1

G.R. Nos. 167274-75

July 21, 2008

(1) If the net retail price (excluding the

excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax
shall be Twelve (P12.00) per pack;

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FORTUNE TOBACCO CORPORATION, Respondent.

(2) If the net retail price (excluding the

excise tax and the value added tax) exceeds
Six pesos and Fifty centavos (P6.50) but
does not exceed Ten pesos (P10.00) per
pack, the tax shall be Eight Pesos (P8.00)
per pack.

DECISION
TINGA, J.:
Simple and uncomplicated is the central issue involved, yet
whopping is the amount at stake in this case.

(3) If the net retail price (excluding the

excise tax and the value-added tax) is Five
pesos (P5.00) but does not exceed Six Pesos
and fifty centavos (P6.50) per pack, the tax
shall be Five pesos (P5.00) per pack;

After much wrangling in the Court of Tax Appeals (CTA) and

the Court of Appeals, Fortune Tobacco Corporation (Fortune
Tobacco) was granted a tax refund or tax credit representing
specific taxes erroneously collected from its tobacco products.
The tax refund is being re-claimed by the Commissioner of
Internal Revenue (Commissioner) in this petition.
The following undisputed facts, summarized by the Court of
Appeals, are quoted in the assailed Decision1 dated 28
September 2004:
CAG.R. SP No. 80675
x xxx
Petitioner2 is a domestic corporation duly organized and
existing under and by virtue of the laws of the Republic of the
Philippines, with principal address at Fortune Avenue, Parang,
Marikina City.
Petitioner is the manufacturer/producer of, among others, the
following cigarette brands, with tax rate classification based
on net retail price prescribed by Annex "D" to R.A. No. 4280,
to wit:

(4) If the net retail price (excluding the

excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax
shall be One peso (P1.00) per pack;
"Variants of existing brands of cigarettes which are introduced
in the domestic market after the effectivity of R.A. No. 8240
shall be taxed under the highest classification of any variant
of that brand.
The excise tax from any brand of cigarettes within the next
three (3) years from the effectivity of R.A. No. 8240 shall not
be lower than the tax, which is due from each brand on
October 1, 1996. Provided, however, that in cases were (sic)
the excise tax rate imposed in paragraphs (1), (2), (3) and (4)
hereinabove will result in an increase in excise tax of more
than seventy percent (70%), for a brand of cigarette, the
increase shall take effect in two tranches: fifty percent (50%)
of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.

Brand

Tax Rate

Champion M 100

P1.00

Salem M 100

P1.00

Salem M King

P1.00

New brands shall be classified according to their current net

retail price.

Camel F King

P1.00

Camel Lights Box 20s

P1.00

Camel Filters Box 20s

P1.00

Winston F Kings

P5.00

For the above purpose, net retail price shall mean the
price at which the cigarette is sold on retail in twenty (20)
major supermarkets in Metro Manila (for brands of cigarettes
marketed nationally), excluding the amount intended to cover
the applicable excise tax and value-added tax. For brands
which are marketed only outside Metro [M]anila, the net
retail price shall mean the price at which the cigarette is
sold in five (5) major supermarkets in the region excluding the
amount intended to cover the applicable excise tax and the
value-added tax.

Winston Lights

P5.00

Immediately prior to January 1, 1997, the above-mentioned

cigarette brands were subject to ad valorem tax pursuant to
then Section 142 of the Tax Code of 1977, as amended.
However, on January 1, 1997, R.A. No. 8240 took effect
whereby a shift from the ad valorem tax (AVT) system to the
specific tax system was made and subjecting the aforesaid
cigarette brands to specific tax under [S]ection 142 thereof,
now renumbered as Sec. 145 of the Tax Code of 1997,
pertinent provisions of which are quoted thus:
Section 145. Cigars and Cigarettes(A) Cigars. There shall be levied, assessed and
collected on cigars a tax of One peso (P1.00) per
cigar.

Duly registered or existing brands of cigarettes or new brands

thereof packed by machine shall only be packed in twenties.
The rates of excise tax on cigars and cigarettes under
paragraphs (1), (2) (3) and (4) hereof, shall be
increased by twelve percent (12%) on January 1, 2000.
(Emphasis supplied)

The classification of each brand of cigarettes based on its

average retail price as of October 1, 1996, as set forth in
Annex "D," shall remain in force until revised by Congress.
Variant of a brand shall refer to a brand on which a modifier
is prefixed and/or suffixed to the root name of the brand
and/or a different brand which carries the same logo or design
of the existing brand.
To implement the provisions for a twelve percent (12%)
increase of excise tax on, among others, cigars and cigarettes
packed by machines by January 1, 2000, the Secretary of
Finance,
upon
recommendation
of
the
respondent
Commissioner of Internal Revenue, issued Revenue
Regulations No. 17-99, dated December 16, 1999, which
provides the increase on the applicable tax rates on cigar and
cigarettes as follows:

"(B) Cigarettes packed by hand. There shall be

levied, assessesed and collected on cigarettes
packed by hand a tax of Forty centavos (P0.40) per
pack.

SECTION

(C) Cigarettes packed by machine. There shall

be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed
below:

145

ARTICLES

PRESENT
SPECIFIC TAX
RATE
PRIOR
TO JAN. 1,
2000

NEW
SPECIFIC
TAX
RATE
EFFECTIVE
JAN. 1, 2000

(A)

P1.00/cigar

P1.12/cigar

2
(B)Cigarettes
packed
machine

by

(1)
Net
retail P12.00/pack
price (excluding
VAT and excise)
exceeds P10.00
per pack

P13.44/ pack

(2)
Exceeds P10.00
per pack

P8.00/pack

P8.96/pack

(3)
Net
retail P5.00/pack
price (excluding
VAT and excise)
is P5.00 to P6.50
per pack

P5.60/pack

(4)
Net
Retail P1.00/pack
Price (excluding
VAT and excise) is
below P5.00 per
pack

P1.12/pack

x xxx
In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the
Court of Tax Appeals reduced the issues to be resolved into
two as stipulated by the parties, to wit: (1) Whether or not the
last paragraph of Section 1 of Revenue Regulation[s] [No.] 1799 is in accordance with the pertinent provisions of Republic
Act [No.] 8240, now incorporated in Section 145 of the Tax
Code of 1997; and (2) Whether or not petitioner is entitled to
a refund ofP35,651,410.00 as alleged overpaid excise tax for
the month of January 2000.
x xxx

Revenue Regulations No. 17-99 likewise provides in the last

paragraph of Section 1 thereof, "(t)hat the new specific tax
rate for any existing brand of cigars, cigarettes packed
by machine, distilled spirits, wines and fermented
liquor shall not be lower than the excise tax that is
actually being paid prior to January 1, 2000."
For the period covering January 1-31, 2000, petitioner
allegedly paid specific taxes on all brands manufactured and
removed in the total amounts of P585,705,250.00.
On February 7, 2000, petitioner filed with respondents
Appellate Division a claim for refund or tax credit of its
purportedly overpaid excise tax for the month of January 2000
in the amount of P35,651,410.00
On June 21, 2001, petitioner filed with respondents Legal
Service a letter dated June 20, 2001 reiterating all the claims
for refund/tax credit of its overpaid excise taxes filed on
various dates, including the present claim for the month of
January 2000 in the amount of P35,651,410.00.
As there was no action on the part of the respondent,
petitioner filed the instant petition for review with this Court
on December 11, 2001, in order to comply with the two-year
period for filing a claim for refund.
In his answer filed on January 16, 2002, respondent raised the
following Special and Affirmative Defenses;
4. Petitioners alleged claim for refund is subject to
administrative routinary investigation/examination by
the Bureau;
5. The amount of P35,651,410 being claimed by
petitioner as alleged overpaid excise tax for the
month of January 2000 was not properly
documented.
6. In an action for tax refund, the burden of proof is
on the taxpayer to establish its right to refund, and
failure to sustain the burden is fatal to its claim for
refund/credit.
7. Petitioner must show that it has complied with the
provisions of Section 204(C) in relation [to] Section
229 of the Tax Code on the prescriptive period for
claiming tax refund/credit;
8. Claims for refund are construed strictly against the
claimant for the same partake of tax exemption from
taxation; and
9. The last paragraph of Section 1 of Revenue
Regulation[s] [No.]17-99 is a valid implementing
regulation which has the force and effect of law."
CA G.R. SP No. 83165

The petition contains essentially similar facts, except that the

said case questions the CTAs December 4, 2003 decision in
CTA Case No. 6612 granting respondents 3 claim for refund of
the amount of P355,385,920.00 representing erroneously or
illegally collected specific taxes covering the period January 1,
2002 to December 31, 2002, as well as its March 17, 2004
Resolution denying a reconsideration thereof.

Hence, the respondent CTA in its assailed October 21, 2002

[twin] Decisions[s] disposed in CTA Case Nos. 6365 & 6383:
WHEREFORE, in view of the foregoing, the court finds the
instant petition meritorious and in accordance with law.
Accordingly, respondent is hereby ORDERED to REFUND to
petitioner the amount of P35,651.410.00 representing
erroneously paid excise taxes for the period January 1 to
January 31, 2000.
SO ORDERED.
Herein petitioner sought reconsideration of the above-quoted
decision. In [twin] resolution[s] [both] dated July 15, 2003, the
Tax Court, in an apparent change of heart, granted the
petitioners consolidated motions for reconsideration, thereby
denying the respondents claim for refund.
However, on consolidated motions for reconsideration filed by
the respondent in CTA Case Nos. 6363 and 6383, the July 15,
2002 resolution was set aside, and the Tax Court ruled, this
time with a semblance of finality, that the respondent is
entitled to the refund claimed. Hence, in a resolution dated
November 4, 2003, the tax court reinstated its December 21,
2002 Decision and disposed as follows:
WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383
are hereby REINSTATED. Accordingly, respondent is hereby
ORDERED to REFUND petitioner the total amount
of P680,387,025.00 representing erroneously paid excise
taxes for the period January 1, 2000 to January 31, 2000 and
February 1, 2000 to December 31, 2001.
SO ORDERED.
Meanwhile, on December 4, 2003, the Court of Tax Appeals
rendered decision in CTA Case No. 6612 granting the prayer
for the refund of the amount of P355,385,920.00 representing
overpaid excise tax for the period covering January 1, 2002 to
December 31, 2002. The tax court disposed of the case as
follows:
IN VIEW OF THE FOREGOING, the Petition for Review is
GRANTED. Accordingly, respondent is hereby ORDERED to
REFUND to petitioner the amount of P355,385,920.00
representing overpaid excise tax for the period covering
January 1, 2002 to December 31, 2002.
SO ORDERED.
Petitioner sought reconsideration of the decision, but the
same was denied in a Resolution dated March 17,
2004.4 (Emphasis supplied) (Citations omitted)
The Commissioner appealed the aforesaid decisions
CTA. The petition questioning the grant of refund
amount of P680,387,025.00 was docketed as CA-G.R.
80675, whereas that assailing the grant of refund
amount of P355,385,920.00 was docketed as CA-G.R.
83165. The petitions were consolidated and eventually
by the Court of Appeals. The appellate court also
reconsideration in its Resolution5 dated 1 March 2005.

of the
in the
SP No.
in the
SP No.
denied
denied

In its Memorandum6 22 dated November 2006, filed on behalf

of the Commissioner, the Office of the Solicitor General (OSG)
seeks to convince the Court that the literal interpretation
given by the CTA and the Court of Appeals of Section 145 of

3
the Tax Code of 1997 (Tax Code) would lead to a lower tax
imposable on 1 January 2000 than that imposable during the
transition period. Instead of an increase of 12% in the tax rate
effective on 1 January 2000 as allegedly mandated by the Tax
Code, the appellate courts ruling would result in a significant
decrease in the tax rate by as much as 66%.

packed by machine a tax at the rates prescribed

below:
(1) If the net retail price (excluding the
excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax
shall be Twelve pesos (P12.00) per pack;

The OSG argues that Section 145 of the Tax Code admits of
several interpretations, such as:

(2) If the net retail price (excluding the

excise tax and the value added tax) exceeds
Six pesos and Fifty centavos (P6.50) but
does not exceed Ten pesos (P10.00) per
pack, the tax shall be Eight Pesos (P8.00)
per pack.

1. That by January 1, 2000, the excise tax on

cigarettes should be the higher tax imposed under
the specific tax system and the tax imposed under
the ad valorem tax system plus the 12% increase
imposed by par. 5, Sec. 145 of the Tax Code;

(3) If the net retail price (excluding the

excise tax and the value-added tax) is Five
pesos (P5.00) but does not exceed Six Pesos
and fifty centavos (P6.50) per pack, the tax
shall be Five pesos (P5.00) per pack;

2. The increase of 12% starting on January 1, 2000

does not apply to the brands of cigarettes listed
under Annex "D" referred to in par. 8, Sec. 145 of the
Tax Code;
3. The 12% increment shall be computed based on
the net retail price as indicated in par. C, sub-par. (1)(4), Sec. 145 of the Tax Code even if the resulting
figure will be lower than the amount already being
paid at the end of the transition period. This is the
interpretation followed by both the CTA and the Court
of Appeals.7
This being so, the interpretation which will give life to the
legislative intent to raise revenue should govern, the OSG
stresses.
Finally, the OSG asserts that a tax refund is in the nature of a
tax exemption and must, therefore, be construed strictly
against the taxpayer, such as Fortune Tobacco.
In its Memorandum8 dated 10 November 2006, Fortune
Tobacco argues that the CTA and the Court of Appeals merely
followed the letter of the law when they ruled that the basis
for the 12% increase in the tax rate should be the net retail
price of the cigarettes in the market as outlined in paragraph
C, sub paragraphs (1)-(4), Section 145 of the Tax Code. The
Commissioner allegedly has gone beyond his delegated rulemaking power when he promulgated, enforced and
implemented Revenue Regulation No. 17-99, which effectively
created a separate classification for cigarettes based on the
excise tax "actually being paid prior to January 1, 2000." 9
It should be mentioned at the outset that there is no dispute
between the fact of payment of the taxes sought to be
refunded and the receipt thereof by the Bureau of Internal
Revenue (BIR). There is also no question about the
mathematical accuracy of Fortune Tobaccos claim since the
documentary evidence in support of the refund has not been
controverted by the revenue agency. Likewise, the claims
have been made and the actions have been filed within the
two (2)-year prescriptive period provided under Section 229 of
the Tax Code.
The power to tax is inherent in the State, such power being
inherently legislative, based on the principle that taxes are a
grant of the people who are taxed, and the grant must be
made by the immediate representatives of the people; and
where the people have laid the power, there it must remain
and be exercised.10
This entire controversy revolves around the interplay between
Section 145 of the Tax Code and Revenue Regulation 17-99.
The main issue is an inquiry into whether the revenue
regulation has exceeded the allowable limits of legislative
delegation.
For ease of reference, Section 145 of the Tax Code is again
reproduced in full as follows:
Section 145. Cigars and Cigarettes(A) Cigars.There shall be levied, assessed and
collected on cigars a tax of One peso (P1.00) per
cigar.

(4) If the net retail price (excluding the

excise tax and the value-added tax) is below
Five pesos (P5.00) per pack, the tax shall be
One peso (P1.00) per pack;
Variants of existing brands of cigarettes which are introduced
in the domestic market after the effectivity of R.A. No. 8240
shall be taxed under the highest classification of any variant
of that brand.
The excise tax from any brand of cigarettes within the next
three (3) years from the effectivity of R.A. No. 8240 shall not
be lower than the tax, which is due from each brand on
October 1, 1996. Provided, however, That in cases where the
excise tax rates imposed in paragraphs (1), (2), (3) and (4)
hereinabove will result in an increase in excise tax of more
than seventy percent (70%), for a brand of cigarette, the
increase shall take effect in two tranches: fifty percent (50%)
of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.
Duly registered or existing brands of cigarettes or new brands
thereof packed by machine shall only be packed in twenties.
The rates of excise tax on cigars and cigarettes under
paragraphs (1), (2) (3) and (4) hereof, shall be
increased by twelve percent (12%) on January 1, 2000.
New brands shall be classified according to their current net
retail price.
For the above purpose, net retail price shall mean the
price at which the cigarette is sold on retail in twenty (20)
major supermarkets in Metro Manila (for brands of cigarettes
marketed nationally), excluding the amount intended to cover
the applicable excise tax and value-added tax. For brands
which are marketed only outside Metro Manila, the net retail
price shall mean the price at which the cigarette is sold in
five (5) major intended to cover the applicable excise tax and
the value-added tax.
The classification of each brand of cigarettes based on its
average retail price as of October 1, 1996, as set forth in
Annex "D," shall remain in force until revised by Congress.
Variant of a brand shall refer to a brand on which a
modifier is prefixed and/or suffixed to the root name of the
brand and/or a different brand which carries the same logo or
design of the existing brand.11 (Emphasis supplied)
Revenue Regulation 17-99, which was issued pursuant to the
unquestioned authority of the Secretary of Finance to
promulgate rules and regulations for the effective
implementation of the Tax Code,12 interprets the above-quoted
provision and reflects the 12% increase in excise taxes in the
following manner:

SECTION

PRESENT
SPECIFIC TAX
DESCRIPTION OF
RATES PRIOR
ARTICLES
TO JAN. 1,
2000

NEW
SPECIFIC TAX
RATE
Effective Jan..
1, 2000

145

(A)

P1.12/cigar

(B). Cigarettes packed by hand.There shall be

levied, assessed and collected on cigarettes packed
by hand a tax of Forty centavos (P0.40) per pack.
(C) Cigarettes packed by machine.There shall
be levied, assessed and collected on cigarettes

P1.00/cigar

4
(B)Cigarettes
packed
Machine

by

(1) Net Retail P12.00/pack

Price (excluding
VAT and Excise)
exceeds P10.00
per pack

P13.44/pack

(2) Net Retail P8.00/pack

Price (excluding
VAT and Excise)
is P6.51
up
to P10.00
per
pack

P8.96/pack

(3) Net Retail P5.00/pack

Price (excluding
VAT and excise)
is P5.00 to P6.50
per pack

P5.60/pack

(4) Net Retail P1.00/pack

Price (excluding
VAT and excise)
is
below P5.00
per pack)

P1.12/pack

This table reflects Section 145 of the Tax Code insofar as it

mandates a 12% increase effective on 1 January 2000 based
on the taxes indicated under paragraph C, sub-paragraph (1)(4). However, Revenue Regulation No. 17-99 went further and
added that "[T]he new specific tax rate for any existing brand
of cigars, cigarettes packed by machine, distilled spirits, wines
and fermented liquor shall not be lower than the excise tax
that is actually being paid prior to January 1, 2000."13
Parenthetically, Section 145 states that during the transition
period, i.e., within the next three (3) years from the effectivity
of the Tax Code, the excise tax from any brand of cigarettes
shall not be lower than the tax due from each brand on 1
October 1996. This qualification, however, is conspicuously
absent as regards the 12% increase which is to be applied on
cigars and cigarettes packed by machine, among others,
effective on 1 January 2000. Clearly and unmistakably,
Section 145 mandates a new rate of excise tax for cigarettes
packed by machine due to the 12% increase effective on 1
January 2000 without regard to whether the revenue
collection starting from this period may turn out to be lower
than that collected prior to this date.
By adding the qualification that the tax due after the 12%
increase becomes effective shall not be lower than the tax
actually paid prior to 1 January 2000, Revenue Regulation No.
17-99 effectively imposes a tax which is the higher amount
between the ad valorem tax being paid at the end of the three
(3)-year transition period and the specific tax under
paragraph C, sub-paragraph (1)-(4), as increased by 12%a
situation not supported by the plain wording of Section 145 of
the Tax Code.
This is not the first time that national revenue officials had
ventured in the area of unauthorized administrative
legislation.
In Commissioner of Internal Revenue v. Reyes,14 respondent
was not informed in writing of the law and the facts on which
the assessment of estate taxes was made pursuant to Section
228 of the 1997 Tax Code, as amended by Republic Act (R.A.)
No. 8424. She was merely notified of the findings by the
Commissioner, who had simply relied upon the old provisions
of the law and Revenue Regulation No. 12-85 which was
based on the old provision of the law. The Court held that in
case of discrepancy between the law as amended and the
implementing regulation based on the old law, the former
necessarily prevails. The law must still be followed, even
though the existing tax regulation at that time provided for a
different procedure.15
In Commissioner of Internal Revenue v. Central Luzon Drug
Corporation,16 the tax authorities gave the term "tax credit" in
Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning
utterly disparate from what R.A. No. 7432 provides. Their
interpretation muddled up the intent of Congress to grant a
mere discount privilege and not a sales discount. The Court,

striking down the revenue regulation, held that an

administrative agency issuing regulations may not enlarge,
alter or restrict the provisions of the law it administers, and it
cannot engraft additional requirements not contemplated by
the legislature. The Court emphasized that tax administrators
are not allowed to expand or contract the legislative mandate
and that the "plain meaning rule" or verbalegis in statutory
construction should be applied such that where the words of a
statute are clear, plain and free from ambiguity, it must be
given its literal meaning and applied without attempted
interpretation.
As we have previously declared, rule-making power must be
confined to details for regulating the mode or proceedings in
order to carry into effect the law as it has been enacted, and it
cannot be extended to amend or expand the statutory
requirements or to embrace matters not covered by the
statute. Administrative regulations must always be in
harmony with the provisions of the law because any resulting
discrepancy between the two will always be resolved in favor
of the basic law.17
In Commissioner of Internal Revenue v. Michel J. Lhuillier
Pawnshop, Inc.,18 Commissioner Jose Ong issued Revenue
Memorandum Order (RMO) No. 15-91, as well as the
clarificatory Revenue Memorandum Circular (RMC) 43-91,
imposing a 5% lending investors tax under the 1977 Tax
Code, as amended by Executive Order (E.O.) No. 273, on
pawnshops. The Commissioner anchored the imposition on
the definition of lending investors provided in the 1977 Tax
Code which, according to him, was broad enough to include
pawnshop operators. However, the Court noted that
pawnshops and lending investors were subjected to different
tax treatments under the Tax Code prior to its amendment by
the executive order; that Congress never intended to treat
pawnshops in the same way as lending investors; and that the
particularly involved section of the Tax Code explicitly
subjected lending investors and dealers in securities only to
percentage tax. And so the Court affirmed the invalidity of the
challenged circulars, stressing that "administrative issuances
must not override, supplant or modify the law, but must
remain consistent with the law they intend to carry out." 19
In Philippine Bank of Communications v. Commissioner of
Internal Revenue,20 the then acting Commissioner issued RMC
7-85, changing the prescriptive period of two years to ten
years for claims of excess quarterly income tax payments,
thereby creating a clear inconsistency with the provision of
Section 230 of the 1977 Tax Code. The Court nullified the
circular, ruling that the BIR did not simply interpret the law;
rather it legislated guidelines contrary to the statute passed
by Congress. The Court held:
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.21
In Commissioner of Internal Revenue v. CA, et al.,22 the central
issue was the validity of RMO 4-87 which had construed the
amnesty coverage under E.O. No. 41 (1986) to include only
assessments issued by the BIR after the promulgation of the
executive order on 22 August 1986 and not assessments
made to that date. Resolving the issue in the negative, the
Court held:
x xx all such issuances must not override, but must remain
consistent and in harmony with, the law they seek to apply
and implement. Administrative rules and regulations are
intended to carry out, neither to supplant nor to modify, the
law.23
x xx
If, as the Commissioner argues, Executive Order No. 41 had
not been intended to include 1981-1985 tax liabilities already
assessed (administratively) prior to 22 August 1986, the law
could have simply so provided in its exclusionary clauses. It
did not. The conclusion is unavoidable, and it is that the
executive order has been designed to be in the nature of a
general grant of tax amnesty subject only to the cases
specifically excepted by it.24

5
In the case at bar, the OSGs argument that by 1 January
2000, the excise tax on cigarettes should be the higher tax
imposed under the specific tax system and the tax imposed
under the ad valorem tax system plus the 12% increase
imposed by paragraph 5, Section 145 of the Tax Code, is an
unsuccessful attempt to justify what is clearly an
impermissible incursion into the limits of administrative
legislation. Such an interpretation is not supported by the
clear language of the law and is obviously only meant to
validate the OSGs thesis that Section 145 of the Tax Code is
ambiguous and admits of several interpretations.
The contention that the increase of 12% starting on 1 January
2000 does not apply to the brands of cigarettes listed under
Annex "D" is likewise unmeritorious, absurd even. Paragraph
8, Section 145 of the Tax Code simply states that, "[T]he
classification of each brand of cigarettes based on its average
net retail price as of October 1, 1996, as set forth in Annex
D, shall remain in force until revised by Congress." This
declaration certainly does not lend itself to the interpretation
given to it by the OSG. As plainly worded, the average net
retail prices of the listed brands under Annex "D," which
classify cigarettes according to their net retail price into low,
medium or high, obviously remain the bases for the
application of the increase in excise tax rates effective on 1
January 2000.
The foregoing leads us to conclude that Revenue Regulation
No. 17-99 is indeed indefensibly flawed. The Commissioner
cannot seek refuge in his claim that the purpose behind the
passage of the Tax Code is to generate additional revenues for
the government. Revenue generation has undoubtedly been a
major consideration in the passage of the Tax Code. However,
as borne by the legislative record, 25 the shift from the ad
valorem system to the specific tax system is likewise meant to
promote fair competition among the players in the industries
concerned, to ensure an equitable distribution of the tax
burden and to simplify tax administration by classifying
cigarettes, among others, into high, medium and low-priced
based on their net retail price and accordingly graduating tax
rates.
At any rate, this advertence to the legislative record is merely
gratuitous because, as we have held, the meaning of the law
is clear on its face and free from the ambiguities that the
Commissioner imputes. We simply cannot disregard the letter
of the law on the pretext of pursuing its spirit.26
Finally, the Commissioners contention that a tax refund
partakes the nature of a tax exemption does not apply to the
tax refund to which Fortune Tobacco is entitled. There is parity
between tax refund and tax exemption only when the former
is based either on a tax exemption statute or a tax refund
statute. Obviously, that is not the situation here. Quite the
contrary, Fortune Tobaccos claim for refund is premised on its
erroneous payment of the tax, or better still the governments
exaction in the absence of a law.
Tax exemption is a result of legislative grace. And he who
claims an exemption from the burden of taxation must justify
his claim by showing that the legislature intended to exempt
him by words too plain to be mistaken.27 The rule is that tax
exemptions must be strictly construed such that the
exemption will not be held to be conferred unless the terms
under which it is granted clearly and distinctly show that such
was the intention.28
A claim for tax refund may be based on statutes granting tax
exemption or tax refund. In such case, the rule of strict
interpretation against the taxpayer is applicable as the claim
for refund partakes of the nature of an exemption, a
legislative grace, which cannot be allowed unless granted in
the most explicit and categorical language. The taxpayer
must show that the legislature intended to exempt him from
the tax by words too plain to be mistaken.29
Tax refunds (or tax credits), on the other hand, are not
founded principally on legislative grace but on the legal
principle which underlies all quasi-contracts abhorring a
persons unjust enrichment at the expense of another. 30The
dynamic of erroneous payment of tax fits to a tee the
prototypic quasi-contract, solutioindebiti, which covers not
only mistake in fact but also mistake in law. 31
The Government is not exempt from the application of solutio
indebiti.32 Indeed, the taxpayer expects fair dealing from the
Government, and the latter has the duty to refund without any
unreasonable delay what it has erroneously collected. 33 If the
State expects its taxpayers to observe fairness and honesty in
paying their taxes, it must hold itself against the same

standard in refunding excess (or erroneous) payments of such

taxes. It should not unjustly enrich itself at the expense of
taxpayers.34 And so, given its essence, a claim for tax refund
necessitates only preponderance of evidence for its
approbation like in any other ordinary civil case.
Under the Tax Code itself, apparently in recognition of the
pervasive quasi-contract principle, a claim for tax refund may
be based on the following: (a) erroneously or illegally
assessed or collected internal revenue taxes; (b) penalties
imposed without authority; and (c) any sum alleged to have
been excessive or in any manner wrongfully collected.35
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.36 As burdens, taxes should not
be unduly exacted nor assumed beyond the plain meaning of
the tax laws.37
WHEREFORE, the petition is DENIED. The Decision of the Court
of Appeals in CA G.R. SP No. 80675, dated 28 September
2004, and its Resolution, dated 1 March 2005, are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
THIRD DIVISION

COMMISSIONER OF INTERNAL G.R. No. 159647

REVENUE, versus
CENTRAL LUZON DRUG Promulgated:
CORPORATION, Respondent
April 15, 2005
DECISION
The 20 percent discount required by the law to be given to
senior citizens is a tax credit, not merely a tax deduction from
the gross income or gross sale of the establishment
concerned. A tax credit is used by a private establishment
only after the tax has been computed; a tax deduction, before
the tax is computed. RA 7432 unconditionally grants a tax
credit to all covered entities. Thus, the provisions of the
revenue regulation that withdraw or modify such grant are
void. Basic is the rule that administrative regulations cannot
amend or revoke the law.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules
of Court, seeking to set aside the August 29, 2002
Decision[2] and the August 11, 2003 Resolution [3] of the Court
of Appeals (CA) in CA-GR SP No. 67439. The assailed Decision
reads as follows:
WHEREFORE,
premises
considered, the Resolution appealed from
is AFFIRMED in toto. No costs.[4]
The assailed Resolution
Reconsideration.
The Facts

denied

petitioners

Motion

The CA narrated the antecedent facts as follows:

Respondent is a domestic corporation
primarily engaged in retailing of medicines
and other pharmaceutical products. In 1996,
it operated six (6) drugstores under the
business name and style Mercury Drug.

for

6
Tax refunds or credits do
not exclusively pertain to
illegally
collected
or
erroneously paid taxes as
they
may
be
other
circumstances where a
refund is warranted. The
tax refund provided under
Section
229
deals
exclusively with illegally
collected or erroneously
paid taxes but there are
other possible situations,
such as the refund of
excess
estimated
corporate
quarterly
income tax paid, or that of
excess input tax paid by a
VAT-registered person, or
that of excise tax paid on
goods locally produced or
manufactured but actually
exported. The standards
and mechanics for the
grant of a refund or credit
under these situations are
different from that under
Sec. 229. Sec. 4[.a)] of
R.A. 7432, is yet another
instance of a tax credit
and it does not in any way
refer to illegally collected
or erroneously paid taxes,
x x x.[7]

From
January
to
December
1996,
respondent granted twenty (20%) percent
sales discount to qualified senior citizens on
their purchases of medicines pursuant to
Republic Act No. [R.A.] 7432 and its
Implementing Rules and Regulations. For
the said period, the amount allegedly
representing the 20% sales discount
granted by respondent to qualified senior
citizens totaled P904,769.00.
On April 15, 1997, respondent filed its
Annual Income Tax Return for taxable year
1996 declaring therein that it incurred net
losses from its operations.
On January 16, 1998, respondent filed with
petitioner a claim for tax refund/credit in the
amount of P904,769.00 allegedly arising
from the 20% sales discount granted by
respondent to qualified senior citizens in
compliance with [R.A.] 7432. Unable to
obtain affirmative response from petitioner,
respondent elevated its claim to the Court of
Tax Appeals [(CTA or Tax Court)] via a
Petition for Review.
On February 12, 2001, the Tax Court
rendered
a Decision[5] dismissing
respondents Petition for lack of merit. In
said decision, the [CTA] justified its ruling
with the following ratiocination:
x xx, if no tax has been
paid to the government,
erroneously or illegally, or
if no amount is due and
collectible
from
the
taxpayer, tax refund or
tax credit is unavailing.
Moreover, whether the
recovery of the tax is
made by means of a claim
for refund or tax credit,
before
recovery
is
allowed[,] it must be first
established that there was
an actual collection and
receipt by the government
of the tax sought to be
recovered. x xx.
x xxxxxxxx
Prescinding
from
the
above, it could logically be
deduced that tax credit is
premised on the existence
of tax liability on the part
of taxpayer. In other
words, if there is no tax
liability, tax credit is not
available.
Respondent
lodged
a
Motion
for
Reconsideration. The [CTA], in its assailed
resolution,[6] granted respondents motion for
reconsideration
and
ordered
herein
petitioner to issue a Tax Credit Certificate in
favor of respondent citing the decision of
the then Special Fourth Division of [the CA]
in CA G.R. SP No. 60057 entitled Central
[Luzon] Drug Corporation vs. Commissioner
of Internal Revenue promulgated on May 31,
2001, to wit:
However, Sec. 229 clearly
does not apply in the
instant case because the
tax sought to be refunded
or credited by petitioner
was not erroneously paid
or illegally collected. We
take exception to the CTAs
sweeping but unfounded
statement that both tax
refund and tax credit are
modes of recovering taxes
which
are
either
erroneously or illegally
paid to the government.

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax
Appeals (CTA) ordering petitioner to issue a tax credit
certificate in favor of respondent in the reduced amount
of P903,038.39. It reasoned that Republic Act No. (RA) 7432
required neither a tax liability nor a payment of taxes by
private establishments prior to the availment of a tax credit.
Moreover, such credit is not tantamount to an unintended
benefit from the law, but rather a just compensation for the
taking of private property for public use.
Hence this Petition.[8]
The Issues
Petitioner
consideration:

raises

the

following

issues

for

our

Whether the Court of Appeals erred in

holding that respondent may claim the 20%
sales discount as a tax credit instead of as a
deduction from gross income or gross sales.
Whether the Court of Appeals erred in
holding that respondent is entitled to a
refund.[9]
These two issues may be summed up in only one: whether
respondent, despite incurring a net loss, may still claim the 20
percent sales discount as a tax credit.
The Courts Ruling
The Petition is not meritorious.
Sole Issue:
Claim
of
20
Percent
Credit Despite Net Loss

Sales

Discount

as Tax

Section 4a) of RA 7432[10] grants to senior citizens the

privilege of obtaining a 20 percent discount on their purchase
of medicine from any private establishment in the country.
[11]
The latter may then claim the cost of the discount as a tax
credit.[12] But can such credit be claimed, even though an
establishment operates at a loss?
We answer in the affirmative.
Tax Credit versus Tax Deduction
Although the term is not specifically defined in our Tax Code,
[13]
tax credit generally refers to an amount that is subtracted
directly from ones total tax liability.[14] It is an allowance

7
against the tax itself[15] or a deduction from what is owed [16] by
a taxpayer to the government. Examples of tax credits are
withheld taxes, payments of estimated tax, and investment
tax credits.[17]
Tax credit should be understood in relation to other tax
concepts. One of these is tax deduction -- defined as a
subtraction from income for tax purposes, [18] or an amount
that is allowed by law to reduce income prior to [the]
application of the tax rate to compute the amount of tax
which is due.[19] An example of a tax deduction is any of the
allowable deductions enumerated in Section 34 [20] of the Tax
Code.
A tax credit differs from a tax deduction. On the one hand,
a tax credit reduces the tax due, including -- whenever
applicable -- the income tax that is determined after applying
the corresponding tax rates to taxable income.[21] A tax
deduction, on the other, reduces the income that is subject to
tax[22] in order to arrive at taxable income.[23] To think of the
former as the latter is to avoid, if not entirely confuse, the
issue. A tax credit is used only after the tax has been
computed; a tax deduction, before.
Tax Liability Required for Tax Credit
Since a tax credit is used to reduce directly the tax that is
due, there ought to be a tax liability before the tax credit can
be applied. Without that liability, any tax credit application will
be useless. There will be no reason for deducting the latter
when there is, to begin with, no existing obligation to the
government. However, as will be presented shortly,
the existence of a tax credit or its grant by law is not the
same as the availment or use of such credit. While the grant is
mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently
due from, a business establishment, there will obviously be no
tax liability against which any tax creditcan be applied.[24] For
the establishment to choose the immediate availment of a tax
credit will be premature and impracticable. Nevertheless, the
irrefutable fact remains that, under RA 7432, Congress has
granted without conditions a tax credit benefit to all covered
establishments.
Although this tax credit benefit is available, it need not be
used by losing ventures, since there is no tax liability that
calls for its application. Neither can it be reduced to nil by the
quick yet callow stroke of an administrative pen, simply
because no reduction of taxes can instantly be effected. By its
nature, the tax creditmay still be deducted from a future, not
a present, tax liability, without which it does not have any
use. In the meantime, it need not move. But it breathes.
Prior Tax Payments Not Required for Tax Credit
While a tax liability is essential to the availment or use of
any tax credit, prior tax payments are not. On the contrary,
for the existence or grant solely of such credit, neither a tax
liability nor a prior tax payment is needed. The Tax Code is in
fact replete with provisions granting or allowing tax credits,
even though no taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E)
allows a tax credit -- subject to certain limitations -- for estate
taxes paid to a foreign country. Also found in Section 101(C) is
a similar provision for donors taxes -- again when paid to a
foreign country -- in computing for the donors tax due.
The tax credits in both instances allude to the prior payment
of taxes, even if not made to our government.
Under Section 110, a VAT (Value-Added Tax)- registered
person engaging in transactions -- whether or not subject to
the VAT -- is also allowed a tax credit that includes a ratable
portion of any input tax not directly attributable to either
activity. This input tax may either be the VAT on the purchase
or importation of goods or services that is merely due from -not necessarily paid by -- such VAT-registered person in the
course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type
may in fact be an amount equivalent to only eight percent of
the value of a VAT-registered persons beginning inventory of
goods, materials and supplies, when such amount -- as
computed -- is higher than the actual VAT paid on the said
items.[25]Clearly from this provision, the tax credit refers to an
input tax that is either due only or given a value by mere
comparison with the VAT actually paid -- then later prorated.
No tax is actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax
credit that is merely presumptive is allowed. For the purchase

of primary agricultural products used as inputs -- either in

processing of sardines, mackerel and milk, or in
manufacture of refined sugar and cooking oil -- and for
contract price of public work contracts entered into with
government, again, no prior tax payments are needed for
use of the tax credit.

the
the
the
the
the

More important, a VAT-registered person whose sales are zerorated or effectively zero-rated may, under Section 112(A),
apply for the issuance of a tax creditcertificate for the amount
of creditable input taxes merely due -- again not necessarily
paid to -- the government and attributable to such sales, to
the extent that the input taxes have not been applied against
output
taxes.[26] Where
a
taxpayer
is engaged in zero-rated or effectively zero-rated sales and
also in taxable or exempt sales, the amount of creditable
input taxes due that are not directly and entirely attributable
to any one of these transactions shall be proportionately
allocated on the basis of the volume of sales. Indeed, in
availing of such tax credit for VAT purposes, this provision -as well as the one earlier mentioned -- shows that the prior
payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is
another illustration of a tax credit allowed, even though no
prior tax payments are not required. Specifically, in this
provision, the imposition of a final withholding tax rate on
cash and/or property dividends received by a nonresident
foreign corporation from a domestic corporation is subjected
to the condition that a foreign tax credit will be given by the
domiciliary country in an amount equivalent to taxes that are
merely deemed paid.[27] Although true, this provision actually
refers to the tax credit as a condition only for the imposition
of a lower tax rate, not as a deductionfromthe corresponding
tax liability. Besides, it is not our government but the
domiciliary country that credits against the income tax
payable to the latter by the foreign corporation, the tax to be
foregone or spared.[28]
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b),
categorically allows as credits, against the income tax
imposable under Title II, the amount of income taxes merely
incurred -- not necessarily paid -- by a domestic corporation
during a taxable year in any foreign country. Moreover,
Section 34(C)(5) provides that for such taxes incurred but not
paid, a tax credit may be allowed, subject to the condition
precedent that the taxpayer shall simply give a bond with
sureties satisfactory to and approved by petitioner, in such
sum as may be required; and further conditioned upon
payment by the taxpayer of any tax found due, upon
petitioners redetermination of it.
In addition to the above-cited provisions in the Tax Code,
there are also tax treaties and special laws that grant or
allow tax credits, even though no prior tax payments have
been made.
Under the treaties in which the tax credit method is used as a
relief to avoid double taxation, income that is taxed in
the state of source is also taxable in the state of residence,
but the tax paid in the former is merely allowed as a credit
against the tax levied in the latter. [29] Apparently, payment is
made to the state of source, not thestate of residence. No tax,
therefore, has been previously paid to the latter.
Under special laws that particularly affect businesses, there
can also be tax credit incentives. To illustrate, the incentives
provided for in Article 48 of Presidential Decree No. (PD) 1789,
as amended by Batas PambansaBlg. (BP) 391, include tax
credits equivalent to either five percent of the net value
earned, or five or ten percent of the net local content of
exports.[30] In order to avail of such credits under the said law
and still achieve its objectives, no prior tax payments are
necessary.
From all the foregoing instances, it is evident that prior tax
payments are not indispensable to the availment of a tax
credit. Thus, the CA correctly held that the availment under
RA 7432 did not require prior tax payments by private
establishments concerned.[31] However, we do not agree with
its finding[32] that the carry-over of tax credits under the said
special law to succeeding taxable periods, and even their
application against internal revenue taxes, did not necessitate
the existence of a tax liability.
The examples above show that a tax liability is certainly
important in the availment or use, not the existence or grant,
of a tax credit. Regarding this matter, a private establishment
reporting a net loss in its financial statements is no different
from another that presents a net income. Both are entitled to
the tax credit provided for under RA 7432, since the law itself

8
accords that unconditional benefit. However, for the losing
establishment to immediately apply such credit, where no tax
is due, will be an improvident usance.
Sections 2.i and 4 of Revenue Regulations No. 2-94
Erroneous
RA 7432 specifically allows private establishments to claim
as tax credit the amount of discounts they grant. [33] In turn,
the Implementing Rules and Regulations, issued pursuant
thereto, provide the procedures for its availment. [34] To deny
such credit, despite the plain mandate of the law and the
regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers
to tax credit as the amount representing the 20 percent
discount that shall be deducted by the said establishments
from their gross income for income tax purposes and from
their gross sales for value-added tax or other percentage tax
purposes.[35] In
ordinary
business
language,
the tax
credit represents the amount of such discount. However, the
manner by which the discount shall be credited against taxes
has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an abatement or
reduction made from the gross amount or value of anything.
[36]
To be more precise, it is in business parlance a deduction
or lowering of an amount of money; [37] or a reduction from the
full amount or value of something, especially a price. [38] In
business there are many kinds of discount, the most common
of which is that affecting the income statement[39] or financial
report upon which the income tax is based.
Business Discounts Deducted from Gross Sales
A cash discount, for example, is one granted by business
establishments to credit customers for their prompt payment.
[40]
It is a reduction in price offered to the purchaser if
payment is made within a shorter period of time than the
maximum time specified.[41] Also referred to as a sales
discount on the part of the seller and a purchase discount on
the part of the buyer, it may be expressed in such
terms as 5/10, n/30.[42]
A quantity discount, however, is a reduction in price allowed
for purchases made in large quantities, justified by savings in
packaging, shipping, and handling.[43] It is also called
a volume or bulk discount.[44]
A percentage reduction from the list price x xx allowed by
manufacturers to wholesalers and by wholesalers to
retailers[45] is known as a trade discount. No entry for it need
be made in the manual or computerized books of accounts,
since the purchase or sale is already valued at the net price
actually charged the buyer.[46] The purpose for the discount is
to encourage trading or increase sales, and the prices at
which the purchased goods may be resold are also suggested.
[47]
Even a chain discount -- a series of discounts from one list
price -- is recorded at net.[48]
Finally, akin to a trade discount is a functional discount. It is a
suppliers price discount given to a purchaser based on the
[latters] role in the [formers] distribution system. [49] This role
usually involves warehousing or advertising.
Based on this discussion, we find that the nature of a sales
discount is peculiar. Applying generally accepted accounting
principles (GAAP) in the country, this type of discount is
reflected in the income statement[50] as a line item deducted -along with returns, allowances, rebates and other similar
expenses -- from gross sales to arrive at net sales.[51] This type
of presentation is resorted to, because the accounts
receivable and sales figures that arise from sales discounts, -as well as from quantity, volume or bulk discounts -- are
recorded in the manual and computerized books of
accounts and reflected in the financial statements at the gross
amounts of the invoices.[52] This manner of recording credit
sales -- known as the gross method -- is most widely used,
because it is simple, more convenient to apply than the net
method, and produces no material errors over time. [53]
However,
under
the net
method used
in
recording trade, chain or functional discounts, only the net
amounts of the invoices -- after the discounts have been
deducted -- are recorded in the books of accounts[54] and
reflected in the financial statements. A separate line item
cannot be shown,[55] because the transactions themselves
involving both accounts receivable and sales have already
been entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax

Code, but one provision adverts to amounts whose sum -along with sales returns, allowances and cost of goods
sold[56] -- is deducted from gross sales to come up with
the gross income, profit or margin[57] derived from business.
[58]
In another provision therein, sales discounts that are
granted and indicated in the invoices at the time of sale -- and
that do not depend upon the happening of any future event -may be excluded from the gross sales within the same quarter
they were given.[59] While determinative only of the VAT, the
latter provision also appears as a suitable reference point for
income tax purposes already embraced in the former. After
all, these two provisions affirm that sales discounts are
amounts that are always deductible from gross sales.
Reason for the Senior Citizen Discount: The Law, Not
Prompt Payment
A distinguishing feature of the implementing rules of RA 7432
is the private establishments outright deduction of the
discount from the invoice price of the medicine sold to the
senior citizen.[60] It is, therefore, expected that for each retail
sale made under this law, the discount period lasts no more
than a day, because such discount is given -- and the net
amount thereof collected -- immediately upon perfection of
the sale.[61] Although prompt payment is made for an armslength transaction by the senior citizen, the real and
compelling reason for the private establishment giving the
discount is that the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount
privilege, not a sales discount or any of the above discounts in
particular. Prompt payment is not the reason for (although a
necessary consequence of) such grant. To be sure, the
privilege enjoyed by the senior citizen must be equivalent to
the tax credit benefit enjoyed by the private establishment
granting the discount. Yet, under the revenue regulations
promulgated by our tax authorities, this benefit has been
erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may
be the same as that resulting from a sales discount. However,
to a private establishment, the effect is different from a
simple reduction in price that results from such discount. In
other words, the tax credit benefit is not the same as a sales
discount. To repeat from our earlier discourse, this benefit
cannot and should not be treated as a tax deduction.
To stress, the effect of a sales discount on the income
statement and income tax return of an establishment covered
by RA 7432 is different from that resulting from
theavailment or use of its tax credit benefit. While the former
is a deduction before, the latter is a deduction after,
the income tax is computed. As mentioned earlier, a discount
is not necessarily a sales discount, and a tax credit for a
simple discount privilege should not be automatically treated
like
a sales
discount. Ubilex
non
distinguit,
necnosdistingueredebemus. Where the law does not
distinguish, we ought not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94
define tax credit as the 20 percent discount deductible
from gross income for income tax purposes, or fromgross
sales for VAT or other percentage tax purposes. In effect,
the tax credit benefit under RA 7432 is related to a sales
discount. This contrived definition is improper, considering
that the latter has to be deducted from gross sales in order to
compute the gross income in the income statement and
cannot be deducted again, even for purposes of computing
the income tax.
When the law says that the cost of the discount may be
claimed as a tax credit, it means that the amount -- when
claimed -- shall be treated as a reduction from any tax
liability, plain and simple. The option to avail of the tax
credit benefit depends upon the existence of a tax liability,
but to limit the benefit to a sales discount-- which is not even
identical to the discount privilege that is granted by law -does not define it at all and serves no useful purpose. The
definition must, therefore, be stricken down.
Laws Not Amended by Regulations
Second, the law cannot be amended by a mere regulation. In
fact, a regulation that operates to create a rule out of
harmony
with
the statute is a mere nullity;[62] it cannot prevail.
It is a cardinal rule that courts will and should respect the
contemporaneous construction placed upon a statute by the
executive officers whose duty it is to enforce it x x x. [63] In the

9
scheme of judicial tax administration, the need for certainty
and predictability in the implementation of tax laws is crucial.
[64]
Our tax authorities fill in the details that Congress may not
have the opportunity or competence to provide. [65] The
regulations these authorities issue are relied upon by
taxpayers, who are certain that these will be followed by the
courts.[66] Courts, however, will not uphold these authorities
interpretations when clearly absurd, erroneous or improper.
In the present case, the tax authorities have given the
term tax credit in Sections 2.i and 4 of RR 2-94 a meaning
utterly in contrast to what RA 7432 provides. Their
interpretation has muddled up the intent of Congress in
granting a mere discount privilege, not a sales discount. The
administrative agency issuing these regulations may not
enlarge, alter or restrict the provisions of the law it
administers; it cannot engraft additional requirements not
contemplated by the legislature.[67]
In case of conflict, the law must prevail. [68] A regulation
adopted pursuant to law is law.[69] Conversely, a regulation or
any portion thereof not adopted pursuant to law is no law and
has neither the force nor the effect of law.[70]
Availment of Tax Credit Voluntary
Third, the word may in the text of the statute[71] implies that
the
availability of the tax credit benefit is neither unrestricted nor
mandatory.[72] There is no absolute right conferred upon
respondent, or any similar taxpayer, to avail itself of the tax
credit remedy whenever it chooses; neither does it impose a
duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and
discretion of the taxpayer.[73] For the tax authorities to compel
respondent to deduct the 20 percent discount from either
its gross income or its gross sales[74] is, therefore, not only to
make an imposition without basis in law, but also to blatantly
contravene the law itself.
What Section 4.a of RA 7432 means is that the tax
credit benefit is merely permissive, not imperative.
Respondent is given two options -- either to claim or not to
claim the cost of the discounts as a tax credit. In fact, it may
even ignore the credit and simply consider the gesture as an
act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims

such cost as a tax credit, then the tax credit can easily be
applied. If there is none, the credit cannot be used and will
just have to be carried over and revalidated [75] accordingly. If,
however, the business continues to operate at a loss and no
other taxes are due, thus compelling it to close shop, the
credit can never be applied and will be lost altogether.
In other words, it is the existence or the lack of a tax liability
that determines whether the cost of the discounts can be
used as a tax credit. RA 7432 does not give respondent the
unfettered right to avail itself of the credit whenever it
pleases. Neither does it allow our tax administrators to
expand or contract the legislative mandate. The plain
meaning rule or verbalegis in statutory construction is thus
applicable x xx. Where the words of a statute are clear, plain
and free from ambiguity, it must be given its literal meaning
and applied without attempted interpretation.[76]

Tax Credit Benefit Deemed Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the
State of its power of eminent domain. Be it stressed that the
privilege
enjoyed
by
senior
citizens
does
not
come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit
granted to these establishments can be deemed as their just
compensation for private property taken by the State for
public use.[77]
The concept of public use is no longer confined to the
traditional notion of use by the public, but held synonymous
with public interest, public benefit, public welfare, andpublic
convenience.[78] The discount privilege to which our senior
citizens are entitled is actually a benefit enjoyed by the
general public to which these citizens belong. The discounts
given would have entered the coffers and formed part of
the gross sales of the private establishments concerned, were
it not for RA 7432. The permanent reduction in their total
revenues is a forced subsidy corresponding to the taking of
private property for public use or benefit.

As a result of the 20 percent discount imposed by RA 7432,

respondent becomes entitled to a just compensation. This
term refers not only to the issuance of a tax credit certificate
indicating the correct amount of the discounts given, but also
to the promptness in its release. Equivalent to the payment of
property taken by the State, such issuance -- when not done
within a reasonable time from the grant of the discounts -cannot be considered as just compensation. In effect,
respondent is made to suffer the consequences of being
immediately deprived of its revenues while awaiting actual
receipt, through the certificate, of the equivalent amount it
needs to cope with the reduction in its revenues.[79]
Besides, the taxation power can also be used as an implement
for the exercise of the power of eminent domain. [80] Tax
measures are but enforced contributions exacted on pain of
penal sanctions[81] and clearly imposed for a public purpose.
[82]
In recent years, the power to tax has indeed become a
most effective tool to realize social justice, public welfare, and
the equitable distribution of wealth.[83]
While it is a declared commitment under Section 1 of RA
7432, social justice cannot be invoked to trample on the rights
of property owners who under our Constitution and laws are
also entitled to protection. The social justice consecrated in
our [C]onstitution [is] not intended to take away rights from a
person and give them to another who is not entitled thereto.
[84]
For this reason, a just compensation for income that is
taken away from respondent becomes necessary. It is in
the tax credit that our legislators find support to realize social
justice, and no administrative body can alter that fact.
To put it differently, a private establishment that merely
breaks even[85] -- without the discounts yet -- will surely start
to incur losses because of such discounts. The same effect is
expected if its mark-up is less than 20 percent, and if all its
sales come from retail purchases by senior citizens. Aside
from the observation we have already raised earlier, it will
also be grossly unfair to an establishment if the discounts will
be treated merely as deductions from either its gross
income or itsgross sales. Operating at a loss through no fault
of its own, it will realize that the tax credit limitation under RR
2-94 is inutile, if not improper. Worse, profit-generating
businesses will be put in a better position if they avail
themselves of tax credits denied those that are losing,
because no taxes are due from the latter.
Grant of Tax Credit Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior
citizens are assisted by the community as a whole and to
establish a program beneficial to them. [86]These objectives are
consonant with the constitutional policy of making health x xx
services available to all the people at affordable cost [87] and of
giving priority for the needs of the x xx elderly. [88] Sections 2.i
and 4 of RR 2-94, however, contradict these constitutional
policies and statutory objectives.
Furthermore, Congress has allowed all private establishments
a simple tax credit, not a deduction. In fact, no cash outlay is
required from the government for theavailment or use of such
credit. The deliberations on February 5, 1992 of the Bicameral
Conference Committee Meeting on Social Justice, which
finalized RA 7432, disclose the true intent of our legislators to
treat the sales discounts as a tax credit, rather than as a
deduction from gross income. We quote from those
deliberations as follows:
"THE CHAIRMAN (Rep. Unico).By the way,
before that ano,
about deductions
from
taxable
income. I think
we incorporated
there a provision
na on
the
responsibility of
the
private
hospitals
and
drugstores,
hindiba?
SEN. ANGARA. Oo.
THE CHAIRMAN. (Rep. Unico), So, I think we
have to put in
also a provision
here about the
deductions from
taxable income of

10
that
private
hospitals,
di
baganon 'yan?
MS. ADVENTO. Kaya langpo sir, and mga
discounts ponila
affecting
government and
public
institutions,
so,
puwedenaponatin
ghindiisamayung
mga
less
deductions
ng
taxable income.
THE

CHAIRMAN.

(Rep.
Unico).
Puwedena.Yung
about the private
hospitals.Yung
isiningitnatin?

MS. ADVENTO. Singitnapobayung 15% on

credit.
(inaudible/did not
use
the
microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa
banaisamanatin?
SEN. ANGARA. Oo. You want to insert that?
THE CHAIRMAN (Rep. Unico). Yung ang
proposal
ni
Senator Shahani,
e.
SEN.

ANGARA.

In

the

case of private
hospitals they got
the grant of 15%
discount,
provided
that,
the
private
hospitals
can
claim
the
expense as a tax
credit.

REP. AQUINO. Yah could be allowed as

deductions in the
perpetrations of
(inaudible)
income.
SEN.

ANGARA.

I-tax
credit
nalangnatinpara
walang cash-out
ano?

REP. AQUINO. Oo, tax credit. Tama, Okay.

Hospitals ba o
lahatng
establishments
na covered.
THE CHAIRMAN. (Rep. Unico). Sakuwanlang
yon, as private
hospitals lang.
REP. AQUINO. Anobayung establishments na
covered?
SEN. ANGARA. Restaurant lodging houses,
recreation
centers.
REP. AQUINO. All establishments covered
siguro?
SEN.

ANGARA.

REP. AQUINO. Oho.

From
all
establishments.Al
isinnanatin 'Yung
kuwan
kung
ganon. Can we
go
back
to
Section 4 ha?

SEN. ANGARA. Letter A. To capture that

thought, we'll say
the grant of 20%
discount from all
establishments et
cetera, et cetera,
provided
that
said
establishments provided
that
private
establishments
may claim the
cost as a tax
credit. Ganonba
'yon?
REP. AQUINO. Yah.
SEN. ANGARA. Dahilkung government, they
don't need to
claim it.
THE CHAIRMAN. (Rep. Unico). Tax credit.
SEN. ANGARA. As a tax credit [rather] than
a
kuwan
deduction, Okay.
REP. AQUINO Okay.
SEN. ANGARA. Sige Okay. Di subject to style
nalangsa
Letter
A".[89]
Special Law Over General Law
Sixth and last, RA 7432 is a special law that should prevail
over the Tax Code -- a general law. x xx [T]he rule is that on a
specific matter the special law shall prevail over the general
law,
which
shall
be resorted to only to supply deficiencies in the former. [90] In
addition, [w]here there are two statutes, the earlier special
and the later general -- the terms of the general broad enough
to include the matter provided for in the special -- the fact
that one is special and the other is general creates a
presumption that the special is to be considered as remaining
an exception to the general,[91] one as a general law of the
land, the other as the law of a particular case. [92] It is a canon
of statutory construction that a later statute, general in its
terms and not expressly repealing a prior special statute, will
ordinarily not affect the special provisions of such earlier
statute.[93]
RA 7432 is an earlier law not expressly repealed by, and
therefore remains an exception to, the Tax Code -- a later law.
When the former states that a tax creditmay be claimed, then
the requirement of prior tax payments under certain
provisions of the latter, as discussed above, cannot be made
to apply. Neither can the instances of or references to a tax
deduction under the Tax Code [94] be made to restrict RA 7432.
No provision of any revenue regulation can supplant or modify
the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed
Decision and Resolution of the Court of Appeals AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
G.R. Nos. L-49839-46

April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,

vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE
ROO, in their capacities as appointed and Acting
Members of the CENTRAL BOARD OF ASSESSMENT
APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL
ROSARIO, RAUL C. FLORES, in their capacities as
appointed and Acting Members of the BOARD OF
ASSESSMENT APPEALS of Manila; and NICOLAS CATIIL
in his capacity as City Assessor of Manila, respondents.

This is a petition for review on certiorari to reverse the June

10, 1977 decision of the Central Board of Assessment
Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes,
Edmundo Reyes, et al. v. Board of Assessment Appeals of

11
Manila and City Assessor of Manila" which affirmed the March
29, 1976 decision of the Board of Tax Assessment Appeals 2 in
BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes,
et al. v. City Assessor of Manila" and "Edmundo Reyes and
Milagros Reyes v. City Assessor of Manila" upholding the
classification and assessments made by the City Assessor of
Manila.
The facts of the case are as follows:
Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are
owners of parcels of land situated in Tondo and Sta. Cruz
Districts, City of Manila, which are leased and entirely
occupied as dwelling sites by tenants. Said tenants were
paying monthly rentals not exceeding three hundred pesos
(P300.00) in July, 1971. On July 14, 1971, the National
Legislature enacted Republic Act No. 6359 prohibiting for one
year from its effectivity, an increase in monthly rentals of
dwelling units or of lands on which another's dwelling is
located, where such rentals do not exceed three hundred
pesos (P300.00) a month but allowing an increase in rent by
not more than 10% thereafter. The said Act also suspended
paragraph (1) of Article 1673 of the Civil Code for two years
from its effectivity thereby disallowing the ejectment of
lessees upon the expiration of the usual legal period of lease.
On October 12, 1972, Presidential Decree No. 20 amended
R.A. No. 6359 by making absolute the prohibition to increase
monthly rentals below P300.00 and by indefinitely suspending
the aforementioned provision of the Civil Code, excepting
leases with a definite period. Consequently, the Reyeses,
petitioners herein, were precluded from raising the rentals and
from ejecting the tenants. In 1973, respondent City Assessor
of Manila re-classified and reassessed the value of the subject
properties based on the schedule of market values duly
reviewed by the Secretary of Finance. The revision, as
expected, entailed an increase in the corresponding tax rates
prompting petitioners to file a Memorandum of Disagreement
with the Board of Tax Assessment Appeals. They averred that
the reassessments made were "excessive, unwarranted,
inequitable, confiscatory and unconstitutional" considering
that the taxes imposed upon them greatly exceeded the
annual income derived from their properties. They argued that
the income approach should have been used in determining
the land values instead of the comparable sales approach
which the City Assessor adopted (Rollo, pp. 9-10-A). The Board
of Tax Assessment Appeals, however, considered the
assessments valid, holding thus:
WHEREFORE, and considering that the appellants
have failed to submit concrete evidence which could
overcome the presumptive regularity of the
classification and assessments appear to be in
accordance with the base schedule of market values
and of the base schedule of building unit values, as
approved by the Secretary of Finance, the cases
should be, as they are hereby, upheld.
SO ORDERED.(Decision of the
Assessment Appeals, Rollo, p. 22).

Board

of

Tax

The Reyeses appealed to the Central Board of Assessment

Appeals.1wphi1 They
submitted,
among
others,
the
summary of the yearly rentals to show the income derived
from the properties. Respondent City Assessor, on the other
hand, submitted three (3) deeds of sale showing the different
market values of the real property situated in the same
vicinity where the subject properties of petitioners are
located. To better appreciate the locational and physical
features of the land, the Board of Hearing Commissioners
conducted an ocular inspection with the presence of two
representatives of the City Assessor prior to the healing of the
case. Neither the owners nor their authorized representatives
were present during the said ocular inspection despite proper
notices served them. It was found that certain parcels of land
were below street level and were affected by the tides (Rollo,
pp. 24-25).
On June 10, 1977, the Central Board of Assessment Appeals
rendered its decision, the dispositive portion of which reads:
WHEREFORE, the appealed decision insofar as the
valuation and assessment of the lots covered by Tax
Declaration Nos. (5835) PD-5847, (5839), (5831) PD5844 and PD-3824 is affirmed.
For the lots covered by Tax Declaration Nos. (1430)
PD-1432, PD-1509, 146 and (1) PD-266, the appealed
Decision is modified by allowing a 20% reduction in
their respective market values and applying therein

the assessment level of 30% to arrive at the

corresponding assessed value.
SO ORDERED. (Decision of the Central Board of
Assessment Appeals, Rollo, p. 27)
Petitioner's subsequent motion
denied, hence, this petition.

for

reconsideration

was

The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE
"COMPARABLE SALES APPROACH" METHOD IN FIXING
THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.
The petition is impressed with merit.
The crux of the controversy is in the method used in tax
assessment of the properties in question. Petitioners maintain
that the "Income Approach" method would have been more
realistic for in disregarding the effect of the restrictions
imposed by P.D. 20 on the market value of the properties
affected, respondent Assessor of the City of Manila unlawfully
and unjustifiably set increased new assessed values at levels
so high and successive that the resulting annual real estate
taxes would admittedly exceed the sum total of the yearly
rentals paid or payable by the dweller tenants under P.D. 20.
Hence, petitioners protested against the levels of the values
assigned to their properties as revised and increased on the
ground that they were arbitrarily excessive, unwarranted,
inequitable, confiscatory and unconstitutional (Rollo, p. 10-A).
On the other hand, while respondent Board of Tax Assessment
Appeals admits in its decision that the income approach is
used in determining land values in some vicinities, it
maintains that when income is affected by some sort of price
control, the same is rejected in the consideration and study of
land values as in the case of properties affected by the Rent
Control Law for they do not project the true market value in
the open market (Rollo, p. 21). Thus, respondents opted
instead for the "Comparable Sales Approach" on the ground
that the value estimate of the properties predicated upon
prices paid in actual, market transactions would be a uniform
and a more credible standards to use especially in case of
mass appraisal of properties (Ibid.). Otherwise stated, public
respondents would have this Court completely ignore the
effects of the restrictions of P.D. No. 20 on the market value of
properties within its coverage. In any event, it is
unquestionable that both the "Comparable Sales Approach"
and the "Income Approach" are generally acceptable methods
of appraisal for taxation purposes (The Law on Transfer and
Business Taxation by Hector S. De Leon, 1988 Edition).
However, it is conceded that the propriety of one as against
the other would of course depend on several factors. Hence,
as early as 1923 in the case of Army & Navy Club, Manila v.
Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been
stressed that the assessors, in finding the value of the
property, have to consider all the circumstances and elements
of value and must exercise a prudent discretion in reaching
conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then
enforced, the rule of taxation must not only be uniform, but
must also be equitable and progressive.
Uniformity has been defined as that principle by which all
taxable articles or kinds of property of the same class shall be
taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969
[1916]).
Notably in the 1935 Constitution, there was no mention of the
equitable or progressive aspects of taxation required in the
1973 Charter (Fernando "The Constitution of the Philippines",
p. 221, Second Edition). Thus, the need to examine closely
and determine the specific mandate of the Constitution.
Taxation is said to be equitable when its burden falls on those
better able to pay. Taxation is progressive when its rate goes
up depending on the resources of the person affected (Ibid.).
The power to tax "is an attribute of sovereignty". In fact, it is
the strongest of all the powers of government. But for all its
plenitude the power to tax is not unconfined as there are
restrictions. Adversely effecting as it does property rights,
both the due process and equal protection clauses of the
Constitution may properly be invoked to invalidate in
appropriate cases a revenue measure. If it were otherwise,
there would be truth to the 1903 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy."
The web or unreality spun from Marshall's famous dictum was

12
brushed away by one stroke of Mr. Justice Holmes pen, thus:
"The power to tax is not the power to destroy while this Court
sits. So it is in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA
655 [1984]; Obillos, Jr. v. Commissioner of Internal Revenue,
139 SCRA 439 [1985]).
In the same vein, the due process clause may be invoked
where a taxing statute is so arbitrary that it finds no support
in the Constitution. An obvious example is where it can be
shown to amount to confiscation of property. That would be a
clear abuse of power (Sison v. Ancheta, supra).
The taxing power has the authority to make a reasonable and
natural classification for purposes of taxation but the
government's act must not be prompted by a spirit of
hostility, or at the very least discrimination that finds no
support in reason. It suffices then that the laws operate
equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same
manner, the conditions not being different both in the
privileges conferred and the liabilities imposed (Ibid., p. 662).
Finally under the Real Property Tax Code (P.D. 464 as
amended), it is declared that the first Fundamental Principle
to guide the appraisal and assessment of real property for
taxation purposes is that the property must be "appraised at
its current and fair market value."
By no strength of the imagination can the market value of
properties covered by P.D. No. 20 be equated with the market
value of properties not so covered. The former has naturally a
much lesser market value in view of the rental restrictions.
Ironically, in the case at bar, not even the factors determinant
of the assessed value of subject properties under the
"comparable sales approach" were presented by the public
respondents, namely: (1) that the sale must represent
a bonafide arm's length transaction between a willing seller
and a willing buyer and (2) the property must be comparable
property (Rollo, p. 27). Nothing can justify or support their
view as it is of judicial notice that for properties covered by
P.D. 20 especially during the time in question, there were
hardly any willing buyers. As a general rule, there were no
takers so that there can be no reasonable basis for the
conclusion that these properties were comparable with other
residential properties not burdened by P.D. 20. Neither can the
given circumstances be nonchalantly dismissed by public
respondents as imposed under distressed conditions clearly
implying that the same were merely temporary in character.
At this point in time, the falsity of such premises cannot be
more convincingly demonstrated by the fact that the law has
existed for around twenty (20) years with no end to it in sight.
Verily, taxes are the lifeblood of the government and so
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 taxations, which is the promotion of the common
good, may be achieved (Commissioner of Internal Revenue v.
Algue Inc., et al., 158 SCRA 9 [1988]). Consequently, it stands
to reason that petitioners who are burdened by the
government by its Rental Freezing Laws (then R.A. No. 6359
and P.D. 20) under the principle of social justice should not
now be penalized by the same government by the imposition
of excessive taxes petitioners can ill afford and eventually
result in the forfeiture of their properties.
By the public respondents' own computation the assessment
by income approach would amount to only P10.00 per sq.
meter at the time in question.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the
assailed decisions of public respondents are REVERSED and
SET ASIDE; and (e) the respondent Board of Assessment
Appeals of Manila and the City Assessor of Manila are ordered
to make a new assessment by the income approach method
to guarantee a fairer and more realistic basis of computation
(Rollo, p. 71).
SO ORDERED.
G.R. No. L-28896 February 17, 1988
COMMISSIONER
vs.

OF

INTERNAL

REVENUE, petitioner,

ALGUE,
INC.,
and
APPEALS, respondents.

THE

COURT

OF

TAX

Taxes are the lifeblood of the government and so should be

collected without unnecessary hindrance On the other hand,
such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself.
It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common
good, may be achieved.
The main issue in this case is whether or not the Collector of
Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns. The corollary
issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was
made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private
respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from
the petitioner assessing it in the total amount of P83,183.85
as delinquency income taxes for the years 1958 and
1959. 1 On January 18, 1965, Algue flied a letter of protest or
request for reconsideration, which letter was stamp received
on the same day in the office of the petitioner. 2 On March 12,
1965, a warrant of distraint and levy was presented to the
private respondent, through its counsel, Atty. Alberto Guevara,
Jr., who refused to receive it on the ground of the pending
protest. 3 A search of the protest in the dockets of the case
proved fruitless. Atty. Guevara produced his file copy and
gave a photostat to BIR agent Ramon Reyes, who deferred
service of the warrant. 4 On April 7, 1965, Atty. Guevara was
finally informed that the BIR was not taking any action on the
protest and it was only then that he accepted the warrant of
distraint and levy earlier sought to be served. 5 Sixteen days
later, on April 23, 1965, Algue filed a petition for review of the
decision of the Commissioner of Internal Revenue with the
Court of Tax Appeals. 6
The above chronology shows that the petition was filed
seasonably. According to Rep. Act No. 1125, the appeal may
be made within thirty days after receipt of the decision or
ruling challenged. 7 It is true that as a rule the warrant of
distraint and levy is "proof of the finality of the
assessment" 8 and
renders
hopeless
a
request
for
reconsideration," 9being "tantamount to an outright denial
thereof and makes the said request deemed rejected." 10 But
there is a special circumstance in the case at bar that
prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent
received the petitioner's notice of assessment, it filed its letter
of protest. This was apparently not taken into account before
the warrant of distraint and levy was issued; indeed, such
protest could not be located in the office of the petitioner. It
was only after Atty. Guevara gave the BIR a copy of the
protest that it was, if at all, considered by the tax authorities.
During the intervening period, the warrant was premature and
could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest
filed by private respondent was not pro forma and was based
on strong legal considerations. It thus had the effect of
suspending on January 18, 1965, when it was filed, the
reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period
started running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of
the said protest and the warrant was finally served on it.
Hence, when the appeal was filed on April 23, 1965, only 20
days of the reglementary period had been consumed.

13
Now for the substantive question.
The petitioner contends that the claimed deduction of
P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The Court
of Tax Appeals had seen it differently. Agreeing with Algue, it
held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment
was in the form of promotional fees. These were collected by
the Payees for their work in the creation of the Vegetable Oil
Investment Corporation of the Philippines and its subsequent
purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had
Originally claimed these promotional fees to be personal
holding company income 12 but later conformed to the
decision of the respondent court rejecting this assertion. 13 In
fact, as the said court found, the amount was earned through
the joint efforts of the persons among whom it was distributed
It has been established that the Philippine Sugar Estate
Development Company had earlier appointed Algue as its
agent, authorizing it to sell its land, factories and oil
manufacturing process. Pursuant to such authority, Alberto
Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell,
and Pablo Sanchez, worked for the formation of the Vegetable
Oil Investment Corporation, inducing other persons to invest
in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased
the PSEDC properties. 15 For this sale, Algue received as agent
a commission of P126,000.00, and it was from this
commission that the P75,000.00 promotional fees were paid
to the aforenamed individuals. 16
There is no dispute that the payees duly reported their
respective shares of the fees in their income tax returns and
paid the corresponding taxes thereon. 17 The Court of Tax
Appeals also found, after examining the evidence, that no
distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious
because most of the payees are members of the same family
in control of Algue. It is argued that no indication was made as
to how such payments were made, whether by check or in
cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an
attempt to evade a legitimate assessment by involving an
imaginary deduction.
We find that these suspicions were adequately met by the
private respondent when its President, Alberto Guevara, and
the accountant, Cecilia V. de Jesus, testified that the payments
were not made in one lump sum but periodically and in
different amounts as each payee's need arose. 19 It should be
remembered that this was a family corporation where strict
business procedures were not applied and immediate
issuance of receipts was not required. Even so, at the end of
the year, when the books were to be closed, each payee
made an accounting of all of the fees received by him or her,
to make up the total of P75,000.00. 20 Admittedly, everything
seemed
to
be
informal.
This
arrangement
was
understandable, however, in view of the close relationship
among the persons in the family corporation.
We agree with the respondent court that the amount of the
promotional fees was not excessive. The total commission
paid by the Philippine Sugar Estate Development Co. to the
private respondent was P125,000.00. 21After deducting the
said fees, Algue still had a balance of P50,000.00 as clear
profit from the transaction. The amount of P75,000.00 was
60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the
Sugar Estate properties. This finding of the respondent court
is in accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In

computing net income there shall be
allowed as deductions
(a) Expenses:
(1) In general.--All the ordinary and
necessary expenses paid or incurred during
the taxable year in carrying on any trade or
business, including a reasonable allowance
for salaries or other compensation for
personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as
follows:
SEC.
70. Compensation
for
personal
services.--Among
the
ordinary
and
necessary expenses paid or incurred in
carrying on any trade or business may be
included a reasonable allowance for salaries
or other compensation for personal services
actually rendered. The test of deductibility
in the case of compensation payments is
whether they are reasonable and are, in
fact, payments purely for service. This test
and
deductibility
in
the
case
of
compensation payments is whether they are
reasonable and are, in fact, payments purely
for service. This test and its practical
application may be further stated and
illustrated as follows:
Any amount paid in the form of
compensation, but not in fact as the
purchase price of services, is not deductible.
(a) An ostensible salary paid by a
corporation may be a distribution of a
dividend on stock. This is likely to occur in
the case of a corporation having few
stockholders, Practically all of whom draw
salaries. If in such a case the salaries are in
excess of those ordinarily paid for similar
services, and the excessive payment
correspond or bear a close relationship to
the stockholdings of the officers of
employees, it would seem likely that the
salaries are not paid wholly for services
rendered, but the excessive payments are a
distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18,
325.)
It is worth noting at this point that most of the payees were
not in the regular employ of Algue nor were they its
controlling stockholders. 23
The Solicitor General is correct when he says that the burden
is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus
has been discharged satisfactorily. The private respondent has
proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in
an experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean feat
and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society.
Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence, despite
the natural reluctance to surrender part of one's hard earned
income to the taxing authorities, every person who is able to
must contribute his share in the running of the government.
The government for its part, is expected to respond in the
form of tangible and intangible benefits intended to improve

14
the lives of the people and enhance their moral and material
values. This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability
of taxation, it is a requirement in all democratic regimes that
it be exercised reasonably and in accordance with the
prescribed procedure. If it is not, then the taxpayer has a right
to complain and the courts will then come to his succor. For all
the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it
has here, that the law has not been observed.
We hold that the appeal of the private respondent from the
decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And
we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code
and should therefore not have been disallowed by the
petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax
Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
G.R. No. L-26521

December 28, 1968

EUSEBIO
VILLANUEVA,
ET
AL., plaintiff-appellee,
vs.
CITY OF ILOILO, defendants-appellants.
Appeal by the defendant City of Iloilo from the decision of the
Court of First Instance of Iloilo declaring illegal Ordinance 11,
series of 1960, entitled, "An Ordinance Imposing Municipal
License Tax On Persons Engaged In The Business Of Operating
Tenement Houses," and ordering the City to refund to the
plaintiffs-appellees the sums of collected from them under the
said ordinance.
On September 30, 1946 the municipal board of Iloilo City
enacted Ordinance 86, imposing license tax fees as follows:
(1) tenement house (casa de vecindad), P25.00 annually; (2)
tenement house, partly or wholly engaged in or dedicated to
business in the streets of J.M. Basa, Iznart and Aldeguer,
P24.00 per apartment; (3) tenement house, partly or wholly
engaged in business in any other streets, P12.00 per
apartment. The validity and constitutionality of this ordinance
were challenged by the spouses Eusebio Villanueva and
Remedies Sian Villanueva, owners of four tenement houses
containing 34 apartments. This Court, in City of Iloilo vs.
Remedios Sian Villanueva and Eusebio Villanueva, L-12695,
March 23, 1959, declared the ordinance ultra vires, "it not
appearing that the power to tax owners of tenement houses is
one among those clearly and expressly granted to the City of
Iloilo by its Charter."
On January 15, 1960 the municipal board of Iloilo City,
believing, obviously, that with the passage of Republic Act
2264, otherwise known as the Local Autonomy Act, it had
acquired the authority or power to enact an ordinance similar
to that previously declared by this Court as ultra vires,
enacted Ordinance 11, series of 1960, hereunder quoted in
full:
AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX
ON PERSONS ENGAGED IN THE BUSINESS OF
OPERATING TENEMENT HOUSES
Be it ordained by the Municipal Board of the City of
Iloilo, pursuant to the provisions of Republic Act No.
2264, otherwise known as the Autonomy Law of
Local Government, that:
Section 1. A municipal license tax is hereby
imposed on tenement houses in accordance with the
schedule of payment herein provided.
Section 2. Tenement house as contemplated in this
ordinance shall mean any building or dwelling for
renting space divided into separate apartments or
accessorias.

Section 3. The municipal license tax provided in

Section 1 hereof shall be as follows:
I. Tenement houses:

(a) Apartment
materials

house

made

of

strong

P20.00
per
door p.a.

(b) Apartment
materials

house

made

of

mixed

P10.00
per
door p.a.

II Rooming house of strong materials

P10.00
per
door p.a.

Rooming house of mixed materials

P5.00
per
door p.a.

III. Tenement house partly or wholly

engaged in or dedicated to business in the
following
streets:
J.M.
Basa, Iznart,
Aldeguer, Guanco and Ledesma from
Plazoleto Gay to Valeria. St.

P30.00
per
door p.a.

IV. Tenement house partly or wholly

engaged in or dedicated to business in any
other street

P12.00
per
door p.a.

V. Tenement houses at the streets

surrounding the super market as soon as
said place is declared commercial

P24.00
per
door p.a.

Section 4. All ordinances or parts

inconsistent herewith are hereby amended.

thereof

Section 5. Any person found violating this

ordinance shall be punished with a fine note
exceeding Two Hundred Pesos (P200.00) or an
imprisonment of not more than six (6) months or
both at the discretion of the Court.
Section 6 This ordinance shall take effect upon
approval.
ENACTED, January 15, 1960.
In Iloilo City, the appelleesEusebio Villanueva and Remedios S.
Villanueva are owners of five tenement houses, aggregately
containing 43 apartments, while the other appellees and the
same Remedios S. Villanueva are owners of ten apartments.
Each of the appellees' apartments has a door leading to a
street and is rented by either a Filipino or Chinese merchant.
The first floor is utilized as a store, while the second floor is
used as a dwelling of the owner of the store. Eusebio
Villanueva owns, likewise, apartment buildings for rent in
Bacolod, Dumaguete City, Baguio City and Quezon City, which
cities, according to him, do not impose tenement or
apartment taxes.
By virtue of the ordinance in question, the appellant City
collected from spouses Eusebio Villanueva and Remedios S.
Villanueva, for the years 1960-1964, the sum of P5,824.30,
and from the appelleesPio Sian Melliza, Teresita S. Topacio,
and Remedios S. Villanueva, for the years 1960-1964, the sum
of P1,317.00. Eusebio Villanueva has likewise been paying real
estate taxes on his property.
On July 11, 1962 and April 24, 1964, the plaintiffs-appellees
filed a complaint, and an amended complaint, respectively,
against the City of Iloilo, in the aforementioned court, praying
that Ordinance 11, series of 1960, be declared "invalid for
being beyond the powers of the Municipal Council of the City
of Iloilo to enact, and unconstitutional for being violative of
the rule as to uniformity of taxation and for depriving said
plaintiffs of the equal protection clause of the Constitution,"
and that the City be ordered to refund the amounts collected
from them under the said ordinance.
On March 30, 1966,1 the lower court rendered judgment
declaring the ordinance illegal on the grounds that (a)
"Republic Act 2264 does not empower cities to impose
apartment taxes," (b) the same is "oppressive and
unreasonable," for the reason that it penalizes owners of

15
tenement houses who fail to pay the tax, (c) it constitutes not
only double taxation, but treble at that and (d) it violates the
rule of uniformity of taxation.
The issues posed in this appeal are:
1. Is Ordinance 11, series of 1960, of the City of Iloilo,
illegal because it imposes double taxation?
2. Is the City of Iloilo empowered by the Local
Autonomy Act to impose tenement taxes?
3. Is Ordinance 11, series of 1960, oppressive and
unreasonable because it carries a penal clause?
4. Does Ordinance 11, series of 1960, violate the rule
of uniformity of taxation?
1. The pertinent provisions of the Local Autonomy Act
are hereunder quoted:
SEC. 2. Any provision of law to the contrary
notwithstanding, all chartered cities, municipalities
and municipal districts shall have authority to impose
municipal license taxes or fees upon persons
engaged in any occupation or business, or exercising
privileges in chartered cities, municipalities or
municipal districts by requiring them to secure
licences at rates fixed by the municipal board or city
council of the city, the municipal council of the
municipality, or the municipal district council of the
municipal district; to collect fees and charges for
services rendered by the city, municipality or
municipal district; to regulate and impose reasonable
fees for services rendered in connection with any
business, profession or occupation being conducted
within the city, municipality or municipal district and
otherwise to levy for public purposes, just and
uniform taxes, licenses or fees; Provided, That
municipalities and municipal districts shall, in no
case, impose any percentage tax on sales 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;Provided, however, That no city, municipality or
municipal district may levy or impose any of the
following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the
printing and publication of any newspaper,
magazine, review or bulletin appearing at regular
intervals and having fixed prices for for subscription
and sale, and which is not published primarily for the
purpose of publishing advertisements;
(d) Taxes on persons operating waterworks, irrigation
and other public utilities except electric light, heat
and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies, and
other acquisitions mortis causa;
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles
and for the issuance of all kinds of licenses or
permits for the driving thereof;
(i) Customs duties registration, wharfage dues on
wharves owned by the national government,
tonnage, and all other kinds of customs fees, charges
and duties;
(j) Taxes of any kind on banks, insurance companies,
and persons paying franchise tax; and
(k) Taxes on premiums paid by owners of property
who obtain insurance directly with foreign insurance
companies.
A tax ordinance shall go into effect on the fifteenth
day after its passage, unless the ordinance shall
provide otherwise: Provided, however, That the

Secretary of Finance shall have authority to suspend

the effectivity of any ordinance within one hundred
and twenty days after its passage, if, in his opinion,
the tax or fee therein levied or imposed is unjust,
excessive, oppressive, or confiscatory, and when the
said Secretary exercises this authority the effectivity
of such ordinance shall be suspended.
In such event, the municipal board or city council in
the case of cities and the municipal council or
municipal district council in the case of municipalities
or municipal districts may appeal the decision of the
Secretary of Finance to the court during the
pendency of which case the tax levied shall be
considered as paid under protest.
It is now settled that the aforequoted provisions of Republic
Act 2264 confer on local governments broad taxing authority
which extends to almost "everything, excepting those which
are mentioned therein," provided that the tax so levied is "for
public purposes, just and uniform," and does not transgress
any constitutional provision or is not repugnant to a
controlling statute.2 Thus, when a tax, levied under the
authority of a city or municipal ordinance, is not within the
exceptions and limitations aforementioned, the same comes
within the ambit of the general rule, pursuant to the rules
of expressiouniusestexclusioalterius,
and
exceptiofirmatregulum in casibus non excepti.
Does the tax imposed by the ordinance in question fall within
any of the exceptions provided for in section 2 of the Local
Autonomy Act? For this purpose, it is necessary to determine
the true nature of the tax. The appellees strongly maintain
that it is a "property tax" or "real estate tax," 3 and not a "tax
on persons engaged in any occupation or business or
exercising privileges," or a license tax, or a privilege tax, or an
excise tax.4 Indeed, the title of the ordinance designates it as
a
"municipal license
tax on persons
engaged in
the business of operating tenement houses," while section 1
thereof states that a "municipal license tax is hereby imposed
on tenement houses." It is the phraseology of section 1 on
which the appellees base their contention that the tax
involved is a real estate tax which, according to them, makes
the ordinance ultra vires as it imposes a levy "in excess of the
one per centum real estate tax allowable under Sec. 38 of the
Iloilo City Charter, Com. Act 158."5.
It is our view, contrary to the appellees' contention, that the
tax in question is not a real estate tax. Obviously, the
appellees confuse the tax with the real estate tax within the
meaning of the Assessment Law,6 which, although not
applicable to the City of Iloilo, has counterpart provisions in
the Iloilo City Charter.7 A real estate tax is a direct tax on the
ownership of lands and buildings or other improvements
thereon, not specially exempted,8 and is payable regardless of
whether the property is used or not, although the value may
vary in accordance with such factor. 9 The tax is usually single
or indivisible, although the land and building or improvements
erected thereon are assessed separately, except when the
land and building or improvements belong to separate
owners.10 It is a fixed proportion11 of the assessed value of the
property taxed, and requires, therefore, the intervention of
assessors.12 It is collected or payable at appointed
times,13 and it constitutes a superior lien on and is enforceable
against the property14 subject to such taxation, and not by
imprisonment of the owner.
The tax imposed by the ordinance in question does not
possess the aforestated attributes. It is not a tax on the land
on which the tenement houses are erected, although both
land and tenement houses may belong to the same owner.
The tax is not a fixed proportion of the assessed value of the
tenement houses, and does not require the intervention of
assessors or appraisers. It is not payable at a designated time
or date, and is not enforceable against the tenement houses
either by sale or distraint. Clearly, therefore, the tax in
question is not a real estate tax.
"The spirit, rather than the letter, or an ordinance determines
the construction thereof, and the court looks less to its words
and more to the context, subject-matter, consequence and
effect. Accordingly, what is within the spirit is within the
ordinance although it is not within the letter thereof, while
that which is in the letter, although not within the spirit, is not
within the ordinance."15 It is within neither the letter nor the
spirit of the ordinance that an additional real estate tax is
being imposed, otherwise the subject-matter would have been
not merely tenement houses. On the contrary, it is plain from
the context of the ordinance that the intention is to impose a
license tax on the operation of tenement houses, which is a

16
form of business or calling. The ordinance, in both its title and
body, particularly sections 1 and 3 thereof, designates the tax
imposed as a "municipal license tax" which, by itself, means
an "imposition or exaction on the right to use or dispose of
property, to pursue a business, occupation, or calling, or to
exercise a privilege."16.
"The character of a tax is not to be fixed by any
isolated words that may beemployed in the statute
creating it, but such words must be taken in the
connection in which they are used and the true
character is to be deduced from the nature and
essence of the subject." 17 The subject-matter of the
ordinance is tenement houses whose nature and
essence are expressly set forth in section 2 which
defines a tenement house as "any building or
dwelling for renting space divided into separate
apartments or accessorias." The Supreme Court,
in City of Iloilo vs. Remedios Sian Villanueva, et al., L12695, March 23, 1959, adopted the definition of a
tenement house18 as "any house or building, or
portion thereof, which is rented, leased, or hired out
to be occupied, or is occupied, as the home or
residence of three families or more living
independently of each other and doing their cooking
in the premises or by more than two families upon
any floor, so living and cooking, but having a
common right in the halls, stairways, yards, waterclosets, or privies, or some of them." Tenement
houses, being necessarily offered for rent or lease by
their very nature and essence, therefore constitute
a distinct form of business or calling, similar to the
hotel or motel business, or the operation of lodging
houses or boarding houses. This is precisely one of
the reasons why this Court, in the said case of City of
Iloilo vs. Remedios Sian Villanueva, et al., supra,
declared Ordinance 86 ultra vires, because, although
the municipal board of Iloilo City is empowered,
under sec. 21, par. j of its Charter, "to tax, fix the
license fee for, and regulate hotels, restaurants,
refreshment parlors, cafes, lodging houses, boarding
houses, livery
garages,
public
warehouses,
pawnshops, theaters, cinematographs," tenement
houses, which constitute a different business
enterprise,19 are not mentioned in the aforestated
section of the City Charter of Iloilo. Thus, in the
aforesaid case, this Court explicitly said:.
"And it not appearing that the power to tax owners of
tenement houses is one among those clearly and
expressly granted to the City of Iloilo by its Charter,
the exercise of such power cannot be assumed and
hence the ordinance in question is ultra vires insofar
as it taxes a tenement house such as those
belonging to defendants." .
The lower court has interchangeably denominated the tax in
question as a tenement tax or an apartment tax. Called by
either name, it is not among the exceptions listed in section 2
of the Local Autonomy Act. On the other hand, the imposition
by the ordinance of a license tax on persons engaged in the
business of operating tenement houses finds authority in
section 2 of the Local Autonomy Act which provides that
chartered cities have the authority to impose municipal
license taxes or fees upon persons engaged in any occupation
or business, or exercising privileges within their respective
territories, and "otherwise to levy for public purposes, just and
uniform taxes, licenses, or fees." .
2. The trial court condemned the ordinance as constituting
"not only double taxation but treble at that," because
"buildings pay real estate taxes and also income taxes as
provided for in Sec. 182 (A) (3) (s) of the National Internal
Revenue Code, besides the tenement tax under the said
ordinance." Obviously, what the trial court refers to as
"income taxes" are the fixed taxes on business and
occupation provided for in section 182, Title V, of the National
Internal Revenue Code, by virtue of which persons engaged in
"leasing or renting property, whether on their account as
principals or as owners of rental property or properties," are
considered "real estate dealers" and are taxed according to
the amount of their annual income.20.
While it is true that the plaintiffs-appellees are taxable under
the aforesaid provisions of the National Internal Revenue Code
as real estate dealers, and still taxable under the ordinance in
question, the argument against double taxation may not be
invoked. The same tax may be imposed by the national
government as well as by the local government. There is
nothing inherently obnoxious in the exaction of license fees or

taxes with respect to the same occupation, calling or activity

by both the State and a political subdivision thereof.21.
The contention that the plaintiffs-appellees are doubly taxed
because they are paying the real estate taxes and the
tenement tax imposed by the ordinance in question, is also
devoid of merit. It is a well-settled rule that a license tax may
be levied upon a business or occupation although the land or
property used in connection therewith is subject to property
tax. The State may collect an ad valorem tax on property used
in a calling, and at the same time impose a license tax on that
calling, the imposition of the latter kind of tax being in no
sensea double tax.22.
"In order to constitute double taxation in the
objectionable or prohibited sense the same property
must be taxed twice when it should be taxed but
once; both taxes must be imposed on the same
property or subject-matter, for the same purpose, by
the same State, Government, or taxing authority,
within the same jurisdiction or taxing district, during
the same taxing period, and they must be the same
kind or character of tax."23 It has been shown that a
real estate tax and the tenement tax imposed by the
ordinance, although imposed by the sametaxing
authority, are not of the same kind or character.
At all events, there is no constitutional
double taxation in the Philippines.24 It
favored, but is permissible, provided some
requirement is not thereby violated, such
that taxes must be uniform."25.

prohibition against
is something not
other constitutional
as the requirement

3. The appellant City takes exception to the conclusion of the

lower court that the ordinance is not only oppressive because
it "carries a penal clause of a fine of P200.00 or imprisonment
of 6 months or both, if the owner or owners of the tenement
buildings divided into apartments do not pay the tenement or
apartment tax fixed in said ordinance," but also
unconstitutional as it subjects the owners of tenement houses
to criminal prosecution for non-payment of an obligation
which is purely sum of money." The lower court apparently
had in mind, when it made the above ruling, the provision of
the Constitution that "no person shall be imprisoned for a debt
or non-payment of a poll tax." 26 It is elementary, however,
that "a tax is not a debt in the sense of an obligation incurred
by contract, express or implied, and therefore is not within the
meaning of constitutional or statutory provisions abolishing or
prohibiting imprisonment for debt, and a statute or ordinance
which punishes the non-payment thereof by fine or
imprisonment is not, in conflict with that prohibition." 27 Nor is
the tax in question a poll tax, for the latter is a tax of a fixed
amount upon all persons, or upon all persons of a certain
class, resident within a specified territory, without regard to
their property or the occupations in which they may be
engaged.28 Therefore, the tax in question is not oppressive in
the manner the lower court puts it. On the other hand, the
charter of Iloilo City29 empowers its municipal board to "fix
penalties for violations of ordinances, which shall not exceed a
fine of two hundred pesos or six months' imprisonment, or
both such fine and imprisonment for each offense." In
Punsalan, et al. vs. Mun. Board of Manila, supra, this Court
overruled the pronouncement of the lower court declaring
illegal and void an ordinance imposing an occupation tax on
persons exercising various professions in the City of
Manilabecause it imposed a penalty of fine and imprisonment
for its violation.30.
4. The trial court brands the ordinance as violative of the rule
of uniformity of taxation.
"... because while the owners of the other buildings
only pay real estate tax and income taxes the
ordinance imposes aside from these two taxes an
apartment or tenement tax. It should be noted that
in the assessment of real estate tax all parts of the
building or buildings are included so that the
corresponding real estate tax could be properly
imposed. If aside from the real estate tax the owner
or owners of the tenement buildings should pay
apartment taxes as required in the ordinance then it
will violate the rule of uniformity of taxation.".
Complementing the above ruling of the lower court, the
appellees argue that there is "lack of uniformity" and "relative
inequality," because "only the taxpayers of the City of Iloilo
are singled out to pay taxes on their tenement houses, while
citizens of other cities, where their councils do not enact a
similar tax ordinance, are permitted to escape such
imposition." .

17
It is our view that both assertions are undeserving of
extended attention. This Court has already ruled that
tenement houses constitute a distinct class of property. It has
likewise ruled that "taxes are uniform and equal when
imposed upon all property of the same class or character
within the taxing authority." 31 The fact, therefore, that the
owners of other classes of buildings in the City of Iloilo do not
pay the taxes imposed by the ordinance in question is no
argument at all against uniformity and equality of the tax
imposition. Neither is the rule of equality and uniformity
violated by the fact that tenement taxesare not imposed in
other cities, for the same rule does not require that taxes for
the same purpose should be imposed in different territorial
subdivisions at the same time.32So long as the burden of the
tax falls equally and impartially on all owners or operators of
tenement houses similarly classified or situated, equality and
uniformity of taxation is accomplished.33 The plaintiffsappellees, as owners of tenement houses in the City of Iloilo,
have not shown that the tax burden is not equally or uniformly
distributed among them, to overthrow the presumption that
tax statutes are intended to operate uniformly and equally. 34.
5. The last important issue posed by the appellees is that
since the ordinance in the case at bar is a mere reproduction
of Ordinance 86 of the City of Iloilo which was declared by this
Court in L-12695, supra, as ultra vires, the decision in that
case should be accorded the effect of res judicata in the
present case or should constitute estoppel by judgment. To
dispose of this contention, it suffices to say that there is no
identity of subject-matter in that case andthis case because
the subject-matter in L-12695 was an ordinance which dealt
not only with tenement houses but also warehouses, and the
said ordinance was enacted pursuant to the provisions of the
City charter, while the ordinance in the case at bar was
enacted pursuant to the provisions of the Local Autonomy Act.
There is likewise no identity of cause of action in the two
cases because the main issue in L-12695 was whether the
City of Iloilo had the power under its charter to impose the tax
levied by Ordinance 11, series of 1960, under the Local
Autonomy Act which took effect on June 19, 1959, and
therefore was not available for consideration in the decision in
L-12695 which was promulgated on March 23, 1959.
Moreover, under the provisions of section 2 of the Local
Autonomy Act, local governments may now tax any taxable
subject-matter or object not included in the enumeration of
matters removed from the taxing power of local
governments.Prior to the enactment of the Local Autonomy
Act the taxes that could be legally levied by local
governments were only those specifically authorized by law,
and their power to tax was construed in strictissimijuris. 35.
ACCORDINGLY, the judgment a quo is reversed, and, the
ordinance in questionbeing valid, the complaint is hereby
dismissed. No pronouncement as to costs..
COMMISSIONER OF INTERNAL G.R. No. 140230
REVENUE,
Petitioner, Present :
- versus PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY,
Respondent.
Promulgated:
December 15, 2005
DECISION
In this petition for review on certiorari, the
Commissioner of Internal Revenue (Commissioner) seeks the
review and reversal of the September 17, 1999 Decision [1] of
the Court of Appeals (CA) in CA-G.R. No. SP 47895, affirming,
in effect, the February 18, 1998 decision[2] of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5178, a claim for tax
refund/credit instituted by respondent Philippine Long
Distance Company (PLDT) against petitioner for taxes it paid
to the Bureau of Internal Revenue (BIR) in connection with its
importation in 1992 to 1994 of equipment, machineries and
spare parts.
The facts:

PLDT is a grantee of a franchise under Republic Act

(R.A.) No. 7082 to install, operate and maintain a
telecommunications system throughout the Philippines.
For equipment, machineries and spare parts it
imported for its business on different dates from October 1,
1992 to May 31, 1994, PLDT paid the BIR the amount
of P164,510,953.00,
broken
down
as
follows:
(a)
compensating tax of P126,713,037.00; advance sales tax
of P12,460,219.00 and other internal revenue taxes
of P25,337,697.00. For similar importations made between
March 1994 to May 31, 1994, PLDT paid P116,041,333.00
value-added tax (VAT).
On March 15, 1994, PLDT addressed a letter to the
BIR seeking a confirmatory ruling on its tax exemption
privilege under Section 12 of R.A. 7082, which reads:
Sec. 12. The grantee shall be liable
to pay the same taxes on their real estate,
buildings, and personal property, exclusive
of this franchise, as other persons or
corporations are now or hereafter may be
required by law to pay. In addition thereto,
the grantee, shall pay a franchise tax
equivalent to three percent (3%) of all gross
receipts of the telephone or other
telecommunications businesses transacted
under this franchise by the grantee, its
successors or assigns, and the said
percentage shall be in lieu of all taxes
on this franchise or earnings thereof:
Provided, That the grantee shall continue to
be liable for income taxes payable under
Title II of the National Internal Revenue Code
pursuant to Sec. 2 of Executive Order No. 72
unless the latter enactment is amended or
repealed, in which case the amendment or
repeal
shall
be
applicable
thereto.
(Emphasis supplied).
Responding, the BIR issued on April 19, 1994 Ruling No. UN140-94,[3] pertinently reading, as follows:
PLDT shall be subject only to the
following taxes, to wit:
xxxxxxxxx
7. The 3% franchise tax on gross
receipts which shall be in lieu of all taxes on
its franchise or earnings thereof.
xxxxxxxxx
The in lieu of all taxes provision
under Section 12 of RA 7082 clearly
exempts PLDT from all taxes including the
10% value-added tax (VAT) prescribed by
Section 101 (a) of the same Code on its
importations of equipment, machineries and
spare parts necessary in the conduct of its
business covered by the franchise, except
the aforementioned enumerated taxes for
which PLDT is expressly made liable.
xxxxxxxxx
In view thereof, this Office hereby holds that
PLDT, is exempt from VAT on its importation
of equipment, machineries and spare parts
needed in its franchise operations.
Armed with the foregoing BIR ruling, PLDT filed on December
2, 1994 a claim[4] for tax credit/refund of the VAT,
compensating taxes, advance sales taxes and other taxes it
had been paying in connection with its importation of various
equipment, machineries and spare parts needed for its
operations. With its claim not having been acted upon by the
BIR, and obviously to forestall the running of the prescriptive
period therefor, PLDT filed with the CTA a petition for review,
[5]
therein seeking a refund of, or the issuance of a tax credit
certificate in, the amount of P280,552,286.00, representing
compensating taxes, advance sales taxes, VAT and other
internal revenue taxes alleged to have been erroneously paid
on its importations from October 1992 to May 1994. The
petition was docketed in said court as CTA Case No. 5178.
On February 18, 1998, the CTA rendered a
decision[6] granting PLDTs petition, pertinently saying:

18
This Court has noted that petitioner
has included in its claim receipts covering
the period prior to December 16, 1992,
thus, prescribed and barred from recovery.
In conclusion, We find that the petitioner is
entitled
to
the
reduced
amount
of P223,265,276.00 after excluding from the
final computation those taxes that were paid
prior to December 16, 1992 as they fall
outside the two-year prescriptive period for
claiming for a refund as provided by law.
The computation of the refundable amount
is summarized as follows:

In time, the BIR Commissioner moved for a reconsideration

but the CTA, in its Resolution[8] of May 7, 1998, denied the
motion, with Judge Amancio Q. Saga reiterating his dissent. [9]
Unable to accept the CTA decision, the BIR
Commissioner elevated the matter to the Court of Appeals
(CA) by way of petition for review, thereat docketed as CAG.R. No. 47895.

COMPENSATING TAX

Relying on its ruling in an earlier case between the same

parties and involving the same issue CA-G.R. SP No. 40811,
decided 16 February 1998 the appellate court partly wrote in
its assailed decision:

Total amount claimed P126,713.037.00

Less:
a)
Amount
already prescribed: xxx
Total P 38,015,132.00
b)
Waived by
petitioner
(Exh.
B216) P 1,440,874.00 P39,456,00
6.00
Amount refundable P87,257,031.00
ADVANCE SALES TAX
Total amount claimed P12,460.219.00
Less
amount
already
prescribed: P5,043,828.00
Amount refundable P7,416,391.00
OTHER BIR TAXES
Total amount claimed P25,337,697.00

Less amount already prescribed: 11,187,740.00

Amount refundable P14,149,957.00
VALUE ADDED TAX
Total amount claimed P116.041,333.00
Less amount waived by petitioner
(unaccounted receipts) 1,599,436.00
Amount refundable P114,441,897.00
TOTAL AMOUNT REFUNDABLE P223,265,276.00,
============
(Breakdown omitted)
and accordingly disposed, as follows:
WHEREFORE, in view of all the
foregoing, this Court finds the instant
petition meritorious and in accordance with
law. Accordingly, respondent is hereby
ordered to REFUND or to ISSUE in favor of
petitioner a Tax Credit Certificate in the
reduced
amount
of P223,265,276.00
representing erroneously paid value-added
taxes, compensating taxes, advance sales
taxes and other BIR taxes on its importation
of equipments (sic), machineries and spare
parts for the period covering the taxable
years 1992 to 1994.
Noticeably, the CTA decision, penned by then Associate
Justice Ramon O. de Veyra, with then CTA Presiding Judge
Ernesto D. Acosta, concurring, is punctuated by a dissenting
opinion[7] of Associate Judge Amancio Q. Saga who maintained
that the phrase in lieu of all taxes found in Section 12 of R.A.
No. 7082, supra, refers to exemption from direct taxes
only and does not cover indirect taxes, such as VAT,
compensating tax and advance sales tax.

As stated at the outset hereof, the appellate court, in

the herein challenged Decision[10] dated September 17, 1999,
dismissed the BIRs petition, thereby effectively affirming the
CTAs judgment.

This Court has already spoken on the issue

of what taxes are referred to in the phrase in
lieu of all taxes found in Section 12 of R.A.
7082. There are no reasons to deviate from
the ruling and the same must be followed
pursuant to the doctrine of stare decisis.
xxx. Stare decisiset non quietamovere.
Stand by the decision and disturb not what
is settled.
Hence, this recourse by the BIR Commissioner on the
lone assigned error that:
THE COURT OF APPEALS ERRED IN HOLDING
THAT RESPONDENT IS EXEMPT FROM THE
PAYMENT
OF
VALUE-ADDED
TAXES,
COMPENSATING TAXES, ADVANCE SALES
TAXES AND OTHER BIR TAXES ON ITS
IMPORTATIONS,
BY
VIRTUE
OF
THE
PROVISION IN ITS FRANCHISE THAT THE 3%
FRANCHISE TAX ON ITS GROSS RECEIPTS
SHALL BE IN LIEU OF ALL TAXES ON ITS
FRANCHISE OR EARNINGS THEREOF.
There is no doubt that, insofar as the Court of
Appeals is concerned, the issue petitioner presently raises had
been resolved by that court in CA-G.R. SP No. 40811,
entitled Commissioner of Internal Revenue vs. Philippine Long
Distance Company. There, the Sixteenth Division of the
appellate court declared that under the express provision of
Section 12 of R.A. 7082, supra, the payment [by PLDT] of the
3% franchise tax of [its] gross receipts shall be in lieu of all
taxes exempts PLDT from payment of compensating tax,
advance sales tax, VAT and other internal revenue taxes on its
importation of various equipment, machinery and spare parts
for the use of its telecommunications system.
Dissatisfied with the CA decision in that case, the BIR
Commissioner initially filed with this Court a motion for time
to file a petition for review, docketed in this Court as G.R. No.
134386. However, on the last day for the filing of the intended
petition, the then BIR Commissioner had a change of heart
and instead manifested[11] that he will no longer pursue G.R.
No. 134386, there being no compelling grounds to disagree
with the Court of Appeals decision in CA-G.R. 40811.
Consequently, on September 28, 1998, the Court issued a
Resolution[12] in G.R. No. 134386 notifying the parties that no
petition was filed in said case and that the CA judgment
sought to be reviewed therein has now become final and
executory. Pursuant to said Resolution, an Entry of
Judgment[13] was issued by the Court of Appeals in CA-G.R. SP
No. 40811. Hence, the CAs dismissal of CA-G.R. No. 47895 on
the additional ground of stare decisis.
Under
the doctrine
of stare
decisiset
non
quietamovere, a point of law already established will,
generally, be followed by the same determining court and by
all courts of lower rank in subsequent cases where the same
legal issue is raised.[14] For reasons needing no belaboring,
however, the Court is not at all concluded by the ruling of the
Court of Appeals in its earlier CA-G.R. SP No. 47895.
The Court has time and again stated that the rule
on stare decisis promotes stability in the law and should,
therefore, be accorded respect. However, blind adherence to
precedents, simply as precedent, no longer rules. More
important than anything else is that the court is right,[15] thus
its duty to abandon any doctrine found to be in violation of
the law in force.[16]
As it were, the former BIR Commissioners decision
not to pursue his petition in G.R. No. 134386 denied the BIR,

19
at least as early as in that case, the opportunity to obtain
from the Court an authoritative interpretation of Section 12 of
R.A. 7082. All is, however, not lost. For, the government is not
estopped by acts or errors of its agents, particularly on
matters involving taxes. Corollarily, the erroneous application
of tax laws by public officers does not preclude the
subsequent correct application thereof.[17] Withal, the errors of
certain administrative officers, if that be the case, should
never be allowed to jeopardize the governments financial
position.[18]
Hence, the need to address the main issue tendered
herein.
According to the Court of Appeals, the in lieu of all
taxes clause found in Section 12 of PLDTs franchise (R.A.
7082) covers all taxes, whether direct or indirect; and that
said section states, in no uncertain terms, that PLDTs payment
of the 3% franchise tax on all its gross receipts from
businesses transacted by it under its franchise is in lieu of all
taxes on the franchise or earnings thereof. In fine, the
appellate court, agreeing with PLDT, posits the view that the
word allencompasses any and all taxes collectible under the
National Internal Revenue Code (NIRC), save those specifically
mentioned in PLDTs franchise, such as income and real
property taxes.
The BIR Commissioner excepts. He submits that the
exempting in lieu of all taxes clause covers direct taxes only,
adding that for indirect taxes to be included in the exemption,
the intention to include must be specific and unmistakable. He
thus faults the Court of Appeals for erroneously declaring
PLDT exempt from payment of VAT and other indirect taxes on
its importations. To the Commissioner, PLDTs claimed
entitlement to tax refund/credit is without basis inasmuch as
the 3% franchise tax being imposed on PLDT is not a
substitute for or in lieu of indirect taxes.
The sole issue at hand is whether or not PLDT, given
the tax component of its franchise, is exempt from paying
VAT, compensating taxes, advance sales taxes and internal
revenue taxes on its importations.
Based on the possibility of shifting the incidence of
taxation, or as to who shall bear the burden of taxation, taxes
may be classified into either direct tax or indirect tax.
In context, direct taxes are those that are exacted
from the very person who, it is intended or desired, should
pay them;[19] they are impositions for which a taxpayer is
directly liable on the transaction or business he is engaged in.
[20]

On the other hand, indirect taxes are those that are

demanded, in the first instance, from, or are paid by, one
person in the expectation and intention that he can shift the
burden to someone else.[21] Stated elsewise, indirect taxes are
taxes wherein the liability for the payment of the tax falls on
one person but the burden thereof can be shifted or passed on
to another person, such as when the tax is imposed upon
goods before reaching the consumer who ultimately pays for
it. When the seller passes on the tax to his buyer, he, in
effect, shifts the tax burden, not the liability to pay it, to the
purchaser as part of the price of goods sold or services
rendered.
To put the situation in graphic terms, by tacking the
VAT due to the selling price, the seller remains the person
primarily and legally liable for the payment of the tax. What is
shifted only to the intermediate buyer and ultimately to the
final purchaser is the burden of the tax. [22] Stated differently, a
seller who is directly and legally liable for payment of an
indirect tax, such as the VAT on goods or services, is not
necessarily the person who ultimately bears the burden of the
same tax. It is the final purchaser or end-user of such goods
or services who, although not directly and legally liable for the
payment thereof, ultimately bears the burden of the tax.[23]
There can be no serious argument that PLDT, vis--vis its
payment of internal revenue taxes on its importations in
question, is effectively claiming exemption from taxes not
falling under the category of direct taxes. The claim covers
VAT, advance sales tax and compensating tax.
The NIRC classifies VAT as an indirect tax the amount
of [which] may be shifted or passed on to the buyer,
transferee or lessee of the goods.[24] As aptly pointed out by
Judge Amancio Q. Saga in his dissent in C.T.A. Case No. 5178,
the 10% VAT on importation of goods partakes of an excise
tax levied on the privilege of importing articles. It is not a tax
on the franchise of a business enterprise or on its earnings. It

is imposed on all taxpayers who import goods (unless such

importation falls under the category of an exempt transaction
under Sec. 109 of the Revenue Code) whether or not the
goods will eventually be sold, bartered, exchanged or utilized
for personal consumption. The VAT on importation replaces
the advance sales tax payable by regular importers who
import articles for sale or as raw materials in the manufacture
of finished articles for sale.[25]
Advance sales tax has the attributes of an indirect
tax because the tax-paying importer of goods for sale or of
raw materials to be processed into merchandise can shift the
tax or, to borrow from Philippine Acetylene Co, Inc. vs.
Commissioner of Internal Revenue,[26] lay the economic
burden of the tax, on the purchaser, by subsequently adding
the tax to the selling price of the imported article or finished
product.
Compensating tax also partakes of the nature of an
excise tax payable by all persons who import articles, whether
in the course of business or not. [27] The rationale for
compensating tax is to place, for tax purposes, persons
purchasing from merchants in the Philippines on a more or
less equal basis with those who buy directly from foreign
countries.[28]
It bears to stress that the liability for the payment of
the indirect taxes lies only with the seller of the goods or
services, not in the buyer thereof. Thus, one cannot invoke
ones exemption privilege to avoid the passing on or the
shifting of the VAT to him by the manufacturers/suppliers of
the goods he purchased.[29]Hence, it is important to determine
if the tax exemption granted to a taxpayer specifically
includes the indirect tax which is shifted to him as part of the
purchase price, otherwise it is presumed that the tax
exemption embraces only those taxes for which the buyer is
directly liable.[30]
Time and again, the Court has stated that taxation is
the rule, exemption is the exception. Accordingly, statutes
granting
tax
exemptions
must
be
construed in
strictissimijuris against the taxpayer and liberally in favor of
the taxing authority.[31] To him, therefore, who claims a refund
or exemption from tax payments rests the burden of justifying
the exemption by words too plain to be mistaken and too
categorical to be misinterpreted.[32]
As may be noted, the clause in lieu of all taxes in
Section 12 of RA 7082 is immediately followed by the limiting
or qualifying clause on this franchise or earnings thereof,
suggesting that the exemption is limited to taxes imposed
directly on PLDT since taxes pertaining to PLDTs franchise or
earnings are its direct liability. Accordingly, indirect taxes, not
being taxes on PLDTs franchise or earnings, are outside the
purview of the in lieu provision.
If we were to adhere to the appellate courts
interpretation of the law that the in lieu of all
taxes clause encompasses the totality of all taxes collectible
under the Revenue Code, then, the immediately following
limiting clause on this franchise and its earnings would be
nothing more than a pure jargon bereft of effect and meaning
whatsoever. Needless to stress, this kind of interpretation
cannot be accorded a governing sway following the familiar
legal maxim redendosingulasingulis meaning, take the words
distributively and apply the reference. Under this principle,
each word or phrase must be given its proper connection in
order to give it proper force and effect, rendering none of
them useless or superfluous. [33]
Significantly, in Manila Electric Company [Meralco] vs. Vera,
[34]
the Court declared the relatively broader exempting
clause shall be in lieu of all taxes and assessments of
whatsoever nature upon the privileges earnings, income
franchise ... of the grantee written in par. # 9 of Meralcos
franchise as not so all encompassing as to embrace indirect
tax, like compensating tax. There, the Court said:
It is a well-settled rule or principle
in taxation that a compensating tax is an
excise tax one that is imposed on the
performance of an act, the engaging in an
occupation, or the enjoyment of a privilege.
A tax levied upon property because of its
ownership is a direct tax, whereas one
levied upon property because of its use is an
excise duty. .
The compensating tax being imposed upon
MERALCO, is an impost on its use of
imported articles and is not in the nature of

20
a direct tax on the articles themselves, the
latter tax falling within the exemption. Thus,
in International
Business
Machine
Corporation vs. Collector of Internal
Revenue, which involved the collection of a
compensating tax from the plaintiffpetitioner on business machines imported
by it, this Court stated in unequivocal terms
that it is not the act of importation that is
taxed under section 190 but the uses of
imported goods not subjected to a sales tax
because
the
compensating
tax
was
expressly designated as a substitute to
make up or compensate for the revenue lost
to the government through the avoidance of
sales taxes by means of direct purchases
abroad.
xxxxxxxxx
xxx If it had been the legislative intent to
exempt MERALCO from paying a tax on the
use of imported equipments, the legislative
body could have easily done so by
expanding the provision of paragraph 9 and
adding to the exemption such words as
compensating tax or purchases from abroad
for use in its business, and the like.
It may be so that in Maceda vs. Macaraig, Jr.[35] the Court held
that an exemption from all taxes granted to the National
Power Corporation (NPC) under its charter [36] includes both
direct and indirect taxes. But far from providing PLDT
comfort, Maceda in fact supports the case of herein petitioner,
the correct lesson of Maceda being that an exemption from all
taxes excludes indirect taxes, unless the exempting statute,
like NPCs charter, is so couched as to include indirect tax from
the exemption. Wrote the Court:
xxx However, the amendment under
Republic Act No. 6395 enumerated the
details
covered
by
the
exemption.
Subsequently, P.D. 380, made even more
specific the details of the exemption of NPC
to cover, among others, both direct and
indirect taxes on all petroleum products
used in its operation. Presidential Decree
No. 938 [NPCs amended charter) amended
the tax exemption by simplifying the same
law in general terms. It succinctly exempts
NPC from all forms of taxes, duties fees .
The use of the phrase all forms of taxes
demonstrate the intention of the law to give
NPC all the tax exemptions it has been
enjoying before. .
xxxxxxxxx
It is evident from the provisions of P.D. No.
938 that its purpose is to maintain the tax
exemption of NPC from all forms of taxes
including indirect taxes as provided under
R.A. No. 6395 and P.D. 380 if it is to attain
its goals. (Italics in the original; words in
bracket added)
Of similar import is what we said in Borja vs. Collector of
Internal Revenue.[37] There, the Court upheld the decision of
the CTA denying a claim for refund of the compensating taxes
paid on the importation of materials and equipment by a
grantee of a heat and power legislative franchise containing
an in lieuprovision, rationalizing as follows:
xxx Moreover, the petitioners alleged
exemption
from
the
payment
of
compensating tax in the present case is not
clear or expressed; unlike the exemption
from the payment of income tax which was
clear and expressed in the Carcar case.
Unless it appears clearly and manifestly that
an exemption is intended, the provision is to
be construed strictly against the party
claiming exemption. xxx.
Jurisprudence thus teaches that imparting the in lieu of all
taxes clause a literal meaning, as did the Court of Appeals
and the CTA before it, is fallacious. It is basic that in
construing a statute, it is the duty of courts to seek the real
intent of the legislature, even if, by so doing, they may limit
the literal meaning of the broad language.[38]

It cannot be over-emphasized that tax exemption

represents a loss of revenue to the government and must,
therefore, not rest on vague inference. When claimed, it must
be strictly construed against the taxpayer who must prove
that he falls under the exception. And, if an exemption is
found to exist, it must not be enlarged by construction, since
the reasonable presumption is that the state has granted in
express terms all it intended to grant at all, and that, unless
the privilege is limited to the very terms of the statute the
favor would be extended beyond dispute in ordinary cases. [39]
All told, we fail to see how Section 12 of RA 7082 operates as
granting PLDT blanket exemption from payment of indirect
taxes, which, in the ultimate analysis, are not taxes on its
franchise or earnings. PLDT has not shown its eligibility for the
desired exemption. None should be granted.
As a final consideration, the Court takes particular stock, as
the CTA earlier did, of PLDTs allegation that the Bureau of
Customs assessed the company for advance sales tax and
compensating tax for importations entered between October
1, 1992 and May 31, 1994 when the value-added tax system
already replaced, if not totally eliminated, advance sales and
compensating taxes.[40] Indeed, pursuant to Executive Order
No. 273[41] which took effect on January 1, 1988, a multi-stage
value-added tax was put into place to replace the tax on
original and subsequent sales tax. [42] It stands to reason then,
as urged by PLDT, that compensating tax and advance sales
tax were no longer collectible internal revenue taxes under
the NILRC when the Bureau of Customs made the
assessments in question and collected the corresponding tax.
Stated a bit differently, PLDT was no longer under legal
obligation to pay compensating tax and advance sales tax on
its importation from 1992 to 1994.
Parenthetically, petitioner has not made an issue about PLDTs
allegations concerning the abolition of the provisions of the
Tax Code imposing the payment of compensating and
advance sales tax on importations and the non-existence of
these taxes during the period under review. On the contrary,
petitioner admits that the VAT on importation of goods
has replace[d] the compensating tax and advance sales tax
under the old Tax Code.[43]
Given the above perspective, the amount PLDT paid in the
concept of advance sales tax and compensating tax on the
1992 to 1994 importations were, in context, erroneous tax
payments and would theoretically be refundable. It should be
emphasized, however, that, such importations were, when
made, already subject to VAT.
Factoring in the fact that a portion of the claim was barred by
prescription, the CTA had determined that PLDT is entitled to a
total refundable amount ofP94,673,422.00 (P87,257,031.00 of
compensating
tax
+ P7,416,391.00
= P94,673,422.00).
Accordingly, it behooves the BIR to grant a refund of the
advance sales tax and compensating tax in the total amount
of P94,673,422.00, subject to the condition that PLDT present
proof of payment of the corresponding VAT on said
transactions.
WHEREFORE,
the
petition
is
partially GRANTED. The Decision of the Court of Appeals in
CA-G.R. No. 47895 dated September 17, 1999 is MODIFIED.
The Commissioner of Internal Revenue is ORDERED to issue a
Tax Credit Certificate or to refund to PLDT only the
of P94,673,422.00 advance sales tax and compensating tax
erroneously collected by the Bureau of Customs from October
1, 1992 to May 31, 1994, less the VAT which may have been
due on the importations in question, but have otherwise
remained uncollected.
SO ORDERED.
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.
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

21
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 selfgovernment 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

22
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 plaintiffappellant 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 exclucionattehus and exceptiofirmatregulum 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. 20But, 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- 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.
[G.R. No. 124043. October 14, 1998]
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. COURT OF APPEALS, COURT OF TAX
APPEALS
and
YOUNG
MENS
CHRISTIAN
ASSOCIATION
OF
THE
PHILIPPINES,
INC., respondents.
DECISION
PANGANIBAN, J.:
Is the income derived from rentals of real property
owned by the Young Mens Christian Association of the
Philippines, Inc. (YMCA) established as a welfare, educational
and charitable non-profit corporation -- subject to income tax
under the National Internal Revenue Code (NIRC) and the
Constitution?
The Case
This is the main question raised before us in this petition
for review on certiorari challenging two Resolutions issued by
the Court of Appeals[1] on September 28, 1995[2] and February
29, 1996[3] in CA-GR SP No. 32007. Both Resolutions affirmed
the Decision of the Court of Tax Appeals (CTA) allowing the
YMCA to claim tax exemption on the latters income from the
lease of its real property.
The Facts
The Facts are undisputed.[4] Private Respondent YMCA is
a non-stock, non-profit institution, which conducts various
programs and activities that are beneficial to the public,
especially the young people, pursuant to its religious,
educational and charitable objectives.
In 1980, private respondent earned, among others, an
income of P676,829.80 from leasing out a portion of its
premises to small shop owners, like restaurants and canteen

23
operators, and P44,259.00 from parking fees collected from
non-members. On July 2, 1984, the commissioner of internal
revenue (CIR) issued an assessment to private respondent, in
the total amount of P415,615.01 including surcharge and
interest, for deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees and
deficiency withholding tax on wages. Private respondent
formally protested the assessment and, as a supplement to its
basic protest, filed a letter dated October 8, 1985. In reply,
the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a
petition for review at the Court if Tax Appeals (CTA) on March
14, 1989. In due course, the CTA issued this ruling in favor of
the YMCA:
xxx [T]he leasing of private respondents facilities to small
shop owners, to restaurant and canteen operators and the
operation of the parking lot are reasonably incidental to and
reasonably necessary for the accomplishment of the
objectives of the [private respondents]. It appears from the
testimonies of the witnesses for the [private respondent]
particularly Mr. James C. Delote, former accountant of YMCA,
that these facilities were leased to members and that they
have to service the needs of its members and their
guests. The Rentals were minimal as for example, the
barbershop was only charged P300 per month. He also
testified that there was actually no lot devoted for parking
space but the parking was done at the sides of the
building. The parking was primarily for members with stickers
on the windshields of their cars and they charged P.50 for
non-members. The rentals and parking fees were just enough
to cover the costs of operation and maintenance only. The
earning[s] from these rentals and parking charges including
those from lodging and other charges for the use of the
recreational facilities constitute [the] bulk of its income which
[is] channeled to support its many activities and attainment of
its objectives. As pointed out earlier, the membership dues
are very insufficient to support its program. We find it
reasonably necessary therefore for [private respondent] to
make [the] most out [of] its existing facilities to earn some
income. It would have been different if under the
circumstances, [private respondent] will purchase a lot and
convert it to a parking lot to cater to the needs of the general
public for a fee, or construct a building and lease it out to the
highest bidder or at the market rate for commercial purposes,
or should it invest its funds in the buy and sell of properties,
real or personal. Under these circumstances, we could
conclude that the activities are already profit oriented, not
incidental and reasonably necessary to the pursuit of the
objectives of the association and therefore, will fall under the
last paragraph of section 27 of the Tax Code and any income
derived therefrom shall be taxable.
Considering our findings that [private respondent] was not
engaged in the business of operating or contracting [a]
parking lot, we find no legal basis also for the imposition of [a]
deficiency fixed tax and [a] contractors tax in the amount[s]
of P353.15 and P3,129.73, respectively.
x xx xxx xxx
WHEREFORE, in view of all the foregoing, the following
assessments are hereby dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980
Deficiency
Tax P3,129.23;
1980
Deficiency
Tax P372,578.20.

Contractors

Income

While the following assessments are hereby sustained:

1980 Deficiency Expanded Withholding

Tax P1,798.93;
1980 Deficiency Withholding
Wages P33,058.82

Tax

on

plus 10% surcharge and 20% interest per annum from July 2,
1984 until fully paid but not to exceed three (3) years
pursuant to Section 51 (e)(2) & (3) of the National Internal
Revenue Code effective as of 1984.[5]
Dissatisfied with the CTA ruling, the CIR elevated the
case to the Court of Appeals (CA). In its Decision of February
16, 1994, the CA[6] initially decided in favor of the CIR and
disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases of Province of
Abra vs. Hernando and Abra Valley College Inc. vs. Aquino, the
ruling of the respondent Court of Tax Appeals that the leasing
of petitioners (herein respondent) facilities to small shop
owners, to restaurant and canteen operators and the
operation of the parking lot are reasonably incidental to and
reasonably necessary for the accomplishment of the
objectives of the petitioners,' and the income derived
therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so
far as it dismissed the assessment for:
1980 Deficiency Income Tax P 353.15
1980
Deficiency
Tax P 3,129.23, &
1980
Deficiency
Tax P372,578.20,

Contractors

Income

but the same is AFFIRMED in all other respect. [7]

Aggrieved, the YMCA asked for reconsideration based on
the following grounds:
I
The findings of facts of the Public Respondent Court of
Tax Appeals being supported by substantial evidence
[are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent
exempting [p]rivate [r]espondent from the income on
rentals of small shops and parking fees [are] in accord
with the applicable law and jurisprudence.[8]
Finding merit in the Motion for Reconsideration filed by
the YMCA, the CA reversed itself and promulgated on
September 28, 1995 its first assailed Resolution which, in part,
reads:
The Court cannot depart from the CTAs findings of fact, as
they are supported by evidence beyond what is considered as
substantial.
x xx xxx xxx
The second ground raised is that the respondent CTA did not
err in saying that the rental from small shops and parking fees
do not result in the loss of the exemption. Not even the
petitioner would hazard the suggestion that YMCA is designed
for profit. Consequently, the little income from small shops
and parking fees help[s] to keep its head above the water, so
to speak, and allow it to continue with its laudable work.

24
The Court, therefore, finds the second ground of the motion to
be meritorious and in accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the
respondent CTAs decision is AFFIRMED in toto.[9]
The internal revenue commissioners own Motion for
Reconsideration was denied by Respondent Court in its
second assailed Resolution of February 29, 1996. Hence, this
petition for review under Rule 45 of the Rules of Court.[10]
The Issues
Before us, petitioner imputes to the Court of Appeals the
following errors:
I
In holding that it had departed from the findings of fact
of Respondent Court of Tax Appeals when it rendered its
Decision dated February 16, 1994; and

truth or falsehood of alleged facts.[16] In the present case, the

CA did not doubt, much less change, the facts narrated by the
CTA. It merely applied the law to the facts. That its
interpretation or conclusion is different from that of the CTA is
not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of
the YMCA from its real estate subject to tax? At the outset, we
set forth the relevant provision of the NIRC:
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 -x xx xxx xxx
(g) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;

II
In affirming the conclusion of Respondent Court of Tax
Appeals that the income of private respondent from
rentals of small shops and parking fees [is] exempt from
taxation.[11]

(h) Club organized and operated exclusively for pleasure,

recreation, and other non-profitable purposes, no part of the
net income of which inures to the benefit of any private
stockholder or member;
x xx xxx xxx

This Courts Ruling

The Petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994
CA Decision reversed the factual findings of the CTA. On the
other hand, petitioner argues that the CA merely reversed
the ruling of the CTA that the leasing of private respondents
facilities to small shop owners, to restaurant and canteen
operators and the operation of parking lots are reasonably
incidental
to
and
reasonably
necessary
for
the
accomplishment of the objectives of the private respondent
and that the income derived therefrom are tax exempt.
[12]
Petitioner insists that what the appellate court reversed
was the legal conclusion, not the factual finding, of the CTA.
[13]
The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual
findings of the CTA, when supported by substantial evidence,
will not be disturbed on appeal unless it is shown that the said
court committed gross error in the appreciation of facts. [14] In
the present case, this Court finds that the February 16, 1994
Decision of the CA did not deviate from this rule. The latter
merely applied the law to the facts as found by the CTA and
ruled on the issue raised by the CIR: Whether or not the
collection or earnings of rental income from the lease of
certain premises and income earned from parking fees shall
fall under the last paragraph of Section 27 of the National
Internal Revenue Code of 1977, as amended.[15]
Clearly, the CA did not alter any fact or evidence. It
merely resolved the aforementioned issue, as indeed it was
expected to. That it did so in a manner different from that of
the CTA did not necessarily imply a reversal of factual
findings.
The distinction between a question of law and a question
of fact is clear-cut. It has been held that [t]here 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

Notwithstanding the provision in the preceding paragraphs,

the income of whatever kind and character of the foregoing
organization 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 the
tax imposed under this Code. (as amended by Pres. Decree
No. 1457)
Petitioners argues that while the income received by the
organizations enumerated in Section 27 (now Section 26) of
the NIRC is, as a rule, exempted from the payment of tax in
respect to income received by them as such, the exemption
does not apply to income derived xxx from any if their
properties, real or personal, or from any of their activities
conducted for profit, regardless, of the disposition made of
such income xxx.
Petitioner adds that rented income derived by a taxexempt organization from the lease of its properties, real or
personal, [is] not, therefore, exempt from income taxation,
even if such income [is] exclusively used for the
accomplishment of its objectives.[17] We agree with the
commissioner.
Because taxes are the lifeblood of the nation, the Court
has always applied the doctrine of strict interpretation in
construing tax exemptions.[18] Furthermore, a claim of
statutory exemption from taxation should be manifest and
unmistakable from the language of the law on which it is
based. Thus, the claimed exemption must expressly be
granted in a statute stated in a language too clear to be
mistaken.[19]
In the instant case, the exemption claimed by the YMCA
is expressly disallowed by the very wording of the last
paragraph of then Section 27 of the NIRC which mandates
that the income of exempt organizations (such as the YMCA)
from any of their properties, real or personal, be subject to the
imposed by the same Code. Because the last paragraph of
said section unequivocally subjects to tax the rent income f
the YMCA from its rental property,[20] the Court is duty-bound
to abide strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at construction.

25
It is axiomatic that where the language of the law is
clear and unambiguous, its express terms must be applied.
[21]
Parenthetically, a consideration of the question of
construction must not even begin, particularly when such
question is on whether to apply a strict construction or a
literal one on statutes that grant tax exemptions to religious,
charitable and educational propert[ies] or institutions.[22]
The last paragraph of Section 27, the YMCA argues,
should be subject to the qualification that the income from the
properties must arise from activities conducted for profit
before it may be considered taxable.[23] This argument is
erroneous. As previously stated, a reading of said paragraph
ineludibly shows that the income from any property of exempt
organizations, as well as that arising from any activity it
conducts for profit, is taxable. The phrase any of their
activities conducted for profit does not qualify the word
properties. This makes income from the property of the
organization taxable, regardless of how that income is used -whether for profit or for lofty non-profit purposes.
Verbalegis non estrecedendum. Hence, Respondent
Court of Appeals committed reversible error when it allowed,
on reconsideration, the tax exemption claimed by YMCA on
income it derived from renting out its real property, on the
solitary but unconvincing ground that the said income is not
collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental
income is taxable regardless of whence such income is
derived and how it used or disposed of. Where the law does
not distinguish, neither should we.

or educational purposes.[33] Father Joaquin G. Bernas, an

eminent authority on the Constitution and also a member of
the Concom, adhered to the same view that the exemption
created by said provision pertained only to property taxes.[34]
In his treatise on taxation, Mr. Justice Jose C. Vitug
concurs,
stating
that
[t]he
tax
exemption
covers property taxes only."[35] Indeed, the income tax
exemption claimed by private respondent finds no basis in
Article VI, Section 28, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4,
par. 3 of the Charter,[36] claiming that the YMCA is a non-stock,
non-profit educational institution whose revenues and assets
are used actually, directly and exclusively for educational
purposes so it is exempt from taxes on its properties and
income.[37] We reiterate that private respondent is exempt
from the payment of property tax, but not income tax on the
rentals from its property. The bare allegation alone that it is a
non-stock, non-profit educational institution is insufficient to
justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are
construed strictissimijuris. Hence, for the YMCA to be granted
the exemption it claims under the aforecited provision, it must
prove with substantial evidence 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. However, the Court notes that not a scintilla of
evidence was submitted by private respondent to prove that it
met the said requisites.

Constitutional Provisions
on Taxation
Invoking not only the NIRC but also the fundamental law,
private respondent submits that Article VI, Section 28 of par. 3
of the 1987 Constitution,[24] exempts charitable institutions
from the payment not only of property taxes but also of
income tax from any source.[25] In support of its novel theory,
it compares the use of the words charitable institutions,
actually and directly in the 1973 and the 1987 Constitutions,
on the hand; and in Article VI Section 22, par. 3 of the 1935
Constitution, on the other hand.[26]
Private respondent enunciates three points. First, the
present provision is divisible into two categories: (1)
[c]haritable institutions, churches and parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries, the
incomes of which are, from whatever source, all tax-exempt;
[27]
and (2) [a]ll lands, buildings and improvements actually
and directly used for religious, charitable or educational
purposes, which are exempt only from property taxes.
[28]
Second, Lladoc v. Commissioner of Internal Revenue,
[29]
which limited the exemption only to the payment of
property taxes, referred to the provision of the 1935
Constitution and not to its counterparts in the 1973 and the
1987 Constitutions.[30] Third, the phrase actually, directly and
exclusively used for religious, charitable or educational
purposes refers not only to all lands, buildings and
improvements, but also to the above-quoted first category
which includes charitable institutions like the private
respondent.[31]
The Court is not persuaded. The debates, interpellations
and expressions of opinion of the framers of the Constitution
reveal their intent which, in turn, may have guided the people
in ratifying the Charter.[32] Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former
constitutional commissioner, who is now a member of this
Court, stressed during the Concom debates that xxx what is
exempted is not the institution itself xxx; those exempted
from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable

Is the YMCA an educational institution within the purview

of Article XIV, Section 4, par.3 of the Constitution? We rule
that it is not. The term educational institution or institution of
learning has acquired a well-known technical meaning,
of which the members of the Constitutional Commission are
deemed cognizant.[38] Under the Education Act of 1982, such
term refers to schools.[39] The school system is synonymous
with formal education,[40] which refers to the hierarchically
structured and chronological graded learnings organized and
provided by the formal school system and for which
certification is required in order for the learner to progress
through the grades or move to the higher levels. [41] The Court
has examined the Amended Articles of Incorporation [42] and
By-Laws[43] of the YMCA, but found nothing in them that even
hints that it is a school or an educational institution.[44]
Furthermore, under the Education Act of 1982, even nonformal education is understood to be school-based and private
auspices such as foundations and civic-spirited organizations
are ruled out.[45] It is settled that the term educational
institution, when used in laws granting tax exemptions, refers
to a xxx school seminary, college or educational
establishment xxx.[46] Therefore, the private respondent
cannot be deemed one of the educational institutions covered
by the constitutional provision under consideration.
xxx Words used in the Constitution are to be taken in their
ordinary acceptation. While in its broadest and best sense
education embraces all forms and phrases of instruction,
improvement and development of mind and body, and as well
of religious and moral sentiments, yet in the common
understanding and application it means a place where
systematic instruction in any or all of the useful branches of
learning is given by methods common to schools and
institutions of learning. That we conceive to be the true intent
and scope of the term [educational institutions,] as used in
the Constitution.[47]
Moreover, without conceding that Private Respondent
YMCA is an educational institution, the Court also notes that
the former did not submit proof of the proportionate amount
of the subject income that was actually, directly and
exclusively used for educational purposes. Article XIII, Section
5 of the YMCA by-laws, which formed part of the evidence

26
submitted, is patently insufficient, since the same merely
signified that [t]he net income derived from the rentals of the
commercial buildings shall be apportioned to the Federation
and Member Associations as the National Board may decide.
[48]
In sum, we find no basis for granting the YMCA exemption
from income tax under the constitutional provision invoked

No. 415. The CTA dismissed the petition for review filed by
petitioner assailing the CTA First Divisions Decision [3] dated
April 25, 2008 and Resolution[4] dated July 10, 2008 which
ordered petitioner to refund the excise taxes paid by
respondent Pilipinas Shell Petroleum Corporation on petroleum
products it sold to international carriers.
The facts are not disputed.

Cases Cited by Private Respondent Inapplicable

The cases[49] relied on by private respondent do not
support its cause. YMCA of Manila v. Collector of Internal
Revenue[50] and Abra Valley College, Inc. v. Aquino [51] are not
applicable, because the controversy in both cases involved
exemption from the payment of property tax, not income
tax. Hospital de San Juan de Dios, Inc. v. Pasay City [52] is not in
point either, because it involves a claim for exemption from
the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City -- an
issue not at all related to that involved in a claimed exemption
from the payment if income taxes imposed on property
leases. In Jesus Sacred Heart College v. Com. Of Internal
Revenue,[53] the party therein, which claimed an exemption
from the payment of income tax, was an educational
institution which submitted substantial evidence that the
income subject of the controversy had been devoted or used
solely for educational purposes. On the other hand, the
private respondent in the present case had not given any
proof that it is an educational institution, or that of its rent
income is actually, directly and exclusively used for
educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its
sympathy with private respondent. It appreciates the nobility
its cause. However, the Courts power and function are limited
merely to applying the law fairly and objectively. It cannot
change the law or bend it to suit its sympathies and
appreciations. Otherwise, it would be overspilling its role and
invading the realm of legislation.
We concede that private respondent deserves the help
and the encouragement of the government. It needs laws that
can facilitate, and not frustrate, its humanitarian tasks. But
the Court regrets that, given its limited constitutional
authority, it cannot rule on the wisdom or propriety of
legislation. That prerogative belongs to the political
departments of government. Indeed, some of the member of
the Court may even believe in the wisdom and prudence of
granting more tax exemptions to private respondent. But such
belief, however well-meaning and sincere, cannot bestow
upon the Court the power to change or amend the law.
WHEREFORE, the
petition
is GRANTED. The
Resolutions of the Court of Appeals dated September 28, 1995
and February 29, 1996 are hereby dated February 16, 1995
is REVERSED and SET ASIDE. The Decision of the Court of
Appeals dated February 16, 1995 is REINSTATED, insofar as
it ruled that the income tax. No pronouncement as to costs.

Respondent is engaged in the business of processing, treating

and refining petroleum for the purpose of producing
marketable products and the subsequent sale thereof. [5]
On July 18, 2002, respondent filed with the Large Taxpayers
Audit & Investigation Division II of the Bureau of Internal
Revenue (BIR) a formal claim for refund or tax credit in the
total amount of P28,064,925.15, representing excise taxes it
allegedly paid on sales and deliveries of gas and fuel oils to
various international carriers during the period October to
December 2001. Subsequently, on October 21, 2002, a similar
claim for refund or tax credit was filed by respondent with the
BIR covering the period January to March 2002 in the amount
of P41,614,827.99. Again, on July 3, 2003, respondent filed
another formal claim for refund or tax credit in the amount
of P30,652,890.55 covering deliveries from April to June 2002.
[6]

Since no action was taken by the petitioner on its claims,

respondent filed petitions for review before the CTA on
September 19, 2003 and December 23, 2003, docketed as
CTA Case Nos. 6775 and 6839, respectively.
In its decision on the consolidated cases, the CTAs First
Division ruled that respondent is entitled to the refund of
excise taxes in the reduced amount of P95,014,283.00. The
CTA First Division relied on a previous ruling rendered by the
CTA En Banc in the case of Pilipinas Shell Petroleum
Corporation v. Commissioner of Internal Revenue [7] where the
CTA also granted respondents claim for refund on the basis of
excise tax exemption for petroleum products sold to
international carriers of foreign registry for their use or
consumption outside the Philippines. Petitioners motion for
reconsideration was denied by the CTA First Division.
Petitioner elevated the case to the CTA En Banc which upheld
the ruling of the First Division. The CTA pointed out the
specific exemption mentioned under Section 135 of
theNational Internal Revenue Code of 1997 (NIRC) of
petroleum products sold to international carriers such as
respondents clients. It said that this Courts ruling in Maceda v.
Macaraig, Jr.[8] is inapplicable because said case only put to
rest the issue of whether or not the National Power
Corporation (NPC) is subject to tax considering that NPC is a
tax-exempt entity mentioned in Sec. 135 (c) of the NIRC
(1997), whereas the present case involves the tax exemption
of the sale of petroleum under Sec. 135 (a) of the same
Code. Further, the CTA said that the ruling in Philippine
Acetylene
Co.,
Inc.
v.
Commissioner
of
Internal
Revenue[9] likewise finds no application because the party
asking for the refund in said case was the seller-producer
based on the exemption granted under the law to the taxexempt buyers, NPC and Voice of America (VOA), whereas in
this case it is the article or product which is exempt from tax
and not the international carrier.
Petitioner filed a motion for reconsideration which the CTA
likewise denied.
Hence, this petition anchored on the following grounds:
I

SO ORDERED.
COMMISSIONER OF
REVENUE, Petitioner,

INTERNAL

G.R. No. 188497

- versus PILIPINAS SHELL PETROLEUM CORPORATION,

Promulgated:

Respondent.

April 25, 2012

DECISION

Petitioner Commissioner of Internal Revenue appeals the

Decision[1] dated March 25, 2009 and Resolution [2] dated June
24, 2009 of the Court of Tax Appeals (CTA) En Bancin CTA EB

III

SECTION 148 OF THE NATIONAL INTERNAL

REVENUE CODE EXPRESSLY SUBJECTS THE
PETROLEUM PRODUCTS TO AN EXCISE TAX
BEFORE THEY ARE REMOVED FROM THE
PLACE OF PRODUCTION.
II
THE ONLY SPECIFIC PROVISION OF THE LAW
WHICH GRANTS TAX CREDIT OR TAX
REFUND OF THE EXCISE TAXES PAID REFERS
TO THOSE CASES WHERE GOODS LOCALLY
PRODUCED
OR
MANUFACTURED
ARE
ACTUALLY EXPORTED WHICH IS NOT SO IN
THIS CASE.

27
THE PRINCIPLES LAID DOWN IN MACEDA VS.
MACARAIG, JR. AND PHILIPPINE ACETYLENE
CO. VS. CIR ARE APPLICABLE TO THIS CASE.
[10]

The Solicitor General argues that the obvious intent of the law
is to grant excise tax exemption to international carriers and
exempt entities as buyers of petroleum products and not to
the manufacturers or producers of said goods. Since the
excise taxes are collected from manufacturers or producers
before removal of the domestic products from the place of
production, respondent paid the subject excise taxes as
manufacturer or producer of the petroleum products pursuant
to Sec. 148 of the NIRC. Thus, regardless of who the
buyer/purchaser is, the excise tax on petroleum products
attached to the said goods before their sale or delivery to
international carriers, as in fact respondent averred that it
paid the excise tax on its petroleum products when it
withdrew petroleum products from its place of production for
eventual sale and delivery to various international carriers as
well as to other customers.[11] Sec. 135 (a) and (c) granting
exemption from the payment of excise tax on petroleum
products can only be interpreted to mean that the respondent
cannot pass on to international carriers and exempt agencies
the excise taxes it paid as a manufacturer or producer.
As to whether respondent has the right to file a claim for
refund or tax credit for the excise taxes it paid for the
petroleum products sold to international carriers, the Solicitor
General contends that Sec. 130 (D) is explicit on the
circumstances under which a taxpayer may claim for a refund
of excise taxes paid on manufactured products, which express
enumeration did not include those excise taxes paid on
petroleum products which were eventually sold to
international
carriers (expressiouniusestexclusioalterius). Further,
the
Solicitor General asserts that contrary to the conclusion made
by the CTA, the principles laid down by this Court in Maceda v.
Macaraig, Jr.[12] and Philippine Acetylene Co. v. Commissioner
of Internal Revenue[13] are applicable to this case. Respondent
must shoulder the excise taxes it previously paid on
petroleum products which it later sold to international carriers
because it cannot pass on the tax burden to the said
international carriers which have been granted exemption
under Sec. 135 (a) of the NIRC. Considering that respondent
failed to prove an express grant of a right to a tax refund,
such claim cannot be implied; hence, it must be denied.
On the other hand, respondent maintains that since petroleum
products sold to qualified international carriers are exempt
from excise tax, no taxes should be imposed on the article, to
which goods the tax attaches, whether in the hands of the
said international carriers or the petroleum manufacturer or
producer. As these excise taxes have been erroneously paid
taxes, they can be recovered under Sec. 229 of the
NIRC. Respondent contends that contrary to petitioners
assertion, Sections 204 and 229 authorizes respondent to
maintain a suit or proceeding to recover such erroneously
paid taxes on the petroleum products sold to tax-exempt
international carriers.
As to the jurisprudence cited by the petitioner, respondent
argues that they are not applicable to the case at bar. It points
out that Maceda v. Macaraig, Jr. is an adjudication on the issue
of tax exemption of NPC from direct and indirect taxes given
the passage of various laws relating thereto. What was put in
issue in said case was NPCs right to claim for refund of
indirect taxes. Here, respondents claim for refund is not
anchored on the exemption of the buyer from direct and
indirect taxes but on the tax exemption of the goods
themselves under Sec. 135. Respondent further stressed that
in Maceda v. Macaraig, Jr., this Court recognized that if NPC
purchases oil from oil companies, NPC is entitled to claim
reimbursement from the BIR for that part of the purchase
price that represents excise taxes paid by the oil company to
the BIR. Philippine Acetylene Co. v. CIR, on the other hand,
involved sales tax, which is a tax on the transaction, which
this Court held as due from the seller even if such tax cannot
be passed on to the buyers who are tax-exempt entities. In
this case, the excise tax is a tax on the goods
themselves. While indeed it is the manufacturer who has the
duty to pay the said tax, by specific provision of law, Sec. 135,
the goods are stripped of such tax under the circumstances
provided therein. Philippine Acetylene Co., Inc. v. CIR was thus
not anchored on an exempting provision of law but merely on
the argument that the tax burden cannot be passed on to
someone.
Respondent further contends that requiring it to
shoulder the burden of excise taxes on petroleum products

sold to international carriers would effectively defeat the

principle of international comity upon which the grant of tax
exemption on aviation fuel used in international flights was
founded. If the excise taxes paid by respondent are not
allowed to be refunded or credited based on the exemption
provided in Sec. 135 (a), respondent avers that the
manufacturers or oil companies would then be constrained to
shift the tax burden to international carriers in the form of
addition to the selling price.
Respondent
cites
as
an
analogous
case Commissioner of International Revenue v. Tours
Specialists, Inc.[14] which involved the inclusion of hotel room
charges remitted by partner foreign tour agents in respondent
TSIs gross receipts for purposes of computing the 3%
contractors tax. TSI opposed the deficiency assessment
invoking, among others, Presidential Decree No. 31, which
exempts foreign tourists from paying hotel room tax. This
Court upheld the CTA in ruling that while CIR may claim that
the 3% contractors tax is imposed upon a different
incidence, i.e., the gross receipts of the tourist agency which
he asserts includes the hotel room charges entrusted to it, the
effect would be to impose a tax, and though different, it
nonetheless imposes a tax actually on room charges. One way
or the other, said the CTA, it would not have the effect of
promoting tourism in the Philippines as that would increase
the costs or expenses by the addition of a hotel room tax in
the overall expenses of said tourists.
The instant petition squarely raised the issue of
whether respondent as manufacturer or producer of
petroleum products is exempt from the payment of excise tax
on such petroleum products it sold to international carriers.
In the previous cases [15] decided by this Court
involving excise taxes on petroleum products sold to
international carriers, what was only resolved is the question
of who is the proper party to claim the refund of excise taxes
paid on petroleum products if such tax was either paid by the
international carriers themselves or incorporated into the
selling price of the petroleum products sold to them. We have
ruled in the said cases that the statutory taxpayer, the local
manufacturer of the petroleum products who is directly liable
for the payment of excise tax on the said goods, is the proper
party to seek a tax refund. Thus, a foreign airline company
who purchased locally manufactured petroleum products for
use in its international flights, as well as a foreign oil company
who likewise bought petroleum products from local
manufacturers and later sold these to international carriers,
have no legal personality to file a claim for tax refund or credit
of excise taxes previously paid by the local manufacturers
even if the latter passed on to the said buyers the tax burden
in the form of additional amount in the price.
Excise taxes, as the term is used in the NIRC, refer to
taxes applicable to certain specified goods or articles
manufactured or produced in the Philippines for domestic
sales or consumption or for any other disposition and to things
imported into the Philippines. These taxes are imposed in
addition to the value-added tax (VAT).[16]
As to petroleum products, Sec. 148 provides that
excise taxes attach to the following refined and manufactured
mineral oils and motor fuels as soon as they are in existence
as such:
(a) Lubricating oils and greases;
(b) Processed gas;
(c) Waxes and petrolatum;
(d) Denatured alcohol to be used
for motive power;
(e) Naphtha, regular gasoline and
other similar products of
distillation;
(f) Leaded premium gasoline;
(g) Aviation turbo jet fuel;
(h) Kerosene;
(i) Diesel fuel oil, and similar fuel
oils having more or less
the
same
generating
power;

28
(j) Liquefied petroleum gas;
(k) Asphalts; and
(l) Bunker fuel oil and similar fuel
oils having more or less
the
same
generating
capacity.
Beginning January 1, 1999, excise taxes levied on
locally manufactured petroleum products and indigenous
petroleum are required to be paid before their removal from
the place of production.[17] However, Sec. 135 provides:
SEC. 135. Petroleum Products Sold
to International Carriers and Exempt
Entities or Agencies. Petroleum products
sold to the following are exempt from excise
tax:
(a)
International
carriers
of
Philippine or foreign registry on their use or
consumption
outside
the
Philippines: Provided, That the petroleum
products sold to these international carriers
shall be stored in a bonded storage tank and
may be disposed of only in accordance with
the rules and regulations to be prescribed
by the Secretary of Finance, upon
recommendation of the Commissioner;
(b) Exempt entities or agencies
covered by tax treaties, conventions and
other international agreements for their use
or consumption: Provided, however, That
the country of said foreign international
carrier or exempt entities or agencies
exempts from similar taxes petroleum
products sold to Philippine carriers, entities
or agencies; and
(c) Entities which are by
exempt from direct and indirect taxes.

law

Respondent claims it is entitled to a tax refund because those

petroleum products it sold to international carriers are not
subject to excise tax, hence the excise taxes it paid upon
withdrawal of those products were erroneously or illegally
collected and should not have been paid in the first
place. Since the excise tax exemption attached to the
petroleum products themselves, the manufacturer or producer
is under no duty to pay the excise tax thereon.
We disagree.
Under Chapter II Exemption or Conditional Tax-Free Removal
of Certain Goods of Title VI, Sections 133, 137, 138, 139 and
140 cover conditional tax-free removal of specified goods or
articles, whereas Sections 134 and 135 provide for tax
exemptions. While the exemption found in Sec. 134 makes
reference to the nature and quality of the goods
manufactured (domestic denatured alcohol) without regard to
the tax status of the buyer of the said goods, Sec. 135 deals
with the tax treatment of a specified article (petroleum
products) in relation to its buyer or consumer. Respondents
failure to make this important distinction apparently led it to
mistakenly assume that the tax exemption under Sec. 135 (a)
attaches to the goods themselves such that the excise tax
should not have been paid in the first place.
On July 26, 1996, petitioner Commissioner issued
Revenue Regulations 8-96[18] (Excise Taxation of Petroleum
Products) which provides:
SEC. 4. Time and Manner of
Payment of Excise Tax on Petroleum
Products, Non-Metallic Minerals and
Indigenous Petroleum
I. Petroleum Products
x xxx
a) On locally manufactured petroleum products
The specific tax on petroleum
products locally manufactured or
produced in the Philippines shall be
paid
by
the
manufacturer,

producer, owner or person having

possession of the same, and such
tax shall be paid within fifteen (15)
days from date of removal from the
place of production. (Underscoring
supplied.)
Thus, if an airline company purchased jet fuel from
an unregistered supplier who could not present proof of
payment of specific tax, the company is liable to pay the
specific tax on the date of purchase.[19] Since the excise tax
must be paid upon withdrawal from the place of production,
respondent cannot anchor its claim for refund on the theory
that the excise taxes due thereon should not have been
collected or paid in the first place.
Sec. 229 of the NIRC allows the recovery of taxes erroneously
or illegally collected. An erroneous or illegal tax is defined as
one levied without statutory authority, or upon property not
subject to taxation or by some officer having no authority to
levy the tax, or one which is some other similar respect is
illegal.[20]
Respondents locally manufactured petroleum products are
clearly subject to excise tax under Sec. 148. Hence, its claim
for tax refund may not be predicated on Sec. 229 of the NIRC
allowing a refund of erroneous or excess payment of tax.
Respondents claim is premised on what it determined as a tax
exemption attaching to the goods themselves, which must be
based on a statute granting tax exemption, or the result of
legislative
grace.
Such
a
claim
is
to
be
construed strictissimijuris against the taxpayer, meaning that
the claim cannot be made to rest on vague inference. Where
the rule of strict interpretation against the taxpayer is
applicable as the claim for refund partakes of the nature of an
exemption, the claimant must show that he clearly falls under
the exempting statute.[21]
The exemption from excise tax payment on
petroleum products under Sec. 135 (a) is conferred on
international carriers who purchased the same for their use or
consumption outside the Philippines. The only condition set by
law is for these petroleum products to be stored in a bonded
storage tank and may be disposed of only in accordance with
the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
On January 22, 2008, or five years after the sale by
respondent of the subject petroleum products, then Secretary
of Finance Margarito B. Teves issued Revenue Regulations No.
3-2008 Amending Certain Provisions of Existing Revenue
Regulations on the Granting of Outright Excise Tax Exemption
on Removal of Excisable Articles Intended for Export or
Sale/Delivery to International Carriers or to Tax-Exempt
Entities/Agencies and Prescribing the Provisions for Availing
Claims for Product Replenishment. Said issuance recognized
the tax relief to which the taxpayers are entitled by availing
of the following remedies: (a) a claim for excise tax exemption
pursuant to Sections 204 and 229 of the NIRC; or (2) a product
replenishment.
SEC. 2.IMPOSITION OF EXCISE TAX
ON REMOVAL OF EXCISABLE ARTICLES FOR
EXPORT
OR
SALE/DELIVERY
TO
INTERNATIONAL CARRIERS AND OTHER TAXEXEMPT ENTITIES/AGENCIES. Subject to
the subsequent filing of a claim for
excise tax credit/refund or product
replenishment,
all
manufacturers
of
articles subject to excise tax under Title VI
of the NIRC of 1997, as amended, shall pay
the excise tax that is otherwise due on
every removal thereof from the place of
production that is intended for exportation
or sale/delivery to international carriers or to
tax-exempt entities/agencies: Provided, That
in case the said articles are likewise being
sold in the domestic market, the applicable
excise tax rate shall be the same as the
excise tax rate imposed on the domestically
sold articles.
In the absence of a similar article
that is being sold in the domestic market,
the applicable excise tax shall be computed
based on the value appearing in the
manufacturers sworn statement converted
to Philippine currency, as may be applicable.
x xxx (Emphasis supplied.)

29
In this case, however, the Solicitor General has adopted a
position contrary to existing BIR regulations and rulings
recognizing the right of oil companies to seek a refund of
excise taxes paid on petroleum products they sold to
international carriers. It is argued that there is nothing in Sec.
135 (a) which explicitly grants exemption from the payment of
excise tax in favor of oil companies selling their petroleum
products to international carriers and that the only claim for
refund of excise taxes authorized by the NIRC is the payment
of excise tax on exported goods, as explicitly provided in Sec.
130 (D), Chapter I under the same Title VI:
(D) Credit for Excise Tax on Goods
Actually Exported. -- When goods locally
produced or manufactured are removed and
actually exported without returning to the
Philippines, whether so exported in their
original state or as ingredients or parts of
any manufactured goods or products, any
excise tax paid thereon shall be credited or
refunded upon submission of the proof of
actual exportation and upon receipt of the
corresponding
foreign
exchange
payment: Provided, That the excise tax on
mineral products, except coal and coke,
imposed under Section 151 shall not be
creditable or refundable even if the mineral
products are actually exported.
According to the Solicitor General, Sec. 135 (a) in relation to
the other provisions on excise tax and from the nature of
indirect taxation, may only be construed as prohibiting the
manufacturers-sellers of petroleum products from passing on
the tax to international carriers by incorporating previously
paid excise taxes into the selling price. In other words,
respondent cannot shift the tax burden to international
carriers who are allowed to purchase its petroleum products
without having to pay the added cost of the excise tax.
We agree with the Solicitor General.
In Philippine Acetylene Co., Inc. v. Commissioner of Internal
Revenue[22] this Court held that petitioner manufacturer who
sold its oxygen and acetylene gases to NPC, a tax-exempt
entity, cannot claim exemption from the payment of sales tax
simply because its buyer NPC is exempt from taxation. The
Court explained that the percentage tax on sales of
merchandise imposed by the Tax Code is due from the
manufacturer and not from the buyer.
Respondent attempts to distinguish this case from Philippine
Acetylene Co., Inc. on grounds that what was involved in the
latter is a tax on the transaction (sales) and not excise tax
which is a tax on the goods themselves, and that the
exemption sought therein was anchored merely on the taxexempt status of the buyer and not a specific provision of law
exempting the goods sold from the excise tax. But as already
stated, the language of Sec. 135 indicates that the tax
exemption
mentioned
therein
is
conferred
on
specified buyersor consumers of the excisable articles or
goods (petroleum products). Unlike Sec. 134 which explicitly
exempted the article or goods itself (domestic denatured
alcohol) without due regard to the tax status of the buyer or
purchaser, Sec. 135 exempts from excise tax petroleum
products which were sold to international carriers and other
tax-exempt agencies and entities.
Considering that the excise taxes attaches to
petroleum products as soon as they are in existence as such,
[23]
there can be no outright exemption from the payment of
excise tax on petroleum products sold to international
carriers. The sole basis then of respondents claim for refund is
the express grant of excise tax exemption in favor of
international carriers under Sec. 135 (a) for their purchases of
locally manufactured petroleum products. Pursuant to our
ruling in Philippine Acetylene, a tax exemption being enjoyed
by the buyer cannot be the basis of a claim for tax exemption
by the manufacturer or seller of the goods for any tax due to
it as the manufacturer or seller. The excise tax imposed on
petroleum products under Sec. 148 is the direct liability of the
manufacturer who cannot thus invoke the excise tax
exemption granted to its buyers who are international
carriers.
In Maceda v. Macaraig, Jr.,[24] the Court specifically
mentioned excise tax as an example of an indirect tax where
the tax burden can be shifted to the buyer:
On the other hand, indirect taxes are taxes
primarily paid by persons who can shift the

burden upon someone else. For example,

the excise and ad valorem taxes that the oil
companies pay to the Bureau of Internal
Revenue upon removal of petroleum
products from its refinery can be shifted to
its buyer, like the NPC, by adding them to
the cash and/or selling price.
An excise tax is basically an indirect tax. Indirect taxes are
those that are demanded, in the first instance, from, or are
paid by, one person in the expectation and intention that he
can shift the burden to someone else. Stated elsewise,
indirect taxes are taxes wherein the liability for the payment
of the tax falls on one person but the burden thereof can be
shifted or passed on to another person, such as when the tax
is imposed upon goods before reaching the consumer who
ultimately pays for it. When the seller passes on the tax to his
buyer, he, in effect, shifts the tax burden, not the liability to
pay it, to the purchaser as part of the price of goods sold or
services rendered.[25]
Further, in Maceda v. Macaraig, Jr., the Court ruled
that because of the tax exemptions privileges being enjoyed
by NPC under existing laws, the tax burden may not be shifted
to it by the oil companies who shall pay for fuel oil taxes on oil
they supplied to NPC. Thus:
In view of all the foregoing, the
Court rules and declares that the oil
companies which supply bunker fuel oil to
NPC have to pay the taxes imposed upon
said bunker fuel oil sold to NPC. By the very
nature of indirect taxation, the economic
burden of such taxation is expected to be
passed on through the channels of
commerce to the user or consumer of the
goods sold.Because, however, the NPC
has been exempted from both direct
and indirect taxation, the NPC must be
held exempted from absorbing the
economic
burden
of
indirect
taxation.This means, on the one hand,
that the oil companies which wish to
sell to NPC absorb all or part of the
economic
burden
of
the
taxes
previously paid to BIR, which they
could shift to NPC if NPC did not enjoy
exemption from indirect taxes. This
means also, on the other hand, that the NPC
may refuse to pay that part of the normal
purchase price of bunker fuel oil which
represents all or part of the taxes previously
paid by the oil companies to BIR. If NPC
nonetheless purchases such oil from the oil
companies because to do so may be more
convenient and ultimately less costly for
NPC than NPC itself importing and hauling
and storing the oil from overseas NPC is
entitled to be reimbursed by the BIR for that
part of the buying price of NPC which
verifiably represents the tax already paid by
the oil company-vendor to the BIR.
[26]
(Emphasis supplied.)
In the case of international air carriers, the tax exemption
granted under Sec. 135 (a) is based on a long-standing
international consensus that fuel used for international air
services should be tax-exempt. The provisions of the 1944
Convention of International Civil Aviation or the Chicago
Convention, which form binding international law, requires the
contracting parties not to charge duty on aviation fuel already
on board any aircraft that has arrived in their territory from
another contracting state. Between individual countries, the
exemption of airlines from national taxes and customs duties
on a range of aviation-related goods, including parts, stores
and fuel is a standard element of the network of bilateral Air
Service Agreements.[27] Later, a Resolution issued by the
International Civil Aviation Organization (ICAO) expanded the
provision as to similarly exempt from taxes all kinds of fuel
taken on board for consumption by an aircraft from a
contracting state in the territory of another contracting State
departing for the territory of any other State. [28] Though
initially aimed at establishing uniformity of taxation among
parties to the treaty to prevent double taxation, the tax
exemption now generally applies to fuel used in international
travel by both domestic and foreign carriers.
On April 21, 1978, then President Ferdinand E. Marcos issued
Presidential Decree (P.D.) No. 1359:

30
PRESIDENTIAL DECREE No. 1359
AMENDING SECTION 134 OF THE
NATIONAL INTERNAL REVENUE CODE OF
1977.
WHEREAS, under the present law
oil products sold to international carriers are
subject to the specific tax;
WHEREAS, some countries allow
the sale of petroleum products to Philippine
Carriers without payment of taxes thereon;
WHEREAS, to foster goodwill and
better relationship with foreign countries,
there is a need to grant similar tax
exemption in favor of foreign international
carriers;
NOW, THEREFORE, I, FERDINAND E.
MARCOS, President of the Philippines, by
virtue of the powers vested in me by the
Constitution, do hereby order and decree
the following:
Section 1. Section 134 of the
National Internal Revenue Code of 1977 is
hereby amended to read as follows:
Sec. 134.Articles
subject to specific tax.
Specific internal revenue
taxes apply to things
manufactured or produced
in the Philippines for
domestic
sale
or
consumption and to things
imported, but not to
anything
produced
or
manufactured here which
shall be removed for
exportation and is actually
exported without returning
to the Philippines, whether
so exported in its original
state or as an ingredient
or
part
of
any
manufactured article or
product.
HOWEVER,
PETROLEUM
PRODUCTS
SOLD
TO
AN
INTERNATIONAL CARRIER
FOR
ITS
USE
OR
CONSUMPTION
OUTSIDE
OF
THE
PHILIPPINES
SHALL NOT BE SUBJECT
TO
SPECIFIC
TAX,
PROVIDED,
THAT
THE
COUNTRY
OF
SAID
CARRIER EXEMPTS FROM
TAX
PETROLEUM
PRODUCTS
SOLD
TO
PHILIPPINE CARRIERS.
In
case
of
importations the internal
revenue tax shall be in
addition to the customs
duties, if any.
Section 2. This Decree shall take effect immediately.
Contrary to respondents assertion that the above
amendment to the former provision of the 1977 Tax
Code supports its position that it was not liable for excise tax
on the petroleum products sold to international carriers, we
find that no such inference can be drawn from the words used
in the amended provision or its introductory part. Founded on
the principles of international comity and reciprocity, P.D. No.
1359 granted exemption from payment of excise tax but only
to foreign international carriers who are allowed to purchase
petroleum products free of specific tax provided the country of
said carrier also grants tax exemption to Philippine
carriers. Both the earlier amendment in the 1977 Tax
Code and the present Sec. 135 of the 1997 NIRC did not
exempt the oil companies from the payment of excise tax on

petroleum products manufactured and sold by them to

international carriers.
Because an excise tax is a tax on the manufacturer and not on
the purchaser, and there being no express grant under the
NIRC of exemption from payment of excise tax to local
manufacturers of petroleum products sold to international
carriers, and absent any provision in the Code authorizing the
refund or crediting of such excise taxes paid, the Court holds
that Sec. 135 (a) should be construed as prohibiting the
shifting of the burden of the excise tax to the international
carriers who buys petroleum products from the local
manufacturers. Said provision thus merely allows the
international carriers to purchase petroleum products without
the excise tax component as an added cost in the price fixed
by the manufacturers or distributors/sellers. Consequently,
the oil companies which sold such petroleum products to
international carriers are not entitled to a refund of excise
taxes previously paid on the goods.
Time and again, we have held that tax refunds are in
the nature of tax exemptions which result to loss of revenue
for the government. Upon the person claiming anexemption
from tax payments rests the burden of justifying
the exemption by words too plain to be mistaken and too
categorical
to
be
misinterpreted,[29] it
is
never
presumed[30] nor be allowed solely on the ground of equity.
[31]
These exemptions, therefore, must not rest on vague,
uncertain or indefinite inference, but should be granted only
by a clear and unequivocal provision of law on the basis of
language too plain to be mistaken. Such exemptions must be
strictly construed against the taxpayer, as taxes are the
lifeblood of the government.[32]
WHEREFORE, the petition for review on certiorari
is GRANTED. The Decision dated March 25, 2009 and
Resolution dated June 24, 2009 of the Court of Tax AppealsEn
Banc in CTA EB No. 415 are hereby REVERSED and SET
ASIDE. The claims for tax refund or credit filed by respondent
Pilipinas Shell Petroleum Corporation are DENIED for lack of
basis.
No pronouncement as to costs.
SO ORDERED.

THIRD DIVISION
[G.R. NO. 180884 : June 27, 2008]
EMERLINDA S. TALENTO, in her capacity as the
Provincial
Treasurer
of
the
Province
of
Bataan,Petitioner, v. HON. REMIGIO M. ESCALADA, JR.,
Presiding Judge of the Regional Trial Court of Bataan,
Branch 3, and PETRON CORPORATION, Respondents.
DECISION
YNARES-SANTIAGO, J.:
The instant Petition for Certiorari under Rule 65 of the Rules of
Court assails the November 5, 2007 Order 1of the Regional Trial
Court of Bataan, Branch 3, in Civil Case No. 8801, granting the
petition for the issuance of a writ of preliminary injunction
filed by private respondent Petron Corporation (Petron)
thereby enjoining petitioner Emerlinda S. Talento, Provincial
Treasurer of Bataan, and her representatives from proceeding
with the public auction of Petron's machineries and pieces of
equipment during the pendency of the latter's appeal from the
revised assessment of its properties.
The facts of the case are as follows:
On June 18, 2007, Petron received from the Provincial
Assessor's Office of Bataan a notice of revised assessment
over its machineries and pieces of equipment in Lamao,
Limay, Bataan. Petron was given a period of 60 days within
which to file an appeal with the Local Board of Assessment
Appeals (LBAA).2Based on said revised assessment, petitioner
Provincial Treasurer of Bataan issued a notice informing Petron

31
that as of June 30, 2007, its total liability is
P1,731,025,403.06,3 representing deficiency real property tax
due from 1994 up to the first and second quarters of 2007.
On August 17, 2007, Petron filed a petition4 with the LBAA
(docketed as LBAA Case No. 2007-01) contesting the revised
assessment on the grounds that the subject assessment
pertained to properties that have been previously declared;
and that the assessment covered periods of more than 10
years which is not allowed under the Local Government Code
(LGC). According to Petron, the possible valid assessment
pursuant to Section 222 of the LGC could only be for the years
1997 to 2006. Petron further contended that the fair market
value or replacement cost used by petitioner included items
which should be properly excluded; that prompt payment of
discounts were not considered in determining the fair market
value; and that the subject assessment should take effect a
year after or on January 1, 2008. In the same petition, Petron
sought the approval of a surety bond in the amount of
P1,286,057,899.54.5
On August 22, 2007, Petron received from petitioner a final
notice of delinquent real property tax with a warning that the
subject properties would be levied and auctioned should
Petron fail to settle the revised assessment due. 6
Consequently, Petron sent a letter 7 to petitioner stating that in
view of the pendency of its appeal 8 with the LBAA, any action
by the Treasurer's Office on the subject properties would be
premature. However, petitioner replied that only Petron's
payment under protest shall bar the collection of the realty
taxes due,9 pursuant to Sections 231 and 252 of the LGC.
With the issuance of a Warrant of Levy 10 against its
machineries and pieces of equipment, Petron filed on
September 24, 2007, an urgent motion to lift the final notice
of delinquent real property tax and warrant of levy with the
LBAA. It argued that the issuance of the notice and warrant is
premature because an appeal has been filed with the LBAA,
where it posted a surety bond in the amount of
P1,286,057,899.54.11
On October 3, 2007, Petron received a notice of sale of its
properties scheduled on October 17, 2007.12Consequently, on
October 8, 2007, Petron withdrew its motion to lift the final
notice of delinquent real property tax and warrant of levy with
the LBAA.13 On even date, Petron filed with the Regional Trial
Court of Bataan the instant case (docketed as Civil Case No.
8801) for prohibition with prayer for the issuance of a
temporary
restraining
order
(TRO)
and
preliminary
injunction.14
On October 15, 2007, the trial court issued a TRO for 20 days
enjoining petitioner from proceeding with the public auction of
Petron's properties.15 Petitioner thereafter filed an urgent
motion for the immediate dissolution of the TRO, followed by
a motion to dismiss Petron's petition for prohibition.
On November 5, 2007, the trial court issued the assailed
Order granting Petron's petition for issuance of writ of
preliminary injunction, subject to Petron's posting of a
P444,967,503.52 bond in addition to its previously posted
surety bond of P1,286,057,899.54, to complete the total
amount
equivalent
to
the
revised
assessment
of
P1,731,025,403.06. The trial court held that in scheduling the
sale of the properties despite the pendency of Petron's appeal
and posting of the surety bond with the LBAA, petitioner
deprived Petron of the right to appeal. The dispositive portion
thereof, reads:
WHEREFORE, the writ of preliminary injunction prayed for by
plaintiff is hereby GRANTED and ISSUED, enjoining defendant
Treasurer, her agents, representatives, or anybody acting in
her behalf from proceeding with the scheduled public auction
of plaintiff's real properties, or any disposition thereof,
pending the determination of the merits of the main action, to

be effective upon posting by plaintiff to the Court of an

injunction bond in the amount of Four Hundred Forty Four
Million Nine Hundred Sixty Seven Thousand Five Hundred
Three and 52/100 Pesos (P444,967,503.52) and the approval
thereof by the Court.
Defendant's Urgent Motion for the Immediate Dissolution of
the Temporary Restraining Order dated October 23, 2007 is
hereby DENIED.
SO ORDERED.16
From the said Order of the trial court, petitioner went directly
to this Court via the instant petition for certiorari under Rule
65 of the Rules of Court.
The question posed in this petition, i.e., whether the collection
of taxes may be suspended by reason of the filing of an
appeal and posting of a surety bond, is undoubtedly a pure
question of law. Section 2(c) of Rule 41 of the Rules of Court
provides:
SEC. 2. Modes of Appeal. (c) Appeal by certiorari . - In all cases when only questions of
law are raised or involved, the appeal shall be to the Supreme
Court by petition for review on certiorari under Rule
45. (Emphasis supplied)
Thus, petitioner resorted to the erroneous remedy when she
filed a petition for certiorari under Rule 65, when the proper
mode
should
have
been
a
Petition
for
Review
on Certiorari under Rule 45. Moreover, under Section 2, Rule
45 of the same Rules, the period to file a Petition for Review is
15 days from notice of the order appealed from. In the instant
case, petitioner received the questioned order of the trial
court on November 6, 2007, hence, she had only up to
November 21, 2007 to file the petition. However, the same
was filed only on January 4, 2008, or 43 days late.
Consequently, petitioner's failure to file an appeal within the
reglementary period rendered the order of the trial court final
and executory.
The perfection of an appeal in the manner and within the
period prescribed by law is mandatory. Failure to conform to
the rules regarding appeal will render the judgment final and
executory and beyond the power of the Court's review.
Jurisprudence mandates that when a decision becomes final
and executory, it becomes valid and binding upon the parties
and their successors in interest. Such decision or order can no
longer be disturbed or reopened no matter how erroneous it
may have been.17
Petitioner's resort to a petition under Rule 65 is obviously a
play to make up for the loss of the right to file an appeal via a
petition under Rule 45. However, a special civil action under
Rule 65 can not cure petitioner's failure to timely file a Petition
for Review on Certiorari under Rule 45 of the Rules of Court.
Rule 65 is an independent action that cannot be availed of as
a substitute for the lost remedy of an ordinary appeal,
including that under Rule 45, especially if such loss or lapse
was occasioned by one's own neglect or error in the choice of
remedies.18
Moreover, even if we assume that a petition under Rule 65 is
the proper remedy, the petition is still dismissible.
We note that no motion for reconsideration of the November
5, 2007 order of the trial court was filed prior to the filing of
the instant petition. The settled rule is that a motion for
reconsideration is a sine qua noncondition for the filing of a
Petition for Certiorari. The purpose is to grant the public
respondent an opportunity to correct any actual or perceived
error attributed to it by the re-examination of the legal and
factual circumstances of the case. Petitioner's failure to file a

32
motion for reconsideration deprived the trial court of the
opportunity to rectify an error unwittingly committed or to
vindicate itself of an act unfairly imputed. Besides, a motion
for reconsideration under the present circumstances is the
plain, speedy and adequate remedy to the adverse judgment
of the trial court.19
Petitioner also blatantly disregarded the rule on hierarchy of
courts. Although the Supreme Court, Regional Trial Courts, and
the Court of Appeals have concurrent jurisdiction to issue
writs
of certiorari,
prohibition, mandamus,
quo
warranto, habeas corpus and injunction, such concurrence
does not give the petitioner unrestricted freedom of choice of
court forum. Recourse should have been made first with the
Court of Appeals and not directly to this Court. 20
True, litigation is not a game of technicalities. It is equally
true, however, that every case must be presented in
accordance with the prescribed procedure to ensure an
orderly and speedy administration of justice. 21 The failure
therefore of petitioner to comply with the settled procedural
rules justifies the dismissal of the present petition.
Finally, we find that the trial court correctly granted
respondent's petition for issuance of a writ of preliminary
injunction. Section 3, Rule 58, of the Rules of Court, provides:
SEC. 3. Grounds for issuance of preliminary injunction. - A
preliminary injunction may be granted by the court when it is
established:
(a) That the applicant is entitled to the relief demanded, and
the whole or part of such relief consists in restraining the
commission or continuance of the acts complained of, or in
the performance of an act or acts, either for a limited period
or perpetually;
(b) That the commission, continuance or non-performance of
the act or acts complained of during the litigation would
probably work injustice to the applicant; or
(c) That a party, court, or agency or a person is doing,
threatening, or attempting to do, or is procuring or suffering
to be done, some act or acts probably in violation of the rights
of the applicant respecting the subject of the action or
proceeding, and tending to render the judgment ineffectual.
The requisites for the issuance of a writ of preliminary
injunction are: (1) the existence of a clear and unmistakable
right that must be protected; and (2) an urgent and
paramount necessity for the writ to prevent serious damage. 22
The urgency and paramount necessity for the issuance of a
writ of injunction becomes relevant in the instant case
considering that what is being enjoined is the sale by public
auction of the properties of Petron amounting to at least P1.7
billion and which properties are vital to its business
operations. If at all, the repercussions and far-reaching
implications of the sale of these properties on the operations
of Petron merit the issuance of a writ of preliminary injunction
in its favor.
We are not unaware of the doctrine that taxes are the
lifeblood of the government, without which it can not properly
perform its functions; and that appeal shall not suspend the
collection of realty taxes. However, there is an exception to
the foregoing rule, i.e., where the taxpayer has shown a clear
and unmistakable right to refuse or to hold in abeyance the
payment of taxes. In the instant case, we note that
respondent contested the revised assessment on the following
grounds: that the subject assessment pertained to properties
that have been previously declared; that the assessment
covered periods of more than 10 years which is not allowed

under the LGC; that the fair market value or replacement cost
used by petitioner included items which should be properly
excluded; that prompt payment of discounts were not
considered in determining the fair market value; and that the
subject assessment should take effect a year after or on
January 1, 2008. To our mind, the resolution of these issues
would have a direct bearing on the assessment made by
petitioner. Hence, it is necessary that the issues must first be
passed upon before the properties of respondent is sold in
public auction.
In addition to the fact that the issues raised by the respondent
would have a direct impact on the validity of the assessment
made by the petitioner, we also note that respondent has
posted a surety bond equivalent to the amount of the
assessment due. The Rules of Procedure of the LBAA,
particularly Section 7, Rule V thereof, provides:
Section 7. Effect of Appeal on Collection of Taxes. - An appeal
shall not suspend the collection of the corresponding realty
taxes on the real property subject of the appeal as assessed
by the Provincial, City or Municipal Assessor, without prejudice
to the subsequent adjustment depending upon the outcome
of the appeal. An appeal may be entertained but the hearing
thereof shall be deferred until the corresponding taxes due on
the real property subject of the appeal shall have been paid
under protest or the petitioner shall have given a surety bond,
subject to the following conditions:
(1) the amount of the bond must not be less than the total
realty taxes and penalties due as assessed by the assessor
nor more than double said amount;
(2) the bond must be accompanied by a certification from the
Insurance Commissioner (a) that the surety is duly authorized
to issue such bond; (a) that the surety bond is approved by
and registered with said Commission; and (c) that the amount
covered by the surety bond is within the writing capacity of
the surety company; andcralawlibrary
(3) the amount of the bond in excess of the surety company's
writing capacity, if any, must be covered by Reinsurance
Binder, in which case, a certification to this effect must
likewise accompany the surety bond.
Corollarily, Section 11 of Republic Act No. 9282, 23 which
amended Republic Act No. 1125 (The Law Creating the Court
of Tax Appeals) provides:
Section 11. Who may Appeal; Mode of Appeal; Effect of
Appeal; xxx
No appeal taken to the Court of Appeals from the Collector of
Internal Revenue x x x shall suspend the payment, levy,
distraint, and/or sale of any property for the satisfaction of his
tax liability as provided by existing law. Provided, however,
That when in the opinion of the Court the collection by
the aforementioned government agencies may jeopardize the
interest of the Government and/or the taxpayer the Court at
any stage of the processing may suspend the collection and
require the taxpayer either to deposit the amount claimed or
to file a surety bond for not more than double the amount
with the Court.
WHEREFORE, in view of all the foregoing, the instant petition
is DISMISSED.
SO ORDERED.