to file the required tax return or the fraudulent intent to evade the
payment of taxes, considering that the same is accompanied by legal
consequences, cannot be presumed."118 Fraud entails corresponding sanctions
under the tax law. Therefore, it is indispensable for the Commissioner of Internal
Revenue to include the basis for its allegations of fraud in the assessment notice.

During the proceedings in the Court of Tax Appeals First Division, respondent
presented its President, Domingo C. Juan Jr. (Juan, Jr.), as witness.119 Juan, Jr.
testified that respondent was, in its pre-operating stage in 1995.120During that
period, respondent "imported equipment and distributed them for market testing
in the Philippines without earning any profit."121 He also confirmed that the Final
Assessment Notice and its attachments failed to substantiate the Commissioner's
allegations of fraud against respondent, thus:

More than three (3) years from the time petitioner filed its 1995 annual income
tax return on April 11, 1996, respondent issued to petitioner a [Final Assessment
Notice] dated March 17, 2004 for the year 1995, pursuant to the Letter of
Authority No. 00002953 dated May 13, 2002. The attached Details of discrepancy
containing the assessment for income tax (IT), value-added tax (VAT) and
documentary stamp tax (DST) as well as the Audit Result/ Assessment Notice do
not impute fraud on the part of petitioner. Moreover, it was obtained on
information and documents illegally obtained by a [Bureau of Internal Revenue]
informant from petitioner's accountant Elnora Carpio in 1996.122 (Emphasis
supplied)

Petitioner did not refute respondent's allegations. For its defense, it presented
Socrates Regala (Regala), the Group Supervisor of the team, who examined
respondent's tax liabilities.123 Regala confirmed that the investigation was
prompted by a tip from an informant who provided them with respondent's list of
sales.124 He admitted125 that the gathered information did not show that
respondent deliberately failed to reflect its true income in 1995.126

IV

The issuance of a valid formal assessment is a substantive prerequisite for

collection of taxes.127 Neither the National Internal Revenue Code nor the
revenue regulations provide for a "specific definition or form of an assessment."
However, the National Internal Revenue Code defines its explicit functions and
effects."128 An assessment does not only include a computation of tax liabilities; it
also includes a demand for payment within a period prescribed.129 Its main
purpose is to determine the amount that a taxpayer is liable to pay.130

A pre-assessment notice "do[es] not bear the gravity of a formal assessment

notice."131 A pre-assessment notice merely gives a tip regarding the Bureau of
Internal Revenue's findings against a taxpayer for an informal conference or a
clarificatory meeting.132

A final assessment is a notice "to the effect that the amount therein stated is due
as tax and a demand for payment thereof."133 This demand for payment signals
the time "when penalties and interests begin to accrue against the taxpayer and
enabling the latter to determine his remedies[.]"134 Thus, it must be "sent to and
received by the taxpayer, and must demand payment of the taxes described
therein within a specific period."135

The disputed Final Assessment Notice is not a valid assessment.

First, it lacks the definite amount of tax liability for which respondent is
accountable. It does not purport to be a demand for payment of tax due, which a
final assessment notice should supposedly be. An assessment, in the context of
the National Internal Revenue Code, is a "written notice and demand made by the
[Bureau of Internal Revenue] on the taxpayer for the settlement of a due tax
liability that is there: definitely set and fixed."136 Although the disputed notice
provides for the computations of respondent's tax liability, the amount remains
indefinite. It only provides that the tax due is still subject to modification,
depending on the date of payment. Thus:

The complete details covering the aforementioned discrepancies established

during the investigation of this case are shown in the accompanying Annex 1 of
this Notice. The 50% surcharge and 20% interest have been imposed pursuant to
Sections 248 and 249 (B) of the [National Internal Revenue Code], as amended.
Please note, however, that the interest and the total amount due will have to be
adjusted if prior or beyond April 15, 2004.137 (Emphasis Supplied)

Second, there are no due dates in the Final Assessment Notice. This negates
petitioner's demand for payment.138Petitioner's contention that April 15, 2004
should be regarded as the actual due date cannot be accepted. The last paragraph
of the Final Assessment Notice states that the due dates for payment were
supposedly reflected in the attached assessment:

In view thereof, you are requested to pay your aforesaid deficiency internal
revenue tax liabilities through the duly authorized agent bank in which you are
enrolled within the time shown in the enclosed assessment notice.139 (Emphasis in
the original)

However, based on the findings of the Court of Tax Appeals First Division, the
enclosed assessment pertained to remained unaccomplished.140

Contrary to petitioner's view, April 15, 2004 was the reckoning date of accrual of
penalties and surcharges and not the due date for payment of tax
liabilities.1avvphi1 The total amount depended upon when respondent decides to
pay. The notice, therefore, did not contain a definite and actual demand to pay.

Compliance with Section 228 of the National Internal Revenue Code is a

substantative requirement.141 It is not a mere formality.142 Providing the taxpayer
with the factual and legal bases for the assessment is crucial before proceeding
with tax collection. Tax collection should be premised on a valid assessment,
which would allow the taxpayer to present his or her case and produce evidence
for substantiation.143

The Court of Tax Appeals did not err in cancelling the Final Assessment Notice as
well as the Audit Result/Assessment Notice issued by petitioner to respondent for
the year 1995 covering the "alleged deficiency income tax, value-added tax and
documentary stamp tax amounting to ₱10,647,529.69, inclusive of surcharges and
interest"144 for lack of due process. Thus, the Warrant of Distraint and/or Levy is
void since an invalid assessment bears no valid effect.145

Taxes are the lifeblood of government and should be collected without

hindrance.146 However, the collection of taxes should be exercised "reasonably
and in accordance with the prescribed procedure."147

The essential nature of taxes for the existence of the State grants government
with vast remedies to ensure its collection. However, taxpayers are guaranteed
their fundamental right to due process of law, as articulated in various ways in the
process of tax assessment. After all, the State's purpose is to ensure the well-
being of its citizens, not simply to deprive them of their fundamental rights.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Tax Appeals En
Banc dated July 14, 2014 and Resolution dated December 16, 2014 in CTA EB Case
No. 970 (CTA Case No. 7160) are hereby AFFIRMED.

SO ORDERED.

SECOND DIVISION

COMMISSIONER OF INTERNAL G.R. No. 178697

REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

LEONARDO-DE CASTRO,*
PERALTA,
- versus - ABAD, and
 MENDOZA, JJ.

SONY PHILIPPINES, INC., Promulgated:

Respondent. November 17, 2010

X ---------------------------------------------------------------------------------------X

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007
Decision and the July 5, 2007 Resolution of the Court of Tax Appeals En
Banc[1] (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision of
the CTA-First Division[2] which, in turn, partially granted the petition for review of
respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled
the deficiency assessment issued by petitioner Commissioner of Internal
Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency
assessment for expanded withholding tax (EWT) in the amount of P1,035,879.70
and the penalties for late remittance of internal revenue taxes in the amount
of P1,269, 593.90.[3]

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No.

000019734 (LOA 19734) authorizing certain revenue officers to examine Sonys
books of accounts and other accounting records regarding revenue taxes for the
period 1997 and unverified prior years. On December 6, 1999, a preliminary
assessment for 1997 deficiency taxes and penalties was issued by the CIR which
Sony protested. Thereafter, acting on the protest, the CIR issued final assessment
notices, the formal letter of demand and the details of discrepancies.[4] Said
details of the deficiency taxes and penalties for late remittance of internal
revenue taxes are as follows:
DEFICIENCY VALUE -ADDED TAX (VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
3,157,314.4
Interest up to 3-31-2000 P 1
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING

TAX (EWT)
(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY

PAYMENTS
(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL

WITHHOLDING TAX
(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
1,729,690.7
Surcharge P 1
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME

PAYMENTS
(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60

15,895,632.65[5
]
GRAND TOTAL P

Sony sought re-evaluation of the aforementioned assessment by filing a

protest on February 2, 2000. Sony submitted relevant documents in support of its
protest on the 16th of that same month.[6]

On October 24, 2000, within 30 days after the lapse of 180 days from
submission of the said supporting documents to the CIR, Sony filed a petition for
review before the CTA.[7]
 After trial, the CTA-First Division disallowed the deficiency VAT assessment
because the subsidized advertising expense paid by Sony which was duly covered
by a VAT invoice resulted in an input VAT credit. As regards the EWT, the CTA-First
Division maintained the deficiency EWT assessment on Sonys motor vehicles and
on professional fees paid to general professional partnerships. It also assessed the
amounts paid to sales agents as commissions with five percent (5%) EWT
pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division,
however, disallowed the EWT assessment on rental expense since it found that
the total rental deposit of P10,523,821.99 was incurred from January to March
1998 which was again beyond the coverage of LOA 19734. Except for the
compromise penalties, the CTA-First Division also upheld the penalties for the late
payment of VAT on royalties, for late remittance of final withholding tax on
royalty as of December 1997 and for the late remittance of EWT by some of Sonys
branches.[8] In sum, the CTA-First Division partly granted Sonys petition by
cancelling the deficiency VAT assessment but upheld a modified deficiency EWT
assessment as well as the penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY

GRANTED. Respondent is ORDERED to CANCEL and WITHDRAW the
deficiency assessment for value-added tax for 1997 for lack of merit.
However, the deficiency assessments for expanded withholding tax
and penalties for late remittance of internal revenue taxes are
UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the
deficiency expanded withholding tax in the amount of P1,035,879.70
and the following penalties for late remittance of internal revenue
taxes in the sum of P1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioners Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid
pursuant to Section 249(C)(3) of the 1997 Tax Code.

SO ORDERED.[9]
 The CIR sought a reconsideration of the above decision and submitted the
following grounds in support thereof:

A. The Honorable Court committed reversible error in holding

that petitioner is not liable for the deficiency VAT in the
amount of P11,141,014.41;

B. The Honorable court committed reversible error in holding

that the commission expense in the amount of P2,894,797.00
should be subjected to 5% withholding tax instead of the 10%
tax rate;

C. The Honorable Court committed a reversible error in holding

that the withholding tax assessment with respect to the 5%
withholding tax on rental deposit in the amount
of P10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding

that the remittance of final withholding tax on royalties
covering the period January to March 1998 was filed on
time.[10]

On April 28, 2005, the CTA-First Division denied the motion for
reconsideration. Unfazed, the CIR filed a petition for review with the CTA-EB
raising identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency

VAT in the amount of P11,141,014.41;

2. Whether or not the commission expense in the amount

of P2,894,797.00 should be subjected to 10% withholding tax
instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the

5% withholding tax on rental deposit in the amount
of P10,523,821.99 is proper; and
 4. Whether or not the remittance of final withholding tax on
royalties covering the period January to March 1998 was filed
outside of time.[11]

Finding no cogent reason to reverse the decision of the CTA-First Division,

the CTA-EB dismissed CIRs petition on May 17, 2007. CIRs motion for
reconsideration was denied by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the
very same grounds it raised before the CTA-First Division and the CTA-EB. The said
grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS

NOT LIABLE FOR DEFICIENCY VAT IN THE AMOUNT OF
PHP11,141,014.41.

II

AS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING

TAX IN THE AMOUNT OF PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION

EXPENSE IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE
SUBJECTED TO A WITHHOLDING TAX OF 5% INSTEAD OF THE
10% TAX RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT

WITH RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL
DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III
 THE CTA EN BANC ERRED IN RULING THAT THE FINAL
WITHHOLDING TAX ON ROYALTIES COVERING THE PERIOD
JANUARY TO MARCH 1998 WAS FILED ON TIME.[12]

Upon filing of Sonys comment, the Court ordered the CIR to file its reply
thereto. The CIR subsequently filed a manifestation informing the Court that it
would no longer file a reply. Thus, on December 3, 2008, the Court resolved to
give due course to the petition and to decide the case on the basis of the
pleadings filed.[13]
The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states the period 1997 and
unverified prior years, should be understood to mean the fiscal year ending in
March 31, 1998.[14] The Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the

authority given to the appropriate revenue officer assigned to perform
assessment functions. It empowers or enables said revenue officer to examine the
books of account and other accounting records of a taxpayer for the purpose of
collecting the correct amount of tax.[15] The very provision of the Tax Code that
the CIR relies on is unequivocal with regard to its power to grant authority to
examine and assess a taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments

and Prescribe Additional Requirements for Tax Administration and
Enforcement.

(A)Examination of Returns and Determination of tax Due. After

a return has been filed as required under the provisions of this Code,
the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of
the correct amount of tax: Provided, however, That failure to file a
return shall not prevent the Commissioner from authorizing the
examination of any taxpayer. x x x [Emphases supplied]
 Clearly, there must be a grant of authority before any revenue officer can
conduct an examination or assessment. Equally important is that the revenue
officer so authorized must not go beyond the authority given. In the absence of
such an authority, the assessment or examination is a nullity.

As earlier stated, LOA 19734 covered the period 1997 and unverified prior
years. For said reason, the CIR acting through its revenue officers went beyond
the scope of their authority because the deficiency VAT assessment they arrived
at was based on records from January to March 1998 or using the fiscal year
which ended in March 31, 1998. As pointed out by the CTA-First Division in its
April 28, 2005 Resolution, the CIR knew which period should be covered by the
investigation. Thus, if CIR wanted or intended the investigation to include the year
1998, it should have done so by including it in the LOA or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734,
particularly the phrase and unverified prior years, violated Section C of Revenue
Memorandum Order No. 43-90 dated September 20, 1990, the pertinent portion
of which reads:

3. A Letter of Authority should cover a taxable period not

exceeding one taxable year. The practice of issuing L/As covering
audit of unverified prior years is hereby prohibited. If the audit of
a taxpayer shall include more than one taxable period, the other
periods or years shall be specifically indicated in the
L/A.[16] [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been
disallowed. Be that as it may, the CIRs argument, that Sonys advertising expense
could not be considered as an input VAT credit because the same was eventually
reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sonys advertising expense was reimbursed by
SIS, the former never incurred any advertising expense. As a result, Sony is not
entitled to a tax credit. At most, the CIR continues, the said advertising expense
should be for the account of SIS, and not Sony.[17]
 The Court is not persuaded. As aptly found by the CTA-First Division and
later affirmed by the CTA-EB, Sonys deficiency VAT assessment stemmed from the
CIRs disallowance of the input VAT credits that should have been realized from
the advertising expense of the latter.[18] It is evident under Section 110[19] of the
1997 Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than CIRs own witness,
Revenue Officer Antonio Aluquin.[20] There is also no denying that Sony incurred
advertising expense. Aluquin testified that advertising companies issued invoices
in the name of Sony and the latter paid for the same.[21] Indubitably, Sony
incurred and paid for advertising expense/ services. Where the money came from
is another matter all together but will definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement
from SIS was income and, thus, taxable. In support of this, the CIR cited a portion
of Sonys protest filed before it:

The fact that due to adverse economic conditions, Sony-

Singapore has granted to our client a subsidy equivalent to the latters
advertising expenses will not affect the validity of the input taxes
from such expenses. Thus, at the most, this is an additional income of
our client subject to income tax. We submit further that our client is
not subject to VAT on the subsidy income as this was not derived
from the sale of goods or services.[22]

Insofar as the above-mentioned subsidy may be considered as income and,

therefore, subject to income tax, the Court agrees. However, the Court does not
agree that the same subsidy should be subject to the 10% VAT. To begin with, the
said subsidy termed by the CIR as reimbursement was not even exclusively
earmarked for Sonys advertising expense for it was but an assistance or aid in
view of Sonys dire or adverse economic conditions, and was only equivalent to
the latters (Sonys) advertising expenses.

Section 106 of the Tax Code explains when VAT may be imposed or
exacted. Thus:

SEC. 106. Value-added Tax on Sale of Goods or Properties.

 (A) Rate and Base of Tax. There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
value-added tax equivalent to ten percent (10%) of the gross selling
price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or
transferor.

Thus, there must be a sale, barter or exchange of goods or properties

before any VAT may be levied. Certainly, there was no such sale, barter or
exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and not
in payment for goods or properties sold, bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to
rule that services rendered for a fee even on reimbursement-on-cost basis only
and without realizing profit are also subject to VAT. The case, however, is not
applicable to the present case. In that case, COMASERCO rendered service to its
affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which
means that it was paid the cost or expense that it incurred although without
profit. This is not true in the present case. Sony did not render any service to SIS
at all. The services rendered by the advertising companies, paid for by Sony using
SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the
amount equivalent to the latters advertising expense but never received any
goods, properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sonys

commission expense, the CIR insists that said deficiency EWT assessment is
subject to the ten percent (10%) rate instead of the five percent (5%) citing
Revenue Regulation No. 2-98 dated April 17, 1998.[24] The said revenue regulation
provides that the 10% rate is applied when the recipient of the commission
income is a natural person. According to the CIR, Sonys schedule of Selling,
General and Administrative expenses shows the commission expense as
commission/dealer salesman incentive, emphasizing the word salesman.
 On the other hand, the application of the five percent (5%) rate by the CTA-
First Division is based on Section 1(g) of Revenue Regulations No. 6-85 which
provides:

(g) Amounts paid to certain Brokers and Agents. On gross

payments to customs, insurance, real estate and commercial brokers
and agents of professional entertainers five per centum (5%).[25]

In denying the very same argument of the CIR in its motion for
reconsideration, the CTA-First Division, held:

x x x, commission expense is indeed subject to 10%

withholding tax but payments made to broker is subject to 5%
withholding tax pursuant to Section 1(g) of Revenue Regulations No.
6-85. While the commission expense in the schedule of Selling,
General and Administrative expenses submitted by petitioner (SPI) to
the BIR is captioned as commission/dealer salesman incentive the
same does not justify the automatic imposition of flat 10% rate. As
itemized by petitioner, such expense is composed of Commission
Expense in the amount of P10,200.00 and Broker Dealer of
P2,894,797.00.[26]

The Court agrees with the CTA-EB when it affirmed the CTA-First Division
decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as amended
by Revenue Regulations No. 12-94, which was the applicable rule during the
subject period of examination and assessment as specified in the LOA. Revenue
Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case. Besides, the withholding tax on
brokers and agents was only increased to 10% much later or by the end of July
2001 under Revenue Regulations No. 6-2001.[27] Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the
CTA-EB on the deficiency EWT assessment on the rental deposit. According to
their findings, Sony incurred the subject rental deposit in the amount
of P10,523,821.99 only from January to March 1998. As stated earlier, in the
absence of the appropriate LOA specifying the coverage, the CIRs deficiency EWT
assessment from January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated
remittance of its FWT on royalties (i) as of December 1997; and (ii) for the period
from January to March 1998. Again, the Court agrees with the CTA-First Division
when it upheld the CIR with respect to the royalties for December 1997 but
cancelled that from January to March 1998.

The CIR insists that under Section 3[28] of Revenue Regulations No. 5-82 and
Sections 2.57.4 and 2.58(A)(2)(a)[29] of Revenue Regulations No. 2-98, Sony should
also be made liable for the FWT on royalties from January to March of 1998. At
the same time, it downplays the relevance of the Manufacturing License
Agreement (MLA) between Sony and Sony-Japan, particularly in the payment of
royalties.

The above revenue regulations provide the manner of withholding

remittance as well as the payment of final tax on royalty. Based on the same,
Sony is required to deduct and withhold final taxes on royalty payments when the
royalty is paid or is payable. After which, the corresponding return and remittance
must be made within 10 days after the end of each month. The question now is
when does the royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following
terms of royalty payments were agreed upon:

(5)Within two (2) months following each semi-annual period

ending June 30 and December 31, the LICENSEE shall furnish to the
LICENSOR a statement, certified by an officer of the LICENSEE,
showing quantities of the MODELS sold, leased or otherwise disposed
of by the LICENSEE during such respective semi-annual period and
amount of royalty due pursuant this ARTICLE X therefore, and the
LICENSEE shall pay the royalty hereunder to the LICENSOR
concurrently with the furnishing of the above statement.[30]
 Withal, Sony was to pay Sony-Japan royalty within two (2) months after
every semi-annual period which ends in June 30 and December 31. However, the
CTA-First Division found that there was accrual of royalty by the end of December
1997 as well as by the end of June 1998. Given this, the FWTs should have been
paid or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it
was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for
the royalty from January to March 1998 was seasonably filed. Although the
royalty from January to March 1998 was well within the semi-annual period
ending June 30, which meant that the royalty may be payable until August 1998
pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10,
1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of
the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.

November 9, 2016

G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
DE LA SALLE UNIVERSITY, INC., Respondent

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

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

x-----------------------x
G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
DE LA SALLE UNIVERSITY, INC., Respondent.

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari:1

1. G.R. No. 196596 filed by the Commissioner of Internal

Revenue (Commissioner) to assail the December 10, 2010 decision and March 29,
2011 resolution of the Court of Tax Appeals (CTA) in En Banc Case No. 622;2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8,
2011 decision and October 4, 2011 resolution in CTA En Banc Case No. 671;3 and

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision
and October 4, 2011 resolution in CTA En Banc Case No. 671.4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First
Division (CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En
Banc Case No. 622 filed by the Commissioner to challenge CTA Case No. 7303.
G.R. No. 198841 and 198941 both stemmed from CTA En Banc Case No. 671 filed
by DLSU to also challenge CTA Case No. 7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter's
books of accounts and other accounting records for all internal revenue taxes for
the period Fiscal Year Ending 2003 and Unverified Prior Years.5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6

Subsequently on August 18, 2004, the BIR through a Formal Letter of

Demand assessed DLSU the following deficiency taxes: (1) income tax on rental
earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAI) on business income; and (3) documentary stamp tax
(DSI) on loans and lease contracts. The BIR demanded the payment
of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years
2001, 2002 and 2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest;
thus, DLSU filed on August 3, 2005 a petition for review with the CTA Division.8

DLSU, a non-stock, non-profit educational institution, principally anchored its

petition on Article XIV, Section 4 (3)of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review.
The dispositive portion of the decision reads:

WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST

assessment on the loan transactions of *DLSU+ in the amount of ₱1,1681,774.00 is
hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax,
VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001,
2002 and 2003 in the total amount of ₱18,421,363.53 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the
total amount due computed from September 30, 2004 until full payment thereof
pursuant to Section 249(C)(3) of the [National Internal Revenue Code]. Further,
the compromise penalties imposed by [the Commissioner] were excluded, there
being no compromise agreement between the parties.

SO ORDERED.9

Both the Commissioner and DLSU moved for the reconsideration of the January 5,
2010 decision.10 On April 6, 2010, the CTA Division denied the Commissioner's
motion for reconsideration while it held in abeyance the resolution on DLSU's
motion for reconsideration.11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En
Banc Case No. 622) arguing that DLSU's use of its revenues and assets for non-
educational or commercial purposes removed these items from the exemption
coverage under the Constitution.12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces
of documentary evidence to prove that its rental income was used actually,
directly and exclusively for educational purposes.13 The Commissioner did not
promptly object to the formal offer of supplemental evidence despite notice.14

On July 29, 2010, the CTA Division, in view of the supplemental evidence
submitted, reduced the amount of DLSU's tax deficiencies. The dispositive portion
of the amended decision reads:

WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY

GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and
DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total
adjusted amount of ₱5,506,456.71 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency
interest on the ... basic deficiency taxes ... until full payment thereof pursuant to
Section 249(B) of the [National Internal Revenue Code] ... xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency
interest on the deficiency taxes, surcharge and deficiency interest which have
accrued ... from September 30, 2004 until fully paid.15

Consequently, the Commissioner supplemented its petition with the CTA En

Banc and argued that the CTA Division erred in admitting DLSU's additional
evidence.16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed
a separate petition for review with the CTA En Banc (CTA En Banc Case No. 671)
on the following grounds: (1) the entire assessment should have been cancelled
because it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA
Division should still have cancelled the entire assessment because DLSU
submitted evidence similar to those submitted by Ateneo De Manila
University (Ateneo) in a separate case where the CTA cancelled Ateneo's tax
assessment;17 and (3) the CTA Division erred in finding that a portion of DLSU's
rental income was not proved to have been used actually, directly and exclusively
for educational purposes.18
The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained
the findings of the CTA Division.19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public

Accountant (Independent CPA), the CTA En Banc found that DLSU was able to
prove that a portion of the assessed rental income was used actually, directly and
exclusively for educational purposes; hence, exempt from tax.20 The CTA En
Banc was satisfied with DLSU's supporting evidence confirming that part of its
rental income had indeed been used to pay the loan it obtained to build the
university's Physical Education – Sports Complex.21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its
income that was not shown by supporting documents to have been actually,
directly and exclusively used for educational purposes, must be subjected to
income tax and VAT.22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU froved its remittance of the DST
due on its loan and mortgage documents.23 The CTA En Banc found that DLSU's
DST payments had been remitted to the BIR, evidenced by the stamp on the
documents made by a DST imprinting machine, which is allowed under Section
200 (D) of the National Internal Revenue Code (Tax Code)24 and Section 2 of
Revenue Regulations (RR) No. 15-2001.25

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence
were admissible even if DLSU formally offered them only when it moved for
reconsideration of the CTA Division's original decision. Notably, the law creating
the CTA provides that proceedings before it shall not be governed strictly by the
technical rules of evidence.26
The Commissioner moved but failed to obtain a reconsideration of the CTA En
Banc's December 10, 2010 decision.27 Thus, she came to this court for relief
through a petition for review on certiorari (G.R. No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced
its tax liabilities to ₱2,554,825.47inclusive of surcharge.28

On the validity of the Letter of Authority

The issue of the LOA' s validity was raised during trial;29 hence, the issue was
deemed properly submitted for decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one
taxable period and that the practice of issuing a LOA covering audit of unverified
prior years is prohibited.30 The prohibition is consistent with Revenue
Memorandum Order (RMO) No. 43-90, which provides that if the audit includes
more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. Hence, the assessments for deficiency income tax, VAT and
DST for taxable years 2001 and 2002 are void, but the assessment for taxable
year 2003 is valid.32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it
involved different parties, factual settings, bases of assessments, sets of evidence,
and defenses.33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It
held that while DLSU successfully proved that a portion of its rental income was
transmitted and used to pay the loan obtained to fund the construction of the
Sports Complex, the rental income from other sources were not shown to have
been actually, directly and exclusively used for educational purposes.34
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the
Commissioner (G.R. No. 198941) came to this Court for relief.

The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived,
used or disposed of.35 DLSU's operations of canteens and bookstores within its
campus even though exclusively serving the university community do not negate
income tax liability.36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution
must be harmonized with Section 30 (H) of the Tax Code, which states among
others, that the income of whatever kind and character of [a non-stock and non-
profit educational institution] from any of [its] properties, real or personal, or
from any of [its] activities conducted for profit regardless of the disposition made
of such income, shall be subject to tax imposed by this Code.37

The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA38 to support its conclusion that
revenues however generated are covered by the constitutional exemption,
provided that, the revenues will be used for educational purposes or will be held
in reserve for such purposes.39

On the contrary, the Commissioner posits that a tax-exempt organization like

DLSU is exempt only from property tax but not from income tax on the rentals
earned from property.40 Thus, DLSU's income from the leases of its real properties
is not exempt from taxation even if the income would be used for educational
purposes.41

Second, the Commissioner insists that DLSU did not prove the fact of DST
payment42 and that it is not qualified to use the On-Line Electronic DST Imprinting
Machine, which is available only to certain classes of taxpayers under RR No. 9-
2000.43
Finally, the Commissioner objects to the admission of DLSU's supplemental offer
of evidence. The belated submission of supplemental evidence reopened the case
for trial, and worse, DLSU offered the supplemental evidence only after it
received the unfavorable CTA Division's original decision.44 In any case, DLSU's
submission of supplemental documentary evidence was unnecessary since its
rental income was taxable regardless of its disposition.45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication
of unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an
assessment issued based on such defective LOA must also be void.46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and
Unverified Prior Years. On the basis of this defective LOA, the Commissioner
assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001,
2002 and 2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is
valid for taxable year 2003. According to DLSU, when RMO No. 43-90 provides
that:

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
prohibited.

it refers to the LOA which has the format "Base Year + Unverified Prior
Years." Since the LOA issued to DLSU follows this format, then any assessment
arising from it must be entirely voided.48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that
for similarly situated parties, the same set of evidence should be appreciated and
weighed in the same manner.49 The CTA En Banc erred when it did not similarly
appreciate DLSU' s evidence as it did to the pieces of evidence submitted by
Ateneo, also a non-stock, non-profit educational institution.50

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition
are exactly the same as those she raised in her: (1) petition docketed as G.R. No.
196596 and (2) comment on DLSU's petition docketed as G.R. No. 198841.51

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition.52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear
that all assets and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes are exempt from taxes
and duties.53

On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit
educational institutions is novel to the 1987 Constitution and that Section 30 (H)
of the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the
1997 Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code -with
the addition of non-stock, non-profit educational institutions to the list of tax-
exempt entities; and (3) that the 1977 Tax Code was promulgated when the 1973
Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational

institution under the 1973 Constitution was only for real property tax. Back then,
the special tax treatment on income of private educational institutions only
emanates from statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution
that exemption from tax of all the assets and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational
purposes, was expressly and categorically enshrined.55

DLSU thus invokes the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force
and effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the
income of whatever kind and character of a non-stock and non-profit educational
institution from any of its properties, real or personal, or from any of its activities
conducted for profit regardless of the disposition made of such income, should be
declared without force and effect in view of the constitutionally granted tax
exemption on "all revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational purposes."57

DLSU further submits that it complies with the requirements enunciated in

the YMCA case, that for an exemption to be granted under Article XIV, Section 4
(3) of the Constitution, the taxpayer must prove that: (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the income it
seeks to be exempted from taxation is used actually, directly and exclusively for
educational purposes.58 Unlike YMCA, which is not an educational institution,
DLSU is undisputedly a non-stock, non-profit educational institution. It had also
submitted evidence to prove that it actually, directly and exclusively used its
income for educational purposes.59

DLSU also cites the deliberations of the 1986 Constitutional Commission where
they recognized that the tax exemption was granted "to incentivize private
educational institutions to share with the State the responsibility of educating the
youth."60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank
that handled DLSU' s loan and mortgage transactions had remitted to the BIR the
DST through an imprinting machine, a method allowed under RR No. 15-2001.61 In
any case, DLSU argues that it cannot be held liable for DST owing to the
exemption granted under the Constitution.62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose
the formal offer of supplemental evidence. Because of the Commissioner's failure
to timely object, she became bound by the results of the submission of such
supplemental evidence.63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's
validity because it failed to raise this issue in both the administrative and judicial
proceedings.64 That it was asked on cross-examination during the trial does not
make it an issue that the CTA could resolve.65 The Commissioner also maintains
that DLSU's rental income is not tax-exempt because an educational institution is
only exempt from property tax but not from tax on the income earned from the
property.66
DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.67 In addition,

DLSU prays that the Court award attorney's fees in its favor because it was
constrained to unnecessarily retain the services of counsel in this separate
petition.68

Issues

Although the parties raised a number of issues, the Court shall decide only the
pivotal issues, which we summarize as follows:

I. Whether DLSU' s income and revenues proved to have been used

actually, directly and exclusively for educational purposes are exempt from
duties and taxes;

II. Whether the entire assessment should be voided because of the

defective LOA;

III. Whether the CTA correctly admitted DLSU's supplemental pieces of

evidence; and

IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence

may be disturbed by the Court.

Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational

institutions proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable
year 2003 is valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental

evidence; and
 IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown
to have manifestly overlooked certain relevant facts not disputed by the
parties and which, if properly considered, would justify a different
conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to
consider relevant facts. We thus sustain the CTA En Banc's findings that:

a. DLSU proved that a portion of its rental income was used actually,
directly and exclusively for educational purposes; and

b. DLSU proved the payment of the DST through its bank's on-line
imprinting machine.

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which
reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall
be exempt from taxes and duties. Upon the dissolution or cessation of the
corporate existence of such institutions, their assets shall be disposed of in the
manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may

likewise be entitled to such exemptions subject to
the limitations provided by law including restrictions on dividends and provisions
for reinvestment. [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions:
(1) non-stock, non-profit educational institutions and (2) proprietary educational
institutions.69

Second, DLSU falls under the first category. Even the Commissioner admits the
status of DLSU as a non-stock, non-profit educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the
Constitution, the Constitution, in the same provision, also imposes certain
conditions to avail of the exemption. We discuss below the import of the
constitutional text vis-a-vis the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of non-stock, non-

profit educational institutions and proprietary educational institutions. The tax
exemption granted to non-stock, non-profit educational institutions is
conditioned only on the actual, direct and exclusive use of their revenues and
assets for educational purposes. While tax exemptions may also be granted to
proprietary educational institutions, these exemptions may be subject to
limitations imposed by Congress.

As we explain below, the marked distinction between a non-stock, non-profit and

a proprietary educational institution is crucial in determining the nature and
extent of the tax exemption granted to non-stock, non-profit educational
institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section
30 (H) of the Tax Code. The relevant text reads:

The following organizations shall not be taxed under this Title [Tax on

Income] in respect to income received by them as such:

xxxx

(H) A non-stock and non-profit educational institution

xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for
profit regardless of the disposition made of such income shall be subject to tax
imposed under this Code. [underscoring and emphasis supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax exemption
granted to non-stock, non-profit educational institutions such that the revenues
and income they derived from their assets, or from any of their activities
conducted for profit, are taxable even if these revenues and income are used for
educational purposes.

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-
stock, non-profit educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,71 the Court in
the YMCA case had in fact already analyzed and explained the meaning of Article
XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal
pronouncements that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property
owned by the YMCA, established as a "welfare, educational and charitable non-
profit corporation," was subject to income tax under the Tax Code and the
Constitution.72

The Court denied YMCA's claim for exemption on the ground that as a charitable
institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA
is not tax-exempt per se; " what is exempted is not the institution itself... those
exempted from real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational purposes."74

The Court held that the exemption claimed by the YMCA is expressly disallowed
by the last paragraph of then Section 27 (now Section 30) of the Tax Code, which
mandates that the income of exempt organizations from any of their properties,
real or personal, are subject to the same tax imposed by the Tax Code, regardless
of how that income is used. The Court ruled that the last paragraph of Section 27
unequivocally subjects to tax the rent income of the YMCA from its property.75
In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA
invoked the tax privilege granted under Article XIV, Section 4 (3) of the
Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the
Constitution holding that the term educational institution, when used in laws
granting tax exemptions, refers to the school system (synonymous with formal
education); it includes a college or an educational establishment; it refers to the
hierarchically structured and chronologically graded learnings organized and
provided by the formal school system.76

The Court then significantly laid down the requisites for availing the tax
exemption under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under
the classification non-stock, non-profit educational institution; and (2)
the income it seeks to be exempted from taxation is used actually, directly and
exclusively for educational purposes.77

We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect
with respect to non-stock, non-profit educational institutions, provided, that the
non-stock, non-profit educational institutions prove that its assets and revenues
are used actually, directly and exclusively for educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non-profit

educational institutions, is not subject to limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income78 for
educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to
charitable institutions, churches, parsonages or convents, mosques, and non-
profit cemeteries), which exempts from tax only the assets,
i.e., "all lands, buildings, and improvements, actually, directly, and exclusively
used for religious, charitable, or educational purposes ... ," Article XIV, Section 4
(3) categorically states that "[a]ll revenues and assets ... used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of
the Constitution is not without significance.

We find that the text demonstrates the policy of the 1987 Constitution,
discernible from the records of the 1986 Constitutional Commission79 to provide
broader tax privilege to non-stock, non-profit educational institutions as
recognition of their role in assisting the State provide a public good. The tax
exemption was seen as beneficial to students who may otherwise be charged
unreasonable tuition fees if not for the tax exemption extended
to all revenues and assets of non-stock, non-profit educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4
(3) does not require that the revenues and income must have also been sourced
from educational activities or activities related to the purposes of an educational
institution. The phrase all revenues is unqualified by any reference to the source
of revenues. Thus, so long as the revenues and income are used actually, directly
and exclusively for educational purposes, then said revenues and income shall be
exempt from taxes and duties.81

We find it helpful to discuss at this point the taxation of revenues versus the
taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct
of business operations.82 It may refer to the sale of goods, rendition of services, or
the return of an investment. Revenue is a component of the tax base in income
tax,83 VAT,84 and local business tax (LBT).85

Assets, on the other hand, are the tangible and intangible properties owned by a
person or entity.86 It may refer to real estate, cash deposit in a bank, investment
in the stocks of a corporation, inventory of goods, or any property from which the
person or entity may derive income or use to generate the same. In Philippine
taxation, the fair market value of real property is a component of the tax base in
real property tax (RPT).87 Also, the landed cost of imported goods is a component
of the tax base in VAT on importation88 and tariff duties.89
Thus, when a non-stock, non-profit educational institution proves that it uses
its revenues actually, directly, and exclusively for educational purposes, it shall be
exempted from income tax, VAT, and LBT. On the other hand, when it also shows
that it uses its assets in the form of real property for educational purposes, it shall
be exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption,
but the specific tax from which the entity shall be exempted from shall depend on
whether the item is an item of revenue or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or

cafeteria, the leased portion is not actually, directly and exclusively used for
educational purposes, even if the bookstore or canteen caters only to university
students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held
in Abra Valley College, Inc. v. Aquino.90 We ruled in that case that the test of
exemption from taxation is the use of the property for purposes mentioned in the
Constitution. We also held that the exemption extends to facilities which are
incidental to and reasonably necessary for the accomplishment of the main
purposes.

In concrete terms, the lease of a portion of a school building for commercial

purposes, removes such asset from the property tax exemption granted under
the Constitution.91 There is no exemption because the asset is not used actually,
directly and exclusively for educational purposes. The commercial use of the
property is also not incidental to and reasonably necessary for the
accomplishment of the main purpose of a university, which is to educate its
students.

However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues
shall be exempt from taxes and duties. The tax exemption no longer hinges on the
use of the asset from which the revenues were earned, but on the actual, direct
and exclusive use of the revenues for educational purposes.

Parenthetically, income and revenues of non-stock, non-profit educational

institution not used actually, directly and exclusively for educational purposes are
not exempt from duties and taxes. To avail of the exemption, the taxpayer
must factually prove that it used actually, directly and exclusively for educational
purposes the revenues or income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the
revenues. These are two things that must be viewed and treated separately. But
so long as the assets or revenues are used actually, directly and exclusively for
educational purposes, they are exempt from duties and taxes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions

differently from proprietary educational institutions cannot be doubted. As
discussed, the privilege granted to the former is conditioned only on the actual,
direct and exclusive use of their revenues and assets for educational purposes. In
clear contrast, the tax privilege granted to the latter may be subject to limitations
imposed by law.

We spell out below the difference in treatment if only to highlight the privileged
status of non-stock, non-profit educational institutions compared with their
proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt

entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a
proprietary educational institution is covered by Section 27 (Rates of Income Tax
on Domestic Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-

profit educational institutions shall not be taxed on income received by them as
such.

Section 27 (B), on the other hand, states that "[p]roprietary educational

institutions ... which are nonprofit shall pay a tax of ten percent (10%) on their
taxable income .. . Provided, that if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income
derived by such educational institutions ... [the regular corporate income tax of
30%] shall be imposed on the entire taxable income ... "92

By the Tax Code's clear terms, a proprietary educational institution is entitled only
to the reduced rate of 10% corporate income tax. The reduced rate is applicable
only if: (1) the proprietary educational institution is nonprofit and (2) its gross
income from unrelated trade, business or activity does not exceed 50% of its total
gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do
not apply to non-stock, non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force
and effect for being contrary to the Constitution insofar as it subjects to tax the
income and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purpose. We make this
declaration in the exercise of and consistent with our duty93 to uphold the
primacy of the Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit
educational institutions and does not cover the other exempt organizations under
Section 30 of the Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to
have been used actually, directly and exclusively for educational purposes are
exempt from duties and taxes.

II. The LOA issued to DLSU is

not entirely void. The
assessment for taxable year
2003 is valid.

DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable
year 2003 and insists that the entire LOA should be voided for being contrary to
RMO No. 43-90, which provides that if tax audit includes more than one taxable
period, the other periods or years shall be specifically indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the
books of account and other accounting records of the taxpayer in order to
determine the taxpayer's correct internal revenue liabilities95 and for the purpose
of collecting the correct amount of tax,96 in accordance with Section 5 of the Tax
Code, which gives the CIR the power to obtain information, to summon/examine,
and take testimony of persons. The LOA commences the audit process97 and
informs the taxpayer that it is under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to
DLSU, and consequently, disregard the BIR and the CTA's findings of tax deficiency
for taxable year 2003?

We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of
which reads:

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one
taxable year. The practice of issuing [LO As] covering audit of unverified prior
years is hereby prohibited. If the audit of a taxpayer shall include more than one
taxable period, the other periods or years shall be specifically indicated in the
[LOA].98

What this provision clearly prohibits is the practice of issuing LOAs covering audit
of unverified prior years. RMO 43-90 does not say that a LOA which contains
unverified prior years is void. It merely prescribes that if the audit includes more
than one taxable period, the other periods or years must be specified. The
provision read as a whole requires that if a taxpayer is audited for more than one
taxable year, the BIR must specify each taxable year or taxable period on separate
LOAs.

Read in this light, the requirement to specify the taxable period covered by the
LOA is simply to inform the taxpayer of the extent of the audit and the scope of
the revenue officer's authority. Without this rule, a revenue officer can unduly
burden the taxpayer by demanding random accounting records from
random unverified years, which may include documents from as far back as ten
years in cases of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. The LOA does not strictly comply with RMO 43-90 because
it includes unverified prior years. This does not mean, however, that the entire
LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because
this taxable period is specified in the LOA. DLSU was fully apprised that it was
being audited for taxable year 2003. Corollarily, the assessments for taxable years
2001 and 2002 are void for having been unspecified on separate LOAs as required
under RMO No. 43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s
validity at the CTA Division, and thus, should not have been entertained on
appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came
up during the trial.100 DLSU then raised the issue in its memorandum and motion
for partial reconsideration with the CTA Division. DLSU raised it again on appeal to
the CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of
the LOA.101Besides, the Commissioner had the opportunity to argue for the
validity of the LOA at the CTA En Banc but she chose not to file her comment and
memorandum despite notice.102

III.The CTA correctly admitted

the supplemental evidence
formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental

pieces of documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion
for reconsideration with the CTA Division.103 The CTA Division admitted the
supplemental evidence, which proved that a portion of DLSU's rental income was
used actually, directly and exclusively for educational purposes. Consequently, the
CTA Division reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct

but mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely
object to the formal offer of supplemental evidence; and (2) the CTA is not
governed strictly by the technical rules of evidence.
First, the failure to object to the offered evidence renders it admissible, and the
court cannot, on its own, disregard such evidence.104

The Court has held that if a party desires the court to reject the evidence offered,
it must so state in the form of a timely objection and it cannot raise the objection
to the evidence for the first time on appeal.105 Because of a party's failure to
timely object, the evidence offered becomes part of the evidence in the case. As a
consequence, all the parties are considered bound by any outcome arising from
the offer of evidence properly presented.106

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal
offer of evidence despite notice.107 The Commissioner objected to the admission
of the supplemental evidence only when the case was on appeal to the CTA En
Banc. By the time the Commissioner raised her objection, it was too late;
the formal offer, admission and evaluation of the supplemental evidence were
all fait accompli.

We clarify that while the Commissioner's failure to promptly object had no

bearing on the materiality or sufficiency of the supplemental evidence admitted,
she was bound by the outcome of the CTA Division's assessment of the
evidence.108

Second, the CTA is not governed strictly by the technical rules of evidence. The
CTA Division's admission of the formal offer of supplemental evidence, without
prompt objection from the Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to
the taxpayers' motion for reconsideration.1âwphi1

In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund
claimant attached to its motion for reconsideration with the CT A its Final
Adjustment Return. The Commissioner, as in the present case, did not oppose the
taxpayer's motion for reconsideration and the admission of the Final Adjustment
Return.110 We thus admitted and gave weight to the Final Adjustment
Return although it was only submitted upon motion for reconsideration.

We held that while it is true that strict procedural rules generally frown upon the
submission of documents after the trial, the law creating the CTA specifically
provides that proceedings before it shall not be governed strictly by the technical
rules of evidence111 and that the paramount consideration remains the
ascertainment of truth. We ruled that procedural rules should not bar courts from
considering undisputed facts to arrive at a just determination of a controversy.112

We applied the same reasoning in the subsequent cases of Filinvest Development

Corporation v. Commissioner of Internal Revenue113 and Commissioner of Internal
Revenue v. PERF Realty Corporation,114 where the taxpayers also submitted the
supplemental supporting document only upon filing their motions for
reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with
the strict application of the technical rules of evidence in the present tax
assessment case. If anything, the liberal application of the rules assumes greater
force and significance in the case of a taxpayer who claims a constitutionally
granted tax exemption. While the taxpayers in the cited cases claimed refund of
excess tax payments based on the Tax Code,115 DLSU is claiming
tax exemption based on the Constitution. If liberality is afforded to taxpayers who
paid more than they should have under a statute, then with more reason that we
should allow a taxpayer to prove its exemption from tax based on the
Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence

not only because the Commissioner failed to promptly object, but more so
because the strict application of the technical rules of evidence may defeat the
intent of the Constitution.

IV. The CTA's appreciation of

evidence is generally binding on
the Court unless compelling
reasons justify otherwise.

It is doctrinal that the Court will not lightly set aside the conclusions reached by
the CTA which, by the very nature of its function of being dedicated exclusively to
the resolution of tax problems, has developed an expertise on the subject, unless
there has been an abuse or improvident exercise of authority.116 We thus accord
the findings of fact by the CTA with the highest respect. These findings of facts
can only be disturbed on appeal if they are not supported by substantial evidence
or there is a showing of gross error or abuse on the part of the CTA. In the
absence of any clear and convincing proof to the contrary, this Court must
presume that the CTA rendered a decision which is valid in every respect.117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that
DLSU had used actually, directly and exclusively for educational purposes
a portion of its assessed income and that it had remitted the DST payments
though an online imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes

a portion of its assessed income.

To see how the CTA arrived at its factual findings, we review the process
undertaken, from which it deduced that DLSU successfully proved that it used
actually, directly and exclusively for educational purposes a portion of its rental
income.

The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the
submission of the supplemental evidence, which consisted of statement of
receipts, statement of disbursement and fund balance and statement of fund
changes.118

These documents showed that DLSU borrowed ₱93.86 Million,119 which was used
to build the university's Sports Complex. Based on these pieces of evidence, the
CTA found that DLSU' s rental income from its concessionaires were indeed
transmitted and used for the payment of this loan. The CTA held that the degree
of preponderance of evidence was sufficiently met to prove actual, direct and
exclusive use for educational purposes.

The CTA also found that DLSU's rental income from other concessionaires, which
were allegedly deposited to a fund (CF-CPA Account),120 intended for the
university's capital projects, was not proved to have been used actually, directly
and exclusively for educational purposes. The CTA observed that "[DLSU] ... failed
to fully account for and substantiate all the disbursements from the [fund]." Thus,
the CTA "cannot ascertain whether rental income from the [other]
concessionaires was indeed used for educational purposes."121
To stress, the CTA's factual findings were based on and supported by the report of
the Independent CPA who reviewed, audited and examined the voluminous
documents submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a)
examination and verification of receipts, invoices, vouchers and other long
accounts; (b) reproduction of, and comparison of such reproduction with, and
certification that the same are faithful copies of original documents, and pre-
marking of documentary exhibits consisting of voluminous documents; (c)
preparation of schedules or summaries containing a chronological listing of the
numbers, dates and amounts covered by receipts or invoices or other relevant
documents and the amount(s) of taxes paid; (d) making findings as to compliance
with substantiation requirements under pertinent tax laws, regulations and
jurisprudence; (e) submission of a formal report with certification of authenticity
and veracity of findings and conclusions in the performance of the audit; (f)
testifying on such formal report; and (g) performing such other functions as the
CTA may direct.122

Based on the Independent CPA's report and on its own appreciation of the
evidence, the CTA held that only the portion of the rental income pertaining to
the substantiated disbursements (i.e., proved by receipts, vouchers, etc.) from the
CF-CPA Account was considered as used actually, directly and exclusively for
educational purposes. Consequently, the unaccounted and unsubstantiated
disbursements must be subjected to income tax and VAT.123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments
for taxable years 2001 and 2002 due to the defective LOA.124

The Court finds that the above fact-finding process undertaken by the CTA shows
that it based its ruling on the evidence on record, which we reiterate, were
examined and verified by the Independent CPA. Thus, we see no persuasive
reason to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not
mean that we are bound by its conclusions. In the present case, we do not agree
with the method used by the CTA to arrive at DLSU' s unsubstantiated rental
income (i.e., income not proved to have been actually, directly and exclusively
used for educational purposes).
To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in
taxable year 2003.125 DLSU earned this income from leasing a portion of its
premises to: 1) MTG-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food
Corp., 5) Capri International, and 6) MTO Bookstore.126

To prove that its rental income was used for educational purposes, DLSU
identified the transactions where the rental income was
expended, viz.: 1) ₱4,007,724.00127 used to pay the loan obtained by DLSU to
build the Sports Complex; and 2) ₱6,602,655.00 transferred to the CF-CPA
Account.128

DLSU also submitted documents to the Independent CPA to prove that the
₱6,602,655.00 transferred to the CF-CPA Account was used actually, directly and
exclusively for educational purposes. According to the Independent CPA' findings,
DLSU was able to substantiate disbursements from the CF-CPA Account
amounting to ₱6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of
the ₱l0,610,379.00 rental income, ₱4,841,066.65 was unsubstantiated, and thus,
subject to income tax and VAT.129

The CTA then concluded that the ratio of substantiated disbursements to the total
disbursements from the CF-CPA Account for taxable year 2003 is only
26.68%.130 The CTA held as follows:

However, as regards petitioner's rental income from Alarey, Inc., Zaide Food
Corp., Capri International and MTO Bookstore, which were transmitted to the CF-
CPA Account, petitioner again failed to fully account for and substantiate all the
disbursements from the CF-CPA Account; thus failing to prove that the rental
income derived therein were actually, directly and exclusively used for
educational purposes. Likewise, the findings of the Court-Commissioned
Independent CPA show that the disbursements from the CF-CPA Account for fiscal
year 2003 amounts to ₱6,259,078.30 only. Hence, this portion of the rental
income, being the substantiated disbursements of the CF-CPA Account, was
considered by the Special First Division as used actually, directly and exclusively
for educational purposes. Since for fiscal year 2003, the total disbursements per
voucher is ₱6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per
subsidiary ledger amounts to ₱23,463,543.02 (Exhibit "LL-29-C"), the ratio of
substantiated disbursements for fiscal year 2003 is 26.68%
(₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of CF-CPA
Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68%
with the total rent income added to and used in the CF-CPA Account in the
amount of ₱6,602,655.00 is ₱1,761,588.35.131 (emphasis supplied)

For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports
Complex (₱4,007,724.00) from the rental income (₱10,610,379.00) earned from
the abovementioned concessionaries. The difference (₱6,602,655.00) was the
portion claimed to have been deposited to the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA

disbursements (₱1,761,308.37) from the ₱6,602,655.00 to arrive at the supposed
unsubstantiated portion of the rental income (₱4,841,066.65).132

3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)133 was

derived by multiplying the rental income claimed to have been added to the CF-
CPA Account (₱6,602,655.00) by 26.68% or the ratio
of substantiated disbursements to total disbursements (₱23,463,543.02).

4. The 26.68% ratio134 was the result of dividing the substantiated disbursements
from the CF-CPA Account as found by the Independent CPA (₱6,259,078.30) by
the total disbursements (₱23,463,543.02) from the same account.

We find that this system of calculation is incorrect and does not truly give effect
to the constitutional grant of tax exemption to non-stock, non-profit educational
institutions. The CTA's reasoning is flawed because it required DLSU to
substantiate an amount that is greater than the rental income deposited in the
CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the
proceeds of its rental income (which amounted to a total of ₱10.61
million)135 were used for educational purposes. This amount was divided into two
parts: (a) the ₱4.0l million, which was used to pay the loan obtained for the
construction of the Sports Complex; and (b) the ₱6.60 million,136 which was
transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account amounted to ₱23
.46 million.137 These figures, read in light of the constitutional exemption, raises
the question: does DLSU claim that the whole total CF-CPA disbursement of
₱23.46 million is tax-exempt so that it is required to prove that all these
disbursements had been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements
of ₱23.46 million had been for educational purposes and should thus be tax-
exempt; DLSU only claimed ₱10.61 million for tax-exemption and should thus be
required to prove that this amount had been used as claimed.

Of this amount, ₱4.01 had been proven to have been used for educational
purposes, as confirmed by the Independent CPA. The amount in issue is therefore
the balance of ₱6.60 million which was transferred to the CF-CPA which in turn
made disbursements of ₱23.46 million for various general purposes, among them
the ₱6.60 million transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made

disbursements for educational purposes in year 2003 in the amount ₱6.26 million.
Based on these given figures, the CT A concluded that the expenses for
educational purposes that had been coursed through the CF-CPA should be
prorated so that only the portion that ₱6.26 million bears to the total CF-CPA
disbursements should be credited to DLSU for tax exemption.

This approach, in our view, is flawed given the constitutional requirement that
revenues actually and directly used for educational purposes should be tax-
exempt. As already mentioned above, DLSU is not claiming that the whole ₱23.46
million CF-CPA disbursement had been used for educational purposes; it only
claims that ₱6.60 million transferred to CF-CPA had been used for educational
purposes. This was what DLSU needed to prove to have actually and directly used
for educational purposes.

That this fund had been first deposited into a separate fund (the CF -CPA
established to fund capital projects) lends peculiarity to the facts of this case, but
does not detract from the fact that the deposited funds were DLSU revenue funds
that had been confirmed and proven to have been actually and directly used for
educational purposes via the CF-CPA. That the CF-CPA might have had other
sources of funding is irrelevant because the assessment in the present case
pertains only to the rental income which DLSU indisputably earned as revenue in
2003. That the proven CF-CPA funds used for educational purposes should not be
prorated as part of its total CF-CPA disbursements for purposes of crediting to
DLSU is also logical because no claim whatsoever had been made that the totality
of the CF-CPA disbursements had been for educational purposes. No prorating is
necessary; to state the obvious, exemption is based on actual and direct use and
this DLSU has indisputably proven.

Based on these considerations, DLSU should therefore be liable only for the
difference between what it claimed and what it has proven. In more concrete
terms, DLSU only had to prove that its rental income for taxable year 2003
(₱10,610,379.00) was used for educational purposes. Hence, while the total
disbursements from the CF-CPA Account amounted to ₱23,463,543.02, DLSU only
had to substantiate its Pl0.6 million rental income, part of which was the
₱6,602,655.00 transferred to the CF-CPA account. Of this latter amount, ₱6.259
million was substantiated to have been used for educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for
taxable year 2003 as follows:

CTA
Decision138
Revised
Rental income 10,610,379.00 10,610,379.00

Less: Rent income used in construction of 4,007,724.00 4,007,724.00

the Sports Complex

Rental income deposited to the CF-CPA

6,602,655.00 6,602,655.00
Account
 Less: Substantiated portion of CF-CPA 1,761,588.35 6,259,078.30
disbursements

Tax base for deficiency income tax and

4,841,066.65 343.576.70
VAT

On DLSU' s argument that the CTA should have appreciated its evidence in the
same way as it did with the evidence submitted by Ateneo in another
separate case, the CTA explained that the issue in the Ateneo case was not the
same as the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to
pay income taxes and VAT under certain BIR and Department of Finance
issuances139 that required the educational institution to own and operate the
canteens, or other commercial enterprises within its campus, as condition for tax
exemption. The CTA held that the Constitution does not require the educational
institution to own or operate these commercial establishments to avail of the
exemption.140

Given the lack of complete identity of the issues involved, the CTA held that it had
to evaluate the separate sets of evidence differently. The CTA likewise stressed
that DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be
equated on its decision on two different cases with two different issues."141

DLSU disagrees with the CTA and argues that the entire assessment must be
cancelled because it submitted similar, if not stronger sets of evidence, as Ateneo.
We reject DLSU's argument for being non sequitur. Its reliance on the concept of
uniformity of taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar

evidence, the sufficiency and materiality of the evidence supporting their
respective claims for tax exemption would necessarily differ because their
attendant issues and facts differ.
To state the obvious, the amount of income received by DLSU and by Ateneo
during the taxable years they were assessed varied. The amount of tax
assessment also varied. The amount of income proven to have been used for
educational purposes
also varied because the amount substantiated varied.142 Thus, the amount of tax
assessment cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency
of ₱17,303,001.12 for taxable years 2001, 2002 and 2003. On the other hand, the
BIR assessed Ateneo a total deficiency tax of ₱8,864,042.35 for the same period.
Notably, DLSU was assessed deficiency DST, while Ateneo was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income
actually, directly and exclusively for educational purposes by submitting similar
evidence, e.g., the testimony of their employees on the use of university
revenues, the report of the Independent CPA, their income summaries, financial
statements, vouchers, etc., the fact remains that DLSU failed to prove that a
portion of its income and revenues had indeed been used for educational
purposes.

The CTA significantly found that some documents that could have fully supported
DLSU's claim were not produced in court. Indeed, the Independent CPA testified
that some disbursements had not been proven to have been used actually,
directly and exclusively for educational purposes.144

The final nail on the question of evidence is DLSU's own admission that the
original of these documents had not in fact been produced before the
CTA although it claimed that there was no bad faith on its part.145 To our mind,
this admission is a good indicator of how the Ateneo and the DLSU cases varied,
resulting in DLSU's failure to substantiate a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised

Rules on Evidence, that the contents of the missing supporting documents were
proven by its recital in some other authentic documents on record,146 can no
longer be entertained at this late stage of the proceeding. The CTA did not rule on
this particular claim. The CTA also made no finding on DLSU' s assertion of lack of
bad faith. Besides, it is not our duty to go over these documents to test the
truthfulness of their contents, this Court not being a trier of facts.
Second, DLSU misunderstands the concept of uniformity of taxation.

Equality and uniformity of taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate.147 A tax is uniform
when it operates with the same force and effect in every place where the subject
of it is found.148 The concept requires that all subjects of taxation similarly
situated should be treated alike and placed in equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated
them alike because their income proved to have been used actually, directly and
exclusively for educational purposes were exempted from taxes. The CTA equally
applied the requirements in the YMCA case to test if they indeed used their
revenues for educational purposes.

DLSU can only assert that the CTA violated the rule on uniformity if it can show
that, despite proving that it used actually, directly and exclusively for educational
purposes its income and revenues, the CTA still affirmed the imposition of taxes.
That the DLSU secured a different result happened because it failed to fully prove
that it used actually, directly and exclusively for educational purposes its revenues
and income.

On this point, we remind DLSU that the rule on uniformity of taxation

does not mean that subjects of taxation similarly situated are treated
in literally the same way in all and every occasion. The fact that the Ateneo and
DLSU are both non-stock, non-profit educational institutions, does not mean that
the CTA or this Court would similarly decide every case for (or against) both
universities. Success in tax litigation, like in any other litigation, depends to a large
extent on the sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA
was correct in not fully cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan
transactions were paid and remitted through its bank's On-Line Electronic DST
Imprinting Machine. The Commissioner argues that DLSU is not allowed to use
this method of payment because an educational institution is excluded from the
class of taxpayers who can use the On-Line Electronic DST Imprinting Machine.
We sustain the findings of the CTA. The Commissioner's argument lacks basis in
both the Tax Code and the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and
paid for by the person making, signing, issuing, accepting, or transferring the
same.150 The Tax Code provides that whenever one party to the document enjoys
exemption from DST, the other party not exempt from DST shall be directly liable
for the tax. Thus, it is clear that DST shall be payable by any party to the
document, such that the payment and compliance by one shall mean the full
settlement of the DST due on the document.

In the present case, DLSU entered into mortgage and loan agreements with
banks. These agreements are subject to DST.151 For the purpose of showing that
the DST on the loan agreement has been paid, DLSU presented its agreements
bearing the imprint showing that DST on the document has been paid by the
bank, its counterparty. The imprint should be sufficient proof that DST has been
paid. Thus, DLSU cannot be further assessed for deficiency DST on the said
documents.

Finally, it is true that educational institutions are not included in the class of
taxpayers who can pay and remit DST through the On-Line Electronic DST
Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is
irrelevant because it was not DLSU who used the On-Line Electronic DST
Imprinting Machine but the bank that handled its mortgage and loan transactions.
RR No. 9-2000 expressly includes banks in the class of taxpayers that can use
the On-Line Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the

payment of the assessed DST deficiency, except for the unpaid balance of

₱13,265.48.152

WHEREFORE, premises considered, we DENY the petition of the Commissioner of

Internal Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision
and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En
Banc Case No. 622, except for the total amount of deficiency tax liabilities of De La
Salle University, Inc., which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841
and the petition of the Commissioner of Internal Revenue in G.R. No. 198941 and
thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the
Court of Tax Appeals En Banc in CTA En Banc Case No. 671, with
the MODIFICATION that the base for the deficiency income tax and VAT for
taxable year 2003 is ₱343,576.70.

SO ORDERED.

THIRD DIVISION

April 5, 2017

G.R. No. 222743

MEDICARD PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

REYES,, J.:

This appeal by Petition for Review1 seeks to reverse and set aside the
Decision2 dated September 2, 2015 and Resolution3 dated January 29, 2016 of the
Court of Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming with
modification the Decision4 dated June 5, 2014 and the Resolution5 dated
September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering
petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent
Commissioner of Internal Revenue (CIR) the deficiency

Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48,

plus 20% interest per annum starting January 25, 2007, until fully paid, pursuant
to Section 249(c)6 of the National Internal Revenue Code (NIRC) of 1997.

The Facts

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid

health and medical insurance coverage to its clients. Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by duly licensed
physicians, specialists and other professional technical staff participating in the
group practice health delivery system at a hospital or clinic owned, operated or
accredited by it.7

MEDICARD filed its First, Second, and Third Quarterly VAT Returns through
Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006 and
October 20, 2006, respectively, and its Fourth Quarterly VAT Return on January
25, 2007.8

Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR)
and VAT Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No.
122-VT-06-00-00020 dated

September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment
Notice (PAN) against MEDICARD for deficiency VAT. A Memorandum dated
December 10, 2007 was likewise issued recommending the issuance of a Formal
Assessment Notice (FAN) against MEDICARD.9 On. January 4, 2008, MEDICARD
received CIR's FAN dated December' 10, 2007 for alleged deficiency VAT for
taxable year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of
penalties. 11

According to the CIR, the taxable base of HMOs for VAT purposes is its gross
receipts without any deduction under Section 4.108.3(k) of Revenue Regulation
(RR) No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health
Care Providers, Inc., 12 the CIR argued that since MEDICARD. does not actually
provide medical and/or hospital services, but merely arranges for the same, its
services are not VAT exempt.13

MEDICARD argued that: (1) the services it render is not limited merely to
arranging for the provision of medical and/or hospital services by hospitals and/or
clinics but include actual and direct rendition of medical and laboratory services;
in fact, its 2006 audited balance sheet shows that it owns x-ray and laboratory
facilities which it used in providing medical and laboratory services to its
members; (2) out of the ₱l .9 Billion membership fees, ₱319 Million was received
from clients that are registered with the Philippine Export Zone Authority (PEZA)
and/or Bureau of Investments; (3) the processing fees amounting to ₱l 1.5 Million
should be excluded from gross receipts because P5.6 Million of which represent
advances for professional fees due from clients which were paid by MEDICARD
while the remainder was already previously subjected to VAT; (4) the professional
fees in the amount of Pl 1 Million should also be excluded because it represents
the amount of medical services actually and directly rendered by MEDICARD
and/or its subsidiary company; and (5) even assuming that it is liable to pay for
the VAT, the 12% VAT rate should not be applied on the entire amount but only
for the period when the 12% VAT rate was already in effect, i.e., on February 1,
2006. It should not also be held liable for surcharge and deficiency interest
because it did not pass on the VAT to its members.14

On February 14, 2008, the CIR issued a Tax Verification Notice authorizing
Revenue Officer Romualdo Plocios to verify the supporting documents of
MEDICARD's Protest. MEDICARD also submitted additional supporting
documentary evidence in aid of its Protest thru a letter dated March 18, 2008.15

On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed

Assessment dated May 15, 2009, denying MEDICARD's protest, to wit:

IN VIEW HEREOF, we deny your letter protest and hereby reiterate in

toto assessment of deficiency *VAT+ in total sum of ₱196,614,476.99. It is
requested that you pay said deficiency taxes immediately. Should payment be
made later, adjustment has to be made to impose interest until date of payment.
This is olir final decision. If you disagree, you may take an appeal to the [CTA]
within the period provided by law, otherwise, said assessment shall become final,
executory and demandable. 16

On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT
A, reiterating its position before the tax authorities. 17

On June 5, 2014, the CTA Division rendered a Decision18 affirming with

modifications the CIR's deficiency VAT assessment covering taxable year 2006,
viz.:

WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR]

against [MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of
P223,l 73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed
under -Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:
 Basic Deficiency
₱l78,538,566.68
VAT

Add: 25%
44,634,641.67
Surcharge

Total ₱223.173.208.35

In addition, [MEDICARD] is ordered to pay:

a. Deficiency interest at the rate of twenty percent (20%) per annum on the
basis deficiency VAT of Pl 78,538,566.68 computed from January 25, 2007
until full payment thereof pursuant to Section 249(B) of the NIRC of 1997,
as amended; and

b. Delinquency interest at the rate of twenty percent (20%) per annum on

the total amount of ₱223,173,208.35 representing basic deficiency VAT of
₱l78,538,566.68 and· 25% surcharge of ₱44,634,64 l .67 and on the 20%
deficiency interest which have accrued as afore-stated in (a), computed
from June 19, 2009 until full payment thereof pursuant to Section 249(C) of
the NIRC of 1997.

SO ORDERED.19

The CTA Division held that: (1) the determination of deficiency VAT is not limited
to the issuance of Letter of Authority (LOA) alone as the CIR is granted vast
powers to perform examination and assessment functions; (2) in lieu of an LOA,
an LN was issued to MEDICARD informing it· of the discrepancies between its ITRs
and VAT Returns and this procedure is authorized under Revenue Memorandum
Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from
questioning the validity of the assessment on the ground of lack of LOA since the
assessment issued against MEDICARD contained the requisite legal and factual
bases that put MEDICARD on notice of the deficiencies and it in fact availed of the
remedies provided by law without questioning the nullity of the assessment; (4)
the amounts that MEDICARD earmarked , and eventually paid to doctors,
hospitals and clinics cannot be excluded from · the computation of its gross
receipts under the provisions of RR No. 4-2007 because the act of earmarking or
allocation is by itself an act of ownership and management over the funds by
MEDICARD which is beyond the contemplation of RR No. 4-2007; (5) MEDICARD's
earnings from its clinics and laboratory facilities cannot be excluded from its gross
receipts because the operation of these clinics and laboratory is merely an
incident to MEDICARD's main line of business as HMO and there is no evidence
that MEDICARD segregated the amounts pertaining to this at the time it received
the premium from its members; and (6) MEDICARD was not able to substantiate
the amount pertaining to its January 2006 income and therefore has no basis to
impose a 10% VAT rate.20

Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied.

Hence, MEDICARD elevated the matter to the CTA en banc.

In a Decision21 dated September 2, 2015, the CTA en banc partially granted the
petition only insofar as the 10% VAT rate for January 2006 is concerned but
sustained the findings of the CTA Division in all other matters, thus:

WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, the Decision date June 5, 2014 is hereby MODIFIED, as
follows:

"WHEREFORE, premises considered, the deficiency VAT assessment issued by

[CIR] against

[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH

MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of
₱220,234,609.48, inclusive of the 25% surcharge imposed under Section 248(A)(3)
of the NIRC of 1997, as amended, computed as follows:

Basic Deficiency VAT ₱76,187,687.58

Add: 25% Surcharge 44,046,921.90

Total ₱220,234.609.48
In addition, [MEDICARD] is ordered to pay:

(a) Deficiency interest at the rate of 20% per annum on the basic deficiency
VAT of ₱l 76,187,687.58 computed from January 25, 2007 until full
payment thereof pursuant to Section 249(B) of the NIRC of 1997, as
amended; and

(b) Delinquency interest at the rate of 20% per annum on the total amount
of ₱220,234,609.48 (representing basic deficiency VAT of ₱l76,187,687.58
and 25% surcharge of ₱44,046,921.90) and on the deficiency interest which
have accrued as afore-stated in (a), computed from June 19, 2009 until full
payment thereof pursuant to Section 249(C) of the NIRC of 1997, as
amended."

SO ORDERED.22

Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for
reconsideration but it was denied.23Hence, MEDICARD now seeks recourse to this
Court via a petition for review on certiorari.

The Issues

l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and

2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND

EVENTUALLY PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD STILL
FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.24

Ruling of the Court

The petition is meritorious.

The absence of an LOA violated

MEDICARD's right to due process

An LOA is the authority given to the appropriate revenue officer assigned to

perform assessment functions. It empowers or enables said revenue officer to
examine the books of account and other accounting records of a taxpayer for the
purpose of collecting the correct amount of tax. 25 An LOA is premised on the fact
that the examination of a taxpayer who has already filed his tax returns is a power
that statutorily belongs only to the CIR himself or his duly authorized
representatives. Section 6 of the NIRC clearly provides as follows:

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement. –

(A) Examination of Return and Determination of Tax Due.- After a return has
been filed as required under the provisions of this Code, the Commissioner or his
duly authorized representative may authorize the examinationof any
taxpayer and the assessment of the correct amount of tax: Provided, however,
That failure to file a return shall not prevent the Commissioner from authorizing
the examination of any taxpayer.

x x x x (Emphasis and underlining ours)

Based on the afore-quoted provision, it is clear that unless authorized by the CIR
himself or by his duly authorized representative, through an LOA, an examination
of the taxpayer cannot ordinarily be undertaken. The circumstances
contemplated under Section 6 where the taxpayer may be assessed through best-
evidence obtainable, inventory-taking, or surveillance among others has nothing
to do with the LOA. These are simply methods of examining the taxpayer in order
to arrive at .the correct amount of taxes. Hence, unless undertaken by the CIR
himself or his duly authorized representatives, other tax agents may not validly
conduct any of these kinds of examinations without prior authority.

With the advances in information and communication technology, the Bureau of

Internal Revenue (BIR) promulgated RMO No. 30-2003 to lay down the policies
and guidelines once its then incipient centralized Data Warehouse (DW) becomes
fully operational in conjunction with its Reconciliation of Listing for Enforcement
System (RELIEF System).26 This system can detect tax leaks by matching the data
available under the BIR's Integrated Tax System (ITS) with data gathered from
third-party sources. Through the consolidation and cross-referencing of third-
party information, discrepancy reports on sales and purchases can be generated
to uncover under declared income and over claimed purchases of Goods and
services.

Under this RMO, several offices of the BIR are tasked with specific functions
relative to the RELIEF System, particularly with regard to LNs. Thus, the Systems
Operations Division (SOD) under the Information Systems Group (ISG) is
responsible for: (1) coming up with the List of Taxpayers with discrepancies within
the threshold amount set by management for the issuance of LN and for the
system-generated LNs; and (2) sending the same to the taxpayer and to the Audit
Information, Tax Exemption and Incentives Division (AITEID). After receiving the
LNs, the AITEID under the Assessment

Service (AS), in coordination with the concerned offices under the ISG, shall be
responsible for transmitting the LNs to the investigating offices [Revenue District
Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers Audit and
Investigation Division (LTAID)]. At the level of these investigating offices, the
appropriate action on the LN s issued to taxpayers with RELIEF data discrepancy
would be determined.

RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down
the "no-contact-audit approach" in the CIR's exercise of its ·power to authorize
any examination of taxpayer arid the assessment of the correct amount of tax.
The no-contact-audit approach includes the process of computerized matching of
sales and purchases data contained in the Schedules of Sales and Domestic
Purchases and Schedule of Importation submitted by VAT taxpayers under the
RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and
8-2002. This may also include the matching of data from other information or
returns filed by the taxpayers with the BIR such as Alphalist of Payees subject to
Final or Creditable Withholding Taxes.

Under this policy, even without conducting a detailed examination of taxpayer's

books and records, if the computerized/manual matching of sales and
purchases/expenses appears to reveal discrepancies, the same shall be
communicated to the concerned taxpayer through the issuance of LN. The LN
shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal
Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue
officer may begin an examination of the taxpayer even prior to the issuance of an
LN or even in the absence of an LOA with the aid of a computerized/manual
matching of taxpayers': documents/records. Accordingly, under the RELIEF
System, the presumption that the tax returns are in accordance with law and are
presumed correct since these are filed under the penalty of perjury27 are easily
rebutted and the taxpayer becomes instantly burdened to explain a purported
discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the
statutory requirement of an LOA before any investigation or examination of the
taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is
merely similar to a Notice for Informal Conference. However, for a Notice of
Informal Conference, which generally precedes the issuance of an assessment
notice to be valid, the same presupposes that the revenue officer who issued the
same is properly authorized in the first place.

With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as
supplemented by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine
tune existing procedures in handing assessments against taxpayers'· issued LNs by
reconciling various revenue issuances which conflict with the NIRC. Among the
objectives in the issuance of RMO No. 32-2005 is to prescribe procedure in the
resolution of LN discrepancies, conversion of LNs to LOAs and assessment and
collection of deficiency taxes.

IV. POLICIES AND GUIDELINES

xxxx

8. In the event a taxpayer who has been issued an LN refutes the discrepancy
shown in the LN, the concerned taxpayer will be given an opportunity to reconcile
its records with those of the BIR within

One Hundred and Twenty (120) days from the date of the issuance of the LN.
However, the subject taxpayer shall no longer be entitled to the abatement of
interest and penalties after the lapse of the sixty (60)-day period from the LN
issuance.

9. In case the above discrepancies remained unresolved at the end of the One
Hundred and Twenty (120)-day period, the revenue officer (RO) assigned to
handle the LN shall recommend the issuance of [LOA) to replace the LN. The
head of the concerned investigating office shall submit a summary list of LNs for
conversion to LAs (using the herein prescribed format in Annex "E" hereof) to the
OACIR-LTS I ORD for the preparation of the corresponding LAs with the notation
"This LA cancels LN_________ No. "

xxxx
V. PROCEDURES

xxxx

B. At the Regional Office/Large Taxpayers Service

xxxx

7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x
x x prior to approval.

8. Upon approval of the above list, prepare/accomplish and sign the

corresponding LAs.

xxxx

Decision 11 G.R. No. 222743

xxxx

10. Transmit the approved/signed LAs, together with the duly

accomplished/approved Summary List of LNs for conversion to LAs, to the
concerned investigating offices for the encoding of the required information x x x
and for service to the concerned taxpayers.

xxxx

C. At the RDO x x x

xxxx

11. If the LN discrepancies remained unresolved within One Hundred and Twenty
(120) days from issuance thereof, prepare a summary list of said LN s for
conversion to LAs x x x.

xxxx

16. Effect the service of the above LAs to the concerned taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the issuance of a
PAN and FAN against MED ICARD. Therefore no LOA was also served on
MEDICARD. The LN that was issued earlier was also not converted into an LOA
contrary to the above quoted provision. Surprisingly, the CIR did not even dispute
the applicability of the above provision of RMO 32-2005 in the present case which
is clear and unequivocal on the necessity of an LOA for the· assessment
proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due
process warrant the reversal of the assailed decision and resolution.

In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the
Court said that:

Clearly, there must be a grant of authority before any revenue officer can conduct
an examination or assessment. Equally important is that the revenue officer so
authorized must not go beyond the authority given. In the absence of such an
authority, the assessment or examination is a nullity.30 (Emphasis and
underlining ours)

The Court cannot convert the LN into the LOA required under the law even if the
same was issued by the CIR himself. Under RR No. 12-2002, LN is issued to a
person found to have underreported sales/receipts per data generated under the
RELIEF system. Upon receipt of the LN, a taxpayer may avail of the BIR's Voluntary
Assessment and Abatement Program. If a taxpayer fails or refuses to avail of the
said program, the BIR may avail of administrative and criminal .remedies,
particularly closure, criminal action, or audit and investigation. Since the law
specifically requires an LOA and RMO No. 32-2005 requires the conversion of the
previously issued LN to an LOA, the absence thereof cannot be simply swept
under the rug, as the CIR would have it. In fact Revenue Memorandum Circular
No. 40-2003 considers an LN as a notice of audit or investigation only for the
purpose of disqualifying the taxpayer from amending his returns.

The following differences between an LOA and LN are crucial. First, an LOA
addressed to a revenue officer is specifically required under the NIRC before an
examination of a taxpayer may be had while an LN is not found in the NIRC and is
only for the purpose of notifying the taxpayer that a discrepancy is found based
on the BIR's RELIEF System. Second, an LOA is valid only for 30 days from date of
issue while an LN has no such limitation. Third, an LOA gives the revenue officer
only a period of 10days from receipt of LOA to conduct his examination of the
taxpayer whereas an LN does not contain such a limitation.31 Simply put, LN is
entirely different and serves a different purpose than an LOA. Due process
demands, as recognized under RMO No. 32-2005, that after an LN has serve its
purpose, the revenue officer should have properly secured an LOA before
proceeding with the further examination and assessment of the petitioner.
Unfortunarely, this was not done in this case.

Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just
because none of the financial books or records being physically kept by
MEDICARD was examined. To begin with, Section 6 of the NIRC requires an
authority from the CIR or from his duly authorized representatives before an
examination "of a taxpayer" may be made. The requirement of authorization is
therefore not dependent on whether the taxpayer may be required to physically
open his books and financial records but only on whether a taxpayer is being
subject to examination.

The BIR's RELIEF System has admittedly made the BIR's assessment and collection
efforts much easier and faster. The ease by which the BIR's revenue generating
objectives is achieved is no excuse however for its non-compliance with the
statutory requirement under Section 6 and with its own administrative issuance.
In fact, apart from being a statutory requirement, an LOA is equally needed even
under the BIR's RELIEF System because the rationale of requirement is the same
whether or not the CIR conducts a physical examination of the taxpayer's records:
to prevent undue harassment of a taxpayer and level the playing field between
the government' s vast resources for tax assessment, collection and enforcement,
on one hand, and the solitary taxpayer's dual need to prosecute its business while
at the same time responding to the BIR exercise of its statutory powers. The
balance between these is achieved by ensuring that any examination of the
taxpayer by the BIR' s revenue officers is properly authorized in the first place by
those to whom the discretion to exercise the power of examination is given by
the statute.

That the BIR officials herein were not shown to have acted unreasonably is beside
the point because the issue of their lack of authority was only brought up during
the trial of the case. What is crucial is whether the proceedings that led to the
issuance of VAT deficiency assessment against MEDICARD had the prior approval
and authorization from the CIR or her duly authorized representatives. Not having
authority to examine MEDICARD in the first place, the assessment issued by the
CIR is inescapably void.

At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court
still partially finds merit in MEDICARD's substantive arguments.

The amounts earmarked and

eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes

MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of
the CT A Division that the gross receipts of an HMO for VAT purposes shall be the
total amount of money or its equivalent actually received from members
undiminished by any amount paid or payable to the owners/operators of
hospitals, clinics and medical and dental practitioners. MEDICARD explains that its
business as an HMO involves two different although interrelated contracts. One is
between a corporate client and MEDICARD, with the corporate client's employees
being considered as MEDICARD members; and the other is between the health
care institutions/healthcare professionals and MED ICARD.

Under the first, MEDICARD undertakes to make arrangements with healthcare

institutions/healthcare professionals for the coverage of MEDICARD members
under specific health related services for a specified period of time in exchange
for payment of a more or less fixed membership fee. Under its contract with its
corporate clients, MEDICARD expressly provides that 20% of the membership fees
per individual, regardless of the amount involved, already includes the VAT of
10%/20% excluding the remaining 80o/o because MED ICARD would earmark this
latter portion for medical utilization of its members. Lastly, MEDICARD also assails
CIR's inclusion in its gross receipts of its earnings from medical services which it
actually and directly rendered to its members.

Since an HMO like MEDICARD is primarily engaged m arranging for coverage or

designated managed care services that are needed by plan holders/members for
fixed prepaid membership fees and for a specified period of time, then
MEDICARD is principally engaged in the sale of services. Its VAT base and
corresponding liability is, thus, determined under Section 108(A)32 of the Tax
Code, as amended by Republic Act No. 9337.

Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT
purposes as a dealer in securities whose gross receipts is the amount actually
received as contract price without allowing any deduction from the gross
receipts.33 This restrictive tenor changed under RR No. 16-2005. Under this RR, an
HMO's gross receipts and gross receipts in general were defined, thus:

Section 4.108-3. xxx

xxxx

HMO's gross receipts shall be the total amount of money or its equivalent
representing the service fee actually or constructively received during the taxable
period for the services performed or to be performed for another person,
excluding the value-added tax. The compensation for their services representing
their service fee, is presumed to be the total amount received as enrollment fee
from their members plus other charges received.

Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental or
royalty, including the amount charged for materials supplied with the services and
deposits applied as payments for services rendered, and advance payments
actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding the VAT. 34

In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005,
including the definition of gross receipts in general.35

According to the CTA en banc, the entire amount of membership fees should form
part of MEDICARD's gross receipts because the exclusions to the gross receipts
under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD is
the definition of gross receipts of an HMO under RR No. 16-2005 and not the
modified definition of gross receipts in general under the RR No. 4-2007.

The CTA en banc overlooked that the definition of gross receipts under. RR No.
16-2005 merely presumed that the amount received by an HMO as membership
fee is the HMO's compensation for their services. As a mere presumption, an
HMO is, thus, allowed to establish that a portion of the amount it received as
membership fee does NOT actually compensate it but some other person, which
in this case are the medical service providers themselves. It is a well-settled
principle of legal hermeneutics that words of a statute will be interpreted in their
natural, plain and ordinary acceptation and signification, unless it is evident that
the legislature intended a technical or special legal meaning to those words. The
Court cannot read the word "presumed" in any other way.

It is notable in this regard that the term gross receipts as elsewhere mentioned as
the tax base under the NIRC does not contain any specific definition.36 Therefore,
absent a statutory definition, this Court has construed the term gross receipts in
its plain and ordinary meaning, that is, gross receipts is understood as comprising
the entire receipts without any deduction.37 Congress, under Section 108, could
have simply left the term gross receipts similarly undefined and its interpretation
subjected to ordinary acceptation,. Instead of doing so, Congress limited the
scope of the term gross receipts for VAT purposes only to the amount that the
taxpayer received for the services it performed or to the amount it received as
advance payment for the services it will render in the future for another person.

In the proceedings ·below, the nature of MEDICARD's business and the extent of
the services it rendered are not seriously disputed. As an HMO, MEDICARD
primarily acts as an intermediary between the purchaser of healthcare services
(its members) and the healthcare providers (the doctors, hospitals and clinics) for
a fee. By enrolling membership with MED ICARD, its members will be able to avail
of the pre-arranged medical services from its accredited healthcare providers
without the necessary protocol of posting cash bonds or deposits prior to being
attended to or admitted to hospitals or clinics, especially during emergencies, at
any given time. Apart from this, MEDICARD may also directly provide medical,
hospital and laboratory services, which depends upon its member's choice.

Thus, in the course of its business as such, MED ICARD members can either avail
of medical services from MEDICARD's accredited healthcare providers or directly
from MEDICARD. In the former, MEDICARD members obviously knew that beyond
the agreement to pre-arrange the healthcare needs of its ·members, MEDICARD
would not actually be providing the actual healthcare service. Thus, based on
industry practice, MEDICARD informs its would-be member beforehand that 80%
of the amount would be earmarked for medical utilization and only the remaining
20% comprises its service fee. In the latter case, MEDICARD's sale of its services is
exempt from VAT under Section 109(G).

The CTA's ruling and CIR's Comment have not pointed to any portion of Section
108 of the NIRC that would extend the definition of gross receipts even to
amounts that do not only pertain to the services to be performed: by another
person, other than the taxpayer, but even to amounts that were indisputably
utilized not by MED ICARD itself but by the medical service providers.

It is a cardinal rule in statutory construction that no word, clause, sentence,

provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes some words idle and
nugatory. This principle is expressed in the maxim Ut magisvaleat quam pereat,
that is, we choose the interpretation which gives effect to the whole of the
statute – it’s every word.

In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38the

Court adopted the principal object and purpose object in determining whether
the MEDICARD therein is engaged in the business of insurance and therefore
liable for documentary stamp tax. The Court held therein that an HMO engaged in
preventive, diagnostic and curative medical services is not engaged in the
business of an insurance, thus:

To summarize, the distinctive features of the cooperative are the rendering of

service, its extension, the bringing of physician and patient together, the
preventive features, the regularization of service as well as payment, the
substantial reduction in cost by quantity purchasing in short, getting the medical
job done and paid for; not, except incidentally to these features, the
indemnification for cost after .the services is rendered. Except the last, these are
not distinctive or generally characteristic of the insurance arrangement. There
is, therefore, a substantial difference between contracting in this way for the
rendering of service, even on the contingency that it be needed, and contracting
merely to stand its cost when or after it is rendered.39 (Emphasis ours)

In sum, the Court said that the main difference between an HMO arid an
insurance company is that HMOs undertake to provide or arrange for the
provision of medical services through participating physicians while insurance
companies simply undertake to indemnify the insured for medical expenses
incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the
value added by the performance of the service by the taxpayer. It is, thus, this
service and the value charged thereof by the taxpayer that is taxable under the
NIRC.

To be sure, there are pros and cons in subjecting the entire amount of
membership fees to VAT.40 But the Court's task however is not to weigh these
policy considerations but to determine if these considerations in favor of taxation
can even be implied from the statute where the CIR purports to derive her
authority. This Court rules that they cannot because the language of the NIRC is
pretty straightforward and clear. As this Court previously ruled:

What is controlling in this case is the well-settled doctrine of strict interpretation

in the imposition of taxes, not the similar doctrine as applied to tax exemptions.
The rule in the interpretation of tax laws is that a statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. A tax
cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a
taxing act are not to be extended by implication. In answering the question of
who is subject to tax statutes, it is basic that in case of doubt, such statutes are to
be construed most strongly against the government and in favor of the subjects
or citizens because burdens are not to be imposed nor presumed to be imposed
beyond what statutes expressly and clearly import. As burdens, taxes should not
be unduly exacted nor assumed beyond the plain meaning of the tax
laws. 41 (Citation omitted and emphasis and underlining ours)

For this Court to subject the entire amount of MEDICARD's gross receipts without
exclusion, the authority should have been reasonably founded from the language
of the statute. That language is wanting in this case. In the scheme of judicial tax
administration, the need for certainty and predictability in the implementation of
tax laws is crucial. Our tax authorities fill in the details that Congress may not have
the opportunity or competence to provide. The regulations these authorities issue
are relied upon by taxpayers, who are certain that these will be followed by the
courts. Courts, however, will not uphold these authorities' interpretations when
dearly absurd, erroneous or improper.42 The CIR's interpretation of gross receipts
in the present case is patently erroneous for lack of both textual and non-textual
support.

As to the CIR's argument that the act of earmarking or allocation is by itself an act
of ownership and management over the funds, the Court does not
agree.1âwphi1 On the contrary, it is MEDICARD's act of earmarking or allocating
80% of the amount it received as membership fee at the time of payment that
weakens the ownership imputed to it. By earmarking or allocating 80% of the
amount, MEDICARD unequivocally recognizes that its possession of the funds is
not in the concept of owner but as a mere administrator of the same. For this
reason, at most, MEDICARD's right in relation to these amounts is a mere
inchoate owner which would ripen into actual ownership if, and only if, there is
underutilization of the membership fees at the end of the fiscal year. Prior to that,
MEDI CARD is bound to pay from the amounts it had allocated as an administrator
once its members avail of the medical services of MEDICARD's healthcare
providers.

Before the Court, the parties were one in submitting the legal issue of whether
the amounts MEDICARD earmarked, corresponding to 80% of its enrollment fees,
and paid to the medical service providers should form part of its gross receipt for
VAT purposes, after having paid the VAT on the amount comprising the 20%. It is
significant to note in this regard that MEDICARD established that upon receipt of
payment of membership fee it actually issued two official receipts, one pertaining
to the VAT able portion, representing compensation for its services, and the other
represents the non-vatable portion pertaining to the amount earmarked for
medical utilization.: Therefore, the absence of an actual and physical segregation
of the amounts pertaining to two different kinds · of fees cannot arbitrarily
disqualify MEDICARD from rebutting the presumption under the law and from
proving that indeed services were rendered by its healthcare providers for which
it paid the amount it sought to be excluded from its gross receipts.

With the foregoing discussions on the nullity of the assessment on due process
grounds and violation of the NIRC, on one hand, and the utter lack of legal basis of
the CIR's position on the computation of MEDICARD's gross receipts, the Court
finds it unnecessary, nay useless, to discuss the rest of the parties' arguments and
counter-arguments.
In fine, the foregoing discussion suffices for the reversal of the assailed decision
and resolution of the CTA en banc grounded as it is on due process violation. The
Court likewise rules that for purposes of determining the VAT liability of an HMO,
the amounts earmarked and actually spent for medical utilization of its members
should not be included in the computation of its gross receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is

hereby GRANTED. The Decision dated September 2, 2015 and Resolution dated
January 29, 2016 issued by the Court of Tax Appeals en bane in CTA EB No. 1224
are REVERSED and SET ASIDE. The definition of gross receipts under Revenue
Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A) of the National
Internal Revenue Code, as amended by Republic Act No. 9337, for purposes of
determining its Value-Added Tax liability, is hereby declared to EXCLUDE the
eighty percent (80%) of the amount of the contract price earmarked as fiduciary
funds for the medical utilization of its members. Further, the Value-Added Tax
deficiency assessment issued against Medicard Philippines, Inc. is hereby declared
unauthorized for having been issued without a Letter of Authority by the
Commissioner of Internal Revenue or his duly authorized representatives.

SO ORDERED.

SECOND DIVISION

FITNESS BY DESIGN, INC., G.R. No. 177982

Petitioner,
Present:

QUISUMBING, J., Chairperson,

CARPIO MORALES,
- versus - TINGA,
VELASCO, JR., and
BRION, JJ.

COMMISSIONER ON INTERNAL Promulgated:

REVENUE, October 17, 2008
Respondent.
x-------------------------------------------------x
 DECISION

CARPIO MORALES, J.:

On March 17, 2004, the Commissioner on Internal Revenue (respondent)
assessed Fitness by Design, Inc. (petitioner) for deficiency income taxes for the tax
year 1995 in the total amount of P10,647,529.69.[1] Petitioner protested the
assessment on the ground that it was issued beyond the three-year prescriptive
period under Section 203 of the Tax Code.[2]Additionally, petitioner claimed that
since it was incorporated only on May 30, 1995, there was no basis to assume
that it had already earned income for the tax year 1995.[3]

On February 1, 2005, respondent issued a warrant of distraint and/or levy

against petitioner,[4] drawing petitioner to file on March 1, 2005 a Petition for
Review (with Motion to Suspend Collection of Income Tax, Value Added Tax,
Documentary Stamp Tax and Surcharges and Interests subject of this
Petition)[5] before the Court of Tax Appeals (CTA) before which it reiterated its
defense of prescription. The petition was docketed as CTA Case No. 7160.

In his Answer,[6] respondent alleged:

The right of the respondent to assess petitioner for

deficiency income tax, VAT and Documentary Stamp Tax for the
year 1995 has not prescribed pursuant to Section 222(a) of the
1997 Tax Code. Petitioners 1995 Income Tax Return (ITR) filed
on April 11, 1996 was false and fraudulent for its deliberate failure
to declare its true sales. Petitioner declared in its 1995 Income Tax
Return that it was on its pre-operation stage and has not declared
its income. Investigation by the revenue officers of the
respondent, however, disclosed that it has been operating/doing
business and had sales operations for the year 1995 in the total
amount of P7,156,336.08 which it failed to report in its 1995
ITR. Thus, for the year 1995, petitioner filed a fraudulent annual
income return with intent to evade tax. Likewise, petitioner failed
to file Value-Added Tax (VAT) Return and reported the amount of
 P7,156,336.08 as its gross sales for the year 1995. Hence,
for failure to file a VAT return and for filing a fraudulent income
tax return for the year 1995, the corresponding taxes may be
assessed at any time within ten (10) years after the discovery of
such omission or fraud pursuant to Section 222(a) of the 1997 Tax
Code.

The subject deficiency tax assessments have already

become final, executory and demandable for failure of the
petitioner to file a protest within the reglementary period
provided for by law.The alleged protest allegedly filed on June 25,
2004 at the Legal Division, Revenue Region No. 8, Makati City is
nowhere to be found in the BIR Records nor reflected in the
Record Book of the Legal Division as normally done by our
receiving clerk when she receive[s] any document. The
respondent, therefore, has legal basis to collect the tax liability
either by distraint and levy or civil action.[7] (Emphasis and
underscoring supplied)

The aforecited Section 222(a)[8] of the 1997 Tax Code provides:

In the case of a false or fraudulent return with intent to

evade tax or of failure to file a return, the tax may be assessed, or
a proceeding in court for the collection of such tax may be filed
without assessment, at any time within ten (10) years after the
discovery of the falsity, fraud, or omission: Provided, That in a
fraud assessment which has become final and executory, the fact
of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof. (Underscoring supplied)

The Bureau of Internal Revenue (BIR) in fact filed on March 10, 2005 a
criminal complaint before the Department of Justice against the officers and
accountant of petitioner for violation of the provisions of The National Internal
Revenue Code of 1977, as amended,[9] covering the taxable year 1995. The
criminal complaint was docketed as I.S. No. 2005-203.

On motion of petitioner in CTA Case No. 7160, a preliminary hearing on the

issue of prescription[10] was conducted during which petitioners former
bookkeeper attested that a former colleague certified public accountant Leonardo
Sablan (Sablan) illegally took custody of petitioners accounting records, invoices,
and official receipts and turned them over to the BIR.[11]

On petitioners request, a subpoena ad testificandum was issued to Sablan

for the hearing before the CTA scheduled on September 4, 2006 but he failed to
appear.[12]

Petitioner thus requested for the issuance of another subpoena ad

testificandum to Sablan for the hearing scheduled on October 23, 2006,[13] and of
subpoena duces tecum to the chief of the National Investigation Division of the BIR
for the production of the Affidavit of the Informer bearing on the assessment in
question.[14] Petitioners requests were granted.[15]

During the scheduled hearing of the case on October 23, 2006, on

respondents counsels manifestation that he was not furnished a copy of
petitioners motion for the issuance of subpoenaes, the CTA ordered petitioner to
file a motion for the issuance of subpoenas and to furnish respondents counsel a
copy thereof.[16] Petitioner complied with the CTA order.[17]

In a related move, petitioner submitted written interrogatories addressed to

Sablan and to Henry Sarmiento and Marinella German, revenue officers of the
National Investigation Division of the BIR.[18]

By Resolution[19] of January 15, 2007, the CTA denied petitioners Motion for
Issuance of Subpoenas and disallowed the submission by petitioner of written
interrogatories to Sablan, who is not a party to the case, and the revenue
officers,[20] it finding that the testimony, documents, and admissions sought are
not relevant.[21] Besides, the CTA found that to require Sablan to testify would
violate Section 2 of Republic Act No. 2338, as implemented by Section 12 of
Finance Department Order No. 46-66, proscribing the revelation of identities of
informers of violations of internal revenue laws, except when the information is
proven to be malicious or false.[22]

In any event, the CTA held that there was no need to issue a
subpoena duces tecum to obtain the Affidavit of the Informer as the same formed
part of the BIR records of the case, the production of which had been ordered by
it.[23]

Petitioners Motion for Reconsideration[24] of the CTA Resolution of January

15, 2007 was denied,[25] hence, the present Petition for Certiorari[26] which imputes
grave abuse of discretion to the CTA

I.
x x x in holding that the legality of the mode of acquiring the
documents which are the bases of the above discussed deficiency
tax assessments, the subject matter of the Petition for Review now
pending in the Honorable Second Division, is not material and
relevant to the issue of prescription.

II.
x x x in holding that Mr. Leonardo Sablans testimony, if allowed,
would violate RA 2338 which prohibits the BIR to reveal the
identity of the informer since 1) the purpose of the subpoena is to
elicit from him the whereabouts of the original accounting records,
documents and receipts owned by the Petitioner and not to
discover if he is the informer since the identity of the informer is
not relevant to the issues raised; 2) RA 2338 cannot legally justify
violation of the Petitioners property rights by a person, whether
he is an informer or not, since such RA cannot allow such invasion
of property rights otherwise RA 2338 would run counter to the
constitutional mandate that no person shall be deprive[d] of life,
liberty or property without due process of law.

III.
x x x in holding that the issuance of subpoena ad testificandum
would constitute a violation of the prohibition to reveal the
identity of the informer because compliance with such prohibition
has been rendered moot and academic by the voluntary
admissions of the Respondent himself.

IV.
x x x in holding that the constitutional right of an accused to
examine the witness against him does not exist in this case. The
Petitioners liability for tax deficiency assessment which is the main
issue in the Petition for Review is currently pending at the
Honorable Second Division. Therefore, it is a prejudicial question
raised in the criminal case filed by the herein Respondent against
the officers of the Petitioner with the Department of Justice.

V.
x x x in dismissing the request for subpoena ad testificandum
because the Opposition thereto submitted by the Respondent was
not promptly filed as provided by the Rules of Court thus, it is
respectfully submitted that, Respondent has waived his right to
object thereto.

VI.
x x x when the Honorable Court of Tax Appeals ruled that the
purpose of the Petitioner in requesting for written interrogatories
is to annoy, embarrass, or oppress the witness because such ruling
has no factual basis since Respondent never alleged nor proved
that the witnesses to whom the interrogatories are addressed will
be annoyed, embarrassed or oppressed; besides the only obvious
purpose of the Petitioner is to know the whereabouts
of accounting records and documents which are in the possession
of the witnesses to whom the interrogatories are directed and to
ultimately get possession thereof. Granting without admitting that
there is annoyance, embarrassment or oppression; the same is not
unreasonable.

VII.
 x x x when it failed to rule that the BIR officers and employees are
not covered by the prohibition under RA 2338 and do not have the
authority to withhold from the taxpayer documents owned by
such taxpayer.

VIII.
x x x when it required the clear and unequivocal proof of relevance
of the documents as a condition precedent for the issuance of
subpoena duces tecum.

IX.
x x x when it quashed the subpoena duces tecum as the Honorable
Court had issued an outstanding order to the Respondent to
certify and forward to the CTA all the records of the case because
up to the date of this Petition the BIR records have not been
submitted yet to the CTA.[27]

Grave abuse of discretion implies such capricious and whimsical exercise of

judgment as equivalent to lack of jurisdiction or, in other words, when the power
is exercised in an arbitrary or despotic manner by reason of passion or personal
hostility, and it must be so patent and gross as to amount to an evasion of positive
duty or a virtual refusal of duty enjoined or to act at all in contemplation of law.[28]

The Court finds that the issuance by the CTA of the questioned resolutions
was not tainted by arbitrariness.

The fact that Sablan was not a party to the case aside, the testimonies,
documents, and admissions sought by petitioner are not indeed relevant to the
issue before the CTA. For in requesting the issuance of the subpoenas and the
submission of written interrogatories, petitioner sought to establish that its
accounting records and related documents, invoices, and receipts which were the
bases of the assessment against it were illegally obtained. The only issues,
however, which surfaced during the preliminary hearing before the CTA, were
whether respondents issuance of assessment against petitioner had prescribed
and whether petitioners tax return was false or fraudulent.
 Besides, as the CTA held, the subpoenas and answers to the written
interrogatories would violate Section 2 of Republic Act No. 2338 as implemented
by Section 12 of Finance Department Order No. 46-66.
Petitioner claims, however, that it only intended to elicit information on the
whereabouts of the documents it needs in order to refute the assessment, and not
to disclose the identity of the informer.[29] Petitioners position does not persuade.
The interrogatories addressed to Sablan and the revenue officers show that they
were intended to confirm petitioners belief that Sablan was the informer. Thus the
questions for Sablan read:

1. Under what circumstances do you know petitioner

corporation? Please state in what capacity, the date or
period you obtained said knowledge.
2. Do you know a Ms. Elnora Carpio, who from 1995 to
the early part of 1996 was the book keeper of
petitioner? Please state how you came to know of Ms.
Carpio.
3. At the time that Ms. Carpio was book keeper of
petitioner did she consult you or show any accounting
documents and records of petitioner?
4. What documents, if any, did you obtain from
petitioner?
5. Were these documents that you obtained from
petitioner submitted to the Bureau of Internal Revenue
(BIR)? Please describe said documents and under what
circumstances the same were submitted.
6. Was the consent of the petitioner, its officers or
employees obtained when the documents that you obtained
were submitted to the BIR? Please state when and from
whom the consent was obtained.
7. Did you execute an affidavit as an informer in the
assessment which was issued by the BIR against petitioner
for the tax year 1995 and other years?[30] (Underscoring
supplied)
while the questions for the revenue officers read:

1. Where did you obtain the documents, particularly the invoices

and official receipts, which [were] used by your office as
evidence and as basis of the assessment for deficiency
income tax and value added tax for the tax year 1995 issued
against petitioner?

2. Do you know Mr. Leonardo Sablan? Please state under what

circumstance you came to know Mr.
[31]
Sablan? (Underscoring supplied)

Petitioner impugns the manner in which the documents in question reached

the BIR, Sablan having allegedly submitted them to the BIR without its
(petitioners) consent. Petitioners lack of consent does not, however, imply that
the BIR obtained them illegally or that the information received is false or
malicious. Nor does the lack of consent preclude the BIR from assessing deficiency
taxes on petitioner based on the documents. Thus Section 5 of the Tax Code
provides:

In ascertaining the correctness of any return, or in making a

return when none has been made, or in determining the liability of
any person for any internal revenue tax, or in collecting any such
liability, or in evaluating tax compliance, the Commissioner is
authorized:

(A) To examine any book, paper, record or other data

which may be relevant or material to such query;
(B) To obtain on a regular basis from any person
other than the person whose internal revenue tax
liability is subject to audit or investigation, or from
any office or officer of the national and local
governments, government agencies and
instrumentalities, including the Bangko Sentral ng
Pilipinas and government-owned and controlled
corporations, any information such as, but not limited
 to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names,
addresses, and financial statements of corporations,
mutual fund companies, insurance companies,
regional operating headquarters of multinational
companies, joint accounts, associations, joint
ventures or consortia and registered partnerships and
their members;
(C) To summon the person liable for tax or required
to file a return, or any officer or employee of such
person, or any person having possession, custody, or
care of the books of accounts and other accounting
records containing entries relating to the business of
the person liable for tax, or any other person, to
appear before the Commissioner or his duly
authorized representatives at a time and place
specified in the summons and to produce such books,
papers, records, or other data, and to give testimony;
(D) To take such testimony of the person concerned,
under oath, as may be relevant or material to such
inquiry; and
(E) To cause revenue officers and employees to
make a canvass from time to time of any revenue
district or region and inquire after and concerning all
persons therein who may be liable to pay any internal
revenue tax, and all persons owning or having the
care, management or possession of any object with
respect to which a tax is imposed.

x x x x (Emphasis and underscoring supplied)

The law thus allows the BIR access to all relevant or material records and
data in the person of the taxpayer,[32] and the BIR can accept documents which
cannot be admitted in a judicial proceeding where the Rules of Court are strictly
observed.[33] To require the consent of the taxpayer would defeat the intent of the
law to help the BIR assess and collect the correct amount of taxes.
 Petitioners invocation of the rights of an accused in a criminal prosecution
to cross examine the witness against him and to have compulsory process issued
to secure the attendance of witnesses and the production of other evidence in his
behalf does not lie. CTA Case No. 7160 is not a criminal prosecution, and even
granting that it is related to I.S. No. 2005-203, the respondents in the latter
proceeding are the officers and accountant of petitioner-corporation, not
petitioner. From the complaint and supporting affidavits in I.S. No. 2005-203,
Sablan does not even appear to be a witness against the respondents therein.[34]

AT ALL EVENTS, issuance of subpoena duces tecum for the production of the
documents requested by the petitioner which documents petitioner claims to be
crucial to its defense[35] is unnecessary in view of the CTA order for respondent to
certify and forward to it all the records of the case.[36] If the order has not been
complied with, the CTA can enforce it by citing respondent for indirect
contempt.[37]

WHEREFORE, in light of the foregoing disquisition, the petition is

DISMISSED.

Costs against petitioner.

SO ORDERED.

February 22, 2017

G.R. No. 221590

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
ASALUS CORPORATION, Respondent

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to reverse and set aside the July 30,
2015 Decision1 and the November 6, 2015 Resolution2 of the Court of Tax
Appeals (CTA) En Banc in CTA EB No. 1191, which affirmed the April 2, 2014
Decision3 of the CTA Third Division (CTA Division).

The Antecedents

On December 16, 2010, respondent Asalus Corporation (Asalus) received a Notice

of Informal Conference from Revenue District Office (RDO) No. 47 of the Bureau
of Internal Revenue (BIR). It was in connection with the investigation conducted
by Revenue Officer Fidel M. Bañares II (Bañares) on the Value-Added
Tax (VAT) transactions of Asalus for the taxable year 2007.4 Asalus filed its Letter-
Reply,5 dated December 29, 2010, questioning the basis of Bañares' computation
for its VAT liability.

On January 10, 2011, petitioner Commissioner of Internal Revenue (CIR) issued

the Preliminary Assessment Notice (PAN) finding Asalus liable for deficiency VAT
for 2007 in the aggregate amount of ₱413, 378, 058.11, inclusive of surcharge and
interest. Asalus filed its protest against the PAN but it was denied by the CIR. 6

On August 26, 2011, Asalus received the Formal Assessment Notice (FAN) stating
that it was liable for deficiency VAT for 2007 in the total amount of
₱95,681,988.64, inclusive of surcharge and interest. Consequently, it filed its
protest against the FAN, dated September 6, 2011. Thereafter, Asal us filed a
supplemental protest stating that the deficiency VAT assessment had prescribed
pursuant to Section 203 of the National Internal Revenue Code (NIRC).7

On October 16, 2012, Asal us received the Final Decision on Disputed

Assessment8 (FDDA) showing VAT deficiency for 2007 in the aggregate amount of
₱106,761,025.17, inclusive of surcharge and interest and ₱25,000.00 as
compromise penalty. As a result, it filed a petition for review before the CTA
Division.

The CTA Division Ruling

In its April 2, 2014 Decision, the CT A Division ruled that the VAT assessment
issued on August 26, 2011 had prescribed and consequently deemed invalid. It
opined that the ten (10)-year prescriptive period under Section 222 of the NIRC
was inapplicable as neither the FAN nor the FDDA indicated that Asalus had filed a
false VAT return warranting the application of the ten (10)-year prescriptive
period. It explained that it was only in the PAN where an allegation of false or
fraudulent return was made. The CTA stressed that after Asalus had protested the
PAN, the CIR never mentioned in both the FAN and the FDDA that the prescriptive
period would be ten (10) years. It further pointed out that the CIR failed to
present evidence regarding its allegation of fraud or falsity in the returns.

The CTA wrote that "the three instances where the three-year prescriptive period
will not apply must always be alleged and established by clear and convincing
evidence and should not be anchored on mere conjectures and
speculations,9 before the ten (10) year prescriptive period could be considered.
Thus, it disposed:

WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, the
deficiency VAT assessment for taxable year 2007 and the compromise penalty are
hereby CANCELLED and WITHDRAWN, on ground of prescription.

SO ORDERED.10

The CIR moved for reconsideration but its motion was denied.

The CTA En Banc Ruling

In its July 30, 2015 Decision, the CTA En Banc sustained the assailed decision of
the CT A Division and dismissed the petition for review filed by the CIR. It
explained that there was nothing in the FAN and the FDDA that would indicate,
the non-application of the three (3) year prescriptive period under Section 203 of
the NIRC. It found that the CIR did not present any evidence during the trial to
substantiate its claim of falsity in the returns and again missed its chance to do so
when it failed to file its memorandum before the CTA Division.

The CTA En Banc further explained that the PAN alone could not be used as a
basis because it was not the assessment contemplated by law. Consequently, the
allegation of falsity in Asalus' tax returns could not be considered as it was not
reiterated in the FAN. The dispositive portion thus reads:

WHEREFORE, premises considered, the present Petition for Review is hereby

DENIED, and accordingly, DISMISSED for lack of merit.

SO ORDERED.11
The CIR sought the reconsideration of the decision of the CTA En Banc, but the
latter upheld its decision in its November 6, 2015 resolution.

Hence, this petition.

ISSUES

WHETHER PETITIONER HAD SUFFICIENTLY APPRISED RESPONDENT THAT THE

FAN AND FDDA ISSUED AGAINST THE LATTER FALLS UNDER SECTION 222(A) OF
THE 1997 NIRC, AS AMENDED;

II

WHETHER RESPONDENT'S FAILURE TO REPORT IN ITS VAT RETURNS ALL THE

FEES IT COLLECTED FROM ITS MEMBERS APPLYING FOR HEALTHCARE SERVICES
CONSTITUTES "FALSE" RETURN UNDER SECTION 222(A) OF THE 1997 NIRC, AS
AMENDED; AND

II

WHETHER PETITIONER'S RIGHT TO ASSESS RESPONDENT FOR ITS DEFICIENCY

VAT FOR TAXABLE YEAR 2007 HAD ALREADY PRESCRIBED.12

The CIR, through the Office of the Solicitor General (OSG), argues that the VAT
assessment had yet to prescribe as the applicable prescriptive period is the ten
(10)-year prescriptive period under Section 222 of the NIRC, and not the three (3)
year prescriptive period under Section 203 thereof. It claims that Asalus was
informed in the PAN of the ten (10)-year prescriptive period and that the FAN
made specific reference to the PAN. In turn, the FDDA made reference to the
FAN. Asalus, on the other hand, only raised prescription in its supplemental
protest to the FAN. The CIR insists that Asalus was made fully aware that the
prescriptive period under Section 222 would apply.

Moreover, the CIR asserts that there was substantial understatement in Asalus'
income, which exceeded 30% of what was declared in its VAT returns as
appearing in its quarterly VAT returns; and the underdeclaration was supported
by the judicial admission of its lone witness that not all the membership fees
collected from members applying for healthcare services were reported in its VAT
returns. Thus, the CIR concludes that there was prima facie evidence of a false
return.

The Position of Asalus

In its Comment/Opposition,13 dated April 22, 2016, Asalus countered that the
present petition involved a question of fact, which was beyond the ambit of a
petition for review under Rule 45. Moreover, it asserted that the findings of fact
of the CT A Division, which were affirmed by the CTA En Banc, were conclusive
and binding upon the Court. It posited that the CIR could not raise for the first
time on appeal a new argument that "the FDDA and the FAN need not explicitly
state the applicability of the ten-year prescriptive period and the bases thereof as
long as the totality of the circumstances show that the taxpayer was 'sufficiently
informed' of the facts in support of the assessment. Based on the totality of the
circumstances, it was informed of the facts in support of the assessment." 14

Asalus reiterated that the CIR, either in the FAN or the FDDA, failed to show that it
had filed false returns warranting the application of the extraordinary prescriptive
period under Section 222 of the NIRC. It insisted that it was not informed of the
facts and law on which the assessment was based because the FAN did not state
that it filed false or fraudulent returns. For this reason, Asalus averred that the
assessment had prescribed because it was made beyond the three (3)-year period
as provided in Section 203 of the NIRC.

The Reply of the CIR

In its Reply, 15 dated August 15, 2016, the CIR argued that the findings of the CT A
might be set aside on appeal if they were not supported with substantial evidence
or if there was a showing of gross error or abuse. It repeated that there was
presumption of falsity in light of the 30% underdeclaration of sales. The CIR
emphasized that even Asalus' own witness testified that not all the membership
fees collected were reported in its VAT returns. It insisted that Asalus was
sufficiently informed of its assessment based on the prescriptive period under
Section 222 of the NIRC as early as when the PAN was issued.

On another note, the CIR manifested that Asalus' counsels made use of insulting
words in its Comment, which could have been dispensed with. Particularly, it
highlighted the use of the following phrases as insulting: "even to the
uninitiated," "petitioner's habit of disregarding firmly established rules of
procedure," "twist establish facts to suit her ends," "just to indulge petitioner,"
and "she then tried to calculate, on her own but without factual basis." It asserted
that "[w]hile a lawyer has a complete discretion on what legal strategy to employ
in a case, the overzealousness in protecting his client's interest does not warrant
the use of insulting and profane language in his pleadings xxx." 16

The Court's Ruling

There is merit in the petition.

It is true that the findings of fact of the CT A are, as a rule, respected by the Court,
but they can be set aside in exceptional cases. In Barcelon, Roxas Securities, Inc.
(now known as UBP Securities, Inc.) v. Commissioner of Internal Revenue, this
Court in Toshiba Information Equipment (Phils.), Inc. v. Commissioner of Internal
Revenue, 17explicitly pronounced-

Jurisprudence has consistently shown that this Court accords the findings of fact
by the CTA with the highest respect. In Sea-Land Service, Inc. v. Court of
Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446], this Court
recognizes that the Court of Tax Appeals, which by the very nature of its function
is dedicated exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will not be overturned
unless there has been an abuse or improvident exercise of authority. Such
findings can only be disturbed on appeal if they are not supported by
substantial evidence or there is a showing of gross error or abuse on the part of
the Tax Court. In the absence of any clear and convincing proof to the contrary,
this Court must presume that the CTA rendered a decision which is valid in every
respect.18 [Emphasis supplied]

After a review of the records and applicable laws and jurisprudence, the Court
finds that the CTA erred in concluding that the assessment against Asalus had
prescribed.

Generally, internal revenue taxes shall be assessed within three (3) years after the
,last day prescribed by law for the filing of the return, or where the return is filed
beyond the period, from the day the return was actually filed. 19Section 222 of the
NIRC, however, provides for exceptions to the general rule. It states that in the
case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the assessment may be made within ten (10) years from the discovery of
the falsity, fraud or omission.

In the oft-cited Aznar v. CTA,20the Court compared a false return to a fraudulent

return in relation to the applicable prescriptive periods for assessments, to wit:

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer
did not file false and fraudulent returns with intent to' evade tax, while
respondent Commissioner of Internal Revenue insists contrariwise, with
respondent Court of Tax Appeals concluding that the very "substantial under
declarations of income for six consecutive years eloquently demonstrate the
falsity or fraudulence of the income tax returns with an intent to evade the
payment of tax."

xxxx

xxx We believe that the proper and reasonable interpretation of said provision
should be that in the three different cases of (1) false return, (2) fraudulent return
with intent to evade tax, (3) failure to file a return, the tax may be assessed, or a
proceeding in court for the collection of such tax may be begun without
assessmeμt, at any time within ten years after the discovery of the (1) falsity, (2)
fraud, (3) omission. Our stand that the law should be interpreted to mean a
separation of the three different situations of false return, fraudulent return
with intent to evade tax, and failure to file a return is strengthened
immeasurably by the last portion of the provision which seggregates the
situations into three different classes, namely "falsity", "fraud" and "omission."
That there is a difference between "false return" and "fraudulent return"
cannot be denied. While the first merely implies deviation from the truth,
whether intentional or not, the second implies intentional or deceitful entry
with intent to evade the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities
under Sec. 331 of the NIRC should be applicable to normal circumstances, but
whenever the government is placed, at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities due to false returns, fraudulent
return intended to evade payment of tax or failure to file returns, the period of
ten years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the
falsity, fraud or omission even seems to be inadequate and should be the one
enforced.

There being undoubtedly false tax returns in this case, We affirm the conclusion
of the respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply
and that the period of ten years within which to assess petitioner's tax liability
had not expired at the time said assessment was made. (Emphasis supplied)

Thus, a mere showing that the returns filed by the taxpayer were false,
notwithstanding the absence of intent to defraud, is sufficient to warrant the
application of the ten (10) year prescriptive period under Section 222 of the NIRC.

Presumption of Falsity of Returns

In the present case, the CTA opined that the CIR failed to substantiate with clear
and convincing evidence its claim that Asalus filed a false return. As it noted that
the CIR never presented any evidence to prove the falsity in the returns that
Asalus filed, the CTA ruled that the assessment was subject to the three (3) year
ordinary prescriptive period.

The Court is of a different view.

Under Section 248(B) of the NIRC,21 there is a prima facie evidence of a false
return if there is a substantial underdeclaration of taxable sales, receipt or
income. The failure to report sales, receipts or income in an amount exceeding
30% what is declared in the returns constitute substantial underdeclaration.
A prima facie evidence is one which that will establish a fact or sustain a judgment
unless contradictory evidence is produced. 22

In other words, when there is a showing that a taxpayer has substantially

underdeclared its sales, receipt or income, there is a presumption that it has filed
a false return. As such, the CIR need not immediately present evidence to support
the falsity of the return, unless the taxpayer fails to overcome the presumption
against it.

Applied in this case, the audit investigation revealed that there were undeclared
VA Table sales more than 30% of that declared in Asalus' VAT returns. Moreover,
Asalus' lone witness testified that not all membership fees, particularly those
pertaining to medical practitioners and hospitals, were reported in Asalus' VAT
returns. The testimony of its witness, in trying to justify why not all of its sales
were included in the gross receipts reflected in the VAT returns, supported the
presumption that the return filed was indeed false precisely because not all the
sales of Asalus were included in the VAT returns.

Hence, the CIR need not present further evidence as the presumption of falsity of
the returns was not overcome. Asalus was bound to refute the presumption of
the falsity of the return and to prove that it had filed accurate returns. Its failure
to overcome the same warranted the application of the ten (10)-year prescriptive
period for assessment under Section 222 of the NIRC. To require the CIR to
present additional evidence in spite of the presumption provided in Section
248(B) of the NIRC would render the said provision inutile.

Substantial Compliance of Notice Requirement

The CTA also posited that the ordinary prescriptive period of three (3) years
applied in this case because there was no mention in the FAN or the FDDA that
what would apply was the extraordinary prescriptive period and that the CIR did
not present any evidence to support its claim of false returns.

Again, the Court disagrees.

It is true that neither the FAN nor the FDDA explicitly stated that the applicable
prescriptive period was the ten (10)-year period set in Section 222 of the NIRC.
They, however, made reference to the PAN, which categorically stated that "[t]he
running of the three-year statute of limitation I as provided un4er Section 203 of
the 1997 National Internal Revenue Code (NIRC) is not i applicable xxx but rather
to the ten (10) year prescriptive period pursua11t to Section 222(A) of the tax
code xxx." 23 In Samar-I Electric Cooperative v. COMELEC,24the Court ruled that it
sufficed that the taxpayer was substantially informed of the legal and factual
bases of the assessment enabling him to file an effective protest, to wit:

Although, the FAN and demand letter issued to petitioner were not accompanied
by a written explanation of the legal and factual bases of the deficiency taxes
assessed against the petitioner, the records showed that respondent in its letter
dated April 10, 2003 responded to petitioner's October 14, 2002 letter-protest,
explaining at length the factual and legal bases of the deficiency tax assessments
and denying the protest.
Considerirg the foregoing exchange of correspondence and Document between
the parties, we find that the requirement of Section 228 was substantially
complied with. Respondent had fully informed I petitioner in writing of the
factual and legal bases of the deficiency taxes assessment, which enabled the
latter to file an "effective" protest, much unlike the taxpayer's situation
in Enron. Petitioner's right to due process was thus not violated. [Emphasis
supplied]

Thus, substantial compliance with the requirement as laid down under Section
228 of the NIRC suffices, for what is important is that the taxpayer has been
sufficiently informed of the factual and legal bases of the assessment so that it
may file an effective protest against the assessment. In the case at bench, Asalus
was sufficiently informed that with respect to its tax liability, the extraordinary
period laid down in Section 222 of the NIRC would apply. This was categorically
stated in the PAN and all subsequent communications from the CIR made
reference to the PAN. Asalus was eventually able to file a protest addressing the
issue on prescription, although it was done only in its supplemental protest to the
FAN.

Considering the existing circumstances, the assessment was timely made because
the applicable prescriptive period was the ten (10)-year prescriptive period under
Section 222 of the NIRC. To reiterate, there was a prima facie showing that the
returns filed by Asalus were false, which it failed to controvert. Also, it was
adequately informed that it was being assessed within the extraordinary
prescriptive period.

A Reminder

A lawyer is indeed expected to champion the cause of his client with utmost zeal
and competence. Such exuberance, however, must be tempered to meet the
standards of civility and decorum. Rule 8.01 of the Code of Professional
Responsibility mandates that "[a] lawyer shall not, in his professional dealings, use
language which is abusive, offensive or otherwise improper." In Noble v. Atty.
Ailes, 25 the Court cautioned lawyers to be careful in their: choice of words as not
to unduly malign the other party, to wit:

Though a lawyer's language may be forceful and emphatic, it should always be

dignified and respectful, befitting the dignity of the legal profession.1âwphi1 The
use of intemperate language and unkind ascriptions has no place in the dignity of
the judicial forum. In Buatis Jr. v. People, the Court treated a lawyer's use of the
words "lousy," "inutile," "carabao English," "stupidity," and "satan" in a letter
addressed to another colleague as defamatory and injurious which effectively
maligned his integrity. Similarly, the hurling of insulting language to describe the
opposing counsel is considered conduct unbecoming of the legal profession.

xxx

On this score, it must be emphasized that membership in the bar is a privilege

burdened with conditions such that a lawyer's words and actions directly affect
the public's opinion of the legal profession. Lawyers are expected to observe
such conduct of nobility and uprightness which should remain with
them, whether in their public or private lives, and may be disciplined in the event
their conduct falls short of the standards imposed upon them. Thus, in this case, it
is inconsequential that the statements were merely relayed to Orlando's brother
in private. As a member of the bar, Orlando should have been more circumspect
in his words, being fully aware that they pertain to another lawyer to whom
fairness as well as candor is owed. It was highly improper for Orlando to interfere
and insult Maximino to his client.

Indulging in offensive personalities in the course of judicial proceedings, as in this

case, constitutes unprofessional conduct which subjects a lawyer to disciplinary
action. While a lawyer is entitled to. present his case with vigor and courage,
such enthusiasm does not justify the use of offensive and abusive language. The
Court has consistently reminded the members of the bar to abstain from all
offensive personality and to advance no fact prejudicial to the honor and
reputation of a party. xxx26[Emphases supplied]

While the Court recognizes and appreciates the passion of Asalus' counsels in
promoting and protecting its interest, they must still be reminded that they
should be more circumspect in their choice of words to argue their client's
position. As much as possible, words which undermine the integrity, competence
and ability of the opposing party, or are otherwise offensive, must be avoided
especially if the message may be delivered in a respectful, yet equally emphatic
manner. A counsel's mettle will not be viewed any less should he choose to
pursue his cause without denigrating the other party.
WHEREFORE, petition is GRANTED. The July 30, 2015 Decision and the November
6, 2015 Resolution of the Court of Tax Appeals En Banc are REVERSED and SET
ASIDE. The case is ordered REMANDED to the Court of Tax Appeals for the
determination of the Value Added Tax liabilities of the Asalus Corporation.

SO ORDERED.

G.R. No. 197515 July 2, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
UNITED SALVAGE AND TOWAGE (PHILS.), INC., Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Revised
Rules of Court which seeks to review, reverse and set aside the Decision1 of the
Court of Tax Appeals En Banc (CTA En Banc), dated June 27, 2011, in the case
entitled Commissioner of Internal Revenue v. United Salvage and Towage (Phils.),
Inc. (USTP), docketed as C.T.A. EB No. 662. The facts as culled from the records:

Respondent is engaged in the business of sub-contracting work for service

contractors engaged in petroleum operations in the Philippines.2 During the
taxable years in question, it had entered into various contracts and/or sub-
contracts with several petroleum service contractors, such as Shell Philippines
Exploration, B.V. and Alorn Production Philippines for the supply of service
vessels.3

In the course of respondent’s operations, petitioner found respondent liable for

deficiency income tax, withholding tax, value-added tax (VAT) and documentary
stamp tax (DST) for taxable years 1992,1994, 1997 and 1998.4Particularly,
petitioner, through BIR officials, issued demand letters with attached assessment
notices for withholding tax on compensation (WTC) and expanded withholding
tax (EWT) for taxable years 1992, 1994 and 1998,5 detailed as follows:

Assessment Notice No. Tax Covered Period Amount

 25-1-000545-92 WTC 1992 ₱50,429.18

25-1-000546-92 EWT 1992 ₱14,079.45

034-14-000029-94 EWT 1994 ₱48,461.76

034-1-000080-98 EWT 1998 ₱22,437.016

On January 29, 1998 and October 24, 2001, USTP filed administrative protests
against the 1994 and 1998 EWT assessments, respectively.7

On February 21, 2003, USTP appealed by way of Petition for Review before the
Court in action (which was thereafter raffled to the CTA-Special First Division)
alleging, among others, that the Notices of Assessment are bereft of any facts,
law, rules and regulations or jurisprudence; thus, the assessments are void and
the right of the government to assess and collect deficiency taxes from it has
prescribed on account of the failure to issue a valid notice of assessment within
the applicable period.8

During the pendency of the proceedings, USTP moved to withdraw the aforesaid
Petition because it availed of the benefits of the Tax Amnesty Program under
Republic Act (R.A.) No. 9480.9 Having complied with all the requirements therefor,
the CTA-Special First Division partially granted the Motion to Withdraw and
declared the issues on income tax, VAT and DST deficiencies closed and
terminated in accordance with our pronouncement in Philippine Banking
Corporation v. Commissioner of Internal Revenue.10 Consequently, the case was
submitted for decision covering the remaining issue on deficiency EWT and WTC,
respectively, for taxable years 1992, 1994 and 1998.11

The CTA-Special First Division held that the Preliminary Assessment Notices
(PANs) for deficiency EWT for taxable years 1994 and 1998 were not formally
offered; hence, pursuant to Section 34, Rule 132 of the Revised Rules of Court,
the Court shall neither consider the same as evidence nor rule on their
validity.12 As regards the Final Assessment Notices (FANs) for deficiency EWT for
taxable years 1994 and 1998, the CTA-Special First Division held that the same do
not show the law and the facts on which the assessments were based.13 Said
assessments were, therefore, declared void for failure to comply with Section 228
of the 1997 National Internal Revenue Code (Tax Code).14 From the foregoing, the
only remaining valid assessment is for taxable year 1992.15

Nevertheless, the CTA-Special First Division declared that the right of petitioner to
collect the deficiency EWT and WTC, respectively, for taxable year 1992 had
already lapsed pursuant to Section 203 of the Tax Code.16 Thus, in ruling for USTP,
the CTA-Special First Division cancelled Assessment Notice Nos. 25-1-00546-92
and 25-1-000545-92, both dated January 9, 1996 and covering the period of 1992,
as declared in its Decision17 dated March 12, 2010, the dispositive portion of
which provides:

WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly,

Assessment Notice No. 25-1-00546-92 dated January 9, 1996 for deficiency
Expanded Withholding Tax and Assessment Notice No. 25-1-000545 dated
January 9, 1996 for deficiency Withholding Tax on Compensation are hereby
CANCELLED.

SO ORDERED.18

Dissatisfied, petitioner moved to reconsider the aforesaid ruling. However, in a

Resolution19 dated July 15, 2010, the CTA-Special First Division denied the same
for lack of merit.

On August 18, 2010, petitioner filed a Petition for Review with the CTA En Banc
praying that the Decision of the CTA-Special First Division, dated March 12,
2010,be set aside.20

On June 27, 2011, the CTA En Banc promulgated a Decision which affirmed with
modification the Decision dated March 12, 2010 and the Resolution dated July 15,
2010 of the CTA-Special First Division, the dispositive portion of which reads:

WHEREFORE, premises considered, the Petition is PARTLY GRANTED. The Decision

dated March 12, 2010 and the Resolution dated July 15, 2010 are AFFIRMED with
MODIFICATION upholding the 1998 EWT assessment. In addition to the basic EWT
deficiency of ₱14,496.79, USTP is ordered to pay surcharge, annual deficiency
interest, and annual delinquency interest from the date due until full payment
pursuant to Section 249 of the 1997 NIRC.
SO ORDERED.21

Hence, the instant petition raising the following issues:

1. Whether or not the Court of Tax Appeals is governed strictly by the

technical rules of evidence;

2. Whether or not the Expanded Withholding Tax Assessments issued by

petitioner against the respondent for taxable year 1994 was without any
factual and legal basis; and

3. Whether or not petitioner’s right to collect the creditable withholding tax

and expanded withholding tax for taxable year 1992 has already
prescribed.22

After careful review of the records and evidence presented before us, we find no
basis to overturn the decision of the CTA En Banc.

On this score, our ruling in Compagnie Financiere Sucres Et Denrees v. CIR,23 is

enlightening, to wit:

We reiterate the well-established doctrine that as a matter of practice and

principle, [we] will not set aside the conclusion reached by an agency, like the
CTA, especially if affirmed by the [CA]. By the very nature of its function, it has
dedicated itself 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 on its part, which is not present here.24

Now, to the first issue.

Petitioner implores unto this Court that technical rules of evidence should not be
strictly applied in the interest of substantial justice, considering that the mandate
of the CTA explicitly provides that its proceedings shall not be governed by the
technical rules of evidence.25 Relying thereon, petitioner avers that while it failed
to formally offer the PANs of EWTs for taxable years 1994and 1998, their
existence and due execution were duly tackled during the presentation of
petitioner’s witnesses, Ruleo Badilles and Carmelita Lynne de Guzman (for taxable
year 1994) and Susan Salcedo-De Castro and Edna A. Ortalla (for taxable year
1998).26 Petitioner further claims that although the PANs were not marked as
exhibits, their existence and value were properly established, since the BIR
records for taxable years 1994 and 1998 were forwarded by petitioner to the CTA
in compliance with the latter’s directive and were, in fact, made part of the CTA
records.27

Under Section 828 of Republic Act (R.A.) No. 1125, the CTA is categorically
described as a court of record.29 As such, it shall have the power to promulgate
rules and regulations for the conduct of its business, and as may be needed, for
the uniformity of decisions within its jurisdiction.30 Moreover, as cases filed
before it are litigated de novo, party-litigants shall prove every minute aspect of
their cases.31 Thus, no evidentiary value can be given the pieces of evidence
submitted by the BIR, as the rules on documentary evidence require that these
documents must be formally offered before the CTA.32 Pertinent is Section 34,
Rule 132 of the Revised Rules on Evidence which reads:

SEC. 34. Offer of evidence. – The court shall consider no evidence which has not
been formally offered. The purpose for which the evidence is offered must be
specified.

Although in a long line of cases, we have relaxed the foregoing rule and allowed
evidence not formally offered to be admitted and considered by the trial court,
we exercised extreme caution in applying the exceptions to the rule, as
pronounced in Vda. de Oñate v. Court of Appeals,33 thus:

From the foregoing provision, it is clear that for evidence to be considered, the
same must be formally offered. Corollarily, the mere fact that a particular
document is identified and marked as an exhibit does not mean that it has already
been offered as part of the evidence of a party. In Interpacific Transit, Inc. v.
Aviles[186 SCRA 385, 388-389 (1990)], we had the occasion to make a distinction
between identification of documentary evidence and its formal offer as an
exhibit. We said that the first is done in the course of the trial and is accompanied
by the marking of the evidence as an exhibit while the second is done only when
the party rests its case and not before. A party, therefore, may opt to formally
offer his evidence if he believes that it will advance his cause or not to do so at all.
In the event he chooses to do the latter, the trial court is not authorized by the
Rules to consider the same.
However, in People v. Napat-a[179 SCRA 403 (1989)] citing People v. Mate[103
SCRA 484 (1980)], we relaxed the foregoing rule and allowed evidence not
formally offered to be admitted and considered by the trial court provided the
following requirements are present, viz.: first, the same must have been duly
identified by testimony duly recorded and, second, the same must have been
incorporated in the records of the case.34

The evidence may, therefore, be admitted provided the following requirements

are present: (1) the same must have been duly identified by testimony duly
recorded; and (2) the same must have been incorporated in the records of the
case. Being an exception, the same may only be applied when there is strict
compliance with the requisites mentioned above; otherwise, the general rule in
Section 34 of Rule 132 of the Rules of Court should prevail.35

In the case at bar, petitioner categorically admitted that it failed to formally offer
the PANs as evidence. Worse, it advanced no justifiable reason for such fatal
omission. Instead, it merely alleged that the existence and due execution of the
PANs were duly tackled by petitioner’s witnesses. We hold that such is not
sufficient to seek exception from the general rule requiring a formal offer of
evidence, since no evidence of positive identification of such PANs by petitioner’s
witnesses was presented. Hence, we agree with the CTA En Banc’s observation
that the 1994 and 1998 PANs for EWT deficiencies were not duly identified by
testimony and were not incorporated in the records of the case, as required by
jurisprudence.

While we concur with petitioner that the CTA is not governed strictly by technical
rules of evidence, as rules of procedure are not ends in themselves but are
primarily intended as tools in the administration of justice,36 the presentation of
PANs as evidence of the taxpayer’s liability is not mere procedural technicality. It
is a means by which a taxpayer is informed of his liability for deficiency taxes. It
serves as basis for the taxpayer to answer the notices, present his case and
adduce supporting evidence.37 More so, the same is the only means by which the
CTA may ascertain and verify the truth of respondent's claims. We are, therefore,
constrained to apply our ruling in Heirs of Pedro Pasag v. Spouses Parocha,38 viz.:

x x x. A formal offer is necessary because judges are mandated to rest their

findings of facts and their judgment only and strictly upon the evidence offered by
the parties at the trial. Its function is to enable the trial judge to know the
purpose or purposes for which the proponent is presenting the evidence. On the
other hand, this allows opposing parties to examine the evidence and object to its
admissibility. Moreover, it facilitates review as the appellate court will not be
required to review documents not previously scrutinized by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court in Constantino v.
Court of Appeals ruled that the formal offer of one's evidence is deemed waived
after failing to submit it within a considerable period of time. It explained that the
court cannot admit an offer of evidence made after a lapse of three (3) months
because to do so would "condone an inexcusable laxity if not non-compliance
with a court order which, in effect, would encourage needless delays and derail
the speedy administration of justice."

Applying the aforementioned principle in this case, we find that the trial court had
reasonable ground to consider that petitioners had waived their right to make a
formal offer of documentary or object evidence. Despite several extensions of
time to make their formal offer, petitioners failed to comply with their
commitment and allowed almost five months to lapse before finally submitting it.
Petitioners' failure to comply with the rule on admissibility of evidence is
anathema to the efficient, effective, and expeditious dispensation of justice. x x
x.39

Anent the second issue, petitioner claims that the EWT assessment issued for
taxable year 1994 has factual and legal basis because at the time the PAN and
FAN were issued by petitioner to respondent on January 19, 1998, the provisions
of Revenue Regulation No. 12-9940 which governs the issuance of assessments
was not yet operative. Hence, its compliance with Revenue Regulation No. 12-
8541 was sufficient. In any case, petitioner argues that a scrutiny of the BIR
records of respondent for taxable year 1994 would show that the details of the
factual finding of EWT were itemized from the PAN issued by petitioner.42

In order to determine whether the requirement for a valid assessment is duly

complied with, it is important to ascertain the governing law, rules and
regulations and jurisprudence at the time the assessment was issued. In the
instant case, the PANs and FANs pertaining to the deficiency EWT for taxable
years 1994 and 1998, respectively, were issued on January 19, 1998, when the
Tax Code was already in effect, as correctly found by the CTA En Banc:
The date of issuance of the notice of assessment determines which law applies-
the 1997 NIRC or the old Tax Code. The case of Commissioner of Internal Revenue
v. Bank of Philippine Islands is instructive:

In merely notifying BPI of his findings, the CIR relied on the provisions of the
former Section 270 prior to its amendment by RA 8424 (also known as the Tax
Reform Act of 1997). In CIR v. Reyes, we held that:

In the present case, Reyes was not informed in writing of the law and the facts on
which the assessment of estate taxes had been made. She was merely notified of
the findings by the CIR, who had simply relied upon the provisions of former
Section 229 prior to its amendment by [RA] 8424, otherwise known as the Tax
Reform Act of 1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an
assessment. The old requirement of merely notifying the taxpayer of the CIR's
findings was changed in 1998to informing the taxpayer of not only the law, but
also of the facts on which an assessment would be made; otherwise, the
assessment itself would be invalid.

It was on February 12, 1998, that a preliminary assessment notice was issued
against the estate. On April 22, 1998, the final estate tax assessment notice, as
well as demand letter, was also issued. During those dates, RA 8424 was already
in effect. The notice required under the old law was no longer sufficient under the
new law.(Emphasis ours.)

In the instant case, the 1997 NIRC covers the 1994 and 1998 EWT FANs because
there were issued on January 19, 1998 and September 21, 2001, respectively, at
the time of the effectivity of the 1997 NIRC. Clearly, the assessments are
governed by the law.43

Indeed, Section 228 of the Tax Code provides that the taxpayer shall be informed
in writing of the law and the facts on which the assessment is made. Otherwise,
the assessment is void. To implement the aforesaid provision, Revenue Regulation
No. 12-99was enacted by the BIR, of which Section 3.1.4 thereof reads:

3.1.4. Formal Letter of Demand and Assessment Notice. –The formal letter of
demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the
taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is based, otherwise, the
formal letter of demand and assessment notice shall be void. The same shall be
sent to the taxpayer only by registered mail or by personal delivery. x x x44

It is clear from the foregoing that a taxpayer must be informed in writing of the
legal and factual bases of the tax assessment made against him. The use of the
word "shall" in these legal provisions indicates the mandatory nature of the
requirements laid down therein.

In the present case, a mere perusal of the FAN for the deficiency EWT for taxable
year 1994will show that other than a tabulation of the alleged deficiency taxes
due, no further detail regarding the assessment was provided by petitioner. Only
the resulting interest, surcharge and penalty were anchored with legal
basis.45 Petitioner should have at least attached a detailed notice of discrepancy
or stated an explanation why the amount of ₱48,461.76 is collectible against
respondent46 and how the same was arrived at. Any short-cuts to the prescribed
content of the assessment or the process thereof should not be countenanced, in
consonance with the ruling in Commissioner of Internal Revenue v. Enron Subic
Power Corporation47 to wit:

The CIR insists that an examination of the facts shows that Enron was properly
apprised of its tax deficiency. During the pre-assessment stage, the CIR advised
Enron’s representative of the tax deficiency, informed it of the proposed tax
deficiency assessment through a preliminary five-day letter and furnished Enron a
copy of the audit working paper allegedly showing in detail the legal and factual
bases of the assessment. The CIR argues that these steps sufficed to inform Enron
of the laws and facts on which the deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of

Enron, as well as the preliminary five-day letter, were not valid substitutes for the
mandatory notice in writing of the legal and factual bases of the assessment.
These steps were mere perfunctory discharges of the CIR’s duties incorrectly
assessing a taxpayer. The requirement for issuing a preliminary or final notice, as
the case may be, informing a taxpayer of the existence of a deficiency tax
assessment is markedly different from the requirement of what such notice must
contain. Just because the CIR issued an advice, a preliminary letter during the pre-
assessment stage and a final notice, in the order required by law, does not
necessarily mean that Enron was informed of the law and facts on which the
deficiency tax assessment was made.

The law requires that the legal and factual bases of the assessment be stated in
the formal letter of demand and assessment notice. Thus, such cannot be
presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR
No. 12-99 would be rendered nugatory. The alleged "factual bases" in the advice,
preliminary letter and "audit working papers" did not suffice. There was no going
around the mandate of the law that the legal and factual bases of the assessment
be stated in writing in the formal letter of demand accompanying the assessment
notice.

We note that the old law merely required that the taxpayer be notified of the
assessment made by the CIR. This was changed in 1998 and the taxpayer must
now be informed not only of the law but also of the facts on which the
assessment is made. Such amendment is in keeping with the constitutional
principle that no person shall be deprived of property without due process. In
view of the absence of a fair opportunity for Enron to be informed of the legal
and factual bases of the assessment against it, the assessment in question was
void. x x x.48

In the same vein, we have held in Commissioner of Internal Revenue v.

Reyes,49 that:

Even a cursory review of the preliminary assessment notice, as well as the

demand letter sent, reveals the lack of basis for -- not to mention the insufficiency
of -- the gross figures and details of the itemized deductions indicated in the
notice and the letter. This Court cannot countenance an assessment based on
estimates that appear to have been arbitrarily or capriciously arrived at. Although
taxes are the lifeblood of the government, their assessment and collection
"should be made in accordance with law as any arbitrariness will negate the very
reason for government itself."50

Applying the aforequoted rulings to the case at bar, it is clear that the assailed
deficiency tax assessment for the EWT in 1994disregarded the provisions of
Section 228 of the Tax Code, as amended, as well as Section 3.1.4 of Revenue
Regulations No. 12-99 by not providing the legal and factual bases of the
assessment. Hence, the formal letter of demand and the notice of assessment
issued relative thereto are void.

In any case, we find no basis in petitioner’s claim that Revenue Regulation No. 12-
99 is not applicable at the time the PAN and FAN for the deficiency EWT for
taxable year 1994 were issued. Considering that such regulation merely
implements the law, and does not create or take away vested rights, the same
may be applied retroactively, as held in Reyes:

x x x x.

Second, the non-retroactive application of Revenue Regulation (RR) No. 12-99 is

of no moment, considering that it merely implements the law.

A tax regulation is promulgated by the finance secretary to implement the

provisions of the Tax Code. While it is desirable for the government authority or
administrative agency to have one immediately issued after a law is passed, the
absence of the regulation does not automatically mean that the law itself would
become inoperative.

At the time the pre-assessment notice was issued to Reyes, RA 8424 already
stated that the taxpayer must be informed of both the law and facts on which the
assessment was based. Thus, the CIR should have required the assessment
officers of the Bureau of Internal Revenue (BIR) to follow the clear mandate of the
new law. The old regulation governing the issuance of estate tax assessment
notices ran afoul of the rule that tax regulations-- old as they were -- should be in
harmony with, and not supplant or modify, the law.

It may be argued that the Tax Code provisions are not self- executory. It would be
too wide a stretch of the imagination, though, to still issue a regulation that
would simply require tax officials to inform the taxpayer, in any manner, of the
law and the facts on which an assessment was based. That requirement is neither
difficult to make nor its desired results hard to achieve. Moreover, an
administrative rule interpretive of a statute, and not declarative of certain rights
and corresponding obligations, is given retroactive effect as of the date of the
effectivity of the statute. RR 12-99 is one such rule. Being interpretive of the
provisions of the Tax Code, even if it was issued only on September 6, 1999, this
regulation was to retroact to January 1, 1998 -- a date prior to the issuance of the
preliminary assessment notice and demand letter.51
Indubitably, the disputed assessments for taxable year 1994 should have already
complied with the requirements laid down under Revenue Regulation No. 12-99.
Having failed so, the same produces no legal effect.

Notwithstanding the foregoing findings, we sustain the CTA En Banc’s findings on

the deficiency EWT for taxable year 1998 considering that it complies with Section
228 of the Tax Code as well as Revenue Regulation No. 12-99, thus:

On the other hand, the 1998 EWT FAN reflected the following: a detailed factual
account why the basic EWT is ₱14,496.79 and the legal basis, Section 57 B of the
1997 NIRC supporting findings of EWT liability of ₱22,437.01. Thus, the EWT FAN
for 1998 is duly issued in accordance with the law.52

As to the last issue, petitioner avers that its right to collect the EWT for taxable
year 1992 has not yet prescribed. It argues that while the final assessment notice
and demand letter on EWT for taxable year 1992 were all issued on January 9,
1996, the five (5)-year prescriptive period to collect was interrupted when
respondent filed its request for reinvestigation on March 14, 1997 which was
granted by petitioner on January 22, 2001 through the issuance of Tax Verification
Notice No. 00165498 on even date.53 Thus, the period for tax collection should
have begun to run from the date of the reconsidered or modified assessment.54

This argument fails to persuade us.

The statute of limitations on assessment and collection of national internal

revenue taxes was shortened from five (5) years to three (3) years by virtue of
Batas Pambansa Blg. 700.55 Thus, petitioner has three (3) years from the date of
actual filing of the tax return to assess a national internal revenue tax or to
commence court proceedings for the collection thereof without an
assessment.56 However, when it validly issues an assessment within the three (3)-
year period, it has another three (3) years within which to collect the tax due by
distraint, levy, or court proceeding.57The assessment of the tax is deemed made
and the three (3)-year period for collection of the assessed tax begins to run on
the date the assessment notice had been released, mailed or sent to the
taxpayer.58

On this matter, we note the findings of the CTA-Special First Division that no
evidence was formally offered to prove when respondent filed its returns and
paid the corresponding EWT and WTC for taxable year 1992.59
Nevertheless, as correctly held by the CTA En Banc, the Preliminary Collection
Letter for deficiency taxes for taxable year 1992 was only issued on February 21,
2002, despite the fact that the FANs for the deficiency EWT and WTC for taxable
year 1992 was issued as early as January 9, 1996. Clearly, five (5) long years had
already lapsed, beyond the three (3)-year prescriptive period, before collection
was pursued by petitioner.

Further, while the request for reinvestigation was made on March 14, 1997, the
same was only acted upon by petitioner on January22, 2001, also beyond the
three (3) year statute of limitations reckoned from January 9, 1996,
notwithstanding the lack of impediment to rule upon such issue. We cannot
countenance such inaction by petitioner to the prejudice of respondent pursuant
to our ruling in Commissioner of Internal Revenue v. Philippine Global
Communication, Inc.,60 to wit:

The assessment, in this case, was presumably issued on 14 April 1994 since the
respondent did not dispute the CIR’s claim. Therefore, the BIR had until 13 April
1997. However, as there was no Warrant of Distraint and/or Levy served on the
respondents nor any judicial proceedings initiated by the BIR, the earliest attempt
of the BIR to collect the tax due based on this assessment was when it filed its
Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond
the three-year prescriptive period. Thus, the CIR is now prescribed from collecting
the assessed tax.61

Here, petitioner had ample time to make a factually and legally well-founded
assessment and implement collection pursuant thereto.1âwphi1 Whatever
examination that petitioner may have conducted cannot possibly outlast the
entire three (3)-year prescriptive period provided by law to collect the assessed
tax. Thus, there is no reason to suspend the running of the statute of limitations
in this case.

Moreover, in Bank of the Philippine Islands, citing earlier jurisprudence, we held

that the request for reinvestigation should be granted or at least acted upon in
due course before the suspension of the statute of limitations may set in, thus:

In BPI v. Commissioner of Internal Revenue, the Court emphasized the rule that
the CIR must first grant the request for reinvestigation as a requirement for the
suspension of the statute of limitations. The Court said:
In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco
requested for a thorough reinvestigation of the assessment against him and
placed at the disposal of the Collector of Internal Revenue all the evidences he
had for such purpose; yet, the Collector ignored the request, and the records and
documents were not at all examined. Considering the given facts, this Court
pronounced that—

x x x The act of requesting a reinvestigation alone does not suspend the period.
The request should first be granted, in order to effect suspension. (Collector v.
Suyoc Consolidated, supra; also Republic v. Ablaza, supra). Moreover, the
Collector gave appellee until April 1, 1949, within which to submit his evidence,
which the latter did one day before. There were no impediments on the part of
the Collector to file the collection case from April 1, 1949…

In Republic of the Philippines v. Acebedo, this Court similarly found that –

x x x T]he defendant, after receiving the assessment notice of September 24,

1949, asked for a reinvestigation thereof on October 11, 1949 (Exh. "A"). There is
no evidence that this request was considered or acted upon. In fact, on October
23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and
levy for the full amount of the assessment (Exh. "D"), but there was follow-up of
this warrant. Consequently, the request for reinvestigation did not suspend the
running of the period for filing an action for collection.[Emphasis in the
original]62With respect to petitioner’s argument that respondent’s act of elevating
its protest to the CTA has fortified the continuing interruption of petitioner’s
prescriptive period to collect under Section 223 of the Tax Code,63 the same is
flawed at best because respondent was merely exercising its right to resort to the
proper Court, and does not in any way deter petitioner’s right to collect taxes
from respondent under existing laws.

On the strength of the foregoing observations, we ought to reiterate our earlier

teachings that "in balancing the scales between the power of the State to tax and
its inherent right to prosecute perceived transgressors of the law on one side, and
the constitutional rights of a citizen to due process of law and the equal
protection of the laws on the other, the scales must tilt in favor of the individual,
for a citizen’s right is amply protected by the Bill of Rights under the
Constitution."64 Thus, while "taxes are the lifeblood of the government," the
power to tax has its limits, in spite of all its plenitude.65 Even as we concede the
inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed
procedure.66

After all, the statute of limitations on the collection of taxes was also enacted to
benefit and protect the taxpayers, as elucidated in the case of Philippine Global
Communication, Inc.,67 thus:

x x x The report submitted by the tax commission clearly states that these
provisions on prescription should be enacted to benefit and protect taxpayers:

Under the former law, the right of the Government to collect the tax does not
prescribe.1âwphi1 However, in fairness to the taxpayer, the Government should
be estopped from collecting the tax where it failed to make the necessary
investigation and assessment within 5 years after the filing of the return and
where it failed to collect the tax within 5 years from the date of assessment
thereof. Just as the government is interested in the stability of its collections, so
also are the taxpayers entitled to an assurance that they will not be subjected to
further investigation for tax purposes after the expiration of a reasonable period
of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322).68

WHEREFORE, the petition is DENIED. The June 27, 2011 Decision of the Court of
Tax Appeals En Banc in C.T.A. EB No. 662 is hereby AFFIRMED.

SO ORDERED.

FIRST DIVISION

G.R. No. 162852 December 16, 2004

PHILIPPINE JOURNALISTS, INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION
YNARES-SANTIAGO, J.:

This is a petition for review filed by Philippine Journalists, Incorporated (PJI)

assailing the Decision1 of the Court of Appeals dated August 5, 2003,2 which
ordered petitioner to pay the assessed tax liability of P111,291,214.46 and the
Resolution3 dated March 31, 2004 which denied the Motion for Reconsideration.

The case arose from the Annual Income Tax Return filed by petitioner for the
calendar year ended December 31, 1994 which presented a net income of
P30,877,387.00 and the tax due of P10,807,086.00. After deducting tax credits for
the year, petitioner paid the amount of P10,247,384.00.

On August 10, 1995, Revenue District Office No. 33 of the Bureau of Internal
Revenue (BIR) issued Letter of Authority No. 871204 for Revenue Officer Federico
de Vera, Jr. and Group Supervisor Vivencio Gapasin to examine petitioner’s books
of account and other accounting records for internal revenue taxes for the period
January 1, 1994 to December 31, 1994.

From the examination, the petitioner was told that there were deficiency taxes,
inclusive of surcharges, interest and compromise penalty in the following
amounts:

Value Added P 229,527.90

Tax
Income Tax 125,002,892.95
Withholding Tax 2,748,012.35
Total P
127,980,433.20

In a letter dated August 29, 1997, Revenue District Officer Jaime Concepcion
invited petitioner to send a representative to an informal conference on
September 15, 1997 for an opportunity to object and present documentary
evidence relative to the proposed assessment. On September 22, 1997,
petitioner’s Comptroller, Lorenza Tolentino, executed a "Waiver of the Statute of
Limitation Under the National Internal Revenue Code (NIRC)".5 The document
"waive[d] the running of the prescriptive period provided by Sections 223 and 224
and other relevant provisions of the NIRC and consent[ed] to the assessment and
collection of taxes which may be found due after the examination at any time
after the lapse of the period of limitations fixed by said Sections 223 and 224 and
other relevant provisions of the NIRC, until the completion of the investigation".6

On July 2, 1998, Revenue Officer De Vera submitted his audit report

recommending the issuance of an assessment and finding that petitioner had
deficiency taxes in the total amount of P136,952,408.97. On October 5, 1998, the
Assessment Division of the BIR issued Pre-Assessment Notices which informed
petitioner of the results of the investigation. Thus, BIR Revenue Region No. 6,
Assessment Division/Billing Section, issued Assessment/Demand No. 33-1-
000757-947 on December 9, 1998 stating the following deficiency taxes, inclusive
of interest and compromise penalty:

Income Tax P108,743,694.88

Value Added 184,299.20
Tax
Expanded 2,363,220.38
Withholding Tax
Total P111,291,214.46

On March 16, 1999, a Preliminary Collection Letter was sent by Deputy

Commissioner Romeo S. Panganiban to the petitioner to pay the assessment
within ten (10) days from receipt of the letter. On November 10, 1999, a Final
Notice Before Seizure8 was issued by the same deputy commissioner giving the
petitioner ten (10) days from receipt to pay. Petitioner received a copy of the final
notice on November 24, 1999. By letters dated November 26, 1999, petitioner
asked to be clarified how the tax liability of P111,291,214.46 was reached and
requested an extension of thirty (30) days from receipt of the clarification within
which to reply.9

The BIR received a follow-up letter from the petitioner asserting that its (PJI)
records do not show receipt of Tax Assessment/Demand No. 33-1-000757-
94.10 Petitioner also contested that the assessment had no factual and legal basis.
On March 28, 2000, a Warrant of Distraint and/or Levy No. 33-06-04611 signed by
Deputy Commissioner Romeo Panganiban for the BIR was received by the
petitioner.

Petitioner filed a Petition for Review12 with the Court of Tax Appeals (CTA) which
was amended on May 12, 2000. Petitioner complains: (a) that no assessment or
demand was received from the BIR; (b) that the warrant of distraint and/or levy
was without factual and legal bases as its issuance was premature; (c) that the
assessment, having been made beyond the 3-year prescriptive period, is null and
void; (d) that the issuance of the warrant without being given the opportunity to
dispute the same violates its right to due process; and (e) that the grave prejudice
that will be sustained if the warrant is enforced is enough basis for the issuance of
the writ of preliminary injunction.

On May 14, 2002, the CTA rendered its decision,13 to wit:

As to whether or not the assessment notices were received by the

petitioner, this Court rules in the affirmative.

To disprove petitioner’s allegation of non-receipt of the aforesaid

assessment notices, respondent presented a certification issued by the Post
Master of the Central Post Office, Manila to the effect that Registered
Letter No. 76134 sent by the BIR, Region No. 6, Manila on December 15,
1998 addressed to Phil. Journalists, Inc. at Journal Bldg., Railroad St., Manila
was duly delivered to and received by a certain Alfonso Sanchez, Jr.
(Authorized Representative) on January 8, 1999. Respondent also showed
proof that in claiming Registered Letter No. 76134, Mr. Sanchez presented
three identification cards, one of which is his company ID with herein
petitioner.

However, as to whether or not the Waiver of the Statute of Limitations is

valid and binding on the petitioner is another question. Since the subject
assessments were issued beyond the three-year prescriptive period, it
becomes imperative on our part to rule first on the validity of the waiver
allegedly executed on September 22, 1997, for if this court finds the same
to be ineffective, then the assessments must necessarily fail.
 …

After carefully examining the questioned Waiver of the Statute of

Limitations, this Court considers the same to be without any binding effect
on the petitioner for the following reasons:

The waiver is an unlimited waiver. It does not contain a definite expiration

date. Under RMO No. 20-90, the phrase indicating the expiry date of the
period agreed upon to assess/collect the tax after the regular three-year
period of prescription should be filled up…

Secondly, the waiver failed to state the date of acceptance by the Bureau
which under the aforequoted RMO should likewise be indicated…

Finally, petitioner was not furnished a copy of the waiver. It is to be noted

that under RMO No. 20-90, the waiver must be executed in three (3)
copies, the second copy of which is for the taxpayer. It is likewise required
that the fact of receipt by the taxpayer of his/her file copy be indicated in
the original copy. Again, respondent failed to comply.

It bears stressing that RMO No. 20-90 is directed to all concerned internal
revenue officers. The said RMO even provides that the procedures found
therein should be strictly followed, under pain of being administratively
dealt with should non-compliance result to prescription of the right to
assess/collect…

Thus, finding the waiver executed by the petitioner on September 22, 1997
to be suffering from legal infirmities, rendering the same invalid and
ineffective, the Court finds Assessment/Demand No. 33-1-000757-94 issued
on December 5, 1998 to be time-barred. Consequently, the Warrant of
Distraint and/or Levy issued pursuant thereto is considered null and void.

WHEREFORE, in view of all the foregoing, the instant Petition for Review is
hereby GRANTED. Accordingly, the deficiency income, value-added and
expanded withholding tax assessments issued by the respondent against
 the petitioner on December 9, 1998, in the total amount of
P111,291,214.46 for the year 1994 are hereby declared CANCELLED,
WITHDRAWN and WITH NO FORCE AND EFFECT. Likewise, Warrant of
Distraint and/or Levy No. 33-06-046 is hereby declared NULL and VOID.

SO ORDERED.14

After the motion for reconsideration of the Commissioner of Internal Revenue

was denied by the CTA in a Resolution dated August 2, 2002, an appeal was filed
with the Court of Appeals on August 12, 2002.

In its decision dated August 5, 2003, the Court of Appeals disagreed with the
ruling of the CTA, to wit:

… The petition for review filed on 26 April 2000 with CTA was neither timely
filed nor the proper remedy. Only decisions of the BIR, denying the request
for reconsideration or reinvestigation may be appealed to the CTA. Mere
assessment notices which have become final after the lapse of the thirty
(30)-day reglementary period are not appealable. Thus, the CTA should not
have entertained the petition at all.

… *T+he CTA found the waiver executed by Phil. Journalists to be invalid for
the following reasons: (1) it does not indicate a definite expiration date; (2)
it does not state the date of acceptance by the BIR; and (3) Phil. Journalist,
the taxpayer, was not furnished a copy of the waiver. These grounds are
merely formal in nature. The date of acceptance by the BIR does not
categorically appear in the document but it states at the bottom page that
the BIR "accepted and agreed to:"…, followed by the signature of the BIR’s
authorized representative. Although the date of acceptance was not stated,
the document was dated 22 September 1997. This date could reasonably
be understood as the same date of acceptance by the BIR since a different
date was not otherwise indicated. As to the allegation that Phil. Journalists
was not furnished a copy of the waiver, this requirement appears
ridiculous. Phil. Journalists, through its comptroller, Lorenza Tolentino,
signed the waiver. Why would it need a copy of the document it knowingly
executed when the reason why copies are furnished to a party is to notify it
of the existence of a document, event or proceeding? …
 As regards the need for a definite expiration date, this is the biggest flaw of
the decision. The period of prescription for the assessment of taxes may be
extended provided that the extension be made in writing and that it be
made prior to the expiration of the period of prescription. These are the
requirements for a valid extension of the prescriptive period. To these
requirements provided by law, the memorandum order adds that the
length of the extension be specified by indicating its expiration date. This
requirement could be reasonably construed from the rule on extension of
the prescriptive period. But this requirement does not apply in the instant
case because what we have here is not an extension of the prescriptive
period but a waiver thereof. These are two (2) very different things. What
Phil. Journalists executed was a renunciation of its right to invoke the
defense of prescription. This is a valid waiver. When one waives the
prescriptive period, it is no longer necessary to indicate the length of the
extension of the prescriptive period since the person waiving may no longer
use this defense.

WHEREFORE, the 02 August 2002 resolution and 14 May 2002 decision of

the CTA are hereby SET ASIDE. Respondent Phil. Journalists is ordered [to]
pay its assessed tax liability of P111,291,214.46.

SO ORDERED.15

Petitioner’s Motion for Reconsideration was denied in a Resolution dated March

31, 2004. Hence, this appeal on the following assignment of errors:

I.

The Honorable Court of Appeals committed grave error in ruling that it is

outside the jurisdiction of the Court of Tax Appeals to entertain the Petition
for Review filed by the herein Petitioner at the CTA despite the fact that
such case inevitably rests upon the validity of the issuance by the BIR of
warrants of distraint and levy contrary to the provisions of Section 7(1) of
Republic Act No. 1125.

II.

The Honorable Court of Appeals gravely erred when it ruled that failure to
comply with the provisions of Revenue Memorandum Order (RMO) No. 20-
90 is merely a formal defect that does not invalidate the waiver of the
statute of limitations without stating the legal justification for such
conclusion. Such ruling totally disregarded the mandatory requirements of
Section 222(b) of the Tax Code and its implementing regulation, RMO No.
20-90 which are substantive in nature. The RMO provides that violation
thereof subjects the erring officer to administrative sanction. This directive
shows that the RMO is not merely cover forms.

III.

The Honorable Court of Appeals gravely erred when it ruled that the
assessment notices became final and unappealable. The assessment issued
is void and legally non-existent because the BIR has no power to issue an
assessment beyond the three-year prescriptive period where there is no
valid and binding waiver of the statute of limitation.

IV.

The Honorable Court of Appeals gravely erred when it held that the
assessment in question has became final and executory due to the failure
of the Petitioner to protest the same. Respondent had no power to issue an
assessment beyond the three year period under the mandatory provisions
of Section 203 of the NIRC. Such assessment should be held void and non-
existent, otherwise, Section 203, an expression of a public policy, would be
rendered useless and nugatory. Besides, such right to assess cannot be
validly granted after three years since it would arise from a violation of the
mandatory provisions of Section 203 and would go against the vested right
of the Petitioner to claim prescription of assessment.

V.

The Honorable Court of Appeals committed grave error when it HELD valid
a defective waiver by considering the latter a waiver of the right to invoke
the defense of prescription rather than an extension of the three year
period of prescription (to make an assessment) as provided under Section
222 in relation to Section 203 of the Tax Code, an interpretation that is
contrary to law, existing jurisprudence and outside of the purpose and
intent for which they were enacted.16
We find merit in the appeal.

The first assigned error relates to the jurisdiction of the CTA over the issues in this
case. The Court of Appeals ruled that only decisions of the BIR denying a request
for reconsideration or reinvestigation may be appealed to the CTA. Since the
petitioner did not file a request for reinvestigation or reconsideration within thirty
(30) days, the assessment notices became final and unappealable. The petitioner
now argue that the case was brought to the CTA because the warrant of distraint
or levy was illegally issued and that no assessment was issued because it was
based on an invalid waiver of the statutes of limitations.

We agree with petitioner. Section 7(1) of Republic Act No. 1125, the Act Creating
the Court of Tax Appeals, provides for the jurisdiction of that special court:

SEC. 7. Jurisdiction. – The Court of Tax Appeals shall exercise exclusive

appellate jurisdiction to review by appeal, as herein provided –

(1) Decisions of the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising
under the National Internal Revenue Code or other laws or part of law
administered by the Bureau of Internal Revenue; (Emphasis supplied).

The appellate jurisdiction of the CTA is not limited to cases which involve
decisions of the Commissioner of Internal Revenue on matters relating to
assessments or refunds. The second part of the provision covers other cases that
arise out of the NIRC or related laws administered by the Bureau of Internal
Revenue. The wording of the provision is clear and simple. It gives the CTA the
jurisdiction to determine if the warrant of distraint and levy issued by the BIR is
valid and to rule if the Waiver of Statute of Limitations was validly effected.

This is not the first case where the CTA validly ruled on issues that did not relate
directly to a disputed assessment or a claim for refund. In Pantoja v. David,17 we
upheld the jurisdiction of the CTA to act on a petition to invalidate and annul the
distraint orders of the Commissioner of Internal Revenue. Also, in Commissioner
of Internal Revenue v. Court of Appeals,18 the decision of the CTA declaring several
waivers executed by the taxpayer as null and void, thus invalidating the
assessments issued by the BIR, was upheld by this Court.
The second and fifth assigned errors both focus on Revenue Memorandum
Circular No. 20-90 (RMO No. 20-90) on the requisites of a valid waiver of the
statute of limitations. The Court of Appeals held that the requirements and
procedures laid down in the RMO are only formal in nature and did not invalidate
the waiver that was signed even if the requirements were not strictly observed.

The NIRC, under Sections 203 and 222,19 provides for a statute of limitations on
the assessment and collection of internal revenue taxes in order to safeguard the
interest of the taxpayer against unreasonable investigation.20Unreasonable
investigation contemplates cases where the period for assessment extends
indefinitely because this deprives the taxpayer of the assurance that it will no
longer be subjected to further investigation for taxes after the expiration of a
reasonable period of time. As was held in Republic of the Phils. v. Ablaza:21

The law prescribing a limitation of actions for the collection of the income
tax is beneficial both to the Government and to its citizens; to the
Government because tax officers would be obliged to act promptly in the
making of assessment, and to citizens because after the lapse of the period
of prescription citizens would have a feeling of security against
unscrupulous tax agents who will always find an excuse to inspect the
books of taxpayers, not to determine the latter’s real liability, but to take
advantage of every opportunity to molest peaceful, law-abiding citizens.
Without such a legal defense taxpayers would furthermore be under
obligation to always keep their books and keep them open for inspection
subject to harassment by unscrupulous tax agents. The law on prescription
being a remedial measure should be interpreted in a way conducive to
bringing about the beneficent purpose of affording protection to the
taxpayer within the contemplation of the Commission which recommend
the approval of the law. (Emphasis supplied)

RMO No. 20-90 implements these provisions of the NIRC relating to the period of
prescription for the assessment and collection of taxes. A cursory reading of the
Order supports petitioner’s argument that the RMO must be strictly followed,
thus:

In the execution of said waiver, the following procedures should be followed:

 1. The waiver must be in the form identified hereof. This form may be
reproduced by the Office concerned but there should be no deviation from
such form. The phrase "but not after __________ 19___" should be filled
up…

2. …

Soon after the waiver is signed by the taxpayer, the Commissioner of

Internal Revenue or the revenue official authorized by him, as hereinafter
provided, shall sign the waiver indicating that the Bureau has accepted
and agreed to the waiver. The date of such acceptance by the Bureau
should be indicated…

3. The following revenue officials are authorized to sign the waiver.

A. In the National Office

3. Commissioner For tax cases

involving more
than P1M

B. In the Regional Offices

1. The Revenue District Officer with respect to tax cases still

pending investigation and the period to assess is about to
prescribe regardless of amount.

5. The foregoing procedures shall be strictly followed. Any

revenue official found not to have complied with this Order
resulting in prescription of the right to assess/collect shall be
administratively dealt with. (Emphasis supplied)22

A waiver of the statute of limitations under the NIRC, to a certain extent, is a

derogation of the taxpayers’ right to security against prolonged and unscrupulous
investigations and must therefore be carefully and strictly construed.23The waiver
of the statute of limitations is not a waiver of the right to invoke the defense of
prescription as erroneously held by the Court of Appeals. It is an agreement
between the taxpayer and the BIR that the period to issue an assessment and
collect the taxes due is extended to a date certain. The waiver does not mean that
the taxpayer relinquishes the right to invoke prescription unequivocally
particularly where the language of the document is equivocal. For the purpose of
safeguarding taxpayers from any unreasonable examination, investigation or
assessment, our tax law provides a statute of limitations in the collection of taxes.
Thus, the law on prescription, being a remedial measure, should be liberally
construed in order to afford such protection. As a corollary, the exceptions to the
law on prescription should perforce be strictly construed.24 RMO No. 20-90
explains the rationale of a waiver:

... The phrase "but not after _________ 19___" should be filled up. This
indicates the expiry date of the period agreed upon to assess/collect the tax
after the regular three-year period of prescription. The period agreed upon
shall constitute the time within which to effect the assessment/collection
of the tax in addition to the ordinary prescriptive period. (Emphasis
supplied)

As found by the CTA, the Waiver of Statute of Limitations, signed by petitioner’s

comptroller on September 22, 1997 is not valid and binding because it does not
conform with the provisions of RMO No. 20-90. It did not specify a definite agreed
date between the BIR and petitioner, within which the former may assess and
collect revenue taxes. Thus, petitioner’s waiver became unlimited in time,
violating Section 222(b) of the NIRC.

The waiver is also defective from the government side because it was signed only
by a revenue district officer, not the Commissioner, as mandated by the NIRC and
RMO No. 20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but
is a bilateral agreement between two parties to extend the period to a date
certain. The conformity of the BIR must be made by either the Commissioner or
the Revenue District Officer. This case involves taxes amounting to more than One
Million Pesos (P1,000,000.00) and executed almost seven months before the
expiration of the three-year prescription period. For this, RMO No. 20-90 requires
the Commissioner of Internal Revenue to sign for the BIR.
The case of Commissioner of Internal Revenue v. Court of Appeals,25 dealt with
waivers that were not signed by the Commissioner but were argued to have been
given implied consent by the BIR. We invalidated the subject waivers and ruled:

Petitioner’s submission is inaccurate…

The Court of Appeals itself also passed upon the validity of the waivers
executed by Carnation, observing thus:

We cannot go along with the petitioner’s theory. Section 319 of the

Tax Code earlier quoted is clear and explicit that the waiver of the
five-year26 prescriptive period must be in writing and signed by both
the BIR Commissioner and the taxpayer.

Here, the three waivers signed by Carnation do not bear the written
consent of the BIR Commissioner as required by law.

We agree with the CTA in holding "these ‘waivers’ to be invalid and

without any binding effect on petitioner (Carnation) for the reason
that there was no consent by the respondent (Commissioner of
Internal Revenue)."

For sure, no such written agreement concerning the said three

waivers exists between the petitioner and private respondent
Carnation.

What is more, the waivers in question reveal that they are in no wise
unequivocal, and therefore necessitates for its binding effect the
concurrence of the Commissioner of Internal Revenue…. On this basis
neither implied consent can be presumed nor can it be contended that
the waiver required under Sec. 319 of the Tax Code is one which is
unilateral nor can it be said that concurrence to such an agreement is a
mere formality because it is the very signatures of both the Commissioner
 of Internal Revenue and the taxpayer which give birth to such a valid
agreement.27 (Emphasis supplied)

The other defect noted in this case is the date of acceptance which makes it
difficult to fix with certainty if the waiver was actually agreed before the
expiration of the three-year prescriptive period. The Court of Appeals held that
the date of the execution of the waiver on September 22, 1997 could reasonably
be understood as the same date of acceptance by the BIR. Petitioner points out
however that Revenue District Officer Sarmiento could not have accepted the
waiver yet because she was not the Revenue District Officer of RDO No. 33 on
such date. Ms. Sarmiento’s transfer and assignment to RDO No. 33 was only
signed by the BIR Commissioner on January 16, 1998 as shown by the Revenue
Travel Assignment Order No. 14-98.28 The Court of Tax Appeals noted in its
decision that it is unlikely as well that Ms. Sarmiento made the acceptance on
January 16, 1998 because "Revenue Officials normally have to conduct first an
inventory of their pending papers and property responsibilities."29

Finally, the records show that petitioner was not furnished a copy of the waiver.
Under RMO No. 20-90, the waiver must be executed in three copies with the
second copy for the taxpayer. The Court of Appeals did not think this was
important because the petitioner need not have a copy of the document it
knowingly executed. It stated that the reason copies are furnished is for a party to
be notified of the existence of a document, event or proceeding.

The flaw in the appellate court’s reasoning stems from its assumption that the
waiver is a unilateral act of the taxpayer when it is in fact and in law an agreement
between the taxpayer and the BIR. When the petitioner’s comptroller signed the
waiver on September 22, 1997, it was not yet complete and final because the BIR
had not assented. There is compliance with the provision of RMO No. 20-90 only
after the taxpayer received a copy of the waiver accepted by the BIR. The
requirement to furnish the taxpayer with a copy of the waiver is not only to give
notice of the existence of the document but of the acceptance by the BIR and the
perfection of the agreement.

The waiver document is incomplete and defective and thus the three-year
prescriptive period was not tolled or extended and continued to run until April 17,
1998. Consequently, the Assessment/Demand No. 33-1-000757-94 issued on
December 9, 1998 was invalid because it was issued beyond the three (3) year
period. In the same manner, Warrant of Distraint and/or Levy No. 33-06-046
which petitioner received on March 28, 2000 is also null and void for having been
issued pursuant to an invalid assessment.

WHEREFORE, premises considered, the instant petition for review

is GRANTED. The Decision of the Court of Appeals dated August 5, 2003 and its
Resolution dated March 31, 2004 are REVERSED and SET ASIDE. The Decision of
the Court of Tax Appeals in CTA Case No. 6108 dated May 14, 2002, declaring
Warrant of Distraint and/or Levy No. 33-06-046 null and void, is REINSTATED.

SO ORDERED.

SECOND DIVISION

COMMISSIONER OF INTERNAL G.R. No. 178087

REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

BRION,
- versus - DEL CASTILLO,
ABAD, and
PEREZ, JJ.

KUDOS METAL CORPORATION, Promulgated:

Respondent. May 5, 2010
x-------------------------------------------------------------------x

DECISION

DEL CASTILLO, J.:

The prescriptive period on when to assess taxes benefits both the government and the
taxpayer.[1] Exceptions extending the period to assess must, therefore, be strictly
construed.

This Petition for Review on Certiorari seeks to set aside the

Decision[2] dated March 30, 2007 of the Court of Tax Appeals (CTA) affirming the
cancellation of the assessment notices for having been issued beyond the prescriptive
period and the Resolution[3] dated May 18, 2007 denying the motion for
reconsideration.
Factual Antecedents

On April 15, 1999, respondent Kudos Metal Corporation filed its Annual Income
Tax Return (ITR) for the taxable year 1998.

Pursuant to a Letter of Authority dated September 7, 1999, the Bureau of

Internal Revenue (BIR) served upon respondent three Notices of Presentation of
Records. Respondent failed to comply with these notices, hence, the BIR issued
a Subpeona Duces Tecum dated September 21, 2006, receipt of which was
acknowledged by respondents President, Mr. Chan Ching Bio, in a letter dated October
20, 2000.

A review and audit of respondents records then ensued.

On December 10, 2001, Nelia Pasco (Pasco), respondents accountant, executed a

Waiver of the Defense of Prescription,[4] which was notarized on January 22, 2002,
received by the BIR Enforcement Service on January 31, 2002 and by the BIR Tax Fraud
Division on February 4, 2002, and accepted by the Assistant Commissioner of the
Enforcement Service, Percival T. Salazar (Salazar).
This was followed by a second Waiver of Defense of Prescription[5] executed
by Pasco on February 18, 2003, notarized on February 19, 2003, received by the BIR Tax
Fraud Division on February 28, 2003 and accepted by Assistant Commissioner Salazar.

On August 25, 2003, the BIR issued a Preliminary Assessment Notice for the
taxable year 1998 against the respondent. This was followed by a Formal Letter of
Demand with Assessment Notices for taxable year 1998, dated September 26,
2003 which was received by respondent on November 12, 2003.
 Respondent challenged the assessments by filing its Protest on Various Tax
Assessments on December 3, 2003 and its Legal Arguments and Documents in Support
of Protests against Various Assessments on February 2, 2004.

On June 22, 2004, the BIR rendered a final Decision[6] on the matter, requesting
the immediate payment of the following tax liabilities:

Kind of Tax Amount

Income Tax P 9,693,897.85
VAT 13,962,460.90
EWT 1,712,336.76
Withholding Tax-Compensation 247,353.24
Penalties 8,000.00
Total P25,624,048.76

Ruling of the Court of Tax Appeals, Second Division

Believing that the governments right to assess taxes had prescribed, respondent
filed on August 27, 2004 a Petition for Review[7] with the CTA. Petitioner in turn filed his
Answer.[8]
On April 11, 2005, respondent filed an Urgent Motion for Preferential Resolution
of the Issue on Prescription.[9]

On October 4, 2005, the CTA Second Division issued a Resolution[10] canceling the
assessment notices issued against respondent for having been issued beyond the
prescriptive period. It found the first Waiver of the Statute of Limitations incomplete
and defective for failure to comply with the provisions of Revenue Memorandum Order
(RMO) No. 20-90. Thus:
First, the Assistant Commissioner is not the revenue official
authorized to sign the waiver, as the tax case involves more
than P1,000,000.00. In this regard, only the Commissioner is authorized to
enter into agreement with the petitioner in extending the period of
assessment;
 Secondly, the waiver failed to indicate the date of acceptance. Such
date of acceptance is necessary to determine whether the acceptance was
made within the prescriptive period;

Third, the fact of receipt by the taxpayer of his file copy was not
indicated on the original copy. The requirement to furnish the taxpayer
with a copy of the waiver is not only to give notice of the existence of the
document but also of the acceptance by the BIR and the perfection of the
agreement.

The subject waiver is therefore incomplete and defective. As such,

the three-year prescriptive period was not tolled or extended and
continued to run. x x x[11]

Petitioner moved for reconsideration but the CTA Second Division denied the motion in
a Resolution[12] dated April 18, 2006.

Ruling of the Court of Tax Appeals, En Banc

On appeal, the CTA En Banc affirmed the cancellation of the assessment

notices. Although it ruled that the Assistant Commissioner was authorized to sign the
waiver pursuant to Revenue Delegation Authority Order (RDAO) No. 05-01, it found that
the first waiver was still invalid based on the second and third grounds stated by the
CTA Second Division. Pertinent portions of the Decision read as follows:

While the Court En Banc agrees with the second and third grounds
for invalidating the first waiver, it finds that the Assistant Commissioner of
the Enforcement Service is authorized to sign the waiver pursuant to
RDAO No. 05-01, which provides in part as follows:

A. For National Office cases

Designated Revenue Official

1. Assistant Commissioner (ACIR), For tax fraud and policy

Enforcement Service cases
 2. ACIR, Large Taxpayers Service For large taxpayers cases
other than those cases falling
under Subsection B hereof

3. ACIR, Legal Service For cases pending

verification and awaiting
resolution of certain legal issues
prior to prescription and for
issuance/compliance
of Subpoena Duces Tecum

4. ACIR, Assessment Service (AS) For cases which are

pending in or subject to
review or approval by the
ACIR, AS

Based on the foregoing, the Assistant Commissioner, Enforcement

Service is authorized to sign waivers in tax fraud cases. A perusal of the
records reveals that the investigation of the subject deficiency taxes in this
case was conducted by the National Investigation Division of the BIR,
which was formerly named the Tax Fraud Division. Thus, the subject
assessment is a tax fraud case.

Nevertheless, the first waiver is still invalid based on the second and
third grounds stated by the Court in Division. Hence, it did not extend the
prescriptive period to assess.

Moreover, assuming arguendo that the first waiver is valid, the

second waiver is invalid for violating Section 222(b) of the 1997 Tax Code
which mandates that the period agreed upon in a waiver of the statute
can still be extended by subsequent written agreement, provided that it is
executed prior to the expiration of the first period agreed upon. As
previously discussed, the exceptions to the law on prescription must be
strictly construed.
 In the case at bar, the period agreed upon in the subject first waiver
expired on December 31, 2002. The second waiver in the instant case
which was supposed to extend the period to assess to December 31,
2003was executed on February 18, 2003 and was notarized on February
19, 2003. Clearly, the second waiver was executed after the expiration of
the first period agreed upon. Consequently, the same could not have
tolled the 3-year prescriptive period to assess.[13]

Petitioner sought reconsideration but the same was unavailing.

Issue

Hence, the present recourse where petitioner interposes that:

THE COURT OF TAX APPEALS EN BANC ERRED IN RULING THAT THE

GOVERNMENTS RIGHT TO ASSESS UNPAID TAXES OF RESPONDENT
PRESCRIBED.[14]

Petitioners Arguments

Petitioner argues that the governments right to assess taxes is not barred by
prescription as the two waivers executed by respondent, through its accountant,
effectively tolled or extended the period within which the assessment can be made. In
disputing the conclusion of the CTA that the waivers are invalid, petitioner claims that
respondent is estopped from adopting a position contrary to what it has previously
taken. Petitioner insists that by acquiescing to the audit during the period specified in
the waivers, respondent led the government to believe that the delay in the process
would not be utilized against it. Thus, respondent may no longer repudiate the validity
of the waivers and raise the issue of prescription.

Respondents Arguments

Respondent maintains that prescription had set in due to the invalidity of the waivers
executed by Pasco, who executed the same without any written authority from it, in
clear violation of RDAO No. 5-01. As to the doctrine of estoppel by acquiescence relied
upon by petitioner, respondent counters that the principle of equity comes into play
only when the law is doubtful, which is not present in the instant case.

Our Ruling

The petition is bereft of merit.

Section 203[15] of the National Internal Revenue Code of 1997 (NIRC) mandates
the government to assess internal revenue taxes within three years from the last day
prescribed by law for the filing of the tax return or the actual date of filing of such
return, whichever comes later. Hence, an assessment notice issued after the three-year
prescriptive period is no longer valid and effective. Exceptions however are provided
under Section 222[16] of the NIRC.

The waivers executed by respondents

accountant did not extend the period within
which the assessment can be made

Petitioner does not deny that the assessment notices were issued beyond the
three-year prescriptive period, but claims that the period was extended by the two
waivers executed by respondents accountant.

We do not agree.

Section 222 (b) of the NIRC provides that the period to assess and collect taxes
may only be extended upon a written agreement between the CIR and the taxpayer
executed before the expiration of the three-year period. RMO 20-90[17] issued on April 4,
1990 and RDAO 05-01[18] issued on August 2, 2001 lay down the procedure for the
proper execution of the waiver, to wit:

1. The waiver must be in the proper form prescribed by RMO 20-90. The
phrase but not after ______ 19 ___, which indicates the expiry date of
the period agreed upon to assess/collect the tax after the regular
three-year period of prescription, should be filled up.
 2. The waiver must be signed by the taxpayer himself or his duly
authorized representative. In the case of a corporation, the waiver
must be signed by any of its responsible officials. In case the authority
is delegated by the taxpayer to a representative, such delegation
should be in writing and duly notarized.

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver
indicating that the BIR has accepted and agreed to the waiver. The
date of such acceptance by the BIR should be indicated. However,
before signing the waiver, the CIR or the revenue official authorized by
him must make sure that the waiver is in the prescribed form, duly
notarized, and executed by the taxpayer or his duly authorized
representative.

5. Both the date of execution by the taxpayer and date of acceptance by

the Bureau should be before the expiration of the period of
prescription or before the lapse of the period agreed upon in case a
subsequent agreement is executed.

6. The waiver must be executed in three copies, the original copy to be

attached to the docket of the case, the second copy for the taxpayer
and the third copy for the Office accepting the waiver. The fact of
receipt by the taxpayer of his/her file copy must be indicated in the
original copy to show that the taxpayer was notified of the acceptance
of the BIR and the perfection of the agreement.[19]

A perusal of the waivers executed by respondents accountant reveals the

following infirmities:

1. The waivers were executed without the notarized written

authority of Pasco to sign the waiver in behalf of respondent.

2. The waivers failed to indicate the date of acceptance.

 3. The fact of receipt by the respondent of its file copy was not
indicated in the original copies of the waivers.

Due to the defects in the waivers, the period to assess or collect taxes was not
extended. Consequently, the assessments were issued by the BIR beyond the three-
year period and are void.

Estoppel does not apply in this case

We find no merit in petitioners claim that respondent is now estopped from

claiming prescription since by executing the waivers, it was the one which asked for
additional time to submit the required documents.
In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,[20] the
doctrine of estoppel prevented the taxpayer from raising the defense of prescription
against the efforts of the government to collect the assessed tax. However, it must be
stressed that in the said case, estoppel was applied as an exception to the statute of
limitations on collection of taxes and not on the assessment of taxes, as the BIR was able
to make an assessment within the prescribed period. More important, there was a
finding that the taxpayer made several requests or positive acts to convince the
government to postpone the collection of taxes, viz:

It appears that the first assessment made against respondent based

on its second final return filed on November 28, 1946 was made
on February 11, 1947. Upon receipt of this assessment respondent
requested for at least one year within which to pay the amount assessed
although it reserved its right to question the correctness of the
assessment before actual payment. Petitioner granted an extension of
only three months. When it failed to pay the tax within the period
extended, petitioner sent respondent a letter on November 28,
1950 demanding payment of the tax as assessed, and upon receipt of the
letter respondent asked for a reinvestigation and reconsideration of the
assessment. When this request was denied, respondent again requested
for a reconsideration on April 25, 1952, which was denied on May 6, 1953,
which denial was appealed to the Conference Staff. The appeal was heard
by the Conference Staff from September 2, 1953 to July 16, 1955, and as a
result of these various negotiations, the assessment was finally reduced
on July 26, 1955. This is the ruling which is now being questioned after a
protracted negotiation on the ground that the collection of the tax has
already prescribed.

It is obvious from the foregoing that petitioner refrained from

collecting the tax by distraint or levy or by proceeding in court within the
5-year period from the filing of the second amended final return due to
the several requests of respondent for extension to which petitioner
yielded to give it every opportunity to prove its claim regarding the
correctness of the assessment. Because of such requests, several
reinvestigations were made and a hearing was even held by the
Conference Staff organized in the collection office to consider claims of
such nature which, as the record shows, lasted for several months. After
inducing petitioner to delay collection as he in fact did, it is most unfair for
respondent to now take advantage of such desistance to elude his
deficiency income tax liability to the prejudice of the Government invoking
the technical ground of prescription.

While we may agree with the Court of Tax Appeals that a mere
request for reexamination or reinvestigation may not have the effect of
suspending the running of the period of limitation for in such case there is
need of a written agreement to extend the period between the Collector
and the taxpayer, there are cases however where a taxpayer may be
prevented from setting up the defense of prescription even if he has not
previously waived it in writing as when by his repeated requests or
positive acts the Government has been, for good reasons, persuaded to
postpone collection to make him feel that the demand was not
unreasonable or that no harassment or injustice is meant by the
Government. And when such situation comes to pass there are authorities
that hold, based on weighty reasons, that such an attitude or behavior
should not be countenanced if only to protect the interest of the
Government.

This case has no precedent in this jurisdiction for it is the first time
that such has risen, but there are several precedents that may be invoked
in American jurisprudence. As Mr. Justice Cardozo has said: The applicable
 principle is fundamental and unquestioned. He who prevents a thing from
being done may not avail himself of the nonperformance which he has
himself occasioned, for the law says to him in effect this is your own act,
and therefore you are not damnified. (R. H. Stearns Co. vs. U.S., 78 L. ed.,
647). Or, as was aptly said, The tax could have been collected, but the
government withheld action at the specific request of the plaintiff. The
plaintiff is now estopped and should not be permitted to raise the defense
of the Statute of Limitations. [Newport Co. vs. U.S., (DC-WIS), 34 F. Supp.
588].[21]

Conversely, in this case, the assessments were issued beyond the prescribed
period. Also, there is no showing that respondent made any request to persuade the
BIR to postpone the issuance of the assessments.

The doctrine of estoppel cannot be applied in this case as an exception to the

statute of limitations on the assessment of taxes considering that there is a detailed
procedure for the proper execution of the waiver, which the BIR must strictly follow. As
we have often said, the doctrine of estoppel is predicated on, and has its origin in,
equity which, broadly defined, is justice according to natural law and right.[22] As such,
the doctrine of estoppel cannot give validity to an act that is prohibited by law or one
that is against public policy.[23] It should be resorted to solely as a means of preventing
injustice and should not be permitted to defeat the administration of the law, or to
accomplish a wrong or secure an undue advantage, or to extend beyond them
requirements of the transactions in which they originate.[24] Simply put, the doctrine of
estoppel must be sparingly applied.

Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure
to comply with RMO 20-90 and RDAO 05-01, which the BIR itself issued. As stated
earlier, the BIR failed to verify whether a notarized written authority was given by the
respondent to its accountant, and to indicate the date of acceptance and the receipt by
the respondent of the waivers. Having caused the defects in the waivers, the BIR must
bear the consequence. It cannot shift the blame to the taxpayer. To stress, a waiver of
the statute of limitations, being a derogation of the taxpayers right to security against
prolonged and unscrupulous investigations, must be carefully and strictly construed.[25]
 As to the alleged delay of the respondent to furnish the BIR of the required
documents, this cannot be taken against respondent. Neither can the BIR use this as an
excuse for issuing the assessments beyond the three-year period because with or
without the required documents, the CIR has the power to make assessments based on
the best evidence obtainable.[26]

WHEREFORE, the petition is DENIED. The assailed Decision dated March 30,
2007 and Resolution dated May 18, 2007 of the Court of Tax Appeals are
hereby AFFIRMED.

SO ORDERED.

COMMISSIONER OF INTERNAL G.R. No. 185371

REVENUE,

Petitioner,
Present:

CARPIO, J., Chairperson,

NACHURA,

PERALTA,
- versus -
ABAD, and

MENDOZA, JJ.

Promulgated:
METRO STAR SUPERAMA, INC.,

Respondent.
December 8, 2010
x -------------------------------------------------------------------------------------- x

DECISION

MENDOZA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court filed by
the petitioner Commissioner of Internal Revenue (CIR) seeks to reverse and set
aside the 1] September 16, 2008 Decision[1] of the Court of Tax Appeals En
Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008
Resolution[2] denying petitioners motion for reconsideration.

The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-
Second Division) in CTA Case No. 7169 reversing the February 8, 2005 Decision of
the CIR which assessed respondent Metro Star Superama, Inc. (Metro Star) of
deficiency value-added tax and withholding tax for the taxable year 1999.

Based on a Joint Stipulation of Facts and Issues[3] of the parties, the CTA Second
Division summarized the factual and procedural antecedents of the case, the
pertinent portions of which read:

Petitioner is a domestic corporation duly organized and

existing by virtue of the laws of the Republic of the Philippines, x x x.
 On January 26, 2001, the Regional Director of Revenue Region
No. 10, Legazpi City, issued Letter of Authority No. 00006561 for
Revenue Officer Daisy G. Justiniana to examine petitioners books of
accounts and other accounting records for income tax and other
internal revenue taxes for the taxable year 1999. Said Letter of
Authority was revalidated on August 10, 2001 by Regional Director
Leonardo Sacamos.

For petitioners failure to comply with several requests for the

presentation of records and Subpoena Duces Tecum, [the] OIC of BIR
Legal Division issued an Indorsement dated September 26,
2001 informing Revenue District Officer of Revenue Region No.
67, Legazpi City to proceed with the investigation based on the best
evidence obtainable preparatory to the issuance of assessment
notice.

On November 8, 2001, Revenue District Officer Socorro O.

Ramos-Lafuente issued a Preliminary 15-day Letter, which petitioner
received on November 9, 2001. The said letter stated that a post
audit review was held and it was ascertained that there was
deficiency value-added and withholding taxes due from petitioner in
the amount of P 292,874.16.

On April 11, 2002, petitioner received a Formal Letter of

Demand dated April 3, 2002 from Revenue District No. 67, Legazpi
City, assessing petitioner the amount of Two Hundred Ninety Two
Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos
(P292,874.16.) for deficiency value-added and withholding taxes for
the taxable year 1999, computed as follows:

ASSESSMENT NOTICE NO. 067-99-003-579-072

VALUE ADDED TAX

Gross Sales P1,697,718.90

Output Tax P 154,338.08

Less: Input Tax

VAT Payable P 154,338.08

Add: 25% Surcharge P 38,584.54

20% Interest 79,746.49

Compromise Penalty

Late Payment P16,000.00

Failure to File VAT returns 2,400.00 18,400.00 136,731.01

TOTAL P 291,069.09

WITHHOLDING TAX

Compensation 2,772.91
Expanded 110,103.92

Total Tax Due P 112,876.83

Less: Tax Withheld 111,848.27

Deficiency Withholding Tax P 1,028.56

Add: 20% Interest p.a. 576.51

Compromise Penalty 200.00

TOTAL P 1,805.07

*Expanded Withholding Tax P1,949,334.25 x 5% 97,466.71

Film Rental 10,000.25 x 10% 1,000.00

Audit Fee 193,261.20 x 5% 9,663.00

Rental Expense 41,272.73 x 1% 412.73

Security Service 156,142.01 x 1% 1,561.42

Service Contractor P 110,103.92

Total

SUMMARIES OF DEFICIENCIES

VALUE ADDED TAX P 291,069.09

WITHHOLDING TAX 1,805.07

TOTAL P 292,874.16
 Subsequently, Revenue District Office No. 67 sent a copy of the
Final Notice of Seizure dated May 12, 2003, which petitioner received
on May 15, 2003, giving the latter last opportunity to settle its
deficiency tax liabilities within ten (10) [days] from receipt thereof,
otherwise respondent BIR shall be constrained to serve and execute
the Warrants of Distraint and/or Levy and Garnishment to enforce
collection.

On February 6, 2004, petitioner received from Revenue District

Office No. 67 a Warrant of Distraint and/or Levy No. 67-0029-23
dated May 12, 2003 demanding payment of deficiency value-added
tax and withholding tax payment in the amount of P292,874.16.

On July 30, 2004, petitioner filed with the Office of respondent

Commissioner a Motion for Reconsideration pursuant to Section
3.1.5 of Revenue Regulations No. 12-99.

On February 8, 2005, respondent Commissioner, through its

authorized representative, Revenue Regional Director of Revenue
Region 10, Legaspi City, issued a Decision denying petitioners Motion
for Reconsideration. Petitioner, through counsel received said
Decision on February 18, 2005.

x x x.
 Denying that it received a Preliminary Assessment
Notice (PAN) and claiming that it was not accorded due process, Metro Star filed a
petition for review[4] with the CTA. The parties then stipulated on the following
issues to be decided by the tax court:

1. Whether the respondent complied with the due process

requirement as provided under the National Internal Revenue
Code and Revenue Regulations No. 12-99 with regard to the
issuance of a deficiency tax assessment;

1.1 Whether petitioner is liable for the respective

amounts of P291,069.09 and P1,805.07 as deficiency
VAT and withholding tax for the year 1999;

1.2. Whether the assessment has become final and

executory and demandable for failure of petitioner to
protest the same within 30 days from its receipt
thereof on April 11, 2002, pursuant to Section 228 of
the National Internal Revenue Code;

2. Whether the deficiency assessments issued by the respondent are

void for failure to state the law and/or facts upon which they are
based.

2.2 Whether petitioner was informed of the law and facts

on which the assessment is made in compliance with
Section 228 of the National Internal Revenue Code;
 3. Whether or not petitioner, as owner/operator of a movie/cinema
house, is subject to VAT on sales of services under Section 108(A)
of the National Internal Revenue Code;

4. Whether or not the assessment is based on the best evidence

obtainable pursuant to Section 6(b) of the National Internal
Revenue Code.

The CTA-Second Division found merit in the petition of Metro Star and,
on March 21, 2007, rendered a decision, the decretal portion of which reads:

WHEREFORE, premises considered, the Petition for Review is

hereby GRANTED. Accordingly, the assailed Decision dated February
8, 2005 is hereby REVERSED and SET ASIDE and respondent is
ORDERED TO DESIST from collecting the subject taxes against
petitioner.

The CTA-Second Division opined that [w]hile there [is] a disputable

presumption that a mailed letter [is] deemed received by the addressee in the
ordinary course of mail, a direct denial of the receipt of mail shifts the burden
upon the party favored by the presumption to prove that the mailed letter was
indeed received by the addressee.[5] It also found that there was no clear showing
that Metro Star actually received the alleged PAN, dated January 16, 2002. It,
accordingly, ruled that the Formal Letter of Demand dated April 3, 2002, as well
as the Warrant of Distraint and/or Levy dated May 12, 2003 were void, as Metro
Star was denied due process.[6]
The CIR sought reconsideration[7] of the decision of the CTA-Second Division, but
the motion was denied in the latters July 24, 2007 Resolution.[8]

Aggrieved, the CIR filed a petition for review[9] with the CTA-En Banc, but the
petition was dismissed after a determination that no new matters were raised.
The CTA-En Bancdisposed:

WHEREFORE, the instant Petition for Review is hereby DENIED

DUE COURSE and DISMISSED for lack of merit. Accordingly, the
March 21, 2007 Decision and July 27, 2007 Resolution of the
CTA Second Division in CTA Case No. 7169 entitled, Metro Star
Superama, Inc., petitioner vs. Commissioner of Internal Revenue,
respondent are hereby AFFIRMED in toto.

SO ORDERED.

The motion for reconsideration[10] filed by the CIR was likewise denied by the CTA-
En Banc in its November 18, 2008 Resolution.[11]

The CIR, insisting that Metro Star received the PAN, dated January 16, 2002,
and that due process was served nonetheless because the latter received the
Final Assessment Notice (FAN), comes now before this Court with the sole issue of
whether or not Metro Star was denied due process.

The general rule is that the Court will not lightly set aside the conclusions
reached by the CTA which, by the very nature of its functions, has accordingly
developed an exclusive expertise on the resolution unless there has been an
abuse or improvident exercise of authority.[12] In Barcelon, Roxas Securities, Inc.
(now known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,[13] the
Court wrote:

Jurisprudence has consistently shown that this Court accords

the findings of fact by the CTA with the highest respect. In Sea-Land
Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001, 357
SCRA 441, 445-446], this Court recognizes that the Court of Tax
Appeals, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will not be
overturned unless there has been an abuse or improvident exercise
of authority. Such findings can only be disturbed on appeal if they
are not supported by substantial evidence or there is a showing of
gross error or abuse on the part of the Tax Court. In the absence of
any clear and convincing proof to the contrary, this Court must
presume that the CTA rendered a decision which is valid in every
respect.

On the matter of service of a tax assessment, a further perusal of our ruling

in Barcelon is instructive, viz:

Jurisprudence is replete with cases holding that if the taxpayer

denies ever having received an assessment from the BIR, it is
incumbent upon the latter to prove by competent evidence that
such notice was indeed received by the addressee. The onus
probandi was shifted to respondent to prove by contrary evidence
that the Petitioner received the assessment in the due course of
mail. The Supreme Court has consistently held that while a mailed
letter is deemed received by the addressee in the course of mail, this
is merely a disputable presumption subject to controversion and a
direct denial thereof shifts the burden to the party favored by the
presumption to prove that the mailed letter was indeed received by
the addressee (Republic vs. Court of Appeals, 149 SCRA 351). Thus as
held by the Supreme Court in Gonzalo P. Nava vs. Commissioner of
Internal Revenue, 13 SCRA 104, January 30, 1965:

"The facts to be proved to raise this presumption

are (a) that the letter was properly addressed with
postage prepaid, and (b) that it was mailed. Once these
facts are proved, the presumption is that the letter was
received by the addressee as soon as it could have been
transmitted to him in the ordinary course of the mail.
But if one of the said facts fails to appear, the
presumption does not lie. (VI, Moran, Comments on the
Rules of Court, 1963 ed, 56-57 citing Enriquez vs. Sunlife
Assurance of Canada, 41 Phil 269)."

x x x. What is essential to prove the fact of mailing is the

registry receipt issued by the Bureau of Posts or the Registry return
card which would have been signed by the Petitioner or its
authorized representative. And if said documents cannot be
located, Respondent at the very least, should have submitted to the
Court a certification issued by the Bureau of Posts and any other
pertinent document which is executed with the intervention of the
Bureau of Posts. This Court does not put much credence to the self
serving documentations made by the BIR personnel especially if they
are unsupported by substantial evidence establishing the fact of
mailing. Thus:
 "While we have held that an assessment is made
when sent within the prescribed period, even if received
by the taxpayer after its expiration (Coll. of Int. Rev. vs.
Bautista, L-12250 and L-12259, May 27, 1959), this ruling
makes it the more imperative that the release, mailing
or sending of the notice be clearly and satisfactorily
proved. Mere notations made without the taxpayers
intervention, notice or control, without adequate
supporting evidence cannot suffice; otherwise, the
taxpayer would be at the mercy of the revenue offices,
without adequate protection or defense." (Nava vs. CIR,
13 SCRA 104, January 30, 1965).

x x x.

The failure of the respondent to prove receipt of the

assessment by the Petitioner leads to the conclusion that no
assessment was issued. Consequently, the governments right to issue
an assessment for the said period has already prescribed. (Industrial
Textile Manufacturing Co. of the Phils., Inc. vs. CIR CTA Case 4885,
August 22, 1996). (Emphases supplied.)

The Court agrees with the CTA that the CIR failed to discharge its duty and
present any evidence to show that Metro Star indeed received the PAN
dated January 16, 2002. It could have simply presented the registry receipt or the
certification from the postmaster that it mailed the PAN, but failed. Neither did it
offer any explanation on why it failed to comply with the requirement of service
of the PAN. It merely accepted the letter of Metro Stars chairman dated April 29,
2002, that stated that he had received the FAN dated April 3, 2002, but not
the PAN; that he was willing to pay the tax as computed by the CIR; and that he
just wanted to clarify some matters with the hope of lessening its tax liability.

This now leads to the question: Is the failure to strictly comply with notice
requirements prescribed under Section 228 of the National Internal Revenue
Code of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of
due process? Specifically, are the requirements of due process satisfied if only the
FAN stating the computation of tax liabilities and a demand to pay within the
prescribed period was sent to the taxpayer?

The answer to these questions require an examination of Section 228 of the

Tax Code which reads:

SEC. 228. Protesting of Assessment. - When the Commissioner

or his duly authorized representative finds that proper taxes should
be assessed, he shall first notify the taxpayer of his
findings: provided, however, that a preassessment notice shall not
be required in the following cases:

(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on
the face of the return; or
 (b) When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding agent;
or

(c) When a taxpayer who opted to claim a refund or tax credit

of excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied the same
amount claimed against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year; or

(d) When the excise tax due on exciseable articles has not been
paid; or

(e) When the article locally purchased or imported by an

exempt person, such as, but not limited to, vehicles, capital
equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.

The taxpayers shall be informed in writing of the law and the

facts on which the assessment is made; otherwise, the assessment
shall be void.

Within a period to be prescribed by implementing rules and

regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his
findings.

Such assessment may be protested administratively by filing a

request for reconsideration or reinvestigation within thirty (30) days
from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting documents
 shall have been submitted; otherwise, the assessment shall become
final.

If the protest is denied in whole or in part, or is not acted upon

within one hundred eighty (180) days from submission of documents,
the taxpayer adversely affected by the decision or inaction may
appeal to the Court of Tax Appeals within thirty (30) days from
receipt of the said decision, or from the lapse of one hundred eighty
(180)-day period; otherwise, the decision shall become final,
executory and demandable. (Emphasis supplied).

Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must
first be informed that he is liable for deficiency taxes through the sending of a
PAN. He must be informed of the facts and the law upon which the assessment is
made. The law imposes a substantive, not merely a formal, requirement. To
proceed heedlessly with tax collection without first establishing a valid
assessment is evidently violative of the cardinal principle in administrative
investigations - that taxpayers should be able to present their case and adduce
supporting evidence.[14]

This is confirmed under the provisions R.R. No. 12-99 of the BIR which
pertinently provide:

SECTION 3. Due Process Requirement in the Issuance of a

Deficiency Tax Assessment.
 3.1 Mode of procedures in the issuance of a deficiency tax
assessment:

3.1.1 Notice for informal conference. The Revenue Officer who

audited the taxpayer's records shall, among others, state in his report
whether or not the taxpayer agrees with his findings that the
taxpayer is liable for deficiency tax or taxes. If the taxpayer is not
amenable, based on the said Officer's submitted report of
investigation, the taxpayer shall be informed, in writing, by the
Revenue District Office or by the Special Investigation Division, as the
case may be (in the case Revenue Regional Offices) or by the Chief of
Division concerned (in the case of the BIR National Office) of the
discrepancy or discrepancies in the taxpayer's payment of his internal
revenue taxes, for the purpose of "Informal Conference," in order to
afford the taxpayer with an opportunity to present his side of the
case. If the taxpayer fails to respond within fifteen (15) days from
date of receipt of the notice for informal conference, he shall be
considered in default, in which case, the Revenue District Officer or
the Chief of the Special Investigation Division of the Revenue
Regional Office, or the Chief of Division in the National Office, as the
case may be, shall endorse the case with the least possible delay to
the Assessment Division of the Revenue Regional Office or to the
Commissioner or his duly authorized representative, as the case may
be, for appropriate review and issuance of a deficiency tax
assessment, if warranted.

3.1.2 Preliminary Assessment Notice (PAN). If after review and

evaluation by the Assessment Division or by the Commissioner or his
duly authorized representative, as the case may be, it is determined
that there exists sufficient basis to assess the taxpayer for any
deficiency tax or taxes, the said Office shall issue to the taxpayer, at
least by registered mail, a Preliminary Assessment Notice (PAN) for
the proposed assessment, showing in detail, the facts and the law,
rules and regulations, or jurisprudence on which the proposed
assessment is based (see illustration in ANNEX A hereof). If the
taxpayer fails to respond within fifteen (15) days from date of receipt
of the PAN, he shall be considered in default, in which case, a formal
letter of demand and assessment notice shall be caused to be issued
by the said Office, calling for payment of the taxpayer's deficiency tax
liability, inclusive of the applicable penalties.

3.1.3 Exceptions to Prior Notice of the Assessment. The notice

for informal conference and the preliminary assessment notice shall
not be required in any of the following cases, in which case, issuance
of the formal assessment notice for the payment of the taxpayer's
deficiency tax liability shall be sufficient:

(i) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax
appearing on the face of the tax return filed by the
taxpayer; or

(ii) When a discrepancy has been determined between

the tax withheld and the amount actually remitted by
the withholding agent; or

(iii) When a taxpayer who opted to claim a refund or tax

credit of excess creditable withholding tax for a
taxable period was determined to have carried over
and automatically applied the same amount claimed
 against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year; or

(iv) When the excise tax due on excisable articles has not
been paid; or

(v) When an article locally purchased or imported by an

exempt person, such as, but not limited to, vehicles,
capital equipment, machineries and spare parts, has
been sold, traded or transferred to non-exempt
persons.

3.1.4 Formal Letter of Demand and Assessment Notice. The

formal letter of demand and assessment notice shall be issued by the
Commissioner or his duly authorized representative. The letter of
demand calling for payment of the taxpayer's deficiency tax or taxes
shall state the facts, the law, rules and regulations, or jurisprudence
on which the assessment is based, otherwise, the formal letter of
demand and assessment notice shall be void (see illustration in
ANNEX B hereof).

The same shall be sent to the taxpayer only by registered mail

or by personal delivery.
 If sent by personal delivery, the taxpayer or his duly authorized
representative shall acknowledge receipt thereof in the duplicate
copy of the letter of demand, showing the following: (a) His name;
(b) signature; (c) designation and authority to act for and in behalf of
the taxpayer, if acknowledged received by a person other than the
taxpayer himself; and (d) date of receipt thereof.

x x x.

From the provision quoted above, it is clear that the sending of a PAN to
taxpayer to inform him of the assessment made is but part of the due process
requirement in the issuance of a deficiency tax assessment, the absence of which
renders nugatory any assessment made by the tax authorities. The use of the
word shall in subsection 3.1.2 describes the mandatory nature of the service of a
PAN. The persuasiveness of the right to due process reaches both substantial and
procedural rights and the failure of the CIR to strictly comply with the
requirements laid down by law and its own rules is a denial of Metro Stars right to
due process.[15] Thus, for its failure to send the PAN stating the facts and the law
on which the assessment was made as required by Section 228 of R.A. No. 8424,
the assessment made by the CIR is void.

The case of CIR v. Menguito[16] cited by the CIR in support of its argument
that only the non-service of the FAN is fatal to the validity of an assessment,
cannot apply to this case because the issue therein was the non-compliance with
the provisions of R. R. No. 12-85 which sought to interpret Section 229 of the old
tax law. RA No. 8424 has already amended the provision of Section 229 on
protesting an assessment. The old requirement of merely notifying the taxpayer
of the CIRs findings was changed in 1998 to informing the taxpayer of not only the
law, but also of the facts on which an assessment would be made. Otherwise, the
assessment itself would be invalid.[17] The regulation then, on the other hand,
simply provided that a notice be sent to the respondent in the form prescribed,
and that no consequence would ensue for failure to comply with that form.

The Court need not belabor to discuss the matter of Metro Stars failure to
file its protest, for it is well-settled that a void assessment bears no fruit.[18]

It is an elementary rule enshrined in the 1987 Constitution that no person

shall be deprived of property without due process of law.[19] In balancing the
scales between the power of the State to tax and its inherent right to prosecute
perceived transgressors of the law on one side, and the constitutional rights of a
citizen to due process of law and the equal protection of the laws on the other,
the scales must tilt in favor of the individual, for a citizens right is amply protected
by the Bill of Rights under the Constitution. Thus, while taxes are the lifeblood of
the government, the power to tax has its limits, in spite of all its plenitude. Hence
in Commissioner of Internal Revenue v. Algue, Inc.,[20] it was said

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.

xxx xxx xxx

It is said that taxes are what we pay for civilized society.

Without taxes, the government would be paralyzed for the lack of
 the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of ones hard-earned income to
taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its part
is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability

of taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of
the tax collector, he may still be stopped in his tracks if the taxpayer
can demonstrate x x x that the law has not
been observed.[21] (Emphasis supplied).

WHEREFORE, the petition is DENIED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-41919-24 May 30, 1980

QUIRICO P. UNGAB, petitioner,
vs.
HON. VICENTE N. CUSI, JR., in his capacity as Judge of the Court of First Instance,
Branch 1, 16TH Judicial District, Davao City, THE COMMISSIONER OF INTERNAL
REVENUE, and JESUS N. ACEBES, in his capacity as State
Prosecutor, respondents.

CONCEPCION JR., J:

Petition for certiorari and prohibition with preliminary injunction and restraining
order to annul and set aside the informations filed in Criminal Case Nos. 1960,
1961, 1962, 1963, 1964, and 1965 of the Court of First Instance of Davao, all
entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused;" and
to restrain the respondent Judge from further proceeding with the hearing and
trial of the said cases.

It is not disputed that sometime in July, 1974, BIR Examiner Ben Garcia examined
the income tax returns filed by the herein petitioner, Quirico P. Ungab, for the
calendar year ending December 31, 1973. In the course of his examination, he
discovered that the petitioner failed to report his income derived from sales of
banana saplings. As a result, the BIR District Revenue Officer at Davao City sent a
"Notice of Taxpayer" to the petitioner informing him that there is due from him
(petitioner) the amount of P104,980.81, representing income, business tax and
forest charges for the year 1973 and inviting petitioner to an informal conference
where the petitioner, duly assisted by counsel, may present his objections to the
findings of the BIR Examiner. 1 Upon receipt of the notice, the petitioner wrote
the BIR District Revenue Officer protesting the assessment, claiming that he was
only a dealer or agent on commission basis in the banana sapling business and
that his income, as reported in his income tax returns for the said year, was
accurately stated. BIR Examiner Ben Garcia, however, was fully convinced that the
petitioner had filed a fraudulent income tax return so that he submitted a "Fraud
Referral Report," to the Tax Fraud Unit of the Bureau of Internal Revenue. After
examining the records of the case, the Special Investigation Division of the Bureau
of Internal Revenue found sufficient proof that the herein petitioner is guilty of
tax evasion for the taxable year 1973 and recommended his
prosecution: têñ.£îhqwâ£
 (1) For having filed a false or fraudulent income tax return for 1973
with intent to evade his just taxes due the government under Section
45 in relation to Section 72 of the National Internal Revenue Code;

(2) For failure to pay a fixed annual tax of P50.00 a year in 1973 and
1974, or a total of unpaid fixed taxes of P100.00 plus penalties of
175.00 or a total of P175.00, in accordance with Section 183 of the
National Internal Revenue Code;

(3) For failure to pay the 7% percentage tax, as a producer of banana

poles or saplings, on the total sales of P129,580.35 to the Davao Fruit
Corporation, depriving thereby the government of its due revenue in
the amount of P15,872.59, inclusive of surcharge. 2

In a second indorsement to the Chief of the Prosecution Division, dated December

12, 1974, the Commissioner of Internal Revenue approved the prosecution of the
petitioner. 3

Thereafter, State Prosecutor Jesus Acebes who had been designated to assist all
Provincial and City Fiscals throughout the Philippines in the investigation and
prosecution, if the evidence warrants, of all violations of the National Internal
Revenue Code, as amended, and other related laws, in Administrative Order No.
116 dated December 5, 1974, and to whom the case was assigned, conducted a
preliminary investigation of the case, and finding probable cause, filed six (6)
informations against the petitioner with the Court of First Instance of Davao City,
to wit: têñ.£îhqwâ£

(1) Criminal Case No. 1960 — Violation of Sec. 45, in relation to Sec.
72 of the National Internal-Revenue Code, for filing a fraudulent
income tax return for the calendar year ending December 31, 1973; 4

(2) Criminal Case No. 1961 — Violation of Sec. 182 (a), in relation to
Secs. 178, 186, and 208 of the National Internal Revenue Code, for
engaging in business as producer of saplings, from January, 1973 to
December, 1973, without first paying the annual fixed or privilege tax
thereof; 5

(3) Criminal Case No. 1962 — Violation of Sec. 183 (a), in relation to
Secs. 186 and 209 of the National Internal Revenue Code, for failure
 to render a true and complete return on the gross quarterly sales,
receipts and earnings in his business as producer of banana saplings
and to pay the percentage tax due thereon, for the quarter ending
December 31, 1973; 6

(4) Criminal Case No. 1963 — Violation of Sec. 183 (a), in relation to
Secs. 186 and 209 of the National Internal Revenue Code, for failure
to render a true and complete return on the gross quarterly sales
receipts and earnings in his business as producer of saplings, and to
pay the percentage tax due thereon, for the quarter ending on March
31, 1973; 7

(5) Criminal Case No. 1964 — Violation of Sec. 183 (a), in relation to
Secs. 186 and 209 of the National Internal Revenue Code, for failure
to render a true and complete return on the gross quarterly sales,
receipts and earnings in his business as producer of banana saplings
for the quarter ending on June 30, 1973, and to pay the percentage
tax due thereon; 8

(6) Criminal Case No. 1965 — Violation of Sec. 183 (a), in relation to
Secs. 186 and 209 of the National Internal Revenue Code, for failure
to render a true and complete return on the gross quarterly sales,
receipts and earnings as producer of banana saplings, for the quarter
ending on September 30, 1973, and to pay the percentage tax due
thereon. 9

On September 16, 1975, the petitioner filed a motion to quash the informations
upon the grounds that: (1) the informations are null and void for want of
authority on the part of the State Prosecutor to initiate and prosecute the said
cases; and (2) the trial court has no jurisdiction to take cognizance of the above-
entitled cases in view of his pending protest against the assessment made by the
BIR Examiner. 10 However, the trial court denied the motion on October 22,
1975. 11 Whereupon, the petitioner filed the instant recourse. As prayed for, a
temporary restraining order was issued by the Court, ordering the respondent
Judge from further proceeding with the trial and hearing of Criminal Case Nos.
1960, 1961, 1962, 1963, 1964, and 1965 of the Court of First Instance of Davao, all
entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused."
The petitioner seeks the annulment of the informations filed against him on the
ground that the respondent State Prosecutor is allegedly without authority to do
so. The petitioner argues that while the respondent State Prosecutor may initiate
the investigation of and prosecute crimes and violations of penal laws when duly
authorized, certain requisites, enumerated by this Court in its decision in the case
of Estrella vs. Orendain, 12 should be observed before such authority may be
exercised; otherwise, the provisions of the Charter of Davao City on the functions
and powers of the City Fiscal will be meaningless because according to said
charter he has charge of the prosecution of all crimes committed within his
jurisdiction; and since "appropriate circumstances are not extant to warrant the
intervention of the State Prosecution to initiate the investigation, sign the
informations and prosecute these cases, said informations are null and void." The
ruling adverted to by the petitioner reads, as follows: têñ.£îhqwâ£

In view of all the foregoing considerations, it is the ruling of this

Court that under Sections 1679 and 1686 of the Revised
Administrative Code, in any instance where a provincial or city fiscal
fails, refuses or is unable, for any reason, to investigate or prosecute
a case and, in the opinion of the Secretary of Justice it is advisable in
the public interest to take a different course of action, the Secretary
of Justice may either appoint as acting provincial or city fiscal to
handle the investigation or prosecution exclusively and only of such
case, any practicing attorney or some competent officer of the
Department of Justice or office of any city or provincial fiscal, with
complete authority to act therein in all respects as if he were the
provincial or city fiscal himself, or appoint any lawyer in the
government service, temporarily to assist such city of provincial fiscal
in the discharge of his duties, with the same complete authority to
act independently of and for such city or provincial fiscal provided
that no such appointment may be made without first hearing the
fiscal concerned and never after the corresponding information has
already been filed with the court by the corresponding city or
provincial fiscal without the conformity of the latter, except when it
can be patently shown to the court having cognizance of the case
that said fiscal is intent on prejudicing the interests of justice. The
same sphere of authority is true with the prosecutor directed and
authorized under Section 3 of Republic Act 3783, as amended and/or
inserted by Republic Act 5184. The observation in Salcedo vs. Liwag,
 supra, regarding the nature of the power of the Secretary of Justice
over fiscals as being purely over administrative matters only was not
really necessary, as indicated in the above relation of the facts and
discussion of the legal issues of said case, for the resolution thereof.
In any event, to any extent that the opinion therein may be
inconsistent herewith the same is hereby modified.

The contention is without merit. Contrary to the petitioner's claim, the rule
therein established had not been violated. The respondent State Prosecutor,
although believing that he can proceed independently of the City Fiscal in the
investigation and prosecution of these cases, first sought permission from the City
Fiscal of Davao City before he started the preliminary investigation of these cases,
and the City Fiscal, after being shown Administrative Order No. 116, dated
December 5, 1974, designating the said State Prosecutor to assist all Provincial
and City fiscals throughout the Philippines in the investigation and prosecution of
all violations of the National Internal Revenue Code, as amended, and other
related laws, graciously allowed the respondent State Prosecutor to conduct the
investigation of said cases, and in fact, said investigation was conducted in the
office of the City Fiscal. 13

The petitioner also claims that the filing of the informations was precipitate and
premature since the Commissioner of Internal Revenue has not yet resolved his
protests against the assessment of the Revenue District Officer; and that he was
denied recourse to the Court of Tax Appeals.

The contention is without merit. What is involved here is not the collection of
taxes where the assessment of the Commissioner of Internal Revenue may be
reviewed by the Court of Tax Appeals, but a criminal prosecution for violations of
the National Internal Revenue Code which is within the cognizance of courts of
first instance. While there can be no civil action to enforce collection before the
assessment procedures provided in the Code have been followed, there is no
requirement for the precise computation and assessment of the tax before there
can be a criminal prosecution under the Code. têñ.£îhqwâ£

The contention is made, and is here rejected, that an assessment of

the deficiency tax due is necessary before the taxpayer can be
prosecuted criminally for the charges preferred. The crime is
complete when the violator has, as in this case, knowingly and
 willfully filed fraudulent returns with intent to evade and defeat a
part or all of the tax. 14

An assessment of a deficiency is not necessary to a criminal

prosecution for willful attempt to defeat and evade the income tax. A
crime is complete when the violator has knowingly and willfuly filed a
fraudulent return with intent to evade and defeat the tax. The
perpetration of the crime is grounded upon knowledge on the part of
the taxpayer that he has made an inaccurate return, and the
government's failure to discover the error and promptly to assess has
no connections with the commission of the crime. 15

Besides, it has been ruled that a petition for reconsideration of an assessment

may affect the suspension of the prescriptive period for the collection of taxes,
but not the prescriptive period of a criminal action for violation of
law. 16Obviously, the protest of the petitioner against the assessment of the
District Revenue Officer cannot stop his prosecution for violation of the National
Internal Revenue Code. Accordingly, the respondent Judge did not abuse his
discretion in denying the motion to quash filed by the petitioner.

WHEREFORE, the petition should be, as it is hereby dismissed. The temporary

restraining order heretofore issued is hereby set aside. With costs against the
petitioner.

SO ORDERED.

THIRD DIVISION

[G.R. No. 128315. June 29, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PASCOR REALTY AND

DEVELOPMENT CORPORATION, ROGELIO A. DIO and VIRGINIA S.
DIO, respondents.
 DECISION
PANGANIBAN, J.:

An assessment contains not only a computation of tax liabilities, but also a

demand for payment within a prescribed period. It also signals the time when
penalties and interests begin to accrue against the taxpayer.To enable the
taxpayer to determine his remedies thereon, due process requires that it must be
served on and received by the taxpayer. Accordingly, an affidavit, which was
executed by revenue officers stating the tax liabilities of a taxpayer and attached
to a criminal complaint for tax evasion, cannot be deemed an assessment that can
be questioned before the Court of Tax Appeals.

Statement of the Case

Before this Court is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court praying for the nullification of the October 30, 1996 Decision[1] of
the Court of Appeals[2] in CA-GR SP No. 40853, which effectively affirmed the
January 25, 1996 Resolution[3] of the Court of Tax Appeals[4] in CTA Case No.
5271. The CTA disposed as follows:

WHEREFORE, finding [the herein petitioners] Motion to Dismiss as

UNMERITORIOUS, the same is hereby DENIED. [The CIR] is hereby given a period
of thirty (30) days from receipt hereof to file her answer.

Petitioner also seeks to nullify the February 13, 1997 Resolution[5] of the Court
of Appeals denying reconsideration.

The Facts

As found by the Court of Appeals, the undisputed facts of the case are as
follows:

It appears that by virtue of Letter of Authority No. 001198, then BIR

Commissioner Jose U. Ong authorized Revenue Officers Thomas T. Que, Sonia T.
Estorco and Emmanuel M. Savellano to examine the books of accounts and other
accounting records of Pascor Realty and Development Corporation. (PRDC) for the
years ending 1986, 1987 and 1988. The said examination resulted in a
recommendation for the issuance of an assessment in the amounts of
P7,498,434.65 and P3,015,236.35 for the years 1986 and 1987, respectively.

On March 1, 1995, the Commissioner of Internal Revenue filed a criminal

complaint before the Department of Justice against the PRDC, its President
Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the
total amount of P10,513,671.00. Private respondents PRDC, et. al. filed an Urgent
Request for Reconsideration/Reinvestigation disputing the tax assessment and tax
liability.

On March 23, 1995, private respondents received a subpoena from the DOJ in
connection with the criminal complaint filed by the Commissioner of Internal
Revenue (BIR) against them.

In a letter dated May 17, 1995, the CIR denied the urgent request for
reconsideration/reinvestigation of the private respondents on the ground that no
formal assessment has as yet been issued by the Commissioner.

Private respondents then elevated the Decision of the CIR dated May 17, 1995 to
the Court of Tax Appeals on a petition for review docketed as CTA Case No. 5271
on July 21, 1995. On September 6, 1995, the CIR filed a Motion to Dismiss the
petition on the ground that the CTA has no jurisdiction over the subject matter of
the petition, as there was no formal assessment issued against the
petitioners. The CTA denied the said motion to dismiss in a Resolution dated
January 25, 1996 and ordered the CIR to file an answer within thirty (30) days
from receipt of said resolution. The CIR received the resolution on January 31,
1996 but did not file an answer nor did she move to reconsider the resolution.

Instead, the CIR filed this petition on June 7, 1996, alleging as grounds that:

Respondent Court of Tax Appeals acted with grave abuse of discretion and
without jurisdiction in considering the affidavit/report of the revenue officer and
the indorsement of said report to the secretary of justice as assessment which
may be appealed to the Court of Tax Appeals;

Respondent Court of Tax Appeals acted with grave abuse of discretion in

considering the denial by petitioner of private respondents Motion for
Reconsideration as [a] final decision which may be appealed to the Court of Tax
Appeals.

In denying the motion to dismiss filed by the CIR, the Court of Tax Appeals stated:

We agree with petitioners contentions, that the criminal complaint for tax evasion
is the assessment issued, and that the letter denial of May 17, 1995 is the decision
properly appealable to [u]s. Respondents ground of denial, therefore, that there
was no formal assessment issued, is untenable.

It is the Courts honest belief, that the criminal case for tax evasion is already an
assessment. The complaint, more particularly, the Joint Affidavit of Revenue
Examiners Lagmay and Savellano attached thereto, contains the details of the
assessment like the kind and amount of tax due, and the period covered.

Petitioners are right, in claiming that the provisions of Republic Act No. 1125,
relating to exclusive appellate jurisdiction of this Court, do not, make any mention
of formal assessment. The law merely states, that this Court has exclusive
appellate jurisdiction over decisions of the Commissioner of Internal Revenue
on disputed assessments, and other matters arising under the National Internal
Revenue Code, other law or part administered by the Bureau of Internal Revenue
Code.

As far as this Court is concerned, the amount and kind of tax due, and the period
covered, are sufficient details needed for an assessment. These details are more
than complete, compared to the following definitions of the term as quoted
hereunder. Thus:

Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43 S.W. (2d) 386, 387,
163 Tenn. 332. (Words and Phrases, Permanent Edition, Vol. 4, p. 446)

The word assessment when used in connection with taxation, may have more
than one meaning. The ultimate purpose of an assessment to such a connection is
to ascertain the amount that each taxpayer is to pay. More commonly, the word
assessment means the official valuation of a taxpayers property for purpose of
taxation. State v. New York, N.H. and H.R. Co. 22 A. 765, 768, 60 Conn. 326, 325.
(Ibid. p. 445)
From the above, it can be gleaned that an assessment simply states how much tax
is due from a taxpayer. Thus, based on these definitions, the details of the tax as
given in the Joint Affidavit of respondents examiners, which was attached to the
tax evasion complaint, more than suffice to qualify as an assessment.Therefore,
this assessment having been disputed by petitioners, and there being a denial of
their letter disputing such assessment, this Court unquestionably acquired
jurisdiction over the instant petition for review.[6]

As earlier observed, the Court of Appeals sustained the CTA and dismissed the
petition.
Hence, this recourse to this Court.[7]

Ruling of the Court of Appeals

The Court of Appeals held that the tax court committed no grave abuse of
discretion in ruling that the Criminal Complaint for tax evasion filed by the
Commissioner of Internal Revenue with the Department of Justice constituted an
assessment of the tax due, and that the said assessment could be the subject of a
protest. By definition, an assessment is simply the statement of the details and
the amount of tax due from a taxpayer. Based on this definition, the details of the
tax contained in the BIR examiners Joint Affidavit,[8] which was attached to the
criminal Complaint, constituted an assessment. Since the assailed Order of the
CTA was merely interlocutory and devoid of grave abuse of discretion, a petition
for certiorari did not lie.

Issues

Petitioners submit for the consideration of this Court the following issues:

(1) Whether or not the criminal complaint for tax evasion can be construed as an
assessment.

(2) Whether or not an assessment is necessary before criminal charges for tax
evasion may be instituted.
(3) Whether or not the CTA can take cognizance of the case in the absence of an
assessment.[9]

In the main, the Court will resolve whether the revenue officers Affidavit-
Report, which was attached to the criminal Complaint filed with the Department
of Justice, constituted an assessment that could be questioned before the Court
of Tax Appeals.

The Courts Ruling

The petition is meritorious.

Main Issue: Assessment

Petitioner argues that the filing of the criminal complaint with the
Department of Justice cannot in any way be construed as a formal assessment of
private respondents tax liabilities. This position is based on Section 205 of the
National Internal Revenue Code[10] (NIRC), which provides that remedies for the
collection of deficient taxes may be by either civil or criminal action. Likewise,
petitioner cites Section 223(a) of the same Code, which states that in case of
failure to file a return, the tax may be assessed or a proceeding in court may be
begun without assessment.
Respondents, on the other hand, maintain that an assessment is not an action
or proceeding for the collection of taxes, but merely a notice that the amount
stated therein is due as tax and that the taxpayer is required to pay the
same. Thus, qualifying as an assessment was the BIR examiners Joint Affidavit,
which contained the details of the supposed taxes due from respondent for
taxable years ending 1987 and 1988, and which was attached to the tax evasion
Complaint filed with the DOJ. Consequently, the denial by the BIR of private
respondents request for reinvestigation of the disputed assessment is properly
appealable to the CTA.
We agree with petitioner. Neither the NIRC nor the revenue regulations
governing the protest of assessments[11] provide a specific definition or form of an
assessment. However, the NIRC defines the specific functions and effects of an
assessment. To consider the affidavit attached to the Complaint as a proper
assessment is to subvert the nature of an assessment and to set a bad precedent
that will prejudice innocent taxpayers.
True, as pointed out by the private respondents, an assessment informs the
taxpayer that he or she has tax liabilities. But not all documents coming from the
BIR containing a computation of the tax liability can be deemed assessments.
To start with, an assessment must be sent to and received by a taxpayer, and
must demand payment of the taxes described therein within a specific
period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in
case the taxpayer fails to pay the deficiency tax within the time prescribed for its
payment in the notice of assessment. Likewise, an interest of 20 percent per
annum, or such higher rate as may be prescribed by rules and regulations, is to be
collected from the date prescribed for its payment until the full payment.[12]
The issuance of an assessment is vital in determining the period of limitation
regarding its proper issuance and the period within which to protest it. Section
203[13]of the NIRC provides that internal revenue taxes must be assessed within
three years from the last day within which to file the return. Section 222,[14] on
the other hand, specifies a period of ten years in case a fraudulent return with
intent to evade was submitted or in case of failure to file a return. Also, Section
228[15] of the same law states that said assessment may be protested only within
thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a
specific document constitutes an assessment. Otherwise, confusion would arise
regarding the period within which to make an assessment or to protest the same,
or whether interest and penalty may accrue thereon.
It should also be stressed that the said document is a notice duly sent to the
taxpayer. Indeed, an assessment is deemed made only when the collector of
internal revenue releases, mails or sends such notice to the taxpayer.[16]
In the present case, the revenue officers Affidavit merely contained a
computation of respondents tax liability. It did not state a demand or a period for
payment. Worse, it was addressed to the justice secretary, not to the taxpayers.
Respondents maintain that an assessment, in relation to taxation, is simply
understood to mean:

A notice to the effect that the amount therein stated is due as tax and a demand
for payment thereof.[17]
Fixes the liability of the taxpayer and ascertains the facts and furnishes the data
for the proper presentation of tax rolls.[18]

Even these definitions fail to advance private respondents case. That the BIR
examiners Joint Affidavit attached to the Criminal Complaint contained some
details of the tax liabilities of private respondents does not ipso facto make it an
assessment. The purpose of the Joint Affidavit was merely to support and
substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to
be a notice of the tax due and a demand to the private respondents for payment
thereof.
The fact that the Complaint itself was specifically directed and sent to the
Department of Justice and not to private respondents shows that the intent of the
commissioner was to file a criminal complaint for tax evasion, not to issue an
assessment. Although the revenue officers recommended the issuance of an
assessment, the commissioner opted instead to file a criminal case for tax
evasion. What private respondents received was a notice from the DOJ that a
criminal case for tax evasion had been filed against them, not a notice that the
Bureau of Internal Revenue had made an assessment.
In addition, what private respondents sent to the commissioner was a motion
for a reconsideration of the tax evasion charges filed, not of an assessment, as
shown thus:

This is to request for reconsideration of the tax evasion charges against my client,
PASCOR Realty and Development Corporation and for the same to be referred to
the Appellate Division in order to give my client the opportunity of a fair and
objective hearing[19]

Additional Issues: Assessment Not Necessary Before Filing of Criminal Complaint

Private respondents maintain that the filing of a criminal complaint must be

preceded by an assessment. This is incorrect, because Section 222 of the NIRC
specifically states that in cases where a false or fraudulent return is submitted or
in cases of failure to file a return such as this case, proceedings in court may be
commenced without an assessment. Furthermore, Section 205 of the same Code
clearly mandates that the civil and criminal aspects of the case may be pursued
simultaneously. In Ungab v. Cusi,[20] petitioner therein sought the dismissal of the
criminal Complaints for being premature, since his protest to the CTA had not yet
been resolved. The Court held that such protests could not stop or suspend the
criminal action which was independent of the resolution of the protest in the
CTA. This was because the commissioner of internal revenue had, in such tax
evasion cases, discretion on whether to issue an assessment or to file a criminal
case against the taxpayer or to do both.
Private respondents insist that Section 222 should be read in relation to
Section 255 of the NIRC,[21] which penalizes failure to file a return. They add that a
tax assessment should precede a criminal indictment. We disagree. To reiterate,
said Section 222 states that an assessment is not necessary before a criminal
charge can be filed. This is the general rule. Private respondents failed to show
that they are entitled to an exception.Moreover, the criminal charge need only be
supported by a prima facie showing of failure to file a required return. This fact
need not be proven by an assessment.
The issuance of an assessment must be distinguished from the filing of a
complaint. Before an assessment is issued, there is, by practice, a pre-assessment
notice sent to the taxpayer. The taxpayer is then given a chance to submit
position papers and documents to prove that the assessment is unwarranted. If
the commissioner is unsatisfied, an assessment signed by him or her is then sent
to the taxpayer informing the latter specifically and clearly that an assessment has
been made against him or her. In contrast, the criminal charge need not go
through all these. The criminal charge is filed directly with the DOJ. Thereafter,
the taxpayer is notified that a criminal case had been filed against him, not that
the commissioner has issued an assessment. It must be stressed that a criminal
complaint is instituted not to demand payment, but to penalize the taxpayer for
violation of the Tax Code.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision
is REVERSED and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
G.R. No. L-22356 July 21, 1967

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
PEDRO B. PATANAO, defendant-appellee.

Office of the Solicitor General Arturo A. Alafriz, Solicitor A. B. Afurong and L. O.

Gal-lang for plaintiff-appellant.
Tranquilino O. Calo, Jr. for defendant-appellee.

ANGELES, J.:

This is an appeal from an order of the Court of First Instance of Agusan in civil
case No. 925, dismissing plaintiff's complaint so far as concerns the collection of
deficiency income taxes for the years 1951, 1953 and 1954 and additional
residence taxes for 1951 and 1952, and requiring the defendant to file his answer
with respect to deficiency income tax for 1955 and residence taxes for 1953-1955.

In the complaint filed by the Republic of the Philippines, through the Solicitor
General, against Pedro B. Patanao, it is alleged that defendant was the holder of
an ordinary timber license with concession at Esperanza, Agusan, and as such was
engaged in the business of producing logs and lumber for sale during the years
1951-1955; that defendant failed to file income tax returns for 1953 and 1954,
and although he filed income tax returns for 1951, 1952 and 1955, the same were
false and fraudulent because he did not report substantial income earned by him
from his business; that in an examination conducted by the Bureau of Internal
Revenue on defendant's income and expenses for 1951-1955, it was ascertained
that the sum of P79,892.75, representing deficiency; income taxes and additional
residence taxes for the aforesaid years, is due from defendant; that on February
14, 1958, plaintiff, through the Deputy Commissioner of Internal Revenue, sent a
letter of demand with enclosed income tax assessment to the defendant requiring
him to pay the said amount; that notwithstanding repeated demands the
defendant refused, failed and neglected to pay said taxes; and that the
assessment for the payment of the taxes in question has become final, executory
and demandable, because it was not contested before the Court of Tax Appeals in
accordance with the provisions of section 11 of Republic Act No. 1125.

Defendant moved to dismiss the complaint on two grounds, namely: (1) that the
action is barred by prior judgment, defendant having been acquitted in criminal
cases Nos. 2089 and 2090 of the same court, which were prosecutions for failure
to file income tax returns and for non-payment of income taxes; and (2) that the
action has prescribed.

After considering the motion to dismiss, the opposition thereto and the rejoinder
to the opposition, the lower court entered the order appealed from, holding that
the only cause of action left to the plaintiff in its complaint is the collection of the
income tax due for the taxable year 1955 and the residence tax (Class B) for 1953,
1954 and 1955. A motion to reconsider said order was denied, whereupon
plaintiff interposed the instant appeal, which was brought directly to this Court,
the questions involved being purely legal.

The conclusion of the trial court, that the present action is barred by prior
judgment, is anchored on the following rationale:

There is no question that the defendant herein has been accused in

Criminal Cases Nos. 2089 and 2090 of this Court for not filing his income tax
returns and for non-payment of income taxes for the years 1953 and 1954.
In both cases, he was acquitted. The rule in this jurisdiction is that the
accused once acquitted is exempt from both criminal and civil responsibility
because when a criminal action is instituted, civil action arising from the
same offense is impliedly instituted unless the offended party expressly
waives the civil action or reserves the right to file it separately. In the
criminal cases abovementioned wherein the defendant was completely
exonerated, there was no waiver or reservation to file a separate civil case
so that the failure to obtain conviction on a charge of non-payment of
income taxes is fatal to any civil action to collect the payment of said
taxes.1äwphï1.ñët

Plaintiff-appellant assails the ruling as erroneous. Defendant-appellee on his part

urges that it should be maintained.

In applying the principle underlying the civil liability of an offender under the
Penal Code to a case involving the collection of taxes, the court a quo fell into
error. The two cases are circumscribed by factual premises which are
diametrically opposed to each either, and are founded on entirely different
philosophies. Under the Penal Code the civil liability is incurred by reason of the
offender's criminal act. Stated differently, the criminal liability gives birth to the
civil obligation such that generally, if one is not criminally liable under the Penal
Code, he cannot become civilly liable thereunder. The situation under the income
tax law is the exact opposite. Civil liability to pay taxes arises from the fact, for
instance, that one has engaged himself in business, and not because of any
criminal act committed by him. The criminal liability arises upon failure of the
debtor to satisfy his civil obligation. The incongruity of the factual premises and
foundation principles of the two cases is one of the reasons for not imposing civil
indemnity on the criminal infractor of the income tax law. Another reason, of
course, is found in the fact that while section 73 of the National Internal Revenue
Code has provided the imposition of the penalty of imprisonment or fine, or both,
for refusal or neglect to pay income tax or to make a return thereof, it failed to
provide the collection of said tax in criminal proceedings. The only civil remedies
provided, for the collection of income tax, in Chapters I and II, Title IX of the Code
and section 316 thereof, are distraint of goods, chattels, etc. or by judicial action,
which remedies are generally exclusive in the absence of a contrary intent from
the legislator. (People vs. Arnault, G.R. No. L-4288, November 20, 1952; People vs.
Tierra, G.R. Nos. L-17177-17180, December 28, 1964) Considering that the
Government cannot seek satisfaction of the taxpayer's civil liability in a criminal
proceeding under the tax law or, otherwise stated, since the said civil liability is
not deemed included in the criminal action, acquittal of the taxpayer in the
criminal proceeding does not necessarily entail exoneration from his liability to
pay the taxes. It is error to hold, as the lower court has held, that the judgment in
the criminal cases Nos. 2089 and 2090 bars the action in the present case. The
acquittal in the said criminal cases cannot operate to discharge defendant
appellee from the duty of paying the taxes which the law requires to be paid,
since that duty is imposed by statute prior to and independently of any attempts
by the taxpayer to evade payment. Said obligation is not a consequence of the
felonious acts charged in the criminal proceeding, nor is it a mere civil liability
arising from crime that could be wiped out by the judicial declaration of non-
existence of the criminal acts charged. (Castro vs. The Collector of Internal
Revenue, G.R. No. L-12174, April 20, 1962).

Regarding prescription of action, the lower court held that the cause of action on
the deficiency income tax and residence tax for 1951 is barred because appellee's
income tax return for 1951 was assessed by the Bureau of Internal Revenue only
on February 14, 1958, or beyond the five year period of limitation for assessment
as provided in section 331 of the National Internal Revenue Code. Appellant
contends that the applicable law is section 332 (a) of the same Code under which
a proceeding in court for the collection of the tax may be commenced without
assessment at any time within 10 years from the discovery of the falsity, fraud or
omission.

The complaint filed on December 7, 1962, alleges that the fraud in the appellee's
income tax return for 1951, was discovered on February 14, 1958. By filing a
motion to dismiss, appellee hypothetically admitted this allegation as all the other
averments in the complaint were so admitted. Hence, section 332 (a) and not
section 331 of the National Internal Revenue Code should determine whether or
not the cause of action of deficiency income tax and residence tax for 1951 has
prescribed. Applying the provision of section 332 (a), the appellant's action
instituted in court on December 7, 1962 has not prescribed.

Wherefore, the order appealed from is hereby set aside. Let the records of this
case be remanded to the court of origin for further proceedings. No
pronouncement as to costs.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and Fernando,
JJ., concur.
Concepcion, C.J. and Dizon, J., are on leave.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-12174 April 26, 1962

MARIA B. CASTRO, petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent.

Rosendo J. Tansinsin and Manuel O. Chan for petitioner.

Office of the Solicitor General and Special Attorney Librada del Rosario-Natividad
for respondent.

REYES, J.B.L., J.:

Appeal from a decision of the Court of Tax Appeals (in its C.T.A. Case 141) holding
petitioner Maria B. Castro liable under the War Profits Tax Law, Republic Act No.
55, and ordering her to pay a deficiency war profits tax (including surcharges and
interest) in the amount of P1,360,514.66, and costs.

The background of this case is set forth in great detail in the decision appealed
from. We quote:

Petitioner Maria B. Castro, who is authorized to manage her own property,

is a duly licensed merchant. Pursuant to the provisions of Section 4 (b) and
(c) of Republic Act No. 55, she filed with the Bureau of Internal Revenue on
February 28, 1947, her war profits tax returns which showed a net worth on
February 26, 1945 in the amount of P431,884.00 and a net worth on
December 8, 1941 in the sum of P409,581.57. Although there is indicated
an increase in net worth in the amount of P22,302.43, she is totally
exempted from paying any war profits tax therefor as the deduction of six
per centum (6%) per annum of the net worth on December 8, 1941
therefrom would show only a taxable increase in net worth in the amount
of P5,574.61 which is not taxable under the said law.

On November 22, 1947, however, Criminal Case No. 4976 was filed against
her in the Court of First Instance of Manila for violation of Section 4, in
connection with Section 8, of the War Profits Tax Law, for allegedly
defrauding the Republic of the Philippines in the total amount of
P1,048,687.76. The criminal action, was filed at the instance of respondent
and simultaneous with the filing of said action, the petitioner received for
the first time the notice of assessment dated November 19, 1947 by
registered mail from the Collector of Internal Revenue. The said letter of
demand was based on the report of Supervising Examiner Felipe Aquino of
the Bureau of Internal Revenue, who recommended that the petitioner be
assessed and made to pay the sum of P1,048,687.76 as war profits tax and
surcharge, computed as follows: .

P 885,694.63
Increase in net worth
Cumulative tax on P500,000 P 352,000.00
90% tax on P385,694.63 347,125.17
 Total Tax P 699,125.17
Add 50% surcharge 349,562.59

Total amount due and

P1,048,687.76
collectible

Petitioner through counsel filed a motion to quash the criminal action

against her and during the pendency of the same, she amended on
December 20, 1947, her original war profits tax returns making it to appear
that her true net worth on February 26, 1945 was P315,438.32 while her
net worth on December 8, 1941 was left unchanged at P409,581.57.
According to the amended return, there was therefore a decrease in net
worth in the amount of P94,143.25 instead of an increase of P22,302.43 as
originally reported.

On February 9, 1948, the motion of petitioner to quash the information was

denied by the Court of First Instance of Manila. At the sheduled hearing of
the case on the merits on March 7, 1949, the City Fiscal of Manila
manifested in open court that after a re-investigation of the case "the
amount of the tax due and for which the accused stands charged for
evading payment is only about P700,000.00, instead of P1,048,687.76 as
stated in the information." However, at the continuation of the hearing of
the case on February 22, 1950, Supervising Examiner Felipe Aquino of the
Bureau of Internal Revenue, who testified for the prosecution, declared in
answer to questions propounded by the City Fiscal "that as a result of a
detailed reinvestigation conducted by his office, it was found out that no
war profits tax was due from the accused in connection with the present
case." Whereupon, City Fiscal Angeles moved for the dismissal of the case.
Finding the petition for dismissal to be well taken, the Court of First
Instance of Manila, in an Order dated February 22, 1950, dismissed Criminal
Case No. 4976 against petitioner.

After the dismissal of the Criminal Case, another report was submitted by
the same Supervising Examiner Felipe Aquino to his superiors wherein he
changed his previous stand taken before the Court of First Instance of
Manila, on the basis of which report another letter of demand for
P2,008,293.53 as war profits tax was issued against petitioner on January
24, 1950. Barely one month thereafter, another report was again submitted
by the same Supervising Examiner Felipe Aquino to his superiors, on the
basis of which another letter of demand for war profits tax was issued by
respondent against petitioner for the sum of P2,229,976.94 or an increase
of P221,683.31 over that assessment of January 24, 1950. The case was
again referred to the City Fiscal's Office for another prosecution based on
the earlier demand but the same was again dropped.

Following insistent requests of petitioner for reinvestigation of her case,

the then Secretary of Finance Pio Pedrosa created a committee on April 11,
1950 to review or re-examine the assessment for war profits tax issued
against the petitioner. This committee, otherwise known as the Pedrosa
Committee, was chairmanned by Atty. Artemio M. Lobrin of the Bureau of
Internal Revenue, with Messrs. Melecio R. Domingo and Roman M. Umali
of the same office, Vivencio L. de Peralta of the General Auditing Office and
Jose P. Alejandro of the Office of the Solicitor General, as members. After a
thorough investigation of the case, the Pedrosa Committee on September
12, 1950, submitted its report, recommending the collection of the amount
of P3,593,950.78 as war profits tax due from petitioner inclusive of
surcharge and interests, broken down as follows: .

Taxable increase in net

P1,762,203.95
worth

War profits tax due thereon P1,526,093.75

50% surcharge 763,406.88

Total war profits tax and
P2,289,140.63
surcharge
15% surcharge 343,371.09
1% monthly interest
thereon from April 1947 961,439.06
to September 30, 1950
 (42%)
Total amount collectible on
September 30, 1950 P3,593,950.78

The findings and recommendations of the Pedrosa Committee were forwarded to

the President of the Philippines for approval and on September 22, 1950, the
President approved the same in toto.

Accordingly, on September 23, 1950 the respondent demanded from the

petitioner Maria B. Castro the payment of the total amount of P3,593,950.78 as
war profits tax computed in detail as follows: .

Net worth on February 26,

1945
as per amended war profits
tax returns P 315,438.32.
Add: (a) Undeclared cash on
February 25, 1945: As P1,871,542.13
per this report
Amount declared 64,097.52 1,807,444.61

(b) Overdeclared
accounts
payable: As per
amended return P 106,000.00
Amount per this report 30,000.00 76,000.00

Net worth on February 26, 1945 P2,198,882.93

Less: Net worth on December 8, 1941:
Net worth as per amended
P 409,581.57
return
Less: Accounts payable 43,547.22 P 366,034.35
 Increase in net worth as per this report P1,832,848.58
Less: 6% per annum on P366,034.35 from
70,644.63
December 8, 1941 to February 26, 1945

Taxable increase in net worth P1,762,203.95

War profits tax due thereon:.

On P 50,000.00 (P6,000
50% P 22,000.00
exempt)
On 30,000.00 60% 30,000.00
On 200,000.00 70% 140,000.00
On 200,000.00 80% 160,000.00
On 500,000.00 90% 450,000.00
On 762,203.95 95% 724,093.75

P 1,762,203.95 P1,526,093.75
50% surcharge 763,046.88

15% surcharge 343,371.09

1% monthly interest from April 1, 1947
961,439.06
to September 30, 1950 (42%)
Total war profits tax and 50% surcharge (carried P2,289,140.63
forward)
Total amount collectible on September 30, P3,593.950.78
1950

In order to enforce collection of this last mentioned assessment of P3,593,950.78,

the respondent caused to be advertised on October 18, 1950, the sale at public
auction on November 22, and 27, 1950, of various real properties of petitioner to
satisfy the war profits tax assessed against her. The petitioner, in order to stop
the scheduled sale at public auction, filed on October 18, 1950, before the Court
of First Instance of Manila a petition for preliminary injunction (Civil Case No.
12356) against the Collector of Internal Revenue, praying, among others, that an
order be issued enjoining said official from proceeding with the collection by
summary methods of the war profits tax demanded. Over the objection of
respondent that the Court of First Instance had no jurisdiction to entertain the
complaint nor to issue a writ of injunction, the said Court entered an order dated
November 8, 1950 declaring that it had authority proceed with the case but
denied the petition for preliminary injunction. Inasmuch as no preliminary
injunction was issued by the Court, respondent proceeded with the distraint and
levy and sale at public auction of the properties of petitioner. These properties,
which are situated in the Cities of Manila, Pasay and Tagaytay and in the
Municipalities of Caloocan and Makati, Rizal, and Moncada, Tarlac, and described
more particularly in Exhibits C, C-1, C-2, C-3, C-4 and C-5 of the petition for
injunction filed with this Court, were offered for sale on November 22, and 27,
1950 as scheduled, to answer for the war profits tax liability of petitioner to the
Republic of the Philippines in the assessed sum of P3,593,950.78, inclusive of
surcharges and interest from April 1, 1947 to September 30, 1950.

For lack of bidders on the scheduled dates of sale, the following properties
(except those in Tagaytay) with their corresponding assessed value, were
forfeited to the Government under Section 328 of the National Internal Revenue
Code: .

Property Assessed Value

Manila P233,460.00
Balintawak 521,390.00
Pasay 18,320.00
Makati 4,830.00
Tarlac 12,530.00
Tagaytay 62,930.00
In another sale at public auction on April 23, 1954, the property of petitioner
situated in Caloocan, Rizal, with an assessed value of P4,990.00 was also offered
for sale to answer for her war profits tax liability. There being no bidders in this
sale as in the previous sale, this last mentioned real property of petitioner was
also forfeited to the Government.

The petitioner has not exercised her right of legal redemption with respect to all
these real properties with a total assessed value of P858,440.00 which were sold
at public auction by the respondent and forfeited in favor of the Government for
lack of bidders.

Parenthetically, it may be stated that the hearing of Civil Case No. 12356 before
the Court of First Instance of Manila for Preliminary Injunction was not continued
to its final determination by said court as the Supreme Court in a decision
promulgated on October 31, 1951 declared the lower court without jurisdiction to
proceed with the trial. (Saturnino David v. The Honorable Simeon Ramos and
Maria B. Castro, G.R. No. L-4300)..

In the course of the summary methods employed by the respondent to enforce

the collection of the war profits tax liability of petitioner, the respondent also
distrained and advertised for sale the properties of the Marvel Building
Corporation in which the petitioner had a substantial interest. To counter-act the
move, the said corporation through counsel filed on November 31, 1950, Civil
Case No. 12555 in the Court of First Instance of Manila wherein it sought to enjoin
the respondent Collector of Internal Revenue from selling at public auction its
various properties described in the complaint. While the corporation was able to
secure the injunction from the lower court, the same was dissolved by the
Supreme Court in its decision in G.R. No. L-5081, Marvel Building Corporation v.
Saturnino David, promulgated on February 24, 1954. Petitioner Maria B. Castro
was declared therein as the sole and exclusive owner of all shares of stock of the
Marvel Building Corporation and all the other partners are her dummies.

In the meantime, petitioner filed on December 10, 1951, Civil Case No. 15316
with the Court of First Instance of Manila against the respondent Collector of
Internal Revenue for the recovery of the properties advertised for saleon
November 22 and 27, 1950 which for lack of bidders were forfeited to
theGovernment. However, before the case could be tried on the merits before
said Court, the Court of Tax Appeals was created by Republic Act No. 1125 and
pursuant to Section 22 thereof, the record of the case was remanded for
finaldisposition to this Court. This last mentioned case is now pending hearing
before this Court.

At this juncture, it should be stated that again on December 22, 1951, an

additional war profits tax was assessed against the petitioner in the sum of
P20,425.00 based allegedly on certain amounts receivable which petitioner
received from Magdalena Estate, Inc. Consequently, the total war profits
taxliability of petitioner, exclusive of surcharge and interest, as found by the
Pedrosa Committee was increased to P1,546,518.75, itemized as follows:
.1äwphï1.ñët

Tax due as per Pedrosa Committee P1,526,093.75

Additional war profits tax on account of
undeclared amount receivable from the
Magdalena Estates, Inc. 20,425.00

Total war profits tax exclusive of surcharge and

P1,546,518.75
interest.

To satisfy, fully the amount of the war profits tax assessed against petitioner, the
respondent on September 29, 1954, caused to be advertised for sale at public
auction for November 2, 1954, other real properties of petitioner situated in
Manila. These properties are described in detail in Appendix B of the petition for
review filed with this Court. According to the "Amended Notice of Sale" (Appendix
B, Petition for Review), the properties were seized, distrained and levied upon
from petitioner "in satisfaction of internal revenue taxes and penalties amounting
to P4,539,556.26, computed as of April 30, 1954" due from her in favor of the
Republic of the Philippines. For lack of bidders at the time of the scheduled sale
on November 2, 1954, the properties in question were forfeited to the
Government under Section 328 of the National Internal Revenue Code for the
total amount of P3,547,892.41 which was allegedly the balance of petitioner's tax
liability as of that date.

Before the expiration of the one-year period provided for in Section 328 of the
National Internal Revenue Code within which petitioner may redeem the real
properties forfeited in favor of the Government in the sale at public auction held
on November 2, 1954, the petitioner filed with this Court on September 30, 1955,
a petition for the annulment of said sale and forfeiture on the ground that her
properties were advertised for sale on tax claim of the Government far in excess
of the alleged war profits tax, surcharges and penalties fixed by respondent.
Respondent filed his opposition to the petition and after due hearing where
evidence was adduced in support of the petition as well as opposition thereto,
this Court, in a resolution dated October 31, 1955, declared the auction sale of
November 2, 1954 as well as the resulting forfeiture, null and void and of no legal
force and effect because of the admitted discrepancy in the amount of tax stated
in the notice of sale for which the properties were auctioned and the actual
amount of tax assessed and demanded.

The said resolution being without prejudice to such action and proceedings a
respondent may take in accordance with law, respondent demanded from
petitioner the amount of P3,594,881.51 not later than November 10, 1955 or he
would again proceed with the resale of her properties on December 12, 1955. To
stop the sale, petitioner filed a petition for injunction with this Court on
November 22, 1955 requesting that respondent be enjoined from proceeding
with the resale of her properties scheduled on December 12, 1955; that the said
properties be released to her; and that she be declared not liable for the war
profits tax assessed and demanded of her. After due hearing of this petition and
the opposition thereto, this Court, in a resolution dated December 10, 1955,
denied the injunction and held in abeyance the determination of other questions
until after the case shall have been heard on the merits. The properties were
therefore advertised for sale on December 12, 1955 to answer for a war profits
tax liability of petitioner to the Republic of the Philippines for the alleged amount
of P3,594,307.51 computed as of that date. For lack of bidders, the same were
forfeited to the Government. Those properties and the amounts for which they
were forfeited are as follows:.

Aguinaldo Building P2,026,517.10

Wise & Co. Building 670,291.47
Zobel Mansion 408,501.24
Shellborne Hotel 489,491.70
 Total P3,594,801.51
Add: Prior forfeitures 888,440.00

P4,453,241.51

After due hearing and reception of evidence, the Tax Court annulled the last tax
sale of December, 1955, covering the found Manila buildings, on account of
irregularities in the notices of sale; but for the rest, it found against petitioner and
assessed her tax liability as follows: .

"Net worth on Feb. 26, 1945

as per amended war profits tax return P 315,438.32
Add: (a) Underdeclared cash
on February 26, 1945:
As per Pedrosa
Committee report P1,871,542.13
Amount declared 64,097.52 1,807.444.61
(b) Accounts Payable: As
P 106,000.00
per amended return
Amount per Pedrosa
Committee Report-
P30,000.00
Accounts payable to Lao
Kang Suy
recognized by Court- 106.000.00
P76,000.00
Net worth on Feb. 26, 1945 P2,122,883.93
Less: Net worth on
December 8, 1941:
Net worth as per
P 409,581.57
amended return
 Less Accounts payable
366,034.35
P43,547.22
Increase in net worth P1,756,848.58
Less 6% per annum on
P366,034.35 from Dec. 8,
1941 to Feb. 26, 1945 70,644.63

Taxable increase in net worth P1,686,203.95

Add: Undeclared
accounts receivable from
Magdalena Estate, Inc. as
of Feb. 26, 1945 that
was discovered in June,
1951 only 21,500.00
Total taxable increase in net
worth P1,707,703.95
War Profits tax due thereon:
On P50,000.00
(P6,000.00 Exempt) @ P 22,000.00
50%
50,000.00 @ 60% 30,000.00
200,000.00 @ 70% 140,000.00
200,000.00 @ 80% 160,000.00
500,000.00 @ 90% 450,000.00
707,703.95 @ 95% 672,318.75

Total . . . . . . . . . . . . . P1,474,318.75
50% surcharge on P1,474,318.75 P 737,159.37
15% surcharge on P1,474,318.75 221,147.81
 1% monthly on P1,474,318.75 from 4/l/47 to
644,768.73
11/22/50

Total amount collectible on 11/22/50 . . . . . . . . P3,077,394.66

Less: Values of properties sold:

On Nov. 22, 1950 P1,556,000
On Nov. 27, 1950 150,900
April 20, 1954 9,980 1,716,880.00

Total due as of December 12, 1955 P1,360,514.66

From this decision, Maria Castro appealed to this Court..

The nineteen alleged errors committed by the Court of Tax Appeals and discussed
by appellant in her printed brief actually revolve around four main defenses: (a)
that the War Profits Tax Law (R.A. No. 55) is unconstitutional and void; (b) that
said law was improperly applied to the case of the appellant; (c) that even if
appellant were subject to the tax liability declared by the court below, such
liability was totally extinguished by the levy and forfeiture of certain properties of
hers; and (d) that appellant's acquittal in the criminal case instituted against her
for violation of the War Profits Tax Law is a bar to the collection of the taxes
assessed, and specially of the 50% surcharge. (a) Petitioner's attack on the
constitutionality of Republic Act No. 55, commonly known as the War Profits Tax
Law, on account of its retrospective operation (Errors XVIII), is now foreclosed by
our decision in Republic vs.Oasan Vda. de Fernandez, G.R. No. L-9141, September
25, 1956, wherein thisCourt upheld the validity of the statute; and no reasons are
alleged that would justify a departure from the ruling made in that case..

(b) Petitioner Castro complains (Errors I and VI) that the Tax Court had declared
subject to the war profits tax her cash transactions from June, 1945to December
31, 1946, when Republic Act No. 55 levies that tax only on the value of the
taxpayer's assets (including real and personal property and/orcash in banks) as of
February 26, 1945, minus his liabilities..
This argument misconceives the process whereby the Tax Court (and the Pedrosa
Committee) arrived at the petitioner's net worth as of February 26,1945. Because
of the difficulty in determining the taxpayer's cash on hand on said date (since her
books and records did not show her invested capital in 1945), said tax authorities
adopted the method of starting from her reported cash on hand on December 31,
1946, and working backwards to February,1945, by adding to the reported cash
the disbursements made by Castro during1945 and 1946, and then deducting her
receipts from the same period. We see nothing fundamentally erroneous in this
method for, as pointed out in the appealed decision, "if cash on hand at the
beginning of the period, plus receipts during the period minus disbursements
during the period, equals cash on hand at the end of the period, the converse
must necessarily be true.".

Such method is in effect but an application (in reverse) of the inventory or

networth system that, contrary to appellants contention (Error XIII), has been
approved by this Court in Perez vs. Collector of Internal Revenue, G.R. No. L-
10507, May 30, 1958; Collector vs. A. P. Reyes, L-11534, November 25, 1958; and
Commissioner of Internal Revenue vs. Avelino, L-14847, September 19, 1961.

The analysis of petitioner's transactions for 1945 and 1946 merely laid the basis
for determining the undisclosed cash funds in her possession as of February 26,
1945 (amounting to P1,807,444.61), and it is this cash thatwas found subject to
the war profits tax.

It is urged, however, that even if this finding were correct, still, under Republic Act
No. 55, only "cash in banks" is expressly mentioned as taxable, and appellant
infers that cash on hand not so deposited was not intended to be subject to war
profits tax. This thesis appears unmeritorious: cash heldby the taxpayer on
February 26, 1945 clearly falls under the description of "assets, including real and
personal property" that section 2 of the Act expressly order included in
determining the taxable net worth. If "cash in banks" is expressly mentioned by
the Act, it is not because cash on hand was intended to be excluded, but because
"cash in banks" is not, strictly, speaking, part of the assets of the taxpayer, but
assets of the banks where the cash is deposited. It is well established that a so-
called "bank deposit" is in reality a loan to the bank, the latter acquiring title to
the amount "deposited", subject to its withdrawal (or recall of the loan) on the
dates specified. Taxpayer's "assets", therefore, would not per se include cash
deposited in banks by the taxpayer; and its inclusion had to be expressly
prescribed by the statute in order to remove all doubt as to its taxability.

Petitioner endeavored to show (Errors VII to XI) that part of the amount of cash
thus arrived at actually originated in receipts from transactions made by her after
February 26, 1945 but which were not disclosed in the books and accounts. Aside
from the fact that this claim in her behalf contradicted her admission to the
Pedrosa Committee that all her 1946 receipts were recorded in her books (v.
Respondent's Exhibit 6-A), it lay within the exclusive discretion of the Tax Court to
believe or not to believe her evidence and statements, and those of her witnesses
regarding the source of the cash in question; and the rule is well settled that in
cases of this kind, only errors of law, and not rulings on the weight of evidence,
are reviewable by this Court. The same principle precludes us from interfering
with the Tax Court's refusal to credit the other deductions claimed by petitioner
as amounts obtained from loans from various individuals. The Court of Tax
Appeals found those items unproved, except the P76,000.00 payable to Lao Kang
Suy, which is accepted, although it had been rejected by the Pedrosa Committee.

Similarly, the finding that the petitioner had disbursed in 1946 P1,025,000.00 on
account of her subscription to the stock of the Marvel Building Corporation (Error
XII) may not be disturbed by us.

(c) The third main ground of appeal is predicated on the acquittal of petitioner in
case No. 4976 of the Court of First Instance of Manila, wherein she was criminally
prosecuted for failure to render a true and accurate return of the war profits tax
due from her, with intent to evade payment of the tax. She contends
(Assignments of Error II to IV) that the acquittal should operate as a bar to the
imposition of the tax and specially the 50% surcharge provided by section 6 of the
War Profits law (R.A. No. 55), invoking the ruling in Coffey v. U.S., 29 L. Ed. 436.

With regard to the tax proper, the state correctly points out in its brief that the
acquittal in the criminal case could not operate to discharge petitioner from the
duty to pay the tax, since that duty is imposed by statute prior to and
independently of any attempts on the part of the taxpayer to evade payment. The
obligation to pay the tax is not a mere consequence of the felonious acts charged
in the information, nor is it a mere civil liability derived from crime that would be
wiped out by the judicial declaration that the criminal acts charged did not exist.
As to the 50% surcharge, the very United States Supreme Court that rendered the
Coffey decision has subsequently pointed out that additions of this kind to the
main tax are not penalties but civil administrative sanctions, provided primarily as
a safeguard for the protection of the state revenue and to reimburse the
government for the heavy expense of investigation and the loss resulting from the
taxpayer's fraud (Helvering vs. Mitchell, 303 U.S. 390, 82 L. Ed. 917; Spies vs. U.S.
317 U.S. 492). This is made plain by the fact that such surcharges are enforceable,
like the primary tax itself, by distraint or civil suit, and that they are provided in a
section of R.A. No. 55 (section 5) that is separate and distinct from that providing
for criminal prosecution (section 7). We conclude that the defense of jeopardy
and estoppel by reason of the petitioner's acquittal is untenable and without
merit. Whether or not there was fraud committed by the taxpayer justifying the
imposition of the surcharge is an issue of fact to be inferred from the evidence
and surrounding circumstances; and the finding of its existence by the Tax Court is
conclusive upon us. (Gutierrez v. Collector, G.R. No. L-9771, May 31, 1951 ; Perez
vs. Collector, supra).

(d) The fourth main ground adduced on behalf of the petitioner (Errors II and XlV)
is that the sale and forfeiture to the government (due to lack of bidders) of the
properties of petitioner in Manila, Balintawak, Pasay, Makati, Tarlac, Tagaytay and
Caloocan which had been levied upon by the respondent Collector of Internal
Revenue and advertised for sale in 1950 and 1954, constitutes a full discharge of
petitioner's tax liabilities. In so arguing, she relies on the provisions of paragraph 1
of Section 328 of the Internal Revenue Code, reading as follows: .

SEC. 328. Forfeiture to Government for Want of Bidder. - In case there is no

bidder for real property exposed for sale as herein above provided or if the
highest bid is for an amount insufficient to pay the taxes, penalties, and
costs, the provincial or city treasurer shall declare the property forfeited to
the Government in satisfaction of the claim in question and within two days
thereafter shall make a return of his proceedings and the forfeiture, which
shall be spread upon the records of his office,

and appellant contends that in the provision to the effect that in the absence of
bidders, the property is to be "forfeited to the Government in satisfaction of the
claim in question", the term "satisfaction" signifies nothing but full discharge of
the taxes, penalties, and costs claimed by the state. Carried to its logical
conclusion, this theory would permit a clever taxpayer, who is able to conceal
most or the more valuable part of his property from the revenue officers, to
escape payment of his tax liability by sacrificing an insignificant portion of his
holdings; and we can not agree that in providing that the forfeiture of the
taxpayer's distrained or levied property, for lack of adequate bids, should operate
in satisfaction of the total tax claims even beyond the value of the property
forfeited. That the satisfaction prescribed in section 328 of the Revenue Code was
intended to mean only a discharge pro tanto is confirmed by the provisions of
section 330 of the Revenue Code to the effect that "remedy by distraint of
personal property and levy on realty may be repeated if necessary until the full
amount due including all expenses, is collected". This section makes no distinction
between forfeitures to the Government and sales to third persons, and we are
satisfied that no distinction was intended and that none is warranted.

Nor do we see that the petitioner has any ground for complaining that the
properties forfeited were undervalued (Error XV). The relation between assessed
value and market price being variable, it is not a matter of notice. However, the
Court of Tax Appeals appraised the forfeited properties at double their assessed
evaluation, and thereby credited her with a part payment on account of her tax
liability in the amount of P1,716,880.00. There is no adequate evidence that they
were worth more, petitioner's own estimates of value being obviously unreliable,
due to her direct interest in the matter under investigation. Since the burden of
proof lay evidently on the taxpayer, she is not in a position to complain in this
regard.

It may be noted in this connection that the validity of the levy and sale of her
properties in November of 1950 and April 1954 is assailed by appellant in her fifth
assignment of error; but as this point was not raised in the Court below, the same
can not be entertained for the first time on appeal.

(e) As pointed out by the counsel for the Government, appellant's stand that the
undeclared cash should be averaged or spread out for the years 1945, 1946 and
1947 (Error XVI) assumes that what was being subjected to tax was her
undeclared income during said years, which is not correct, as previously declared
in this opinion. If her expenditures during 1945 and 1946 were scrutinized and
analyzed, it was merely to determine the actual value of her taxable net worth as
of February 26, 1945, that was subject to the war profits tax, as representing
accumulated profits earned during the occupation years.
Finally, no argument is needed to show that unless taxes are to be left at the
discretion of the taxpayer, she can not be allowed to seek refuge or relief by
pleading (Error XVII) the alleged inefficient and erratic manner in which her books
of account and supporting papers had been prepared, contrary to the
requirements of the revenue laws; and that it is incredible that a trader like the
appellant should be able to do business running into millions of pesos without
knowing exactly her financial condition.

Appellant's alleged Error XIX, being merely pro forma, requires no discussion.

Finding no reversible error in the decision appealed from, we hereby affirm the
same, with costs against appellant.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes and Dizon,
JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 197590 November 24, 2014

BUREAU OF INTERNAL REVENUE, as represented by the COMMISSIONER OF

INTERNAL REVENUE,Petitioner,
vs.
COURT OF APPEALS, SPOUSES ANTONIO VILLAN MANLY, and RUBY ONG
MANLY, Respondents.

DECISION

DEL CASTILLO, J.:

There is grave abuse of discretion when the determination of probable cause is

exercised in an arbitrary or despotic manner, due to passion or personal hostility,
so patent and gross as to amount to an evasion of a positive duty or a virtual
refusal to perform a duty enjoined by law.1 This Petition for Certiorari2 under Rule
65 of the Rules of Court assails the Decision3 dated October 28, 2010 and the
Resolution4 dated May 10, 2011 of the Court of Appeals (CA) in CA-G.R. SP No.
112479.

Factual Antecedents

Respondent Antonio Villan Manly (Antonio) is a stockholder and the Executive

Vice-President of Standard Realty Corporation, a family-owned corporation.5 He is
also engaged in rental business.6 His spouse, respondent Ruby Ong Manly, is a
housewife.7

On April 27, 2005, petitioner Bureau of Internal Revenue (BIR) issued Letter of
Authority No. 2001 000123878authorizing its revenue officers to investigate
respondent spouses’ internal revenue tax liabilities for taxable year 2003 and
prior years.

On June 6, 2005, petitioner issued a letter9 to respondent spouses requiring them

to submit documentary evidence to substantiate the source of their cash
purchase of a 256-square meter log cabin in Tagaytay City worth ₱17,511,010.00.
Respondent spouses, however, failedto comply with the letter.10

On June 23, 2005, the revenue officers executed a Joint Affidavit11 alleging that
respondent Antonio’s reported or declared annual income for the taxable years
1998-2003 are as follows:

Net Profit
Rental
Taxable Business
Compensatio (1169-73 G. Total sources Tax
CASH
n Masangkay of Funds Due/paid
Income St.,
Tondo,
Manila

1998 [P]133,532.3 [P] [P] [P]55,834.00 [P] 269,613.46

6 191,915.10 325,447.46 <
1999 142,550.50 260,961.78 403,512.28 79,254.00 324,258.28

2000 141,450.00 213,740.67 355,190.67 64,757.21 290,433.46

2001 151,500.00 233,396.62 384,896.62 73,669.00 311,227.62

2002 148,500.00 186,106.62 334,606.62 58,581.00 276,025.62

2003 148,100.00 152,817.53 300.917.93 48,729.00 252,188.93

[Total ₱1,238,938.3 ₱2,104,571.5 ₱1,723,747.37

₱865,633.26 ₱380,824.21 12
] 2 8

and that despite his modestincome for the said years, respondent spouses were
able to purchase in cash the following properties:

1) a luxurious vacation house in Tagaytay City valuedat ₱17,511,010.0013 in

the year 2000, evidenced by a Deed of Absolute Sale14 dated October 24,
2000;

2) a Toyota RAV4 for ₱1,350,000.00 in the year 2001, evidenced by a Sales

Invoice15 dated June 28, 2001; and

3) a Toyota Prado for ₱2,000,000.00 in 2003, evidenced by a Deed of

Sale16 dated July 9, 2003.17

Since respondent spouses failed to showthe source of their cash purchases, the
revenue officers concluded that respondent Antonio’s Income Tax Returns (ITRs)
for taxable years 2000, 2001,and 2003 were underdeclared.18 And since the under
declaration exceeded 30% of the reported or declared income, it was considered
a prima facie evidence of fraud with intent to evade the payment of proper taxes
due to the government.19 The revenue officers, thus, recommended the filing of
criminal cases against respondent spouses for failing to supply correct and
accurate information intheir ITRs for the years 2000, 2001, and 2003, punishable
under Sections 25420 and 25521 in relation to Section 248(B)22 of Republic Act No.
8424 or the "Tax Reform Act of 1997," hereinafter referred to as the National
Internal Revenue Code (NIRC).23

Respondent spouses, in their Joint Counter-Affidavit,24 denied the accusations

hurled against them and alleged that they used their accumulated savings from
their earnings for the past24 years in purchasing the properties.25 They also
contended that the criminal complaint should be dismissed because petitioner
failed to issue a deficiency assessment against them.26

In response, the revenue officers executed a Joint Reply-Affidavit.27 Respondent

spouses, in turn, executed a Joint Rejoinder-Affidavit.28

Ruling of the State Prosecutor

On August 31, 2006, State ProsecutorMa. Cristina A. Montera-Barot issued a

Resolution29 in I.S. No. 2005-573 recommending the filing of criminal
charges30 against respondent spouses, to wit:

WHEREFORE, premises considered, it is respectfully recommended that

[respondent] spouses ANTONIO VILLAN MANLY and RUBY ONG MANLY be
charged [with] the following:

(1) Three (3) counts of Violation of Section 254 – Attempt to Evade or

Defeat Tax of the NIRC for taxable years 2000, 2001, and 2003;

(2) Three (3) counts for Violation of Section 255 of the NIRC – Failure to
Supply Correct and Accurate Information for taxable years 2000, 2001 and
2003;

(3) Three counts of Violation ofSection 255 of the NIRC – Failure to Pay, as a
consequence of *respondent spouses’+ failure to supply correct and
accurate information on their tax returns for taxable years 2000, 2001, and
2003.31

Respondent spouses moved for reconsideration32 but the State Prosecutor denied
the same in a Resolution33 dated November 29, 2007.
 Ruling of the Secretary of Justice

On appeal to the Secretary of Justice via a Petition for Review,34 Acting Justice
Secretary Agnes VST Devanadera (Devanadera) reversed the Resolution of the
State Prosecutor. She found no willfulfailure to pay or attempt to evade or defeat
the tax on the part of respondent spouses as petitioner allegedly failed to specify
the amount of tax due and the likely source of income from which the same was
based.35 She also pointed out petitioner’s failure to issue a deficiency tax
assessment against respondentspouses which is a prerequisite to the filing of a
criminal case for tax evasion.36 The dispositive portion of the Resolution37 dated
July 27, 2009 reads:

WHEREFORE, the assailed Resolution is hereby REVERSED and SET ASIDE. The
Chief State Prosecutor ishereby directed to withdraw the Information filed against
[respondent spouses] Antonio Villan Manly and Ruby Ong Manly, if one has been
filed, and report the action taken thereon within ten (10) days from receipt
hereto.

SO ORDERED.38

Petitioner sought reconsideration39 but Acting Justice Secretary Devanadera

denied the same in a Resolution40dated November 5, 2009.

Ruling of the Court of Appeals

Unfazed, petitioner filed a Petition for Certiorari41 with the CA imputing grave
abuse of discretion on the part of Acting Justice Secretary Devanadera in finding
no probable cause to indict respondent spouses for willfulattempt to evade or
defeat tax and willful failure to supply correct and accurate information for
taxable years 2000, 2001 and 2003.

On October 28, 2010, the CA rendered the assailed Decision42 dismissing the
Petition for Certiorari. Although it disagreed that anassessment is a condition sine
qua nonin filing a criminal case for tax evasion, the CA, nevertheless, ruled that
there was no probable cause to charge respondent spouses as petitioner allegedly
failed to state their exact tax liability and to show sufficient proof of their likely
source of income.43 The CA further said that before one could be prosecuted for
tax evasion,the fact that a tax is due must first be proved.44 Thus:
IN LIGHT OF ALL THE FOREGOING, the instant petition is hereby DENIED, and the
assailed Resolution of the Secretary of Justice dated July 27, 2009 dismissing I.S.
No. 2005-573 against private respondents, AFFIRMED. However, the dismissal of
the instant case is without prejudice to the refiling by the BIR of a complaint
sufficient in form and substance before the appropriate tribunal.

SO ORDERED.45

The CA likewise denied petitioner’s Motion for Reconsideration46 in its

Resolution47 dated May 10, 2011.

Issues

Hence, petitioner filed the instant Petition contending that the CA committed
grave abuse of discretion amounting to lackor excess of jurisdiction in holding
that:

I. A CATEGORICAL FINDING OF THE EXACT AMOUNT OF TAX DUE FROM THE

PRIVATE RESPONDENT SHOULD BE SPECIFICALLY ALLEGED [AND THAT]
SINCE THE BIR FAILED TO MAKE SUCH FINDINGS
THEYCONSEQUENTLYFAILED TO BUILD A CASE FOR TAX EVASION AGAINST
[RESPONDENT SPOUSES] DESPITE THE WELL ESTABLISHED DOCTRINE THAT
IN TAX EVASION CASES, A PRECISE COMPUTATION OF THE [TAX] DUE IS
NOT NECESSARY.

II. THE BIR FAILED TO SHOW SUFFICIENT PROOF OF A LIKELY SOURCE OF

*RESPONDENT SPOUSES’+ INCOME DESPITE THE FACT THAT THE BIR WAS
SUFFICIENTLY ABLE TO SHOW PROOF OF SUCH INCOME.48

Petitioner’s Arguments

Petitioner imputes grave abuse of discretion on the part of the CA in affirming the
dismissal of the criminal cases against respondent spouses. Petitioner contends
that in filing a criminal case for tax evasion, a prior computation or assessment of
tax is not required because the crime is complete when the violator knowingly
and willfully filed a fraudulent return with intentto evade a part or all of the
tax.49 In this case, an analysis of respondent spouses’ income and expenditure
shows that their cash expenditure is grossly disproportionate to their reported or
declared income, leading petitioner to believe that they under declared their
income.50 In computing the unreported or undeclared income, which was likely
sourced from respondent Antonio’s rental business,51 petitioner used the
expenditure method of reconstructing income, a method used to determine a
taxpayer’s income tax liability when his records are inadequate or
inaccurate.52 And since respondent spouses failed to explain the alleged
unreported or undeclared income, petitioner asserts that criminal charges for tax
evasion should be filed against them.

Respondent spouses’ Arguments

Respondent spouses, on the other hand, argue that the instant Petition should be
dismissed as petitioner availed of the wrong remedy in filing a Petition for
Certiorari under Rule 65 of the Rules of Court.53 And even if the Petition is given
due course, the same should still be dismissed because no grave abuse of
discretion can be attributed to the CA.54 They maintain that petitioner miserably
failed to prove that a tax is actually due.55 Neither was it able to show the source
of the alleged unreported or undeclared income as required by Revenue
Memorandum Order No. 15-95, Guidelines and Investigative Procedures in the
Development of Tax Fraud Cases for Internal Revenue Officers.56 As to the
method used by petitioner, they claim that it completely ignored their lifetime
savings because it was limited to the years 1998-2003.57

Our Ruling

The Petition is meritorious.

Before discussing the merits of thiscase, we shall first discuss the procedural
matter raised by respondent spouses that petitioner availed of the wrong remedy
in filing a Petition for Certiorari under Rule 65 of the Rules of Court, instead of a
Petition for Review on Certiorari under Rule 45.

Indeed, the remedy of a party aggrieved by a decision, final order, or resolution of

the CA is to file a Petition for Review on Certiorari under Rule 45 of the Rules of
Court, which is a continuation of the appellate process over the original
case.58 And as a rule, if the remedy of an appeal is available, an action for
certiorari under Rule 65 of the Rules of Court, which is anoriginal or independent
action based on grave abuse of discretion amounting to lack or excess of
jurisdiction, will not prosper59 because it is not a substitute for a lost appeal.60
There are, however, exceptions to this rule, to wit: 1) when public welfare and the
advancement of public policy dictate; 2) when the broader interest of justice so
requires; 3) when the writs issued are null and void; 4) when the questioned
order amounts to an oppressive exercise of judicial authority; 5) when, for
persuasive reasons, the rules may be relaxed to relieve a litigant of an injustice
not commensurate with his failure to comply with the prescribed procedure; 6)
when the judgment or order is attended by grave abuse of discretion; or 7) in
other meritorious cases.61

In this case, after considering the arguments raised by the parties, we find that
there is reason to give due course to the instant Petition for Certiorari as
petitioner was able to convincingly show that the CA committed grave abuse of
discretion when it affirmed the dismissal of the criminal charges against
respondent spouses despite the fact that there isprobable cause toindict them.

Although the Court has consistently adopted the policy of non-interference in the
conduct and determination of probable cause,62 which is exclusively within the
competence of the Executive Department, through the Secretary of
Justice,63 judicial intrusion, in the form of judicial review, is allowed when there is
proof that the Executive Department gravely abused its discretion in making its
determination and in arriving atthe conclusion it reached.64

Grave abuse of discretion is defined as a capricious and whimsical exercise of

judgment tantamount to lack or excess of jurisdiction, a blatant abuse of
authority so grave and so severe as to deprive the court of its very power to
dispense justice, or an exercise of powerin an arbitrary and despotic manner, due
to passion, prejudice or personal hostility, sopatent and gross as to amount to an
evasion or to a unilateral refusal to perform the duty enjoined or to act in
contemplation of the law.65 Such is the situation in this case.

Having resolved the foregoing procedural matter, we shall now proceed to

determine the main issue in this case.

Sections 254 and 255 of the NIRC pertinently provide:

SEC. 254. Attempt to Evade or Defeat Tax. – Any person who willfully attempts in
any manner to evade or defeat any tax imposed under this Code or the payment
thereof shall, in addition to other penalties provided by law, upon conviction
thereof, be punished by a fine of not less than Thirty thousand pesos (₱30,000.00)
but not more than One hundred thousand pesos (₱100,000.00) and suffer
imprisonment of not less than two (2) years but not more than four (4) years:
Provided, That the conviction or acquittal obtained under this Section shall not be
a bar to the filing of a civil suit for the collection of taxes.

SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax,
Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. –
Any person required under this Code or by rules and regulations promulgated
thereunder to pay any tax, make a return, keep any record, or supply correct and
accurate information, who willfully fails to pay such tax, make such return, keep
such record, or supply such correct and accurate information, or withhold or
remit taxes withheld, or refund excess taxes withheld on compensation at the
time or times required by law or rules and regulations shall, in addition to other
penalties provided by law, upon conviction thereof, be punished by a fine of not
less than Ten thousand pesos (₱10,000.00) and suffer imprisonment of not less
than one (1) year but not more than ten (10) years.

In Ungab v. Judge Cusi, Jr.,66 we ruled that tax evasion is deemed complete when
the violator has knowingly and willfully filed a fraudulent return with intent to
evade and defeat a part or all of the tax.67 Corollarily, an assessment of the tax
deficiency is notrequired in a criminal prosecution for tax evasion.68 However, in
Commissioner of Internal Revenue v. Court of Appeals,69 we clarified that
although a deficiency assessment is not necessary, the fact that a tax is due must
first be proved before one can be prosecuted for tax evasion.70

In the case of income, for it to be taxable, there must be a gain realized or

received by the taxpayer, which is not excluded by law or treaty from
taxation.71 The government is allowed to resort to all evidence or resources
available to determine a taxpayer’s income and to use methods to reconstruct his
income.72 A method commonly used by the government isthe expenditure
method, which is a method of reconstructing a taxpayer’s income by deducting
the aggregate yearly expenditures from the declared yearly income.73 The theory
of this method is that when the amount of the money that a taxpayer spends
during a given year exceeds his reported or declared income and the source of
such money is unexplained, it may be inferred that such expenditures represent
unreported or undeclared income.74
In the case at bar, petitioner used this method to determine respondent spouses’
tax liability.1âwphi1 Petitioner deducted respondent spouses’ major cash
acquisitions from their available funds. Thus:

Cash Loans Withdra Funds Major Unexplaine

(business wal available Acquisitio d
) of ns Sources of
Capital Funds

1998 P 900,000. 130,638. 1,300,252.4

269,613.4 00 98 4
6

1999 324,258.2 (400,000. 39,281.8 1,263,792.5

8 00) 7 9

2000 290,433.4 - 102,024. 1,656,251.0 17,511,01 (15,854,75

6 97 2 0.00 8.98)

2001 311,227.6 - 406,309. 717,537.32 1,350,000. (632,462.6

2 70 00 8)

2002 276,025.6 (100,000. 184,092. 360,117.65

2 00) 03

2003 252,188.9 - 245,167. 857,474.55 2,000,000. (1,142,525.

3 97 00 45)

7
[Tota ₱1,723,74 20,861,01 (17,629,74
5
l:] 7.37 0.00 7.11)
 2000 2001 2003

Unexplained funds – under declaration [P]15,854,75 [P]632,46 [P]

8.98 2.68 1,142,525.4
5

Taxable income [P]15,854,75 [P]632,46 [P]

8.98 2.68 1,142,525.4
5

Income Tax due thereon:

First Php500,000.00 125,000.00 125,000.0 125,000.00

0

In excess of Php500,000.00 4,913,522.8 42,388.06 205,608.14

7

Total income tax due (net tax paid) 4,973,765.6 93,719.06 281,879.14
6

Add: 50% Surcharge 2,486,882.8 46,859.53 165,304.07

3

20% Interest (up to 5/31/2005) - 825 4,104,376.2 77,337.43 272,751.72

9

7
Total Tax Due inclusive of Increments [P]11,565,02 [P]217,91 [P] 6

4.79 6.02 655,369.01

 Particulars 2000 2001 2003

Unexplained Funds [P]15,854,758.98 [P]632,462.68 [P]1,142,525.45

[Underdeclaration]

Sources of Funds as per [P]1,656,251.02 [P]717,537.32 [P]817,474.55

Financial Statements as
attached to the Income
Tax Return

Percentage of 957.27% 88.14% 133.24%77

underdeclaration

And since the underdeclaration is more than 30%of respondent spouses’ reported
or declared income, which under Section 248(B) of the NIRC constitutes as prima
facie evidence of false or fraudulent return, petitioner recommended the filing of
criminal cases against respondent spouses under Sections 254 and 255, in relation
to Section 248(B) of the NIRC.

The CA, however, found no probable cause to indict respondent spouses for tax
evasion. It agreed with Acting Justice Secretary Devanadera that petitioner failed
to make "a categorical finding of the exact amount of tax due from [respondent
spouses]" and "to show sufficient proof of a likely source of [respondent spouses’+
income that enabled them to purchase the real and personal properties adverted
to x x x."78 We find otherwise.

The amount of tax due from respondent spouses was specifically alleged in the
Complaint-Affidavit.79 The computation, as wellas the method used in
determining the tax liability, was also clearly explained. The revenue officers
likewise showed that the under declaration exceeded 30% of the reported or
declared income.
The revenue officers alsoidentified the likely source of the unreported or
undeclared income intheir Reply-Affidavit. The pertinent portion reads:

7. x x x x

[Respondent spouses] are into rental business and the net profit for six (6) years
before tax summed only to ₱1,238,938.32 (an average of more or less
Php200,000.00 annually). We asked respondent [Antonio] if we can proceed to
his rented property to [appraise] the earning capacity of the building [for] lease/
rent, but he declined our proposition. Due to such refusal made by the
respondent, [petitioner], thru its examiners,took pictures of the subject property
and came up with the findings that indeed the unexplained funds sought to have
been used in acquiring the valuable property in Tagaytay x x x came from the
underdeclaration of rental income.80

Apparently, the revenue officers considered respondent Antonio’s rental business

to be the likely source of their unreported or undeclared income due to his
unjustified refusal to allow the revenue officers to inspect the building.

Respondent spouses’ defense that they had sufficient savings to purchase the
properties remains self-serving at thispoint since they have not yet presented any
evidence to support this. And since there is no evidence yet to suggest that the
money they used to buy the properties was from an existing fund, it is safe to
assume that that money is income or a flowof wealth other than a mere return on
capital. It is a basic concept in taxation that income denotes a flow of wealth
during a definite period of time, while capital is a fund or property existing at one
distinct point in time.81

Moreover, by just looking at the tables presented by petitioner, there is a

manifest showing that respondent spouses had under declared their income. The
huge disparity between respondent Antonio’s reported or declared annual
income for the past several years and respondent spouses’ cash acquisitions for
the years 2000, 2001, and 2003 cannot be ignored. Infact, it makes uswonder how
they were able to purchase the properties in cash given respondent Antonio’s
meager income.

In view of the foregoing,we are convinced that there is probable cause to indict
respondent spouses for tax evasion aspetitioner was able to show that a tax is
due from them. Probable cause, for purposes of filing a criminal information, is
defined as such facts that are sufficient to engender a well-founded belief that a
crime has been committed, that the accusedis probably guilty thereof, and that
he should be held for trial.82 It bears stressing that the determination of probable
cause does not require actual or absolute certainty, nor clear and convincing
evidence of guilt; it only requires reasonable belief or probability that more likely
than not a crime has been committed by the accused.83

In completely disregarding the evidence presented and in affirming the ruling of

the Acting Justice Secretary Devanadera that no probable cause exists, we find
that the CA committed grave abuse of discretion amounting to lack or excess of
jurisdiction. As we have said, ifthere is grave abuse of discretion, the court may
step in and proceed to make its own independent determination of probable
cause as judicial review is allowed to ensure that the Executive Department acts
within the permissible bounds of its authority or does not gravely abuse the
same.84

We must make it clear, however, that we are only here to determine probable
cause.1âwphi1 As to whether respondent spouses are guilty of tax evasion is an
issue that must be resolved during the trial of the criminal case, where the
quantum of proof required is proof beyond reasonable doubt.

Before we close, we must stress that our ruling in this case should not be
interpreted as an unbridled license for our tax officials to engage in fishing
expeditions and witch-hunting. They should not abuse their investigative powers,
instead they should exercise the same within the bounds of the law. They must
properly observe the guidelines in making assessments and investigative
procedures to ensure that the constitutional rights of the taxpayers are well
protected as we cannot allow the floodgates to be opened for frivolous and
malicious tax suits.

WHEREFORE, the Petition is hereby GRANTED. The Decision dated October 28,
2010 and the Resolution dated May 10, 2011 of the Court of Appeals in CA-G.R. SP
No. 112479 are hereby REVERSED and SET ASIDE. The Resolutions dated August
31, 2006 and November 29, 2007 of State Prosecutor Ma. Cristina A. Montera-
Barot in LS. No. 2005-573 finding probable cause to indict respondent spouses
Antonio Villan Manly and Ruby Ong Manly for Violation of Sections 254 and 255
of the National Internal Revenue Code are hereby REINSTATED.
SO ORDERED.

Republic of the Philippines

Supreme Court
Manila

FIRST DIVISION

COMMISSIONER OF INTERNAL G.R. Nos. 179045-46

REVENUE,
Petitioner, Present:

CORONA, C. J., Chairperson,

VELASCO, JR.,
- versus - LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.

SMART COMMUNICATION, INC.,⃰ Promulgated:

Respondent. August 25, 2010
x-----------------------------------------------------------x

DECISION

DEL CASTILLO, J.:

The right of a withholding agent to claim a refund of erroneously or illegally withheld

taxes comes with the responsibility to return the same to the principal taxpayer.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set
aside the Decision[1] dated June 28, 2007 and the Resolution[2] dated July 31, 2007 of the
Court of Tax Appeals (CTA) En Banc.

Factual Antecedents

Respondent Smart Communications, Inc. is a corporation organized and existing under

Philippine law. It is an enterprise duly registered with the Board of Investments.

On May 25, 2001, respondent entered into three Agreements for Programming and
Consultancy Services[3] with Prism Transactive (M) Sdn. Bhd. (Prism), a non-resident
corporation duly organized and existing under the laws of Malaysia. Under the
agreements, Prism was to provide programming and consultancy services for the
installation of the Service Download Manager (SDM) and the Channel Manager (CM),
and for the installation and implementation of Smart Money and Mobile Banking
Service SIM Applications (SIM Applications) and Private Text Platform (SIM Application).

On June 25, 2001, Prism billed respondent in the amount of US$547,822.45,

broken down as follows:

SDM Agreement US$236,000.00

CM Agreement 296,000.00
SIM Application Agreement 15,822.45
Total US$547,822.45[4]

Thinking that these payments constitute royalties, respondent withheld the

amount of US$136,955.61 or P7,008,840.43,[5] representing the 25% royalty tax under
the RP-Malaysia Tax Treaty.[6]

On September 25, 2001, respondent filed its Monthly Remittance Return of Final
Income Taxes Withheld (BIR Form No. 1601-F)[7] for the month of August 2001.

On September 24, 2003, or within the two-year period to claim a refund,

respondent filed with the Bureau of Internal Revenue (BIR), through the International
Tax Affairs Division (ITAD), an administrative claim for refund[8] of the amount
of P7,008,840.43.
Proceedings before the CTA Second Division

Due to the failure of the petitioner Commissioner of Internal Revenue (CIR) to act
on the claim for refund, respondent filed a Petition for Review[9] with the CTA, docketed
as CTA Case No. 6782 which was raffled to its Second Division.
In its Petition for Review, respondent claimed that it is entitled to a refund
because the payments made to Prism are not royalties[10] but business
profits,[11] pursuant to the definition of royalties under the RP-Malaysia Tax
Treaty,[12] and in view of the pertinent Commentaries of the Organization for Economic
Cooperation and Development (OECD) Committee on Fiscal Affairs through the
Technical Advisory Group on Treaty Characterization of Electronic Commerce
Payments.[13] Respondent further averred that since under Article 7 of the RP-Malaysia
Tax Treaty, business profits are taxable in the Philippines only if attributable to a
permanent establishment in the Philippines, the payments made to Prism, a Malaysian
company with no permanent establishment in the Philippines,[14] should not be taxed.[15]

On December 1, 2003, petitioner filed his Answer[16] arguing that respondent, as

withholding agent, is not a party-in-interest to file the claim for refund,[17] and that
assuming for the sake of argument that it is the proper party, there is no showing that
the payments made to Prism constitute business profits.[18]

Ruling of the CTA Second Division

In a Decision[19] dated February 23, 2006, the Second Division of the CTA upheld
respondents right, as a withholding agent, to file the claim for refund citing the cases
of Commissioner of Internal Revenue v. Wander Philippines, Inc.,[20] Commissioner of
Internal Revenue v. Procter & Gamble Philippine Manufacturing
Corporation and Commissioner of Internal Revenue v. The Court of Tax Appeals.[22]
[21]

However, as to the claim for refund, the Second Division found respondent
entitled only to a partial refund. Although it agreed with respondent that the payments
for the CM and SIM Application Agreements are business profits,[23] and therefore, not
subject to tax[24] under the RP-Malaysia Tax Treaty, the Second Division found the
payment for the SDM Agreement a royalty subject to withholding tax.[25] Accordingly,
respondent was granted refund in the amount of P3,989,456.43, computed as
follows:[26]

Particulars Amount (in US$)

1. CM 296,000.00
2. SIM Application 15,822.45
Total US$311,822.45

Particulars Amount
Tax Base US$311,822.45
Multiply by: Withholding Tax
Rate 25%
Final Withholding Tax US$ 77,955.61
Multiply by: Prevailing Exchange
Rate 51.176
Tax Refund Due P3,989,456.43
The dispositive portion of the Decision of the CTA Second Division reads:

WHEREFORE, premises considered, the instant petition is partially

GRANTED. Accordingly, respondent Commissioner of Internal Revenue is
hereby ORDERED to REFUND or ISSUE a TAX CREDIT CERTIFICATE to
petitioner Smart Communications, Inc. in the amount of P3,989,456.43,
representing overpaid final withholding taxes for the month of August
2001.

SO ORDERED.[27]

Both parties moved for partial reconsideration[28] but the CTA Second Division denied
the motions in a Resolution[29] dated July 18, 2006.

Ruling of the CTA En Banc

Unsatisfied, both parties appealed to the CTA En Banc by filing their respective Petitions
for Review,[30] which were consolidated per Resolution[31] dated February 8, 2007.
 On June 28, 2007, the CTA En Banc rendered a Decision affirming the partial
refund granted to respondent. In sustaining respondents right to file the claim for
refund, the CTA En Banc said that although respondent and Prism are unrelated entities,
such circumstance does not affect the status of [respondent] as a party-in-interest [as its
legal interest] is based on its direct and independent liability under the withholding tax
system.[32] The CTA En Banc also concurred with the Second Divisions characterization of
the payments made to Prism, specifically that the payments for the CM and SIM
Application Agreements constitute business profits,[33] while the payment for the SDM
Agreement is a royalty.[34]

The dispositive portion of the CTA En Banc Decision reads:

WHEREFORE, the instant petition is hereby DISMISSED. Accordingly, the

assailed Decision and Resolution are hereby AFFIRMED.

SO ORDERED.[35]

Only petitioner sought reconsideration[36] of the Decision. The CTA En Banc, however,
found no cogent reason to reverse its Decision, and thus, denied petitioners motion for
reconsideration in a Resolution[37] dated July 31, 2007.

Unfazed, petitioner availed of the present recourse.

Issues

The two issues to be resolved are: (1) whether respondent has the right to file
the claim for refund; and (2) if respondent has the right, whether the payments made to
Prism constitute business profits or royalties.

Petitioners Arguments

Petitioner contends that the cases relied upon by the CTA in upholding
respondents right to claim the refund are inapplicable since the withholding agents
therein are wholly owned subsidiaries of the principal taxpayers, unlike in the instant
case where the withholding agent and the taxpayer are unrelated entities. Petitioner
further claims that since respondent did not file the claim on behalf of Prism, it has no
legal standing to claim the refund. To rule otherwise would result to the unjust
enrichment of respondent, who never shelled-out any amount to pay the royalty
taxes. Petitioner, thus, posits that the real party-in-interest to file a claim for refund of
the erroneously withheld taxes is Prism. He cites as basis the case of Silkair (Singapore)
Pte, Ltd. v. Commissioner of Internal Revenue,[38] where it was ruled that the proper
party to file a refund is the statutory taxpayer.[39] Finally, assuming that respondent is
the proper party, petitioner counters that it is still not entitled to any refund because
the payments made to Prism are taxable as royalties, having been made in
consideration for the use of the programs owned by Prism.

Respondents Arguments

Respondent, on the other hand, maintains that it is the proper party to file a claim for
refund as it has the statutory and primary responsibility and liability to withhold and
remit the taxes to the BIR. It points out that under the withholding tax system, the
agent-payor becomes a payee by fiction of law because the law makes the agent
personally liable for the tax arising from the breach of its duty to withhold. Thus, the fact
that respondent is not in any way related to Prism is immaterial.

Moreover, respondent asserts that the payments made to Prism do not fall under the
definition of royalties since the agreements are for programming and consultancy
services only, wherein Prism undertakes to perform services for the creation,
development or the bringing into existence of software applications solely for the
satisfaction of the peculiar needs and requirements of respondent.
Our Ruling

The petition is bereft of merit.

Withholding agent may file a claim for refund

Sections 204(c) and 229 of the National Internal Revenue Code (NIRC) provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate, and

Refund or Credit Taxes. The Commissioner may
xxxx

(C) Credit or refund taxes erroneously or illegally received or penalties

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

xxxx

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. No suit or

proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund
or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum
has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of
two (2) years from the date of payment of the tax or penalty regardless of
any supervening cause that may arise after payment: Provided, however,
That the Commissioner may, even without a written claim therefor,
refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been
erroneously paid.(Emphasis supplied)
 Pursuant to the foregoing, the person entitled to claim a tax refund is the
taxpayer. However, in case the taxpayer does not file a claim for refund, the withholding
agent may file the claim.

In Commissioner of Internal Revenue v. Procter & Gamble Philippine

Manufacturing Corporation,[40] a withholding agent was considered a proper party to file
a claim for refund of the withheld taxes of its foreign parent company. Pertinent
portions of the Decision read:

The term taxpayer is defined in our NIRC as referring to any person subject
to tax imposed by the Title [on Tax on Income]. It thus becomes important
to note that under Section 53(c)[41] of the NIRC, the withholding agent who
is required to deduct and withhold any tax is made personally liable for
such tax and indeed is indemnified against any claims and demands which
the stockholder might wish to make in questioning the amount of
payments effected by the withholding agent in accordance with the
provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable for the correct amount of the tax that should be
withheld from the dividend remittances. The withholding agent is,
moreover, subject to and liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld be finally found to be less
than the amount that should have been withheld under law.

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

In Philippine Guaranty Company, Inc. v. Commissioner of Internal

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

If, as pointed out in Philippine Guaranty, the withholding agent is also an

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

xxxx

We believe and so hold that, under the circumstances of this case, P&G-
Phil. is properly regarded as a taxpayer within the meaning of Section
309,[42] NIRC, and as impliedly authorized to file the claim for refund and
the suit to recover such claim. (Emphasis supplied.)
 Petitioner, however, submits that this ruling applies only when the withholding
agent and the taxpayer are related parties, i.e., where the withholding agent is a wholly
owned subsidiary of the taxpayer.

We do not agree.

Although such relation between the taxpayer and the withholding agent is a
factor that increases the latters legal interest to file a claim for refund, there is nothing
in the decision to suggest that such relationship is required or that the lack of such
relation deprives the withholding agent of the right to file a claim for refund. Rather,
what is clear in the decision is that a withholding agent has a legal right to file a claim for
refund for two reasons. First, he is considered a taxpayer under the NIRC as he is
personally liable for the withholding tax as well as for deficiency assessments,
surcharges, and penalties, should the amount of the tax withheld be finally found to be
less than the amount that should have been withheld under law. Second, as an agent of
the taxpayer, his authority to file the necessary income tax return and to remit the tax
withheld to the government impliedly includes the authority to file a claim for refund
and to bring an action for recovery of such claim.

In this connection, it is however significant to add that while the withholding

agent has the right to recover the taxes erroneously or illegally collected, he
nevertheless has the obligation to remit the same to the principal taxpayer. As an agent
of the taxpayer, it is his duty to return what he has recovered; otherwise, he would be
unjustly enriching himself at the expense of the principal taxpayer from whom the taxes
were withheld, and from whom he derives his legal right to file a claim for refund.

As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue[43] cited by

the petitioner, we find the same inapplicable as it involves excise taxes, not withholding
taxes. In that case, it was ruled that the proper party to question, or seek a refund of, an
indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and
who paid the same even if he shifts the burden thereof to another.

In view of the foregoing, we find no error on the part of the CTA in upholding
respondents right as a withholding agent to file a claim for refund.
The payments for the CM and the SIM
Application Agreements constitute

business profits

Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of
any kind received as consideration for: (i) the use of, or the right to use, any patent,
trade mark, design or model, plan, secret formula or process, any copyright of literary,
artistic or scientific work, or for the use of, or the right to use, industrial, commercial, or
scientific equipment, or for information concerning industrial, commercial or scientific
experience; (ii) the use of, or the right to use, cinematograph films, or tapes for radio or
television broadcasting.[44] These are taxed at the rate of 25% of the gross amount.[45]

Under the same Treaty, the business profits of an enterprise of

a Contracting State is taxable only in that State, unless the enterprise carries on business
in the other Contracting State through a permanent establishment.[46] The term
permanent establishment is defined as a fixed place of business where the enterprise is
wholly or partly carried on.[47] However, even if there is no fixed place of business, an
enterprise of a Contracting State is deemed to have a permanent establishment in the
other Contracting State if it carries on supervisory activities in that other State for more
than six months in connection with a construction, installation or assembly project
which is being undertaken in that other State.[48]

In the instant case, it was established during the trial that Prism does not have a
permanent establishment in the Philippines. Hence, business profits derived from
Prisms dealings with respondent are not taxable. The question is whether the payments
made to Prism under the SDM, CM, and SIM Application agreements are business
profits and not royalties.

Paragraph 1.3 of the Programming Services (Schedule A) of the SDM

Agreement,[49] reads:

1.3 Intellectual Property Rights (IPR)

The SDM shall be installed by PRISM, including the SDM
Libraries, the IPR of which shall be retained by PRISM. PRISM,
 however, shall provide the Client the APIs for the SDM at no cost to
the Client. The Client shall be permitted to develop programs to
interface with the SDM or the SDM Libraries, using the related APIs
as appropriate.[50] (Emphasis supplied.)

Whereas, paragraph 1.4 of the Programming Services (Schedule A) of the CM

Agreement and paragraph 1.3 of the Programming Services (Schedule A) of the SIM
Agreement provide:

1.4 Intellectual Property Rights (IPR)

The IPR of all components of the CM belong to the Client with the
exception of the following components, which are provided,
without technical or commercial restraints or obligations:
ConfigurationException.java
DataStructures (DblLinkedListjava, DbIListNodejava, List
EmptyException.java, ListFullException.java,
ListNodeNotFoundException.java,
QueueEmptyException.java, QueueFullException.java,
QueueList.java, QueuListEx.java, and
QueueNodeNotFoundException.java)
FieldMappedObjeet.java
LogFileEx.java
Logging (BaseLogger.java and Logger.java)
PrismGeneric Exception.java
PrismGenericObject.java
ProtocolBuilders/CIMD2 (Alive.java, BaseMessageData.
java, DeliverMessage.java, Login.java, Logout.java, Nack.java,
SubmitMessage.java,
TemplateManagement (FileTemplateDataBag.java, Template
DataBag.java, TemplateManagerExBag.java, and
TemplateParserExBag.java)
TemplateManager.class
TemplateServer.class
TemplateServer$RequestThread.class
Template Server_skel.class
 TemplateServer_stub.class
TemplateService.class
Prism Crypto Server module for PHP4[51]

xxxx

1.3 Intellectual Property Rights (IPR)

The Client shall own the IPR for the Specifications and the Source
Code for the SIM Applications. PRISM shall develop an executable
compiled code (the Executable Version) of the SIM Applications for
use on the aSIMetric card which, however, shall only be for the
Clients use. The Executable Version may not be provided by PRISM
to any third [party] without the prior written consent of the Client.
It is further recognized that the Client anticipates licensing the use
of the SIM Applications, but it is agreed that no license fee will be
charged to PRISM or to a licensee of the aSIMetrix card from PRISM
when SIMs are supplied to the Client.[52] (Emphases supplied.)

The provisions in the agreements are clear. Prism has intellectual property right
over the SDM program, but not over the CM and SIM Application programs as the
proprietary rights of these programs belong to respondent. In other words, out of the
payments made to Prism, only the payment for the SDM program is a royalty subject to
a 25% withholding tax. A refund of the erroneously withheld royalty taxes for the
payments pertaining to the CM and SIM Application Agreements is therefore in order.

Indeed, the government has no right to retain what does not belong to it. No
one, not even the State, should enrich oneself at the expense of another.[53]

WHEREFORE, the petition is DENIED. The assailed Decision dated June 28, 2007
and the Resolution dated July 31, 2007 of the Court of Tax Appeals En Banc are
hereby AFFIRMED. The Bureau of Internal Revenue is hereby ORDERED to ISSUE a TAX
CREDIT CERTIFICATE to Prism Transactive (M) Sdn. Bhd. in the amount of P3,989,456.43
representing the overpaid final withholding taxes for the month of August 2001.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 204142 November 19, 2014

HONDA CARS PHILIPPINES, INC., Petitioner,

vs.
HONDA CARS TECHNICAL SPECIALIST AND SUPERVISORS UNION, Respondent.

DECISION

BRION, J.:

We resolve the present petition for review on certiorari1 seeking to nullify the
March 30, 2012 decision2 and October 25, 2012 resolution3 of the Court of
Appeals (CA) in CA-G.R. SP No. 109297. These rulings were penned by Associate
Justice Noel G. Tijam and concurred in by Associate Justices Romeo F. Barza and
Edwin D. Sorongon.

The Factual Antecedents

On December 8, 2006, petitioner Honda Cars Philippines, Inc., (company) and

respondent Honda Cars Technical Specialists and Supervisory Union (union), the
exclusive collective bargaining representative of the company’s supervisors and
technical specialists, entered into a collective bargaining agreement (CBA)
effective April 1, 2006 to March 31, 2011.4

Prior to April 1, 2005, the union members were receiving a transportation

allowance of 3,300.00 a month. On September 3, 2005, the company and the
union entered into a Memorandum of Agreement5 (MOA) converting the
transportation allowance into a monthly gasoline allowance starting at 125 liters
effective April 1,2005. The allowance answers for the gasoline consumed by the
union members for official business purposes and for home to office travel and
vice-versa. The company claimed that the grant of the gasoline allowance is tied
up to a similar company policy for managers and assistant vice-presidents (AVPs),
which provides that in the event the amount of gasoline is not fully consumed,
the gasoline not used may be converted into cash, subject to whatever tax may be
applicable. Since the cash conversion is paid in the monthly payroll as an excess
gas allowance, the company considers the amount as part of the managers’ and
AVPs’ compensation that is subject to income tax on compensation.

Accordingly, the company deducted from the union members’ salaries the
withholding tax corresponding to the conversion to cash of their unused gasoline
allowance.

The union, on the other hand, argued that the gasoline allowance for its members
is a "negotiated item" under Article XV, Section 15 of the new CBA on fringe
benefits. It thus opposed the company’s practice of treating the gasoline
allowance that, when converted into cash, is considered as compensation income
that is subject to withholding tax.

The disagreement between the company and the union on the matter resulted in
a grievance which they referred to the CBA grievance procedure for resolution. As
it remained unsettled there, they submitted the issue to a panel of voluntary
arbitrators as required by the CBA.

The Voluntary Arbitration Decision

On February 6, 2009, the Panel of Voluntary Arbitrators6 rendered a

decision/award7 declaring that the cash conversion of the unused gasoline
allowance enjoyed by the members of the union is a fringe benefit subject to the
fringe benefit tax, not to income tax. The panel held that the deductions made by
the company shall be considered as advances subject to refund in future
remittances of withholding taxes.

The company moved for partial reconsideration of the decision, but the panel
denied the motion in its June 3, 2009 order,8 prompting the company to appeal to
the CA through a Rule 43 petition for review. The core issue in this appeal was
whether the cash conversion of the unused gasoline allowance is a fringe benefit
subject to the fringe benefit tax, and not to a compensation income subject to
withholding tax.

The CA Ruling
The CA Eight Division denied the petition and upheld with modification the
voluntary arbitration decision. It agreed with the panel’s ruling that the cash
conversion of the unused gasoline allowance is a fringe benefit granted under
Section 15, Article XV of the CBA on "Fringe Benefits." Accordingly, the CA held
that the benefit is not compensation income subject to withholding tax.

This conclusion notwithstanding, the CA clarified that while the gasoline

allowance or the cash conversion of its unused portion is a fringe benefit, it is "not
necessarily subject to fringe benefit tax."9 It explained that Section 33 (A) of the
National Internal Revenue Code (NIRC) of 1997 imposed a fringe benefit tax,
effective January 1, 2000 and thereafter, on the grossed-up monetary value of
fringe benefit furnished or granted to the employee (except rank-and-file
employees) by the employer (unless the fringe benefit is required by the nature
of, or necessary to the trade, business or profession of the employer, or when the
fringe benefit is for the convenience or advantage of the employer).

According to the CA, "it is undisputed that the reason behind the grant of the
gasoline allowance to the union members is primarily for the convenience and
advantage of Honda, their employer."10 It thus declared that the gasoline
allowance or the cash conversion of the unused portion thereof is not subject to
fringe benefit tax.11

The Petition

Its motion for reconsideration denied, the company appeals to this Court to set
aside the CA’s dispositions, raising the very same issue it brought to the appellate
court — whether the cash conversion of the gasoline allowance of the union
members is a fringe benefit or compensation income, for taxation purposes.

The company reiterates its position that the cash conversion of the union
members’ gasoline allowance is compensation income subject to income tax, and
not to a fringe benefit tax. It argues that the tax treatment of a benefit extended
by the employer to the employees is governed by law and the applicable tax
regulations, and notby the nomenclature or definition provided by the parties.
The fact that the CBA erroneously classified the gasoline allowance as a fringe
benefit is immaterial as it is the law – Section 33 of the NIRC – that provides for
the legal classification of the benefit.
It adds that there is no basis for the CA conclusion that the cash conversion of the
unused gasoline allowance redounds to the benefit of management. Common
sense dictates that it is the individual union members who solely benefit from the
cash conversion of the gasoline allowance as it goes into their compensation
income.

In any event, the company submits that even assuming that the cash conversion
of the unused gasoline allowance is a tax-exempt fringe benefit and that it erred
in withholding the income taxes due, still the union members would have no
cause of action against it for the refund of the amounts withheld from them and
remitted to the Bureau of Internal Revenue (BIR).

Citing Section 204 of the NIRC, the company contends that an action for the
refund of an erroneous withholding and payment of taxes should be in the nature
of a tax refund claim with the BIR. It further contends that when it withheld the
income tax due from the cash conversion of the unused gasoline allowance of the
union members, it was simply acting as an agent of the government for the
collection and payment of taxes due from the members.

The Union’s Position

In its Comment12 dated April 19, 2013, the union argues for the denial of the
petition for lack of merit. Itposits that its members’ gasoline allowance and its
unused gas equivalent are fringe benefits under the CBA and the law [Section 33
(A) of NIRC] and is therefore not subject to withholding tax on compensation
income. Moreover, under that law and BIR Revenue Regulations 2-98, the same
benefit is not subject to the fringe benefit tax because it is required by the nature
of, or necessary to the trade or business of the company.

The union further submits that in 2007, the BIR ruled that fixed and/or pre-
computed transportation allowance given to supervisory employees in pursuit of
the business of the company, shall not be taxable as compensation or fringe
benefits of the employees.13 It maintains that the gasoline allowance is already
pre-computed by the company as sufficient to cover the gasoline consumption of
the supervisors whenever they perform work for the company. The fact that the
company allowed its members to convert it to cash when not fully consumed is no
longer their problem because the benefit was already given.

Our Ruling
We partly grant the petition.

The Voluntary Arbitrator has no

jurisdiction to settle tax matters

The Labor Code vests the Voluntary Arbitrator original and exclusive jurisdiction
to hear and decide all unresolved grievances arising from the interpretation or
implementation of the Collective Bargaining Agreement and those arising from
the interpretation or enforcement of company personnel policies.14 Upon
agreement of the parties, the Voluntary Arbitrator shall also hear and decide
allother labor disputes, including unfair labor practices and bargaining
deadlocks.15

In short, the Voluntary Arbitrator’s jurisdiction is limited to labor disputes. Labor

dispute means "any controversy or matter concerning terms and conditions of
employment or the association or representation of persons in negotiating, fixing,
maintaining, changing, or arranging the terms and conditions of employment,
regardless of whether the disputants stand in the proximate relation of employer
and employee."16

The issues raised before the Panel of Voluntary Arbitrators are: (1) whether the
cash conversion of the gasoline allowance shall be subject to fringe benefit tax or
the graduated income tax rate on compensation; and (2) whether the company
wrongfully withheld income tax on the converted gas allowance.

The Voluntary Arbitrator has no competence to rule on the taxability of the gas
allowance and on the propriety of the withholding of tax. These issues are clearly
tax matters, and do not involve labor disputes. To be exact, they involve tax issues
within a labor relations setting as they pertain to questions of law on the
application of Section 33 (A) of the NIRC. They do not require the application of
the Labor Code or the interpretation of the MOA and/or company personnel
policies. Furthermore, the company and the union cannot agree or compromise
on the taxability of the gas allowance. Taxation is the State’s inherent power; its
imposition cannot be subject to the will of the parties.

Under paragraph 1, Section 4 of the NIRC, the CIR shall have the exclusive and
original jurisdiction to interpret the provisions of the NIRC and other tax laws,
subject to review by the Secretary of Finance. Consequently, if the company
and/or the union desire/s to seek clarification of these issues, it/they should have
requested for a tax ruling17 from the Bureau of Internal Revenue (BIR). Any
revocation, modification or reversal of the CIR’s ruling shall not be given
retroactive application if the revocation, modification or reversal will be
prejudicial to the taxpayers, except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from
his return or any document required of him by the BIR;

(b) Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.18

On the other hand, if the union disputes the withholding of tax and desires a
refund of the withheld tax, it should have filed an administrative claim for refund
with the CIR. Paragraph 2, Section 4 of the NIRC expressly vests the CIR original
jurisdiction over refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other tax matters. The union has no
cause of action against the company

Under the withholding tax system, the employer as the withholding agent acts as
both the government and the taxpayer’s agent. Except in the case of a minimum
wage earner, every employer has the duty to deduct and withhold upon the
employee’s wages a tax determined in accordance with the rules and regulations
to be prescribed by the Secretary of Finance, upon the CIR’s
recommendation.19 As the Government’s agent, the employer collects tax and
serves as the payee by fiction of law.20 As the employee’s agent, the employer
files the necessary income tax return and remits the tax to the Government.21

Based on these considerations, we hold that the union has no cause of action
against the company.1âwphi1 The company merely performed its statutory duty
to withhold tax based on its interpretation of the NIRC, albeit that interpretation
may later be found to be erroneous. The employer did not violate the employee's
right by the mere act of withholding the tax that may be due the government.22

Moreover, the NIRC only holds the withholding agent personally liable for the tax
arising from the breach of his legal duty to withhold, as distinguished from his
duty to pay tax.23 Under Section 79 (B) of the NIRC, if the tax required to be
deducted and withheld is not collected from the employer, the employer shall not
be relieved from liability for any penalty or addition to the unwithheld tax.

Thus, if the BIR illegally or erroneously collected tax, the recourse of the taxpayer,
and in proper cases, the withholding agent, is against the BIR, and not against the
withholding agent.24 The union's cause of action for the refund or non-
withholding of tax is against the taxing authority, and not against the employer.
Section 229 of the NIRC provides:

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or

proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or duress.

WHEREFORE, premises considered, we PARTLY GRANT the petition for review on

certiorari filed by Honda Cars Philippines, Inc. We REVERSE AND SET ASIDE the
March 30, 2012 decision and the October 25, 2012 resolution of the Court of
Appeals in CA-G.R. SP No. 109297. We declare NULL AND VOID the February 6,
2009 decision and June 3, 2009 resolution of the Panel of Voluntary Arbitrators.
No costs.

SO ORDERED.

G.R. No. 186223, October 01, 2014 - COMMISSIONER OF INTERNAL REVENUE,

Petitioner, v. PHILIPPINE ASSOCIATED SMELTING AND REFINING CORPORATION,
Respondent.

THIRD DIVISION
G.R. No. 186223, October 01, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PHILIPPINE ASSOCIATED

SMELTING AND REFINING CORPORATION, Respondent.

RESOLUTION

REYES, J.:

The instant petition filed under Rule 45 of the Revised Rules of Court seeks to
reverse and set aside the Court of Tax Appeals (CTA) En Bane Decision1 dated
November 12, 2008 in CTA E.B. Case No. 351 (CTA Case No. 7565) entitled
"Philippine Associated Smelting and Refining Corporation v. The Honorable
Commissioner of Internal Revenue" which ruled that respondent is a PEZA-
registered enterprise and enjoys tax exemption privilege; hence, it is exempt from
paying the excise tax on petroleum products in issue and entitled to seek a refund
thereof. The Resolution2 dated January 30, 2009 denied the motion for
reconsideration filed by the Commissioner of Internal Revenue (petitioner).

The respondent Philippine Associated Smelting and Refining Corporation (PASAR)

is a domestic corporation engaged in the business of processing, smelting,
refining and exporting refined copper cathodes and other copper products, and a
registered Zone Export Enterprise with the Export Processing Zone Authority
(EPZA).3 PASAR uses petroleum products for its manufacturing and other
processes, and purchases it from local distributors, which import the same and
pay the corresponding excise taxes. The excise taxes paid are then passed on by
the local distributors to its purchasers. In this particular case, Petron passed on to
PASAR the excise taxes it paid on the petroleum products bought by the latter
during the period of January 2005 to October 2005, totalling eleven million six
hundred eighty-seven thousand four hundred sixty-seven 62/100
(P11,687,467.62).

In December 2006, PASAR filed a claim for refund and/or tax credit with the Office
of the Regional Director of Region XIV, which denied the same in a letter dated
January 3, 2007.4cralawred

PASAR then filed a petition for review with the Court of Tax Appeals (CTA) Second
Division, which was contested by the petitioner. The petitioner also filed a motion
to preliminarily resolve whether PASAR is the proper party to ask for a refund.
Thereafter, the parties agreed to the following stipulation of
issues:chanRoblesvirtualLawlibrary

1. Whether or not petroleum products purchased from Petron and delivered to

PASAR to be used in its operation in LIDE are exempt from excise taxes under
Section 17 of P.D. No. 66 and thus entitled to a refund or issuance of a tax credit
certificate.

2. Whether or not PASAR is the proper party to claim for refund or issuance of tax
credit certificate for excise taxes paid.

3. Whether or not the claim for tax credit/refund is properly substantiated by

receipts and invoices.

4. Whether or not the claim for tax credit/refund is timely filed.5

On September 19, 2007, the CTA Second Division issued a Resolution6 granting
the petitioner's motion to preliminarily resolve whether PASAR is the proper party
to ask for a refund, and dismissed its petition for review. When its motion for
reconsideration was denied in the Resolution7 dated December 3, 2007, PASAR
filed a petition for review with the CTA En Banc.

In the assailed Resolution8 dated November 12, 2008, the CTA En Banc set aside
CTA Resolutions dated September 19, 2007 and December 3, 2007, and ordered
the remand of the petition for review to the CTA Second Division for reception of
evidence and determination of the amount to be refunded to the petitioner. The
petitioner filed a motion for reconsideration, which was denied by the CTA En
Banc in the assailed Resolution9 dated January 30, 2009.

In granting PASAR's petition for review, the CTA En Banc ruled that it is the proper
party to claim the refund/credit, citing Commissioner of Customs v. Philippine
Phosphate Fertilizer Corp.10 and Philippine Phosphate Fertilizer Corporation v.
Commissioner of Internal Revenue.11 According to the CTA, since PASAR is a PEZA-
registered entity enjoying tax exemption privilege under Presidential Decree
(P.D.) No. 66 and subsequently, Republic Act (R.A.) No. 7916, it is exempt from
payment of excise taxes on petroleum products. And following the Court's ruling
in the Philippine Phosphate Fertilizer Corporation, PASAR, therefore, may seek
refund.12cralawred

The grounds relied upon in this petition are as

follows:chanRoblesvirtualLawlibrary

I.

THE CTA SHOULD HAVE DISMISSED RESPONDENT'S PETITION FOR REVIEW FOR
LACK OF JURISDICTION OVER THE SUBJECT MATTER OF THE CASE.

II.

THE CTA EN BANC'S RELIANCE ON COMMISSIONER OF CUSTOMS V. PHILIPPINE

PHOSPHATE FERTILIZER CORPORATION AND PHILIPPINE PHOSPHATE FERTILIZER
CORPORATION V. COMMISSIONER OF INTERNAL REVENUE IS MISPLACED.

III.

RESPONDENT IS NOT THE PROPER PARTY TO CLAIM A TAX CREDIT AND/OR

REFUND.

IV.

THE SPECIFIC TAXES HEREIN SOUGHT TO BE REFUNDED/CREDITED DO NOT FORM

PART OF THE EXPORT PRODUCTS MANUFACTURED BY RESPONDENT AND,
THEREFORE, NOT REFUNDABLE.13

The petitioner contends that the CTA has no jurisdiction over the BIR Regional
Director's denial of PASAR's claim, arguing that the CTA's exclusive appellate
jurisdiction pertains only to decisions of the Commissioner of Internal Revenue, as
provided in Section 7 of R.A. No. 1125, as amended by Section 7 of R.A. No. 9282.
The petitioner also objects to the CTA En Banc's application of the Commissioner
of Customs and Philphos cases in the present case and argues that Commissioner
of Customs involved the tax refund/credit of customs duties and not excise
taxes; Philphos, on the other hand, did not squarely resolve the issue of whether
an EPZA-registered enterprise is exempt from paying the excise taxes on
petroleum products indirectly used. The petitioner also contends that the proper
party to seek a tax refund/credit is the statutory taxpayer or the person on whom
the tax was imposed and paid the same, which in this case was Petron, even
though the latter subsequently shifted the burden to PASAR. Finally, the
petitioner believes that Section 17 of P.D. No. 66 does not clearly provide that
petroleum products delivered to EPZA-registered enterprises are exempt from
taxes, and that the petroleum products purchased by PASAR from Petron do not
form part of the export products it manufactures.14cralawred

Respondent, meanwhile, claims that the petitioner is estopped from questioning

the jurisdiction of the CTA. Respondent also contends, in sum, that Commissioner
of Customs and Philphos are applicable in this case, that it is the proper party to
apply for a tax refund and that it is exempted from paying excise
taxes.15cralawred

At the outset, it must be stated that the Court will limit the issue to be resolved in
this case to whether PASAR is the proper party to claim the tax credit/refund on
the excise taxes paid on the petroleum products purchased from Petron. The
other grounds raised by the petitioner, i.e., jurisdiction and the factual basis of
PASAR's claim for tax refund/credit, are not proper at the moment inasmuch as
the CTA En Banc's review only dealt with the petitioner's "motion to preliminary
resolve the issue of whether or not [respondent] is the proper party that may ask
for a refund."16 And on this issue, the Court finds that the CTA En Banc did not
commit any reversible error when it ruled that PASAR is the proper party to file a
claim for the refund/credit of excise taxes. Hence, the petition must be denied.

PASAR is a business enterprise registered with the EPZA pursuant to P.D. No.
66.17 There is no dispute as regards its use of fuel and petroleum products for the
processing, smelting and refining of its export copper products, and that Petron,
from which PASAR purchased its fuel and petroleum, products, passed on the
excise taxes paid to the latter. In ruling that PASAR is the proper party to file the
claim for the refund/credit, the CTA En Bane chiefly relied on the Court's rulings
in Commissioner of Customs v. Philippine Phosphate Fertilizer
Corp.18 and Philippine Phosphate Fertilizer Corporation v. Commissioner of Internal
Revenue.19cralawred

Commissioner of Customs involved a claim for refund by Philippine Phosphate

Fertilizer Corporation (Philphos) of the customs duties it indirectly paid on fuel
and petroleum products purchased from Petron Corporation for the period of
October 1991 until June 1992. This was opposed by the Commissioner of
Customs. One of the issues raised in the case was the legal basis for Philphos'
exemption from duties and taxes, it being an EPZA-registered company. While it
may be true that Commissioner of Customs involved the refund of customs duties
paid on petroleum products, it was nevertheless correctly applied by the CTA En
Banc.

Notably, in Commissioner of Customs, the Court squarely interpreted the

exemption granted under Section 17 of P.D. No. 66 as applicable to both customs
duties and internal revenue taxes, viz:chanroblesvirtuallawlibrary

The incentives offered to enterprises duly registered with the PEZA consist,
among others, of tax exemptions, x x x

Section 17 of the EPZA Law particularizes the tax benefits accorded to duly
registered enterprises. It states:
SEC. 17. Tax Treatment of Merchandize in the Zone. - (1) Except as otherwise
provided in this Decree, foreign and domestic merchandise, raw
materials, supplies, articles, equipment, machineries, spare parts and wares of
every description, except those prohibited by law, brought into the Zone to be
sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded,
or otherwise processed, manipulated, manufactured, mixed with foreign or
domestic merchandise or used whether directly or indirectly in such activity, shall
not be subject to customs and internal revenue laws and regulations nor to local
tax ordinances, the following provisions of law to the contrary notwithstanding.
The cited provision certainly covers petroleum supplies used, directly or
indirectly, by Philphos to facilitate its production of fertilizers, subject to the
minimal requirement that these supplies are brought into the zone. The supplies
are not subject to customs and internal revenue laws and regulations, nor to
local tax ordinances. It is clear that Section 17(1) considers such supplies exempt
even if they are used indirectly, as they had been in this case.20 (Emphasis and
underscoring ours)

Thus, the Court affirmed the refund of customs duties granted by the CTA and in
closing, stated that "[t]he grant of exemption under Section 17(1) is clear and
unambiguous, x x x."21cralawred

Philphos, meanwhile, involved Philphos' claim for refund of excise taxes passed on
by Petron. One of the issues identified by the Court in the case was whether the
CTA should have granted the claim for refund. In resolving said issue, the Court
ruled that the CTA erred when it disallowed the petitioner's claim due to its
failure to present invoices as there is nothing in CTA Circular No. 1-95 that
requires its presentation. The issue of whether the petitioner was entitled to
exemption from payment of excise taxes was not lengthily discussed by the Court
because it was already undisputed. Thus, the Court
stated:chanRoblesvirtualLawlibrary

In this case, there is no dispute that petitioner is entitled to exemption from the
payment of excise taxes by virtue of its being an EPZA registered enterprise. As
stated by the CTA, the only thing left to be determined is whether or not
petitioner is entitled to the amount claimed for refund.

xxxx

Since it is not disputed that petitioner is entitled to tax exemption, it should not
be precluded from presenting evidence to substantiate the amount of refund it is
claiming on mere technicality especially in this case, where the failure to present
invoices at the first instance was adequately explained by petitioner.22 (Emphasis
ours)

Applying the foregoing rulings in this case, it is therefore undeniable that PASAR is
exempted from payment of excise taxes.

The next pivotal question then that must be resolved is whether PASAR has the
legal personality to file the claim for the refund of the excise taxes passed on by
Petron. The petitioner insists that PASAR is not the proper party to seek a refund
of an indirect tax, such as an excise tax or Value Added Tax, because it is not the
statutory taxpayer. The petitioner's argument, however, has no merit.

The rule that it is the statutory taxpayer which has the legal personality to file a
claim for refund23 finds no applicability in this case. In Philippine Airlines, Inc. v.
Commissioner of Internal Revenue,24 the Court distinguished between the kinds of
exemption enjoyed by a claimant in order to determine the propriety of a tax
refund claim. "If the law confers an exemption from both direct or indirect
taxes, a claimant is entitled to a tax refund even if it only bears the economic
burden of the applicable tax. On the other hand, if the exemption conferred only
applies to direct taxes, then the statutory taxpayer is regarded as the proper party
to file the refund claim."25 In PASAR's case, Section 17 of P.D. No. 66, as affirmed
in Commissioner of Customs, specifically declared that supplies, including
petroleum products, whether used directly or indirectly, shall not be subject to
internal revenue laws and regulations. Such exemption includes the payment of
excise taxes, which was passed on to PASAR by Petron. PASAR, therefore, is the
proper party to file a claim for refund.

WHEREFORE, the petition is DENIED for lack of merit. Accordingly, the Decision
dated November 12, 2008 and its Resolution dated January 30, 2009 of the Court
of Tax Appeals En Banc in CTA E.B. Case No. 351 are hereby AFFIRMED in toto.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 181459 June 9, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
MANILA ELECTRIC COMPANY (MERALCO), Respondent.

DECISION

PERALTA, J.:

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

The facts of this case are uncontroverted.

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

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

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

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

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

Consequently, on July 13, 2004, relying on the aforesaid BIR Ruling, respondent
MERALCO filed with petitioner a claim for tax refund or issuance of tax credit
certificate in the aggregate amount of ₱264,120,181.44, representing the
erroneously paid or overpaid final withholding tax on interest payments made to
NORD/LB Singapore Branch.10

On November 5, 2004, respondent MERALCO received a letter from petitioner

denying its claim for tax refund on the basis that the same had already prescribed
under Section 204 of the Tax Code, which gives a taxpayer/claimant a period of
two (2) years from the date of payment of tax to file a claim for refund before the
BIR.11

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

IN VIEW OF THE FOREGOING, petitioner’s claim in the amount of TWO HUNDRED

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

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

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

SO ORDERED.13

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

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

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

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

WHEREFORE, premises considered, both petitions are hereby DISMISSED.

SO ORDERED.20

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

Hence, the instant petition.

The sole issue presented before us is whether or not respondent MERALCO is

entitled to a tax refund/credit relative to its payment of final withholding taxes on
interest payments made to NORD/LB from January 1999 to September 2003.

Petitioner maintains that respondent MERALCO is not entitled to a tax

refund/credit, considering that its testimonial and documentary evidence failed to
categorically establish that NORD/LB is owned and controlled by the Federal
Republic of Germany; hence, exempted from final withholding taxes on income
derived from investments in the Philippines.22

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

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

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

x x x x.

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

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

As the regional bank for Lower Saxony, Saxony-Anhalt and MecklenburgWestern

Pomerania, NORD/LB offers support in public sector financing. It fulfills as
Girozentrale the function of a central bank for the savings bank in these three
states (Lander).

x x x25

Given that the same was issued by the Embassy of the Federal Republic of
Germany in the regular performance of their official functions, and the due
execution and authenticity thereof was not disputed when it was presented in
trial, the same may be admitted as proof of the facts stated therein. Further, it is
worthy to note that the Embassy of the Federal Republic of Germany was in the
best position to confirm such information, being the representative of the Federal
Republic of Germany here in the Philippines.
To bolster this, respondent MERALCO presented as witness its Vice-President and
Head of Tax and Tariff, German F. Martinez, Jr., who testified on and identified
the existence of such certification. In this regard, we concur with the CTA En Banc
that absent any strong evidence to disprove the truthfulness of such certification,
there is no basis to controvert the findings of the CTA-First Division, to wit:

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

Consequently, such certification was used by petitioner as basis in issuing BIR

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

Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling
exempting it from the payment of withholding tax on the sale of the land by
various BIR-approved trustees and tax-exempt private employees' retirement
benefit trust funds represented by Citytrust. The BIR ruled that the private
employees’ benefit trust funds, which included petitioner, have met the
requirements of the law and the regulations and, therefore, qualify as reasonable
retirement benefit plans within the contemplation of Republic Act No. 4917 (now
Sec. 28 [b] [7] [A], Tax Code). The income from the trust fund investments is,
therefore, exempt from the payment of income tax and, consequently, from the
payment of the creditable withholding tax on the sale of their real property.
Thus, the documents issued and certified by Citytrust showing that money from
the Employees' Trust Fund was invested in the MBP lot cannot simply be brushed
aside by the BIR as self-serving, in the light of previous cases holding that Citytrust
was indeed handling the money of the Employees' Trust Fund. These documents,
together with the notarized Memorandum of Agreement, clearly establish that
petitioner, on behalf of the Employees' Trust Fund, indeed invested in the
purchase of the MBP lot. Thus, the Employees' Trust Fund owns 49.59% of the
MBP lot.

Since petitioner has proven that the income from the sale of the MBP lot came
from an investment by the Employees' Trust Fund, petitioner, as trustee of the
Employees' Trust Fund, is entitled to claim the tax refund of ₱3,037,500 which
was erroneously paid in the sale of the MBP lot.28

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

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

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

xxxx

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

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

Section 32. Gross Income. –

x x x x.

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

xxxx

(7) Miscellaneous Items. −

(a) Income Derived by Foreign Government. − Income derived from investments

in the Philippines in loans, stocks, bonds or other domestic securities, or from
interest on deposits in banks in the Philippines by (i) foreign governments, (ii)
financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial institutions established
by foreign governments.

x x x x.32

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

Section 229. Recovery of Tax Erroneously or Illegally Collected. − No suit or

proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, of any sum alleged to have been excessively or in any manner
wrongfully collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may
be maintained, whether or not such tax, penalty, or sum has been paid under
protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any
tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.33

As can be gleaned from the foregoing, the prescriptive period provided is

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

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

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

Finally, we ought to remind petitioner that the arguments it raised in support of

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

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

SO ORDERED.

SECOND DIVISION

COMMISSIONER OF INTERNAL G.R. No. 173854

REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

- versus - BRION,
DEL CASTILLO,
ABAD, and
FAR EAST BANK & TRUST PEREZ, JJ.
COMPANY (NOW BANK OF
THE PHILIPPINE ISLANDS), Promulgated:
Respondent. March 15, 2010
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

DEL CASTILLO, J.:

Entitlement to a tax refund is for the taxpayer to prove and not for the
government to disprove.

This Petition for Review on Certiorari assails the January 31, 2006 Decision[1] of
the Court of Appeals (CA) in CA-G.R. SP No. 56773 which reversed and set aside the
October 4, 1999 Decision[2] of the Court of Tax Appeals (CTA) in CTA Case No. 5487. Also
assailed is the July 19, 2006 Resolution[3] of the CA denying the motion for
reconsideration.
 The CTA found that respondent Far East Bank & Trust Company failed to prove
that the income derived from rentals and sale of real property from which the taxes
were withheld were reflected in its 1994 Annual Income Tax Return. The CA found
otherwise.

Factual Antecedents

On April 10, 1995, respondent filed with the Bureau of Internal Revenue (BIR)
two Corporate Annual Income Tax Returns, one for its Corporate Banking Unit
(CBU)[4] and another for its Foreign Currency Deposit Unit (FCDU),[5] for the taxable year
ending December 31, 1994. The return for the CBU consolidated the respondents
overall income tax liability for 1994, which reflected a refundable income tax
of P12,682,864.00, computed as follows:
FCDU CBU
Gross Income P13,319,068 5,348,080,630
Less: Deductions 1,397,157 5,432,828,719

Net Income 11,921,911 [84,748,089]

Tax Rate 35% 35%

Income Tax Due Thereon 4,172,669 NIL

_______________________________________
Consolidated Tax Due for
Both CBU and FCDU P 4,172,669
Operations

Less:

Quarterly Income Tax

Payments
CBU -1st Quarter 633,085
-2nd Quarter 11,844,333
FCDU -1st Quarter 955, 280
-2nd Quarter 1,104,942

Less:
 Creditable Taxes 2,317,893
Withheld at Source
Refundable Income Tax [P12,682,864][6]

Pursuant to Section 69[7] of the old National Internal Revenue Code (NIRC),
the amount of P12,682,864.00 was carried over and applied against respondents
income tax liability for the taxable year ending December 31, 1995. On April 15, 1996,
respondent filed its 1995 Annual Income Tax Return, which showed a total overpaid
income tax in the amount of P17,443,133.00, detailed as follows:
FCDU CBU
Gross Income P16,531,038 7,076,497,628
Less: Deductions 1,327,549 7,086,821,354

Net Income 15,203,539 [10,423,728]

Tax Rate 35% 35%
Income Tax Due Thereon 5,321,239 NIL
_______________________________________
Consolidated Tax Due for
Both CBU and FCDU P 5,321,239
Operations

Less:
Prior years (1994) excess
income tax credit 12,682,864
Additional prior years excess
income tax credit 6,283,484
Creditable Taxes
Withheld at Source 3,798,024
Refundable Income Tax [P17,443,133][8]

Out of the P17,433,133.00 refundable income tax, only P13,645,109.00 was

sought to be refunded by respondent. As to the remaining P3,798,024.00, respondent
opted to carry it over to the next taxable year.

On May 17, 1996, respondent filed a claim for refund of the amount
of P13,645,109.00 with the BIR. Due to the failure of petitioner Commissioner of
Internal Revenue (CIR) to act on the claim for refund, respondent was compelled to
bring the matter to the CTA on April 8, 1997 via a Petition for Review docketed as CTA
Case No. 5487.

After the filing of petitioners Answer, trial ensued.

To prove its entitlement to a refund, respondent presented the following documents:

Exhibits Nature and Description

A Corporate Annual Income Tax Return covering income of

respondents CBU for the year
ended December 31, 1994 together
with attachments

B Corporate Annual Income Tax Return covering income of

respondents FCDU for the year
ended December 31, 1994 together
with attachments

C Corporate Annual Income Tax Return covering income of

respondents CBU for the year
ended December 31, 1995 together
with attachments

D Corporate Annual Income Tax Return covering income of

respondents FCDU for the year
ended December 31, 1995 together
with attachments

N to Z; Certificates of Creditable
AA to UU Withholding Tax and Monthly Remittance Returns of Income
Taxes Withheld issued by various
withholding agents for the year
ended December 31, 1994
 VV Letter claim for refund dated May 8, 1996 filed with the Revenue
District Office No. 33 on May 17, 1996[9]

Petitioner, on the other hand, did not present any evidence.

Ruling of the Court of Tax Appeals

On October 4, 1999, the CTA rendered a Decision denying respondents claim for refund
on the ground that respondent failed to show that the income derived from rentals and
sale of real property from which the taxes were withheld were reflected in its 1994
Annual Income Tax Return.

On October 20, 1999, respondent filed a Motion for New Trial based on
excusable negligence. It prayed that it be allowed to present additional evidence to
support its claim for refund.

However, the motion was denied on December 16, 1999 by the CTA. It reasoned,
thus:

[Respondent] is reminded that this case was originally submitted

for decision as early as September 22, 1998 (p. 497, CTA Records). In
view, however, of the Urgent Motion to Admit Memorandum filed on
April 27, 1999 by Atty. Louella Martinez, who entered her appearance as
collaborating counsel of Atty. Manuel Salvador allegedly due to the latter
counsels absences, this Court set aside its resolution of September 22,
1998 and considered this case submitted for decision as of May 7,
1999. Nonetheless, it took [respondent] another five months after it was
represented by a new counsel and after a decision unfavorable to it was
rendered before [respondent] realized that an additional material
documentary evidence has to be presented by way of a new trial, this time
initiated by a third counsel coming from the same law firm. x x x

Furthermore, in ascertaining whether or not the income upon

which the taxes were withheld were included in the returns of the
[respondent], this Court based its findings on the income tax returns and
 their supporting schedules prepared and reviewed by the [respondent]
itself and which, to Us, are enough to support the conclusion reached.

WHEREFORE, in view of the foregoing, [respondents] Motion for

New Trial is hereby DENIED for lack of merit.

SO ORDERED.[10]

Ruling of the Court of Appeals

On appeal, the CA reversed the Decision of the CTA. The CA found that
respondent has duly proven that the income derived from rentals and sale of real
property upon which the taxes were withheld were included in the return as part of the
gross income.

Hence, this present recourse.

Issue

The lone issue presented in this petition is whether respondent has proven its
entitlement to the refund.[11]

Our Ruling

We find that the respondent miserably failed to prove its entitlement to the
refund. Therefore, we grant the petition filed by the petitioner CIR for being
meritorious.

A taxpayer claiming for a tax credit or refund of creditable withholding tax must
comply with the following requisites:

1) The claim must be filed with the CIR within the two-year period from the date
of payment of the tax;

2) It must be shown on the return that the income received was declared as part
of the gross income; and
 3) The fact of withholding must be established by a copy of a statement duly
issued by the payor to the payee showing the amount paid and the
amount of the tax withheld.[12]

The two-year period requirement is based on Section 229 of the NIRC of 1997 which
provides that:

SECTION 229. Recovery of Tax Erroneously or Illegally Collected. No

suit or proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive
or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the

expiration of two (2) years from the date of payment of the tax or penalty
regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written
claim therefor, refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears clearly to have
been erroneously paid. (Formerly Section 230 of the old NIRC)

While the second and third requirements are found under Section 10 of Revenue
Regulation No. 6-85, as amended, which reads:

Section 10. Claims for tax credit or refund. Claims for tax credit or
refund of income tax deducted and withheld on income payments shall be
given due course only when it is shown on the return that the income
payment received was declared as part of the gross income and the fact of
withholding is established by a copy of the statement duly issued by the
payer to the payee (BIR Form No. 1743.1) showing the amount paid and
the amount of tax withheld therefrom.
Respondent timely filed its claim for refund.

There is no dispute that respondent complied with the first requirement. The filing of
respondents administrative claim for refund on May 17, 1996 and judicial claim for
refund on April 8, 1997 were well within the two-year period from the date of the filing
of the return on April 10, 1995.[13]

Respondent failed to prove that the income

derived from rentals and sale of real property
were included in the gross income as reflected
in its return.

However, as to the second and third requirements, the tax court and the
appellate court arrived at different factual findings.

The CTA ruled that the income derived from rentals and sales of real property
were not included in respondents gross income. It noted that in respondents 1994
Annual Income Tax Return, the phrase NOT APPLICABLE was printed on the space
provided for rent, sale of real property and trust income. The CTA also declared that the
certifications issued by respondent cannot be considered in the absence of the
Certificates of Creditable Tax Withheld at Source. The CTA ruled that:

x x x the Certificates of Creditable Tax Withheld at Source submitted by

[respondent] pertain to rentals of real property while the Monthly
Remittance Returns of Income Taxes Withheld refer to sales of real
property. But,if we are to look at Schedules 3, 4, and 5 of the Annual
Income Tax Return of [respondent] for 1994 (Exhibit A), there was no
showing that the Rental Income and Income from Sale of Real Property
were included as part of the gross income appearing in Section A of the
said return. In fact, under the said schedules, the phrase NOT APPLICABLE
was printed by [respondent]. Verily, the income of [respondent] coming
from rent and sale of real property upon which the creditable taxes
withheld were based were not duly reflected. As to the certifications
issued by the [respondent] (Exh. UU), the same cannot be considered in
the absence of the requisite Certificates of Creditable Tax Withheld at
Source.

Based on the foregoing, [respondent] has failed to comply with

two essential requirements for a valid claim for refund. Consequently,
the same cannot be given due course. [14] (Emphasis supplied)

On the other hand, the CA found thus:

We disagree with x x x CTAs findings. In the case of Citibank, N.A. vs.

Court of Appeals (280 SCRA 459), the Supreme Court held that:

a refund claimant is required to prove the inclusion

of the income payments which were the basis of the
withholding taxes and the fact of withholding. However, a
detailed proof of the truthfulness of each and every item in
the income tax return is not required. x x x

x x x The grant of a refund is founded on the assumption that

the tax return is valid; that is, the facts stated therein are
true and correct. x x x
In the case at bench, the BIR examined [respondent] Banks
Corporate Annual Income Tax Returns for the years 1994 and 1995 when
they were filed on April 10, 1995 and April 15, 1996,
respectively.Presumably, the BIR found no false declaration in them
because it did not allege any false declaration thereof in its Answer (to the
petition for review) filed before x x x CTA. Nowhere in the Answer, did the
BIR dispute the amount of tax refund being claimed by [respondent] Bank
as inaccurate or erroneous. In fact, the reason given by the BIR (in its
Answer to the petition for review) why the claimed tax refund should be
denied was that x x x the amount of P13,645,109.00 was not illegally or
erroneously collected, hence, the petition for review has no basis [see
Record, p. 32]. The amount of P17,433,133.00 reflected as refundable
income tax in [respondent] Banks Corporate Annual Income Tax Return
for the year 1995 was not disputed by the BIR to be inaccurate because
there were certain income not included in the return of the
[respondent]. Verily, this leads Us to a conclusion that [respondent] Banks
Corporate Annual Income Tax Returns submitted were accepted as
regular and even accurate by the BIR.

Incidentally, under Sec. 16 of the NIRC, the Commissioner of

the BIR is tasked to make an examination of returns and assess the
correct amount of tax, to wit:

Sec. 16. Power of the Commissioner to make

assessment and prescribe additional requirements for tax
administration and enforcement.

(a) After a return is filed as required under the

provision of this Code, the Commissioner shall examine it
and assess the correct amount of tax. x x x

which the [petitioner] Commissioner undeniably failed to

do. Moreover, noteworthy is the fact that during the hearing of the
petition for review before the CTA, [petitioner] Commissioner of the BIR
submitted the case for decision in view of the fact that he has no evidence
to present nor records to submit relative to the case x x x

Thus, although it is a fact that [respondent] failed to indicate said income

payments under the appropriate Schedules 3, 4, and 5 of Section C of its
1994 Annual Income Tax Return (Exhibit A), however, We give credence
to [respondent] Banks assertion that it reported the said income
payments as part of its gross income when it included the same as part
of the Other Income, Trust Income, and Interest Income stated in the
Schedule of Income (referred to as an attachment in Section C of Exhibit A,
x x x and in the 1994 audited Financial Statements (FS) supporting
[respondents] 1994 Annual Corporate Income Tax Return. The reason why
the phrase NOT APPLICABLE was indicated in schedules 3, 4, and 5 of
Section C of [respondents] 1994 Annual Income Tax Return is due to the
fact that [respondent] Bank already reported the subject rental income
and income from sale of real property in the Schedule of Income under
the headings Other Income/Earnings, Trust Income and Interest Income.
 Therefore, [respondent] Bank still complied with the second requirement
that the income upon which the taxes were withheld are included in the
return as part of the gross income.

xxxx

[Respondent] Banks various documentary evidence showing that it had

satisfied all requirements under the Tax Code vis--vis the Bureau of
Internal Revenues failure to adduce any evidence in support of their
denial of the claim, [respondent] Bank should, therefore, be granted the
present claim for refund.[15] (Emphasis supplied)
Between the decision of the CTA and the CA, it is the formers that is based on the
evidence and in accordance with the applicable law and jurisprudence.

To establish the fact of withholding, respondent submitted Certificates of

Creditable Tax Withheld at Source and Monthly Remittance Returns of Income Taxes
Withheld, which pertain to rentals and sales of real property, respectively. However, a
perusal of respondents 1994 Annual Income Tax Return shows that the gross income
was derived solely from sales of services. In fact, the phrase NOT APPLICABLE was
printed on the schedules pertaining to rent, sale of real property, and trust
income.[16] Thus, based on the entries in the return, the income derived from rentals
and sales of real property upon which the creditable taxes were withheld were not
included in respondents gross income as reflected in its return. Since no income was
reported, it follows that no tax was withheld. To reiterate, it is incumbent upon the
taxpayer to reflect in his return the income upon which any creditable tax is required to
be withheld at the source.[17]

Respondents explanation that its income derived from rentals and sales of real
properties were included in the gross income but were classified as Other Earnings in its
Schedule of Income[18]attached to the return is not supported by the evidence. There is
nothing in the Schedule of Income to show that the income under the heading Other
Earnings includes income from rentals and sales of real property. No documentary or
testimonial evidence was presented by respondent to prove this. In fact, respondent,
upon realizing its omission, filed a motion for new trial on the ground of excusable
negligence with the CTA. Respondent knew that it had to present additional evidence
showing the breakdown of the Other Earnings reported in its Schedule of Income
attached to the return to prove that the income from rentals and sales of real property
were actually included under the heading Other Earnings.[19] Unfortunately, the CTA was
not convinced that there was excusable negligence to justify the granting of a new trial.

Accordingly, the CA erred in ruling that respondent complied with the second
requirement.

Respondent failed to present all the

Certificates of Creditable Tax Withheld at
Source.

The CA likewise failed to consider in its Decision the absence of several

Certificates of Creditable Tax Withheld at Source. It immediately granted the refund
without first verifying whether the fact of withholding was established by the
Certificates of Creditable Tax Withheld at Source as required under Section 10 of
Revenue Regulation No. 6-85. As correctly pointed out by the CTA, the
certifications (Exhibit UU) issued by respondent cannot be considered in the absence of
the required Certificates of Creditable Tax Withheld at Source.

The burden is on the taxpayer to prove its

entitlement to the refund.

Moreover, the fact that the petitioner failed to present any evidence or to
refute the evidence presented by respondent does not ipso facto entitle the respondent
to a tax refund. It is not the duty of the government to disprove a taxpayers claim for
refund. Rather, the burden of establishing the factual basis of a claim for a refund rests
on the taxpayer.[20]

And while the petitioner has the power to make an examination of the returns
and to assess the correct amount of tax, his failure to exercise such powers does not
create a presumption in favor of the correctness of the returns. The taxpayer must still
present substantial evidence to prove his claim for refund. As we have said, there is no
automatic grant of a tax refund.[21]
 Hence, for failing to prove its entitlement to a tax refund, respondents claim
must be denied. Since tax refunds partake of the nature of tax exemptions, which are
construed strictissimi jurisagainst the taxpayer, evidence in support of a claim must
likewise be strictissimi scrutinized and duly proven.[22]

WHEREFORE, the petition is GRANTED. The assailed January 31, 2006 Decision of
the Court of Appeals in CA-G.R. SP No. 56773 and its July 19, 2006 Resolution
are REVERSED and SET ASIDE. The October 4, 1999 Decision of the Court of Tax Appeals
denying respondents claim for tax refund for failure to prove that the income derived
from rentals and sale of real property from which the taxes were withheld were
reflected in its 1994 Annual Income Tax Return, is REINSTATED and AFFIRMED.

SO ORDERED.

FIRST DIVISION

SYSTRA PHILIPPINES, INC., G.R. No. 176290

Petitioner,

Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,

- v e r s u s - CORONA,

AZCUNA and

GARCIA, JJ.

COMMISSIONER OF

INTERNAL REVENUE,
Respondent. Promulgated:

September 21, 2007

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

RESOLUTION
CORONA, J.:

This resolves petitioner Systra Philippines, Inc.s (1) motion for leave to file a
second motion for reconsideration and (2) second motion for reconsideration of
the Courts March 28, 2007 resolution.

On March 9, 2007, petitioner filed a petition for review on certiorari

assailing the January 18, 2007 decision[1] of the Court of Tax Appeals (CTA) in CTA
EB Case No. 135. The Court denied the petition in its March 28, 2007 resolution
on the following grounds:

(a) failure of petitioners counsel to submit his IBP[2] O.R.[3] number

showing proof of payment of IBP dues for the current year (the IBP
O.R. No. was for 2006, i.e., it was dated November 20, 2006);

(b) submitting a verification of the petition, certification of non-forum

shopping and affidavit of service that failed to comply with the 2004
Rules on Notarial Practice with respect to competent evidence of
affiants identities and
 (c) failure to give an explanation why service was not done personally
as required by Section 11, Rule 13 in relation to Section 3, Rule 45 and
Section 5(d), Rule 56 of the Rules of Court.

On July 5, 2007, petitioners motion for reconsideration was denied with

finality as there was no compelling reason to warrant a modification of the March
28, 2007 resolution. Thus, the present motions.

Petitioner claims that this Court has granted second and even third motions
for reconsideration for extraordinarily persuasive reasons. It avers that this Court
should look into the importance of the issues involved in deciding whether leave
to file a second motion for reconsideration should be granted or not. It prays that
its petition should not be denied on the basis of procedural lapses alone and
points out that the substantial amount involved in the petition justifies relaxation
of technical rules. It asserts that there is an important legal issue involved in this
case: whether the exercise of the option to carry over excess income tax credits
under Section 76 of the National Internal Revenue Code of 1997, as amended (Tax
Code) bars a taxpayer from claiming the excess tax credits for refund even if the
amount remains unutilized in the succeeding taxable year. Finally, it contends
that the assailed CTA decision was contradictory to the decisions of the Court of
Appeals (CA)[4] in Bank of the Philippine Islands v. Commissioner of Internal
Revenue[5] and Raytheon Ebasco Overseas Ltd. Philippine Branch v. Commissioner
of Internal Revenue[6] which involved the same issue as that in this case. According
to petitioner, in view of those CA decisions, it is unjust to deprive it of the right to
claim a refund.
 We deny petitioners motions.

A SECOND MOTION FOR

RECONSIDERATION IS

PROHIBITED

The denial of a motion for reconsideration is final. It means that the Court
will no longer entertain and consider further arguments or submissions from the
parties respecting the correctness of its decision or resolution.[7] It signifies that,
in the Courts considered view, nothing more is left to be discussed, clarified or
done in the case since all issues raised have been passed upon and definitely
resolved. Any other issue which could and should have been raised is deemed
waived and is no longer available as ground for a second motion. A denial with
finality underscores that the case is considered closed.[8] Thus, as a rule, a second
motion for reconsideration is a prohibited pleading.[9] The Court stressed
in Ortigas and Company Limited Partnership v. Velasco:[10]

A second motion for reconsideration is forbidden except for

extraordinarily persuasive reasons, and only upon express leave first
obtained.[11] (emphasis supplied)
 It is true that procedural rules may be relaxed in the interest of substantial
justice. They are not, however, to be disdained as mere technicalities that may be
ignored at will to suit the convenience of a party.[12] They are intended to ensure
the orderly administration of justice and the protection of substantive rights in
judicial proceedings.[13] Thus, procedural rules are not to be belittled or dismissed
simply because their non-observance may have resulted in prejudicing a partys
substantive rights.[14] Like all rules, they are required to be followed except only
when, for the most persuasive of reasons, they may be relaxed to relieve a litigant
of negative consequences commensurate with the degree of thoughtlessness in
not complying with the prescribed procedure.[15]

In this case, contrary to petitioners claim, there was no compelling reason

to excuse non-compliance with the rules. Nor were the grounds raised by it
extraordinarily persuasive.[16]

Moreover, petitioner can neither properly nor successfully rely on the

decisions of the CA in the Bank of the Philippine Islands and Raytheon Ebasco
Overseas Ltd. Philippine Branch cases. First, the CA and the CTA are now of the
same level pursuant to RA 9282.[17] Decisions of the CA are thus no longer
superior to nor reversive of those of the CTA. Second, a decision of the CA in an
action in personam binds only the parties in that case. A third party in an action in
personam cannot claim any right arising from a decision therein. Finally and most
importantly, while a ruling of the CA on any question of law is not conclusive on
this Court, all rulings of this Court on questions of law are conclusive and binding
on all courts including the CA. All courts must take their bearings from the
decisions of this Court.[18]

ON THE SUBSTANTIVE ASPECT,

THE PETITION HAS NO MERIT

The antecedents of this case are as follows:

On April 16, 2001, petitioner filed with the [Bureau of Internal

Revenue (BIR)] its Annual Income Tax Return (ITR) for the taxable
year ended December 31, 2000 declaring revenues in the amount of
[P18,252,719] the bulk of which consists of income from
management consultancy services rendered to the Philippine Branch
of Group Systra SA, France. Subjecting said income from consultancy
services of petitioner to 5% creditable withholding tax, a total
amount of [P4,703,019] was declared by petitioner as creditable
taxes withheld for the taxable year 2000.

For the same period, petitioner reflected a total gross income

of [P3,752,129], a net loss of [P17,930] and a minimum corporate
income tax (MCIT) of [P75,043]. Said MCIT of P75,043 was offset
against its total tax credits for the year 2000 amounting to
[P4,703,019] thereby leaving a total unutilized tax credits of
[P4,627,976], computed as follows:

Gross Income P3,752,129.00

Less: Deductions P3,770,059.00

Net loss P 17,930.00

Minimum Corporate Income Tax Due P75,043.00

Less: Tax Credits

Prior years excess credits P -

Creditable taxes withheld P4,703,019.00 P4,703,019.00

during the year

Tax Overpayment P4,627,976.00

Petitioner opted to carry over the said excess tax credit to the
succeeding taxable year 2001.

For the taxable year ended December 31, 2001, petitioner filed
with the BIR its Annual ITR on April 12, 2002, reflecting a total gross
income of [P4,771,419] and a total creditable taxes withheld of
[P1,111,587] for consultancy services. It likewise declared a taxable
income of [P1,936,851] with corresponding normal income tax due in
the amount of [P619,792]. After deducting the unexpired excess of
the previous year MCIT [1999 and 2000] in the amount of [P222,475]
from the normal income tax due for the period, petitioners net tax
due of [P397,317] was applied against the accumulated tax credits of
 [P5,739,563]. Said reported tax credits comprised of prior years
excess tax credits in the amount of [P4,627,976] and creditable taxes
withheld during the year 2001 in the sum of [P1,111,587]. These
excess tax credits were utilized to pay off the income tax still due of
[P397,317] resulting to an overpayment of [P5,342,246], computed
as follows:

Gross Income P4,771,419.00

Less: Deductions P2,834,568.00

Taxable Income P1,936,851.00

Income Tax Due at the Normal Rate of 32% P 619,792.00

Less: Unexpired Excess of Prior Years MCIT

Over Normal Income Tax Rate P 222,475.00 P 397,317.00

Income Tax Still Due

Less: Tax Credits

Prior years excess credits P4,627,976.00

Creditable taxes withheld

during the year 1,111,587.00 P5,739,563.00

Tax Overpayment P5,342,246.00

 Petitioner indicated in the 2001 ITR the option To be issued a
Tax Credit Certificate relative to its tax overpayments.

On August 9, 2002, petitioner instituted a claim for refund or

issuance of a tax credit certificate with the BIR of its unutilized
creditable withholding taxes in the amount of P5,342,246.00 as of
December 31, 2001.

Due to the inaction of the BIR on petitioners claim for refund

and to preserve its right to claim for the refund to its unutilized CWT
for CYs 2000 and 2001 by judicial action, petitioner filed a petition for
review with the Court in Division on April 14, 2003.[19]

In its August 3, 2005 decision, the First Division of the CTA partially granted
the petition and ordered the issuance of a tax credit certificate to petitioner in the
amount of P1,111,587 representing the excess or unutilized creditable
withholding taxes for taxable year 2001. The CTA, however, denied petitioners
claim for refund of the excess tax credits for the year 2000 in the amount
of P4,627,976. It ruled that petitioner was precluded from claiming a refund
thereof or requesting a tax credit certificate therefor. Once it was made for a
particular taxable period, the option to carry over became irrevocable.
 Petitioner moved for reconsideration but it was denied. Petitioner elevated
the case to the CTA en banc which rendered the assailed decision. Thus, this
petition.

As already stated, petitioner formulated the issue in this petition as follows:

whether the exercise of the option to carry-over excess income tax credits under
Section 76 of the Tax Code bars a taxpayer from claiming the excess tax credits for
refund even if the amount remains unutilized in the succeeding taxable year.
Petitioner contends that it does not.

We disagree.

Section 76 of the Tax Code provides:

SEC. 76. Final Adjustment Return. Every corporation liable to

tax under Section 27 shall file a final adjustment return covering the
total taxable income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable year
is not equal to the total tax due on the entire taxable net income of
that year the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or

 (C) Be credited or refunded with the excess amount paid,
as the case may be.

In case the corporation is entitled to a tax credit or refund of

the excess estimated quarterly income taxes paid, the excess amount
shown on its final adjustment return may be carried over and
credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable years. Once the option to
carry-over and apply the excess quarterly income tax against
income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable
for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed
therefor. (emphasis supplied)

A corporation entitled to a tax credit or refund of the excess estimated

quarterly income taxes paid has two options: (1) to carry over the excess credit or
(2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If
the option to carry over the excess credit is exercised, the same shall be
irrevocable for that taxable period.

In exercising its option, the corporation must signify in its annual corporate
adjustment return (by marking the option box provided in the BIR form) its
intention either to carry over the excess credit or to claim a refund. To facilitate
tax collection, these remedies are in the alternative and the choice of one
precludes the other.[20]

This is known as the irrevocability rule and is embodied in the last sentence
of Section 76 of the Tax Code. The phrase such option shall be considered
irrevocable for that taxable period means that the option to carry over the excess
tax credits of a particular taxable year can no longer be revoked.

The rule prevents a taxpayer from claiming twice the excess quarterly taxes
paid: (1) as automatic credit against taxes for the taxable quarters of the
succeeding years for which no tax credit certificate has been issued and (2) as a
tax credit either for which a tax credit certificate will be issued or which will be
claimed for cash refund.[21]

In this case, it was in the year 2000 that petitioner derived excess tax
credits and exercised the irrevocable option to carry them over as tax credits for
the next taxable year. Under Section 76 of the Tax Code, a claim for refund of
such excess credits can no longer be made. The excess credits will only be applied
against income tax due for the taxable quarters of the succeeding taxable years.

The legislative intent to make the option irrevocable becomes clearer when
Section 76 is viewed in comparison to Section 69 of the (old) 1977 Tax Code:

SECTION 69. Final Adjustment Return. Every corporation liable

to tax under Section 24 shall file a final adjustment return covering
 the total net income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable year
is not equal to the total tax due on the entire taxable net income of
that year the corporation shall either:

(A) Pay the excess tax still due; or

(B) Be refunded the excess amount paid, as the case may

be.

In case the corporation is entitled to a tax credit or refund of

the excess estimated quarterly income taxes paid, the refundable
amount shown on its final adjustment return may be credited against
the estimated quarterly income tax liabilities for the taxable quarters
of the succeeding taxable year.

Under Section 69 of the 1977 Tax Code, there was no irrevocability rule.
Instead of claiming a refund, the excess tax credits could be credited against the
estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year, that is, the immediately following year only. In contrast,
Section 76 of the present Tax Code formulates an irrevocability rule which
stresses and fortifies the nature of the remedies or options as alternative, not
cumulative. It also provides that the excess tax credits may be carried over and
credited against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years until fully utilized.
 Furthermore, this case is closely similar to Philam Asset Management, Inc.
v. Commissioner of Internal Revenue.[22] In that case, Philam Asset Management,
Inc. had an unapplied creditable withholding tax in the amount of P459,756.07 for
the year 1998. It carried over the said excess tax to the following taxable year,
1999. In the next succeeding year, it had a tax due in the amount of P80,042 and a
creditable withholding tax in the amount of P915,995. As such, the amount due
for the year 1999 (P80,042) was credited to its P915,995 creditable withholding
tax for that year. Thus, its 1998 creditable withholding tax in the amount
of P459,756.07 remained unutilized. Thereafter, it filed a claim for refund with
respect to the unapplied creditable withholding tax of P459,756.07 for the year
1998. The Court denied the claim and ruled:

Section 76 [is] clear and unequivocal. Once the carry-over option is

taken, actually or constructively, it becomes irrevocable. Petitioner
has chosen that option for its 1998 creditable withholding taxes.
Thus, it is no longer entitled to a tax refund of P459,756.07, which
corresponds to its 1998 excess tax credit. Nonetheless, the amount
will not be forfeited in the governments favor, because it may be
claimed by petitioner as tax credits in the succeeding taxable years.
(emphasis supplied)

Since petitioner elected to carry over its excess credits for the year 2000 in
the amount of P4,627,976 as tax credits for the following year, it could no longer
claim a refund. Again, at the risk of being repetitive, once the carry over option
was made, actually or constructively, it became forever irrevocable regardless of
whether the excess tax credits were actually or fully utilized. Nevertheless, as held
in Philam Asset Management, Inc., the amount will not be forfeited in favor of the
government but will remain in the taxpayers account. Petitioner may claim and
carry it over in the succeeding taxable years, creditable against future income tax
liabilities until fully utilized.[23]

WHEREFORE, petitioners motion for leave to file a second motion for

reconsideration and the second motion for reconsideration are hereby DENIED.

Costs against petitioner.

No further pleadings shall be entertained. Let entry of judgment be made in

due course.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 206526 January 28, 2015

WINEBRENNER & IÑIGO INSURANCE BROKERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

MENDOZA, J.:

In this petition for review under Rule 45 of the Rules of Court and Rule 16 of the
Revised Rules of the Court of Tax Appeals, Winebrenner & Ifiigo Insurance
Brokers, Inc. (petitioner) seeks the review of the March 22, 2013 Decision1of the
Court of Tax Appeals En Banc (CTA-En Banc). In the said decision, the CTA-En Banc
affirmed the denial of petitioner's judicial claim for refund or issuance of tax
credit certificate for excess and unutilized creditable withholding tax (CWT) for
the 1st to 4th quarter of calendar year (CJ} 2003 amounting to ₱4,073,954.00. In
denying the refund, the CTA-En Banc held that petitioner failed to prove that the
excess CWT for CY 2003 was not carried over to the succeeding quarters of the
subject taxable year. Under the 1997 National Internal Revenue Code (NJRC), a
taxpayer must not have exercised the option to carryover the excess CWT for a
particular taxable year in order to qualify for refund.

The Factual Antecedents

On April 15, 2004, petitioner filed itsAnnual Income Tax Return for CY 2003.

About two years thereafter or on April 7, 2006, petitioner applied for the
administrative tax credit/refund claiming entitlement to the refund of its excess
or unutilized CWT for CY 2003, by filing BIR Form No. 1914 with the Revenue
District Office No. 50 of the Bureau of Internal Revenue (BIR).

There being no action taken on the said claim, a petition for review was filed by
petitioner before the CTA on April 11, 2006. The case was docketed as CTA Case
No. 7440 and was raffled to the Special First Division (CTA Division).

On April 13, 2010, CTA Division partially granted petitioner’s claim for refund of
excess and unutilized CWT for CY 2003 in the reduced amount of ₱2,737,903.34 in
its April 13, 2010 Decision2 (original decision). The dispositive portion of the
decision reads:
In view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT
CERTIFICATE in favor of the petitioner in the reduced amount of ₱2,737,903.34
representing its excess/unutilized creditable withholding taxes for the year 2003.

SO ORDERED.3

Petitioner filed a Motion for Partial Reconsideration with Leave to Submit

Supplemental Evidence. It prayed that an amended decision be issued granting
the entirety of its claim for refund, or in the alternative, that it be allowed to
submit and offer relevant documents as supplemental evidence.

Respondent Commissioner of Internal Revenue (CIR) also moved for

reconsideration, praying for the denial of the entire amount of refund because
petitioner failed to present the quarterly Income Tax Returns (ITRs) for CY 2004.
To the CIR, the presentation of the 2004 quarterly ITRs was indispensable in
proving petitioner’s entitlement to the claimed amount because it would prove
that no carry-over of unutilized and excess CWT for the four (4) quarters of CY
2003 to the succeeding four (4) quarters of CY 2004 was made. In the absence of
said ITRs, no refund could be granted. In the CIR’s view, this was in accordance
with the irrevocability rule under Section 76 of the NIRC which reads:

SEC. 76. Final Adjustment Return. – Every corporation liable to tax under Section
27 shall file an adjustment return covering the total taxable income for the
preceding calendar or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credits; or

(C) Be credited or refunded with the excess amount paid, as the case may
be.

In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment
return may be carried over and credited against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding taxable years. Once the
option to carry-over and apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable years has been made, such
option shall be considered irrevocable for that taxable period and no application
for cash refund or issuance of a tax credit certificate shall be allowed therefor.

On July 27, 2011, the CTA-Division reversed itself. In an Amended Decision,4 it

denied the entire claim of petitioner. It reasoned out that petitioner should have
presented as evidence its first, second and third quarterly ITRs for the year 2004
to prove that the unutilized CWT being claimed had not been carried over to the
succeeding quarters. Thus:

WHEREFORE,in view of the foregoing, petitioner’s Motion for Partial

Reconsideration is hereby DENIED while respondent’s Motion for Reconsideration
is hereby GRANTED. Accordingly, the Decision dated April 13, 2010 granting
petitioner’s claim in the reduced amount of ₱2,737,903.34 is hereby REVERSED
AND SET ASIDE. Consequently, the instant Petition for Review is hereby
DENIEDdue to insufficiency of evidence.

SO ORDERED.5

Aggrieved, petitioner elevated the case to the CTA En Bancpraying for the reversal
of the Amended Decision of the CTA Division.

In its March 22, 2013 Decision,6 the CTA-En Bancaffirmed the Amended Decision
of the CTA-Division. It stated that before a cash refund or an issuance of tax credit
certificate for unutilized excess tax credits could be granted, it was essential for
petitioner to establish and prove, by presenting the quarterly ITRs of the
succeeding years, that the excess CWT was not carried over to the succeeding
taxable quarters considering that the option to carry over in the succeeding
taxable quarters could not be modified in the final adjustment returns
(FAR).Because petitioner did not present the first, second and third quarterly
ITRsfor CY 2004, despite having offered and submitted the Annual ITR/FAR for the
same year, the CTA-En Banc stated that the petitioner failed to discharge its
burden, hence, no refund could be granted. In justifying its conclusions, the CTA-
En Banccited its own case of Millennium Business Services, Inc.v. Commissioner of
Internal Revenue (Millennium)7 wherein it held as follows:

Since the burden of proof is upon the claimant to show that the amount claimed
was not utilized or carried over to the succeeding taxable quarters, the
presentation of the succeeding quarterly income tax return and final adjustment
return is indispensable to prove that it did not carry over or utilized the claimed
excess creditable withholding taxes. Absent thereof, there will be no basis for a
taxpayer’s claim for refund since there will be no evidence that the taxpayer did
not carry over or utilize the claimed excess creditable withholding taxes to the
succeeding taxable quarters.

Significantly, a taxpayer may amend its quarterly income tax return or annual
income tax return or Final Adjustment Return, which in any case may modify the
previous intention to carry-over, apply as tax credit certificate or refund, as the
case may be. But the option to carry over in the succeeding taxable quarters
under the irrevocability rule cannot be modified in its final adjustment return.

The presentation of the final adjustment return does not shift the burden of proof
that the excess creditable withholding tax was not utilized or carried overto the
first three (3) taxable quarters. It remains with the taxpayer claimant. It goes
without saying that final adjustment returns of the preceding and the succeeding
taxable years are not sufficient to prove that the amount claimed was utilized or
carried over to the first three (3) taxable quarters.

The importance of the presentation of the succeeding quarterly income tax return
and the annual income tax return of the subsequent taxable year need not be
overly emphasized. All corporations subject to income tax, are required to file
quarterly income tax returns, on a cumulative basis for the preceding quarters,
upon which payment of their income tax has been made. In addition to the
quarterly income tax returns, corporations are required to file a final or
adjustment return on or before the fifteenth day of April. The quarterly income
tax return, like the final adjustment return, is the most reliable firsthand evidence
of corporate acts pertaining to income taxes, as it includes the itemization and
summary of additions to and deductions from the income tax due. These entries
are not without rhyme or reason. They are required, because they facilitate the
tax administration process, and guide this Court to the veracity of a petitioner’s
claim for refund without which petitioner could not prove with certainty that the
claimed amount was not utilized or carried over to the succeeding quarters or the
option to carry over and apply the excess was effectively chosen despite the
intent to claim a refund.
In the same vein, if the government wants to disprove that the excess creditable
withholding tax was not utilized or carried over to the succeeding taxable
quarters, the presentation of the succeeding quarterly income tax return and the
annual income tax return of the subsequent taxable year indicating utilization or
carrying over are [sic] indispensible. However, the claimant must first establish its
claim for refund, such that it did not utilize or carry over or that it opted to utilize
and carry over to the 1 st, 2nd, 3rd quarters and final adjustment return of the
succeeding taxable year.

Concomitantly, the presentation of the quarterly income tax return and the
annual income tax return to prove the fact that excess creditable withholding tax
was not utilized or carried over or opted to be utilized and carried over to the 1st,
2nd, 3rd quarters and final adjustment return of the succeeding taxable quarter is
not only for convenience to facilitate the tax administration process but it is part
of the requisites to establish the claim for refund. Section 76 of the NIRC of 1997
provides that if the taxpayer claimant carries over and applies the excess
quarterly income tax against the income tax due for the taxable quarters of the
succeeding taxable years, the same is irrevocable and no application for cash
refund or issuance of a tax credit certificate shall be allowed.8

Hence, this petition.

Noteworthy is the fact that the CTA-En Bancruling was met with two dissents
from Associate Justices Juanito C. Castañeda (Justice Castañeda) and Esperanza R.
Fabon-Victorino (Justice Fabon-Victorino).

In his Dissenting Opinion9 which was concurred in by Justice FabonVictorino,

Justice Castañeda expressed the view that the CTA-En Banc should have
reinstated the CTA-Division’s original decision because in the cases of Philam
Asset Management Inc. v. Commissioner of Internal Revenue (Philam);10 State
Land Investment Corporation v. Commissioner of Internal Revenue (State
Land);11 Commissioner of Internal Revenue v. PERF Realty Corporation (PERF
Realty);12 and Commissioner of Internal Revenue v. Mirant (Philippines)
Operations, Corporation (Mirant),13this Court already ruled that requiring the ITR
or the FAR for the succeeding year in a claim for refund had no basis in law and
jurisprudence. According to him, the submission of the FAR of the succeeding
taxable year was not required under the law to prove the claimant’s entitlement
to excess or unutilized CWT, and by following logic, the submission of quarterly
income tax returns for the subsequent taxable period was likewise unnecessary.
He found no justifiable reason not to follow the existing rulings of this Court.
Petitioner’s reasoning in this petition echoes the dissenting opinion of Justice
Castaneda. It further submits that despite the non-presentation of the quarterly
ITRs, it has sufficiently shown that the excess CWT for CY 2003 was not carried
over or applied to itsincome tax liabilities for CY 2004, as shown in the Annual ITR
for 2004 it submitted. Thus, petitioner insists that its refund should have been
granted. Petitioner further avers, in its Reply,14 that even if Millennium Business
case was applicable, such must be given prospective effect considering that this
case was litigated on the basis of the doctrines laid down in Philam, State Landand
PERF Realty cases wherein the submission of quarterly ITRs in a case for tax
refund was held by this Court as not mandatory.

In its Comment,15 the CIR counters that even if the taxpayer signifies the option
for either tax refund or carry-over as tax credit, this does not ipso facto confer the
right to avail of the option immediately. There is a need, according to the CIR, for
an investigation to ascertain the correctness of the corporate returns and the
amount sought to be credited; and part of which is to look into the quarterly
returns so that it may be determined whether or not excess and unutilized CWT
was carried over into the succeeding quarters of the next taxable year. Because
the pertinent quarterly ITRs were not presented, the CIR submits that the
petitioner failed to prove its right to a tax refund.

Issue

The sole issue here is whether the submission and presentation of the quarterly
ITRs of the succeeding quarters of a taxable year is indispensable in a claim for
refund.

The Court’s Ruling

The Court recognizes, as it always has, that the burden of proof to establish
entitlement to refund is on the claimant taxpayer.16 Being in the nature of a claim
for exemption,17 refund is construed in strictissimi juris against the entity claiming
the refund and in favor of the taxing power.18 This is the reason why a claimant
must positively show compliance with the statutory requirements provided for
under the NIRC in order to successfully pursue one’s claim. As implemented by
the applicable rules and regulations and as interpreted in a vast array of decisions,
a taxpayer who seeks a refund of excess and unutilized CWT must:

1) File the claim with the CIR within the two year period from the date of
payment of the tax;

2) Show on the return that the income received was declared as part of the
gross income; and

3) Establish the fact of withholding by a copy of a statement duly issued by

the payor to the payee showing the amount paid and the amount of tax
withheld.19

The original decision of the CTA-Division made plain that the petitioner complied
with the above requisites in so far as the reduced amount of ₱2,737,903.34 was
concerned. In the amended decision, however, it was pointed out that because
petitioner failed to present the quarterly ITRs of the subsequent year, there was
an impossibility of determining compliance with the irrevocability rule under
Section 76 of the NIRC as in those documents could be found evidence of whether
the excess CWT was applied to its income tax liabilities in the quarters of 2004.
The irrevocability rule under Section 76 of the NIRC means that once an option,
either for refund or issuance of tax credit certificate or carry-over of CWT has
been exercised, the same can no longer be modified for the succeeding taxable
years.20 For said reason, the CTA-En Banc affirmed the conclusion in the amended
decision that because of the said impossibility, the claim for refund was not
substantiated.

The CIR agrees with the disposition of the CTA-En Banc, stressing that the
petitioner failed to carry out the burden of showing that no carryover was made
when it did not present the quarterly ITRs for CY 2004.

Petitioner disagrees, as the dissents did, that the non-submission of quarterly ITRs
is fatal to its claim.

Hence, the issue on the indispensability of quarterly ITRs of the succeeding

taxable year in a claim for refund.

The Court finds for the petitioner.

There is no question that those who claim must not only prove its entitlement to
the excess credits, but likewise must prove that no carry-over has been made in
cases where refund is sought.

In this case, the fact of havingcarried over petitioner’s 2003 excess credits to
succeeding taxable year isin issue. According to the CTA-En Bancand the CIR, the
only evidence that can sufficiently show that carrying over has been made is to
present the quarterly ITRs. Some members of this Court adhere to the same view.

The Court however cannot.

Proving that no carry-over has been made does not absolutely require the
presentation of the quarterly ITRs.

In Philam, the petitioner therein sought for recognition of its right to the claimed
refund of unutilized CWT. The CIR opposed the claim, on the grounds similar to
the caseat hand, that no proof was provided showing the non-carry over of excess
CWT to the subsequent quarters of the subject year. In a categorical manner, the
Court ruled that the presentation of the quarterly ITRs was not necessary.
Therein, it was written:

Requiring that the ITR or the FAR of the succeeding year be presented to the BIR
in requesting a tax refund has no basis in law and jurisprudence.

First, Section 76 of the Tax Code does not mandate it. The law merely requires the
filing of the FAR for the preceding – not the succeeding – taxable year. Indeed,
any refundable amount indicated in the FAR of the preceding taxable year may be
credited against the estimated income tax liabilities for the taxable quarters of
the succeeding taxable year. However, nowhere is there even a tinge of a hint in
any provisions of the [NIRC] that the FAR of the taxable year following the period
to which the tax credits are originally being applied should also be presented to
the BIR.

Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-85, merely

provides that claims for refund of income taxes deducted and withheld from
income payments shall be given due course only (1) when it is shown on the ITR
that the income payment received is being declared part of the taxpayer’s gross
income; and (2) when the fact of withholding is established by a copy of the
withholding tax statement, duly issued by the payor to the payee, showing the
amount paid and the income tax withheld from that amount.

It has been submitted that Philam cannot be cited as a precedent to hold that the
presentation of the quarterly income tax return is not indispensable as it appears
that the quarterly returns for the succeeding year were presented when the
petitioner therein filed an administrative claim for the refund of its excess taxes
withheld in 1997.

It appears however that there is misunderstanding in the ruling of the Court in

Philam. That factual distinction does not negate the proposition that subsequent
quarterly ITRs are not indispensable. The logic in not requiring quarterly ITRs of
the succeeding taxable years to be presented remains true to this day. What
Section 76 requires, just like in all civil cases, is to prove the prima facie
entitlement to a claim, including the fact of not having carried over the excess
credits to the subsequent quarters or taxable year. It does not say that to prove
such a fact, succeeding quarterly ITRs are absolutely needed.

This simply underscores the rulethat any document, other than quarterly ITRs
may be used to establish that indeed the non-carry over clause has been
complied with, provided that such is competent, relevant and part of the records.
The Court is thusnot prepared to make a pronouncement as to the
indispensability of the quarterly ITRs in a claim for refund for no court can limit a
party to the means of proving a fact for as long as they are consistent with the
rules of evidence and fair play. The means of ascertainment of a fact is best left to
the party that alleges the same. The Court’s power is limited only to the
appreciation of that means pursuant to the prevailing rules of evidence. To stress,
what the NIRC merely requires is to sufficiently prove the existence of the non-
carry over of excess CWT in a claim for refund.

The implementing rules similarly support this conclusion, particularly Section

2.58.3 of Revenue Regulation No. 2-98 thereof. There, it provides as follows:

SECTION 2.58.3. Claim for Tax Credit or Refund.

(A) The amount of creditable tax withheld shall be allowed as a tax credit
against the income tax liability of the payee in the quarter of the taxable
year in which income was earned or received.
 (B) Claims for tax credit or refund of any creditable income tax which was
deducted and withheld on income payments shall be given due course only
when it is shown that the income payment has been declared as part of the
gross income and the fact of withholding is established bya copy of the
withholding tax statement duly issued by the payer to the payee showing
the amount paid and the amount of tax withheld therefrom.

xxx xxx xxx

Evident from the above is the absence of any categorical pronouncement of

requiring the presentation of the succeeding quarterly ITRs in order to prove the
fact of non-carrying over. To say the least, the Court rules that as to the means of
proving it, Ithas no power to unduly restrict it.

In this case, it confounds the Court why the CTA did not recognize and discuss in
detail the sufficiency of the annual ITR for 2004,21 which was submitted by the
petitioner. The CTA in fact said:

In the present case, while petitioner did offer its Annual ITR/Final Adjustment
Return for taxable year 2004, it appears that petitioner miserably failed to submit
and offer as part of its evidence the first, second, and third Quarterly ITRs for the
year 2004. Consequently, petitioner was not able to prove that it did not exercise
its option to carry-over its excess CWT.22

Petitioner claims that the requirement of proof showing the non-carry over has
been established in said document.

Indeed, an annual ITR contains the total taxable income earned for the four (4)
quarters of a taxable year, as well as deductions and tax credits previously
reported or carried over in the quarterly income tax returns for the subject
period. A quick look atthe Annual ITR reveals this fact:

Aggregate Income Tax Due

Less Tax Credits/Payments

Prior Year’s excess Credits – Taxes withheld

Tax Payment (s) for the Previous Quarter (s) of the same taxable year other than
MCIT

xxx xxx xxx

Creditable Tax Withheld for the Previous Quarter (s)

Creditable Tax Withheld Per BIR Form No. 2307 for this Quarter

xxx xxx x x x23

It goes without saying that the annual ITR (including any other proof that may be
sufficient to the Court)can sufficiently reveal whether carry over has been made
in subsequent quarters even if the petitioner has chosen the option of tax credit
or refund inthe immediately 2003 annual ITR. Section 76 of the NIRC requires a
corporation to file a Final Adjustment Return (or Annual ITR) covering the total
taxable income for the preceding calendar or fiscal year. The total taxable income
contains the combined income for the four quarters of the taxable year, as well as
the deductions and excess tax credits carried over in the quarterly income tax
returns for the same period.

If the excess tax credits of the preceding year were deducted, whether in whole
or in part, from the estimated income tax liabilities of any of the taxable quarters
of the succeeding taxable year, the total amount of the tax credits deducted for
the entire taxable year should appear in the Annual ITR under the item "Prior
Year’s Excess Credits." Otherwise, or if the tax credits were carried over to the
succeeding quarters and the corporation did not report it in the annual ITR, there
would be a discrepancy in the amounts of combined income and tax credits
carried over for all quarters and the corporation would end up shouldering a
bigger tax payable. It must be remembered that taxes computed in the quarterly
returns are mere estimates. It is the annual ITR which shows the aggregate
amounts of income, deductions, and credits for all quarters of the taxable year. It
is the final adjustment return which shows whether a corporation incurred a loss
or gained a profit during the taxable quarter.24 Thus, the presentation of the
annual ITR would suffice in proving that prior year’s excess credits were not
utilized for the taxable year in order to make a final determination of the total tax
due.
In this case, petitioner reported an overpayment in the amount of ₱7,194,213.00
in its annual ITR for the year ended December 2003:

Annual ITR 2003

Income Tax Due 1,259,259.00

Less: Prior Year’s Excess Credits (2002 Annual ITR) (4,379,518.00)

Creditable Tax Withheld for the 4th Quarter (4,073,954.00)

Tax Payable / (Overpayment) (7,194,213.00)

For the overpayment, petitioner chose the option "To be issued a Tax Credit
Certificate." In its Annual ITR for the year ended December 2004, petitioner did
not report the Creditable Tax Withheld for the 4th quarter of 2003 in the amount
of ₱4,073,954.00 as prior year’s excess credits. As shown in the 2004 ITR:

Annual ITR 2004

Income Tax Due 1,321,409.00

Less: Prior Year’s Excess Credits -

Creditable Tax Withheld for the 4th (3,689,419.00)

Quarter
Tax Payable / (Overpayment) (2,368,010.00)

Verily, the absence of any amount written in the Prior Year excess Credit – Tax
Withheld portion of petitioner’s 2004 annual ITR clearly shows that no prior
excess credits were carried over in the first four quarters of 2004. And since
petitioner was able to sufficiently prove that excess tax credits in 2003 were not
carried over to taxable year 2004 by leaving the item "Prior Year’s Excess Credits"
as blank in its 2004 annual ITR, then petitioner is entitled to a refund.
Unfortunately, the CTA, in denying entirely the claim, merely relied on the
absence of the quarterly ITRs despite being able to verify the truthfulness of the
declaration that no carry over was indeed effected by simply looking at the 2004
annual ITR.

At this point, worth mentioning is the fact that subsequent cases affirm the
proposition as correctly pointed out by petitioner. State Land, PERF and
Mirantreiterated the rule that the presentation of the quarterly ITRs of the
subsequent year is not mandatory on the part of the claimant to prove its claims.

There are some who challenges the applicability of PERF in the case at bar. It is
said that PERFis not in point because the Annual ITR for the succeeding year had
actually been attached to PERF’s motion for reconsideration with the CTA and had
formed part of the records of the case. Clearly, if the Annual ITR has been
recognized by this Court in PERF, why then would the submitted 2004 Annual ITR
in this case be insufficient despite the absence of the quarterly ITRs? Why then
would this Court require more than what is enough and deny a claim even if the
minimum burden has been overcome? At best, the existence of quarterly ITRs
would have the effect of strengthening a proven fact. And as such, may only be
considered corroborative evidence, obviously not indispensable in character.
PERF simply affirms that quarterly ITRs are not indispensable, provided that there
is sufficient proof that carrying over excess CWT was not effected.

Stateland and Mirantare equally challenged. In all these cases however, the
factual distinctions only serve to bolster the proposition that succeeding quarterly
ITRs are not indispensable. Implicit from all these cases is the Court’s recognition
that proving carry-over is an evidentiary matter and that the submission of
quarterly ITRs is but a means to prove the fact of one’s entitlement to a refund
and not a condition sine qua non for the success of refund. True, it would have
been better, easier and more efficient for the CTA and the CIR to have as basis the
quarterly ITRs, but it is not the only way considering further that in this case, the
Annual ITR for 2004 is sufficient. Courts are here to painstakingly weigh evidence
so that justice and equity in the end will prevail.

It must be emphasized that once the requirements laid down by the NIRC have
been met, a claimant should be considered successful in discharging its burden of
proving its right to refund. Thereafter, the burden of going forward with the
evidence, as distinct from the general burden of proof, shifts to the opposing
party,25 that is, the CIR. It is then the turn of the CIR to disprove the claim by
presenting contrary evidence which could include the pertinent ITRs easily
obtainable from its own files.

All along, the CIR espouses the viewthat it must be given ample opportunity to
investigate the veracity of the claims. Thus, the Court asks: In the process of
investigation at the administrative level to determine the right of the petitioner to
the claimed amount, did the CIR, with all its resources even attempt to verify the
quarterly ITRsit had in its files? Certainly, it did not as the application was met by
the inaction of the CIR. And if desirous in its effort to clearly verify petitioner’s
claim, it should have had the time, resources and the liberty to do so. Yet, nothing
was produced during trial to destroy the prima facie right of the petitioner by
counterchecking the claims with the quarterly ITRs the CIR has on its file. To the
Court, it seems that the CIR languished on its duties to ascertain the veracity of
the claims and just hoped that the burden would fall on the petitioner’s head
once the issue reaches the courts.

This mindset ignores the rule that the CIR has the equally important responsibility
of contradicting petitioner’s claim by presenting proof readily on hand once the
burden of evidence shifts to its side. Claims for refund are civil in nature and as
such, petitioner, as claimant, though having a heavy burden of showing
entitlement, need only prove preponderance of evidence in order to recover
excess credit in cold cash. To review, "[P]reponderance of evidence is [defined as]
the weight, credit, and value of the aggregate evidence on either sideand is
usually considered to be synonymous with the term ‘greater weight of the
evidence’ or ‘greater weight of the credible evidence.’ It is evidence which is more
convincing to the court asworthy of belief than that which is offered in opposition
thereto.26

The CIR must then be reminded that in Philam, the CIR’s "failure to present*the
quarterly ITRs and AFR] to support its contention against the grant of a tax refund
to [a claimant] is certainly fatal." PERF reinforces this with a sweeping statement
holding that the verification process is not incumbent on PERF[or any claimant for
that matter]; [but] is the duty of the CIR to verify whether xxx excess incometaxes
[have been carried over].

And should there be a possibility that a claimant may have violated the
irrevocability rule and thereafter claim twice from its credits, no one is to be
blamed but the CIR for not discharging its burden of evidence to destroy a
claimant’s right to a refund. At any rate, a claimant who defrauds the government
cannot escape liability be it criminal or civil in nature.

Verily, with the petitioner having complied with the requirements for refund, and
without the CIR showing contrary evidence other than its bare assertion of the
absence of the quarterly ITRs, copies of which are easily verifiable by its very own
records, the burden of proof of establishing the propriety of the claim for refund
has been sufficiently discharged. Hence, the grant of refund is proper.

The Court does not, and cannot, however, grant the entire claimed amount as it
finds no error in the original decision of the CTA Division granting refund to the
reduced amount of ₱2,737,903.34. This finding of fact is given respect, if not
finality, as the CTA,27 which by the very nature of its functions of dedicating itself
exclusively to the consideration of the tax problems has necessarily developed an
expertise on the subject.28 It being the case, the Court partly grants this petition
to the extent of reinstating the April 23, 2010 original decision of the CTA Division.

The Court reminds the CIR that substantial justice, equity and fair play take
precedence over technicalities and legalisms.1âwphi1 The government must keep
in mind that it has no right to keep the rponey not belonging to it, thereby
enriching itself at the expense of the law-abiding citizen29 or entities who have
complied with the requirements of the law in order to forward the claim for
refund. Under the principle of solution ihdebiti provided in Article 2154 of the
Civil Code, the CIR must return anythihg it has received.30

Finally, even assuming that the Court reverses itself and pronounces the
indispensability of presenting the quarterly ITRs to prove entitlement to the
claimed refund, petitioner should not be Brejudiced for relying on Philam. The
CTA En Banc merely based its pronouncement on a case that does not enjoy the
benefit of stare decis et non quieta movere which means "to adhere to
precedents, and not to unsettle things which are established."31 As between a
CTA En Banc Decision (Millennium) and this Court's Decision (Philam), it is
elementary that the latter should prevail.

WHEREFORE, the Court partly grants the petition. The March 22, 2013 Decision of
the Court of Tax Appeals En Banc is REVERSED. The April 13, 2010 Decision of the
Court of Tax Appeals Special First Division is REINSTATED. Respondent
Commissioner of Internal Revenue is ordered to REFUND to petitioner the
amount of ₱2,737,903.34 as excess creditable withholding tax paid for taxable
year 2003.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 188016 January 14, 2015

REPUBLIC OF THE PHILIPPINES, represented by the COMMISSIONER OF

INTERNAL REVENUE, Petitioner,
vs.
TEAM (PHILS.) ENERGY CORPORATION (formerly MIRANT (PHILS.) ENERGY
CORPORATION), Respondent.

DECISION

BERSAMIN, J.:

The Republic of the Philippines, represented by the Commissioner of Internal

Revenue, appeals the decision promulgated on April 15, 2009,1 whereby the Court
of Tax Appeals En Banc (CTA En Banc) upheld the decision of the CTA in Division
rendered on May 15, 2008 ordering the Commissioner of Internal Revenue to
refund or to issue a tax credit certificate in favor of the respondent in the
modified amount of ₱16,366,412.59 representing the respondent's excess and
unutilized creditable withholding taxes for calendar years 2002 and 2003.
Antecedents

Respondent Mirant (Philippines) Energy Corporation, a domestic corporation, is

primarily engaged in the business of developing, designing, constructing, erecting,
assembling, commissioning, owning, operating, maintaining, rehabilitating, and
managing gas turbine and other power generating plants and related facilities for
conversion into electricity, coal, distillate and other fuel provided by and under
contract with the Government, or any subdivision, instrumentality or agency
thereof, or any government-owned or controlled corporations or any entity
engaged in the development, supply or distribution of energy.2 On August 16,
2001, the respondent filed with the Securities and Exchange Commission (SEC) its
Amended Articles of Incorporation stating its intent to change its corporate name
from Mirant (Philippines) Mobile Corporation to Mirant (Philippines) Energy
Corporation; and to include the business of supplying and delivering electricity
and providing services necessary in connection with the supply or delivery of
electricity. The SEC approved the amendment on October 22, 2001.3

The respondent filed its annual income tax return (ITR) for calendar years 2002
and 2003 on April 15, 2003 and April 15, 2004, respectively, reflecting overpaid
income taxes or excess creditable withholding taxes in the amounts of
₱6,232,003.00 and ₱10,134,410.00 for taxable years 2002 and 2003,
respectively.4 It indicated in the ITRs its option for the refund of the tax
overpayments for calendar years 2002 and 2003.5

On March 22, 2005, the respondent filed an administrative claim for refund or
issuance of tax credit certificate with the Bureau of Internal Revenue (BIR) in the
total amount of ₱16,366,413.00, representing the overpaid income tax or the
excess creditable withholding tax of the respondent for calendar years 2002 and
2003.6

Due to the inaction of the BIR and in order to toll the running of the two-year
prescriptive period for claiming a refund under Section 229 of the National
Internal Revenue Code (NIRC) of 1997, the respondent filed a petition for review
in the Court of Tax Appeals (CTA) on April 14, 2005.7 In the answer, the petitioner
interposed the following special and affirmative defenses, to wit:

xxxx

3. He reiterates and repleads the preceding paragraphs of this answer as

part of his Special and Affirmative Defenses;

4. Petitioner’s claim for refund is still subject to the administrative routinary

investigation/examination by the respondent's Bureau;

5. Taxes paid and collected are presumed to have been made in accordance
with law and implementing regulations, hence, not refundable.
 6. Petitioner's claim for refund/issuance of tax credit in the amount of
₱16,366,413.00, as alleged overpaid income taxes or excess creditable
withholding taxes for taxable year ended December 31, 2002 and
December 31, 2003 were not fully substantiated by proper documentary
evidence.

7. Petitioner failed to prove that the amount of ₱16,366,413.00as alleged

overpaid income taxes or excess creditable withholding taxes for taxable
year ended December 31, 2002 and December 31, 2003 were included as
part of its gross income for the said taxable years 2002 and 2003, and did
not carry-over to the succeeding taxable quarter/year the subject of its
claim, and the same were not utilized in payment of its income tax liability
for the succeeding taxable quarter/year.

8. The filing of the instant petition for review with this Honorable Court was
premature since respondent was not given an ample opportunity to
examine its claim for refund;

9. Assuming but without admitting that petitioner is entitled to tax refund,

it is incumbent upon the latter to show that it complied with the provisions
of Sections 204in relation to Section 230 (now 229)of the Tax Code.
Otherwise, its failure to prove the same is fatal to its claim for refund.

10. Claims for refund are construed strictly against the claimant for the
same partake the nature of exemption from taxation (Commissioner of
Internal Revenue v. Ledesma, 31 SCRA 95) and as such, they are looked
upon with disfavor (Western Minolco Corp. v. Commissioner of Internal
Revenue, 124 SCRA 121).8

On May 15, 2008, the CTA in Division rendered its decision in favor of the
respondent, disposing thusly:

WHEREFORE, the instant "Petition for Review" is hereby GRANTED. Accordingly,

respondent is hereby ORDERED TO REFUND or TO ISSUE A TAX CREDIT
CERTIFICATE in favor of petitioner in the modified amount of SIXTEEN MILLION
THREE HUNDRED SIXTY-SIX THOUSAND FOUR HUNDRED TWELVE AND 59/100
(₱16,366,412.59), representing petitioner's excess and unutilized creditable
withholding taxes for calendar years 2002 and 2003. SO ORDERED.9
The CTA in Division found that the respondent had signified in its ITRs for the
same years its intent to have its excess creditable tax withheld for calendar years
2002 and 2003 be refunded; that the respondent’s administrative and judicial
claims for refund had been timely filed within the two-year prescriptive period
under Section 204 (C) in relation to Section 229 of the NIRC; that the fact of
withholding had been established by the respondent because it had submitted its
certificate of creditable tax withheld at source showing that the aggregate
amount of ₱17,168,749.60 constituted the CWT withheld by the respondent onits
services to Republic Cement Corporation, Mirant (Philippines) Industrial Power
Corporation and Solid Development Corporation for taxable years 2002 and 2003;
and that the income from which the CWT had been withheld was duly declared as
part of the respondent’s income in itsannual ITRs for 2002 and 2003.

The petitioner then filed a motion for reconsideration, but the CTA in Division
denied the motion on September 5, 2008.

The petitioner brought a petition for review before the CTA En Banc raising two
issues, namely:

I.

THE SECOND DIVISION OF THISHONORABLE COURT ERRED IN HOLDING

THAT RESPONDENT IS ENTITLED TO ITS CLAIMED REFUND OF EXCESS
ANDUNUTILIZED CREDITABLE WITHHOLDING TAXES FOR CALENDAR YEARS
2002 AND 2003, SINCE THERE WAS A VIOLATION ON THE PART OF THE
RESPONDENT TO FULLY COMPLYWITH THE REQUIREMENTS UNDER
SECTION 76 OF THE 1997 TAX CODE.

II.

THE SECOND DIVISION OF THIS HONORABLE COURT ERRED IN NOT

APPLYING THE RULE THAT TAX REFUNDS BEING IN THE NATURE OF TAX
EXEMPTION ARE CONSTRUED STRICTISSIMI JURIS AGAINST THE PERSON OR
ENTITY CLAIMING THE EXEMPTION.10

On April 15, 2009, however, the CTA En Banc rendered its assailed judgment,
disposing thus: WHEREFORE, the instant petition is hereby DISMISSED.
Accordingly, the assailed Decision and Resolution are hereby AFFIRMED.
SO ORDERED.11

The CTA En Banc held that the defenses raised by the petitioner were general and
standard arguments to oppose any claim for refund by a taxpayer; that the trial
proper was conducted in the CTA in Division, during which the respondent
presented evidence of its entitlement to the refund and in negation of the
defenses of the petitioner; and that the petitioner raised the issue on the non-
presentment of the respondent’s quarterly returns for 2002 and 2003 only in the
petition for review, which was not allowed, stating thusly:

This cannot be allowed. Petitioner had the opportunity to raise this issue either
during the trial or at the latest, in his Motion for Reconsideration of the assailed
Decision of the Court in Division but he cited only the following grounds in his
motion: x x x

xxxx

In its assailed Resolution, the Court in Division reiterated its finding that
respondent had complied with the substantiation requirements for its
entitlement to refund. It also ruled that the alleged under-declaration of
respondent cannot be determined by the Court since it is the duty of the BIR to
investigate and confirm the truthfulness of each and every item in the ITR. It
finally declared that respondent, by presenting copies of CWT certificates of
unutilized CWT, sufficiently complied with the requirements of the fact of
withholding.

Thus, petitioner's averment that Section 76 of the NIRC speaks of quarterly

income tax payments which consequently requires the offer in evidence of
quarterly income tax returns is raised for the first time on appeal with the Court
En Banc. It is a well-settled rule that points of law, theories, issues and arguments
not adequately brought to the attention of the lower court need not be
considered by the reviewing court as they cannot be raised for the first time on
appeal. x x x

xxxx

In the present case, petitioner could have simply exercised his power to examine
and verify respondent's claim for refund by presenting the latter's quarterly
income tax returns. The BIR ought to have on file the originals or copies of
respondent's quarterly income tax returns for the subject years, on the basis of
which it could rebut respondent's claim that it did not carry-over its unutilized
and excess creditable withholding taxes for taxable years 2002 and 2003 to the
succeeding taxable quarters of taxable years 2003 and 2004. Petitioner's failure to
present these vital documents before the Court in Division to support his
contention against the grant of a tax refund to respondent, is fatal.

At any rate, Section 76 of the 1997 NIRC speaks only of the filing of the Final
Adjusted Return and as held by the Supreme Court, the Annual ITR or "(t)he Final
Adjustment Return is the most reliable first hand evidence of corporate acts
pertaining to income taxes. In it are found the itemization and summary of
additions to and deductions from income taxes due. These entries are not without
rhyme or reason. They are required, because they facilitate the tax administration
process." And in this case, respondent offered in evidence its Annual ITRs for
calendar years 2002, 2003, and 2004.12

As to whether the respondent proved its entitlement to the refund, the CTA En
Banc declared:

However, petitioner's entitlement torefund is still subject to the satisfaction of

the requirements laid down by the NIRC of 1997, as amended, namely:

1. That the claim for refund was filed within the two-year reglamentary
period pursuant to Section 230 of the Tax Code, as amended;

2. That the fact of withholding isestablished by a copy of the statement duly

issued by the payor to the payee showing the amount paid and the amount
withheld therefrom; and

3. That the income upon which the taxes were withheld is included as part
of the gross income declared in the income tax return of the recipient.

Petitioner complied with the first requisite. The subject claim involves calendar
years 2002 and 2003. Petitioner filed its Annual Income Tax Returns on April 15,
2003 and April 15, 2004. Counting from these dates, petitioner had until April 15,
2005 and April 15, 2006 within which to file its administrative and judicial claims
for refund. Petitioner filed with the BIR its administrative claim for refund on
March 22, 2005. The instant petition was filed on April 15,2005. Hence, both the
administrative and judicial claims for refund weretimely filed within the two-year
prescriptive period.

Anent the second requirement, the Supreme Court enunciated in the case of
Banco Filipino Savings and Mortgage Bank v. Court of Appeals, Court of Tax
Appeals and Commissioner of Internal Revenue that the fact of withholding
isestablished by a copy of the statement duly issued by the payor to the payee
through the Certificates of Creditable Taxes Withheld at Source. In the present
case, petitioner submitted to this Court as part of its documentary evidence ten
(10) Certificates of Creditable Taxes Withheld at Source. x x x

xxxx

The aggregate amount of ₱17,168,749.60 constitutes the creditable withholding

taxes withheld from the Certificates of Creditable Tax Withheld at Source on its
services to Republic Cement Corporation, Mirant (Philippines) Industrial Power
Corporation and Solid Development Corporation for taxable years 2002 and 2003.

Regarding the third requisite, the income from which the creditable taxes were
withheld were duly declaredas part of petitioner's income in its Annual Income
Tax Returns for 2002 and 2003.13 x x x

Aggrieved, the petitioner has brought this appeal.

Issue

The issue is whether or not the respondent proved its entitlement to the refund.

The petitioner asserts the necessity of submission of the quarterly return of the
respondent to prove its entitlement to the refund pursuant to Sec. 76 of the NIRC
because such quarterly returns would establish the correctness of the total
amount of payments made and the taxes due as reported on the adjusted return
at the end of the year. The petitioner insists that the amount claimed for refund
was not carried over to the succeeding year; that the submission of the quarterly
return would prevent the possibility of a claimant carrying over the excess credit
and then claiming a refund for it; that the final adjustment return was not
sufficient to establish the respondent’s claim for refund because it only reflected
the sum of the payments made and the taxes due for the year; that the quarterly
return was necessary to prove that the sum, as stated in the adjusted return, was
correct; and that should the respondent chose to carry over the previous year’s
excess credit, the quarterly returns would prove that the carrying-over was
properly done during the succeeding year.

In its comment/opposition, the respondent, while admitting having the burden of

proving the factual basis for its claim for refund, contends that it discharged its
burden. It counters that with the presentation of its annual ITRs for the years
2002, 2003 and 2004, it already properly established that its excess creditable
withholding taxes for taxable years 2002 and 2003 were not carried over to
succeeding taxable periods.

In its reply, the petitioner states that the issue on the respondent’s failure to
present its quarterly income tax returns for taxable years 2002 and 2003, even if
not raised by the petitioner at the trial, could be raised before the CTA En Banc,
because it was interposed as a defense in the answer; and that every issue raised
in an answer may be raised on appeal even if it was not taken up in the court of
original jurisdiction.

Ruling

The petition is without merit.

Section 76 of the NIRC outlines the mechanisms and remedies that a corporate
taxpayer may opt to exercise, viz:

Section 76. Final Adjusted Return.- Every corporation liable to tax under Section
27 shall file a final adjustment return covering the total taxable income for the
preceding calendar of fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either:

(A) Pay the balance of the tax still due; or

(B) Carry over the excess credit; or

(C) Be credited or refunded withthe excess amount paid, as the case may
be.
In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment
return may be carried over and credited against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding taxable years. Once the
option to carry over and apply the excess quarterly income tax against income tax
due for the taxable years of the succeeding taxable years has been made, such
option shall be considered irrevocable for that taxable period and no application
for cash refund or issuance of a tax credit certificate shall be allowed therefor.
(emphasis supplied) The two options are alternative and not cumulative in nature,
that is, the choice of one precludes the other. The logic behind the rule, according
to Philam Asset Management, Inc. v. Commissioner of Internal Revenue,14 is to
ease tax administration, particularly the self-assessment and collection aspects. In
Philam Asset Management, Inc., the Court expounds on the two alternative
options of a corporate taxpayer on how the choice of one option precludes the
other, viz:

The first option is relatively simple. Any tax on income that is paid in excess of the
amount due the government may be refunded, provided that a taxpayer properly
applies for the refund.

The second option works by applying the refundable amount, as shown on the
FAR of a given taxable year, against the estimated quarterly income tax liabilities
of the succeeding taxable year.

These two options under Section 76 are alternative in nature. The choice of one
precludes the other. Indeed, in Philippine Bank of Communications v.
Commissioner of Internal Revenue, the Court ruled that a corporation must
signify its intention – whether to request a tax refund or claim a tax credit– by
marking the corresponding option box provided in the FAR. While a taxpayer is
required to mark its choice in the form provided by the BIR, this requirement is
only for the purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same excess
income taxes paid. x x x (emphasis supplied)

In Commissioner of Internal Revenuev. Bank of the Philippine Islands,15 the Court,

citing the pronouncement in Philam Asset Management, Inc., points out that
Section 76 of the NIRC of 1997 is clear and unequivocal in providing that the
carry-over option, once actually or constructively chosen by a corporate taxpayer,
becomes irrevocable. The Court explains: Hence, the controlling factor for the
operation of the irrevocability ruleis that the taxpayer chose an option; and once
it had already done so, it could no longer make another one. Consequently, after
the taxpayer opts to carry-over its excess tax credit to the following taxable
period, the question of whether or not it actually gets to apply said tax credit is
irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option
to carry over has been made, "no application for tax refund or issuance of a tax
credit certificate shall be allowed therefor."

The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to
carry-over and apply the excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable periodand no application for tax
refund or issuance ofa tax credit certificate shall be allowed therefor." The phrase
"for that taxable period" merely identifies the excess income tax, subject of the
option, by referring to the taxable period when it was acquired by the taxpayer. In
the present case, the excess income tax credit, which BPI opted to carry over, was
acquired by the said bank during the taxable year 1998. The option of BPI to carry
over its 1998 excess income tax credit is irrevocable; it cannot later on opt to
apply for a refund of the very same 1998 excess income tax credit.

The Court of Appeals mistakenly understood the phrase "for that taxable period"
as a prescriptive period for the irrevocability rule. This would mean that since the
tax credit in this case was acquired in 1998, and BPI opted to carry it overto 1999,
then the irrevocability of the option to carry over expired by the end of 1999,
leaving BPI free to again take another option as regards its 1998 excess income
tax credit. This construal effectively renders nugatory the irrevocability rule. The
evident intent of the legislature, in adding the last sentence to Section 76 of the
NIRC of 1997, is to keep the taxpayer from flip-flopping on its options, and avoid
confusion and complication as regards said taxpayer's excess tax credit. The
interpretation of the Court of Appeals only delays the flip-flopping to the end of
each succeeding taxable period.

The Court similarly disagrees in the declaration of the Court of Appeals that to
deny the claim for refund of BPI, because of the irrevocability rule, would be
tantamount to unjust enrichment on the part of the government.1âwphi1 The
Court addressed the very same argument in Philam, where it elucidated that
there would be no unjust enrichment in the event of denial of the claim for
refund under such circumstances, because there would be no forfeiture of any
amount in favor of the government. The amount being claimed asa refund would
remain in the account of the taxpayer until utilized in succeeding taxable years, as
provided in Section 76 of the NIRC of 1997. It is worthy to note that unlike the
option for refund of excess income tax, which prescribes after two years from the
filing of the FAR, there is no prescriptive period for the carrying over of the same.
Therefore, the excess income tax credit of BPI, which it acquired in 1998 and
opted to carry over, may be repeatedly carried over to succeeding taxable years,
i.e., to 1999, 2000, 2001, and so on and so forth, until actually applied or credited
to a tax liability of BPI.16(emphasis ours) In the instant case, the respondent opted
to be refunded or to be issued a tax credit certificate, not to carry over the excess
withholding tax for taxable year 2002 to the following taxable year. The taking of
the option was duly noted by the CTA En Banc, citing the decision of the CTA in
Division, as follows:

Under Line 30 of the 2002 Annual ITR, petitioner marked "x" the box "To be
refunded". In order toprove that petitioner did not carryover its 2002 excess
withholding tax, petitioner presented its 2003 Annual ITR which does not have
any entry inLine 27A "Prior Year's Excess Credits." Under Line 31 of the same2003
Annual ITR, petitioner marked "x" the box "To be refunded" and petitioner
presented its 2004 Annual ITR, showing no entry in Line 27A "Prior Year's Excess
Credit" to prove that it did not carry-over its 2003 excess withholding tax.17

Consequently, the only issue that remains is whether the respondent was entitled
to the refund of excess withholding tax.

The requirements for entitlement of a corporate taxpayer for a refund or the

issuance of tax credit certificate involving excess withholding taxes are as follows:

1. That the claim for refund was filed within the two-year reglementary
period pursuant to Section 22918 of the NIRC;

2. When it is shown on the ITR that the income payment received is being
declared part of the taxpayer’s gross income; and

3. When the fact of withholding is established by a copy of the withholding

tax statement, duly issued by the payor to the payee, showing the amount
paidand income tax withheld from that amount.
We do not expound anymore on the first requirement because even the
petitioner does not contest that the respondent filed its administrative and
judicial claim for refund within the statutory period.

With regard to the second requirement, it is fundamental that the findings of fact
by the CTA in Divisionare not to be disturbed without any showing of grave abuse
of discretion considering that the members of the Division are in the best position
to analyze the documents presented by the parties.19 Consequently, we adopt the
findings of the CTA in Division, which the CTA En Banc cited, as follows.

The above mentioned declarations are further supported by the testimonies of

Ms. Imelda Dela Cruz Tagama, petitioner’s Accounting Manager and Mr. Ruben R.
Rubio, the Independent Certified Public Accountant (ICPA) duly commissioned by
the Court, proving that the total amount of Creditable Withholding Tax per
petitioner's Annual ITRs for calendar years ended December 31, 2002 and
December 31, 2003 agrees with the total amount of Creditable Withholding Tax
presented on petitioner’s Schedule of Creditable Withholding Tax Certificates for
the calendar years ended December 31, 2002 and December 31, 2003. Moreover,
the total amount of gross sales/revenue reported in the Annual ITRs for calendar
years 2002 and 2003 is equal to the amounts recorded in the General Ledger
Listing of the Creditable Withholding Tax on the Transfer of Real Property and
Sale of Electricity, 2002 Reconciliation of Revenue per ITR and per General Ledger.
Hence, the third requirement is satisfied.20

With respect to the third requirement, the respondent proved that it had met the
requirement by presenting the 10 certificates of creditable taxes withheld at
source. The petitioner did not challenge the respondent’s compliance with the
requirement.

We are likewise unmoved by the assertion of the petitioner that the respondent
should have submitted the quarterly returns of the respondent to show that it did
not carry-over the excess withholding tax to the succeeding quarter. When the
respondent was able to establish prima facie its right to the refund by testimonial
and object evidence, the petitioner should have presented rebuttal evidence to
shift the burden of evidence back to the respondent. Indeed, the petitioner ought
to have its own copies of the respondent’s quarterly returns on file, on the basis
of which it could rebut the respondent's claim that it did not carry over its
unutilized and excess creditable withholding taxes for the immediately succeeding
quarters. The BIR's failure to present such vital document during the trial in order
to bolster the petitioner's contention against the respondent's claim for the tax
refund was fatal.21

WHEREFORE, we DENY the petition for review on certiorari, and AFFIRM the
decision promulgated on April 15, 2009.

SO ORDERED.

THIRD DIVISION

COMMISSIONER OF INTERNAL G.R. No. 161997

REVENUE,
Petitioner,
Present:

PANGANIBAN, J., Chairman

SANDOVAL-GUTIERREZ,
- versus -
CORONA,

CARPIO MORALES, and

GARCIA, JJ.

Promulgated:
PHILIPPINE NATIONAL BANK,

Respondent.
October 25, 2005

x------------------------------------------------------------------------------------x
 DECISION

GARCIA, J.:

Thru this appeal by way of a petition for review on certiorari under Rule 45 of the
Rules of Court, petitioner Commissioner of Internal Revenue seeks to set aside
the Decision dated October 14, 2003[1] of the Court of Appeals (CA) in CA-G.R. SP
No. 76488 and its Resolution dated January 26, 2004[2] denying petitioners motion
for reconsideration.

The petition is cast against the following factual setting:

In early April 1991, respondent Philippine National Bank (PNB) issued to the
Bureau of Internal Revenue (BIR) PNB Cashiers Check No. 109435 for
P180,000,000.00. The check represented PNBs advance income tax payment for
the banks 1991 operations and was remitted in response to then President
Corazon C. Aquinos call to generate more revenues for national development. The
BIR acknowledged receipt of the amount by issuing Payment Order No. C-
10151465 and BIR Confirmation Receipt No. 22063553, both dated April 15,
1991.[3]

Via separate letters dated April 19 and 29, 1991 and May 14, 1991[4] to then BIR
Commissioner Jose C. Ong, PNB requested the issuance of a tax credit certificate
(TCC) to be utilized against future tax obligations of the bank.
For the first and second quarters of 1991, PNB also paid additional taxes
amounting to P6,096,150.00 and P26,854,505.80, respectively, as shown in its
corporate quarterly income tax return filed on May 30, 1991.[5] Inclusive of the
P180 Million aforementioned, PNB paid and BIR received in 1991 the aggregate
amount of P212, 950,656.79.[6] This final figure, if tacked to PNBs prior years
excess tax credit (P1,385,198.30) and the creditable tax withheld for 1991
(P3,216,267.29), adds up to P217,552,122.38.

By the end of CY 1991, PNBs annual income tax liability, per its 1992 annual
income tax return,[7] amounted to P144,253,229.78, which, when compared to its
claimed total credits and tax payments of P217,552,122.38, resulted to a credit
balance in its favor in the amount of P73,298,892.60.[8] This credit balance was
carried-over to cover tax liability for the years 1992 to 1996, but, as PNB alleged,
was never applied owing to the banks negative tax position for the said inclusive
years, having incurred losses during the 4-year period.

On July 28, 1997, PNB wrote then BIR Commissioner Liwayway Vinzons-Chato,
Attention: Appellate Division, to inform her about the above developments and to
reiterate its request for the issuance of a TCC, this time for the unutilized balance
of its advance payment made in 1991 amounting to P73,298,892.60.[9] This
request was forwarded for review and further processing to the Office of the
Deputy Commissioner for Legal and Inspection Group, Lilian B. Hefti, and then to
the BIRs Large Taxpayers Service.

In a letter dated July 26, 2000, PNB sought reconsideration of the decision of
Deputy Commissioner Hefti not to take cognizance of the banks claim for tax
credit certificate on the ground that the jurisdiction of the Appellate Division is
limited to claims for tax refund and credit involving erroneous or illegal collection
of taxes whenever there are questions of law and/or facts and does not include
claims for refund of advance payment, pursuant to Revenue Administrative Order
[RAO] No. 7-95 dated October 10, 1995.[10] In her letter-reply dated August 8,
2008,[11] Deputy Commissioner Hefti denied PNBs request for reconsideration
with the following explanations:

In reply, please be advised that upon review . . . of your case, this

Office finds that the same presents no legal question for resolution.
Rather, what is involved is the verification of factual matters, i.e., the
existence of material facts to establish your entitlement to
refund. Such facts were initially verified through the proper audit of
your refund case by the investigating unit under the functional
control and supervision of the Deputy Commissioner, Operations
Group of this Bureau. It is therefore right and proper for the
Operations Group to review, confirm and/or pass judgment upon the
findings of the unit under it.

At any rate, sound management practices demand that issues as

crucial as refund cases be subjected to complete staff work. There
might be a little delay in the transition of cases but expect the new
procedures to be well-established in no time. Allow us, however, to
allay your concern about delayed processing of your claim. In fact,
the undersigned has made representations with the Operations
Group about your case and if you would check the status of your case
again, you will find that the same has been duly acted upon.
(Emphasis supplied)

On August 14, 2001, PNB again wrote the BIR requesting that it be allowed to
apply its unutilized advance tax payment of P73,298,892.60 to the banks future
gross receipts tax liability.[12]

Replying, the BIR Commissioner denied PNBs claim for tax credit for the following
reasons stated in his letter of May 21, 2002, to wit:[13]

1. The amount subject of claim for [TCC] is being carried over from
your 1991 to 1996 Annual Income Tax Returns. xxx. To grant
your claim would result into granting it twice first for tax carry
 over as shown in your 1991 amended Income Tax Return and
second for granting a tax credit.

2. When you requested for a refund on April 19, 1991, reiterated on

April 29, 1991 and again on May 14, 1991 on alleged excess
income taxes, the same was considered premature since the
determination . . . of your income tax liability can only be
ascertained upon filing of your Final or Adjusted Income Tax
Return for 1991 on or before April 15, 1992.

3. When you carried over the excess tax payments from 1991 to 1996
Annual Income Tax Return, you had already abandoned your
original intention of claiming for a [TCC]. Furthermore, the
1991 amended Income Tax Return you filed on April 14, 1994
clearly showed that the amount being claimed has already
been applied as tax credit against your 1992 income tax
liability.

4. Although there was already a recommendation for the issuance of

a [TCC] by the Chief, Appellate Division and concurred in by the
Assistant Commissioner, Legal Service, the recommendation
was for . . . year 1992 and not for the taxable year 1991, which
is the taxable year involved in this case.

5. Even if you reiterated your claim for tax credit certificate when you
filed your claim on July 28, 1997, the same has already
prescribed on the ground that it was filed beyond the two (2)
year prescriptive period as provided for under Section 204 of
NIRC. [Words in bracket and emphasis added]

On June 20, 2002, PNB, via a petition for review, appealed the denial action of the
BIR Commissioner to the Court of Tax Appeals (CTA). There, its appellate recourse
was docketed as C.T.A. Case No. 6487.
The Revenue Commissioner filed a motion to dismiss PNBs aforementioned
petition on ground of prescription under the 1977 National Internal Revenue
Code (NIRC)[14]. To this motion, PNB interposed an opposition,
citing Commissioner of Internal Revenue vs. Philippine American Life Insurance
Co.[15]

In its Resolution of October 10, 2002,[16] the CTA granted the Commissioners
motion to dismiss and, accordingly, denied PNBs petition for review, pertinently
stating as follows:

To reiterate, both the claim for refund and the subsequent

appeal to this court must be filed within the same two (2)-year
period [provided in Sec. 230 of the NIRC]. This is not subject to
qualification. The court is bereft of any jurisdiction or authority to
hear the instant Petition for Review, considering that the above
stated action for refund was filed beyond the two (2)-year
prescriptive period as allowed under the Tax Code. (Words in bracket
added)

PNBs motion for reconsideration was denied by the tax court in its
subsequent Resolution of March 20, 2003.[17]

In time, PNB filed a petition for review with the Court of Appeals (CA), thereat
docketed as CA-G.R. SP No. 76488, arguing that the applicability of the two (2)-
year prescriptive period is not jurisdictional and that said rule admits of certain
exceptions.[18] Following the filing by the Commissioner Internal Revenue of his
Comment to PNBs petition in CA-G.R. in SP No. 76488, respondent PNB filed a
Supplement to its Petition for Review.[19]

In the herein assailed Decision dated October 14, 2003,[20] the appellate court
reversed the ruling of the CTA, disposing as follows:
 WHEREFORE, premises considered, the present petition is
hereby GIVEN DUE COURSE. Consequently, the assailed Resolutions
dated October 10, 2002 and March 30, 2003 of the Court of Tax
Appeals in C.T.A. Case No. 6487 are hereby ANNULLED and SET
ASIDE. The case is hereby REMANDED to the respondent
Commissioner for issuance with deliberate dispatch of the tax credit
certificate after completion of processing of petitioners
claim/request by the concerned BIR officer/s as to the correct
amount of tax credit to which petitioner is entitled.

No pronouncements as to costs.

SO ORDERED.

In gist, the appellate court predicated its disposition on the following main
premises:

1. Considering the special circumstance that the tax credit PNB has been
seeking is to be sourced not from any tax erroneously or illegally
collected but from advance income tax payment voluntarily made in
response to then President Aquinos call to generate more revenues for
the government, in no way can the amount of P180 million advanced by
PNB in 1991 be considered as erroneously or illegally paid tax.[21]
2. The BIR is deemed to have waived the two (2)-year prescriptive period
when its officials led the PNB to believe that its request for tax credit
had not yet prescribed since the matter was not being treated as an
ordinary claim for tax refund/credit or a simple case of excess payment.
3. Commissioner of Internal Revenue vs. Philippine American Life
Insurance Co.[22] instructs that even if the two (2)-year prescriptive
period under the Tax Code had already lapsed, the same is not
jurisdictional, and may be suspended for reasons of equity and other
 special circumstances. PNBs failure to apply the advance income tax
payment due to its negative tax liability in the succeeding taxable years
i.e., 1992-1996, should not be subject to the two (2)-year limitation as to
bar its claim for tax credit. The advance income tax payment, made as it
were under special circumstances, warrants a suspension of the two (2)-
year limitation, underscoring the fact that PNBs claim is not even a
simple case of excess payment.

In time, the BIR Commissioner moved for a reconsideration, but its motion was
denied by the appellate court in its equally challenged Resolution of January 26,
2004.[23]

Hence, the Commissioners present recourse on the following substantive

submissions:

1. A prior tax assessment before respondent PNB can apply for tax credit is
unnecessary;
2. PNBs letter dated April 19, 29 and May 14, 1991 cannot be legally
interpreted as claims for refund or tax credit as required by the NIRC;

3. PNBs claim for tax credit is barred by prescription; and

4. The equitable principle of estoppel does bar the BIR petitioner from
collecting taxes due. [24]

Petitioner first scores the CA for concluding that the amount of advance income
tax payment voluntarily remitted to the BIR by the [respondent] was not a
consequence of a prior tax assessment or computation by the taxpayer based on
business income and, therefore, it cannot be treated as similar to those national
revenue taxes erroneously, illegally or wrongfully paid as to be automatically
covered by the two (2)-year limitation under Sec. 230 [of the NIRC] for the right to
its recovery. Petitioner invokes the all too-familiar principle that the collection of
taxes, being the lifeblood of the nation,[25] should be summary and with the least
interference from the courts.

Pressing its point, petitioner asserts that what transpired under the premises is a
case of excessive collection not arising from an erroneous, illegal of wrongful
assessment and collection. According to petitioner, respondent PNB, after making
a prepayment of taxes in 1991, had realized, upon filing, in 1992, of its 1991 final
annual income tax return, the excess payment by simple process of mathematical
computation; hence, it was unnecessary to make any assessment of overpaid
taxes. Moreover, petitioner points out that the tenor of PNBs letters of April 19,
29, and May 14, 1991[26] indicated a mere request for an issuance of a TCC
covering the advance payments of taxes, not a claim for refund or tax credit of
overpaid national internal revenue taxes.
Citing Revenue Regulation No. 10-77, petitioner likewise argues that any excess or
overpaid income tax for a given taxable year may be carried to the succeeding
taxable year only. It cannot, petitioner expounds, go beyond, as what respondent
PNB attempted to do in 1997, when, after realizing the inapplicability of the
excess carry-forward scheme for its 1992 income tax liabilities owing to its
negative tax position for the 1992 to 1996 tax period, it belatedly requested for a
TCC issuance.

Lastly, petitioner urges the Court to make short shrift of the invocation of
equity and estoppel, on the postulate that the erroneous application and
enforcement of tax laws by public officers does not preclude the subsequent
correct application of such laws.[27]

In its Comment, respondent PNB contends that its claim for tax credit did not
arise from overpayment resulting from erroneous, illegal or wrongful collection of
tax. And obviously having in mind the holding of this Court in Juan Luna
Subdivision Inc. vs. Sarmiento,[28] respondent stresses that its P180 Million
advance income tax payment for 1991 partakes of the nature of a deposit made in
anticipation of taxes not yet due or levied. Accordingly, respondent adds, the
P180 Million was strictly not a payment of a valid and existing tax liability, let
alone an erroneous payment, the refund of which is governed by Section 230 of
the NIRC.

Taking a different tack, respondent PNB would also argue that, even
assuming, in gratia argumenti that the two (2)-year limitation in Section 230 of
the NIRC is of governing application, still the prescriptive period set forth therein
is not jurisdictional. The suspension of the statutory limitation in this case, PNB
adds, is justified under exceptional circumstance.
We rule for respondent PNB.

As may be recalled, both the CTAs and the BIRs refusal to grant PNBs claim for
refund or credit was based on the proposition that such claim was time-barred.
On the other hand, the CA rejected both the CTAs and BIRs stance for reasons as
shall be explained shortly.

As we see it then, the core issue in this case pivots on the applicability
hereto of the two (2)-year prescriptive period under in Section 230 (now Sec. 229)
of the NIRC, reading:

SEC. 230. Recovery of tax erroneously or illegally collected. No suit or

proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected , . . , or of any sum,
alleged to have been excessive or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with
the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest
or duress.

In any case, no such suit or proceeding shall be begun after the

expiration of two [(2)] years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after
 payment: Provided, however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where on
the face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid. (Underscoring
added.)

Here, respondent PNB requested the BIR to issue a TCC on the remaining balance
of the advance income tax payment it made in 1991. It should be noted that the
request was made considering that, while PNB carried over such credit balance to
the succeeding taxable years, i.e., 1992 to 1996, its negative tax position during
said tax period prevented it from actually applying the credit balance of P73,
298,892.60. It is fairly correct to say then that the claim for tax credit was
specifically pursued to enable the respondent bank to utilize the same for future
tax liabilities. However, petitioner ruled that the claim in question is time-barred,
the bank having filed such claim only in 1997, or more than two (2) years from
1992 when the overpayment of annual income tax for 1991 was realized by the
bank and the amount of excess payment ascertained with the filing of its final
1991 income tax return.

In rejecting petitioners ruling, as seconded by the CTA, the CA stated that PNBs
request for issuance of a tax credit certificate on the balance of its advance
income tax payment cannot be treated as a simple case of excess payment as to
be automatically covered by the two (2)-year limitation in Section 230, supra of
the NIRC.

We agree with the Court of Appeals.

Section 230 of the Tax Code, as couched, particularly its statute of

limitations component, is, in context, intended to apply to suits for the recovery
of internal revenue taxes or sums erroneously, excessively, illegally or wrongfully
collected.
Black defines the term erroneous or illegal tax as one levied without statutory
authority.[29] In the strict legal viewpoint, therefore, PNBs claim for tax credit did
not proceed from, or is a consequence of overpayment of tax erroneously or
illegally collected. It is beyond cavil that respondent PNB issued to the BIR the
check for P180 Million in the concept of tax payment in advance, thus eschewing
the notion that there was error or illegality in the payment. What in effect
transpired when PNB wrote its July 28, 1997 letter[30] was that respondent sought
the application of amounts advanced to the BIR to future annual income tax
liabilities, in view of its inability to carry-over the remaining amount of such
advance payment to the four (4) succeeding taxable years, not having incurred
income tax liability during that period.

The instant case ought to be distinguished from a situation where, owing to net
losses suffered during a taxable year, a corporation was also unable to apply to its
income tax liability taxes which the law requires to be withheld and remitted. In
the latter instance, such creditable withholding taxes, albeit also legally collected,
are in the nature of erroneously collected taxes which entitled the corporate
taxpayer to a refund under Section 230 of the Tax Code. So it is that in Citibank,
N.A. vs. Court of Appeals[31], we held:

The taxes thus withheld and remitted are provisional in nature. We

repeat: five percent of the rental income withheld and remitted to
the BIR pursuant to Rev. Reg. No. 13-78 is, unlike the withholding of
final taxes on passive incomes, a creditable withholding tax; that is,
creditable against income tax liability if any, for that taxable year.

In Commissioner of Internal Revenue vs. TMX Sales, Inc., this Court

ruled that the payments of quarterly income taxes (per Section 68,
NIRC) should be considered mere installments on the annual tax due.
These quarterly tax payments . . . should be treated as advances or
portions of the annual income tax due, to be adjusted at the end of
the calendar or fiscal year. The same holds true in the case of the
 withholding of creditable tax at source. Withholding taxes are
deposits which are subject to adjustments at the proper time when
the complete tax liability is determined.

In this case, the payments of the withholding taxes for 1979 and
1980 were creditable to the income tax liability, if any, of petitioner-
bank, determined after the filing of the corporate income tax returns
on April 15, 1980 and April 15, 1981. As petitioner posted net losses
in its 1979 and 1980 returns, it was not liable for any income taxes.
Consequently and clearly, the taxes withheld during the course of the
taxable year, while collected legally under the aforecited revenue
regulation, became untenable and took on the nature of erroneously
collected taxes at the end of the taxable year. (Underscoring added)

Analyzing the underlying reason behind the advance payment made by

respondent PNB in 1991, the CA held that it would be improper to treat the same
as erroneous, wrongful or illegal payment of tax within the meaning of Section
230 of the Tax Code. So that even if the respondents inability to carry-over the
remaining amount of its advance payment to taxable years 1992 to 1996 resulted
in excess credit, it would be inequitable to impose the two (2)-year prescriptive
period in Section 230 as to bar PNBs claim for tax credit to utilize the same for
future tax liabilities. We quote with approval the CAs disquisition on this point:

Thus, in no sense can the subject amount of advance income tax

voluntarily remitted to the BIR by the [respondent], not as a
consequence of prior tax assessment or computation by the taxpayer
based on business income, be treated as similar to those national
revenue taxes erroneously, illegally or wrongfully paid as to be
automatically covered by the two (2)-year limitation under Sec. 230
for the right to its recovery. When the P180 million advance income
tax payment was tendered by [respondent], no tax had been
assessed or due, or actually imposed and collected by the BIR.
Neither can such payment be considered as illegal having been made
in response to a call of patriotic duty to help the national government
. We therefore hold that the tax credit sought by [respondent] is not
 simply a case of excess payment, but rather for the application of the
balance of advance income tax payment for subsequent taxable
years after failure or impossibility to make such application or carry
over the preceding four (4)-year period when no tax liability was
incurred by petitioner due to losses in its operations. It is truly
inequitable to strictly impose the two (2)-year prescriptive period as
to legally bar any request for such tax credit certificate considering
the special circumstances under which the advance income tax
payment was made and the unexpected event (four years of business
losses) which prevented such application or carry over. Ironically,
both the [petitioner] and CTA would fault the [respondent] for
electing to credit or carry over the excess amount of tax payment
advanced instead of choosing to refund any such excess amount,
holding that such decision on the part of petitioner caused the two
(2)-year period to lapse without the petitioner filing such a request for
the issuance of a tax credit certificate. They emphasized that the
advance tax payment was made with the understanding that any
excess amount will be either carried over to the next taxable year or
refunded. It appears then that the request for issuance of a tax credit
certificate was arbitrarily interpreted by respondent as a simple claim
for refund instead of a request for application of the balance (excess
amount) to tax liability for the succeeding taxable years, as was the
original intention of [respondent] when it tendered the advance
payment in 1991.[32] (Emphasis in the original; words in bracket
added)

Petitioner insists that a prior tax assessment in this case was unnecessary, the
excess tax payment having already been ascertained by the end of 1992 upon the
filing by respondent of its adjusted final return. Thus, petitioner adds, the two (2)-
year prescriptive period to recover said excess credit balance had begun to run
from the accomplishment of the said final return and, ergo, PNBs claim for tax
credit asserted in 1997 is definitely belated. Additionally, petitioner, citing
Revenue Regulation No. 10-77, contends that the carrying forward of any excess
or overpaid income tax for a given taxable year is limited to the succeeding
taxable year only.

We do not agree.

Revenue Regulation No. 10-77[33] governs the method of computing corporate

quarterly income tax on a cumulative basis. Section 7 thereof provides:

SEC. 7. Filing of final or adjustment return and final payment of

income tax. -- A final or an adjustment return . . . covering the total
taxable income of the corporation for the preceding calendar or fiscal
year shall be filed on or before the 15th day of the fourth month
following the close of the calendar or fiscal year. xxxx. The amount of
income tax to be paid shall be the balance of the total income tax
shown on the final or adjustment return after deducting therefrom
the total quarterly income taxes paid during the preceding first three
quarters of the same calendar or fiscal year.

Any excess of the total quarterly payments over the actual income
tax computed and shown in the adjustment or final corporate
income tax return shall either (a) be refunded to the corporation, or
(b) may be credited against the estimated quarterly income tax
liabilities for the quarters of the succeeding taxable year. The
corporation must signify in its annual corporate adjustment return its
intention whether to request for the refund of the overpaid income
or claim for automatic tax credit to be applied against its income tax
liabilities for the quarters of the succeeding taxable year by filling the
appropriate box on the corporate tax return. (B.I.R. Form No. 1702)
[Emphasis added]

As can be gleaned from the above, the mandate of Rev. Reg. No. 10-77 is hardly
of any application to PNBs advance payment which, needless to stress, are
not quarterly payments reflected in the adjusted final return, but a lump sum
payment to cover future tax obligations. Neither can such advance lump sum
payment be considered overpaid income tax for a given taxable year, so that the
carrying forward of any excess or overpaid income tax for a given taxable year is
limited to the succeeding taxable year only.[34] Clearly, limiting the right to carry-
over the balance of respondents advance payment only to the immediately
succeeding taxable year would be unfair and improper considering that, at the
time payment was made, BIR was put on due notice of PNBs intention to apply
the entire amount to its future tax obligations.

In Commissioner vs. Phi-am Life[35], the Court ruled that an availment of a tax
credit due for reasons other than the erroneous or wrongful collection of taxes
may have a different prescriptive period. Absent any specific provision in the Tax
Code or special laws, that period would be ten (10) years under Article 1144 of
the Civil Code. Significantly, Commissioner vs. Phil-Am is partly a reiteration of a
previous holding that even if the two (2)-year prescriptive period, if applicable,
had already lapsed, the same is not jurisdictional[36] and may be suspended for
reasons of equity and other special circumstances.[37]

While perhaps not in all fours because it involved the refund of overpayment due
to misinterpretation of the law on franchise, our ruling in Panay Electric Co. vs.
Collector of Internal Revenue[38], is apropos. There, the Court stated:

xxx(L)egally speaking, the decision of the Tax Court [on the

two-year prescriptive period for tax refund] is therefore correct,
being in accordance with law. However, ones conscience does not
and cannot rest easy on this strict application of the law, considering
the special circumstances that surround this case. Because of his
erroneous interpretation of the law on franchise taxes, the Collector,
from the year 1947 had illegally collected from petitioner the
respectable sum of . . . . From a moral standpoint, the Government
would be enriching itself of this amount at the expense of the
taxpayer. (Words in bracket added and underscoring added.)
Like the CA, this Court perceives no compelling reason why the principle
enunciated in Panay Electric and Commissioner vs. Phil-Am Life should not be
applied in this case, more so since the amount over which tax credit is claimed
was theoretically booked as advance income tax payment. It bears stressing that
respondent PNB remitted the P180 Million in question as a measure of goodwill
and patriotism, a gesture noblesse oblige, so to speak, to help the cash-strapped
national government. It would thus indeed, be unfair, as the CA correctly
observed, to leave respondent PNB to suffer losing millions of pesos advanced by
it for future tax liabilities. The cut becomes all the more painful when it is
considered that PNBs failure to apply the balance of such advance income tax
payment from 1992 to 1996 was, to repeat, due to business downturn
experienced by the bank so that it incurred no tax liability for the period.

The rule of long standing is that the Court will not set aside lightly the conclusions
reached by the CTA which, by the very nature of its functions, is dedicated
exclusively to the resolution of tax problems and has, accordingly, developed an
expertise on the subject, unless there has been an abuse or improvident exercise
of authority.[39]It is likewise settled that to a claimant rests the onus to establish
the factual basis of his or her claim for tax credit or refund.[40] In this case,
however, petitioner does not dispute that a portion of the P180 Million PNB
remitted to the BIR in 1991 as advance payment remains unutilized for the
purpose for which it was intended in the first place. But petitioner asserts that
respondents right to recover the same is already time-barred. The CTA upheld the
position of petitioner. The CA ruled otherwise. We find the CAs position more in
accord with the facts on record and is consistent with applicable laws and
jurisprudence.

Verily, the suspension of the two (2)-year prescriptive period is warranted not
solely by the objective or purpose pursuant to which respondent PNB made the
advance income tax payment in 1991. Records show that petitioners very own
conduct led the bank to believe all along that its original intention to apply the
advance payment to its future income tax obligations will be respected by the BIR.
Notwithstanding respondent PNBs failure to request for tax credit after incurring
negative tax position in 1992, up to taxable year 1996, there appears to be a valid
reason to assume that the agreed carrying forward of the balance of the advance
payment extended to succeeding taxable years, and not only in 1992. Thus, upon
posting a net income in 1997 and regaining a profitable business operation,
respondent bank promptly sought the issuance of a TCC for the reason that its
credit balance of P73, 298,892.60 remained unutilized. If ever, petitioners pose
about respondent PNB never having made a written claim for refund only serves
to buttress the latters position that it was not out to secure a refund or recover
the aforesaid amount, but for the BIR to issue a TCC so it can apply the same to its
future tax obligations.

Lest it be overlooked, petitioner peremptorily denied the request for tax

credit on the ground of its having been filed beyond the two (2)-year prescriptive
period. In the same breath, however, petitioner appears to have glossed over an
incident which amounts to an earlier BIR ruling that there is no legal question to
be resolved but only a factual investigation in the processing of PNBs claim. Even
as petitioner concluded such administrative investigation, it did not deny the
request for issuance of a tax credit certificate on any factual finding, such as the
veracity of alleged business losses in the taxable years 1992 to 1996, during which
the respondent bank alleged the credit balance was not applied. Lastly, there is
no indication that petitioner considered respondents request as an ordinary claim
for refund, the very reason why the same was referred by the BIR for processing
to the Operations Group of the Bureau.

Hence, no reversible error was committed by the CA in holding that, upon basic
considerations of equity and fairness, respondents request for issuance of a tax
credit certificate should not be subject to the two (2)-year limitation in Section
230 of the NIRC.
 With the foregoing disquisitions, the Court finds it unnecessary to delve on
the question of whether or not mistakes of tax officers constitute a bar to
collection of taxes by the BIR Commissioner.

The procedural issue presently raised by petitioner, i.e., respondent PNBs alleged
non-compliance with the forum shopping rule when its petition for review filed
with the CTA did not contain the requisite authority of PNB Vice President Ligaya
R. Gagolinan to sign the certification, need not detain us long.
Petitioner presently faults the CA for not having taken notice that PNBs
initiatory pleading before the CTA suffers from an infirmity that justifies the
dismissal thereof. But it is evident that the issue of forum shopping is being raised
for the first time in this appellate proceedings. Accordingly, the Court loathes to
accommodate petitioners urging for the dismissal of respondents basic claim on
the forum-shopping angle. As earlier ruled by this Court, a party ought to invoke
the issue of forum shopping, assuming its presence, at the first opportunity in his
motion to dismiss or similar pleading filed in the trial court. Else, he is barred from
raising the ground of forum shopping in the Court of Appeals and in this
Court.[41] So it must be here.

WHEREFORE, the petition is DENIED for lack of merit and the assailed decision
and resolution of the Court of Appeals in CA-G.R. SP No. 76488 AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
G.R. No. 198756 January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,

METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK
AND PLANTERS DEVELOPMENT BANK, Petitioners,

RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL

CORPORATION, Petitioners-Intervenors,

CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,

vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE,
BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF
FINANCE, THE NATIONAL TREASURER AND BUREAU OF TREASURY, Respondent.

DECISION

LEONEN, J.:

The case involves the proper tax treatment of the discount or interest income
arising from the ₱35 billion worth of 10-year zero-coupon treasury bonds issued
by the Bureau of Treasury on October 18, 2001 (denominated as the Poverty
Eradication and Alleviation Certificates or the PEA Ce Bonds by the Caucus of
Development NGO Networks).

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No.
370-20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit
substitutes are subject to the 20% final withholding tax. Pursuant to this ruling,
the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final
tax from the face value of the PEACe Bonds upon their payment at maturity on
October 18, 2011.

This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners

under Rule 65 of the Rules of Court seeking to:

a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011

[and] other related rulings issued by BIR of similar tenor and import, for
being unconstitutional and for having been issued without jurisdiction or
 with grave abuse of discretion amounting to lack or· excess of jurisdiction ...
;

b. PROHIBIT Respondents, particularly the BTr; from withholding or

collecting the 20% FWT from the payment of the face value of the
Government Bonds upon their maturity;

c. COMMAND Respondents, particularly the BTr, to pay the full amount of

the face value of the Government Bonds upon maturity ... ; and

d. SECURE a temporary restraining order (TRO), and subsequently a writ of

preliminary injunction, enjoining Respondents, particularly the BIR and the
BTr, from withholding or collecting 20% FWT on the Government Bonds and
the respondent BIR from enforcing the assailed 2011 BIR Ruling, as well
asother related rulings issued by the BIR of similar tenor and import,
pending the resolution by [the court] of the merits of [the] Petition.3

Factual background

By letter4 dated March 23, 2001, the Caucus of Development NGO Networks
(CODE-NGO) "with the assistance of its financial advisors, Rizal Commercial
Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and
Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc. (SEED),"5 requested
an approval from the Department of Finance for the issuance by the Bureau of
Treasury of 10-year zerocoupon Treasury Certificates (T-notes).6 The T-notes
would initially be purchased by a special purpose vehicle on behalf of CODE-NGO,
repackaged and sold at a premium to investors as the PEACe Bonds.7 The net
proceeds from the sale of the Bonds"will be used to endow a permanent fund
(Hanapbuhay® Fund) to finance meritorious activities and projects of accredited
non-government organizations (NGOs) throughout the country."8

Prior to and around the time of the proposal of CODE-NGO, other proposals for
the issuance of zero-coupon bonds were also presented by banks and financial
institutions, such as First Metro Investment Corporation (proposal dated March 1,
2001),9 International Exchange Bank (proposal dated July 27, 2000),10 Security
Bank Corporation and SB Capital Investment Corporation (proposal dated July 25,
2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25,
1999).12 "[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng
Fixed Income indicate that the interest income or discount earned on the
proposed zerocoupon bonds would be subject to the prevailing withholding
tax."13

A zero-coupon bondis a bond bought at a price substantially lower than its face
value (or at a deep discount), with the face value repaid at the time of
maturity.14 It does not make periodic interest payments, or have socalled
"coupons," hence the term zero-coupon bond.15 However, the discount to face
value constitutes the return to the bondholder.16

On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters
dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on the tax
treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed by then
Commissioner ofInternal Revenue René G. Bañez confirmed that the PEACe Bonds
would not be classified as deposit substitutes and would not be subject to the
corresponding withholding tax:

Thus, to be classified as "deposit substitutes", the borrowing of funds must be

obtained from twenty (20) or more individuals or corporate lenders at any one
time. In the light of your representation that the PEACe Bonds will be issued only
to one entity, i.e., Code NGO, the same shall not be considered as "deposit
substitutes" falling within the purview of the above definition. Hence, the
withholding tax on deposit substitutes will not apply.18 (Emphasis supplied)

The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was
subsequently reiterated in BIR Ruling No. 035-200119 dated August 16, 2001 and
BIR Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the 2001
Rulings). In sum, these rulings pronounced that to be able to determine whether
the financial assets, i.e., debt instruments and securities are deposit substitutes,
the "20 or more individual or corporate lenders" rule must apply. Moreover, the
determination of the phrase "at any one time" for purposes of determining the
"20 or more lenders" is to be determined at the time of the original issuance.
Such being the case, the PEACe Bonds were not to be treated as deposit
substitutes.

Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo

Sergio G. Edeza (Former Treasurer Edeza) questioned the propriety of issuing the
bonds directly to a special purpose vehicle considering that the latter was not a
Government Securities Eligible Dealer (GSED).22 Former Treasurer Edeza
recommended that the issuance of the Bonds "be done through the ADAPS"23 and
that CODE-NGO "should get a GSED to bid in [sic] its behalf."24

Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury

Bonds25 (Public Offering) dated October 9, 2001, the Bureau of Treasury
announced that "₱30.0B worth of 10-year Zero[-] Coupon Bonds [would] be
auctioned on October 16, 2001[.]"26 The notice stated that the Bonds "shall be
issued to not morethan 19 buyers/lenders hence, the necessity of a manual
auction for this maiden issue."27 It also required the GSEDs to submit their bids
not later than 12 noon on auction date and to disclose in their bid submissions
the names of the institutions bidding through them to ensure strict compliance
with the 19 lender limit.28 Lastly, it stated that "the issue being limitedto 19
lenders and while taxable shall not be subject to the 20% final withholding
[tax]."29

On October 12, 2001, the Bureau of Treasury released a memo30 on the "Formula
for the Zero-Coupon Bond." The memo stated inpart that the formula (in
determining the purchase price and settlement amount) "is only applicable to the
zeroes that are not subject to the 20% final withholding due to the 19
buyer/lender limit."31

A day before the auction date or on October 15, 2001, the Bureau of Treasury
issued the "Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be
Issued on October 16, 2001" (Auction Guidelines).32 The Auction Guidelines
reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding
tax as the issue will be limited to a maximum of 19 lenders in the primary market
(pursuant to BIR Revenue Regulation No. 020 2001)."33The Auction Guidelines, for
the first time, also stated that the Bonds are "[e]ligible as liquidity reserves
(pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]"34

On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-
coupon bonds.35 Also on the same date, the Bureau of Treasury issued another
memorandum36 quoting excerpts of the ruling issued by the Bureau of Internal
Revenue concerning the Bonds’ exemption from 20% final withholding tax and
the opinion of the Monetary Board on reserve eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was
very wide, from as low as 12.248% to as high as 18.000%.39 Nonetheless, the
Bureau of Treasury accepted the auction results.40 The cut-off was at 12.75%.41

After the auction, RCBC which participated on behalf of CODE-NGO was declared
as the winning bidder having tendered the lowest bids.42 Accordingly, on October
18, 2001, the Bureau of Treasury issued ₱35 billion worth of Bonds at yield-to-
maturity of 12.75% to RCBC for approximately ₱10.17 billion,43 resulting in a
discount of approximately ₱24.83 billion.

Also on October 16, 2001, RCBC Capital entered into an underwriting

Agreement44 with CODE-NGO, whereby RCBC Capital was appointed as the Issue
Manager and Lead Underwriter for the offering of the PEACe Bonds.45RCBC
Capital agreed to underwrite46 on a firm basis the offering, distribution and sale of
the 35 billion Bonds at the price of ₱11,995,513,716.51.47 In Section 7(r) of the
underwriting agreement, CODE-NGO represented that "[a]ll income derived from
the Bonds, inclusive of premium on redemption and gains on the trading of the
same, are exempt from all forms of taxation as confirmed by Bureau of Internal
Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001,
respectively."48

RCBC Capital sold the Government Bonds in the secondary market for an issue
price of ₱11,995,513,716.51. Petitioners purchased the PEACe Bonds on different
dates.49

BIR rulings

On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20%
FWT on the Government Bonds and directing the BTr to withhold said final tax at
the maturity thereof, [allegedly without] consultation with Petitioners as bond
holders, and without conducting any hearing."50

"It appears that the assailed 2011 BIR Ruling was issued in response to a query of
the Secretary of Finance on the proper tax treatment of the discount or interest
income derived from the Government Bonds."51 The Bureau of Internal Revenue,
citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No.
007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13,
2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be
subject to 20% Final Tax on interest income from deposit substitutes. It is now
settled that all treasury bonds (including PEACe Bonds), regardless of the number
of purchasers/lenders at the time of origination/issuance are considered deposit
substitutes. In the case of zero-coupon bonds, the discount (i.e. difference
between face value and purchase price/discounted value of the bond) is treated
as interest income of the purchaser/holder. Thus, the Php 24.3 interest income
should have been properly subject to the 20% Final Tax as provided in Section
27(D)(1) of the Tax Code of 1997. . . .

....

However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not
able tocollect the final tax on the discount/interest income realized by RCBC as a
result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling No. 007-04
dated July 16, 2004 effectively modifies and supersedes the 2001 Rulings by
stating that the [1997] Tax Code is clear that the "term public means borrowing
from twenty (20) or more individual or corporate lenders at any one time." The
word "any" plainly indicates that the period contemplated is the entire term of
the bond, and not merely the point of origination or issuance. . . . Thus, by taking
the PEACe bonds out of the ambit of deposits [sic] substitutes and exempting it
from the 20% Final Tax, an exemption in favour of the PEACe Bonds was created
when no such exemption is found in the law.55

On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued
by the Philippine Dealing System Holdings Corporation and Subsidiaries ("PDS
Group"). The Memo provides that in view of the pronouncement of the DOF and
the BIR on the applicability of the 20% FWT on the Government Bonds, no
transferof the same shall be allowed to be recorded in the Registry of Scripless
Securities ("ROSS") from 12 October 2011 until the redemption payment date on
18 October 2011. Thus, the bondholders of record appearing on the ROSS as of 18
October 2011, which include the Petitioners, shall be treated by the BTr asthe
beneficial owners of such securities for the relevant [tax] payments to be imposed
thereon."56

On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the
Bureau of Internal Revenue issued BIR Ruling No. DA 378-201157 clarifying that
the final withholding tax due on the discount or interest earned on the PEACe
Bonds should "be imposed and withheld not only on RCBC/CODE NGO but also
*on+ ‘all subsequent holders of the Bonds.’"58

On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or
mandamus (with urgent application for a temporary restraining order and/or writ
of preliminary injunction)59 before this court.

On October 18, 2011, this court issued a temporary restraining order

(TRO)60 "enjoining the implementation of BIR Ruling No. 370-2011 against the
[PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on
interest income there from shall be withheld by the petitioner banks and placed
in escrow pending resolution of [the] petition."61

On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to
intervene and to admit petition-in-intervention62 dated October 27, 2011, which
was granted by this court on November 15, 2011.63

Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with

Urgent Ex Parte Motion to Direct Respondents to Comply with the TRO."64 They
alleged that on the same day that the temporary restraining order was issued, the
Bureau of Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the amounts
corresponding to the 20% final withholding tax on interest income, and that the
Bureau of Treasury refused to release the amounts corresponding to the 20% final
withholding tax.65On November 15, 2011, this court directed respondents to: "(1)
SHOW CAUSE why they failed to comply with the October 18, 2011 resolution;
and (2) COMPLY with the Court’s resolution in order that petitioners may place
the corresponding funds in escrow pending resolution of the petition."66

On the same day, CODE-NGO filed a motion for leave to intervene (and to admit
attached petition-in-intervention with comment on the petitionin-intervention of
RCBC and RCBC Capital).67 The motion was granted by this court on November 22,
2011.68

On December 1, 2011, public respondents filed their compliance.69 They explained

that: 1) "the implementation of [BIR Ruling No. 370-2011], which has already
been performed on October 18, 2011 with the withholding of the 20% final
withholding tax on the face value of the PEACe bonds, is already fait accompli . . .
when the Resolution and TRO were served to and received by respondents BTr
and National Treasurer [on October 19, 2011]";70 and 2) the withheld amount has
ipso facto become public funds and cannot be disbursed or released to
petitioners without congressional appropriation.71 Respondents further aver
that"[i]nasmuch as the . . . TRO has already become moot . . . the condition
attached to it, i.e., ‘that the 20% final withholding tax on interest income
therefrom shall be withheld by the banks and placed in escrow . . .’has also been
rendered moot[.]"72

On December 6, 2011, this court noted respondents' compliance.73

On February 22, 2012, respondents filed their consolidated comment74 on the

petitions-in-intervention filed by RCBC and RCBC Capital and On November 27,
2012, petitioners filed their "Manifestation with Urgent Reiterative Motion (To
Direct Respondents to Comply with the Temporary Restraining Order)."75

On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent
reiterative motion (to direct respondents to comply with the temporary
restraining order); and (b) required respondents to comment thereon.76

Respondents’ comment77 was filed on April 15,2013, and petitioners filed their
reply78 on June 5, 2013.

Issues

The main issues to be resolved are:

I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to
20% final withholding tax under the 1997 National Internal Revenue Code.
Related to this question is the interpretation of the phrase "borrowing from
twenty (20) or more individual or corporate lenders at any one time" under
Section 22(Y) of the 1997 National Internal Revenue Code, particularly on
whether the reckoning of the 20 lenders includes trading of the bonds in
the secondary market; and

II. If the PEACe Bonds are considered "deposit substitutes," whether the
government or the Bureau of Internal Revenue is estopped from imposing
and/or collecting the 20% final withholding tax from the face value of these
Bonds
 a. Will the imposition of the 20% final withholding tax violate the
non-impairment clause of the Constitution?

b. Will it constitute a deprivation of property without due process of

law?

c. Will it violate Section 245 of the 1997 National Internal Revenue

Code on non-retroactivity of rulings?

Arguments of petitioners, RCBC and RCBC

Capital, and CODE-NGO

Petitioners argue that "[a]s the issuer of the Government Bonds acting through
the BTr, the Government is obligated . . . to pay the face value amount of Ph₱35
Billion upon maturity without any deduction whatsoever."79 They add that "the
Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively
and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere
eleven (11) days before maturity and after several, consistent categorical
declarations that such bonds are exempt from the 20% FWT, without violating
due process"80 and the constitutional principle on non-impairment of
contracts.81 Petitioners aver that at the time they purchased the Bonds, they had
the right to expect that they would receive the full face value of the Bonds upon
maturity, in view of the 2001 BIR Rulings.82 "[R]egardless of whether or not the
2001 BIR Rulings are correct, the fact remains that [they] relied [on] good faith
thereon."83

At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as
defined under Section 22(Y) of the 1997 National Internal Revenue Code because
there was only one lender (RCBC) to whom the Bureau of Treasury issued the
Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings "erroneously
interpreted that the number of investors that participate in the ‘secondary
market’ is the determining factor in reckoning the existence or non-existence of
twenty (20) or more individual or corporate lenders."85 Furthermore, they
contend that the Bureau of Internal Revenue unduly expanded the definition of
deposit substitutes under Section 22 of the 1997 National Internal Revenue Code
in concluding that "the mere issuance of government debt instruments and
securities is deemed as falling within the coverage of ‘deposit
substitutes*.+’"86 Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to an
unauthorized act of administrative legislation[.]"87

Petitioners further argue that their income from the Bonds is a "trading gain,"
which is exempt from income tax.88They insist that "[t]hey are not lenders whose
income is considered as ‘interest income or yield’ subject to the 20% FWT under
Section 27 (D)(1) of the [1997 National Internal Revenue Code]"89 because they
"acquired the Government Bonds in the secondary or tertiary market."90

Even assuming without admitting that the Government Bonds are deposit
substitutes, petitioners argue that the collection of the final tax was barred by
prescription.91 They point out that under Section 7 of DOF Department Order No.
141-95,92 the final withholding tax "should have been withheld at the time of their
issuance[.]"93 Also, under Section 203 of the 1997 National Internal Revenue
Code, "internal revenuetaxes, such as the final tax, [should] be assessed within
three (3) years after the last day prescribed by law for the filing of the return."94

Moreover, petitioners contend that the retroactive application of the 2011 BIR
Ruling without prior notice to them was in violation of their property
rights,95 their constitutional right to due process96 as well as Section 246 of the
1997 National Internal Revenue Code on non-retroactivity of rulings.97 Allegedly,
it would also have "an adverse effect of colossal magnitude on the investors, both
localand foreign, the Philippine capital market, and most importantly, the
country’s standing in the international commercial community."98 Petitioners
explained that "unless enjoined, the government’s threatened refusal to pay the
full value of the Government Bonds will negatively impact on the image of the
country in terms of protection for property rights (including financial assets),
degree of legal protection for lender’s rights, and strength of investor
protection."99 They cited the country’s ranking in the World Economic Forum:
75th in the world in its 2011–2012 Global Competitiveness Index, 111th out of
142 countries worldwide and 2nd to the last among ASEAN countries in terms of
Strength of Investor Protection, and 105th worldwide and last among ASEAN
countries in terms of Property Rights Index and Legal Rights Index.100 It would also
allegedly "send a reverberating message to the whole world that there is no
certainty, predictability, and stability of financial transactions in the capital
markets[.]"101 "[T]he integrity of Government-issued bonds and notes will be
greatly shattered and the credit of the Philippine Government will suffer"102 if the
sudden turnaround of the government will be allowed,103 and it will reinforce
"investors’ perception that the level of regulatory risk for contracts entered into
by the Philippine Government is high,"104 thus resulting in higher interestrate for
government-issued debt instruments and lowered credit rating.105

Petitioners-intervenors RCBC and RCBC Capital contend that respondent

Commissioner of Internal Revenue "gravely and seriously abused her discretion in
the exercise of her rule-making power"106 when she issued the assailed 2011 BIR
Ruling which ruled that "all treasury bonds are ‘deposit substitutes’ regardless of
the number of lenders, in clear disregard of the requirement of twenty (20)or
more lenders mandated under the NIRC."107 They argue that "[b]y her blanket and
arbitrary classification of treasury bonds as deposit substitutes, respondent CIR
not only amended and expanded the NIRC, but effectively imposed a new tax on
privately-placed treasury bonds."108Petitioners-intervenors RCBC and RCBC
Capital further argue that the 2011 BIR Ruling will cause substantial impairment of
their vested rights109 under the Bonds since the ruling imposes new conditions by
"subjecting the PEACe Bonds to the twenty percent (20%) final withholding tax
notwithstanding the fact that the terms and conditions thereof as previously
represented by the Government, through respondents BTr and BIR, expressly
state that it is not subject to final withholding tax upon their maturity."110 They
added that "[t]he exemption from the twenty percent (20%) final withholding tax
[was] the primary inducement and principal consideration for [their]
participat[ion] in the auction and underwriting of the PEACe Bonds."111

Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that
respondent Commissioner of Internal Revenue violated their rights to due process
when she arbitrarily issued the 2011 BIR Ruling without prior notice and hearing,
and the oppressive timing of such ruling deprived them of the opportunity to
challenge the same.112

Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-
intervenors RCBC and RCBC Capital claim that respondents Bureau of Treasury
and CODE-NGO should be held liable "as [these] parties explicitly represented . . .
that the said bonds are exempt from the final withholding tax."113

Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the

implementation of the [2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011]
will have pernicious effects on the integrity of existing securities, which is contrary
to the State policies of stabilizing the financial system and of developing capital
markets."114

For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA
378-2011 are "invalid because they contravene Section 22(Y) of the 1997 [NIRC]
when the said rulings disregarded the applicability of the ‘20 or more lender’ rule
to government debt instruments"[;]115 (b) "when [it] sold the PEACe Bonds in the
secondary market instead of holding them until maturity, [it] derived . . . long-
term trading gain[s], not interest income, which [are] exempt . . . under Section
32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the tax exemption privilege relating to the
issuance of the PEACe Bonds . . . partakes of a contractual commitment granted
by the Government in exchange for a valid and material consideration [i.e., the
issue price paid and savings in borrowing cost derived by the Government,] thus
protected by the non-impairment clause of the 1987 Constitution"[;]117 and (d)
the 2004, 2005, and 2011 BIR Rulings "did not validly revoke the 2001 BIR Rulings
since no notice of revocation was issued to [it], RCBC and [RCBC Capital] and
petitioners[-bondholders], nor was there any BIR administrative guidance issued
and published[.]"118CODE-NGO additionally argues that impleading it in a Rule 65
petition was improper because: (a) it involves determination of a factual
question;119 and (b) it is premature and states no cause of action as it amounts to
an anticipatory third-party claim.120

Arguments of respondents

Respondents argue that petitioners’ direct resort to this court to challenge the
2011 BIR Ruling violates the doctrines of exhaustion of administrative remedies
and hierarchy ofcourts, resulting in a lack of cause of action that justifies the
dismissal of the petition.121 According to them, "the jurisdiction to review the
rulings of the [Commissioner of Internal Revenue], after the aggrieved party
exhausted the administrative remedies, pertains to the Court of Tax
Appeals."122 They point out that "a case similar to the present Petition was [in
fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351
*and+ entitled, ‘Rizal Commercial Banking Corporation and RCBC Capital
Corporation vs. Commissioner of Internal Revenue, et al.’"123

Respondents further take issue on the timeliness of the filing of the petition and
petitions-in-intervention.124 They argue that under the guise of mainly assailing
the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR
Rulings, of which the attack is legally prohibited, and the petition insofar as it
seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant
to Rule 65, Section 4.125

Respondents contend that the discount/interest income derived from the PEACe
Bonds is not a trading gain but interest income subject to income tax.126 They
explain that "[w]ith the payment of the Ph₱35 Billion proceeds on maturity of the
PEACe Bonds, Petitioners receive an amount of money equivalent to about
Ph₱24.8 Billion as payment for interest. Such interest is clearly an income of the
Petitioners considering that the same is a flow of wealth and not merely a return
of capital – the capital initially invested in the Bonds being approximately Ph₱10.2
Billion[.]"127

Maintaining that the imposition of the 20% final withholding tax on the PEACe
Bonds does not constitute an impairment of the obligations of contract,
respondents aver that: "The BTr has no power to contractually grant a tax
exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be
considered a material term of the Bonds"[;]128 "[t]here has been no change in the
laws governing the taxability of interest income from deposit substitutes and said
laws are read into every contract"[;]129 "[t]he assailed BIR Rulings merely interpret
the term "deposit substitute" in accordance with the letter and spirit of the Tax
Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default by the
Government as the latter performed its obligations to the bondholders in
full"[;]131 and "[i]f there was a breach of contract or a misrepresentation it was
between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the
PEACe Bonds."132

Similarly, respondents counter that the withholding of "[t]he 20% final

withholding tax on the PEACe Bonds does not amount to a deprivation of
property without due process of law."133 Their imposition of the 20% final
withholding tax is not arbitrary because they were only performing a duty
imposed by law;134 "[t]he 2011 BIR Ruling is aninterpretative rule which merely
interprets the meaning of deposit substitutes [and upheld] the earlier
construction given to the termby the 2004 and 2005 BIR Rulings."135 Hence,
respondents argue that "there was no need to observe the requirements of
notice, hearing, and publication[.]"136
Nonetheless, respondents add that "there is every reason to believe that
Petitioners — all major financial institutions equipped with both internal and
external accounting and compliance departments as wellas access to both
internal and external legal counsel; actively involved in industry organizations
such as the Bankers Association of the Philippines and the Capital Market
Development Council; all actively taking part in the regular and special debt
issuances of the BTr and indeed regularly proposing products for issue by BTr —
had actual notice of the 2004 and 2005 BIR Rulings."137 Allegedly, "the sudden and
drastic drop — including virtually zero trading for extended periods of six months
to almost a year — in the trading volume of the PEACe Bonds after the release of
BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market participants,
including the Petitioners herein, were aware of the ruling and its consequences
for the PEACe Bonds."138

Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the
Commissioner of Internal Revenue’s rule-making power;139 that it and the 2004
and 2005 BIR Rulings did not unduly expand the definition of deposit substitutes
by creating an unwarranted exception to the requirement of having 20 or more
lenders/purchasers;140 and the word "any" in Section 22(Y) of the National
Internal Revenue Code plainly indicates that the period contemplated is the entire
term of the bond and not merely the point of origination or issuance.141

Respondents further argue that a retroactive application of the 2011 BIR Ruling
will not unjustifiably prejudice petitioners.142 "[W]ith or without the 2011 BIR
Ruling, Petitioners would be liable topay a 20% final withholding tax just the same
because the PEACe Bonds in their possession are legally in the nature of deposit
substitutes subject to a 20% final withholding tax under the NIRC."143 Section 7 of
DOF Department Order No. 141-95 also provides that incomederived from
Treasury bonds is subject to the 20% final withholding tax.144 "[W]hile revenue
regulations as a general rule have no retroactive effect, if the revocation is due to
the fact that the regulation is erroneous or contrary to law, such revocation shall
have retroactive operation as to affect past transactions, because a wrong
construction of the law cannot give rise to a vested right that can be invoked by a
taxpayer."145

Finally, respondents submit that "there are a number of variables and factors
affecting a capital market."146 "[C]apital market itself is inherently
unstable."147 Thus, "*p+etitioners’ argument that the 20% final withholding tax . . .
will wreak havoc on the financial stability of the country is a mere supposition
that is not a justiciable issue."148

On the prayer for the temporary restraining order, respondents argue that this
order "could no longer be implemented [because] the acts sought to be enjoined
are already fait accompli."149 They add that "to disburse the funds withheld to the
Petitioners at this time would violate Section 29[,] Article VI of the Constitution
prohibiting ‘money being paid out of the Treasury except in pursuance of an
appropriation made by law*.+’"150 "The remedy of petitioners is to claim a tax
refund under Section 204(c) of the Tax Code should their position be upheld by
the Honorable Court."151

Respondents also argue that "the implementation of the TRO would violate
Section 218 of the Tax Code in relation to Section 11 of Republic Act No. 1125 (as
amended by Section 9 of Republic Act No. 9282) which prohibits courts, except
the Court of Tax Appeals, from issuing injunctions to restrain the collection of any
national internal revenue tax imposed by the Tax Code."152

Summary of arguments

In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and

CODE-NGO argue that:

1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997
National Internal Revenue Code when it declared that all government debt
instruments are deposit substitutes regardless of the 20-lender rule; and

2. The 2011 BIR Ruling cannot be applied retroactively because:

a) It will violate the contract clause;

● It constitutes a unilateral amendment of a material term (tax

exempt status) in the Bonds, represented by the government as an
inducement and important consideration for the purchase of the
Bonds;

b) It constitutes deprivation ofproperty without due process because

there was no prior notice to bondholders and hearing and
publication;
 c) It violates the rule on non-retroactivity under the 1997 National
Internal Revenue Code;

d) It violates the constitutional provision on supporting activities of

non-government organizations and development of the capital
market; and

e) The assessment had already prescribed.

Respondents counter that:

1) Respondent Commissioner of Internal Revenue did not act with grave abuse of
discretion in issuing the challenged 2011 BIR Ruling:

a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of
the Commissioner of Internal Revenue’s power to interpret the provisions
of the 1997 National Internal Revenue Code and other tax laws;

b. Commissioner of Internal Revenue merely restates and confirms the

interpretations contained in previously issued BIR Ruling Nos. 007-2004,
DA-491-04,and 008-05, which have already effectively abandoned or
revoked the 2001 BIR Rulings;

c. Commissioner of Internal Revenue is not bound by his or her

predecessor’s rulings especially when the latter’s rulings are not in
harmony with the law; and

d. The wrong construction of the law that the 2001 BIR Rulings have
perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR
Ruling can be given retroactive effect.

2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and
adequate remedy in the ordinary course of law:

a. Petitioners had the basic remedy offiling a claim for refund of the 20% final
withholding tax they allege to have been wrongfully collected; and

b. Non-observance of the doctrine of exhaustion of administrative remedies and

of hierarchy of courts.
 Court’s ruling

Procedural Issues
Non-exhaustion of
administrative remedies proper

Under Section 4 of the 1997 National Internal Revenue Code, interpretative

rulings are reviewable by the Secretary of Finance.

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.
-The power to interpret the provisions of this Code and other tax laws shall be
under the exclusive and original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance. (Emphasis supplied)

Thus, it was held that "[i]f superior administrative officers [can] grant the relief
prayed for, [then] special civil actions are generally not entertained."153 The
remedy within the administrative machinery must be resorted to first and
pursued to its appropriate conclusion before the court’s judicial power can be
sought.154

Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of

administrative remedies:

[The doctrine of exhaustion of administrative remedies] is a relative one and its

flexibility is called upon by the peculiarity and uniqueness of the factual and
circumstantial settings of a case. Hence, it is disregarded (1) when there is a
violation of due process, (2) when the issue involved is purely a legal
question,155 (3) when the administrative action is patently illegal amounting to
lack or excess of jurisdiction,(4) when there is estoppel on the part of the
administrative agency concerned,(5) when there is irreparable injury, (6) when
the respondent is a department secretary whose acts as an alter ego of the
President bears the implied and assumed approval of the latter, (7) when to
require exhaustion of administrative remedies would be unreasonable, (8) when
it would amount to a nullification of a claim, (9) when the subject matter is a
private land in land case proceedings, (10) when the rule does not provide a plain,
speedy and adequate remedy, (11) when there are circumstances indicating the
urgency of judicial intervention.156 (Emphasis supplied, citations omitted)
The exceptions under (2) and (11)are present in this case. The question involved is
purely legal, namely: (a) the interpretation of the 20-lender rule in the definition
of the terms public and deposit substitutes under the 1997 National Internal
Revenue Code; and (b) whether the imposition of the 20% final withholding tax
on the PEACe Bonds upon maturity violates the constitutional provisions on non-
impairment of contracts and due process. Judicial intervention is likewise urgent
with the impending maturity of the PEACe Bonds on October 18, 2011.

The rule on exhaustion of administrative remedies also finds no application when

the exhaustion will result in an exercise in futility.157

In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR
Ruling would be a futile exercise because it was upon the request of the Secretary
of Finance that the 2011 BIR Ruling was issued by the Bureau of Internal Revenue.
It appears that the Secretary of Finance adopted the Commissioner of Internal
Revenue’s opinions as his own.158 This position was in fact confirmed in the
letter159 dated October 10, 2011 where he ordered the Bureau of Treasury to
withhold the amount corresponding to the 20% final withholding tax on the
interest or discounts allegedly due from the bondholders on the strength of the
2011 BIR Ruling. Doctrine on hierarchy of courts

We agree with respondents that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The
questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in connection
with the implementation of the 1997 National Internal Revenue Code on the
taxability of the interest income from zero-coupon bonds issued by the
government.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as
amended by Republic Act No. 9282,160such rulings of the Commissioner of Internal
Revenue are appealable to that court, thus:

SEC. 7.Jurisdiction.- The CTA shall exercise:

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

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or
other laws administered by the Bureau of Internal Revenue;

....

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party
adversely affected by a decision, ruling or inaction of the Commissioner of
Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of Agriculture or the Central
Board of Assessment Appeals or the Regional Trial Courts may file an appeal with
the CTA within thirty (30) days after the receipt of such decision or rulingor after
the expiration of the period fixed by law for action as referred toin Section 7(a)(2)
herein.

....

SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding
involving matters arising under the National Internal Revenue Code, the Tariff and
Customs Code or the Local Government Code shall be maintained, except as
herein provided, until and unless an appeal has been previously filed with the CTA
and disposed of in accordance with the provisions of this Act.

In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v.

Blaquera,162 this court emphasized the jurisdiction of the Court of Tax Appeals
over rulings of the Bureau of Internal Revenue, thus:

While the Court of Appeals correctly took cognizance of the petition for certiorari,
however, let it be stressed that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to
the RTC.

The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or
opinions of the Commissioner implementing the Tax Code on the taxability of
pawnshops.. . .

....

Such revenue orders were issued pursuant to petitioner's powers under Section
245 of the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and
regulations. — The Secretary of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules and regulations for the effective
enforcement of the provisions of this Code.

The authority of the Secretary of Finance to determine articles similar or

analogous to those subject to a rate of sales tax under certain category
enumerated in Section 163 and 165 of this Code shall be without prejudice to the
power of the Commissioner of Internal Revenue to make rulings or opinions in
connection with the implementation of the provisionsof internal revenue laws,
including ruling on the classification of articles of sales and similar purposes."
(Emphasis in the original)

....

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:

"Plaintiff maintains that this is not an appeal from a ruling of the Collector of
Internal Revenue, but merely an attempt to nullify General Circular No. V-148,
which does not adjudicate or settle any controversy, and that, accordingly, this
case is not within the jurisdiction of the Court of Tax Appeals.

We find no merit in this pretense. General Circular No. V-148 directs the officers
charged with the collection of taxes and license fees to adhere strictly to the
interpretation given by the defendant tothe statutory provisions
abovementioned, as set forth in the Circular. The same incorporates, therefore, a
decision of the Collector of Internal Revenue (now Commissioner of Internal
Revenue) on the manner of enforcement of the said statute, the administration of
which is entrusted by law to the Bureau of Internal Revenue. As such, it comes
within the purview of Republic Act No. 1125, Section 7 of which provides that the
Court of Tax Appeals ‘shall exercise exclusive appellate jurisdiction to review by
appeal . . . decisions of the Collector of Internal Revenue in . . . matters arising
under the National Internal Revenue Code or other law or part of the law
administered by the Bureau of Internal Revenue.’"163

In exceptional cases, however, this court entertained direct recourse to it when

"dictated by public welfare and the advancement of public policy, or demanded
by the broader interest of justice, or the orders complained of were found to be
patent nullities, or the appeal was considered as clearly an inappropriate
remedy."164

In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The

Secretary, Department of Interior and Local Government,165 this court noted that
the petition for prohibition was filed directly before it "in disregard of the rule on
hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction over
the . . . petition and decide the same on its merits in viewof the significant
constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt
disposition of the matter."166

Here, the nature and importance of the issues raised167 to the investment and
banking industry with regard to a definitive declaration of whether government
debt instruments are deposit substitutes under existing laws, and the novelty
thereof, constitute exceptional and compelling circumstances to justify resort to
this court in the first instance.

The tax provision on deposit substitutes affects not only the PEACe Bonds but also
any other financial instrument or product that may be issued and traded in the
market. Due to the changing positions of the Bureau of Internal Revenue on this
issue, there isa need for a final ruling from this court to stabilize the expectations
in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative remedies

and hierarchy of courts had been rendered moot by this court’s issuance of the
temporary restraining order enjoining the implementation of the 2011 BIR Ruling.
The temporary restraining order effectively recognized the urgency and necessity
of direct resort to this court.

Substantive issues

Tax treatment of deposit

substitutes

Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal

Revenue Code, a final withholdingtax at the rate of 20% is imposed on interest on
any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements. These provisions read:
SEC. 24. Income Tax Rates.

....

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of interest fromany
currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements; . . . Provided, further,
That interest income from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed
under this Subsection: Provided, finally, That should the holder of the certificate
pre-terminate the deposit or investment before the fifth (5th) year, a final tax
shall be imposed on the entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and

Less than three (3) years - 20%. (Emphasis supplied)

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

....

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A
final tax at the rate of twenty percent (20%) is hereby imposed upon the amount
of interest on currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements received
by domestic corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived by a domestic
corporation from a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven and one-half
percent (7 1/2%) of such interest income. (Emphasis supplied)

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from
any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and royalties derived
from sources within the Philippines shall be subject to a final income tax at the
rate of twenty percent (20%) of such interest: Provided, however, That interest
income derived by a resident foreign corporation from a depository bank under
the expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of such interest income.
(Emphasis supplied)

This tax treatment of interest from bank deposits and yield from deposit
substitutes was first introduced in the 1977 National Internal Revenue Code
through Presidential Decree No. 1739168 issued in 1980. Later, Presidential Decree
No. 1959, effective on October 15, 1984, formally added the definition of deposit
substitutes, viz:

(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from
the public, other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's own account, for the purpose
of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer.These promissory notes,
repurchase agreements, certificates of assignment or participation and similar
instrument with recourse as may be authorized by the Central Bank of the
Philippines, for banks and non-bank financial intermediaries or by the Securities
and Exchange Commission of the Philippines for commercial, industrial, finance
companies and either non-financial companies: Provided, however, that only debt
instruments issued for inter-bank call loans to cover deficiency in reserves against
deposit liabilities including those between or among banks and quasi-banks shall
not be considered as deposit substitute debt instruments. (Emphasis supplied)

Revenue Regulations No. 17-84, issued to implement Presidential Decree No.

1959, adopted verbatim the same definition and specifically identified the
following borrowings as "deposit substitutes":

SECTION 2. Definitions of Terms. . . .

(h) "Deposit substitutes" shall mean –

....

(a) All interbank borrowings by or among banks and non-bank financial

institutions authorized to engage in quasi-banking functions evidenced by
deposit substitutes instruments, except interbank call loans to cover
deficiency in reserves against deposit liabilities as evidenced by interbank
loan advice or repayment transfer tickets.

(b) All borrowings of the national and local government and its
instrumentalities including the Central Bank of the Philippines, evidenced
by debt instruments denoted as treasury bonds, bills, notes, certificates of
indebtedness and similar instruments.

(c) All borrowings of banks, non-bank financial intermediaries, finance

companies, investment companies, trust companies, including the trust
department of banks and investment houses, evidenced by deposit
substitutes instruments. (Emphasis supplied)

The definition of deposit substitutes was amended under the 1997 National
Internal Revenue Code with the addition of the qualifying phrase for public –
borrowing from 20 or more individual or corporate lenders at any one time.
Under Section 22(Y), deposit substitute is defined thus: SEC. 22. Definitions- When
used in this Title:

....
(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining
funds from the public(the term 'public' means borrowing from twenty (20) or
more individual or corporate lenders at any one time) other than deposits,
through the issuance, endorsement, or acceptance of debt instruments for the
borrower’s own account, for the purpose of relending or purchasing of
receivables and other obligations, or financing their own needs or the needs of
their agent or dealer. These instruments may include, but need not be limited to,
bankers’ acceptances, promissory notes, repurchase agreements, including
reverse repurchase agreements entered into by and between the Bangko Sentral
ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5)
days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit
substitute debt instruments. (Emphasis supplied)

Under the 1997 National Internal Revenue Code, Congress specifically defined
"public" to mean "twenty (20) or more individual or corporate lenders at any one
time." Hence, the number of lenders is determinative of whether a debt
instrument should be considered a deposit substitute and consequently subject to
the 20% final withholding tax.

20-lender rule

Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr
issued the Government Bonds."169 On the other hand, respondents theorize that
the word "any" "indicates that the period contemplated is the entire term of the
bond and not merely the point of origination or issuance[,]"170 such that if the
debt instruments "were subsequently sold in secondary markets and so on, insuch
a way that twenty (20) or more buyers eventually own the instruments, then it
becomes indubitable that funds would be obtained from the "public" as defined
in Section 22(Y) of the NIRC."171 Indeed, in the context of the financial market, the
words "at any one time" create an ambiguity.

Financial markets

Financial markets provide the channel through which funds from the surplus units
(households and business firms that have savings or excess funds) flow to the
deficit units (mainly business firms and government that need funds to finance
their operations or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into financial
assets, and the borrowers receive these funds now considered as their financial
liabilities. The transfer of funds is represented by a security, such as stocks and
bonds. Fund suppliers earn a return on their investment; the return is necessary
to ensure that funds are supplied to the financial markets.172

"The financial markets that facilitate the transfer of debt securities are commonly
classified by the maturity of the securities[,]"173 namely: (1) the money market,
which facilitates the flow of short-term funds (with maturities of one year or less);
and (2) the capital market, which facilitates the flow of long-term funds (with
maturities of more than one year).174

Whether referring to money marketsecurities or capital market securities,

transactions occur either in the primary market or in the secondary
market.175 "Primary markets facilitate the issuance of new securities. Secondary
markets facilitate the trading of existing securities, which allows for a change in
the ownership of the securities."176 The transactions in primary markets exist
between issuers and investors, while secondary market transactions exist among
investors.177

"Over time, the system of financial markets has evolved from simple to more
complex ways of carrying out financial transactions."178 Still, all systems perform
one basic function: the quick mobilization of money from the lenders/investors to
the borrowers.179

Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect
finance; and (3) indirect finance.180

With direct financing, the "borrower and lender meet each other and exchange
funds in returnfor financial assets"181(e.g., purchasing bonds directly from the
company issuing them). This method provides certain limitations such as: (a)
"both borrower and lender must desire to exchange the same amount of funds at
the same time"[;]182 and (b) "both lender and borrower must frequently incur
substantial information costs simply to find each other."183

In semidirect financing, a securities broker or dealer brings surplus and deficit

units together, thereby reducing information costs.184 A Broker185 is "an individual
or financial institution who provides information concerning possible purchases
and sales of securities. Either a buyer or a seller of securities may contact a
broker, whose job is simply to bring buyers and sellers together."186 A
dealer187 "also serves as a middleman between buyers and sellers, but the dealer
actually acquires the seller’s securities in the hope of selling them at a later time
at a more favorable price."188 Frequently, "a dealer will split up a large issue of
primary securities into smaller units affordable by . . . buyers . . . and thereby
expand the flow of savings into investment."189 In semi direct financing, "[t]he
ultimate lender still winds up holding the borrower’s securities, and therefore the
lender must be willing to accept the risk, liquidity, and maturity characteristics of
the borrower’s *debt security+. There still must be a fundamental coincidence of
wants and needs between [lenders and borrowers] for semidirect financial
transactions to take place."190

"The limitations of both direct and semidirect finance stimulated the

development of indirect financial transactions, carried out with the help of
financial intermediaries"191 or financial institutions, like banks, investment banks,
finance companies, insurance companies, and mutual funds.192 Financial
intermediaries accept funds from surplus units and channel the funds to deficit
units.193 "Depository institutions [such as banks] accept deposits from surplus
units and provide credit to deficit units through loans and purchase of [debt]
securities."194 Nondepository institutions, like mutual funds, issue securities of
their own (usually in smaller and affordable denominations) to surplus units and
at the same time purchase debt securities of deficit units.195 "By pooling the
resources of[small savers, a financial intermediary] can service the credit needs of
large firms simultaneously."196

The financial market, therefore, is an agglomeration of financial transactions in

securities performed by market participants that works to transfer the funds from
the surplus units (or investors/lenders) to those who need them (deficit units or
borrowers).

Meaning of "at any one time"

Thus, from the point of view of the financial market, the phrase "at any one time"
for purposes of determining the "20 or more lenders" would mean every
transaction executed in the primary or secondary market in connection with the
purchase or sale of securities.
For example, where the financial assets involved are government securities like
bonds, the reckoning of "20 or more lenders/investors" is made at any transaction
in connection with the purchase or sale of the Government Bonds, such as:

1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary

market;

2. Sale and distribution by GSEDs to various lenders/investors in the

secondary market;

3. Subsequent sale or trading by a bondholder to another lender/investor in

the secondary market usually through a broker or dealer; or

4. Sale by a financial intermediary-bondholder of its participation interests

in the bonds to individual or corporate lenders in the secondary market.

When, through any of the foregoing transactions, funds are simultaneously

obtained from 20 or morelenders/investors, there is deemed to be a public
borrowing and the bonds at that point intime are deemed deposit substitutes.
Consequently, the seller is required to withhold the 20% final withholding tax on
the imputed interest income from the bonds.

For debt instruments that are

not deposit substitutes, regular
income tax applies

It must be emphasized, however, that debt instruments that do not qualify as

deposit substitutes under the 1997 National Internal Revenue Code are subject to
the regular income tax.

The phrase "all income derived from whatever source" in Chapter VI,
Computation of Gross Income, Section 32(A) of the 1997 National Internal
Revenue Code discloses a legislative policy to include all income not expressly
exempted as within the class of taxable income under our laws.

"The definition of gross income isbroad enough to include all passive incomes
subject to specific tax rates or final taxes."197 Hence, interest income from deposit
substitutes are necessarily part of taxable income. "However, since these passive
incomes are already subject to different rates and taxed finally at source, they are
no longer included in the computation of gross income, which determines taxable
income."198 "Stated otherwise . . . if there were no withholding tax system in place
in this country, this 20 percent portion of the ‘passive’ income of
[creditors/lenders] would actually be paid to the [creditors/lenders] and then
remitted by them to the government in payment of their income tax."199

This court, in Chamber of Real Estate and Builders’ Associations, Inc. v.

Romulo,200 explained the rationale behind the withholding tax system:

The withholding [of tax at source] was devised for three primary reasons: first, to
provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be
lost or substantially reduced through failure to file the corresponding returns[;]
and third, to improve the government’s cash flow. This results in administrative
savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated
means and remedies.201 (Citations omitted)

"The application of the withholdings system to interest on bank deposits or yield

from deposit substitutes is essentially to maximize and expedite the collection of
income taxes by requiring its payment at the source."202

Hence, when there are 20 or more lenders/investors in a transaction for a specific

bond issue, the seller isrequired to withhold the 20% final income tax on the
imputed interest income from the bonds.

Interest income v. gains from sale or redemption

The interest income earned from bonds is not synonymous with the "gains"
contemplated under Section 32(B)(7)(g)203 of the 1997 National Internal Revenue
Code, which exempts gains derived from trading, redemption, or retirement of
long-term securities from ordinary income tax.

The term "gain" as used in Section 32(B)(7)(g) does not include interest, which
represents forbearance for the use of money. Gains from sale or exchange or
retirement of bonds orother certificate of indebtedness fall within the general
category of "gainsderived from dealings in property" under Section 32(A)(3), while
interest from bonds or other certificate of indebtedness falls within the category
of "interests" under Section 32(A)(4).204 The use of the term "gains from sale" in
Section 32(B)(7)(g) shows the intent of Congress not toinclude interest as referred
under Sections 24, 25, 27, and 28 in the exemption.205

Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized
from the trading of the bonds before their maturity date, which is the difference
between the selling price of the bonds in the secondary market and the price at
which the bonds were purchased by the seller; and (2) gain realized by the last
holder of the bonds when the bonds are redeemed at maturity, which is the
difference between the proceeds from the retirement of the bonds and the price
atwhich such last holder acquired the bonds. For discounted instruments,like the
zero-coupon bonds, the trading gain shall be the excess of the selling price over
the book value or accreted value (original issue price plus accumulated discount
from the time of purchase up to the time of sale) of the instruments.206

The Bureau of Internal

Revenue rulings

The Bureau of Internal Revenue’s interpretation as expressed in the three 2001

BIR Rulings is not consistent with law.207 Its interpretation of "at any one time" to
mean at the point of origination alone is unduly restrictive.

BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the
2004 and 2005 BIR Rulings) that "all treasury bonds . . . regardlessof the number
of purchasers/lenders at the time of origination/issuance are considered deposit
substitutes."208 Being the subject of this petition, it is, thus, declared void because
it completely disregarded the 20 or more lender rule added by Congress in the
1997 National Internal Revenue Code. It also created a distinction for government
debt instruments as against those issued by private corporations when there was
none in the law.

Tax statutes must be reasonably construed as to give effect to the whole act.
Their constituent provisions must be read together, endeavoring to make every
part effective, harmonious, and sensible.209 That construction which will leave
every word operative will be favored over one that leaves some word, clause, or
sentence meaningless and insignificant.210

It may be granted that the interpretation of the Commissioner of Internal

Revenue in charge of executing the 1997 National Internal Revenue Code is an
authoritative construction ofgreat weight, but the principle is not absolute and
may be overcome by strong reasons to the contrary. If through a
misapprehension of law an officer has issued an erroneous interpretation, the
error must be corrected when the true construction is ascertained.

In Philippine Bank of Communications v. Commissioner of Internal

Revenue,211 this court upheld the nullification of Revenue Memorandum Circular
(RMC) No. 7-85 issued by the Acting Commissioner of Internal Revenue because it
was contrary to the express provision of Section 230 of the 1977 National Internal
Revenue Codeand, hence, "[cannot] be given weight for to do so would, in effect,
amend the statute."212 Thus:

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing
the prescriptive period of two years to ten years on claims of excess quarterly
income tax payments, such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret
the law; rather it legislated guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered

administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. Thus, courts will
not countenance administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and
implement.213(Citations omitted)

This court further held that "[a] memorandum-circular of a bureau head could not
operate to vest a taxpayer with a shield against judicial action [because] there are
no vested rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same."214 In Commissioner of
Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,215 this court nullified
Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which
imposed a 5% lending investor's tax on pawnshops.216 It was held that "the
[Commissioner] cannot, in the exercise of [its interpretative] power, issue
administrative rulings or circulars not consistent with the law sought to be
applied. Indeed, administrative issuances must not override, supplant or modify
the law, but must remain consistent with the law they intend to carry out. Only
Congress can repeal or amend the law."217

In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance

Secretary,218 this court stated that the Commissioner of Internal Revenue is not
bound by the ruling of his predecessors,219 but, to the contrary, the overruling of
decisions is inherent in the interpretation of laws:

[I]n considering a legislative rule a court is free to make three inquiries: (i)
whether the rule is within the delegated authority of the administrative agency;
(ii) whether itis reasonable; and (iii) whether it was issued pursuant to proper
procedure. But the court is not free to substitute its judgment as to the
desirability or wisdom of the rule for the legislative body, by its delegation of
administrative judgment, has committed those questions to administrative
judgments and not to judicial judgments. In the case of an interpretative rule, the
inquiry is not into the validity but into the correctness or propriety of the rule. As
a matter of power a court, when confronted with an interpretative rule, is free to
(i) give the force of law to the rule; (ii) go to the opposite extreme and substitute
its judgment; or (iii) give some intermediate degree of authoritative weight to the
interpretative rule.

In the case at bar, we find no reason for holding that respondent Commissioner
erred in not considering copra as an "agricultural food product" within the
meaning of § 103(b) of the NIRC. As the Solicitor General contends, "copra per se
is not food, that is, it is not intended for human consumption. Simply stated,
nobody eats copra for food." That previous Commissioners considered it so, is not
reason for holding that the present interpretation is wrong. The Commissioner of
Internal Revenue is not bound by the ruling of his predecessors. To the contrary,
the overruling of decisions is inherent in the interpretation of laws.220 (Emphasis
supplied, citations omitted)

Tax treatment of income

derived from the PEACe Bonds

The transactions executed for the sale of the PEACe Bonds are:

1. The issuance of the 35 billion Bonds by the Bureau of Treasury to

RCBC/CODE-NGO at 10.2 billion; and
 2. The sale and distribution by RCBC Capital (underwriter) on behalf of
CODE-NGO of the PEACe Bonds to undisclosed investors at ₱11.996 billion.

It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to
whom the PEACe Bonds were issued at the time of origination. However, a
reading of the underwriting agreement221 and RCBC term sheet222reveals that the
settlement dates for the sale and distribution by RCBC Capital (as underwriter for
CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase
price of approximately ₱11.996 would fall on the same day, October 18, 2001,
when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality,
therefore, the entire ₱10.2 billion borrowing received by the Bureau of Treasury
in exchange for the ₱35 billion worth of PEACe Bonds was sourced directly from
the undisclosed number of investors to whom RCBC Capital/CODE-NGO
distributed the PEACe Bonds — all at the time of origination or issuance. At this
point, however, we do not know as to how many investors the PEACe Bonds were
sold to by RCBC Capital.

Should there have been a simultaneous sale to 20 or more lenders/investors, the

PEACe Bonds are deemed deposit substitutes within the meaning of Section 22(Y)
of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would
have been obliged to pay the 20% final withholding tax on the interest or discount
from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on
the corresponding interest from the PEACe Bonds would likewise be required of
any lender/investor had the latter turnedaround and sold said PEACe Bonds,
whether in whole or part, simultaneously to 20 or more lenders or investors.

We note, however, that under Section 24223 of the 1997 National Internal
Revenue Code, interest income received by individuals from longterm deposits or
investments with a holding period of not less than five (5) years is exempt from
the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit
substitutes, the proper procedure was for the Bureau of Treasury to pay the face
value of the PEACe Bonds to the bondholders and for the Bureau of Internal
Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, orany lender or investor if such be the case, as the
withholding agents.
The collection of tax is not
barred by prescription

The three (3)-year prescriptive period under Section 203 of the 1997 National
Internal Revenue Code to assess and collect internal revenue taxes is extended to
10 years in cases of (1) fraudulent returns; (2) false returns with intent to evade
tax; and (3) failureto file a return, to be computed from the time of discovery of
the falsity, fraud, or omission. Section 203 states:

SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as

provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return
is filed beyond the period prescribed by law, the three (3)-year period shall be
counted from the day the return was filed. For purposes of this Section, a return
filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day. (Emphasis supplied)

....

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of

Taxes.

(a) In the case of a false or fraudulent return with intent to evade tax or of failure
to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be filed without assessment, at any time within ten (10)
years after the discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection
thereof.

Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to
20 or more lenders/investors, the Bureau of Internal Revenue may still collect the
unpaid tax from RCBC Capital/CODE-NGO within 10 years after the discovery of
the omission.

In view of the foregoing, there is no need to pass upon the other issues raised by
petitioners and petitioners-intervenors.
 Reiterative motion on the temporary restraining order

Respondents’ withholding of the

20% final withholding tax on
October 18, 2011 was justified

Under the Rules of Court, court orders are required to be "served upon the
parties affected."224 Moreover, service may be made personally or by mail.225 And,
"[p]ersonal service is complete upon actual delivery [of the order.]"226This court’s
temporary restraining order was received only on October 19, 2011, or a day after
the PEACe Bonds had matured and the 20% final withholding tax on the interest
income from the same was withheld.

Publication of news reports in the print and broadcast media, as well as on the
internet, is not a recognized mode of service of pleadings, court orders, or
processes. Moreover, the news reports227 cited by petitioners were posted
minutes before the close of office hours or late in the evening of October 18,
2011, and they did not givethe exact contents of the temporary restraining order.

"[O]ne cannot be punished for violating an injunction or an order for an injunction

unless it is shown that suchinjunction or order was served on him personally or
that he had notice of the issuance or making of such injunction or order."228

At any rate, "[i]n case of doubt, a withholding agent may always protect himself
or herself by withholding the tax due"229 and return the amount of the tax
withheld should it be finally determined that the income paid is not subject to
withholding.230 Hence, respondent Bureau of Treasury was justified in withholding
the amount corresponding to the 20% final withholding tax from the proceeds of
the PEACe Bonds, as it received this court’s temporary restraining order only on
October 19, 2011, or the day after this tax had been withheld.

Respondents’ retention of the

amounts withheld is a defiance
of the temporary restraining
order

Nonetheless, respondents’ continued failure to release to petitioners the amount

corresponding to the 20% final withholding tax in order that it may be placed in
escrow as directed by this court constitutes a defiance of this court’s temporary
restraining order.231

The temporary restraining order is not moot. The acts sought to be enjoined are
not fait accompli. For an act to be considered fait accompli, the act must have
already been fully accomplished and consummated.232 It must be irreversible,
e.g., demolition of properties,233 service of the penalty of imprisonment,234 and
hearings on cases.235When the act sought to be enjoined has not yet been fully
satisfied, and/or is still continuing in nature,236 the defense of fait accomplicannot
prosper.

The temporary restraining order enjoins the entire implementation of the 2011
BIR Ruling that constitutes both the withholding and remittance of the 20% final
withholding tax to the Bureau of Internal Revenue. Even though the Bureau of
Treasury had already withheld the 20% final withholding tax237 when it received
the temporary restraining order, it had yet to remit the monies it withheld to the
Bureau of Internal Revenue, a remittance which was due only on November 10,
2011.238 The act enjoined by the temporary restraining order had not yet been
fully satisfied and was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which
prescribes to national government agencies such as the Bureau of Treasury the
procedure for the remittance of all taxes it withheld to the Bureau of Internal
Revenue, a national agency shall file before the Bureau of Internal Revenue a Tax
Remittance Advice (TRA) supported by withholding tax returns on or before the
10th day of the following month after the said taxes had been withheld.240 The
Bureau of Internal Revenue shall transmit an original copy of the TRA to the
Bureau of Treasury,241which shall be the basis for recording the remittance of the
tax collection.242 The Bureau of Internal Revenue will then record the amount of
taxes reflected in the TRA as tax collection in the Journal ofTax Remittance by
government agencies based on its copies of the TRA.243 Respondents did not
submit any withholding tax return or TRA to provethat the 20% final withholding
tax was indeed remitted by the Bureau of Treasury to the Bureau of Internal
Revenue on October 18, 2011.

Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244 dated

October 18, 2011 submitted to this court shows:
 Account Debit Amount Credit
Code Amount

Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00

Coupon T/Bonds

(Peace Bonds) – 10 yr

Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59

Due to BIR 412-002 4,966,207,796.41

To record redemption of 10yr

Zero
coupon (Peace Bond) net of the
20% final
withholding tax pursuant to BIR
Ruling No.
378-2011, value date, October
18, 2011 per
BTr letter authority and BSP Bank
Statements.

The foregoing journal entry, however, does not prove that the amount of
₱4,966,207,796.41, representing the 20% final withholding tax on the PEACe
Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on
October 18, 2011. The entries merely show that the monies corresponding to 20%
final withholding tax was set aside for remittance to the Bureau of Internal
Revenue.

We recall the November 15, 2011 resolution issued by this court directing
respondents to "show cause why they failed to comply with the [TRO]; and [to]
comply with the [TRO] in order that petitioners may place the corresponding
funds in escrow pending resolution of the petition."245 The 20% final withholding
tax was effectively placed in custodia legiswhen this court ordered the deposit of
the amount in escrow. The Bureau of Treasury could still release the money
withheld to petitioners for the latter to place in escrow pursuant to this court’s
directive. There was no legal obstacle to the release of the 20% final withholding
tax to petitioners. Congressional appropriation is not required for the servicing of
public debts in view of the automatic appropriations clause embodied in
Presidential Decree Nos. 1177 and 1967.

Section 31 of Presidential Decree No. 1177 provides:

Section 31. Automatic Appropriations. All expenditures for (a) personnel

retirement premiums, government service insurance, and other similar fixed
expenditures, (b) principal and interest on public debt, (c) national government
guarantees of obligations which are drawn upon, are automatically appropriated:
provided, that no obligations shall be incurred or payments made from funds thus
automatically appropriated except as issued in the form of regular budgetary
allotments.

Section 1 of Presidential Decree No. 1967 states:

Section 1. There is hereby appropriated, out of any funds in the National Treasury
not otherwise appropriated, such amounts as may be necessary to effect
payments on foreign or domestic loans, or foreign or domestic loans whereon
creditors make a call on the direct and indirect guarantee of the Republic of the
Philippines, obtained by:

a. the Republic of the Philippines the proceeds of which were relent to

government-owned or controlled corporations and/or government
financial institutions;

b. government-owned or controlled corporations and/or government

financial institutions the proceeds of which were relent to public or private
institutions;

c. government-owned or controlled corporations and/or financial

institutions and guaranteed by the Republic of the Philippines;
 d. other public or private institutions and guaranteed by government
owned or controlled corporations and/or government financial institutions.

The amount of ₱35 billion that includes the monies corresponding to 20% final
withholding tax is a lawfuland valid obligation of the Republic under the
Government Bonds. Since said obligation represents a public debt, the release of
the monies requires no legislative appropriation.

Section 2 of Republic Act No. 245 likewise provides that the money to be used for
the payment of Government Bonds may be lawfully taken from the continuing
appropriation out of any monies in the National Treasury and is not required to
be the subject of another appropriation legislation: SEC. 2. The Secretary of
Finance shall cause to be paid out of any moneys in the National Treasury not
otherwise appropriated, or from any sinking funds provided for the purpose by
law, any interest falling due, or accruing, on any portion of the public debt
authorized by law. He shall also cause to be paid out of any such money, or from
any such sinking funds the principal amount of any obligations which have
matured, or which have been called for redemption or for which redemption has
been demanded in accordance with terms prescribed by him prior to date of
issue. . . In the case of interest-bearing obligations, he shall pay not less than their
face value; in the case of obligations issued at a discount he shall pay the face
value at maturity; or if redeemed prior to maturity, such portion of the face value
as is prescribed by the terms and conditions under which such obligations were
originally issued. There are hereby appropriated as a continuing appropriation out
of any moneys in the National Treasury not otherwise appropriated, such sums as
may be necessary from time to time to carry out the provisions of this section.
The Secretary of Finance shall transmit to Congress during the first month of each
regular session a detailed statement of all expenditures made under this section
during the calendar year immediately preceding.

Thus, DOF Department Order No. 141-95, as amended, states that payment for
Treasury bills and bonds shall be made through the National Treasury’s account
with the Bangko Sentral ng Pilipinas, to wit:

Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains
a Demand Deposit Account with the Bangko Sentral ng Pilipinas to which all
proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245, as
amended, shall be credited and all payments for redemption of Treasury Bills and
Bonds shall be charged.1âwphi1

Regarding these legislative enactments ordaining an automatic appropriations

provision for debt servicing, this court has held:

Congress . . . deliberates or acts on the budget proposals of the President, and

Congress in the exercise of its own judgment and wisdom formulates an
appropriation act precisely following the process established by the Constitution,
which specifies that no money may be paid from the Treasury except in
accordance with an appropriation made by law.

Debt service is not included inthe General Appropriation Act, since authorization
therefor already exists under RA Nos. 4860 and 245, as amended, and PD 1967.
Precisely in the light of this subsisting authorization as embodied in said Republic
Acts and PD for debt service, Congress does not concern itself with details for
implementation by the Executive, butlargely with annual levels and approval
thereof upon due deliberations as part of the whole obligation program for the
year. Upon such approval, Congress has spoken and cannot be said to
havedelegated its wisdom to the Executive, on whose part lies the
implementation or execution of the legislative wisdom.246 (Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary restraining
order issued by this court, which remained in full force and effect, until set aside,
vacated, or modified. Its conduct finds no justification and is reprehensible.247

WHEREFORE, the petition for review and petitions-in-intervention are GRANTED.

BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued

retention of the amount corresponding to the 20% final withholding tax despite
this court's directive in the temporary restraining order and in the resolution
dated November 15, 2011 to deliver the amounts to the banks to be placed in
escrow pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and

pay to the bondholders the amount corresponding-to the 20% final withholding
tax that it withheld on October 18, 2011.
MARVIC M.V.F. LEONEN
Associate Justice

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-23611 April 24, 1967

THE GUAGUA ELECTRIC LIGHT PLANT COMPANY, INC., petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE and THE HONORABLE COURT OF TAX
APPEALS, respondents.

Eligio Lagman for petitioner.

Office of the Solicitor General for respondents.

BENGZON, J.P., J.:

Guagua Electric Light Plant Co. (hereinafter called Guagua Electric Company for
short), a grantee of municipal franchise by the municipal council of Guagua,
Pampanga under Resolution No. 42 dated December 13, 1927 and by the
municipal council of Sexmoan, Pampanga under Resolution No. 48 dated
November 15, 1928 pursuant to Act 667, as amended, realized and reported a
gross income in the sum of P1,133,003.44 during the period from January 1, 1947
to November 1956 and paid thereon a franchise tax in the amount of P56,664.97
computed at 5% thereof in accordance with Section 259 of the National Internal
Revenue Code.

Believing that it should pay franchise tax at the lower rates provided for in its
franchises1 instead of 5% fixed by Section 259 of the Tax Code, it filed on March
25, 1957 a claim for refund for allegedly overpaid franchise tax amounting to
P35,593.98 on its gross receipts realized from January 1, 1947 to November 1956.
The Commissioner of Internal Revenue denied refund of franchise tax
corresponding to the period prior to the fourth quarter of 1951 on the ground
that the right to its refund had prescribed. 2 He however granted refund of the
following amounts:

Period Sum Refunded

4th quarter, 1951 to 3rd quarter, 1953 P7,482.17
1st quarter, 1955 to Sept. 1956 P8,232.39
Oct. and Nov. 1956 879.31

TOTAL P16,593.87
============

Not satisfied with the determination of the Commissioner, Guagua Electric

appealed to the Court of Tax Appeals. However, its appeal, docketed as C.T.A.
Case No. 508 was dismissed upon motion of the Commissioner of Internal
Revenue, interposed before filing his answer to the petition for review on the
ground that the same was instituted beyond the 30-days, period provided for in
Section 11 of Republic Act 1125.

Subsequently, this Court held in Hoa Hin Co., Inc. vs. David3 that electric franchise
holders under Act 567 are liable for franchise tax at the rate fixed by Section 259
of the Tax Code, that is, 5% of the gross receipts. Accordingly, on March 2, 1961
the Commissioner of Internal Revenue assessed against Guagua Electric deficiency
franchise tax computed thus:

1. Gross receipts, Guagua and Sexmoan, Oct. 1, 1952 to June 30,

P1,116,138.01
1959
Gross receipts, Sexmoan July 1, 1959 to Oct. 31, 1959 5,543.25
Gross receipts, Guagua, July 1, 1959 to June 30, 1960 181,354.57

Total gross receipts

P1,303,035.81
5% franchise tax due 65,151.79
Less: amount paid 43,941.64
Tax still due
 21,210.15
Less: Overpayment, Sexmoan, Nov. 1, 1959 to June 30, 1960 181.71

Deficiency tax 21,028.44

Add: 25% surcharge 3,257.11
2 Add: Amount refunded 16,593.87

Total tax due 42,879.42

============

Guagua Electric contested the deficiency assessment in its letter dated March 30,
1961 contending that the same is violative of its franchises; that the computation
of the gross receipts is contrary to rules; and that the right to assess and/or
collect the tax has prescribed. On August 21, 1961 the appellate division of the
Bureau of Internal Revenue recommended that the right to assess and collect the
tax corresponding to the period prior to January 1, 1956 has prescribed.
Consequently, the Commissioner issued the following revised assessment
eliminating therefrom the deficiency tax for the period prior to January 1, 1956,
as recommended:

Gross receipts, Jan. 1, 1956 to June 30, 1962 P858,070.67

5% franchise tax and 3% percentage tax due thereon 42,662.71
Less: Tax already paid 22,724.59

Balance still due P19,938.12

Add: 25% surcharge 4,984.53
Amount refunded 16,593.87

Total tax due P41,516.52

=============
Guagua Electric appealed from the aforesaid Commissioner's decision to the
Court of Tax Appeals which in turn affirmed the same. Still not satisfied, it
elevated the case to Us and submitted the following propositions:

1. The application of the rate of 5% as provided for in Section 259 of the Tax
Code, instead of 1% or 2% as provided for in its franchises granted under
Act 667, impairs the obligation of contract and is therefore
unconstitutional.

2. The government is precluded from recovering the sum of P16,593.87

representing the amount refunded to it on grounds of prescription and
failure to set up as counterclaim in C.T.A. Case No. 508.

The constitutionality of collecting franchise tax at the rate of 5% of the gross

receipts as provided for in Section 259 of the Tax Code instead of at the lower
rates fixed by the franchise granted under Act 667, has already been settled in
several cases.4 Guagua Electric, whose franchises were similarly granted under Act
667, being similarly situated as the taxpayers-franchise holders in those cases
already decided by Us, shall likewise be subject to the 5% rate imposed in Section
259 of the Tax Code.

The Commissioner of Internal Revenue seeks the recovery of the amount of

P16,593.87 allegedly erroneously refunded to Guagua Electric. Said amount
represents the difference between the tax computed at 5% pursuant to Section
259 of the Tax Code and the tax at 1% or 2% under its franchises covering the
period from September 1951 through November 1956. This, in effect, is an
assessment for deficiency franchise tax.

It should be noted that the deficiency assessment of P19,638.12 in this case for
the difference between the franchise tax paid at 1% or 2% under taxpayer's
franchises and the tax computed at 5% pursuant to Section 259 of the Tax Code
covers the period from January 1, 1956 to June 30, 1962. Obviously, if Guagua
Electric were required to pay P16,593.87 in addition to the sum of P19,938.12, it
would be paying twice for the same deficiency tax for the period from January 1
to November 30, 1956.

As afore-stated, moreover, the Commissioner of Internal Revenue revised his first

deficiency assessment dated March 2, 1961 by eliminating therefrom the
deficiency tax for the period prior to January 1, 1956 because the right to assess
the same has prescribed. By insisting on the payment of the amount of
P16,593.87 (which covers the period from September 1951 to November 1956),
he is, in fact, trying to collect the same deficiency tax, the right to assess the same
he had found to have been lost by prescription.

The Court of Tax Appeals however stated in its decision that Guagua Electric did
not raise the issue of prescription of the right of the Government to assess and
collect the sum of P16,593.87. This finding of the lower court is not supported by
the pleadings. In its letter dated March 30, 1961 contesting the first assessment
dated March 2, 1961 Guagua Electric assailed the right to assess and/or collect
the tax on grounds of prescription. In paragraph 20 of its petition for review
(C.T.A. Rec. p. 4), it raised the defense of prescription of the Commissioner's right
to assess and collect the tax.

Anent the contention of the Commissioner of Internal Revenue that Guagua

Electric failed to adduce evidence to prove prescription of his right to assess and
collect the P16.593.87, suffice it to state that in paragraph 10 of the
Commissioner's answer he admitted the allegations in paragraph 13 of the
petition for review. Paragraph 13 alleged the facts, supported by annexes,
constituting prescription. There was therefore no need for the taxpayer to
present further evidence in the point.

The Commissioner of Internal Revenue further maintains that the prescription of

his right to recover the amount of P16,593.87 is governed by Article 1145(2) in
relation to Articles 1154 and 1155 of the Civil Code. Hence, prescription will set in
only after the expiration of six years from 1957 and 1959, the dates refunds were
granted. Since the petition for review and answer thereto were filed in the Court
of Tax Appeals on February 14, and May 4, 1962, he concludes that the
prescriptive period of six years has not expired.1äwphï1.ñët

As stated above, the demand on the taxpayer to pay the sum of P16,593.87 is in
effect an assessment for deficiency franchise tax. And being so, the right to assess
or collect the same is governed by Section 331 of the Tax Code5 rather than by
Article 1145 of the Civil Code. A special law (Tax Code) shall prevail over a general
law (Civil Code).6

Our above conclusion absolving Guagua Electric from the payment of the sum of
P16,593.87 has removed the necessity of discussing Guagua Electric's assertion
that the Government is precluded from recovering the said sum because it failed
to set it up as a counterclaim in C.T.A. Case No. 508.

With regard to the 25% surcharge in the amount of P4,984.53, it is patently unfair
on the part of the Government to require its payment inasmuch as the taxpayer
acted in good faith in paying the franchise tax at the lower rates fixed by its
franchises. As a matter of fact, the Bureau of Internal Revenue shared with the
taxpayer the view that Section 259 of the Tax Code does not apply. Guagua
Electric should not therefore be made to pay the 25% surcharge.7Wherefore, the
judgment appealed from is affirmed with the modification that the amount of
P16,593.87 representing franchise tax allegedly refunded erroneously and the
25% surcharge imposed on petitioner should be, and are eliminated, thereby
reducing the tax from a total of P41,516.52 to P19,938.12. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Zaldivar, Sanchez and
Castro, JJ., concur.

EN BANC

G.R. No. 175723, February 04, 2014

THE CITY OF MANILA, REPRESENTED BY MAYOR JOSE L. ATIENZA, JR., AND MS.
LIBERTY M. TOLEDO, IN HER CAPACITY AS THE CITY TREASURER OF
MANILA, Petitioners, v. HON. CARIDAD H. GRECIA–CUERDO, IN HER CAPACITY AS
PRESIDING JUDGE OF THE REGIONAL TRIAL COURT, BRANCH 112, PASAY CITY;
SM MART, INC.; SM PRIME HOLDINGS, INC.; STAR APPLIANCES CENTER;
SUPERVALUE, INC.; ACE HARDWARE PHILIPPINES, INC.; WATSON PERSONAL
CARE STORES, PHILS., INC.; JOLLIMART PHILS., CORP.; SURPLUS MARKETING
CORPORATION AND SIGNATURE LINES, Respondents.

DECISION

PERALTA, J.:

Before the Court is a special civil action for certiorari under Rule 65 of the Rules of
Court seeking to reverse and set aside the Resolutions1 dated April 6, 2006 and
November 29, 2006 of the Court of Appeals (CA) in CA–G.R. SP No. 87948.
The antecedents of the case, as summarized by the CA, are as
follows:chanRoblesvirtualLawlibrary
The record shows that petitioner City of Manila, through its treasurer, petitioner
Liberty Toledo, assessed taxes for the taxable period from January to December
2002 against private respondents SM Mart, Inc., SM Prime Holdings, Inc., Star
Appliances Center, Supervalue, Inc., Ace Hardware Philippines, Inc., Watsons
Personal Care Stores Phils., Inc., Jollimart Philippines Corp., Surplus Marketing
Corp. and Signature Lines. In addition to the taxes purportedly due from private
respondents pursuant to Section 14, 15, 16, 17 of the Revised Revenue Code of
Manila (RRCM), said assessment covered the local business taxes petitioners
were authorized to collect under Section 21 of the same Code. Because payment
of the taxes assessed was a precondition for the issuance of their business
permits, private respondents were constrained to pay the P 19,316,458.77
assessment under protest.

On January 24, 2004, private respondents filed [with the Regional Trial Court of
Pasay City+ the complaint denominated as one for “Refund or Recovery of Illegally
and/or Erroneously–Collected Local Business Tax, Prohibition with Prayer to Issue
TRO and Writ of Preliminary Injunction” which was docketed as Civil Case No. 04–
0019–CFM before public respondent’s sala [at Branch 112]. In the amended
complaint they filed on February 16, 2004, private respondents alleged that, in
relation to Section 21 thereof, Sections 14, 15, 16, 17, 18, 19 and 20 of
the RRCM were violative of the limitations and guidelines under Section 143 (h) of
Republic Act. No. 7160 [Local Government Code] on double taxation. They further
averred that petitioner city’s Ordinance No. 8011 which amended pertinent
portions of the RRCM had already been declared to be illegal and unconstitutional
by the Department of Justice.2ChanRoblesVirtualawlibrary
In its Order3 dated July 9, 2004, the RTC granted private respondents’ application
for a writ of preliminary injunction.

Petitioners filed a Motion for Reconsideration4 but the RTC denied it in its
Order5 dated October 15, 2004.

Petitioners then filed a special civil action for certiorari with the CA assailing the
July 9, 2004 and October 15, 2004 Orders of the RTC.6

In its Resolution promulgated on April 6, 2006, the CA dismissed petitioners’

petition for certiorariholding that it has no jurisdiction over the said petition. The
CA ruled that since appellate jurisdiction over private respondents’ complaint for
tax refund, which was filed with the RTC, is vested in the Court of Tax Appeals
(CTA), pursuant to its expanded jurisdiction under Republic Act No. 9282 (RA
9282), it follows that a petition for certiorari seeking nullification of an
interlocutory order issued in the said case should, likewise, be filed with the CTA.

Petitioners filed a Motion for Reconsideration,7 but the CA denied it in its

Resolution dated November 29, 2006.

Hence, the present petition raising the following

issues:chanRoblesvirtualLawlibrary
I– Whether or not the Honorable Court of Appeals gravely erred in dismissing
the case for lack of jurisdiction.

II– Whether or not the Honorable Regional Trial Court gravely abuse[d] its
discretion amounting to lack or excess of jurisdiction in enjoining by issuing a
Writ of Injunction the petitioners[,] their agents and/or authorized
representatives from implementing Section 21 of the Revised Revenue Code of
Manila, as amended, against private respondents.

III– Whether or not the Honorable Regional Trial Court gravely abuse[d] its
discretion amounting to lack or excess of jurisdiction in issuing the Writ of
Injunction despite failure of private respondents to make a written claim for tax
credit or refund with the City Treasurer of Manila.

IV– Whether or not the Honorable Regional Trial Court gravely abuse[d] its
discretion amounting to lack or excess of jurisdiction considering that under
Section 21 of the Manila Revenue Code, as amended, they are mere collecting
agents of the City Government.

V– Whether or not the Honorable Regional Trial Court gravely abuse[d] its
discretion amounting to lack or excess of jurisdiction in issuing the Writ of
Injunction because petitioner City of Manila and its constituents would result to
greater damage and prejudice thereof. (sic)8ChanRoblesVirtualawlibrary
Without first resolving the above issues, this Court finds that the instant petition
should be denied for being moot and academic.
U pon perusal of the original records of the instant case, this Court discovered
that a Decision9 in the main case had already been rendered by the RTC on August
13, 2007, the dispositive portion of which reads as
follows:chanRoblesvirtualLawlibrary
WHEREFORE, in view of the foregoing, this Court hereby renders JUDGMENT in
favor of the plaintiff and against the defendant to grant a tax refund or credit for
taxes paid pursuant to Section 21 of the Revenue Code of the City of Manila as
amended for the year 2002 in the following amounts:chanRoblesvirtualLawlibrary
P
To plaintiff SM Mart, Inc. –
11,462,525.02
To plaintiff SM Prime Holdings,
– 3,118,104.63
Inc.
To plaintiff Star Appliances
– 2,152,316.54
Center
To plaintiff Supervalue, Inc. – 1,362,750.34
To plaintiff Ace Hardware Phils.,
– 419,689.04
Inc.
To plaintiff Watsons Personal
– 231,453.62
Care Health Stores Phils., Inc.
To plaintiff Jollimart Phils.,
– 140,908.54
Corp.
To plaintiff Surplus Marketing
– 220,204.70
Corp.
To plaintiff Signature Mktg.
– 94,906.34
Corp.

P
TOTAL:
19,316,458.77
Defendants are further enjoined from collecting taxes under Section 21, Revenue
Code of Manila from herein plaintiff.

SO ORDERED.10ChanRoblesVirtualawlibrary
The parties did not inform the Court but based on the records, the above Decision
had already become final and executory per the Certificate of Finality11 issued by
the same trial court on October 20, 2008. In fact, a Writ of Execution12 was issued
by the RTC on November 25, 2009.
In view of the foregoing, it clearly appears that the issues raised in the present
petition, which merely involve the incident on the preliminary injunction issued
by the RTC, have already become moot and academic considering that the trial
court, in its decision on the merits in the main case, has already ruled in favor of
respondents and that the same decision is now final and executory. Well
entrenched is the rule that where the issues have become moot and academic,
there is no justiciable controversy, thereby rendering the resolution of the same
of no practical use or value.13

In any case , the Court finds it necessary to resolve the issue on jurisdiction raised
by petitioners owing to its significance and for future guidance of both bench and
bar. It is a settled principle that courts will decide a question otherwise moot and
academic if it is capable of repetition, yet evading review.14

However, before proceeding, to resolve the question on jurisdiction, the Court

deems it proper to likewise address a procedural error which petitioners
committed.

Petitioners availed of the wrong remedy when they filed the instant special civil
action for certiorari under Rule 65 of the Rules of Court in assailing the
Resolutions of the CA which dismissed their petition filed with the said court and
their motion for reconsideration of such dismissal. There is no dispute that the
assailed Resolutions of the CA are in the nature of a final order as they disposed
of the petition completely. It is settled that in cases where an assailed judgment
or order is considered final, the remedy of the aggrieved party is appeal. Hence, in
the instant case, petitioner should have filed a petition for review
on certiorari under Rule 45, which is a continuation of the appellate process over
the original case.15

Petitioners should be reminded of the equally–settled rule that a special civil

action for certiorari under Rule 65 is an original or independent action based on
grave abuse of discretion amounting to lack or excess of jurisdiction and it will lie
only if there is no appeal or any other plain, speedy, and adequate remedy in the
ordinary course of law.16 As such, it cannot be a substitute for a lost appeal.17

Nonetheless, in accordance with the liberal spirit pervading the Rules of Court and
in the interest of substantial justice, this Court has, before, treated a petition
for certiorari as a petition for review on certiorari, particularly (1) if the petition
for certiorari was filed within the reglementary period within which to file a
petition for review on certiorari; (2) when errors of judgment are averred; and (3)
when there is sufficient reason to justify the relaxation of the rules.18 Considering
that the present petition was filed within the 15–day reglementary period for
filing a petition for review on certiorari under Rule 45, that an error of judgment is
averred, and because of the significance of the issue on jurisdiction, the Court
deems it proper and justified to relax the rules and, thus, treat the instant petition
for certiorari as a petition for review on certiorari.

Having disposed of the procedural aspect, we now turn to the central issue in this
case. The basic question posed before this Court is whether or not the CTA has
jurisdiction over a special civil action for certiorari assailing an interlocutory order
issued by the RTC in a local tax case.

This Court rules in the affirmative.

On June 16, 1954, Congress enacted Republic Act No. 1125 (RA 1125) creating the
CTA and giving to the said court jurisdiction over the
following:chanRoblesvirtualLawlibrary
(1) Decisions of the Collector of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal
Revenue;

(2) Decisions of the Commissioner of Customs in cases involving liability for

customs duties, fees or other money charges; seizure, detention or release of
property affected fines, forfeitures or other penalties imposed in relation thereto;
or other matters arising under the Customs Law or other law or part of law
administered by the Bureau of Customs; and

(3) Decisions of provincial or City Boards of Assessment Appeals in cases involving

the assessment and taxation of real property or other matters arising under the
Assessment Law, including rules and regulations relative thereto.
On March 30, 2004, the Legislature passed into law Republic Act No. 9282 (RA
9282) amending RA 1125 by expanding the jurisdiction of the CTA, enlarging its
membership and elevating its rank to the level of a collegiate court with special
jurisdiction. Pertinent portions of the amendatory act provides
thus:chanRoblesvirtualLawlibrary
Sec. 7. Jurisdiction. – The CTA shall exercise:chanRoblesvirtualLawlibrary
a. Exclusive appellate jurisdiction to review by appeal, as herein
provided:chanRoblesvirtualLawlibrary
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or
other laws administered by the Bureau of Internal Revenue;

2. Inaction by the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relations thereto, or other matters arising under the National Internal Revenue
Code or other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period of action, in which case
the inaction shall be deemed a denial;

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

4. Decisions of the Commissioner of Customs in cases involving liability for

customs duties, fees or other money charges, seizure, detention or release of
property affected, fines, forfeitures or other penalties in relation thereto, or other
matters arising under the Customs Law or other laws administered by the Bureau
of Customs;

5. Decisions of the Central Board of Assessment Appeals in the exercise of its

appellate jurisdiction over cases involving the assessment and taxation of real
property originally decided by the provincial or city board of assessment appeals;

6. Decisions of the Secretary of Finance on customs cases elevated to him

automatically for review from decisions of the Commissioner of Customs which
are adverse to the Government under Section 2315 of the Tariff and Customs
Code;

7. Decisions of the Secretary of Trade and Industry, in the case of nonagricultural

product, commodity or article, and the Secretary of Agriculture in the case of
agricultural product, commodity or article, involving dumping and countervailing
duties under Section 301 and 302, respectively, of the Tariff and Customs Code,
and safeguard measures under Republic Act No. 8800, where either party may
appeal the decision to impose or not to impose said duties.
b. Jurisdiction over cases involving criminal offenses as herein
provided:chanRoblesvirtualLawlibrary
1. Exclusive original jurisdiction over all criminal offenses arising from violations of
the National Internal Revenue Code or Tariff and Customs Code and other laws
administered by the Bureau of Internal Revenue or the Bureau of Customs:
Provided, however, That offenses or felonies mentioned in this paragraph where
the principal amount of taxes and fees, exclusive of charges and penalties,
claimed is less than One million pesos ( P 1,000,000.00) or where there is no
specified amount claimed shall be tried by the regular Courts and the jurisdiction
of the CTA shall be appellate. Any provision of law or the Rules of Court to the
contrary notwithstanding, the criminal action and the corresponding civil action
for the recovery of civil liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly determined in the same proceeding by
the CTA, the filing of the criminal action being deemed to necessarily carry with it
the filing of the civil action, and no right to reserve the filing of such civil action
separately from the criminal action will be recognized.

2. Exclusive appellate jurisdiction in criminal offenses:

a. Over appeals from the judgments, resolutions or orders of the Regional Trial
Courts in tax cases originally decided by them, in their respected territorial
jurisdiction.

b. Over petitions for review of the judgments, resolutions or orders of the

Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases
originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in their respective jurisdiction.

c. Jurisdiction over tax collection cases as herein provided:

1. Exclusive original jurisdiction in tax collection cases involving final and
executory assessments for taxes, fees, charges and penalties: Provides, however,
that collection cases where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than One million pesos ( P 1,000,000.00)
shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and
Regional Trial Court.

2. Exclusive appellate jurisdiction in tax collection

cases:chanRoblesvirtualLawlibrary
a. Over appeals from the judgments, resolutions or orders of the Regional Trial
Courts in tax collection cases originally decided by them, in their respective
territorial jurisdiction.

b. Over petitions for review of the judgments, resolutions or orders of the

Regional Trial Courts in the Exercise of their appellate jurisdiction over tax
collection cases originally decided by the Metropolitan Trial Courts, Municipal
Trial Courts and Municipal Circuit Trial Courts, in their respective
jurisdiction.19ChanRoblesVirtualawlibrary
A perusal of the above provisions would show that, while it is clearly stated that
the CTA has exclusive appellate jurisdiction over decisions, orders or resolutions
of the RTCs in local tax cases originally decided or resolved by them in the
exercise of their original or appellate jurisdiction,there is no categorical statement
under RA 1125 as well as the amendatory RA 9282, which provides that the CTA
has jurisdiction over petitions for certiorari assailing interlocutory orders issued
by the RTC in local tax cases filed before it.

The prevailing doctrine is that the authority to issue writs of certiorari involves the
exercise of original jurisdiction which must be expressly conferred by the
Constitution or by law and cannot be implied from the mere

existence of appellate jurisdiction.20 Thus, in the cases of Pimentel v.

COMELEC,21Garcia v. De Jesus,22Veloria v. COMELEC,23Department of Agrarian
Reform Adjudication Board v. Lubrica,24 and Garcia v. Sandiganbayan,25 this Court
has ruled against the jurisdiction of courts or tribunals over petitions
for certiorari on the ground that there is no law which expressly gives these
tribunals such power.26 It must be observed, however, that with the exception
of Garcia v. Sandiganbayan,27 these rulings pertain not to regular courts but to
tribunals exercising quasi–judicial powers. With respect to the Sandiganbayan,
Republic Act No. 824928 now provides that the special criminal court has exclusive
original jurisdiction over petitions for the issuance of the writs of mandamus,
prohibition, certiorari,habeas corpus, injunctions, and other ancillary writs and
processes in aid of its appellate jurisdiction.

In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants
power to the Supreme Court, in the exercise of its original jurisdiction, to issue
writs of certiorari, prohibition and mandamus. With respect to the Court of
Appeals, Section 9 (1) of Batas Pambansa Blg. 129 (BP 129) gives the appellate
court, also in the exercise of its original jurisdiction, the power to issue, among
others, a writ of certiorari,whether or not in aid of its appellate jurisdiction. As to
Regional Trial Courts, the power to issue a writ of certiorari, in the exercise of
their original jurisdiction, is provided under Section 21 of BP 129.

The foregoing notwithstanding, while there is no express grant of such power,

with respect to the CTA, Section 1, Article VIII of the 1987 Constitution provides,
nonetheless, that judicial power shall be vested in one Supreme Court and in such
lower courts as may be established by law and that judicial power includes the
duty of the courts of justice to settle actual controversies involving rights which
are legally demandable and enforceable, and to determine whether or not there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction
on the part of any branch or instrumentality of the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted

that the power of the CTA includes that of determining whether or not there has
been grave abuse of discretion amounting to lack or excess of jurisdiction on the
part of the RTC in issuing an interlocutory order in cases falling within the
exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by
constitutional mandate, is vested with jurisdiction to issue writs of certiorari in
these cases.

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

Consistent with the above pronouncement, this Court has held as early as the
case of J.M. Tuason & Co., Inc. v. Jaramillo, et al.29 that “if a case may be appealed
to a particular court or judicial tribunal or body, then said court or judicial tribunal
or body has jurisdiction to issue the extraordinary writ of certiorari, in aid of its
appellate jurisdiction.”30 This principle was affirmed in De Jesus v. Court of
Appeals,31 where the Court stated that “a court may issue a writ of certiorari in
aid of its appellate jurisdiction if said court has jurisdiction to review, by appeal or
writ of error, the final orders or decisions of the lower court.”32The rulings in J.M.
Tuason and De Jesus were reiterated in the more recent cases of Galang, Jr. v.
Geronimo33 and Bulilis v. Nuez.34

Furthermore, Section 6, Rule 135 of the present Rules of Court provides that
when by law, jurisdiction is conferred on a court or judicial officer, all auxiliary
writs, processes and other means necessary to carry it into effect may be
employed by such court or officer.

If this Court were to sustain petitioners’ contention that jurisdiction over

their certiorari petition lies with the CA, this Court would be confirming the
exercise by two judicial bodies, the CA and the CTA, of jurisdiction over basically
the same subject matter – precisely the split–jurisdiction situation which is
anathema to the orderly administration of justice.35 The Court cannot accept that
such was the legislative motive, especially considering that the law expressly
confers on the CTA, the tribunal with the specialized competence over tax and
tariff matters, the role of judicial review over local tax cases without mention of
any other court that may exercise such power. Thus, the Court agrees with the
ruling of the CA that since appellate jurisdiction over private respondents’
complaint for tax refund is vested in the CTA, it follows that a petition
for certiorari seeking nullification of an interlocutory order issued in the said case
should, likewise, be filed with the same court. To rule otherwise would lead to an
absurd situation where one court decides an appeal in the main case while
another court rules on an incident in the very same case.

Stated differently, it would be somewhat incongruent with the pronounced

judicial abhorrence to split jurisdiction to conclude that the intention of the law is
to divide the authority over a local tax case filed with the RTC by giving to the CA
or this Court jurisdiction to issue a writ of certiorari against interlocutory orders of
the RTC but giving to the CTA the jurisdiction over the appeal from the decision of
the trial court in the same case. It is more in consonance with logic and legal
soundness to conclude that the grant of appellate jurisdiction to the CTA over tax
cases filed in and decided by the RTC carries with it the power to issue a writ
of certiorari when necessary in aid of such appellate jurisdiction. The supervisory
power or jurisdiction of the CTA to issue a writ of certiorari in aid of its appellate
jurisdiction should co–exist with, and be a complement to, its appellate
jurisdiction to review, by appeal, the final orders and decisions of the RTC, in
order to have complete supervision over the acts of the latter.36

A grant of appellate jurisdiction implies that there is included in it the power

necessary to exercise it effectively, to make all orders that will preserve the
subject of the action, and to give effect to the final determination of the appeal. It
carries with it the power to protect that jurisdiction and to make the decisions of
the court thereunder effective. The court, in aid of its appellate jurisdiction, has
authority to control all auxiliary and incidental matters necessary to the efficient
and proper exercise of that jurisdiction. For this purpose, it may, when necessary,
prohibit or restrain the performance of any act which might interfere with the
proper exercise of its rightful jurisdiction in cases pending before it.37

Lastly, it would not be amiss to point out that a court which is endowed with a
particular jurisdiction should have powers which are necessary to enable it to act
effectively within such jurisdiction. These should be regarded as powers which are
inherent in its jurisdiction and the court must possess them in order to enforce its
rules of practice and to suppress any abuses of its process and to defeat any
attempted thwarting of such process.

In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level
as the CA and shall possess all the inherent powers of a court of justice.

Indeed, courts possess certain inherent powers which may be said to be implied
from a general grant of jurisdiction, in addition to those expressly conferred on
them. These inherent powers are such powers as are necessary for the ordinary
and efficient exercise of jurisdiction; or are essential to the existence, dignity and
functions of the courts, as well as to the due administration of justice; or are
directly appropriate, convenient and suitable to the execution of their granted
powers; and include the power to maintain the court’s jurisdiction and render it
effective in behalf of the litigants.38

Thus, this Court has held that “while a court may be expressly granted the
incidental powers necessary to effectuate its jurisdiction, a grant of jurisdiction, in
the absence of prohibitive legislation, implies the necessary and usual incidental
powers essential to effectuate it, and, subject to existing laws and constitutional
provisions, every regularly constituted court has power to do all things that are
reasonably necessary for the administration of justice within the scope of its
jurisdiction and for the enforcement of its judgments and mandates.”39 Hence,
demands, matters or questions ancillary or incidental to, or growing out of, the
main action, and coming within the above principles, may be taken cognizance of
by the court and determined, since such jurisdiction is in aid of its authority over
the principal matter, even though the court may thus be called on to consider and
decide matters which, as original causes of action, would not be within its
cognizance.40

Based on the foregoing disquisitions, it can be reasonably concluded that the

authority of the CTA to take cognizance of petitions for certiorari questioning
interlocutory orders issued by the RTC in a local tax case is included in the powers
granted by the Constitution as well as inherent in the exercise of its appellate
jurisdiction.

Finally, it would bear to point out that this Court is not abandoning the rule that,
insofar as quasi–judicial tribunals are concerned, the authority to issue writs
of certiorari must still be expressly conferred by the Constitution or by law and
cannot be implied from the mere existence of their appellate jurisdiction. This
doctrine remains as it applies only to quasi–judicial bodies.

WHEREFORE, the petition is DENIED.ChanRoblesVirtualawlibrary

SO ORDERED.

Sereno, C.J., Carpio, Velasco, Jr., Leonardo–De Castro, Brion, Bersamin, Abad,
Villarama, Jr., Perez, Mendoza, Reyes, Perlas–Bernabe, and Leonen, JJ., concur.
Del Castillo, J., no part.
G.R. No. 201530, April 19, 2017 - ASIATRUST DEVELOPMENT BANK, INC.,
Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.; G.R.
Nos. 201680-81 - COMMISSIONER OF INTERNAL REVENUE, Petitioner, v.
ASIATRUST DEVELOPMENT BANK, INC., Respondent.

FIRST DIVISION

G.R. No. 201530, April 19, 2017

ASIATRUST DEVELOPMENT BANK, INC., Petitioner, v. COMMISSIONER OF

INTERNAL REVENUE, Respondent.

G.R. Nos. 201680-81

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ASIATRUST

DEVELOPMENT BANK, INC., Respondent.

DECISION

DEL CASTILLO, J.:

An application for tax abatement is deemed approved only upon the

issuance of a termination letter by the Bureau of Internal Revenue (BIR).

These consolidated Petitions for Review on Certiorari1 under Ru1e 45 of

the Rules of Court assail the November 16, 2011 Decision2 and the April
16, 2012 Resolution3 of the Court of Tax Appeals (CTA) En Banc in CTA EB
Case Nos. 614 and 677.

Factual Antecedents

On separate dates in February 2000, Asiatrust Development Bank, Inc.

(Asiatrust) received from the Commissioner of Internal Revenue (CIR)
three Formal Letters of Demand (FLD) with Assessment Notices4for
deficiency internal revenue taxes in the amounts of P131,909,161.85,
P83,012,265.78, and P144,012,918.42 for fiscal years ending June 30,
1996, 1997, and 1998, respectively.5

On March 17, 2000, Asiatrust timely protested the assessment notices.6

Due to the inaction of the CIR on the protest, Asiatrust filed before the
CTA a Petition for Review7docketed as CTA Case No. 6209 praying for the
cancellation of the tax assessments for deficiency income tax,
documentary stamp tax (DST) - regular, DST - industry issue, final
withholding tax, expanded withholding tax, and fringe benefits tax issued
against it by the CIR.

On December 28, 2001, the CIR issued against Asiatrust new Assessment
Notices for deficiency taxes in the amounts of P112,816,258.73,
P53,314,512.72, and P133,013,458.73, covering the fiscal years ending
June 30, 1996, 1997, and 1998, respectively.8

On the same day, Asiatrust partially paid said deficiency tax assessments
thus leaving the following balances:

Fiscal Year 1996

Documentary Stamp Tax P 13,497,227.80

Final Withholding Tax - Trust 8,770,265.07

Documentary Stamp Tax - Industry Issue 88,584,931.39

TOTAL P 110,852,424.26

Fiscal Year 1997

Documentary Stamp Tax P 10,156,408.63

Documentary Stamp Tax - Industry Issue 39,163,539.57

 TOTAL P 49,319,948.20

Fiscal year 1998

Documentary Stamp Tax P 20,425,770.07

Final Withholding Tax - Trust 10,183,367.80

Documentary Stamp Tax - Industry Issue 93,430,878.54

TOTAL P 124,040,016.419
On April 19, 2005, the CIR approved Asiatrust's Offer of Compromise of
DST - regular assessments for the fiscal years ending June 30, 1996, 1997,
and 1998.10

During the trial, Asiatrust manifested that it availed of the Tax Abatement
Program for its deficiency final withholding tax - trust assessments for
fiscal years ending June 30, 1996 and 1998; and that on June 29, 2007, it
paid the basic taxes in the amounts of P4,187,683.27 and P6,097,825.03
for the said fiscal years, respectively.11 Asiatrust also claimed that on
March 6, 2008, it availed of the provisions of Republic Act (RA) No. 9480,
otherwise known as the Tax Amnesty Law of 2007.12

Ruling of the Court of Tax Appeals Division

On January 20, 2009, the CTA Division rendered a Decision13 partially

granting the Petition. The CTA Division declared void the tax assessments
for fiscal year ending June 30, 1996 for having been issued beyond the
three-year prescriptive period.14 However, due to the failure of Asiatrust
to present documentary and testimonial evidence to prove its availment
of the Tax Abatement Program and the Tax Anmesty Law, the CTA Division
affirmed the deficiency DST - Special Savings Account (SSA) assessments
for the fiscal years ending June 30, 1997 and 1998 and the deficiency DST -
Interbank Call Loans (IBCL) and deficiency final withholding tax - trust
assessments for fiscal year ending June 30, 1998, in the total amount of
P142,777,785.91.15 Thus:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the instant Petition for Review is
hereby PARTIALLY GRANTED. Accordingly, Assessment Notices issued
against [Asiatrust] for deficiency documentary stamp, final withholding,
expanded withholding, and fringe benefits tax assessments for the fiscal
year ended June 30, 1996 are VOID for being [issued] beyond the
prescriptive period allowed by law.

The Assessment Notices issued by [CIR] against [Asiatrust] for deficiency

income, documentary stamp - regular, documentary stamp - trust, and
fringe benefits tax assessments for the fiscal years ended June 30, 1997 &
1998 are hereby ordered CANCELLED and WITHDRAWN. Moreover,
[Asiatrust's] deficiency documentary stamp tax IBCL assessment for the
fiscal year ended June 30, 1997 is ordered CANCELLED and WITHDRAWN.

However, [Asiatrust's] deficiency documentary stamp tax - Special Savings

Account assessments for the fiscal years ended June 30, 1997 & 1998, and
deficiency documentary stamp tax - IBCL and deficiency final withholding
tax - trust assessments for the fiscal year ended June 30, 1998, in the
aggregate amount of P142,777,785.91 are hereby AFFIRMED. The said
amount is broken down as follows:chanRoblesvirtualLawlibrary
Fiscal Year 1997

Documentary Stamp Tax - Industry Issue P 39,163,539.57

Fiscal Year 1998

Final Withholding Tax - Trust 10,183,367.80

Documentary Stamp Tax - Industry Issue 93,430,878.54

Total Deficiency Tax P 142,777,785.91

SO ORDERED.16
Asiatrust filed a Motion for Reconsideration17 attaching photocopies of its
Application for Abatement Program, BIR Payment Form, BIR Tax Payment
Deposit Slip, Improved Voluntary Assessment Program Application Forms,
Tax Amnesty Return, Tax Amnesty Payment Form, Notice of Availment of
Tax Amnesty and Statement of Assets and Liabilities and Networth (SALN)
as of June 30, 2005.
The CIR, on the other hand, filed a Motion for Partial Reconsideration of
the assessments assailing the CTA Division's finding of prescription and
cancellation of assessment notices for deficiency income, DST - regular,
DST trust, and fringe benefit tax for fiscal years ending June 30, 1997 and
1998.18

On July 6, 2009, the CTA Division issued a Resolution19 denying the motion
of the CIR while partially granting the motion of Asiatrust. The CTA
Division refused to consider Asiatrust's availment of the Tax Abatement
Program due to its failure to submit a termination letter from the
BIR.20 However, as to Asiatrust's availment of the Tax Amnesty Law, the
CTA Division resolved to set the case for hearing for the presentation of
the originals of the documents attached to Asiatrust's motion for
reconsideration.21

Meanwhile, the CIR appealed the January 20, 2009 Decision and the July 6,
2009 Resolution before the CTA En Banc via a Petition for
Review22 docketed as CTA EB No. 508. The CTA En Banc however dismissed
the Petition for being premature considering that the proceedings before
the CTA Division was still pending.23

On December 7, 2009, Asiatrust filed a Manifestation24 informing the CTA

Division that the BIR issued a Certification25 dated August 20, 2009
certifying that Asiatrust paid the amounts of P4,187,683.27 and
P6,097,825.03 at the Development Bank of the Philippines in connection
with the One-Time Administrative Abatement under Revenue Regulations
(RR) No. 15-2006.26

On March 16, 2010, the CTA Division rendered an Amended

Decision27 finding that Asiatrust is entitled to the immunities and privileges
granted in the Tax Amnesty Law.28 However, it reiterated its ruling that in
the absence of a termination letter fium the BIR, it cannot consider
Asiatrust's availment of the Tax Abatement Program.29 Thus, the CTA
Division disposed of the case in this wise:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, [Asiatrust's] Motion for
Reconsideration is hereby PARTIALLY GRANTED and this
Court's Decision dated January 20, 2009 is hereby MODIFIED. Accordingly,
the above captioned case as regards [Asiatrust's] liability for deficiency
documentary stamp tax is CLOSED and TERMINATED, subject to the
provisions of R.A. No. 9480. However, [Asiatrust's] liability for deficiency
final withholding tax assessment for fiscal year ended June 30, 1998,
subject of this litigation, in the amount of P10,183,367.80, is hereby
REAFFIRMED.

SO ORDERED.30
Still unsatisfied, Asiatrust moved for partial reconsideration31 insisting that
the Certification issued by the BIR is sufficient proof of its availment of the
Tax Abatement Program considering that the CIR, despite Asiatrust's
request, has not yet issued a termination letter. Asiatrust attached to the
motion photocopies of its letter32 dated March 17, 2009. requesting the
BIR to issue a termination letter, Payment Form33BIR Tax Payment Deposit
Slips,34 Improved Voluntary Assessment Program (IVAP) Payment
Form,35 and a letter36 dated October 17, 2007 issued by Revenue District
Officer (RDO) Ms. Clavelina S. Nacar.

On July 28, 2010, the CTA Division issued a Resolution37 denying Asiatrust's
motion. The CTA Division maintained that it cannot consider Asiatrust's
availment of the Tax Abatement Program in the absence of a termination
letter from the BIR.38 As to the Certification issued by BIR, the CTA Division
noted that it pertains to fiscal period July 1, 1995 to June 30, 1996.39

Both parties appealed to CTA En Banc.

Ruling of the Court of Tax Appeals En Banc

On November 16, 2011, the CTA En Banc denied both appeals. It denied
the CIR's appeal for failure to file a prior motion for reconsideration of the
Amended Decision,40 while it denied Asiatrust's appeal for lack of
merit.41 The CTA En Banc sustained the ruling of the CTA Division that in
the absence of a termination letter, it cannot be established that Asiatrust
validly availed of the Tax Abatement Program.42As to the Certification
issued by the BIR, the CTA En Banc noted that it only covers the fiscal year
ending June 30, 1996.43 As to the letter issued by RDO Nacar and the
various BIR Tax Payment Deposit Slips, the CTA En Banc pointed out that
these have no probative value because these were not authenticated nor
formally offered in evidence and are mere photocopies of the purported
documents.44

On April 16, 2012, the CTA En Banc denied the motions for partial
reconsideration of the CIR and Asiatrust.45

Issues

Hence, the instant consolidated Petitions under Rule 45 of the Rules of

Court, with the following issues:chanRoblesvirtualLawlibrary
G.R. No. 201530

I.

WHETHER X X X THE [CTA] EN BANC ERRED IN FINDING THAT [ASIATRUST]

IS LIABLE FOR DEFICIENCY FINAL WITHHOLDING TAX FOR FISCAL YEAR
ENDING JUNE 30, 1998.

II.

WHETIIER X X X THE ORDER OF THE [CTA] EN BANC FOR PETITIONER TO

PAY AGAIN THE FINAL WITHHOLDING TAX FOR FISCAL YEAR ENDING JUNE
30, 1998 WOULD AMOUNT TO DOUBLE TAXATION.

III.

WHETHER X X X THE [CTA] EN BANC ERRED IN RESOLVING THE ISSUE OF

ALLEGED DEFICIENCY FINAL WITHHOLDING TAX FOR FISCAL YEAR ENDING
JUNE 30, 1998 BASED ON MERE TECHNICALITIES.46

G.R. Nos. 201680-81

I.

WHETHER X X X THE [CTA] EN BANC COMMITTED REVERSIBLE ERROR

WHEN IT DISMISSED [THE CIR'S] PETITION FOR REVIEW ON THE GROUND
THAT THE LATTER ALLEGEDLY FAILED TO COMPLY WITH SECTION 1, RULE 8
OF THE REVISED RULES OF THE [CTA].
 II.

WHETHER X X X THE [CTA] EN BANC COMMITTED REVERSIBLE ERROR

WHEN IT SUSTAINED THE AMENDED DECISION DATED 16 MARCH 2010 OF
THE FIRST DIVISION DECLARING CLOSED AND TERMINATED
RESPONDENT'S LIABILITY FOR DEFICIENCY DOCUMENTARY STAMP TAX
FOR TAXABLE YEARS 1997 AND 1998.47
G.R. No. 201530

Asiatrust's Arguments

Asiatrust contends that the CTA En Banc erred in affirming the assessment
for deficiency final withholding tax for fiscal year ending June 30, 1998
considering that it already availed of the Tax Abatement Program as
evidenced by the Certification issued by the BIR the letter issued by RDO
Nacar, and the BIR Tax Payment Deposit Slips.48 Asiatrust maintains that
the BIR Certification is sufficient proof of its availment of the Tax
Abatement Program considering CIR's unjustifiable refusal to issue a
termination letter.49 And although the letter and the BIR Tax Payment
Deposit Slips were not formally offered in evidence, Asiatrust insists that
the CTA En Banc should have relaxed the rules as the Supreme Court in
several cases has relaxed procedural rules in the interest of substantial
justice.50 Moreover, Asiatrust posits that since it already paid the basic
taxes, the affirmance of the deficiency fmal withholding tax assessment
for fiscal year ending June 30, 1998 would constitute double taxation as
Asiatrust would be made to pay the basic tax twice.51

The CIR's Arguments

The CIR, however, points out that the BIR Certification relied upon by
Asiatrust does not cover fiscal year ending June 30, 1998.52 And even if the
letter issued by RDO Nacar and the BIR Tax Payment Deposit Slips were
admitted in evidence, the result would still be the same as these are not
sufficient to prove that Asiatrust validly availed of the Tax Abatement
Program.53

G.R. Nos. 201680-81

The CIR's Arguments

The CIR contends that the CTA En Banc erred in dismissing his appeal for
failing to file a motion for reconsideration on the Amended Decision as a
perusal of the Amended Decision shows that it is a mere resolution,
modifying the original Decision.54

Furthermore, the CIR claims that Asiatrust is not entitled to a tax amnesty
because it failed to submit its income tax returns (ITRs).55 The CIR likewise
imputes bad faith on the part of Asiatrust in belatedly submitting the
documents before the CTA Division.56

Asiatrust's Arguments

Asiatrust on the other hand argues that the CTA En Banc correctly
dismissed the CIR's appeal for failure to file a motion for reconsideration
on the Amended Decision.57 It asserts that an amended decision is not a
mere resolution but a new decision.58

Asiatrust insists that the CIR can no longer assail the Amended Decision of
the CTA Division before the Court considering the dismissal ofhis appeal
for failing to file a motion for reconsideration on the Amended
Decision.59 In any case, Asiatrust claims that the submission of its ITRs is
not required as the Tax Amnesty Law only requires the submission of a
SALN as of December 31, 2005,60 As to its belated submission of the
documents, Asiatrust contends that recent jurisprudence allows the
presentation of evidence before the CTA En Banc even after trial.61 Thus, it
follows that the presentation of evidence before the CTA Division should
likewise be allowed.62

Our Ruling

The Petitions lack merit.

G.R. No. 201530

An application for tax abatement is considered approved only upon the

issuance of a termination letter.

Section 204(B)63 of the 1997 National Internal Revenue Code (NIRC)

empowers the CIR to abate or cancel a tax liability.

On Septembr 27, 2006 the BIR issued RR No. 15-06 prescribing tho
guidelines on the implementation of the one-time administrative
abatement of all penalties/surcharges and interest on delinquent accounts
and assessments (preliminary or final, disputed or not) as of June 30, 2006.
Section 4 of RR No. 15-06 provides:chanRoblesvirtualLawlibrary
SECTION 4. Who May Avail. - Any person/taxpayer, natural or juridical,
may settle thru this abatement program any delinquent account or
assessment which has been released as of June 30, 2006, by paying an
amount equal to One Hundred Percent (100%) of the Basic Tax assessed
with the Accredited Agent Bank (AAB) of the Revenue District Office
(RDO)/Large Taxpayers Service (LTS)/Large Taxpayers District Office (LTDO)
that has jurisdiction over the taxpayer. In the absence of an AAB, payment
may be made with the Revenue Collection Officer/Deputized Treasurer of
the RDO that has jurisdiction over the taxpayer. After payment of the basic
tax, the assessment for penalties/surcharge and interest shall be cancelled
by the concerned BIR Office following existing rules and procedures.
Thereafter, the docket of the case shall be fmwarded to the Office of the
Commissioner, thru the Deputy Commissioner for Operations Group, for
issuance of Termination Letter.
Based on the guidelines, the last step in the tax abatement process is the
issuance of the termination letter. The presentation of the termination
letter is essential as it proves that the taxpayer's application for tax
abatement has been approved. Thus, without a termination letter, a tax
assessment cannot be considered closed and terminated.

In this case, Asiatrust failed to present a termination letter from the BIR.
Instead, it presented a Certification issued by the BIR to prove that it
availed of the Tax Abatement Program and paid the basic tax. It also
attached copies of its BIR

'I'ax Payment Deposit Slips and a letter issued by RDO Nacar. These
documents, however, do not prove that Asiatrust's application for tax
abatement has been approved. If at all, these documents only prove
Asiatrust's payment of basic taxes, which is not a ground to consider its
deficiency tax assessment closed and terminated.

Since no tennination letter has been issued by the BIR, there is no reason
tor the Court to consider as closed and terminated the tax assessment on
Asiatrust's fmal withholding tax for fiscal year ending June 30, 1998.
Asiatrust's application for tax abatement will be deemed approved only
upon the issuance of a termination letter, and only then will the deficiency
tax assessment be considered closed and terminated. However, in case
Asiatrust's application for tax abatement is denied, any payment made by
it would be applied to its out ding tax liability. For this reason, Asiatrust's
allegation of double taxation must also fail.

Thus, the Court finds no error on the part of the CTA En Banc in affirming
the said tax assessment.

G.R. Nos. 201680-81

An appeal to the CTA En Banc must be preceded by the filing of a timely

motion for reconsideration or new trial with the CTA Division.

Section 1, Rule 8 of the Revised Rules of the CTA

states:chanRoblesvirtualLawlibrary
SECTION 1. Review of cases in the Court en banc. - In cases falling under
the exclusive appellate jurisdiction of the Court en banc, the petition for
review of a decision or resolution of the Court in Division must be
preceded by the filing of a timely motion for reconsideration or new trial
With the pivision.
Thus, in order for the CTA En Banc to take cognizance of an appeal via a
petition for review, a timely motion for reconsideration or new trial must
first be filed with the CTA Division that issued the assailed decision or
resolution. Failure to do so is a ground for the dismissal of the appeal as
the word "must" indicates that the filing of a prior motion is mandatory,
and not merely directory.64

The same is true in the case of an amended decision. Section 3, Rule 14 of

the same rules defines an amended decision as "[a]ny action modifying or
reversing a decision of the Court en banc or in Division." As explained in CE
Luzon Geothermal Power Company, Inc. v. Commissioner of Internal
Revenue,65 an amended decision is a different decision, and thus, is a
proper subject of a motion for reconsideration.

In this case, the CIR's failure to move for a reconsideration of the

Amended Decision of the CTA Division is a ground for the dismissal of its
Petition for Review before the CTA En Banc. Thus, the CTA En Banc did not
err in denying the CIR's appeal on procedural grounds.

Due to this procedural lapse, the Amended Decision has attained fmality
insofar as the CIR is concerned. The CIR, therefore, may no longer question
the merits of the. case before this Court. Accordingly, there is no reason
for the Court to discuss the other issues raised by the CIR

As the Court has often held, procedural rules exist to be followed, not to
be trifled with, and thus, may be relaxed only for the most persua.Sive
reasons.66

WHEREFORE, the Petitions are hereby DENIED. The assailed November 16,
2011 Decision and the April 16, 2012 Resolution of the Court of Tax
Appeals En Banc in CTA EB Case Nos. 614 and 677 are hereby AFFIRMED,
without prejudice to the action of the Bureau of Internal Revenue on
Asiatrust Development Bank, Inc.'s application for abatement. The Bureau
of Internal Revenue is DIRECTED to act on Asiatrust Development Bank,
Inc.'s applicationfor abatementin view of Section 5, Revenue Regulations
No. 13-2001.

SO ORDERED.