GENERAL PRINCIPLES OF TAXATION PART 1

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

1. G.R. No. 120082 September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,
vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial
Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R.
OSMEA, and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of 22
March 1995 1 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition
for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu International Airport
Authority vs. City of Cebu", and its order of 4, May 1995 2denying the motion to reconsider the
decision.
We resolved to give due course to this petition for its raises issues dwelling on the scope of the
taxing power of local government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of
Republic Act No. 6958, mandated to "principally undertake the economical, efficient
and effective control, management and supervision of the Mactan International Airport
in the Province of Cebu and the Lahug Airport in Cebu City, . . . and such other Airports
as may be established in the Province of Cebu . . . (Sec. 3, RA 6958). It is also
mandated to:
a) encourage, promote and develop international and
domestic air traffic in the Central Visayas and
Mindanao regions as a means of making the regions
centers of international trade and tourism, and
accelerating the development of the means of
transportation and communication in the country; and
b) upgrade the services and facilities of the airports
and to formulate internationally acceptable standards
of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from
payment of realty taxes in accordance with Section 14 of its Charter.
Sec. 14. Tax Exemptions. The authority shall be exempt from realty
taxes imposed by the National Government or any of its political
subdivisions, agencies and instrumentalities . . .
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the
Treasurer of the City of Cebu, demanded payment for realty taxes on several parcels of
land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474,
109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A), located at
Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total amount of
P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified, claiming
in its favor the aforecited Section 14 of RA 6958 which exempt it from payment of
realty taxes. It was also asserted that it is an instrumentality of the government
performing governmental functions, citing section 133 of the Local Government Code
of 1991 which puts limitations on the taxing powers of local government units:
Sec. 133. Common Limitations on the Taxing Powers of Local
Government Units. Unless otherwise provided herein, the exercise of
the taxing powers of provinces, cities, municipalities, and barangay
shall not extend to the levy of the following:
a) . . .
xxx xxx xxx
o) Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, and
local government units. (Emphasis supplied)
Respondent City refused to cancel and set aside petitioner's realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax exemption
privilege has been withdrawn by virtue of Sections 193 and 234 of the Local
Governmental Code that took effect on January 1, 1992:
Sec. 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons
whether natural or juridical,including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under RA No. 6938, nonstock, and non-profit hospitals and educational institutions,are hereby withdrawn upon
the effectivity of this Code. (Emphasis supplied)
xxx xxx xxx
Sec. 234. Exemptions from Real Property taxes. . . .
(a) . . .

xxx xxx xxx

(c) . . .
Except as provided herein, any exemption from payment of real
property tax previously granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled
corporations are hereby withdrawn upon the effectivity of this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account "under protest" and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu,
Branch 20, on December 29, 1994. MCIAA basically contended that the taxing powers
of local government units do not extend to the levy of taxes or fees of any kind on
an instrumentality of the national government. Petitioner insisted that while it is indeed
a government-owned corporation, it nonetheless stands on the same footing as an
agency or instrumentality of the national government. Petitioner insisted that while it is
indeed a government-owned corporation, it nonetheless stands on the same footing as
an agency or instrumentality of the national government by the very nature of its
powers and functions.
Respondent City, however, asserted that MACIAA is not an instrumentality of the
government but merely a government-owned corporation performing proprietary
functions As such, all exemptions previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992. 3
The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995, 4 the trial court dismissed the petition in light of its findings, to
wit:
A close reading of the New Local Government Code of 1991 or RA 7160 provides the
express cancellation and withdrawal of exemption of taxes by government owned and
controlled corporation per Sections after the effectivity of said Code on January 1,
1992, to wit: [proceeds to quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent City Government of
Cebu are exempted from paying realty taxes in view of the exemption granted under
RA 6958 to pay the same (citing Section 14 of RA 6958).
However, RA 7160 expressly provides that "All general and special laws, acts, city
charters, decress [sic], executive orders, proclamations and administrative regulations,
or part or parts thereof which are inconsistent with any of the provisions of this Code
are hereby repealed or modified accordingly." ([f], Section 534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed by
the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby declared
the policy of the State that the territorial and political subdivisions of the State shall
enjoy genuine and meaningful local autonomy to enable them to attain their fullest
development as self-reliant communities and make them more effective partners in the
attainment of national goals. Towards this end, the State shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization whereby local government units shall be given more powers,
authority, responsibilities, and resources. The process of decentralization shall proceed
from the national government to the local government units. . . . 5
Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the
petitioner filed the instant petition based on the following assignment of errors:
I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH GOVERNMENT POWERS AND FUNCTIONS
WHICH PLACE IT IN THE SAME CATEGORY AS AN INSTRUMENTALITY OR
AGENCY OF THE GOVERNMENT.
II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE
TO PAY REAL PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although it is a government-owned or
controlled corporation it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to perform
governmental functions primarily to promote certain aspects of the economic life of the
people. 6 Considering its task "not merely to efficiently operate and manage the Mactan-Cebu
International Airport, but more importantly, to carry out the Government policies of promoting
and developing the Central Visayas and Mindanao regions as centers of international trade and
tourism, and accelerating the development of the means of transportation and communication
in the country," 7 and that it is an attached agency of the Department of Transportation and
Communication (DOTC), 8 the petitioner "may stand in [sic] the same footing as an agency or
instrumentality of the national government." Hence, its tax exemption privilege under Section
14 of its Charter "cannot be considered withdrawn with the passage of the Local Government
Code of 1991 (hereinafter LGC) because Section 133 thereof specifically states that the taxing
powers of local government units shall not extend to the levy of taxes of fees or charges of any
kind on the national government its agencies and instrumentalities."
As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco
vs. Philippine Amusement and Gaming Corporation; 9
Local governments have no power to tax instrumentalities of the National Government.
PAGCOR is a government owned or controlled corporation with an original character,
PD 1869. All its shares of stock are owned by the National Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.

The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (McCulloch v. Maryland, 4
Wheat 316, 4 L Ed. 579).
This doctrine emanates from the "supremacy" of the National Government over local
government.
Justice Holmes, speaking for the Supreme Court, make references to the entire
absence of power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in
such a way as to prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them. (Antieau Modern Constitutional
Law, Vol. 2, p. 140)
Otherwise mere creature of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the
power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to tax
which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it. (Emphasis supplied)
It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a governmental
function as against one performing merely proprietary ones such that the exemption privilege
withdrawn under the said Code would apply toall government corporations." For it is clear from
Section 133, in relation to Section 234, of the LGC that the legislature meant to
exclude instrumentalities of the national government from the taxing power of the local
government units.
In its comment respondent City of Cebu alleges that as local a government unit and a political
subdivision, it has the power to impose, levy, assess, and collect taxes within its jurisdiction.
Such power is guaranteed by the Constitution 10 and enhanced further by the LGC. While it may
be true that under its Charter the petitioner was exempt from the payment of realty
taxes, 11 this exemption was withdrawn by Section 234 of the LGC. In response to the
petitioner's claim that such exemption was not repealed because being an instrumentality of
the National Government, Section 133 of the LGC prohibits local government units from
imposing taxes, fees, or charges of any kind on it, respondent City of Cebu points out that the
petitioner is likewise a government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned or controlled corporations performing governmental
and purely proprietary functions. Respondent city of Cebu urges this the Manila International
Airport Authority is a governmental-owned corporation, 12 and to reject the application of Basco
because it was "promulgated . . . before the enactment and the singing into law of R.A. No.
7160," and was not, therefore, decided "in the light of the spirit and intention of the framers of
the said law.
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only
in the responsibility of the legislature which imposes the tax on the constituency who are to

pay it. Nevertheless, effective limitations thereon may be imposed by the people through their
Constitutions. 13 Our Constitution, for instance, provides that the rule of taxation shall be
uniform and equitable and Congress shall evolve a progressive system of taxation. 14 So potent
indeed is the power that it was once opined that "the power to tax involves the power to
destroy." 15 Verily, taxation is a destructive power which interferes with the personal and
property for the support of the government. Accordingly, tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer. 16 But since taxes are
what we pay for civilized society, 17 or are the lifeblood of the nation, the law frowns against
exemptions from taxation and statutes granting tax exemptions are thus construed strictissimi
juris against the taxpayers and liberally in favor of the taxing authority. 18 A claim of exemption
from tax payment must be clearly shown and based on language in the law too plain to be
mistaken. 19 Elsewise stated, taxation is the rule, exemption therefrom is the
exception. 20 However, if the grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply because the practical effect of the
exemption is merely to reduce the amount of money that has to be handled by the
government in the course of its operations. 21
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before,
but pursuant to direct authority conferred by Section 5, Article X of the Constitution. 22 Under
the latter, the exercise of the power may be subject to such guidelines and limitations as the
Congress may provide which, however, must be consistent with the basic policy of local
autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from
the payment of realty taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of
the taxing authority. The only exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the Constitution. 23
The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise
by local government units of their power to tax, the scope thereof or its limitations, and the
exemption from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:
Sec. 133. Common Limitations on the Taxing Power of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, "inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise provided herein

(d) Customs duties, registration fees of vessels and wharfage on

wharves, tonnage dues, and all other kinds of customs fees charges
and dues except wharfage on wharves constructed and maintained by
the local government unit concerned:
(e) Taxes, fees and charges and other imposition upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise or charges for wharfages, tolls for
bridges or otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;
(f) Taxes fees or charges on agricultural and aquatic products when
sold by marginal farmers or fishermen;
(g) Taxes on business enterprise certified to be the Board of Investment
as pioneer or non-pioneer for a period of six (6) and four (4) years,
respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal
Revenue Code, as amended, and taxes, fees or charges on petroleum
products;
(i) Percentage or value added tax (VAT) on sales, barters or exchanges
or similar transactions on goods or services except as otherwise
provided herein;
(j) Taxes on the gross receipts of transportation contractor and person
engage in the transportation of passengers of freight by hire and
common carriers by air, land, or water, except as provided in this code;
(k) Taxes on premiums paid by ways reinsurance or retrocession;
(l) Taxes, fees, or charges for the registration of motor vehicles and for
the issuance of all kinds of licenses or permits for the driving of
thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine product actually
exported, except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprise and Cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the "Cooperative Code of the Philippines; and
(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL
GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL
GOVERNMENT UNITS. (emphasis supplied)
Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges"
referred to are "of any kind", hence they include all of these, unless otherwise provided by the
LGC. The term "taxes" is well understood so as to need no further elaboration, especially in the

light of the above enumeration. The term "fees" means charges fixed by law or Ordinance for
the regulation or inspection of business activity, 24while "charges" are pecuniary liabilities such
as rents or fees against person or property. 25
Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section
232. It reads as follows:
Sec. 232. Power to Levy Real Property Tax. A province or city or a municipality within
the Metropolitan Manila Area may levy on an annual ad valorem tax on real property
such as land, building, machinery and other improvements not hereafter specifically
exempted.
Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons, including
government owned and controlled corporations, except as provided therein. It provides:
Sec. 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof had been
granted, for reconsideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents
appurtenants thereto, mosques nonprofits or religious cemeteries and
all lands, building and improvements actually, directly, and exclusively
used for religious charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided
for under R.A. No. 6938; and;
(e) Machinery and equipment used for pollution control and
environmental protection.
Except as provided herein, any exemptions from payment of real
property tax previously granted to or presently enjoyed by, all persons
whether natural or juridical, including all government owned or
controlled corporations are hereby withdrawn upon the effectivity of
his Code.
These exemptions are based on the ownership, character, and use of the property. Thus;
(a) Ownership Exemptions. Exemptions from real property taxes on the
basis of ownership are real properties owned by: (i) the Republic, (ii) a
province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi)
registered cooperatives.

(b) Character Exemptions. Exempted from real property taxes on the

basis of their character are: (i) charitable institutions, (ii) houses and
temples of prayer like churches, parsonages or convents appurtenant
thereto, mosques, and (iii) non profit or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the basis
of the actual, direct and exclusive use to which they are devoted are:
(i) all lands buildings and improvements which are actually, directed
and exclusively used for religious, charitable or educational purpose;
(ii) all machineries and equipment actually, directly and exclusively
used or by local water districts or by government-owned or controlled
corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power; and (iii) all machinery
and equipment used for pollution control and environmental
protection.
To help provide a healthy environment in the midst of the modernization of the
country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously
granted to natural or juridical persons including government-owned or
controlled corporations are withdrawn upon the effectivity of the
Code. 26
Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It
provides:
Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
code, tax exemptions or incentives granted to or presently enjoyed by all persons,
whether natural or juridical, including government-owned, or controlled corporations,
except local water districts, cooperatives duly registered under R.A. 6938, non stock
and non profit hospitals and educational constitutions, are hereby withdrawn upon the
effectivity of this Code.
On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:
Sec. 192. Authority to Grant Tax Exemption Privileges. Local government units may,
through ordinances duly approved, grant tax exemptions, incentives or reliefs under
such terms and conditions as they may deem necessary.
The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions
and the exceptions thereto. The use of exceptions of provisos in these section, as shown by the
following clauses:
(1) "unless otherwise provided herein" in the opening paragraph of
Section 133;
(2) "Unless otherwise provided in this Code" in section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the aforementioned
clause in section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise
provided herein," with the "herein" to mean, of course, the section, it should have used the
clause "unless otherwise provided in this Code." The former results in absurdity since the
section itself enumerates what are beyond the taxing powers of local government units and,
where exceptions were intended, the exceptions were explicitly indicated in the text. For
instance, in item (a) which excepts the income taxes "when livied on banks and other financial
institutions", item (d) which excepts "wharfage on wharves constructed and maintained by the
local government until concerned"; and item (1) which excepts taxes, fees, and charges for the
registration and issuance of license or permits for the driving of "tricycles". It may also be
observed that within the body itself of the section, there are exceptions which can be found
only in other parts of the LGC, but the section interchangeably uses therein the clause "except
as otherwise provided herein" as in items (c) and (i), or the clause "except as otherwise
provided herein" as in items (c) and (i), or the clause "excepts as provided in this Code" in item
(j). These clauses would be obviously unnecessary or mere surplus-ages if the opening clause
of the section were" "Unless otherwise provided in this Code" instead of "Unless otherwise
provided herein". In any event, even if the latter is used, since under Section 232 local
government units have the power to levy real property tax, except those exempted therefrom
under Section 234, then Section 232 must be deemed to qualify Section 133.
Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general
rule, as laid down in Section 133 the taxing powers of local government units cannot extend to
the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its
agencies and instrumentalties, and local government units"; however, pursuant to Section 232,
provinces, cities, municipalities in the Metropolitan Manila Area may impose the real property
tax except on, inter alia, "real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial used thereof has been granted, for
consideration or otherwise, to a taxable person", as provided in item (a) of the first paragraph
of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical
persons, including government-owned and controlled corporations, Section 193 of the LGC
prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except
upon the effectivity of the LGC, except those granted to local water districts, cooperatives duly
registered under R.A. No. 6938, non stock and non-profit hospitals and educational institutions,
and unless otherwise provided in the LGC. The latter proviso could refer to Section 234, which
enumerates the properties exempt from real property tax. But the last paragraph of Section
234 further qualifies the retention of the exemption in so far as the real property taxes are
concerned by limiting the retention only to those enumerated there-in; all others not included
in the enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as the
real property is owned by the Republic of the Philippines, or any of its political subdivisions
covered by item (a) of the first paragraph of Section 234, the exemption is withdrawn if the
beneficial use of such property has been granted to taxable person for consideration or
otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the
LGC, exemptions from real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and the
petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its

exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge
under any of the exceptions provided in Section 234, but not under Section 133, as it now
asserts, since, as shown above, the said section is qualified by Section 232 and 234.
In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing
powers of the local government units cannot extend to the levy of:
(o) taxes, fees, or charges of any kind on the National Government, its
agencies, or instrumentalities, and local government units.
I must show that the parcels of land in question, which are real property, are any one of those
enumerated in Section 234, either by virtue of ownership, character, or use of the property.
Most likely, it could only be the first, but not under any explicit provision of the said section, for
one exists. In light of the petitioner's theory that it is an "instrumentality of the Government", it
could only be within be first item of the first paragraph of the section by expanding the scope
of the terms Republic of the Philippines" to embrace . . . . . . "instrumentalities" and
"agencies" or expediency we quote:
(a) real property owned by the Republic of the Philippines, or any of the
Philippines, or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.
This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions the
word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political subdivision
"in Section 234(a).
The terms "Republic of the Philippines" and "National Government" are not interchangeable.
The former is boarder and synonymous with "Government of the Republic of the Philippines"
which the Administrative Code of the 1987 defines as the "corporate governmental entity
though which the functions of the government are exercised through at the Philippines,
including, saves as the contrary appears from the context, the various arms through which
political authority is made effective in the Philippines, whether pertaining to the autonomous
reason, the provincial, city, municipal or barangay subdivision or other forms of local
government." 27 These autonomous regions, provincial, city, municipal or barangay
subdivisions" are the political subdivision. 28
On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments." 29 The National
Government then is composed of the three great departments the executive, the legislative
and the judicial. 30
An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit therein;" 31 while an "instrumentality"
refers to "any agency of the National Government, not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy; usually

through a charter. This term includes regulatory agencies, chartered institutions and
government-owned and controlled corporations". 32
If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption
from payment of real property taxes under the last sentence of the said section to the
agencies and instrumentalities of the National Government mentioned in Section 133(o), then
it should have restated the wording of the latter. Yet, it did not Moreover, that Congress did not
wish to expand the scope of the exemption in Section 234(a) to include real property owned by
other instrumentalities or agencies of the government including government-owned and
controlled corporations is further borne out by the fact that the source of this exemption is
Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax Code, which reads:
Sec 40. Exemption from Real Property Tax. The exemption shall be as follows:
(a) Real property owned by the Republic of the
Philippines or any of its political subdivisions and any
government-owned or controlled corporations so
exempt by is charter: Provided, however, that this
exemption shall not apply to real property of the above
mentioned entities the beneficial use of which has
been granted, for consideration or otherwise, to a
taxable person.
Note that as a reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of exemption from payment
of real property taxes in the last paragraph of property taxes in the last paragraph of Section
234. These policy considerations are consistent with the State policy to ensure autonomy to
local governments 33 and the objective of the LGC that they enjoy genuine and meaningful
local autonomy to enable them to attain their fullest development as self-reliant communities
and make them effective partners in the attainment of national goals. 34 The power to tax is the
most effective instrument to raise needed revenues to finance and support myriad activities of
local government units for the delivery of basic services essential to the promotion of the
general welfare and the enhancement of peace, progress, and prosperity of the people. It may
also be relevant to recall that the original reasons for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other units of
government were that such privilege resulted in serious tax base erosion and distortions in the
tax treatment of similarly situated enterprises, and there was a need for this entities to share
in the requirements of the development, fiscal or otherwise, by paying the taxes and other
charges due from them. 35
The crucial issues then to be addressed are: (a) whether the parcels of land in question belong
to the Republic of the Philippines whose beneficial use has been granted to the petitioner, and
(b) whether the petitioner is a "taxable person".
Section 15 of the petitioner's Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works, or air operations,

including all equipment which are necessary for the operations of air navigation,
acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication, the
approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the authority. The
authority may assist in the maintenance of the Air Transportation Office equipment.
The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International
AirPort in the Province of Cebu", 36 which belonged to the Republic of the Philippines, then
under the Air Transportation Office (ATO).37
It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands"
among other things, to the petitioner and not just the transfer of the beneficial use thereof,
with the ownership being retained by the Republic of the Philippines.
This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate owned
and/or administered by the airports." 38 Hence, the petitioner is now the owner of the land in
question and the exception in Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It
was only exempted from the payment of real property taxes. The grant of the privilege only in
respect of this tax is conclusive proof of the legislative intent to make it a taxable person
subject to all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable person for purposes of real property
tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be an
"agency" or "instrumentality" of the Government, a taxable person for such purpose in view of
the withdrawal in the last paragraph of Section 234 of exemptions from the payment of real
property taxes, which, as earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine
Amusement and Gaming Corporation 39 is unavailing since it was decided before the effectivity
of the LGC. Besides, nothing can prevent Congress from decreeing that even instrumentalities
or agencies of the government performing governmental functions may be subject to tax.
Where it is done precisely to fulfill a constitutional mandate and national policy, no one can
doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and order of the Regional
Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC
2. G.R. No. 160756

March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondents.
DECISION
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424 2 and
the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said
provision and those involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded
former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and
then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98.
Petitioner argues that the MCIT violates the due process clause because it levies income tax even if
there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98,
and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the
collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that
these revenue regulations are contrary to law for two reasons: first, they ignore the different treatment
by RA 8424 of ordinary assets and capital assets and second, respondent Secretary of Finance has no
authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of
the real properties classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the
due process clause because, like the MCIT, the government collects income tax even when the net
income has not yet been determined. They contravene the equal protection clause as well because the
CWT is being levied upon real estate enterprises but not on other business enterprises, more
particularly those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as
ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.
Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT
of 2% of its gross income when such MCIT is greater than the normal corporate income tax imposed
under Section 27(A).4If the regular income tax is higher than the MCIT, the corporation does not pay
the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and credited against the
normal income tax for the three immediately succeeding taxable years. Section 27(E) of RA 8424
provides:
Section 27 (E). [MCIT] on Domestic Corporations. (1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income
tax as computed under Subsection (A) of this Section shall be carried forward and credited
against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, the necessary rules and regulations that shall define the terms and conditions
under which he may suspend the imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection (E)
hereof, the term gross income shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.
For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually
sold including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or
warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales
returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, that in the case of banks, "cost of
services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E). 5 The
pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby
imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following
the taxable year in which such corporation commenced its business operations. The MCIT shall be
imposed whenever such corporation has zero or negative taxable income or whenever the amount of
minimum corporate income tax is greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and
thereafter.
xxx

xxx

xxx

(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax as
computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited
against the normal income tax for the three (3) immediately succeeding taxable years.
xxx

xxx

xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR,
promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of
taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of
real property, other than capital assets, by persons residing in the Philippines and habitually engaged
in the real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx

xxx

xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of. Real property, other than capital assets, sold by an individual,
corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in
the real estate business in accordance with the following schedule
Exempt
Those which are exempt from a
withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.

1.5%
With a selling price of five hundred
thousand pesos (P500,000.00) or
less.

3.0%
With a selling price of more than five
hundred thousand pesos
(P500,000.00) but not more than two
million pesos (P2,000,000.00).

5.0%
With selling price of more than two
million pesos (P2,000,000.00)

xxx

xxx

xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange, as determined in the Income Tax
Regulations shall be used.
Where the consideration or part thereof is payable on installment, no withholding tax is required to be
made on the periodic installment payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld
on the last installment or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax
shall be deducted and withheld by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx

xxx

xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross
selling price/total amount of consideration or the fair market value determined in accordance with
Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or
exchange of real property, other than capital asset, shall be imposed upon the withholding
agent,/buyer, in accordance with the following schedule:
Exempt
Where the seller/transferor is exempt from [CWT] in
accordance with Sec. 2.57.5 of these regulations.

Upon the following values of real property, where the

seller/transferor is habitually engaged in the real estate
business.
1.5%
With a selling price of Five Hundred Thousand Pesos
(P500,000.00) or less.
3.0%
With a selling price of more than Five Hundred Thousand
Pesos (P500,000.00) but not more than Two Million Pesos
(P2,000,000.00).

5.0%
With a selling price of more than two Million Pesos
(P2,000,000.00).

xxx

xxx

xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange shall be considered as the
consideration.
xxx

xxx

xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules
shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not
exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every
installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the
installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall
withhold the tax based on the gross selling price or fair market value of the property, whichever is
higher, on the first installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT]
due on the sale, transfer or exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified
that such transfers and conveyances have been reported and the taxes thereof have been duly paid: 7
Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfers and conveyances have been reported and
the expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully
paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining
whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT,
among others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines;
xxx

xxx

xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to
the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price
or current fair market value as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable income.
xxx

xxx

xxx

xxx

xxx

c. In the case of domestic corporations.

xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98],
as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec.
27(E) of the Code, whichever is applicable.
xxx

xxx

xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question
before the court must be ripe for adjudication; (3) the person challenging the validity of the act must
have standing to do so; (4) the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis mota of the case.9
Respondents aver that the first three requisites are absent in this case. According to them, there is no
actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed
by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege
that its members have shut down their businesses as a result of the payment of the MCIT or CWT.
Petitioner has raised concerns in mere abstract and hypothetical form without any actual, specific and
concrete instances cited that the assailed law and revenue regulations have actually and adversely
affected it. Lacking empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that
does not really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims
which is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or
dispute.11 On the other hand, a question is considered ripe for adjudication when the act being
challenged has a direct adverse effect on the individual challenging it. 12
Contrary to respondents assertion, we do not have to wait until petitioners members have shut down
their operations as a result of the MCIT or CWT. The assailed provisions are already being
implemented. As we stated in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA)
v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said
to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken judicial duty. 14
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle
such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and builders in the Philippines.
Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material
interest or any wrong that it may suffer from the enforcement of [the assailed provisions]. 15
Legal standing or locus standi is a partys personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. 16 In Holy
Spirit Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing
because its members stood to be injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute
that the individual members of petitioner association are residents of the NGC. As such they are
covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as
regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus,
petitioner association may assail those provisions in the IRR which it believes to be unfavorable to the
rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising
from the enforcement of the IRR in that they have been disqualified and eliminated from the selection
process.18
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing when paramount public interest is
involved.19 The questioned MCIT and CWT affect not only petitioners but practically all domestic
corporate taxpayers in our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance of this petition. 20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation
system. It came about as a result of the perceived inadequacy of the self-assessment system in
capturing the true income of corporations.21 It was devised as a relatively simple and effective
revenue-raising instrument compared to the normal income tax which is more difficult to control and
enforce. It is a means to ensure that everyone will make some minimum contribution to the support of
the public sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting
constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost
of government. In this regard, the Tax Reform Act introduces for the first time a new concept called the
[MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for
administrative convenience. This will go a long way in ensuring that corporations will pay their just
share in supporting our public life and our economic advancement. 22
Domestic corporations owe their corporate existence and their privilege to do business to the
government. They also benefit from the efforts of the government to improve the financial market and
to ensure a favorable business climate. It is therefore fair for the government to require them to make
a reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while having large turn-overs,
report minimal or negative net income resulting in minimal or zero income taxes year in and year out,
through under-declaration of income or over-deduction of expenses otherwise called tax shelters. 23

Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed
the [MCIT]. Because from experience too, you have corporations which have been losing year in and
year out and paid no tax. So, if the corporation has been losing for the past five years to ten years,
then that corporation has no business to be in business. It is dead. Why continue if you are losing year
in and year out? So, we have this provision to avoid this type of tax shelters, Your Honor. 24
The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements
and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are
allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross
income, it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated
and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax
rate was lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated
into the law:
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major
capital expenditures, the imposition of the MCIT commences only on the fourth taxable year
immediately following the year in which the corporation commenced its operations. 25 This grace period
allows a new business to stabilize first and make its ventures viable before it is subjected to the MCIT. 26
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax
which shall be credited against the normal income tax for the three immediately succeeding years. 27
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation system, several other
countries already had their own system of minimum corporate income taxation. Our lawmakers noted
that most developing countries, particularly Latin American and Asian countries, have the same form
of safeguards as we do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent
(0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and
exemptions. Of course the different countries have different basis for that minimum income tax.
The other thing youll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries. 29
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their
own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of
law. It explains that gross income as defined under said provision only considers the cost of goods sold
and other direct expenses; other major expenditures, such as administrative and interest expenses
which are equally necessary to produce gross income, were not taken into account. 31 Thus, pegging the
tax base of the MCIT to a corporations gross income is tantamount to a confiscation of capital because
gross income, unlike net income, is not "realized gain."32

We disagree.
Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor
endure. The exercise of taxing power derives its source from the very existence of the State whose
social contract with its citizens obliges it to promote public interest and the common good. 33
Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially,
this means that in the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation. 36 It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it
should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very
nature no limits, so that the principal check against its abuse is to be found only in the responsibility of
the legislature (which imposes the tax) to its constituency who are to pay it. 37 Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation
carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of
life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the
due process clause may properly be invoked to invalidate, in appropriate cases, a revenue
measure39 when it amounts to a confiscation of property.40 But in the same case, we also explained
that we will not strike down a revenue measure as unconstitutional (for being violative of the due
process clause) on the mere allegation of arbitrariness by the taxpayer. 41 There must be a factual
foundation to such an unconstitutional taint.42 This merely adheres to the authoritative doctrine that,
where the due process clause is invoked, considering that it is not a fixed rule but rather a broad
standard, there is a need for proof of such persuasive character. 43
Petitioner is correct in saying that income is distinct from capital. 44 Income means all the wealth which
flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at
one distinct point in time while income denotes a flow of wealth during a definite period of
time.45 Income is gain derived and severed from capital.46 For income to be taxable, the following
requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation. 47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.
In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax
on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods48 and other direct expenses from gross sales.
Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net
income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the
amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporations gross income.
Besides, there is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate. 49

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found
in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to
uniformity of taxation.50
The United States has a similar alternative minimum tax (AMT) system which is generally
characterized by a lower tax rate but a broader tax base.51 Since our income tax laws are of American
origin, interpretations by American courts of our parallel tax laws have persuasive effect on the
interpretation of these laws.52 Although our MCIT is not exactly the same as the AMT, the policy behind
them and the procedure of their implementation are comparable. On the question of the AMTs
constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v.
Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.
xxx

xxx

xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional. 54
The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a legitimate governmental end to which the AMT bore a
reasonable relation.55
American courts have also emphasized that Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it chooses to tax. 56 This is because
deductions are a matter of legislative grace.57
Absent any other valid objection, the assignment of gross income, instead of net income, as the tax
base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its
members nor does it present empirical data to show that the implementation of the MCIT resulted in
the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is
arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional simply because of its
yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely affects property
rights.59 The party alleging the laws unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the
MCIT is being imposed and collected even when there is actually a loss, or a zero or negative taxable
income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax
due from such corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation

incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still
subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on
gross income notwithstanding the amount of the net income. But the law also states that the MCIT is to
be paid only if it is greater than the normal net income. Obviously, it may well be the case that the
MCIT would be less than the net income of the corporation which posts a zero or negative taxable
income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including income taxes) are
collected.61 Under Section 57 of RA 8424, the types of income subject to withholding tax are divided
into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax
at source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT) and
maintains that the revenue regulations on the collection of CWT on sale of real estate categorized as
ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424,
contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003
were promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"62 because they ignore such distinctions. Petitioners conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value (FMV)
of the real estate as basis for determining the income tax for the sale of real estate classified as
ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently,
respondents cannot disregard the distinctions set by the legislators as regards the tax base, modes of
collection and payment of taxes on income from the sale of capital and ordinary assets.
Petitioners arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real
Property Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such
authority is subject to the limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement. 64 It is well-settled that an
administrative agency cannot amend an act of Congress. 65
We have long recognized that the method of withholding tax at source is a procedure of collecting
income tax which is sanctioned by our tax laws.66 The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to improve the governments cash
flow.67 This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated means
and remedies.68
Respondent Secretary has the authority to require the withholding of a tax on items of income payable
to any person, national or juridical, residing in the Philippines. Such authority is derived from Section
57(B) of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source.
xxx

xxx

xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B)
to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding
tax is imposed on the income payable and the tax is creditable against the income tax liability of the
taxpayer for the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in
the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate
business income tax from net income to GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
possible tax obligation. 69 They are installments on the annual tax which may be due at the end of the
taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary
assets remains to be the entitys net income imposed under Section 24 (resident individuals) or
Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less
allowable deductions. The CWT is to be deducted from the net income tax payable by the taxpayer at
the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax
base for the sale of real property classified as ordinary assets remains to be the net taxable income:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;
xxx

xxx

xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines;
xxx

xxx

xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current
[FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable income.
xxx

xxx

xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98],
as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu

of the ordinary income tax, however, domestic corporations may become subject to the [MCIT] under
Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the
taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the
tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than
the tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is
taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the
tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the
end of the taxable year. Instead, said withholding agents knowledge and privity are limited only to the
particular transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as
these are the only factors reasonably known or knowable by him in connection with the performance of
his duties as a withholding agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property
categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and
flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its GSP or
FMV. This final tax is also withheld at source. 72
The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary
assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are
distinguished as follows:

FWT

CWT

a) The amount of income tax withheld by

the withholding agent is constituted as a
full and final payment of the income tax
due from the payee on the said income.

a) Taxes withheld on certain income

payments are intended to equal or at least
approximate the tax due of the payee on
said income.

b)The liability for payment of the tax rests

primarily on the payor as a withholding
agent.

b) Payee of income is required to report

the income and/or pay the difference
between the tax withheld and the tax due
on the income. The payee also has the
right to ask for a refund if the tax withheld
is more than the tax due.

c) The payee is not required to file an

income tax return for the particular

c) The income recipient is still required to

file an income tax return, as prescribed in

income.73

Sec. 51 and Sec. 52 of the NIRC, as

amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed
on the sale of ordinary assets. The inherent and substantial differences between FWT and CWT
disprove petitioners contention that ordinary assets are being lumped together with, and treated
similarly as, capital assets in contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary
to the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment
of income tax involving ordinary assets.75
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the
same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the
CWT. The withholding agent/buyers act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the withholding tax method of tax
collection.
No Rule that Only Passive
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It
follows that Section 57(B) on CWT should also be limited to passive income:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E);
27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)
(c); 33; and 282 of this Code on specified items of income shall be withheld by payorcorporation and/or person and paid in the same manner and subject to the same conditions as
provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be credited against the income tax
liability of the taxpayer for the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and
enumerates these as passive income. The BIR defines passive income by stating what it is not:

if the income is generated in the active pursuit and performance of the corporations primary
purposes, the same is not passive income 76
It is income generated by the taxpayers assets. These assets can be in the form of real properties that
return rental income, shares of stock in a corporation that earn dividends or interest income received
from savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to
natural or juridical persons, residing in the Philippines." There is no requirement that this income be
passive income. If that were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to
CWT. The former covers the kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it is
wrong to regard 57(A) and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has
been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its
functions.77 Similarly, considering that the law uses the general term "income," the Secretary and CIR
may specify the kinds of income the rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given weight and respect by the
courts78 in view of the rule-making authority given to those who formulate them and their specific
expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business,
gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax
from net income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the
end of the taxable year. The seller will be able to claim a tax refund if its net income is less than the
taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the
constitutional guarantee of due process. More importantly, the due process requirement applies to the
power to tax.79 The CWT does not impose new taxes nor does it increase taxes. 80 It relates entirely to
the method and time of payment.
Petitioner protests that the refund remedy does not make the CWT less burdensome because
taxpayers have to wait years and may even resort to litigation before they are granted a refund. 81 This
argument is misleading. The practical problems encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise been used by the enterprise to
pay labor wages, materials, cost of money and other expenses which can then save the entity from
having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and
pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings;
long gestation period; sudden and unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least
20 government agencies.82
Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners
complaints are essentially matters of policy best addressed to the executive and legislative branches
of the government. Besides, the CWT is applied only on the amounts actually received or receivable by
the real estate entity. Sales on installment are taxed on a per-installment basis. 83 Petitioners desire to
utilize for its operational and capital expenses money earmarked for the payment of taxes may be a

practical business option but it is not a fundamental right which can be demanded from the court or
from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal protection clause because the
CWT is being levied only on real estate enterprises. Specifically, petitioner points out that
manufacturing enterprises are not similarly imposed a CWT on their sales, even if their manner of
doing business is not much different from that of a real estate enterprise. Like a manufacturing
concern, a real estate business is involved in a continuous process of production and it incurs costs
and expenditures on a regular basis. The only difference is that "goods" produced by the real estate
business are house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same
place and in like circumstances."85 Stated differently, all persons belonging to the same class shall be
taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation
based on a reasonable classification. Classification, to be valid, must (1) rest on substantial
distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions only
and (4) apply equally to all members of the same class. 86
The taxing power has the authority to make reasonable classifications for purposes of
taxation.87 Inequalities which result from a singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation.88 The real estate industry is, by itself, a class and can
be validly treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to
realize that what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their goods
sold and the number of transactions involved. The income from the sale of a real property is bigger
and its frequency of transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with
several thousand customers every month involving both minimal and substantial amounts. To require
the customers of manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable
system of taxation and may well defeat the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g.heavy equipment, jewelry, furniture, appliance and other capital goods yet these are
not similarly subjected to the CWT.89 As already discussed, the Secretary may adopt any reasonable
method to carry out its functions.90Under Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate.
The sales of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR,
are also subject to CWT for their transactions with said 5,000 corporations. 91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should
not effect the regisration of any document transferring real property unless a certification is issued by
the CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down this
rule except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not.
Furthermore, this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is
unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration of any document transferring real
property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been reported, and the capital gains or
[CWT], if any, has been paid: xxxx any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to
understand is the income tax."92 When a party questions the constitutionality of an income tax
measure, it has to contend not only with Einsteins observation but also with the vast and wellestablished jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner has
miserably failed to discharge its burden of convincing the Court that the imposition of MCIT and CWT is
unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Baguio
EN BANC
3. G.R. Nos. 147036-37

April 10, 2012

Petitioner-Organizations, namely: PAMBANSANG KOALISYON NG MGA SAMAHANG

MAGSASAKA AT MANGGAGAWA SA NIYUGAN (PKSMMN), COCONUT INDUSTRY REFORM
MOVEMENT (COIR), BUKLOD NG MALAYANG MAGBUBUKID, PAMBANSANG KILUSAN NG MGA
SAMAHANG MAGSASAKA (PAKISAMA), CENTER FOR AGRARIAN REFORM, EMPOWERMENT
AND TRANSFORMATION (CARET), PAMBANSANG KATIPUNAN NG MGA SAMAHAN SA
KANAYUNAN (PKSK); Petitioner-Legislator: REPRESENTATIVE LORETA ANN ROSALES; and
Petitioner-Individuals, namely: VIRGILIO V. DAVID, JOSE MARIE FAUSTINO, JOSE
CONCEPCION, ROMEO ROYANDOYAN, JOSE V. ROMERO, JR., ATTY. CAMILO L. SABIO, and
ATTY. ANTONIO T. CARPIO, Petitioners,
vs.
EXECUTIVE SECRETARY, SECRETARY OF AGRICULTURE, SECRETARY OF AGRARIAN REFORM,
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, THE SOLICITOR GENERAL, PHILIPPINE
COCONUT PRODUCERS FEDERATION, INC. (COCOFED), and UNITED COCONUT PLANTERS
BANK (UCPB), Respondents.
x-----------------------x
G.R. No. 147811
TEODORO J. AMOR, representing the Peasant Alliance of Samar and Leyte (PASALEY),
DOMINGO C. ENCALLADO, representing Aniban ng Magsasaka at Manggagawa sa Niyugan
(AMMANI), and VIDAL M. PILIIN, representing the Laguna Coalition, Petitioners,

vs.
EXECUTIVE SECRETARY, SECRETARY OF AGRICULTURE, SECRETARY OF AGRARIAN REFORM,
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, THE SOLICITOR GENERAL, PHILIPPINE
COCONUT PRODUCERS FEDERATION, UNITED COCONUT PLANTERS BANK, Respondents.
DECISION
ABAD, J.:
These are consolidated petitions to declare unconstitutional certain presidential decrees and executive
orders of the martial law era relating to the raising and use of coco-levy funds.
The Facts and the Case
On June 19, 1971 Congress enacted Republic Act (R.A.) 6260 1 that established a Coconut Investment
Fund (CI Fund) for the development of the coconut industry through capital financing. 2 Coconut farmers
were to capitalize and administer the Fund through the Coconut Investment Company (CIC) 3 whose
objective was, among others, to advance the coconut farmers interests. For this purpose, the law
imposed a levy of P0.55 on the coconut farmers first domestic sale of every 100 kilograms of copra, or
its equivalent, for which levy he was to get a receipt convertible into CIC shares of stock. 4
About a year following his proclamation of martial law in the country or on August 20, 1973 President
Ferdinand E. Marcos issued Presidential Decree (P.D.) 276, 5which established a Coconut Consumers
Stabilization Fund (CCS Fund), to address the crisis at that time in the domestic market for coconutbased consumer goods. The CCS Fund was to be built up through the imposition of a P15.00-levy for
every first sale of 100 kilograms of copra resecada. 6 The levy was to cease after a year or earlier
provided the crisis was over. Any remaining balance of the Fund was to revert to the CI Fund
established under R.A. 6260.7
A year later or on November 14, 1974 President Marcos issued P.D. 582, 8 creating a permanent fund
called the Coconut Industry Development Fund (CID Fund) to channel for the ultimate direct benefit of
coconut farmers part of the levies that they were already paying. The Philippine Coconut Authority
(PCA) was to provideP100 million as initial capital of the CID Fund and, thereafter, give the Fund at
least P0.20 per kilogram of copra resecada out of the PCAs collection of coconut consumers
stabilization levy. In case of the lifting of this levy, the PCA was then to impose a permanent levy
of P0.20 on the first sale of every kilogram of copra to form part of the CID Fund. 9 Also, under P.D. 582,
the Philippine National Bank (PNB), then owned by the Government, was to receive on deposit,
administer, and use the CID Fund.10 P.D. 582 authorized the PNB to invest the unused portion of the CID
Fund in easily convertible investments, the earnings of which were to form part of the Fund. 11
In 1975 President Marcos enacted P.D. 75512 which approved the acquisition of a commercial bank for
the benefit of the coconut farmers to enable such bank to promptly and efficiently realize the
industrys credit policy.13 Thus, the PCA bought 72.2% of the shares of stock of First United Bank,
headed by PedroCojuangco.14 Due to changes in its corporate identity and purpose, the banks articles
of incorporation were amended in July 1975, resulting in a change in the banks name from First United
Bank to United Coconut Planters Bank (UCPB).15
On July 14, 1976 President Marcos enacted P.D. 961, 16 the Coconut Industry Code, which consolidated
and codified existing laws relating to the coconut industry. The Code provided that surpluses from the
CCS Fund and the CID Fund collections, not used for replanting and other authorized purposes, were to
be invested by acquiring shares of stock of corporations, including the San Miguel Corporation (SMC),
engaged in undertakings related to the coconut and palm oil industries. 17UCPB was to make such

investments and equitably distribute these for free to coconut farmers. 18 These investments
constituted the Coconut Industry Investment Fund (CIIF). P.D. 961 also provided that the coconut levy
funds (coco-levy funds) shall be owned by the coconut farmers in their private capacities. 19 This was
reiterated in the PD 146820 amendment of June 11, 1978.
In 1980, President Marcos issued P.D. 1699, 21 suspending the collections of the CCS Fund and the CID
Fund. But in 1981 he issued P.D. 184122 which revived the collection of coconut levies. P.D. 1841
renamed the CCS Fund into the Coconut Industry Stabilization Fund (CIS Fund). 23 This Fund was to be
earmarked proportionately among several development programs, such as coconut hybrid replanting
program, insurance coverage for the coconut farmers, and scholarship program for their children. 24
In November 2000 then President Joseph Estrada issued Executive Order (E.O.) 312, 25 establishing a
Sagip Niyugan Program which sought to provide immediate income supplement to coconut farmers
and encourage the creation of a sustainable local market demand for coconut oil and other coconut
products.26 The Executive Order sought to establish a P1-billion fund by disposing of assets acquired
using coco-levy funds or assets of entities supported by those funds. 27 A committee was created to
manage the fund under this program.28 A majority vote of its members could engage the services of a
reputable auditing firm to conduct periodic audits.29
At about the same time, President Estrada issued E.O. 313, 30 which created an irrevocable trust fund
known as the Coconut Trust Fund (the Trust Fund). This aimed to provide financial assistance to
coconut farmers, to the coconut industry, and to other agri-related programs. 31 The shares of stock of
SMC were to serve as the Trust Funds initial capital. 32 These shares were acquired with CII Funds and
constituted approximately 27% of the outstanding capital stock of SMC. E.O. 313 designated UCPB,
through its Trust Department, as the Trust Funds trustee bank. The Trust Fund Committee would
administer, manage, and supervise the operations of the Trust Fund. 33 The Committee would designate
an external auditor to do an annual audit or as often as needed but it may also request the
Commission on Audit (COA) to intervene.34
To implement its mandate, E.O. 313 directed the Presidential Commission on Good Government, the
Office of the Solicitor General, and other government agencies to exclude the 27% CIIF SMC shares
from Civil Case 0033, entitled Republic of the Philippines v. Eduardo Cojuangco, Jr., et al., which was
then pending before the Sandiganbayan and to lift the sequestration over those shares. 35
On January 26, 2001, however, former President Gloria Macapagal-Arroyo ordered the suspension of
E.O.s 312 and 313.36 This notwithstanding, on March 1, 2001 petitioner organizations and individuals
brought the present action in G.R. 147036-37 to declare E.O.s 312 and 313 as well as Article III, Section
5 of P.D. 1468 unconstitutional. On April 24, 2001 the other sets of petitioner organizations and
individuals instituted G.R. 147811 to nullify Section 2 of P.D. 755 and Article III, Section 5 of P.D.s 961
and 1468 also for being unconstitutional.
The Issues Presented
The parties submit the following issues for adjudication:
Procedurally
1. Whether or not petitioners special civil actions of certiorari under Rule 65 constituted the
proper remedy for their actions; and
2. Whether or not petitioners have legal standing to bring the same to court.

On the substance
3. Whether or not the coco-levy funds are public funds; and
4. Whether or not (a) Section 2 of P.D. 755, (b) Article III, Section 5 of P.D.s 961 and 1468, (c)
E.O. 312, and (d) E.O. 313 are unconstitutional.
The Rulings of the Court
First. UCPB questions the propriety of the present petitions for certiorari and mandamus under Rule 65
on the ground that there are no ongoing proceedings in any tribunal or board or before a government
official exercising judicial, quasi-judicial, or ministerial functions. 37 UCPB insists that the Court exercises
appellate jurisdiction with respect to issues of constitutionality or validity of laws and presidential
orders.38
But, as the Court previously held, where there are serious allegations that a law has infringed the
Constitution, it becomes not only the right but the duty of the Court to look into such allegations and,
when warranted, uphold the supremacy of the Constitution. 39 Moreover, where the issues raised are of
paramount importance to the public, as in this case, the Court has the discretion to brush aside
technicalities of procedure.40
Second. The Court has to uphold petitioners right to institute these petitions. The petitioner
organizations in these cases represent coconut farmers on whom the burden of the coco-levies
attaches. It is also primarily for their benefit that the levies were imposed.
The individual petitioners, on the other hand, join the petitions as taxpayers. The Court recognizes
their right to restrain officials from wasting public funds through the enforcement of an
unconstitutional statute.41 This so-called taxpayers suit is based on the theory that expenditure of
public funds for the purpose of executing an unconstitutional act is a misapplication of such funds. 42
Besides, the 1987 Constitution accords to the citizens a greater participation in the affairs of
government. Indeed, it provides for people's initiative, the right to information on matters of public
concern (including the right to know the state of health of their President), as well as the right to file
cases questioning the factual bases for the suspension of the privilege of writ of habeas corpus or
declaration of martial law. These provisions enlarge the peoples right in the political as well as the
judicial field. It grants them the right to interfere in the affairs of government and challenge any act
tending to prejudice their interest.
Third. For some time, different and conflicting notions had been formed as to the nature and ownership
of the coco-levy funds. The Court, however, finally put an end to the dispute when it categorically ruled
in Republic of the Philippines v. COCOFED43 that these funds are not only affected with public interest;
they are, in fact, prima facie public funds. Prima facie means a fact presumed to be true unless
disproved by some evidence to the contrary.44
The Court was satisfied that the coco-levy funds were raised pursuant to law to support a proper
governmental purpose. They were raised with the use of the police and taxing powers of the State for
the benefit of the coconut industry and its farmers in general. The COA reviewed the use of the funds.
The Bureau of Internal Revenue (BIR) treated them as public funds and the very laws governing
coconut levies recognize their public character.45
The Court has also recently declared that the coco-levy funds are in the nature of taxes and can only
be used for public purpose.46 Taxes are enforced proportional contributions from persons and property,

levied by the State by virtue of its sovereignty for the support of the government and for all its public
needs.47 Here, the coco-levy funds were imposed pursuant to law, namely, R.A. 6260 and P.D. 276. The
funds were collected and managed by the PCA, an independent government corporation directly under
the President.48 And, as the respondent public officials pointed out, the pertinent laws used the term
levy,49 which means to tax,50 in describing the exaction.
Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise money to boost the
governments general funds but to provide means for the rehabilitation and stabilization of a
threatened industry, the coconut industry, which is so affected with public interest as to be within the
police power of the State.51The funds sought to support the coconut industry, one of the main
economic backbones of the country, and to secure economic benefits for the coconut farmers and farm
workers. The subject laws are akin to the sugar liens imposed by Sec. 7(b) of P.D. 388, 52 and the oil
price stabilization funds under P.D. 1956,53 as amended by E.O. 137.54
Respondent UCPB suggests that the coco-levy funds are closely similar to the Social Security System
(SSS) funds, which have been declared to be not public funds but properties of the SSS members and
held merely in trust by the government.55 But the SSS Law56 collects premium contributions. It does not
collect taxes from members for a specific public purpose. They pay contributions in exchange for
insurance protection and benefits like loans, medical or health services, and retirement packages. The
benefits accrue to every SSS member, not to the public, in general. 57
Furthermore, SSS members do not lose ownership of their contributions. The government merely holds
these in trust, together with his employers contribution, to answer for his future benefits. 58 The cocolevy funds, on the other hand, belong to the government and are subject to its administration and
disposition. Thus, these funds, including its incomes, interests, proceeds, or profits, as well as all its
assets, properties, and shares of stocks procured with such funds must be treated, used, administered,
and managed as public funds.59
Lastly, the coco-levy funds are evidently special funds. In Gaston v. Republic Planters Bank,60 the Court
held that the State collected stabilization fees from sugar millers, planters, and producers for a special
purpose: to finance the growth and development of the sugar industry and all its components. The fees
were levied for a special purpose and, therefore, constituted special fund when collected. Its character
as such fund was made clear by the fact that they were deposited in the PNB (then a wholly owned
government bank) and not in the Philippine Treasury. In Osmea v. Orbos,61 the Court held that the oil
price stabilization fund was a special fund mainly because this was segregated from the general fund
and placed in what the law referred to as a trust account. Yet it remained subject to COA scrutiny and
review. The Court finds no substantial distinction between these funds and the coco-levy funds, except
as to the industry they each support.
Fourth. Petitioners in G.R. 147811 assert that Section 2 of P.D. 755 above is void and unconstitutional
for disregarding the public character of coco-levy funds. The subject section provides:
Section 2. Financial Assistance. x x x and since the operations, and activities of the Philippine
Coconut Authority are all in accord with the present social economic plans and programs of the
Government, all collections and levies which the Philippine Coconut Authority is authorized to levy and
collect such as but not limited to the Coconut Consumers Stabilization Levy, and the Coconut Industry
Development Fund as prescribed by Presidential Decree No. 582 shall not be considered or construed,
under any law or regulation, special and/or fiduciary funds and do not form part of the general funds of
the national government within the contemplation of Presidential Decree No. 711. (Emphasis ours)
The Court has, however, already passed upon this question in Philippine Coconut Producers Federation,
Inc. (COCOFED) v. Republic of the Philippines. 62 It held as unconstitutional Section 2 of P.D. 755 for

"effectively authorizing the PCA to utilize portions of the CCS Fund to pay the financial commitment of
the farmers to acquire UCPB and to deposit portions of the CCS Fund levies with UCPB interest free.
And as there also provided, the CCS Fund, CID Fund and like levies that PCA is authorized to collect
shall be considered as non-special or fiduciary funds to be transferred to the general fund of the
Government, meaning they shall be deemed private funds."
Identical provisions of subsequent presidential decrees likewise declared coco-levy funds private
properties of coconut farmers. Article III, Section 5 of P.D. 961 reads:
Section 5. Exemptions. The Coconut Consumers Stabilization Fund and the Coconut Industry
Development Fund as well as all disbursements of said funds for the benefit of the coconut farmers as
herein authorized shall not be construed or interpreted, under any law or regulation, as special and/or
fiduciary funds, or as part of the general funds of the national government within the contemplation of
P.D. No. 711; nor as a subsidy, donation, levy, government funded investment, or government share
within the contemplation of P.D. 898, the intention being that said Fund and the disbursements thereof
as herein authorized for the benefit of the coconut farmers shall be owned by them in their own private
capacities. (Emphasis ours)
Section 5 of P.D. 1468 basically reproduces the above provision, thus
Section 5. Exemption. The Coconut Consumers Stabilization Fund and the Coconut Industry
Development Fund, as well as all disbursements as herein authorized, shall not be construed or
interpreted, under any law or regulation, as special and/or fiduciary funds, or as part of the
general funds of the national government within the contemplation of P.D. 711; nor as subsidy,
donation, levy government funded investment, or government share within the
contemplation of P.D. 898, the intention being that said Fund and the disbursements
thereof as herein authorized for the benefit of the coconut farmers shall be owned by them
in their private capacities: Provided, however, That the President may at any time authorize the
Commission on Audit or any other officer of the government to audit the business affairs,
administration, and condition of persons and entities who receive subsidy for coconut-based consumer
products x x x. (Emphasis ours)
Notably, the raising of money by levy on coconut farm production, a form of taxation as already stated,
began in 1971 for the purpose of developing the coconut industry and promoting the interest of
coconut farmers. The use of the fund was expanded in 1973 to include the stabilization of the domestic
market for coconut-based consumer goods and in 1974 to divert part of the funds for obtaining direct
benefit to coconut farmers. After five years or in 1976, however, P.D. 961 declared the coco-levy funds
private property of the farmers. P.D. 1468 reiterated this declaration in 1978. But neither presidential
decree actually turned over possession or control of the funds to the farmers in their private capacity.
The government continued to wield undiminished authority over the management and disposition of
those funds.
In any event, such declaration is void. There is ownership when a thing pertaining to a person is
completely subjected to his will in everything that is not prohibited by law or the concurrence with the
rights of another.63 An owner is free to exercise all attributes of ownership: the right, among others, to
possess, use and enjoy, abuse or consume, and dispose or alienate the thing owned. 64 The owner is of
course free to waive all or some of these rights in favor of others. But in the case of the coconut
farmers, they could not, individually or collectively, waive what have not been and could not be legally
imparted to them.
Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III, Section 5 of P.D. 1468 completely
ignore the fact that coco-levy funds are public funds raised through taxation. And since taxes could be

exacted only for a public purpose, they cannot be declared private properties of individuals although
such individuals fall within a distinct group of persons. 65
The Court of course grants that there is no hard-and-fast rule for determining what constitutes public
purpose. It is an elastic concept that could be made to fit into modern standards. Public purpose, for
instance, is no longer restricted to traditional government functions like building roads and school
houses or safeguarding public health and safety. Public purpose has been construed as including the
promotion of social justice. Thus, public funds may be used for relocating illegal settlers, building lowcost housing for them, and financing both urban and agrarian reforms that benefit certain poor
individuals. Still, these uses relieve volatile iniquities in society and, therefore, impact on public order
and welfare as a whole.
But the assailed provisions, which removed the coco-levy funds from the general funds of the
government and declared them private properties of coconut farmers, do not appear to have a color of
social justice for their purpose. The levy on copra that farmers produce appears, in the first place, to
be a business tax judging by its tax base. The concept of farmers-businessmen is incompatible with
the idea that coconut farmers are victims of social injustice and so should be beneficiaries of the taxes
raised from their earnings.
It would altogether be different of course if the laws mentioned set apart a portion of the coco-levy
fund for improving the lives of destitute coconut farm owners or workers for their social amelioration to
establish a proper government purpose. The support for the poor is generally recognized as a public
duty and has long been an accepted exercise of police power in the promotion of the common
good.66 But the declarations do not distinguish between wealthy coconut farmers and the impoverished
ones. And even if they did, the Government cannot just embark on a philanthropic orgy of inordinate
dole-outs for motives political or otherwise.67Consequently, such declarations are void since they
appropriate public funds for private purpose and, therefore, violate the citizens right to substantive
due process.68
On another point, in stating that the coco-levy fund "shall not be construed or interpreted, under any
law or regulation, as special and/or fiduciary funds, or as part of the general funds of the national
government," P.D.s 961 and 1468 seek to remove such fund from COA scrutiny.
This is also the fault of President Estradas E.O. 312 which deals with P1 billion to be generated out of
the sale of coco-fund acquired assets. Thus
Section 5. Audit of Fund and Submission of Report. The Committee, by a majority vote, shall engage
the services of a reputable auditing firm to conduct periodic audits of the fund. It shall render a
quarterly report on all pertinent transactions and availments of the fund to the Office of the
President within the first three (3) working days of the succeeding quarter. (Emphasis ours)
E.O. 313 has a substantially identical provision governing the management and disposition of the
Coconut Trust Fund capitalized with the substantial SMC shares of stock that the coco-fund acquired.
Thus
Section 13. Accounting. x x x
The Fund shall be audited annually or as often as necessary by an external auditor
designated by the Committee. The Committee may also request the Commission on Audit to
conduct an audit of the Fund. (Emphasis ours)

But, since coco-levy funds are taxes, the provisions of P.D.s 755, 961 and 1468 as well as those of E.O.s
312 and 313 that remove such funds and the assets acquired through them from the jurisdiction of the
COA violate Article IX-D, Section 2(1)69 of the 1987 Constitution. Section 2(1) vests in the COA the
power and authority to examine uses of government money and property. The cited P.D.s and E.O.s
also contravene Section 270 of P.D. 898 (Providing for the Restructuring of the Commission on Audit),
which has the force of a statute.
And there is no legitimate reason why such funds should be shielded from COA review and audit. The
PCA, which implements the coco-levy laws and collects the coco-levy funds, is a government-owned
and controlled corporation subject to COA review and audit.
E.O. 313 suffers from an additional infirmity. Its title, "Rationalizing the Use of the Coconut Levy Funds
by Constituting a Fund for Assistance to Coconut Farmers as an Irrevocable Trust Fund and Creating a
Coconut Trust Fund Committee for the Management thereof" tends to mislead. Apparently, it intends to
create a trust fund out of the coco-levy funds to provide economic assistance to the coconut farmers
and, ultimately, benefit the coconut industry.71 But on closer look, E.O. 313 strays from the special
purpose for which the law raises coco-levy funds in that it permits the use of coco-levy funds for
improving productivity in other food areas. Thus:
Section 2. Purpose of the Fund. The Fund shall be established for the purpose of financing
programs of assistance for the benefit of the coconut farmers, the coconut industry, and other agrirelated programs intended to maximize food productivity, develop business opportunities
in the countryside, provide livelihood alternatives, and promote anti-poverty
programs. (Emphasis ours)
xxxx
Section 9. Use and Disposition of the Trust Income. The Coconut Trust Fund Committee, on an
annual basis, shall determine and establish the amount comprising the Trust Income. After such
determination, the Committee shall earmark, allocate and disburse the Trust Income for the following
purposes, namely:
xxxx
(d) Thirty percent (30%) of the Trust Income shall be used to assist and fund agriculturallyrelated programs for the Government, as reasonably determined by the Trust Fund Committee,
implemented for the purpose of: (i) maximizing food productivity in the agriculture areas of the
country, (ii) enhancing the upliftment and well-being of the living conditions of farmers and agricultural
workers, (iii) developing viable industries and business opportunities in the countryside, (iv) providing
alternative means of livelihood to the direct dependents of agriculture businesses and enterprises, and
(v) providing financial assistance and support to coconut farmers in times of economic hardship due to
extremely low prices of copra and other coconut products, natural calamities, world market dislocation
and similar occurrences, including financial support to the ERAPs Sagip Niyugan Program established
under Executive Order No. 312 dated November 3, 2000; x x x. (Emphasis ours)
Clearly, E.O. 313 above runs counter to the constitutional provision which directs that all money
collected on any tax levied for a special purpose shall be treated as a special fund and paid out for
such purpose only.72 Assisting other agriculturally-related programs is way off the coco-funds objective
of promoting the general interests of the coconut industry and its farmers.
A final point, the E.O.s also transgress P.D. 1445, 73 Section 84(2),74 the first part by the previously
mentioned sections of E.O. 313 and the second part by Section 4 of E.O. 312 and Sections 6 and 7 of

E.O. 313. E.O. 313 vests the power to administer, manage, and supervise the operations and
disbursements of the Trust Fund it established (capitalized with SMC shares bought out of coco-levy
funds) in a Coconut Trust Fund Committee. Thus
Section 6. Creation of the Coconut Trust Fund Committee. A Committee is hereby created to
administer, manage and supervise the operations of the Trust Fund, chaired by the President
with ten (10) members, as follows:
(a) four (4) representatives from the government sector, two of whom shall be the Secretary of
Agriculture and the Secretary of Agrarian Reform who shall act as Vice Chairmen;
(b) four (4) representatives from coconut farmers organizations, one of whom shall come from
a list of nominees from the Philippine Coconut Producers Federation Inc. ("COCOFED");
(c) a representative from the CIIF; and
(d) a representative from a non-government organization (NGO) involved in agricultural and
rural development.
All decisions of the Coconut Trust Fund Committee shall be determined by a majority vote of all the
members.
The Coconut Trust Fund Committee shall perform the functions and duties set forth in Section 7 hereof,
with the skill, care, prudence and diligence necessary under the circumstances then prevailing that a
prudent man acting in like capacity would exercise.
The members of the Coconut Trust Fund Committee shall be appointed by the President and shall hold
office at his pleasure.
The Coconut Trust Fund Committee is authorized to hire administrative, technical and/or support staff
as may be required to enable it to effectively perform its functions and responsibilities. (Emphasis
ours)
Section 7. Functions and Responsibilities of the Committee. The Coconut Trust Fund Committee
shall have the following functions and responsibilities:
(a) set the investment policy of the Trust Fund;
(b) establish priorities for assistance giving preference to small coconut farmers and
farmworkers which shall be reviewed periodically and revised as necessary in accordance with
changing conditions;
(c) receive, process and approve project proposals for financing by the Trust Fund;
(d) decide on the use of the Trust Funds income or net earnings including final
action on applications for assistance, grants and/or loans;
(e) avail of professional counsel and services by retaining an investment and financial
manager, if desired;

(f) formulate the rules and regulations governing the allocation, utilization and
disbursement of the Fund; and
(g) perform such other acts and things as may be necessary proper or conducive to attain the
purposes of the Fund. (Emphasis ours)
Section 4 of E.O. 312 does essentially the same thing. It vests the management and disposition of the
assistance fund generated from the sale of coco-levy fund-acquired assets into a Committee of five
members. Thus, Section 4 of E.O. 312 provides
Section 4. Funding. Assets acquired through the coconut levy funds or by entities financed by the
coconut levy funds identified by the President for appropriate disposal or sale, shall be sold or disposed
to generate a maximum fund of ONE BILLION PESOS (P1,000,000,000.00) which shall be managed by a
Committee composed of a Chairman and four (4) members to be appointed by the President whose
term shall be co-terminus with the Program. x x x (Emphasis ours)
In effect, the above transfers the power to allocate, use, and disburse coco-levy funds that P.D. 232
vested in the PCA and transferred the same, without legislative authorization and in violation of P.D.
232, to the Committees mentioned above. An executive order cannot repeal a presidential decree
which has the same standing as a statute enacted by Congress.
UCPB invokes the principle of separability to save the assailed laws from being struck down. The
general rule is that where part of a statute is void as repugnant to the Constitution, while another part
is valid, the valid portion, if susceptible to being separated from the invalid, may stand and be
enforced. When the parts of a statute, however, are so mutually dependent and connected, as
conditions, considerations, or compensations for each other, as to warrant a belief that the legislature
intended them as a whole, the nullity of one part will vitiate the rest. In which case, if some parts are
unconstitutional, all the other provisions which are thus dependent, conditional, or connected must
consequently fall with them.75
But, given that the provisions of E.O.s 312 and 313, which as already stated invalidly transferred
powers over the funds to two committees that President Estrada created, the rest of their provisions
became non-operational. It is evident that President Estrada would not have created the new funding
programs if they were to be managed by some other entity. Indeed, he made himself Chairman of the
Coconut Trust Fund and left to his discretion the appointment of the members of the other committee.
WHEREFORE, the Court GRANTS the petition in G.R. 147036-37, PARTLY GRANTS the petition in G.R.
147811, and declares the following VOID:
a) E.O. 312, for being repugnant to Section 84(2) of P.D. 1445, and Article IX-D, Section 2(1) of
the Constitution; and
b) E.O. 313, for being in contravention of Section 84(2) of P.D. 1445, and Article IX-D, Section
2(1) and Article VI, Section 29(3) of the Constitution.
The Court has previously declared Section 2 of P.D. 755 and Article III, Section 5 of P.D.s 961 and 1468
unconstitutional.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
4. G.R. No. 158540

July 8, 2004

SOUTHERN CROSS CEMENT CORPORATION, petitioner,

vs.
THE PHILIPPINE CEMENT MANUFACTURERS CORP., THE SECRETARY OF THE DEPARTMENT OF
TRADE & INDUSTRY, THE SECRETARY OF THE DEPARTMENT OF FINANCE, and THE
COMMISSIONER OF THE BUREAU OF CUSTOMS, respondents.

DECISION

TINGA, J.:
"Good fences make good neighbors," so observed Robert Frost, the archetype of traditional New
England detachment. The Frost ethos has been heeded by nations adjusting to the effects of the
liberalized global market.1 The Philippines, for one, enacted Republic Act (Rep. Act) No. 8751 (on the
imposition of countervailing duties), Rep. Act No. 8752 (on the imposition of anti-dumping duties) and,
finally, Rep. Act No. 8800, also known as the Safeguard Measures Act ("SMA") 2 soon after it joined the
General Agreement on Tariff and Trade (GATT) and the World Trade Organization (WTO) Agreement. 3
The SMA provides the structure and mechanics for the imposition of emergency measures, including
tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict
serious injury on them.4 The wisdom of the policies behind the SMA, however, is not put into question
by the petition at bar. The questions submitted to the Court relate to the means and the procedures
ordained in the law to ensure that the determination of the imposition or non-imposition of a safeguard
measure is proper.
Antecedent Facts
Petitioner Southern Cross Cement Corporation ("Southern Cross") is a domestic corporation engaged in
the business of cement manufacturing, production, importation and exportation. Its principal
stockholders are Taiheiyo Cement Corporation and Tokuyama Corporation, purportedly the largest
cement manufacturers in Japan.5
Private respondent Philippine Cement Manufacturers Corporation 6 ("Philcemcor") is an association of
domestic cement manufacturers. It has eighteen (18) members, 7 per Record. While Philcemcor heralds
itself to be an association of domestic cement manufacturers, it appears that considerable equity
holdings, if not controlling interests in at least twelve (12) of its member-corporations, were acquired
by the three largest cement manufacturers in the world, namely Financiere Lafarge S.A. of France,
Cemex S.A. de C.V. of Mexico, and Holcim Ltd. of Switzerland (formerly Holderbank Financiere Glaris,
Ltd., then Holderfin B.V.).8
On 22 May 2001, respondent Department of Trade and Industry ("DTI") accepted an application from
Philcemcor, alleging that the importation of gray Portland cement9 in increased quantities has caused
declines in domestic production, capacity utilization, market share, sales and employment; as well as

caused depressed local prices. Accordingly, Philcemcor sought the imposition at first of provisional,
then later, definitive safeguard measures on the import of cement pursuant to the SMA. Philcemcor
filed the application in behalf of twelve (12) of its member-companies. 10
After preliminary investigation, the Bureau of Import Services of the DTI, determined that critical
circumstances existed justifying the imposition of provisional measures. 11 On 7 November 2001, the
DTI issued an Order,imposing a provisional measure equivalent to Twenty Pesos and Sixty Centavos
(P20.60) per forty (40) kilogram bag on all importations of gray Portland cement for a period not
exceeding two hundred (200) days from the date of issuance by the Bureau of Customs (BOC) of the
implementing Customs Memorandum Order.12 The corresponding Customs Memorandum Order was
issued on 10 December 2001, to take effect that same day and to remain in force for two hundred
(200) days.13
In the meantime, the Tariff Commission, on 19 November 2001, received a request from the DTI for a
formal investigation to determine whether or not to impose a definitive safeguard measure on imports
of gray Portland cement, pursuant to Section 9 of the SMA and its Implementing Rules and Regulations.
A notice of commencement of formal investigation was published in the newspapers on 21 November
2001. Individual notices were likewise sent to concerned parties, such as Philcemcor, various importers
and exporters, the Embassies of Indonesia, Japan and Taiwan, contractors/builders associations,
industry associations, cement workers' groups, consumer groups, non-government organizations and
concerned government agencies.14 A preliminary conference was held on 27 November 2001, attended
by several concerned parties, including Southern Cross. 15 Subsequently, the Tariff Commission received
several position papers both in support and against Philcemcor's application. 16 The Tariff Commission
also visited the corporate offices and manufacturing facilities of each of the applicant companies, as
well as that of Southern Cross and two other cement importers. 17
On 13 March 2002, the Tariff Commission issued its Formal Investigation Report ("Report"). Among the
factors studied by the Tariff Commission in its Report were the market share of the domestic
industry,18 production and sales,19 capacity utilization,20 financial performance and profitability,21 and
return on sales.22 The Tariff Commission arrived at the following conclusions:
1. The circumstances provided in Article XIX of GATT 1994 need not be demonstrated since the
product under consideration (gray Portland cement) is not the subject of any Philippine
obligation or tariff concession under the WTO Agreement. Nonetheless, such inquiry is
governed by the national legislation (R.A. 8800) and the terms and conditions of the
Agreement on Safeguards.
2. The collective output of the twelve (12) applicant companies constitutes a major proportion
of the total domestic production of gray Portland cement and blended Portland cement.
3. Locally produced gray Portland cement and blended Portland cement (Pozzolan) are "like" to
imported gray Portland cement.
4. Gray Portland cement is being imported into the Philippines in increased quantities, both in
absolute terms and relative to domestic production, starting in 2000. The increase in volume of
imports is recent, sudden, sharp and significant.
5. The industry has not suffered and is not suffering significant overall impairment in its
condition, i.e., serious injury.
6. There is no threat of serious injury that is imminent from imports of gray Portland cement.
7. Causation has become moot and academic in view of the negative determination of the
elements of serious injury and imminent threat of serious injury. 23
Accordingly, the Tariff Commission made the following recommendation, to wit:

The elements of serious injury and imminent threat of serious injury not having been
established, it is hereby recommended that no definitive general safeguard measure be
imposed on the importation of gray Portland cement.24
The DTI received the Report on 14 March 2002. After reviewing the report, then DTI Secretary Manuel
Roxas II ("DTI Secretary") disagreed with the conclusion of the Tariff Commission that there was no
serious injury to the local cement industry caused by the surge of imports. 25 In view of this
disagreement, the DTI requested an opinion from the Department of Justice ("DOJ") on the DTI
Secretary's scope of options in acting on the Commission's recommendations. Subsequently, then DOJ
Secretary Hernando Perez rendered an opinion stating that Section 13 of the SMA precluded a review
by the DTI Secretary of the Tariff Commission's negative finding, or finding that a definitive safeguard
measure should not be imposed.26
On 5 April 2002, the DTI Secretary promulgated a Decision. After quoting the conclusions of the Tariff
Commission, the DTI Secretary noted the DTI's disagreement with the conclusions. However, he also
cited the DOJ Opinion advising the DTI that it was bound by the negative finding of the Tariff
Commission. Thus, he ruled as follows:
The DTI has no alternative but to abide by the [Tariff] Commission's recommendations.
IN VIEW OF THE FOREGOING, and in accordance with Section 13 of RA 8800 which states:
"In the event of a negative final determination; or if the cash bond is in
excess of the definitive safeguard duty assessed, the Secretary shall
immediately issue, through the Secretary of Finance, a written instruction to
the Commissioner of Customs, authorizing the return of the cash bond or the
remainder thereof, as the case may be, previously collected as provisional
general safeguard measure within ten (10) days from the date a final
decision has been made; Provided, that the government shall not be liable
for any interest on the amount to be returned. The Secretary shall not
accept for consideration another petition from the same industry, with
respect to the same imports of the product under consideration within one
(1) year after the date of rendering such a decision."
The DTI hereby issues the following:
The application for safeguard measures against the importation of gray Portland cement filed
by PHILCEMCOR (Case No. 02-2001) is hereby denied. 27 (Emphasis in the original)
Philcemcor received a copy of the DTI Decision on 12 April 2002. Ten days later, it filed with the Court
of Appeals a Petition for Certiorari, Prohibition and Mandamus28 seeking to set aside the
DTI Decision, as well as the Tariff Commission's Report. Philcemcor likewise applied for a Temporary
Restraining Order/Injunction to enjoin the DTI and the BOC from implementing the
questioned Decision and Report. It prayed that the Court of Appeals direct the DTI Secretary to
disregard the Report and to render judgment independently of the Report. Philcemcor argued that the
DTI Secretary, vested as he is under the law with the power of review, is not bound to adopt the
recommendations of the Tariff Commission; and, that the Report is void, as it is predicated on a flawed
framework, inconsistent inferences and erroneous methodology. 29
On 10 June 2002, Southern Cross filed its Comment.30 It argued that the Court of Appeals had no
jurisdiction over Philcemcor's Petition, for it is on the Court of Tax Appeals ("CTA") that the SMA
conferred jurisdiction to review rulings of the Secretary in connection with the imposition of a
safeguard measure. It likewise argued that Philcemcor's resort to the special civil action of certiorari is
improper, considering that what Philcemcor sought to rectify is an error of judgment and not an error
of jurisdiction or grave abuse of discretion, and that a petition for review with the CTA was available as
a plain, speedy and adequate remedy. Finally, Southern Cross echoed the DOJ Opinion that Section 13
of the SMA precludes a review by the DTI Secretary of a negative finding of the Tariff Commission.

After conducting a hearing on 19 June 2002 on Philcemcor's application for preliminary injunction, the
Court of Appeals' Twelfth Division31 granted the writ sought in its Resolution dated 21 June
2002.32 Seven days later, on 28 June 2002, the two-hundred (200)-day period for the imposition of the
provisional measure expired. Despite the lapse of the period, the BOC continued to impose the
provisional measure on all importations of Portland cement made by Southern Cross. The
uninterrupted assessment of the tariff, according to Southern Cross, worked to its detriment to the
point that the continued imposition would eventually lead to its closure. 33
Southern Cross timely filed a Motion for Reconsideration of the Resolution on 9 September 2002.
Alleging that Philcemcor was not entitled to provisional relief, Southern Cross likewise sought a
clarificatory order as to whether the grant of the writ of preliminary injunction could extend the earlier
imposition of the provisional measure beyond the two hundred (200)-day limit imposed by law. The
appeals' court failed to take immediate action on Southern Cross's motion despite the four (4) motions
for early resolution the latter filed between September of 2002 and February of 2003. After six (6)
months, on 19 February 2003, the Court of Appeals directed Philcemcor to comment on Southern
Cross's Motion for Reconsideration.34 After Philcemcor filed itsOpposition35 on 13 March 2003, Southern
Cross filed another set of four (4) motions for early resolution.
Despite the efforts of Southern Cross, the Court of Appeals failed to directly resolve the Motion for
Reconsideration. Instead, on 5 June 2003, it rendered a Decision,36 granting in part Philcemcor's
petition. The appellate court ruled that it had jurisdiction over the petition for certiorari since it alleged
grave abuse of discretion. It refused to annul the findings of the Tariff Commission, citing the rule that
factual findings of administrative agencies are binding upon the courts and its corollary, that courts
should not interfere in matters addressed to the sound discretion and coming under the special
technical knowledge and training of such agencies. 37 Nevertheless, it held that the DTI Secretary is not
bound by the factual findings of the Tariff Commission since such findings are merely recommendatory
and they fall within the ambit of the Secretary's discretionary review. It determined that the legislative
intent is to grant the DTI Secretary the power to make a final decision on the Tariff Commission's
recommendation.38 The dispositive portion of the Decision reads:
WHEREFORE, based on the foregoing premises, petitioner's prayer to set aside the findings of
the Tariff Commission in its assailed Report dated March 13, 2002 is DENIED. On the other
hand, the assailed April 5, 2002 Decision of the Secretary of the Department of Trade and
Industry is hereby SET ASIDE. Consequently, the case is REMANDED to the public respondent
Secretary of Department of Trade and Industry for a final decision in accordance with RA 8800
and its Implementing Rules and Regulations.
SO ORDERED.39
On 23 June 2003, Southern Cross filed the present petition, assailing the appellate court's Decision for
departing from the accepted and usual course of judicial proceedings, and not deciding the substantial
questions in accordance with law and jurisprudence. The petition argues in the main that the Court of
Appeals has no jurisdiction over Philcemcor's petition, the proper remedy being a petition for review
with the CTA conformably with the SMA, and; that the factual findings of the Tariff Commission on the
existence or non-existence conditions warranting the imposition of general safeguard measures are
binding upon the DTI Secretary.
The timely filing of Southern Cross's petition before this Court necessarily prevented the Court of
AppealsDecision from becoming final.40 Yet on 25 June 2003, the DTI Secretary issued a new Decision,
ruling this time that that in light of the appellate court's Decision there was no longer any legal
impediment to his deciding Philcemcor's application for definitive safeguard measures. 41 He made a
determination that, contrary to the findings of the Tariff Commission, the local cement industry had
suffered serious injury as a result of the import surges. 42 Accordingly, he imposed a definitive
safeguard measure on the importation of gray Portland cement, in the form of a definitive safeguard
duty in the amount of P20.60/40 kg. bag for three years on imported gray Portland Cement. 43
On 7 July 2003, Southern Cross filed with the Court a "Very Urgent Application for a Temporary
Restraining Order and/or A Writ of Preliminary Injunction" ("TRO Application"), seeking to enjoin the DTI
Secretary from enforcing his Decision of 25 June 2003 in view of the pending petition before this Court.

Philcemcor filed an opposition, claiming, among others, that it is not this Court but the CTA that has
jurisdiction over the application under the law.
On 1 August 2003, Southern Cross filed with the CTA a Petition for Review, assailing the DTI Secretary's
25 June 2003 Decision which imposed the definite safeguard measure. Prescinding from this action,
Philcemcor filed with this Court a Manifestation and Motion to Dismiss in regard to Southern Cross's
petition, alleging that it deliberately and willfully resorted to forum-shopping. It points out that
Southern Cross's TRO Application seeks to enjoin the DTI Secretary's second decision, while
its Petition before the CTA prays for the annulment of the same decision. 44
Reiterating its Comment on Southern Cross's Petition for Review, Philcemcor also argues that the CTA,
being a special court of limited jurisdiction, could only review the ruling of the DTI Secretary when a
safeguard measure is imposed, and that the factual findings of the Tariff Commission are not binding
on the DTI Secretary.45
After giving due course to Southern Cross's Petition, the Court called the case for oral argument on 18
February 2004.46 At the oral argument, attended by the counsel for Philcemcor and Southern Cross and
the Office of the Solicitor General, the Court simplified the issues in this wise: (i) whether
the Decision of the DTI Secretary is appealable to the CTA or the Court of Appeals; (ii) assuming that
the Court of Appeals has jurisdiction, whether its Decision is in accordance with law; and, (iii) whether
a Temporary Restraining Order is warranted.47
During the oral arguments, counsel for Southern Cross manifested that due to the imposition of the
general safeguard measures, Southern Cross was forced to cease operations in the Philippines in
November of 2003.48
Propriety of the Temporary Restraining Order
Before the merits of the Petition, a brief comment on Southern Cross's application for provisional relief.
It sought to enjoin the DTI Secretary from enforcing the definitive safeguard measure he imposed in his
25 June 2003Decision. The Court did not grant the provisional relief for it would be tantamount to
enjoining the collection of taxes, a peremptory judicial act which is traditionally frowned upon, 49 unless
there is a clear statutory basis for it.50 In that regard, Section 218 of the Tax Reform Act of 1997
prohibits any court from granting an injunction to restrain the collection of any national internal
revenue tax, fee or charge imposed by the internal revenue code. 51A similar philosophy is expressed by
Section 29 of the SMA, which states that the filing of a petition for review before the CTA does not stop,
suspend, or otherwise toll the imposition or collection of the appropriate tariff duties or the adoption of
other appropriate safeguard measures.52 This evinces a clear legislative intent that the imposition of
safeguard measures, despite the availability of judicial review, should not be enjoined notwithstanding
any timely appeal of the imposition.
The Forum-Shopping Issue
In the same breath, we are not convinced that the allegation of forum-shopping has been duly proven,
or that sanction should befall upon Southern Cross and its counsel. The standard by Section 5, Rule 7
of the 1997 Rules of Civil Procedure in order that sanction may be had is that "the acts of the party or
his counsel clearly constitute willful and deliberate forum shopping." 53 The standard implies a malicious
intent to subvert procedural rules, and such state of mind is not evident in this case.
The Jurisdictional Issue
On to the merits of the present petition.
In its assailed Decision, the Court of Appeals, after asserting only in brief that it had jurisdiction over
Philcemcor'sPetition, discussed the issue of whether or not the DTI Secretary is bound to adopt the
negative recommendation of the Tariff Commission on the application for safeguard measure. The
Court of Appeals maintained that it had jurisdiction over the petition, as it alleged grave abuse of
discretion on the part of the DTI Secretary, thus:

A perusal of the instant petition reveals allegations of grave abuse of discretion on the part of
the DTI Secretary in rendering the assailed April 5, 2002 Decision wherein it was ruled that he
had no alternative but to abide by the findings of the Commission on the matter of safeguard
measures for the local cement industry. Abuse of discretion is admittedly within the ambit of
certiorari.
Grave abuse of discretion implies such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction. It is alleged that, in the assailed Decision, the DTI Secretary
gravely abused his discretion in wantonly evading to discharge his duty to render an
independent determination or decision in imposing a definitive safeguard measure. 54
We do not doubt that the Court of Appeals' certiorari powers extend to correcting grave abuse of
discretion on the part of an officer exercising judicial or quasi-judicial functions. 55 However, the special
civil action of certiorari is available only when there is no plain, speedy and adequate remedy in the
ordinary course of law.56 Southern Cross relies on this limitation, stressing that Section 29 of the SMA is
a plain, speedy and adequate remedy in the ordinary course of law which Philcemcor did not avail of.
The Section reads:
Section 29. Judicial Review. Any interested party who is adversely affected by the ruling of
the Secretary in connection with the imposition of a safeguard measure may file with
the CTA, a petition for review of such ruling within thirty (30) days from receipt thereof.
Provided, however, that the filing of such petition for review shall not in any way stop, suspend
or otherwise toll the imposition or collection of the appropriate tariff duties or the adoption of
other appropriate safeguard measures, as the case may be.
The petition for review shall comply with the same requirements and shall follow the same
rules of procedure and shall be subject to the same disposition as in appeals in connection with
adverse rulings on tax matters to the Court of Appeals. 57 (Emphasis supplied)
It is not difficult to divine why the legislature singled out the CTA as the court with jurisdiction to review
the ruling of the DTI Secretary in connection with the imposition of a safeguard measure. The Court
has long recognized the legislative determination to vest sole and exclusive jurisdiction on matters
involving internal revenue and customs duties to such a specialized court. 58 By the very nature of its
function, the CTA is dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject. 59
At the same time, since the CTA is a court of limited jurisdiction, its jurisdiction to take cognizance of a
case should be clearly conferred and should not be deemed to exist on mere implication. 60 Concededly,
Rep. Act No. 1125, the statute creating the CTA, does not extend to it the power to review decisions of
the DTI Secretary in connection with the imposition of safeguard measures. 61 Of course, at that time
which was before the advent of trade liberalization the notion of safeguard measures or safety nets
was not yet in vogue.
Undeniably, however, the SMA expanded the jurisdiction of the CTA by including review of the rulings
of the DTI Secretary in connection with the imposition of safeguard measures. However, Philcemcor
and the public respondents agree that the CTA has appellate jurisdiction over a decision of the DTI
Secretary imposing a safeguard measure, but not when his ruling is not to impose such measure.
In a related development, Rep. Act No. 9282, enacted on 30 March 2004, expressly vests unto the CTA
jurisdiction over "[d]ecisions of the Secretary of Trade and Industry, in case of nonagricultural product,
commodity or article xxx involving xxx safeguard measures under Republic Act No. 8800, where
either party may appeal the decision to impose or not to impose said duties."62 Had Rep. Act
No. 9282 already been in force at the beginning of the incidents subject of this case, there would have
been no need to make any deeper inquiry as to the extent of the CTA's jurisdiction. But as Rep. Act No.
9282 cannot be applied retroactively to the present case, the question of whether such jurisdiction
extends to a decision not to impose a safeguard measure will have to be settled principally on the
basis of the SMA.

Under Section 29 of the SMA, there are three requisites to enable the CTA to acquire jurisdiction over
the petition for review contemplated therein: (i) there must be a ruling by the DTI Secretary; (ii) the
petition must be filed by an interested party adversely affected by the ruling; and (iii) such ruling must
be in connection with the imposition of a safeguard measure. The first two requisites are clearly
present. The third requisite deserves closer scrutiny.
Contrary to the stance of the public respondents and Philcemcor, in this case where the DTI Secretary
decides not to impose a safeguard measure, it is the CTA which has jurisdiction to review his decision.
The reasons are as follows:
First. Split jurisdiction is abhorred.
Essentially, respondents' position is that judicial review of the DTI Secretary's ruling is exercised by two
different courts, depending on whether or not it imposes a safeguard measure, and in either case the
court exercising jurisdiction does so to the exclusion of the other. Thus, if the DTI decision involves the
imposition of a safeguard measure it is the CTA which has appellate jurisdiction; otherwise, it is the
Court of Appeals. Such setup is as novel and unusual as it is cumbersome and unwise. Essentially,
respondents advocate that Section 29 of the SMA has established split appellate jurisdiction over
rulings of the DTI Secretary on the imposition of safeguard measure.
This interpretation cannot be favored, as the Court has consistently refused to sanction split
jurisdiction.63 The power of the DTI Secretary to adopt or withhold a safeguard measure emanates from
the same statutory source, and it boggles the mind why the appeal modality would be such that one
appellate court is qualified if what is to be reviewed is a positive determination, and it is not if what is
appealed is a negative determination. In deciding whether or not to impose a safeguard measure,
provisional or general, the DTI Secretary would be evaluating only one body of facts and applying them
to one set of laws. The reviewing tribunal will be called upon to examine the same facts and the same
laws, whether or not the determination is positive or negative.
In short, if we were to rule for respondents we would be confirming the exercise by two judicial bodies
of jurisdiction over basically the same subject matterprecisely the split-jurisdiction situation which is
anathema to the orderly administration of justice.64 The Court cannot accept that such was the
legislative motive especially considering that the law expressly confers on the CTA, the tribunal with
the specialized competence over tax and tariff matters, the role of judicial review without mention of
any other court that may exercise corollary or ancillary jurisdiction in relation to the SMA. The provision
refers to the Court of Appeals but only in regard to procedural rules and dispositions of appeals from
the CTA to the Court of Appeals.65
The principle enunciated in Tejada v. Homestead Property Corporation66 is applicable to the case at
bar:
The Court agrees with the observation of the [that] when an administrative agency or body is
conferred quasi-judicial functions, all controversies relating to the subject matter
pertaining to its specialization are deemed to be included within the jurisdiction of
said administrative agency or body. Split jurisdiction is not favored.67
Second. The interpretation of the provisions of the SMA favors vesting untrammeled appellate
jurisdiction on the CTA.
A plain reading of Section 29 of the SMA reveals that Congress did not expressly bar the CTA from
reviewing a negative determination by the DTI Secretary nor conferred on the Court of Appeals such
review authority. Respondents note, on the other hand, that neither did the law expressly grant to the
CTA the power to review a negative determination. However, under the clear text of the law, the CTA is
vested with jurisdiction to review the ruling of the DTI Secretary " in connection with the imposition
of a safeguard measure." Had the law been couched instead to incorporate the phrase "the ruling
imposing a safeguard measure," then respondent's claim would have indisputable merit. Undoubtedly,
the phrase "in connection with" not only qualifies but clarifies the succeeding phrase "imposition of a

safeguard measure." As expounded later, the phrase also encompasses the opposite or converse ruling
which is the non-imposition of a safeguard measure.
In the American case of Shaw v. Delta Air Lines, Inc.,68 the United States Supreme Court, in interpreting
a key provision of the Employee Retirement Security Act of 1974, construed the phrase "relates to" in
its normal sense which is the same as "if it has connection with or reference to." 69 There is no serious
dispute that the phrase "in connection with" is synonymous to "relates to" or "reference to," and that
all three phrases are broadly expansive. This is affirmed not just by jurisprudential fiat, but also the
acquired connotative meaning of "in connection with" in common parlance. Consequently, with the use
of the phrase "in connection with," Section 29 allows the CTA to review not only the ruling imposing a
safeguard measure, but all other rulings related or have reference to the application for such
measure.
Now, let us determine the maximum scope and reach of the phrase "in connection with" as used in
Section 29 of the SMA. A literalist reading or linguistic survey may not satisfy. Even the US Supreme
Court in New York State Blue Cross Plans v. Travelers Ins.70 conceded that the phrases "relate to" or "in
connection with" may be extended to the farthest stretch of indeterminacy for, universally, relations or
connections are infinite and stop nowhere.71 Thus, in the case the US High Court, examining the same
phrase of the same provision of law involved in Shaw, resorted to looking at the statute and its
objectives as the alternative to an "uncritical literalism."72 A similar inquiry into the other provisions of
the SMA is in order to determine the scope of review accorded therein to the CTA. 73
The authority to decide on the safeguard measure is vested in the DTI Secretary in the case of nonagricultural products, and in the Secretary of the Department of Agriculture in the case of agricultural
products.74 Section 29 is likewise explicit that only the rulings of the DTI Secretary or the Agriculture
Secretary may be reviewed by the CTA.75 Thus, the acts of other bodies that were granted some
powers by the SMA, such as the Tariff Commission, are not subject to direct review by the CTA.
Under the SMA, the Department Secretary concerned is authorized to decide on several matters.
Within thirty (30) days from receipt of a petition seeking the imposition of a safeguard measure, or
from the date he mademotu proprio initiation, the Secretary shall make a preliminary determination on
whether the increased imports of the product under consideration substantially cause or threaten to
cause serious injury to the domestic industry.76 Such ruling is crucial since only upon the Secretary's
positive preliminary determination that a threat to the domestic industry exists shall the matter be
referred to the Tariff Commission for formal investigation, this time, to determine whether the general
safeguard measure should be imposed or not.77 Pursuant to a positive preliminary determination, the
Secretary may also decide that the imposition of a provisional safeguard measure would be warranted
under Section 8 of the SMA.78 The Secretary is also authorized to decide, after receipt of the report of
the Tariff Commission, whether or not to impose the general safeguard measure, and if in the
affirmative, what general safeguard measures should be applied. 79 Even after the general safeguard
measure is imposed, the Secretary is empowered to extend the safeguard measure, 80 or terminate,
reduce or modify his previous rulings on the general safeguard measure. 81
With the explicit grant of certain powers involving safeguard measures by the SMA on the DTI
Secretary, it follows that he is empowered to rule on several issues. These are the issues which arise in
connection with, or in relation to, the imposition of a safeguard measure. They may arise at different
stages the preliminary investigation stage, the post-formal investigation stage, or the post-safeguard
measure stage yet all these issues do become ripe for resolution because an initiatory action has
been taken seeking the imposition of a safeguard measure. It is the initiatory action for the imposition
of a safeguard measure that sets the wheels in motion, allowing the Secretary to make successive
rulings, beginning with the preliminary determination.
Clearly, therefore, the scope and reach of the phrase "in connection with," as intended by Congress,
pertain to all rulings of the DTI Secretary or Agriculture Secretary which arise from the time an
application or motu proprioinitiation for the imposition of a safeguard measure is taken. Indeed, the
incidents which require resolution come to the fore only because there is an initial application or action
seeking the imposition of a safeguard measure. From the legislative standpoint, it was a matter of
sense and practicality to lump up the questions related to the initiatory application or action for
safeguard measure and to assign only one court and; that is the CTA to initially review all the rulings

related to such initiatory application or action. Both directions Congress put in place by employing the
phrase "in connection with" in the law.
Given the relative expanse of decisions subject to judicial review by the CTA under Section 29, we do
not doubt that a negative ruling refusing to impose a safeguard measure falls within the scope of its
jurisdiction. On a literal level, such negative ruling is "a ruling of the Secretary in connection with the
imposition of a safeguard measure," as it is one of the possible outcomes that may result from the
initial application or action for a safeguard measure. On a more critical level, the rulings of the DTI
Secretary in connection with a safeguard measure, however diverse the outcome may be, arise from
the same grant of jurisdiction on the DTI Secretary by the SMA. 82 The refusal by the DTI Secretary to
grant a safeguard measure involves the same grant of authority, the same statutory prescriptions, and
the same degree of discretion as the imposition by the DTI Secretary of a safeguard measure.
The position of the respondents is one of "uncritical literalism" 83 incongruent with the animus of the
law. Moreover, a fundamentalist approach to Section 29 is not warranted, considering the absurdity of
the consequences.
Third. Interpretatio Talis In Ambiguis Semper Fienda Est, Ut Evitur Inconveniens Et Absurdum.84
Even assuming arguendo that Section 29 has not expressly granted the CTA jurisdiction to review a
negative ruling of the DTI Secretary, the Court is precluded from favoring an interpretation that would
cause inconvenience and absurdity.85 Adopting the respondents' position favoring the CTA's minimal
jurisdiction would unnecessarily lead to illogical and onerous results.
Indeed, it is illiberal to assume that Congress had intended to provide appellate relief to rulings
imposing a safeguard measure but not to those declining to impose the measure. Respondents might
argue that the right to relief from a negative ruling is not lost since the applicant could, as Philcemcor
did, question such ruling through a special civil action for certiorari under Rule 65 of the 1997 Rules of
Civil Procedure, in lieu of an appeal to the CTA. Yet these two reliefs are of differing natures and
gravamen. While an appeal may be predicated on errors of fact or errors of law, a special civil action
for certiorari is grounded on grave abuse of discretion or lack of or excess of jurisdiction on the part of
the decider. For a special civil action for certiorari to succeed, it is not enough that the questioned act
of the respondent is wrong. As the Court clarified in Sempio v. Court of Appeals:
A tribunal, board or officer acts without jurisdiction if it/he does not have the legal power to
determine the case. There is excess of jurisdiction where, being clothed with the power to
determine the case, the tribunal, board or officer oversteps its/his authority as determined by
law. And there is grave abuse of discretion where the tribunal, board or officer acts in a
capricious, whimsical, arbitrary or despotic manner in the exercise of his judgment as to be
said to be equivalent to lack of jurisdiction. Certiorari is often resorted to in order to correct
errors of jurisdiction. Where the error is one of law or of fact, which is a mistake of judgment,
appeal is the remedy.86
It is very conceivable that the DTI Secretary, after deliberate thought and careful evaluation of the
evidence, may either make a negative preliminary determination as he is so empowered under Section
7 of the SMA, or refuse to adopt the definitive safeguard measure under Section 13 of the same law.
Adopting the respondents' theory, this negative ruling is susceptible to reversal only through a special
civil action for certiorari, thus depriving the affected party the chance to elevate the ruling on appeal
on the rudimentary grounds of errors in fact or in law. Instead, and despite whatever indications that
the DTI Secretary acted with measure and within the bounds of his jurisdiction are, the aggrieved party
will be forced to resort to a gymnastic exercise, contorting the straight and narrow in an effort to
discombobulate the courts into believing that what was within was actually beyond and what was
studied and deliberate actually whimsical and capricious. What then would be the remedy of the party
aggrieved by a negative ruling that simply erred in interpreting the facts or the law? It certainly cannot
be the special civil action for certiorari, for as the Court held in Silverio v. Court of Appeals: "Certiorari
is a remedy narrow in its scope and inflexible in its character. It is not a general utility tool in the legal
workshop."87

Fortunately, this theoretical quandary need not come to pass. Section 29 of the SMA is worded in such
a way that it places under the CTA's judicial review all rulings of the DTI Secretary, which are
connected with the imposition of a safeguard measure. This is sound and proper in light of the
specialized jurisdiction of the CTA over tax matters. In the same way that a question of whether to tax
or not to tax is properly a tax matter, so is the question of whether to impose or not to impose a
definitive safeguard measure.
On another note, the second paragraph of Section 29 similarly reveals the legislative intent that rulings
of the DTI Secretary over safeguard measures should first be reviewed by the CTA and not the Court of
Appeals. It reads:
The petition for review shall comply with the same requirements and shall follow the same
rules of procedure and shall be subject to the same disposition as in appeals in connection with
adverse rulings on tax matters to the Court of Appeals.
This is the only passage in the SMA in which the Court of Appeals is mentioned. The express wish of
Congress is that the petition conform to the requirements and procedure under Rule 43 of the Rules of
Civil Procedure. Since Congress mandated that the form and procedure adopted be analogous to a
review of a CTA ruling by the Court of Appeals, the legislative contemplation could not have been that
the appeal be directly taken to the Court of Appeals.
Issue of Binding Effect of Tariff
Commission's Factual Determination
on DTI Secretary.
The next issue for resolution is whether the factual determination made by the Tariff Commission under
the SMA is binding on the DTI Secretary. Otherwise stated, the question is whether the DTI Secretary
may impose general safeguard measures in the absence of a positive final determination by the Tariff
Commission.
The Court of Appeals relied upon Section 13 of the SMA in ruling that the findings of the Tariff
Commission do not necessarily constitute a final decision. Section 13 details the procedure for the
adoption of a safeguard measure, as well as the steps to be taken in case there is a negative final
determination. The implication of the Court of Appeals' holding is that the DTI Secretary may adopt a
definitive safeguard measure, notwithstanding a negative determination made by the Tariff
Commission.
Undoubtedly, Section 13 prescribes certain limitations and restrictions before general safeguard
measures may be imposed. However, the most fundamental restriction on the DTI Secretary's
power in that respect is contained in Section 5 of the SMAthat there should first be a
positive final determination of the Tariff Commissionwhich the Court of Appeals curiously all
but ignored. Section 5 reads:
Sec. 5. Conditions for the Application of General Safeguard Measures. The Secretary shall
apply a general safeguard measure upon a positive final determination of the
[Tariff] Commission that a product is being imported into the country in increased quantities,
whether absolute or relative to the domestic production, as to be a substantial cause of serious
injury or threat thereof to the domestic industry; however, in the case of non-agricultural
products, the Secretary shall first establish that the application of such safeguard measures
will be in the public interest. (emphasis supplied)
The plain meaning of Section 5 shows that it is the Tariff Commission that has the power to make a
"positive final determination." This power lodged in the Tariff Commission, must be distinguished from
the power to impose the general safeguard measure which is properly vested on the DTI Secretary. 88
All in all, there are two condition precedents that must be satisfied before the DTI Secretary may
impose a general safeguard measure on grey Portland cement. First, there must be a positive final
determination by the Tariff Commission that a product is being imported into the country in increased

quantities (whether absolute or relative to domestic production), as to be a substantial cause of

serious injury or threat to the domestic industry. Second, in the case of non-agricultural products the
Secretary must establish that the application of such safeguard measures is in the public interest. 89 As
Southern Cross argues, Section 5 is quite clear-cut, and it is impossible to finagle a different conclusion
even through overarching methods of statutory construction. There is no safer nor better settled canon
of interpretation that when language is clear and unambiguous it must be held to mean what it plainly
expresses:90 In the quotable words of an illustrious member of this Court, thus:
[I]f a statute is clear, plain and free from ambiguity, it must be given its literal meaning and
applied without attempted interpretation. The verba legis or plain meaning rule rests on the
valid presumption that the words employed by the legislature in a statute correctly express its
intent or will and preclude the court from construing it differently. The legislature is presumed
to know the meaning of the words, to have used words advisedly, and to have expressed its
intent by the use of such words as are found in the statute. 91
Moreover, Rule 5 of the Implementing Rules and Regulations of the SMA, 92 which interprets Section 5 of
the law, likewise requires a positive final determination on the part of the Tariff Commission before the
application of the general safeguard measure.
The SMA establishes a distinct allocation of functions between the Tariff Commission and the DTI
Secretary. The plain meaning of Section 5 shows that it is the Tariff Commission that has the power to
make a "positive final determination." This power, which belongs to the Tariff Commission, must be
distinguished from the power to impose general safeguard measure properly vested on the DTI
Secretary. The distinction is vital, as a "positive final determination" clearly antecedes, as a condition
precedent, the imposition of a general safeguard measure. At the same time, a positive final
determination does not necessarily result in the imposition of a general safeguard measure. Under
Section 5, notwithstanding the positive final determination of the Tariff Commission, the DTI Secretary
is tasked to decide whether or not that the application of the safeguard measures is in the public
interest.
It is also clear from Section 5 of the SMA that the positive final determination to be undertaken by the
Tariff Commission does not entail a mere gathering of statistical data. In order to arrive at such
determination, it has to establish causal linkages from the statistics that it compiles and evaluates:
after finding there is an importation in increased quantities of the product in question, that such
importation is a substantial cause of serious threat or injury to the domestic industry.
The Court of Appeals relies heavily on the legislative record of a congressional debate during
deliberations on the SMA to assert a purported legislative intent that the findings of the Tariff
Commission do not bind the DTI Secretary.93 Yet as explained earlier, the plain meaning of Section 5
emphasizes that only if the Tariff Commission renders a positive determination could the DTI Secretary
impose a safeguard measure. Resort to the congressional records to ascertain legislative intent is not
warranted if a statute is clear, plain and free from ambiguity. The legislature is presumed to know the
meaning of the words, to have used words advisedly, and to have expressed its intent by the use of
such words as are found in the statute.94
Indeed, the legislative record, if at all to be availed of, should be approached with extreme caution, as
legislative debates and proceedings are powerless to vary the terms of the statute when the meaning
is clear.95 Our holding in Civil Liberties Union v. Executive Secretary 96 on the resort to deliberations of
the constitutional convention to interpret the Constitution is likewise appropriate in ascertaining
statutory intent:
While it is permissible in this jurisdiction to consult the debates and proceedings of the
constitutional convention in order to arrive at the reason and purpose of the resulting
Constitution, resort thereto may be had only when other guides fail as said proceedings are
powerless to vary the terms of the Constitution when the meaning is clear. Debates in the
constitutional convention "are of value as showing the views of the individual members, and as
indicating the reasons for their votes, but they give us no light as to the views of the large
majority who did not talk xxx. We think it safer to construe the constitution from what appears
upon its face."97

Moreover, it is easy to selectively cite passages, sometimes out of their proper context, in order to
assert a misleading interpretation. The effect can be dangerous. Minority or solitary views, anecdotal
ruminations, or even the occasional crude witticisms, may improperly acquire the mantle of legislative
intent by the sole virtue of their publication in the authoritative congressional record. Hence, resort to
legislative deliberations is allowable when the statute is crafted in such a manner as to leave room for
doubt on the real intent of the legislature.
Section 5 plainly evinces legislative intent to restrict the DTI Secretary's power to impose a general
safeguard measure by preconditioning such imposition on a positive determination by the Tariff
Commission. Such legislative intent should be given full force and effect, as the executive power to
impose definitive safeguard measures is but a delegated powerthe power of taxation, by nature and
by command of the fundamental law, being a preserve of the legislature. 98 Section 28(2), Article VI of
the 1987 Constitution confirms the delegation of legislative power, yet ensures that the prerogative of
Congress to impose limitations and restrictions on the executive exercise of this power:
The Congress may, by law, authorize the President to fix within specified limits, and subject to
such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the national
development program of the Government.99
The safeguard measures which the DTI Secretary may impose under the SMA may take the following
variations, to wit: (a) an increase in, or imposition of any duty on the imported product; (b) a decrease
in or the imposition of a tariff-rate quota on the product; (c) a modification or imposition of any
quantitative restriction on the importation of the product into the Philippines; (d) one or more
appropriate adjustment measures, including the provision of trade adjustment assistance; and (e) any
combination of the above-described actions. Except for the provision of trade adjustment assistance,
the measures enumerated by the SMA are essentially imposts, which precisely are the subject of
delegation under Section 28(2), Article VI of the 1987 Constitution. 100
This delegation of the taxation power by the legislative to the executive is authorized by the
Constitution itself.101At the same time, the Constitution also grants the delegating authority (Congress)
the right to impose restrictions and limitations on the taxation power delegated to the President. 102 The
restrictions and limitations imposed by Congress take on the mantle of a constitutional command,
which the executive branch is obliged to observe.
The SMA empowered the DTI Secretary, as alter ego of the President,103 to impose definitive general
safeguard measures, which basically are tariff imposts of the type spoken of in the Constitution.
However, the law did not grant him full, uninhibited discretion to impose such measures. The DTI
Secretary authority is derived from the SMA; it does not flow from any inherent executive power. Thus,
the limitations imposed by Section 5 are absolute, warranted as they are by a constitutional fiat. 104
Philcemcor cites our 1912 ruling in Lamb v. Phipps105 to assert that the DTI Secretary, having the final
decision on the safeguard measure, has the power to evaluate the findings of the Tariff Commission
and make an independent judgment thereon. Given the constitutional and statutory limitations
governing the present case, the citation is misplaced. Lamb pertained to the discretion of the Insular
Auditor of the Philippine Islands, whom, as the Court recognized, "[t]he statutes of the United States
require[d] xxx to exercise his judgment upon the legality xxx [of] provisions of law and resolutions of
Congress providing for the payment of money, the means of procuring testimony upon which he may
act."106
Thus in Lamb, while the Court recognized the wide latitude of discretion that may have been vested on
the Insular Auditor, it also recognized that such latitude flowed from, and is consequently limited by,
statutory grant. However, in this case, the provision of the Constitution in point expressly recognizes
the authority of Congress to prescribe limitations in the case of tariffs, export/import quotas and other
such safeguard measures. Thus, the broad discretion granted to the Insular Auditor of the Philippine
Islands cannot be analogous to the discretion of the DTI Secretary which is circumscribed by Section 5
of the SMA.

For that matter, Cario v. Commissioner on Human Rights,107 likewise cited by Philcemcor, is also
inapplicable owing to the different statutory regimes prevailing over that case and the present petition.
In Cario, the Court ruled that the constitutional power of the Commission on Human Rights (CHR) to
investigate human rights' violations did not extend to adjudicating claims on the merits. 108 Philcemcor
claims that the functions of the Tariff Commission being "only investigatory," it could neither decide
nor adjudicate.109
The applicable law governing the issue in Cario is Section 18, Article XIII of the Constitution, which
delineates the powers and functions of the CHR. The provision does not vest on the CHR the power to
adjudicate cases, but only to investigate all forms of human rights violations. 110 Yet, without modifying
the thorough disquisition of the Court in Cario on the general limitations on the investigatory power,
the precedent is inapplicable because of the difference in the involved statutory frameworks. The
Constitution does not repose binding effect on the results of the CHR's investigation. 111 On the other
hand, through Section 5 of the SMA and under the authority of Section 28(2), Article VI of the
Constitution, Congress did intend to bind the DTI Secretary to the determination made by the Tariff
Commission.112 It is of no consequence that such determination results from the exercise of
investigatory powers by the Tariff Commission since Congress is well within its constitutional mandate
to limit the authority of the DTI Secretary to impose safeguard measures in the manner that it sees fit.
The Court of Appeals and Philcemcor also rely on Section 13 of the SMA and Rule 13 of the SMA's
Implementing Rules in support of the view that the DTI Secretary may decide independently of the
determination made by the Tariff Commission. Admittedly, there are certain infelicities in the language
of Section 13 and Rule 13. But reliance should not be placed on the textual imprecisions. Rather,
Section 13 and Rule 13 must be viewed in light of the fundamental prescription imposed by Section
5. 113
Section 13 of the SMA lays down the procedure to be followed after the Tariff Commission renders its
report. The provision reads in full:
SEC. 13. Adoption of Definitive Measures. Upon its positive determination, the Commission
shall recommend to the Secretary an appropriate definitive measure, in the form of:
(a) An increase in, or imposition of, any duty on the imported product;
(b) A decrease in or the imposition of a tariff-rate quota (MAV) on the product;
(c) A modification or imposition of any quantitative restriction on the importation of the
product into the Philippines;
(d) One or more appropriate adjustment measures, including the provision of trade adjustment
assistance;
(e) Any combination of actions described in subparagraphs (a) to (d).
The Commission may also recommend other actions, including the initiation of international
negotiations to address the underlying cause of the increase of imports of the product, to
alleviate the injury or threat thereof to the domestic industry, and to facilitate positive
adjustment to import competition.
The general safeguard measure shall be limited to the extent of redressing or preventing the
injury and to facilitate adjustment by the domestic industry from the adverse effects directly
attributed to the increased imports: Provided, however, That when quantitative import
restrictions are used, such measures shall not reduce the quantity of imports below the
average imports for the three (3) preceding representative years, unless clear justification is
given that a different level is necessary to prevent or remedy a serious injury.

A general safeguard measure shall not be applied to a product originating from a developing
country if its share of total imports of the product is less than three percent (3%): Provided,
however, That developing countries with less than three percent (3%) share collectively
account for not more than nine percent (9%) of the total imports.
The decision imposing a general safeguard measure, the duration of which is more than one
(1) year, shall be reviewed at regular intervals for purposes of liberalizing or reducing its
intensity. The industry benefiting from the application of a general safeguard measure shall be
required to show positive adjustment within the allowable period. A general safeguard measure
shall be terminated where the benefiting industry fails to show any improvement, as may be
determined by the Secretary.
The Secretary shall issue a written instruction to the heads of the concerned government
agencies to implement the appropriate general safeguard measure as determined by the
Secretary within fifteen (15) days from receipt of the report.
In the event of a negative final determination, or if the cash bond is in excess of the definitive
safeguard duty assessed, the Secretary shall immediately issue, through the Secretary of
Finance, a written instruction to the Commissioner of Customs, authorizing the return of the
cash bond or the remainder thereof, as the case may be, previously collected as provisional
general safeguard measure within ten (10) days from the date a final decision has been
made: Provided, That the government shall not be liable for any interest on the amount to be
returned. The Secretary shall not accept for consideration another petition from the same
industry, with respect to the same imports of the product under consideration within one (1)
year after the date of rendering such a decision.
When the definitive safeguard measure is in the form of a tariff increase, such increase shall
not be subject or limited to the maximum levels of tariff as set forth in Section 401(a) of the
Tariff and Customs Code of the Philippines.
To better comprehend Section 13, note must be taken of the distinction between the investigatory and
recommendatory functions of the Tariff Commission under the SMA.
The word "determination," as used in the SMA, pertains to the factual findings on whether there are
increased imports into the country of the product under consideration, and on whether such increased
imports are a substantial cause of serious injury or threaten to substantially cause serious injury to the
domestic industry.114The SMA explicitly authorizes the DTI Secretary to make a preliminary
determination,115 and the Tariff Commission to make the final determination. 116 The distinction is
fundamental, as these functions are not interchangeable. The Tariff Commission makes its
determination only after a formal investigation process, with such investigation initiated only if there is
a positive preliminary determination by the DTI Secretary under Section 7 of the SMA. 117 On the other
hand, the DTI Secretary may impose definitive safeguard measure only if there is a positive final
determination made by the Tariff Commission.118
In contrast, a "recommendation" is a suggested remedial measure submitted by the Tariff Commission
under Section 13 after making a positive final determination in accordance with Section 5. The Tariff
Commission is not empowered to make a recommendation absent a positive final determination on its
part.119 Under Section 13, the Tariff Commission is required to recommend to the [DTI] Secretary an
"appropriate definitive measure."120 The Tariff Commission "may also recommend other actions,
including the initiation of international negotiations to address the underlying cause of the increase of
imports of the products, to alleviate the injury or threat thereof to the domestic industry and to
facilitate positive adjustment to import competition."121
The recommendations of the Tariff Commission, as rendered under Section 13, are not obligatory on
the DTI Secretary. Nothing in the SMA mandates the DTI Secretary to adopt the recommendations
made by the Tariff Commission. In fact, the SMA requires that the DTI Secretary establish that the
application of such safeguard measures is in the public interest, notwithstanding the Tariff
Commission's recommendation on the appropriate safeguard measure based on its positive final
determination.122 The non-binding force of the Tariff Commission's recommendations is congruent with

the command of Section 28(2), Article VI of the 1987 Constitution that only the President may be
empowered by the Congress to impose appropriate tariff rates, import/export quotas and other similar
measures.123 It is the DTI Secretary, as alter ego of the President, who under the SMA may impose such
safeguard measures subject to the limitations imposed therein. A contrary conclusion would in essence
unduly arrogate to the Tariff Commission the executive power to impose the appropriate tariff
measures. That is why the SMA empowers the DTI Secretary to adopt safeguard measures other than
those recommended by the Tariff Commission.
Unlike the recommendations of the Tariff Commission, its determination has a different effect on the
DTI Secretary. Only on the basis of a positive final determination made by the Tariff Commission under
Section 5 can the DTI Secretary impose a general safeguard measure. Clearly, then the DTI Secretary
is bound by thedetermination made by the Tariff Commission.
Some confusion may arise because the sixth paragraph of Section 13 124 uses the variant word
"determined" in a different context, as it contemplates "the appropriate general safeguard measure as
determined by the Secretary within fifteen (15) days from receipt of the report." Quite plainly, the word
"determined" in this context pertains to the DTI Secretary's power of choice of the appropriate
safeguard measure, as opposed to the Tariff Commission's power to determine the existence of
conditions necessary for the imposition of any safeguard measure. In relation to Section 5, such choice
also relates to the mandate of the DTI Secretary to establish that the application of safeguard
measures is in the public interest, also within the fifteen (15) day period. Nothing in Section 13
contradicts the instruction in Section 5 that the DTI Secretary is allowed to impose the general
safeguard measures only if there is a positive determination made by the Tariff Commission.
Unfortunately, Rule 13.2 of the Implementing Rules of the SMA is captioned "Final Determination by
the Secretary." The assailed Decision and Philcemcor latch on this phraseology to imply that the factual
determination rendered by the Tariff Commission under Section 5 may be amended or reversed by the
DTI Secretary. Of course, implementing rules should conform, not clash, with the law that they seek to
implement, for a regulation which operates to create a rule out of harmony with the statute is a
nullity.125 Yet imperfect draftsmanship aside, nothing in Rule 13.2 implies that the DTI Secretary can set
aside the determination made by the Tariff Commission under the aegis of Section 5. This can be seen
by examining the specific provisions of Rule 13.2, thus:
RULE 13.2. Final Determination by the Secretary
RULE 13.2.a. Within fifteen (15) calendar days from receipt of the Report of the
Commission, the Secretary shall make a decision, taking into consideration the
measures recommended by the Commission.
RULE 13.2.b. If the determination is affirmative, the Secretary shall issue, within two
(2) calendar days after making his decision, a written instruction to the heads of the
concerned government agencies to immediately implement the appropriate general
safeguard measure as determined by him. Provided, however, that in the case of nonagricultural products, the Secretary shall first establish that the imposition of the
safeguard measure will be in the public interest.
RULE 13.2.c. Within two (2) calendar days after making his decision, the Secretary
shall also order its publication in two (2) newspapers of general circulation. He shall
also furnish a copy of his Order to the petitioner and other interested parties, whether
affirmative or negative. (Emphasis supplied.)
Moreover, the DTI Secretary does not have the power to review the findings of the Tariff Commission
for it is not subordinate to the Department of Trade and Industry ("DTI"). It falls under the supervision,
not of the DTI nor of the Department of Finance (as mistakenly asserted by Southern Cross), 126 but of
the National Economic Development Authority, an independent planning agency of the
government of co-equal rank as the DTI.127 As the supervision and control of a Department
Secretary is limited to the bureaus, offices, and agencies under him, 128 the DTI Secretary generally
cannot exercise review authority over actions of the Tariff Commission. Neither does the SMA
specifically authorize the DTI Secretary to alter, amend or modify in any way the determination made

by the Tariff Commission. The most that the DTI Secretary could do to express displeasure over the
Tariff Commission's actions is to ignore its recommendation, but not its determination.
The word "determination" as used in Rule 13.2 of the Implementing Rules is dissonant with the same
word as employed in the SMA, which in the latter case is undeviatingly in reference to the
determination made by the Tariff Commission. Beyond the resulting confusion, however, the divergent
use in Rule 13.2 is explicable as the Rule textually pertains to the power of the DTI Secretary to review
the recommendations of the Tariff Commission, not the latter's determination. Indeed, an examination
of the specific provisions show that there is no real conflict to reconcile. Rule 13.2 respects the logical
order imposed by the SMA. The Rule does not remove the essential requirement under Section 5 that a
positive final determination be made by the Tariff Commission before a definitive safeguard measure
may be imposed by the DTI Secretary.
The assailed Decision characterizes the findings of the Tariff Commission as merely recommendatory
and points to the DTI Secretary as the authority who renders the final decision. 129 At the same time,
Philcemcor asserts that the Tariff Commission's functions are merely investigatory, and as such do not
include the power to decide or adjudicate. These contentions, viewed in the context of the
fundamental requisite set forth by Section 5, are untenable. They run counter to the statutory
prescription that a positive final determination made by the Tariff Commission should first be obtained
before the definitive safeguard measures may be laid down.
Was it anomalous for Congress to have provided for a system whereby the Tariff Commission may
preclude the DTI, an office of higher rank, from imposing a safeguard measure? Of course, this Court
does not inquire into the wisdom of the legislature but only charts the boundaries of powers and
functions set in its enactments. But then, it is not difficult to see the internal logic of this statutory
framework.
For one, as earlier stated, the DTI cannot exercise review powers over the Tariff Commission which is
not its subordinate office.
Moreover, the mechanism established by Congress establishes a measure of check and balance
involving two different governmental agencies with disparate specializations. The matter of safeguard
measures is of such national importance that a decision either to impose or not to impose then could
have ruinous effects on companies doing business in the Philippines. Thus, it is ideal to put in place a
system which affords all due deliberation and calls to fore various governmental agencies exercising
their particular specializations.
Finally, if this arrangement drawn up by Congress makes it difficult to obtain a general safeguard
measure, it is because such safeguard measure is the exception, rather than the rule. The Philippines
is obliged to observe its obligations under the GATT, under whose framework trade liberalization, not
protectionism, is laid down. Verily, the GATT actually prescribes conditions before a member-country
may impose a safeguard measure. The pertinent portion of the GATT Agreement on Safeguards reads:
2. A Member may only apply a safeguard measure to a product only if that member has
determined, pursuant to the provisions set out below, that such product is being imported into
its territory in such increased quantities, absolute or relative to domestic production, and
under such conditions as to cause or threaten to cause serious injury to the domestic industry
that produces like or directly competitive products.130
3. (a) A Member may apply a safeguard measure only following an investigation by the
competent authorities of that Member pursuant to procedures previously established and
made public in consonance with Article X of the GATT 1994. This investigation shall include
reasonable public notice to all interested parties and public hearings or other appropriate
means in which importers, exporters and other interested parties could present evidence and
their views, including the opportunity to respond to the presentations of other parties and to
submit their views, inter alia, as to whether or not the application of a safeguard measure
would be in the public interest. The competent authorities shall publish a report setting forth
their findings and reasoned conclusions reached on all pertinent issues of fact and law. 131

The SMA was designed not to contradict the GATT, but to complement it. The two requisites laid down
in Section 5 for a positive final determination are the same conditions provided under the GATT
Agreement on Safeguards for the application of safeguard measures by a member country. Moreover,
the investigatory procedure laid down by the SMA conforms to the procedure required by the GATT
Agreement on Safeguards. Congress has chosen the Tariff Commission as the competent authority to
conduct such investigation. Southern Cross stresses that applying the provision of the GATT Agreement
on Safeguards, the Tariff Commission is clearly empowered to arrive at binding conclusions. 132 We
agree: binding on the DTI Secretary is the Tariff Commission's determinations on whether a product is
imported in increased quantities, absolute or relative to domestic production and whether any such
increase is a substantial cause of serious injury or threat thereof to the domestic industry. 133
Satisfied as we are with the proper statutory paradigm within which the SMA should be analyzed, the
flaws in the reasoning of the Court of Appeals and in the arguments of the respondents become
apparent. To better understand the dynamics of the procedure set up by the law leading to the
imposition of definitive safeguard measures, a brief step-by-step recount thereof is in order.
1. After the initiation of an action involving a general safeguard measure, 134 the DTI Secretary makes a
preliminary determination whether the increased imports of the product under consideration
substantially cause or threaten to substantially cause serious injury to the domestic industry, 135 and
whether the imposition of a provisional measure is warranted under Section 8 of the SMA. 136 If the
preliminary determination is negative, it is implied that no further action will be taken on the
application.
2. When his preliminary determination is positive, the Secretary immediately transmits the records
covering the application to the Tariff Commission for immediate formal investigation. 137
3. The Tariff Commission conducts its formal investigation, keyed towards making a final
determination. In the process, it holds public hearings, providing interested parties the opportunity to
present evidence or otherwise be heard.138 To repeat, Section 5 enumerates what the Tariff Commission
is tasked to determine: (a) whether a product is being imported into the country in increased
quantities, irrespective of whether the product is absolute or relative to the domestic production; and
(b) whether the importation in increased quantities is such that it causes serious injury or threat to the
domestic industry.139 The findings of the Tariff Commission as to these matters constitute the final
determination, which may be either positive or negative.
4. Under Section 13 of the SMA, if the Tariff Commission makes a positive determination, the Tariff
Commission "recommends to the [DTI] Secretary an appropriate definitive measure." The Tariff
Commission "may also recommend other actions, including the initiation of international negotiations
to address the underlying cause of the increase of imports of the products, to alleviate the injury or
threat thereof to the domestic industry, and to facilitate positive adjustment to import competition." 140
5. If the Tariff Commission makes a positive final determination, the DTI Secretary is then to decide,
within fifteen (15) days from receipt of the report, as to what appropriate safeguard measures should
he impose.
6. However, if the Tariff Commission makes a negative final determination, the DTI Secretary cannot
impose any definitive safeguard measure. Under Section 13, he is instructed instead to return
whatever cash bond was paid by the applicant upon the initiation of the action for safeguard measure.
The Effect of the Court's Decision
The Court of Appeals erred in remanding the case back to the DTI Secretary, with the instruction that
the DTI Secretary may impose a general safeguard measure even if there is no positive final
determination from the Tariff Commission. More crucially, the Court of Appeals could not have acquired
jurisdiction over Philcemcor's petition for certiorari in the first place, as Section 29 of the SMA properly
vests jurisdiction on the CTA. Consequently, the assailed Decision is an absolute nullity, and we declare
it as such.

What is the effect of the nullity of the assailed Decision on the 5 June 2003 Decision of the DTI
Secretary imposing the general safeguard measure? We have recognized that any initial judicial review
of a DTI ruling in connection with the imposition of a safeguard measure belongs to the CTA. At the
same time, the Court also recognizes the fundamental principle that a null and void judgment cannot
produce any legal effect. There is sufficient cause to establish that the 5 June 2003 Decision of the DTI
Secretary resulted from the assailed Court of Appeals Decision, even if the latter had not yet become
final. Conversely, it can be concluded that it was because of the putative imprimatur of the Court of
Appeals' Decision that the DTI Secretary issued his ruling imposing the safeguard measure. Since the 5
June 2003 Decision derives its legal effect from the void Decisionof the Court of Appeals, this ruling of
the DTI Secretary is consequently void. The spring cannot rise higher than the source.
The DTI Secretary himself acknowledged that he drew stimulating force from the appellate
court's Decision for in his own 5 June 2003 Decision, he declared:
From the aforementioned ruling, the CA has remanded the case to the DTI Secretary for a final
decision. Thus, there is no legal impediment for the Secretary to decide on the application. 141
The inescapable conclusion is that the DTI Secretary needed the assailed Decision of the Court of
Appeals to justify his rendering a second Decision. He explicitly invoked the Court of
Appeals' Decision as basis for rendering his 5 June 2003 ruling, and implicitly recognized that without
such Decision he would not have the authority to revoke his previous ruling and render a new, obverse
ruling.
It is clear then that the 25 June 2003 Decision of the DTI Secretary is a product of the void Decision, it
being an attempt to carry out such null judgment. There is therefore no choice but to declare it void as
well, lest we sanction the perverse existence of a fruit from a non-existent tree. It does not even
matter what the disposition of the 25 June 2003 Decision was, its nullity would be warranted even if
the DTI Secretary chose to uphold his earlier ruling denying the application for safeguard measures.
It is also an unfortunate spectacle to behold the DTI Secretary, seeking to enforce a judicial decision
which is not yet final and actually pending review on appeal. Had it been a judge who attempted to
enforce a decision that is not yet final and executory, he or she would have readily been subjected to
sanction by this Court. The DTI Secretary may be beyond the ambit of administrative review by this
Court, but we are capacitated to allocate the boundaries set by the law of the land and to exact fealty
to the legal order, especially from the instrumentalities and officials of government.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is DECLARED
NULL AND VOID and SET ASIDE. The Decision of the DTI Secretary dated 25 June 2003 is also
DECLARED NULL AND VOID and SET ASIDE. No Costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
THIRD DIVISION
5. G.R. No. 159647 April 15, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioners,
vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.
DECISION
PANGANIBAN, J.:

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 Review1 under Rule 45 of the Rules of Court, seeking to set aside the August
29, 2002 Decision2 and the August 11, 2003 Resolution3 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 denied petitioners Motion for Reconsideration.
The Facts
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.
"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 Decision5 dismissing respondents Petition for lack of
merit. In said decision, the [CTA] justified its ruling with the following ratiocination:
x x x, 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 x x.
x x x x x x x x x
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. 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
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 raises the following issues for our consideration:
"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 Sales Discount
as Tax Credit Despite Net Loss
Section 4a) of RA 743210 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 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 3420 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 Atax deduction, on the other, reduces the income that is subject to tax22 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 credit can 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 credit may 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 VATregistered 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 the processing of sardines,
mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the contract price
of public work contracts entered into with the government, again, no prior tax payments are needed
for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may,
under Section 112(A), apply for the issuance of a tax credit certificate 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 deduction from the 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 the state 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 Pambansa Blg. (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 atax 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
finding32 that the carry-over of tax creditsunder 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 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 statement39 or financial report upon which theincome 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 x x 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
statement50 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
accounts54 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 sold56 -- is deducted
from gross sales to come up with the gross income, profit or margin57 derived from business.58 In
another provision therein, sales discountsthat 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 arms-length 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 the availment 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. Ubi lex non
distinguit, nec nos distinguere debemus. 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 from gross 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 theincome 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 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 statute71 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 sales74 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 revalidated75accordingly. 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 verba legis in statutory construction is
thus applicable x x x. 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, and public 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 asjust 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.80Tax measures are but "enforced contributions exacted on pain of penal sanctions" 81 and
"clearly imposed for apublic 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 its gross 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 x x services available to all the people at affordable
cost"87 and of giving "priority for the needs of the x x x 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 the availment 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, hindi ba?
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 that private hospitals, di ba ganon 'yan?
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public
institutions, so, puwede na po nating hindi isama yung mga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin?
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?
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 na lang natin para walang cash-out ano?
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.
REP. AQUINO. Ano ba yung establishments na covered?
SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go back to
Section 4 ha?
REP. AQUINO. Oho.
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. Ganon ba 'yon?
REP. AQUINO. Yah.
SEN. ANGARA. Dahil kung 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 na lang sa 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 x x
[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 credit may 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 Code94 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.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
6.G.R. No. 154068

August 3, 2007

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ROSEMARIE ACOSTA, as represented by Virgilio A. Abogado, respondent.
DECISION
QUISUMBING, J.:
Assailed in this petition for review are the Decision1 and Resolution2 dated February 13, 2002 and May
29, 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 55572 which had reversed the
Resolution3 dated August 4, 1999 of the Court of Tax Appeals in C.T.A. Case No. 5828 and ordered the
latter to resolve respondents petition for review.
The facts are as follows:
Respondent is an employee of Intel Manufacturing Phils., Inc. (Intel). For the period January 1, 1996 to
December 31, 1996, respondent was assigned in a foreign country. During that period, Intel withheld
the taxes due on respondents compensation income and remitted to the Bureau of Internal Revenue
(BIR) the amount ofP308,084.56.
On March 21, 1997, respondent and her husband filed with the BIR their Joint Individual Income Tax
Return for the year 1996. Later, on June 17, 1997, respondent, through her representative, filed an
amended return and a Non-Resident Citizen Income Tax Return, and paid the BIR P17,693.37 plus
interests in the amount ofP14,455.76. On October 8, 1997, she filed another amended return indicating
an overpayment of P358,274.63.
Claiming that the income taxes withheld and paid by Intel and respondent resulted in an overpayment
ofP340,918.92,4 respondent filed on April 15, 1999 a petition for review docketed as C.T.A. Case No.
5828 with the Court of Tax Appeals (CTA). The Commissioner of Internal Revenue (CIR) moved to
dismiss the petition for failure of respondent to file the mandatory written claim for refund before the
CIR.
In its Resolution dated August 4, 1999, the CTA dismissed respondents petition. For one, the CTA ruled
that respondent failed to file a written claim for refund with the CIR, a condition precedent to the filing
of a petition for review before the CTA.5 Second, the CTA noted that respondents omission,
inadvertently or otherwise, to allege in her petition the date of filing the final adjustment return,

deprived the court of its jurisdiction over the subject matter of the case. 6 The decretal portion of the
CTAs resolution states:
WHEREFORE, in view of all the foregoing, Respondents Motion to Dismiss is GRANTED.
Accordingly[,] the Petition for Review is hereby DISMISSED.
SO ORDERED.7
Upon review, the Court of Appeals reversed the CTA and directed the latter to resolve respondents
petition for review. Applying Section 204(c)8 of the 1997 National Internal Revenue Code (NIRC), the
Court of Appeals ruled that respondents filing of an amended return indicating an overpayment was
sufficient compliance with the requirement of a written claim for refund. 9 The decretal portion of the
Court of Appeals decision reads:
WHEREFORE, finding the petition to be meritorious, this Court GRANTS it due course
and REVERSESthe appealed Resolutions and DIRECTS the Court of Tax Appeal[s] to resolve
the petition for review on the merits.
SO ORDERED.10
Petitioner sought reconsideration, but it was denied. Hence, the instant petition raising the following
questions of law:
I.
WHETHER OR NOT THE 1997 TAX REFORM ACT CAN BE APPLIED RETROACTIVELY.
II.
WHETHER OR NOT THE CTA HAS JURISDICTION TO TAKE [COGNIZANCE] OF RESPONDENTS
PETITION FOR REVIEW.11
While the main concern in this controversy is the CTAs jurisdiction, we must first resolve two issues.
First, does the amended return filed by respondent indicating an overpayment constitute the written
claim for refund required by law, thereby vesting the CTA with jurisdiction over this case? Second, can
the 1997 NIRC be applied retroactively?
Petitioner avers that an amended return showing an overpayment does not constitute the written
claim for refund required under Section 23012 of the 1993 NIRC13 (old Tax Code). He claims that an
actual written claim for refund is necessary before a suit for its recovery may proceed in any court.
On the other hand, respondent contends that the filing of an amended return indicating an
overpayment ofP358,274.63 constitutes a written claim for refund pursuant to the clear proviso stated
in the last sentence of Section 204(c) of the 1997 NIRC (new Tax Code), to wit:
xxxx
Provided, however, That a return filed showing an overpayment shall be considered as a
written claim for credit or refund.
xxxx

Along the same vein, respondent invokes the liberal application of technicalities in tax refund cases,
conformably with our ruling in BPI-Family Savings Bank, Inc. v. Court of Appeals. 14 We are, however,
unable to agree with respondents submission on this score.
The applicable law on refund of taxes pertaining to the 1996 compensation income is Section 230 of
the old Tax Code, which was the law then in effect, and not Section 204(c) of the new Tax Code, which
was effective starting only on January 1, 1998.
Noteworthy, the requirements under Section 230 for refund claims are as follows:
1. A written claim for refund or tax credit must be filed by the taxpayer with the
Commissioner;
2. The claim for refund must be a categorical demand for reimbursement;
3. The claim for refund or tax credit must be filed, or the suit or proceeding therefor must be
commenced in court within two (2) years from date of payment of the tax or penalty
regardless of any supervening cause.15 (Emphasis ours.)
In our view, the law is clear. A claimant must first file a written claim for refund, categorically
demanding recovery of overpaid taxes with the CIR, before resorting to an action in court. This
obviously is intended, first, to afford the CIR an opportunity to correct the action of subordinate
officers; and second, to notify the government that such taxes have been questioned, and the notice
should then be borne in mind in estimating the revenue available for expenditure. 16
Thus, on the first issue, we rule against respondents contention. Entrenched in our jurisprudence is
the principle that tax refunds are in the nature of tax exemptions which are construed strictissimi
juris against the taxpayer and liberally in favor of the government. As tax refunds involve a return of
revenue from the government, the claimant must show indubitably the specific provision of law from
which her right arises; it cannot be allowed to exist upon a mere vague implication or inference 17 nor
can it be extended beyond the ordinary and reasonable intendment of the language actually used by
the legislature in granting the refund.18 To repeat, strict compliance with the conditions imposed for the
return of revenue collected is a doctrine consistently applied in this jurisdiction. 19
Under the circumstances of this case, we cannot agree that the amended return filed by respondent
constitutes the written claim for refund required by the old Tax Code, the law prevailing at that time.
Neither can we apply the liberal interpretation of the law based on our pronouncement in the case
of BPI-Family Savings Bank, Inc. v. Court of Appeals, as the taxpayer therein filed a written claim for
refund aside from presenting other evidence to prove its claim, unlike this case before us.
On the second issue, petitioner argues that the 1997 NIRC cannot be applied retroactively as the
instant case involved refund of taxes withheld on a 1996 income. Respondent, however, points out that
when the petition was filed with the CTA on April 15, 1999, the 1997 NIRC was already in effect, hence,
Section 204(c) should apply, despite the fact that the refund being sought pertains to a 1996 income
tax. Note that the issue on the retroactivity of Section 204(c) of the 1997 NIRC arose because the last
paragraph of Section 204(c) was not found in Section 230 of the old Code. After a thorough
consideration of this matter, we find that we cannot give retroactive application to Section 204(c)
abovecited. We have to stress that tax laws are prospective in operation, unless the language of the
statute clearly provides otherwise.20
Moreover, it should be emphasized that a party seeking an administrative remedy must not merely
initiate the prescribed administrative procedure to obtain relief, but also pursue it to its appropriate

conclusion before seeking judicial intervention in order to give the administrative agency an
opportunity to decide the matter itself correctly and prevent unnecessary and premature resort to
court action.21 This the respondent did not follow through. Additionally, it could not escape notice that
at the time respondent filed her amended return, the 1997 NIRC was not yet in effect. Hence,
respondent had no reason at that time to think that the filing of an amended return would constitute
the written claim for refund required by applicable law.
Furthermore, as the CTA stressed, even the date of filing of the Final Adjustment Return was omitted,
inadvertently or otherwise, by respondent in her petition for review. This omission was fatal to
respondents claim, for it deprived the CTA of its jurisdiction over the subject matter of the case.
Finally, we cannot agree with the Court of Appeals finding that the nature of the instant case calls for
the application of remedial laws. Revenue statutes are substantive laws and in no sense must their
application be equated with that of remedial laws. As well said in a prior case, revenue laws are not
intended to be liberally construed.22 Considering that taxes are the lifeblood of the government and in
Holmess memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly
implemented.
WHEREFORE, the petition is GRANTED. Both the assailed Decision and Resolution dated February 13,
2002 and May 29, 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 55572 are REVERSED
and SET ASIDE. The Resolution dated August 4, 1999 of the Court of Tax Appeals in C.T.A. Case No.
5828 is herebyREINSTATED.
No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
7.G.R. No. 148191

November 25, 2003

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
SOLIDBANK CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Under the Tax Code, the earnings of banks from "passive" income are subject to a twenty percent final
withholding tax (20% FWT). This tax is withheld at source and is thus not actually and physically
received by the banks, because it is paid directly to the government by the entities from which the
banks derived the income. Apart from the 20% FWT, banks are also subject to a five percent gross
receipts tax (5% GRT) which is imposed by the Tax Code on their gross receipts, including the "passive"
income.
Since the 20% FWT is constructively received by the banks and forms part of their gross receipts or
earnings, it follows that it is subject to the 5% GRT. After all, the amount withheld is paid to the
government on their behalf, in satisfaction of their withholding taxes. That they do not actually receive

the amount does not alter the fact that it is remitted for their benefit in satisfaction of their tax
obligations.
Stated otherwise, the fact is that if there were no withholding tax system in place in this country, this
20 percent portion of the "passive" income of banks would actually be paid to the banks and then
remitted by them to the government in payment of their income tax. The institution of the withholding
tax system does not alter the fact that the 20 percent portion of their "passive" income constitutes
part of their actual earnings, except that it is paid directly to the government on their behalf in
satisfaction of the 20 percent final income tax due on their "passive" incomes.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to annul the July 18,
2000 Decision2 and the May 8, 2001 Resolution3 of the Court of Appeals4 (CA) in CA-GR SP No. 54599.
The decretal portion of the assailed Decision reads as follows:
"WHEREFORE, we AFFIRM in toto the assailed decision and resolution of the Court of Tax Appeals." 5
The challenged Resolution denied petitioners Motion for Reconsideration.
The Facts
Quoting petitioner, the CA6 summarized the facts of this case as follows:
"For the calendar year 1995, [respondent] seasonably filed its Quarterly Percentage Tax Returns
reflecting gross receipts (pertaining to 5% [Gross Receipts Tax] rate) in the total amount
of P1,474,691,693.44 with corresponding gross receipts tax payments in the sum of P73,734,584.60,
broken down as follows:
Period Covered

Gross Receipts

Gross Receipts Tax

January to March 1994

P 188,406,061.95

P 9,420,303.10

April to June 1994

370,913,832.70

18,545,691.63

July to September 1994

481,501,838.98

24,075,091.95

October to December 1994

433,869,959.81

21,693,497.98

Total

P 1,474,691,693.44

P 73,734,584.60

"[Respondent] alleges that the total gross receipts in the amount of P1,474,691,693.44 included the
sum ofP350,807,875.15 representing gross receipts from passive income which was already subjected
to 20% final withholding tax.
"On January 30, 1996, [the Court of Tax Appeals] rendered a decision in CTA Case No. 4720 entitled
Asian Bank Corporation vs. Commissioner of Internal Revenue[,] wherein it was held that the 20% final
withholding tax on [a] banks interest income should not form part of its taxable gross receipts for
purposes of computing the gross receipts tax.
"On June 19, 1997, on the strength of the aforementioned decision, [respondent] filed with the Bureau
of Internal Revenue [BIR] a letter-request for the refund or issuance of [a] tax credit certificate in the
aggregate amount ofP3,508,078.75, representing allegedly overpaid gross receipts tax for the year
1995, computed as follows:
Gross Receipts Subjected to the Final Tax

Derived from Passive [Income]

P 350,807,875.15

Multiply by Final Tax rate

20%

20% Final Tax Withheld at Source

P 70,161,575.03

Multiply by [Gross Receipts Tax] rate

5%

Overpaid [Gross Receipts Tax]

P 3,508,078.75

"Without waiting for an action from the [petitioner], [respondent] on the same day filed [a] petition for
review [with the Court of Tax Appeals] in order to toll the running of the two-year prescriptive period to
judicially claim for the refund of [any] overpaid internal revenue tax[,] pursuant to Section 230 [now
229] of the Tax Code [also National Internal Revenue Code] x x x.
xxx

xxx

xxx

"After trial on the merits, the [Court of Tax Appeals], on August 6, 1999, rendered its decision ordering
x x x petitioner to refund in favor of x x x respondent the reduced amount of P1,555,749.65 as
overpaid [gross receipts tax] for the year 1995. The legal issue x x x was resolved by the [Court of Tax
Appeals], with Hon. Amancio Q. Saga dissenting, on the strength of its earlier pronouncement in x x x
Asian Bank Corporation vs. Commissioner of Internal Revenue x x x, wherein it was held that the 20%
[final withholding tax] on [a] banks interest income should not form part of its taxable gross receipts
for purposes of computing the [gross receipts tax]." 7
Ruling of the CA
The CA held that the 20% FWT on a banks interest income did not form part of the taxable gross
receipts in computing the 5% GRT, because the FWT was not actually received by the bank but was
directly remitted to the government. The appellate court curtly said that while the Tax Code "does not
specifically state any exemption, x x x the statute must receive a sensible construction such as will
give effect to the legislative intention, and so as to avoid an unjust or absurd conclusion." 8
Hence, this appeal.9
Issue
Petitioner raises this lone issue for our consideration:
"Whether or not the 20% final withholding tax on [a] banks interest income forms part of the taxable
gross receipts in computing the 5% gross receipts tax."10
The Courts Ruling
The Petition is meritorious.
Sole Issue:
Whether the 20% FWT Forms Part
of the Taxable Gross Receipts
Petitioner claims that although the 20% FWT on respondents interest income was not actually
received by respondent because it was remitted directly to the government, the fact that the amount
redounded to the banks benefit makes it part of the taxable gross receipts in computing the 5% GRT.
Respondent, on the other hand, maintains that the CA correctly ruled otherwise.

We agree with petitioner. In fact, the same issue has been raised recently in China Banking Corporation
v. CA,11where this Court held that the amount of interest income withheld in payment of the 20% FWT
forms part of gross receipts in computing for the GRT on banks.
The FWT and the GRT:
Two Different Taxes
The 5% GRT is imposed by Section 11912 of the Tax Code,13 which provides:
"SEC. 119. Tax on banks and non-bank financial intermediaries. There shall be collected a tax on
gross receipts derived from sources within the Philippines by all banks and non-bank financial
intermediaries in accordance with the following schedule:
"(a) On interest, commissions and discounts from lending activities as well as income from financial
leasing, on the basis of remaining maturities of instruments from which such receipts are derived.
Short-term maturity not in excess of two (2) years5%
Medium-term maturity over two (2) years
but not exceeding four (4) years....3%
Long-term maturity:
(i) Over four (4) years but not exceeding
seven (7) years1%
(ii) Over seven (7) years..0%
"(b) On dividends...0%
"(c) On royalties, rentals of property, real or personal, profits from exchange and all other items
treated as gross income under Section 2814 of this
Code....................................................................5%
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru
pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for
purposes of classifying the transaction as short, medium or long term and the correct rate of tax shall
be applied accordingly.
"Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on
persons performing similar banking activities."
The 5% GRT15 is included under "Title V. Other Percentage Taxes" of the Tax Code and is not subject to
withholding. The banks and non-bank financial intermediaries liable therefor shall, under Section
125(a)(1),16 file quarterly returns on the amount of gross receipts and pay the taxes due thereon within
twenty (20)17 days after the end of each taxable quarter.
The 20% FWT,18 on the other hand, falls under Section 24(e)(1) 19 of "Title II. Tax on Income." It is a tax
on passive income, deducted and withheld at source by the payor-corporation and/or person as
withholding agent pursuant to Section 50,20 and paid in the same manner and subject to the same
conditions as provided for in Section 51. 21

A perusal of these provisions clearly shows that two types of taxes are involved in the present
controversy: (1) the GRT, which is a percentage tax; and (2) the FWT, which is an income tax. As a
bank, petitioner is covered by both taxes.
A percentage tax is a national tax measured by a certain percentage of the gross selling price or gross
value in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any
person engaged in the sale of services.22 It is not subject to withholding.
An income tax, on the other hand, is a national tax imposed on the net or the gross income realized in
a taxable year.23 It is subject to withholding.
In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed; the
payor, a separate entity, acts as no more than an agent of the government for the collection of the tax
in order to ensure its payment. Obviously, this amount that is used to settle the tax liability is deemed
sourced from the proceeds constitutive of the tax base.24 These proceeds are either actual or
constructive. Both parties herein agree that there is no actual receipt by the bank of the amount
withheld. What needs to be determined is if there is constructive receipt thereof. Since the payee -- not
the payor -- is the real taxpayer, the rule on constructive receipt can be easily rationalized, if not made
clearly manifest.25
Constructive Receipt
Versus Actual Receipt
Applying Section 7 of Revenue Regulations (RR) No. 17-84, 26 petitioner contends that there is
constructive receipt of the interest on deposits and yield on deposit substitutes. 27 Respondent,
however, claims that even if there is, it is Section 4(e) of RR 12-80 28 that nevertheless governs the
situation.
Section 7 of RR 17-84 states:
"SEC. 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes.
(a) The interest earned on Philippine Currency bank deposits and yield from deposit
substitutes subjected to the withholding taxes in accordance with these regulations need not
be included in the gross income in computing the depositors/investors income tax liability in
accordance with the provision of Section 29(b),29(c)30 and (d) of the National Internal Revenue
Code, as amended.
(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared
for purposes of imposing the withholding taxes in accordance with these regulations shall be
allowed as interest expense deductible for purposes of computing taxable net income of the
payor.
(c) If the recipient of the above-mentioned items of income are financial institutions, the same
shall be included as part of the tax base upon which the gross receipt[s] tax is imposed."
Section 4(e) of RR 12-80, on the other hand, states that the tax rates to be imposed on the gross
receipts of banks, non-bank financial intermediaries, financing companies, and other non-bank
financial intermediaries not performing quasi-banking activities shall be based on all items of income
actually received. This provision reads:
"SEC. 4. x x x x x x x x x
"(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other
non-bank financial intermediaries not performing quasi-banking activities. The rates of tax to be
imposed on the gross receipts of such financial institutions shall be based on all items of income
actually received. Mere accrual shall not be considered, but once payment is received on such accrual

or in cases of prepayment, then the amount actually received shall be included in the tax base of such
financial institutions, as provided hereunder x x x."
Respondent argues that the above-quoted provision is plain and clear: since there is no actual receipt,
the FWT is not to be included in the tax base for computing the GRT. There is supposedly no pecuniary
benefit or advantage accruing to the bank from the FWT, because the income is subjected to a tax
burden immediately upon receipt through the withholding process. Moreover, the earlier RR 12-80
covered matters not falling under the later RR 17-84.31
We are not persuaded.
By analogy, we apply to the receipt of income the rules on actual and constructive possession provided
in Articles 531 and 532 of our Civil Code.
Under Article 531:32
"Possession is acquired by the material occupation of a thing or the exercise of a right, or by the fact
that it is subject to the action of our will, or by the proper acts and legal formalities established for
acquiring such right."
Article 532 states:
"Possession may be acquired by the same person who is to enjoy it, by his legal representative, by his
agent, or by any person without any power whatever; but in the last case, the possession shall not be
considered as acquired until the person in whose name the act of possession was executed has ratified
the same, without prejudice to the juridical consequences of negotiorum gestio in a proper case." 33
The last means of acquiring possession under Article 531 refers to juridical acts -- the acquisition of
possession by sufficient title to which the law gives the force of acts of possession. 34 Respondent
argues that only items of income actually received should be included in its gross receipts. It claims
that since the amount had already been withheld at source, it did not have actual receipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is
through the proper acts and legal formalities established therefor. The withholding process is one such
act. There may not be actual receipt of the income withheld; however, as provided for in Article 532,
possession by any person without any power whatsoever shall be considered as acquired when ratified
by the person in whose name the act of possession is executed.
In our withholding tax system, possession is acquired by the payor as the withholding agent of the
government, because the taxpayer ratifies the very act of possession for the government. There is
thus constructive receipt. The processes of bookkeeping and accounting for interest on deposits and
yield on deposit substitutes that are subjected to FWT are indeed -- for legal purposes -- tantamount to
delivery, receipt or remittance.35 Besides, respondent itself admits that its income is subjected to a tax
burden immediately upon "receipt," although it claims that it derives no pecuniary benefit or
advantage through the withholding process. There being constructive receipt of such income -- part of
which is withheld -- RR 17-84 applies, and that income is included as part of the tax base upon which
the GRT is imposed.
RR 12-80 Superseded by RR 17-84
We now come to the effect of the revenue regulations on interest income constructively received.
In general, rules and regulations issued by administrative or executive officers pursuant to the
procedure or authority conferred by law upon the administrative agency have the force and effect, or
partake of the nature, of a statute.36 The reason is that statutes express the policies, purposes,
objectives, remedies and sanctions intended by the legislature in general terms. The details and

manner of carrying them out are oftentimes left to the administrative agency entrusted with their
enforcement.
In the present case, it is the finance secretary who promulgates the revenue regulations, upon
recommendation of the BIR commissioner. These regulations are the consequences of a delegated
power to issue legal provisions that have the effect of law. 37
A revenue regulation is binding on the courts as long as the procedure fixed for its promulgation is
followed. Even if the courts may not be in agreement with its stated policy or innate wisdom, it is
nonetheless valid, provided that its scope is within the statutory authority or standard granted by the
legislature.38 Specifically, the regulation must (1) be germane to the object and purpose of the
law;39 (2) not contradict, but conform to, the standards the law prescribes; 40 and (3) be issued for the
sole purpose of carrying into effect the general provisions of our tax laws. 41
In the present case, there is no question about the regularity in the performance of official duty. What
needs to be determined is whether RR 12-80 has been repealed by RR 17-84.
A repeal may be express or implied. It is express when there is a declaration in a regulation -- usually
in its repealing clause -- that another regulation, identified by its number or title, is repealed. All others
are implied repeals.42 An example of the latter is a general provision that predicates the intended
repeal on a substantial conflict between the existing and the prior regulations. 43
As stated in Section 11 of RR 17-84, all regulations, rules, orders or portions thereof that are
inconsistent with the provisions of the said RR are thereby repealed. This declaration proceeds on the
premise that RR 17-84 clearly reveals such an intention on the part of the Department of Finance.
Otherwise, later RRs are to be construed as a continuation of, and not a substitute for, earlier RRs; and
will continue to speak, so far as the subject matter is the same, from the time of the first
promulgation.44
There are two well-settled categories of implied repeals: (1) in case the provisions are in irreconcilable
conflict, the later regulation, to the extent of the conflict, constitutes an implied repeal of an earlier
one; and (2) if the later regulation covers the whole subject of an earlier one and is clearly intended as
a substitute, it will similarly operate as a repeal of the earlier one. 45 There is no implied repeal of an
earlier RR by the mere fact that its subject matter is related to a later RR, which may simply be a
cumulation or continuation of the earlier one.46
Where a part of an earlier regulation embracing the same subject as a later one may not be enforced
without nullifying the pertinent provision of the latter, the earlier regulation is deemed impliedly
amended or modified to the extent of the repugnancy.47 The unaffected provisions or portions of the
earlier regulation remain in force, while its omitted portions are deemed repealed. 48 An exception
therein that is amended by its subsequent elimination shall now cease to be so and instead be
included within the scope of the general rule. 49
Section 4(e) of the earlier RR 12-80 provides that only items of income actually received shall be
included in the tax base for computing the GRT, but Section 7(c) of the later RR 17-84 makes no such
distinction and provides that all interests earned shall be included. The exception having been
eliminated, the clear intent is that the later RR 17-84 includes the exception within the scope of the
general rule.
Repeals by implication are not favored and will not be indulged, unless it is manifest that the
administrative agency intended them. As a regulation is presumed to have been made with
deliberation and full knowledge of all existing rules on the subject, it may reasonably be concluded
that its promulgation was not intended to interfere with or abrogate any earlier rule relating to the
same subject, unless it is either repugnant to or fully inclusive of the subject matter of an earlier one,
or unless the reason for the earlier one is "beyond peradventure removed." 50Every effort must be
exerted to make all regulations stand -- and a later rule will not operate as a repeal of an earlier one, if
by any reasonable construction, the two can be reconciled. 51

RR 12-80 imposes the GRT only on all items of income actually received, as opposed to their mere
accrual, while RR 17-84 includes all interest income in computing the GRT. RR 12-80 is superseded by
the later rule, because Section 4(e) thereof is not restated in RR 17-84. Clearly therefore, as petitioner
correctly states, this particular provision was impliedly repealed when the later regulations took
effect.52
Reconciling the Two Regulations
Granting that the two regulations can be reconciled, respondents reliance on Section 4(e) of RR 12-80
is misplaced and deceptive. The "accrual" referred to therein should not be equated with the
determination of the amount to be used as tax base in computing the GRT. Such accrual merely refers
to an accounting method that recognizes income as earned although not received, and expenses as
incurred although not yet paid.
Accrual should not be confused with the concept of constructive possession or receipt as earlier
discussed. Petitioner correctly points out that income that is merely accrued -- earned, but not yet
received -- does not form part of the taxable gross receipts; income that has been received, albeit
constructively, does.53
The word "actually," used confusingly in Section 4(e), will be clearer if removed entirely. Besides, if
actually is that important, accrual should have been eliminated for being a mere surplusage. The
inclusion of accrual stresses the fact that Section 4(e) does not distinguish between actual and
constructive receipt. It merely focuses on the method of accounting known as the accrual system.
Under this system, income is accrued or earned in the year in which the taxpayers right thereto
becomes fixed and definite, even though it may not be actually received until a later year; while a
deduction for a liability is to be accrued or incurred and taken when the liability becomes fixed and
certain, even though it may not be actually paid until later. 54
Under any system of accounting, no duty or liability to pay an income tax upon a transaction arises
until the taxable year in which the event constituting the condition precedent occurs. 55 The liability to
pay a tax may thus arise at a certain time and the tax paid within another given time. 56
In reconciling these two regulations, the earlier one includes in the tax base for GRT all income,
whether actually or constructively received, while the later one includes specifically interest income. In
computing the income tax liability, the only exception cited in the later regulations is the exclusion
from gross income of interest income, which is already subjected to withholding. This exception,
however, refers to a different tax altogether. To extend mischievously such exception to the GRT will
certainly lead to results not contemplated by the legislators and the administrative body promulgating
the regulations.
Manila Jockey Club
Inapplicable
In Commissioner of Internal Revenue v. Manila Jockey Club, 57 we held that the term "gross receipts"
shall not include money which, although delivered, has been especially earmarked by law or regulation
for some person other than the taxpayer.58
To begin, we have to nuance the definition of gross receipts59 to determine what it is exactly. In this
regard, we note that US cases have persuasive effect in our jurisdiction, because Philippine income tax
law is patterned after its US counterpart.60
"[G]ross receipts with respect to any period means the sum of: (a) The total amount received or
accrued during such period from the sale, exchange, or other disposition of x x x other property of a
kind which would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of
its trade or business, and (b) The gross income, attributable to a trade or business, regularly carried on
by the taxpayer, received or accrued during such period x x x."61

"x x x [B]y gross earnings from operations x x x was intended all operations xxx including incidental,
subordinate, and subsidiary operations, as well as principal operations." 62
"When we speak of the gross earnings of a person or corporation, we mean the entire earnings or
receipts of such person or corporation from the business or operations to which we refer." 63
From these cases, "gross receipts"64 refer to the total, as opposed to the net, income.65 These are
therefore the total receipts before any deduction66 for the expenses of management.67 Websters New
International Dictionary, in fact, defines gross as "whole or entire."
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in
many jurisdictions.68 Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to
uniformity of taxation.69
Moreover, we have emphasized that the BIR has consistently ruled that "gross receipts" does not admit
of any deduction.70 Following the principle of legislative approval by reenactment, 71 this interpretation
has been adopted by the legislature throughout the various reenactments of then Section 119 of the
Tax Code.72
Given that a tax is imposed upon total receipts and not upon net earnings, 73 shall the income withheld
be included in the tax base upon which such tax is imposed? In other words, shall interest income
constructively received still be included in the tax base for computing the GRT?
We rule in the affirmative.
Manila Jockey Club does not apply to this case. Earmarking is not the same as withholding. Amounts
earmarked do not form part of gross receipts, because, although delivered or received, these are by
law or regulation reserved for some person other than the taxpayer. On the contrary, amounts
withheld form part of gross receipts, because these are in constructive possession and not subject to
any reservation, the withholding agent being merely a conduit in the collection process.
The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys amounts that
never became the property of the race track.74 Unlike these amounts, the interest income that had
been withheld for the government became property of the financial institutions upon constructive
possession thereof. Possession was indeed acquired, since it was ratified by the financial institutions in
whose name the act of possession had been executed. The money indeed belonged to the taxpayers;
merely holding it in trust was not enough.75
The government subsequently becomes the owner of the money when the financial institutions pay
the FWT to extinguish their obligation to the government. As this Court has held before, this is the
consideration for the transfer of ownership of the FWT from these institutions to the government. 76 It is
ownership that determines whether interest income forms part of taxable gross receipts. 77 Being
originally owned by these financial institutions as part of their interest income, the FWT should form
part of their taxable gross receipts.
Besides, these amounts withheld are in payment of an income tax liability, which is different from a
percentage tax liability. Commissioner of Internal Revenue v. Tours Specialists, Inc. aptly held thus: 78
"x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to
the taxpayer which do not belong to them and do not redound to the taxpayers benefit; and it is not
necessary that there must be a law or regulation which would exempt such monies and receipts within
the meaning of gross receipts under the Tax Code." 79
In the construction and interpretation of tax statutes and of statutes in general, the primary
consideration is to ascertain and give effect to the intention of the legislature. 80 We ought to impute to
the lawmaking body the intent to obey the constitutional mandate, as long as its enactments fairly

admit of such construction.81 In fact, "x x x no tax can be levied without express authority of law, but
the statutes are to receive a reasonable construction with a view to carrying out their purpose and
intent."82
Looking again into Sections 24(e)(1) and 119 of the Tax Code, we find that the first imposes an income
tax; the second, a percentage tax. The legislature clearly intended two different taxes. The FWT is a
tax on passive income, while the GRT is on business. 83 The withholding of one is not equivalent to the
payment of the other.
Non-Exemption of FWT from GRT:
Neither Unjust nor Absurd
Taxing the people and their property is essential to the very existence of government. Certainly, one of
the highest attributes of sovereignty is the power of taxation, 84 which may legitimately be exercised on
the objects to which it is applicable to the utmost extent as the government may choose. 85 Being an
incident of sovereignty, such power is coextensive with that to which it is an incident. 86 The interest on
deposits and yield on deposit substitutes of financial institutions, on the one hand, and their business
as such, on the other, are the two objects over which the State has chosen to extend its sovereign
power. Those not so chosen are, upon the soundest principles, exempt from taxation. 87
While courts will not enlarge by construction the governments power of taxation, 88 neither will they
place upon tax laws so loose a construction as to permit evasions, merely on the basis of fanciful and
insubstantial distinctions.89 When the legislature imposes a tax on income and another on business,
the imposition must be respected. The Tax Code should be so construed, if need be, as to avoid empty
declarations or possibilities of crafty tax evasion schemes. We have consistently ruled thus:
"x x x [I]t is upon taxation that the [g]overnment chiefly relies to obtain the means to carry on its
operations, and it is of the utmost importance that the modes adopted to enforce the collection of the
taxes levied should be summary and interfered with as little as possible. x x x." 90
"Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting the taxes,
may derange the operations of government, and thereby cause serious detriment to the public." 91
"No government could exist if all litigants were permitted to delay the collection of its taxes." 92
A taxing act will be construed, and the intent and meaning of the legislature ascertained, from its
language.93 Its clarity and implied intent must exist to uphold the taxes as against a taxpayer in whose
favor doubts will be resolved.94 No such doubts exist with respect to the Tax Code, because the income
and percentage taxes we have cited earlier have been imposed in clear and express language for that
purpose.95
This Court has steadfastly adhered to the doctrine that its first and fundamental duty is the application
of the law according to its express terms -- construction and interpretation being called for only when
such literal application is impossible or inadequate without them. 96 In Quijano v. Development Bank of
the Philippines,97 we stressed as follows:
"No process of interpretation or construction need be resorted to where a provision of law peremptorily
calls for application." 98
A literal application of any part of a statute is to be rejected if it will operate unjustly, lead to absurd
results, or contradict the evident meaning of the statute taken as a whole. 99 Unlike the CA, we find that
the literal application of the aforesaid sections of the Tax Code and its implementing regulations does
not operate unjustly or contradict the evident meaning of the statute taken as a whole. Neither does it
lead to absurd results. Indeed, our courts are not to give words meanings that would lead to absurd or
unreasonable consequences.100 We have repeatedly held thus:

"x x x [S]tatutes should receive a sensible construction, such as will give effect to the legislative
intention and so as to avoid an unjust or an absurd conclusion." 101
"While it is true that the contemporaneous construction placed upon a statute by executive officers
whose duty is to enforce it should be given great weight by the courts, still if such construction is so
erroneous, x x x the same must be declared as null and void." 102
It does not even matter that the CTA, like in China Banking Corporation, 103 relied erroneously on Manila
Jockey Club. Under our tax system, the CTA acts as a highly specialized body specifically created for
the purpose of reviewing tax cases.104 Because of its recognized expertise, its findings of fact will
ordinarily not be reviewed, absent any showing of gross error or abuse on its part. 105 Such findings are
binding on the Court and, absent strong reasons for us to delve into facts, only questions of law are
open for determination.106
Respondent claims that it is entitled to a refund on the basis of excess GRT payments. We disagree.
Tax refunds are in the nature of tax exemptions.107 Such exemptions are strictly construed against the
taxpayer, being highly disfavored108 and almost said "to be odious to the law." Hence, those who claim
to be exempt from the payment of a particular tax must do so under clear and unmistakable terms
found in the statute. They must be able to point to some positive provision, not merely a vague
implication,109 of the law creating that right.110
The right of taxation will not be surrendered, except in words too plain to be mistaken.1wphi1 The
reason is that the State cannot strip itself of this highest attribute of sovereignty -- its most essential
power of taxation -- by vague or ambiguous language. Since tax refunds are in the nature of tax
exemptions, these are deemed to be "in derogation of sovereign authority and to be construed
strictissimi juris against the person or entity claiming the exemption." 111
No less than our 1987 Constitution provides for the mechanism for granting tax exemptions. 112 They
certainly cannot be granted by implication or mere administrative regulation. Thus, when an
exemption is claimed, it must indubitably be shown to exist, for every presumption is against it, 113 and
a well-founded doubt is fatal to the claim.114 In the instant case, respondent has not been able to
satisfactorily show that its FWT on interest income is exempt from the GRT. Like China Banking
Corporation, its argument creates a tax exemption where none exists. 115
No exemptions are normally allowed when a GRT is imposed. It is precisely designed to maintain
simplicity in the tax collection effort of the government and to assure its steady source of revenue
even during an economic slump.116
No Double Taxation
We have repeatedly said that the two taxes, subject of this litigation, are different from each other. The
basis of their imposition may be the same, but their natures are different, thus leading us to a final
point. Is there double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it should be taxed only once; that is, "x x
x taxing the same person twice by the same jurisdiction for the same thing." 117 It is obnoxious when
the taxpayer is taxed twice, when it should be but once. 118 Otherwise described as "direct duplicate
taxation,"119 the two taxes must be imposed on the same subject matter, for the same purpose, by the
same taxing authority, within the same jurisdiction, during the same taxing period; and they must be
of the same kind or character.120
First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is
the passive income generated in the form of interest on deposits and yield on deposit substitutes,
while the subject matter of the GRT is the privilege of engaging in the business of banking.

A tax based on receipts is a tax on business rather than on the property; hence, it is an excise 121 rather
than a property tax.122 It is not an income tax, unlike the FWT. In fact, we have already held that one
can be taxed for engaging in business and further taxed differently for the income derived
therefrom.123 Akin to our ruling in Velilla v. Posadas,124 these two taxes are entirely distinct and are
assessed under different provisions.
Second, although both taxes are national in scope because they are imposed by the same taxing
authority -- the national government under the Tax Code -- and operate within the same Philippine
jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The
FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar
quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid
only after every taxable quarter in which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by the same taxing authority,
within the same jurisdiction, for the same purpose, in different taxing periods, some of the property in
the territory.125Subjecting interest income to a 20% FWT and including it in the computation of the 5%
GRT is clearly not double taxation.
WHEREFORE, the Petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals
are hereby REVERSED and SET ASIDE. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

8. G.R. No. 127105 June 25, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the
decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision
of the Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
[Respondent], a domestic corporation organized and operating under the Philippine
laws, entered into a license agreement with SC Johnson and Son, United States of
America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to

which the [respondent] was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture, package and
distribute the products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology Transfer Board of
the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of
Registration No. 8064 (Exh. "A").
For the use of the trademark or technology, [respondent] was obliged to pay SC
Johnson and Son, USA royalties based on a percentage of net sales and subjected the
same to 25% withholding tax on royalty payments which [respondent] paid for the
period covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. "B"
to "L" and submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs Division
(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing
that, "the antecedent facts attending [respondent's] case fall squarely within the same
circumstances under which said MacGeorge and Gillete rulings were issued. Since the
agreement was approved by the Technology Transfer Board, the preferential tax rate of
10% should apply to the [respondent]. We therefore submit that royalties paid by the
[respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax
pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13
Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]"
(Petition for Review [filed with the Court of Appeals], par. 12). [Respondent's] claim for
there fund of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance

July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877

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

April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461

P6,421,770 P1,605,443 P642,177 P963,266 1
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc.
(S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the case was
docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments
from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the
Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00
representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. 2
The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which
rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and
affirming in toto the CTA ruling. 3
This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS
ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS
PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX
TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the
"most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties
derived by a resident of the United States from sources within the Philippines only if the circumstances
of the resident of the United States are similar to those of the resident of West Germany. Since the RPUS Tax Treaty contains no "matching credit" provision as that provided under Article 24 of the RP-West
Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar
circumstances as those obtaining in the RP-West Germany Tax Treaty. Even assuming that the phrase
"paid under similar circumstances" refers to the payment of royalties, and not taxes, as held by the
Court of Appeals, still, the "most favored nation" clause cannot be invoked for the reason that when a
tax treaty contemplates circumstances attendant to the payment of a tax, or royalty remittances for
that matter, these must necessarily refer to circumstances that are tax-related. Finally, petitioner
argues that since S.C. Johnson's invocation of the "most favored nation" clause is in the nature of a
claim for exemption from the application of the regular tax rate of 25% for royalties, the provisions of
the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1)
because it contains a defective certification against forum shopping as required under SC Circular No.
28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and (2)
that the "most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under similar

circumstances as those royalties subject to tax in other treaties; that the phrase "paid under similar
circumstances" does not refer to payment of the tax but to the subject matter of the tax, that is,
royalties, because the "most favored nation" clause is intended to allow the taxpayer in one state to
avail of more liberal provisions contained in another tax treaty wherein the country of residence of
such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation
in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable;
thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances". S.C.
Johnson also contends that the Commissioner is estopped from insisting on her interpretation that the
phrase "paid under similar circumstances" refers to the manner in which the tax is paid, for the reason
that said interpretation is embodied in Revenue Memorandum Circular ("RMC") 39-92 which was
already abandoned by the Commissioner's predecessor in 1993; and was expressly revoked in BIR
Ruling No. 052-95 which stated that royalties paid to an American licensor are subject only to 10%
withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany
Tax Treaty. Said ruling should be given retroactive effect except if such is prejudicial to the taxpayer
pursuant to Section 246 of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by
petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No.
28-91 applies only to original actions and not to appeals, as in the instant case. Moreover, the
requirement that the certification should be signed by petitioner and not by counsel does not apply to
petitioner who has only the Office of the Solicitor General as statutory counsel. Petitioner reiterates
that even if the phrase "paid under similar circumstances" embodied in the most favored nation clause
of the RP-US Tax Treaty refers to the payment of royalties and not taxes, still the presence or absence
of a "matching credit" provision in the said RP-US Tax Treaty would constitute a material circumstance
to such payment and would be determinative of the said clause's application.1wphi1.nt
We address first the objection raised by private respondent that the certification against forum
shopping was not executed by the petitioner herself but by her counsel, the Office of the Solicitor
General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR
PETITIONS FILED WITH THE SUPREME
COURT AND THE COURT OF APPEALS
TO PREVENT FORUM SHOPPING OR
MULTIPLE FILING OF PETITIONS AND
COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and
complaints involving the same issues in the Supreme Court, the Court of Appeals or
other tribunals or agencies, with the result that said courts, tribunals or agencies have
to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court
of Appeals, the petitioner aside from complying with pertinent provisions of the Rules
of Court and existing circulars, must certify under oath to all of the following facts or
undertakings: (a) he has not theretofore commenced any other action or proceeding
involving the same issues in the Supreme Court, the Court of Appeals, or any tribunal

or
agency; . . .
(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be
a cause for the summary dismissal of the multiple petitions or complaints; . . .
The circular expressly requires that a certificate of non-forum shopping should be attached to petitions
filed before this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies
only to original actions and not to appeals as in the instant case is not supported by the text nor by the
obvious intent of the Circular which is to prevent multiple petitions that will result in the same issue
being resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not
commenced any other action involving the same issues in this Court or the Court of Appeals or any
other tribunal or agency, we are inclined to accept petitioner's submission that since the OSG is the
only lawyer for the petitioner, which is a government agency mandated under Section 35, Chapter 12,
title III, Book IV of the 1987 Administrative Code 4 to be represented only by the Solicitor General, the
certification executed by the OSG in this case constitutes substantial compliance with Circular No. 2891.
With respect to the merits of this petition, the main point of contention in this appeal is the
interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed
by the Philippines upon royalties received by a non-resident foreign corporation. The provision states
insofar as pertinent
that
1) Royalties derived by a resident of one of the Contracting States from
sources within the other Contracting State may be taxed by both
Contracting States.
2) However, the tax imposed by that Contracting State shall not
exceed.
a) In the case of the United States, 15 percent of the
gross amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of
the royalties;
(ii) 15 percent of the gross amount of
the royalties, where the royalties are
paid by a corporation registered with
the Philippine Board of Investments
and engaged in preferred areas of
activities; and
(iii) the lowest rate of Philippine tax
that may be imposed on royalties of
the same kind paid under similar

circumstances to a resident of a third

State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to
the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax
Treaty which provides:
(2) However, such royalties may also be taxed in the Contracting State
in which they arise, and according to the law of that State, but the tax
so charged shall not exceed:
xxx xxx xxx
b) 10 percent of the gross amount of royalties arising
from the use of, or the right to use, any patent,
trademark, design or model, plan, secret formula or
process, or from the use of or the right to use,
industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial or
scientific experience.
For as long as the transfer of technology, under Philippine law, is subject to approval,
the limitation of the tax rate mentioned under b) shall, in the case of royalties arising
in the Republic of the Philippines, only apply if the contract giving rise to such royalties
has been approved by the Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross
amount of such royalties against German income and corporation tax for the taxes payable in the
Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty.
Article 24 of the RP-Germany Tax Treaty states
1) Tax shall be determined in the case of a resident of the Federal
Republic of Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law
regarding credit for foreign tax, there shall be allowed
as a credit against German income and corporation tax
payable in respect of the following items of income
arising in the Republic of the Philippines, the tax paid
under the laws of the Philippines in accordance with
this Agreement on:
xxx xxx xxx

dd) royalties, as defined in paragraph 3

of Article 12;
xxx xxx xxx
c) For the purpose of the credit referred in
subparagraph; b) the Philippine tax shall be deemed to
be
xxx xxx xxx
cc) in the case of royalties for which
the tax is reduced to 10 or 15 per cent
according to paragraph 2 of Article 12,
20 percent of the gross amount of such
royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under
circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20
percent matching credit in the former convention and private respondent cannot invoke the
concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty.
Petitioner's position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax
paid on income from sources within the Philippines is allowed as a credit against
German income and corporation tax on the same income. In the case of royalties for
which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of
the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of such
royalty. To illustrate, the royalty income of a German resident from sources within the
Philippines arising from the use of, or the right to use, any patent, trade mark, design
or model, plan, secret formula or process, is taxed at 10% of the gross amount of said
royalty under certain conditions. The rate of 10% is imposed if credit against the
German income and corporation tax on said royalty is allowed in favor of the German
resident. That means the rate of 10% is granted to the German taxpayer if he is
similarly granted a credit against the income and corporation tax of West Germany.
The clear intent of the "matching credit" is to soften the impact of double taxation by
different jurisdictions.
The RP-US Tax Treaty contains no similar "matching credit" as that provided under the
RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is
not paid under similar circumstances as those obtaining in the RP-West Germany Tax
Treaty. Therefore, the "most favored nation" clause in the RP-West Germany Tax Treaty
cannot be availed of in interpreting the provisions of the RP-US Tax Treaty. 5
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of
Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax
Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the
reason that the phrase "paid under similar circumstances" is followed by the phrase "to a resident of a

third state". The respondent court held that "Words are to be understood in the context in which they
are used", and since what is paid to a resident of a third state is not a tax but a royalty "logic instructs"
that the treaty provision in question should refer to royalties of the same kind paid under similar
circumstances.
The above construction is based principally on syntax or sentence structure but fails to take into
account the purpose animating the treaty provisions in point. To begin with, we are not aware of any
law or rule pertinent to the payment of royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar circumstances. The tax rates on royalties and
the circumstances of payment thereof are the same for all the recipients of such royalties and there is
no disparity based on nationality in the circumstances of such payment. 6 On the other hand, a cursory
reading of the various tax treaties will show that there is no similarity in the provisions on relief from or
avoidance of double taxation 7 as this is a matter of negotiation between the contracting parties. 8 As
will be shown later, this dissimilarity is true particularly in the treaties between the Philippines and the
United States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into
for the avoidance of double taxation. 9 The purpose of these international agreements is to reconcile
the national fiscal legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions.10 More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical double taxation, which is defined as the
imposition of comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods. 11 The apparent rationale for doing away with double taxation
is of encourage the free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and dynamic
economies. 12 Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a contracting state and derives
income from, or owns capital in, the other contracting state and both states impose tax on that income
or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets
out the respective rights to tax of the state of source or situs and of the state of residence with regard
to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of
the contracting states; however, for other items of income or capital, both states are given the right to
tax, although the amount of tax that may be imposed by the state of source is limited. 14
The second method for the elimination of double taxation applies whenever the state of source is given
a full or limited right to tax together with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two
methods of relief the exemption method and the credit method. In the exemption method, the
income or capital which is taxable in the state of source or situs is exempted in the state of residence,
although in some instances it may be taken into account in determining the rate of tax applicable to
the taxpayer's remaining income or capital. On the other hand, in the credit method, although the
income or capital which is taxed in the state of source is still taxable in the state of residence, the tax
paid in the former is credited against the tax levied in the latter. The basic difference between the two
methods is that in the exemption method, the focus is on the income or capital itself, whereas the
credit method focuses upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will
give up a part of the tax in the expectation that the tax given up for this particular investment is not
taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar

circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated
"circumstances that are tax-related".
In the case at bar, the state of source is the Philippines because the royalties are paid for the right to
use property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The
United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based
there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to
tax the royalties, with a restraint on the tax that may be collected by the state of
source. 18 Furthermore, the method employed to give relief from double taxation is the allowance of a
tax credit to citizens or residents of the United States (in an appropriate amount based upon the taxes
paid or accrued to the Philippines) against the United States tax, but such amount shall not exceed the
limitations provided by United States law for the taxable year. 19 Under Article 13 thereof, the
Philippines may impose one of three rates 25 percent of the gross amount of the royalties; 15
percent when the royalties are paid by a corporation registered with the Philippine Board of
Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may
be imposed on royalties of the same kind paid under similar circumstances to a resident of a third
state.
Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the
concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the
taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under
similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty
grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon
royalties earned from sources within the Philippines as those allowed to their German counterparts
under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting.
Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and
corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the
other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief
for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid.
Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of
the law of the United States (as it may be amended from time to time
without changing the general principle thereof), the United States shall
allow to a citizen or resident of the United States as a credit against
the United States tax the appropriate amount of taxes paid or accrued
to the Philippines and, in the case of a United States corporation
owning at least 10 percent of the voting stock of a Philippine
corporation from which it receives dividends in any taxable year, shall
allow credit for the appropriate amount of taxes paid or accrued to the
Philippines by the Philippine corporation paying such dividends with
respect to the profits out of which such dividends are paid. Such
appropriate amount shall be based upon the amount of tax paid or
accrued to the Philippines, but the credit shall not exceed the

limitations (for the purpose of limiting the credit to the United States
tax on income from sources within the Philippines or on income from
sources outside the United States) provided by United States law for
the taxable year. . . .
The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b)
(iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the
light of the fundamental purpose of such treaty which is to grant an incentive to the foreign investor by
lowering the tax and at the same time crediting against the domestic tax abroad a figure higher than
what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to
be achieved and that the general purpose is a more important aid to the meaning of a law than any
rule which grammar may lay down. 20 It is the duty of the courts to look to the object to be
accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a
reasonable or liberal construction which will best effectuate its purpose. 21 The Vienna Convention on
the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the treaty in their context and in the light of its object
and
purpose. 22
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to
invest in the Philippines a crucial economic goal for developing countries. 23 The goal of double
taxation conventions would be thwarted if such treaties did not provide for effective measures to
minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor.
Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should
be a concomitant commitment on the part of the state of residence to grant some form of tax relief,
whether this be in the form of a tax credit or exemption. 24 Otherwise, the tax which could have been
collected by the Philippine government will simply be collected by another state, defeating the object
of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state
of residence does not grant some form of tax relief to the investor, no benefit would redound to the
Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower
tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate
rather than lose much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on "relief from double taxation" in
the two tax treaties in question should be considered in light of the purpose behind the most favored
nation clause.
The purpose of a most favored nation clause is to grant to the contracting party treatment not less
favorable than that which has been or may be granted to the "most favored" among other
countries. 25 The most favored nation clause is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the contracting nations may enjoy
the privileges accorded by either party to those of the most favored nation. 26 The essence of the
principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax
treaty to which the country of residence of such taxpayer is also a party provided that the subject
matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the
taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany
Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology.
The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for
royalties) would derogate from the design behind the most grant equality of international treatment
since the tax burden laid upon the income of the investor is not the same in the two countries. The

similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored
nation treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax
credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West
Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted
under the latter treaty for the reason that there is no payment of taxes on royalties under similar
circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in
derogation of sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption. 27The burden of proof is upon him who claims the exemption in his favor and
he must be able to justify his claim by the clearest grant of organic or statute law. 28 Private
respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is
nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under
similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of
the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby
SET ASIDE.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
9. G.R. No. 147188

September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna
Kapunan and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-G.R.
SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case
No. 5328,3which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency
income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989,
and ordered the cancellation and setting aside of the assessment issued by Commissioner of Internal
Revenue Liwayway Vinzons-Chato on 9 January 1995.

The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal
Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial
building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building
stands for an amount of not less than P90 million.4
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in
turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary
public.5
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6
On 16 April 1990, CIC filed its corporate annual income tax return 7 for the year 1989, declaring, among
other things, its gain from the sale of real property in the amount of P75,728.021. After crediting
withholding taxes ofP254,497.00, it paid P26,341,2078 for its net taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994,
Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice 10 and demand
letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against the
old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders;
moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax
liabilities for the fiscal years 1987-1989. 11
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna
Kapunan and Mario Luza Bautista, received a Notice of Assessment 12 dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount
of P79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return

P75,987,725.00

Add: Additional gain on sale of real property taxable

under ordinary corporate income but were substituted
with individual capital gains(P200M 100M)
Total Net Taxable Income per investigation
Tax Due thereof at 35%

100,000,000.00
P175,987,725.00

P 61,595,703.75

Less: Payment already made

1. Per return

P26,595,704.00

2. Thru Capital Gains Tax made

by R.A. Altonaga

10,000,000.00

36,595,704.00
P 24,999,999.75

Balance of tax
due

Add: 50% Surcharge

12,499,999.88

25% Surcharge

6,249,999.94

Total

P 43,749,999.57

Add: Interest 20% from

4/16/90-4/30/94 (.808)

TOTAL AMT. DUE & COLLECTIBLE

35,349,999.65
P 79,099,999.22
===========
===

The Estate thereafter filed a letter of protest.13

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by
covering up the additional gain of P100 million, which resulted in the change in the income structure of
the proceeds of the sale of the two parcels of land and the building thereon to an individual capital
gains, thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review 15 with the CTA alleging that the
Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud of
the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to
assess CIC had already prescribed.
In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the
property from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the
difference between the second simulated sale for P200 million and the first simulated sale for P100
million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga,
instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for
1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud
was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well
within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of
1986, which provides that tax may be assessed within ten years from the discovery of the falsity or
fraud. With the sale being tainted with fraud, the separate corporate personality of CIC should be
disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial
owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should
be held liable for the deficiency income tax, especially because the gains realized from the sale were
withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his
estate shall answer for his liability.
In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a preconceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax
evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC
is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed
by law for the filing of the return. Thus, the governments right to assess CIC prescribed on 15 April
1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled
that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient
ground for piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate
is not liable for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the
assessment issued by the Commissioner on 9 January 1995.

In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by
CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter
was a representative, dummy, and a close business associate of the former, having held his office in a
property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by
Toda for representation services rendered. The CTA denied20 the motion for reconsideration, prompting
the Commissioner to file a petition for review21 with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA,
reasoning that the CTA, being more advantageously situated and having the necessary expertise in
matters of taxation, is "better situated to determine the correctness, propriety, and legality of the
income tax assessments assailed by the Toda Estate." 22
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition
invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD
WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE
CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS
RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC
of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially
incapable of purchasing it. She further points out that the documents themselves prove the fact of
fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the
Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC
and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as
Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No.92, Page 20, Book I, Series of 1989,
of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from
Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in
Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration
of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of
Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989,
if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a

scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to
further or additional civil or criminal liabilities. 23
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of
less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown
that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith,"
"willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is
unlawful.24
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989,
prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC
received P40 million from RMI,25 and not from Altonaga. That P40 million was debited by RMI and
reflected in its trial balance26 as "other inv. Cibeles Bldg." Also, as of 31 July 1989, another P40 million
was debited and reflected in RMIs trial balance as "other inv. Cibeles Bldg." This would show that the
real buyer of the properties was RMI, and not the intermediary Altonaga.lavvphi1.net
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one
of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the
assistant accountant of CIC and an old timer in the company. 27 But Mr. Prieto did not testify on this
matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not
verified either, since the letter-request for investigation of Altonaga was unserved, 28 Altonaga having
left for the United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit
finds support in the admission of respondent Estate that the sale to him was part of the tax planning
scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate
declared:
Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted
one hundred percent. But isnt this precisely the definition of tax planning? Change the
structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists,
allowing tax free transfers of property for stock, changing the structure of the property and the
tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a
lower tax is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic]
cannot be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring
supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate
tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is
taken of another."30
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual
capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and
transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never
controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to
him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless,
the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the
consequent income tax liability.lavvphi1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion. 31

Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by the
means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each
step from the commencement of negotiations to the consummation of the sale is relevant. A sale by
one person cannot be transformed for tax purposes into a sale by another by using the latter as a
conduit through which to pass title. To permit the true nature of the transaction to be disguised by
mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and
distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. 34 The two
sale transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended
(now 27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, and partnerships,
no matter how created or organized but not including general professional partnerships, in
accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not
exceed one hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one
hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual
capital gains tax provided for in Section 34 (h) of the NIRC of 1986 35 (now 6% under Section 24 (D) (1)
of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax
issued by the BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the
case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax
may be assessed, or a proceeding in court after the collection of such tax may be begun
without assessment, at any time within ten years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which has become final and executory, the fact
of fraud shall be judicially taken cognizance of in the civil or criminal action for collection
thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to assess tax is ten years from discovery of the fraud,
falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the
BIR on the tax consequence of the two sale transactions. 36 Thus, the BIR was amply informed of the
transactions even prior to the execution of the necessary documents to effect the transfer.
Subsequently, the two sales were openly made with the execution of public documents and the
declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As
earlier discussed those two transactions were tainted with fraud. And even assuming arguendo that
there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did

not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was
done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years
from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was
claimed to have been discovered only on 8 March 1991. 37 The assessment for the 1989 deficiency
income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for
deficiency income tax was well within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or composing
it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the
liabilities of a corporation and vice versa. There are, however, certain instances in which personal
liability may arise. It has been held in a number of cases that personal liability of a corporate director,
trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross
negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action. 38
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and
voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years
1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities
or obligations, contingent or otherwise, for taxes, sums of money or insurance claims other
than those reported in its audited financial statement as of December 31, 1989, attached
hereto as "Annex B" and made a part hereof. The business of Cibeles has at all times been
conducted in full compliance with all applicable laws, rules and regulations. SELLER
undertakes and agrees to hold the BUYER and Cibeles free from any and all income
tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989. 39 [Underscoring
Supplied].
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax
liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself
personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency
income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation
arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court
of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another
one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as
deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1
May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
10. G.R. No. 141658

March 18, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., THE PHILIPPINE
AMERICAN ASSURANCE COMPANY, INC., and THE PHILIPPINE AMERICAN GENERAL
INSURANCE CO., INC.,Respondents.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review1 assailing the Decision2 of 7 January 2000 of the Court of
Appeals in CA-G.R. SP No. 36816. The Court of Appeals affirmed the Decision 3 of 5 January 1995 of the
Court of Tax Appeals ("CTA") in CTA Cases Nos. 2514, 2515 and 2516. The CTA ordered the
Commissioner of Internal Revenue ("petitioner") to refund a total of P29,575.02 to respondent
companies ("respondents").
Antecedent Facts
Respondents are domestic corporations licensed to transact insurance business in the country. From
August 1971 to September 1972, respondents paid the Bureau of Internal Revenue under protest the
3% tax imposed on lending investors by Section 195-A4 of Commonwealth Act No. 466 ("CA 466"), as
amended by Republic Act No. 6110 ("RA 6110") and other laws. CA 466 was the National Internal
Revenue Code ("NIRC") applicable at the time.
Respondents paid the following amounts: P7,985.25 from Philippine American ("PHILAM") Accident
Insurance Company; P7,047.80 from PHILAM Assurance Company; and P14,541.97 from PHILAM
General Insurance Company. These amounts represented 3% of each companys interest income from
mortgage and other loans. Respondents also paid the taxes required of insurance companies under CA
466.
On 31 January 1973, respondents sent a letter-claim to petitioner seeking a refund of the taxes paid
under protest. When respondents did not receive a response, each respondent filed on 26 April 1973 a
petition for review with the CTA. These three petitions, which were later consolidated, argued that
respondents were not lending investors and as such were not subject to the 3% lending investors tax
under Section 195-A.
The CTA archived respondents case for several years while another case with a similar issue was
pending before the higher courts. When respondents case was reinstated, the CTA ruled that
respondents were entitled to their refund.
The Ruling of the Court of Tax Appeals

The CTA held that respondents are not taxable as lending investors because the term "lending
investors" does not embrace insurance companies. The CTA traced the history of the tax on lending
investors, as follows:
Originally, a person who was engaged in lending money at interest was taxed as a money
lender. [Sec. 1464(x), Rev. Adm. Code] The term money lenders was defined as including "all
persons who make a practice of lending money for themselves or others at interest." [Sec.
1465(v), id.] Under this law, an insurance company was not considered a money lender and
was not taxable as such. To quote from an old BIR Ruling:
"The lending of money at interest by insurance companies constitutes a necessary
incident of their regular business. For this reason, insurance companies are not liable
to tax as money lenders or real estate brokers for making or negotiating loans secured
by real property. (Ruling, February 28, 1920; BIR 135.2)" (The Internal Revenue Law,
Annotated, 2nd ed., 1929, by B.L. Meer, page 143)
The same rule has been applied to banks.
"For making investments on salary loans, banks will not be required to pay the money
lenders tax imposed by this subsection, for the reason that money lending is
considered a mere incident of the banking business. [See Ruling No. 43, (October 8,
1926) 25 Off. Gaz. 1326)" (The Internal Revenue Law, Annotated, id.)
The term "money lenders" was later changed to "lending investors" but the definition of the
term remains the same. [Sec. 1464(x), Rev. Adm. Code, as finally amended by Com. Act No.
215, and Sec. 1465(v) of the same Code, as finally amended by Act No. 3963] The same law is
embodied in the present National Internal Revenue Code (Com. Act No. 466) without change,
except in the amount of the tax. [See Secs. 182(A) (3) (dd) and 194(u), National Internal
Revenue Code.]
It is a well-settled rule that an administrative interpretation of a law which has been followed
and applied for a long time, and thereafter the law is re-enacted without substantial change,
such administrative interpretation is deemed to have received legislative approval. In short,
the administrative interpretation becomes part of the law as it is presumed to carry out the
legislative purpose.5
The CTA held that the practice of lending money at interest is part of the insurance business. CA 466
already taxes the insurance business. The CTA pointed out that the law recognizes and even regulates
this practice of lending money by insurance companies.
The CTA observed that CA 466 also treated differently insurance companies from lending investors in
regard to fixed taxes. Under Section 182(A)(3)(gg), insurance companies were subject to the same
fixed tax as banks and finance companies. The CTA reasoned that insurance companies were grouped
with banks and finance companies because the latters lending activities were also integral to their
business. In contrast, lending investors were taxed at a different fixed tax under Section 182(A)(3)(dd)
of CA 466. The CTA stated that "insurance companies xxx had never been required by respondent
[CIR] to pay the fixed tax imposed on lending investors xxx."6
The dispositive portion of the Decision of 5 January 1995 of the Court of Tax Appeals ("CTA Decision")
reads:

WHEREFORE, premises considered, petitioners Philippine American Accident Insurance Co.,

Philippine American Assurance Co., and Philippine American General Insurance Co., Inc. are not
taxable on their lending transactions independently of their insurance business. Accordingly,
respondent is hereby ordered to refund to petitioner[s] the sum of P7,985.25, P7,047.80
and P14,541.97 in CTA Cases No. 2514, 2515 and 2516, respectively representing the fixed
and percentage taxes when (sic) paid by petitioners as lending investor from August 1971 to
September 1972.
No pronouncement as to cost.
SO ORDERED.7
Dissatisfied, petitioner elevated the matter to the Court of Appeals. 8
The Ruling of the Court of Appeals
The Court of Appeals ruled that respondents are not taxable as lending investors. In its Decision of 7
January 2000 ("CA Decision"), the Court of Appeals affirmed the ruling of the CTA, thus:
WHEREFORE, premises considered, the petition is DISMISSED, hereby AFFIRMING the decision,
dated January 5, 1995, of the Court of Tax Appeals in CTA Cases Nos. 2514, 2515 and 2516.
SO ORDERED.9
Petitioner appealed the CA Decision to this Court.
The Issues
Petitioner raises the sole issue:
WHETHER RESPONDENT INSURANCE COMPANIES ARE SUBJECT TO THE 3% PERCENTAGE TAX
AS LENDING INVESTORS UNDER SECTIONS 182(A)(3)(DD) AND 195-A, RESPECTIVELY IN
RELATION TO SECTION 194(U), ALL OF THE NIRC. 10
The Ruling of the Court
The petition lacks merit.
On the Additional Issue Raised by Petitioner
Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax on lending investors, depending on their
location.11 The sole question before the CTA was whether respondents were subject to the percentage
tax on lending investors under Section 195-A. Petitioner raised for the first time the issue of the fixed
tax in the Petition for Review12 petitioner filed before the Court of Appeals.
Ordinarily, a party cannot raise for the first time on appeal an issue not raised in the trial court. 13 The
Court of Appeals should not have taken cognizance of the issue on respondents supposed liability
under Section 182(A)(3)(dd). However, we cannot entirely fault the Court of Appeals or petitioner. Even
if the percentage tax on lending investors was the sole issue before it, the CTA ordered petitioner to
refund to the PHILAM companies "the fixed and percentage taxes [t]hen paid by petitioners as lending
investor."14 Although the amounts for refund consisted only of what respondents paid as percentage

taxes, the CTA Decision also ordered the refund to respondents of the fixed tax on lending investors.
Respondents in their pleadings deny any liability under Section 182(A)(3)(dd), on the same ground that
they are not lending investors.
The question of whether respondents should pay the fixed tax under Section 182(A)(3)(dd) revolves
around the same issue of whether respondents are taxable as lending investors. In similar
circumstances, the Court has held that an appellate court may consider an unassigned error if it is
closely related to an error that was properly assigned. 15 This rule properly applies to the present case.
Thus, we shall consider and rule on the issue of whether respondents are subject to the fixed tax under
Section 182(A)(3)(dd).
Whether Insurance Companies are
Taxable as Lending Investors
Invoking Sections 195-A and 182(A)(3)(dd) in relation to Section 194(u) of CA 466, petitioner argues
that insurance companies are subject to two fixed taxes and two percentage taxes. Petitioner alleges
that:
As a lending investor, an insurance company is subject to an annual fixed tax of P500.00 and
anotherP500.00 under Section 182 (A)(3)(dd) and (gg) of the Tax Code. As an underwriter, an
insurance company is subject to the 3% tax of the total premiums collected and another 3% on
the gross receipts as a lending investor under Sections 255 and 195-A, respectively of the
same Code. xxx16
Petitioner also contends that the refund granted to respondents is in the nature of a tax exemption,
and cannot be allowed unless granted explicitly and categorically.
The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the
taxpayer is clearly subject to the tax being levied against him. Unless a statute imposes a tax clearly,
expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax
cannot be presumed.17Where there is doubt, tax laws must be construed strictly against the
government and in favor of the taxpayer.18This is because taxes are burdens on the taxpayer, and
should not be unduly imposed or presumed beyond what the statutes expressly and clearly import. 19
Section 182(A)(3)(dd) of CA 466 also provides:
Sec. 182. Fixed taxes. (A) On business xxx
xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount
stated being for the whole year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;

3. In fourth and fifth class municipalities and municipal districts, one hundred and
twenty-five pesos; Provided, That lending investors who do business as such in more
than one province shall pay a tax of five hundred pesos.
Section 195-A of CA 466 provides:
Sec. 195-A. Percentage tax on dealers in securities; lending investors. Dealers in securities
and lending investors shall pay a tax equivalent to three per centum on their gross income.
Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance companies. Section 182(A)(3)(dd)
provides for the taxation of lending investors in different localities. Section 195-A refers to dealers in
securities and lending investors. The burden is thus on petitioner to show that insurance companies
are lending investors for purposes of taxation.
In this case, petitioner does not dispute that respondents are in the insurance business. Petitioner
merely alleges that the definition of lending investors under CA 466 is broad enough to encompass
insurance companies. Petitioner insists that because of Section 194(u), the two principal activities of
the insurance business, namely, underwriting and investment, are separately taxable. 20
Section 194(u) of CA 466 states:
(u) "Lending investor" includes all persons who make a practice of lending money for
themselves or others at interest.
xxx
As can be seen, Section 194(u) does not tax the practice of lending per se. It merely defines what
lending investors are. The question is whether the lending activities of insurance companies make
them lending investors for purposes of taxation.
We agree with the CTA and Court of Appeals that it does not. Insurance companies cannot be
considered lending investors under CA 466, as amended.
Definition of Lending
Investors under CA 466 Does
Not Include Insurance
Companies.
The definition in Section 194(u) of CA 466 is not broad enough to include the business of insurance
companies. The Insurance Code of 197821 is very clear on what constitutes an insurance company. It
provides that an insurer or insurance company "shall include all individuals, partnerships, associations
or corporations xxx engaged as principals in the insurance business, excepting mutual benefit
associations."22 More specifically, respondents fall under the category of insurance corporations as
defined in Section 185 of the Insurance Code, thus:
SECTION 185. Corporations formed or organized to save any person or persons or other
corporations harmless from loss, damage, or liability arising from any unknown or future or
contingent event, or to indemnify or to compensate any person or persons or other
corporations for any such loss, damage, or liability, or to guarantee the performance of or
compliance with contractual obligations or the payment of debts of others shall be known as
"insurance corporations."

Plainly, insurance companies and lending investors are different enterprises in the eyes of the law.
Lending investors cannot, for a consideration, hold anyone harmless from loss, damage or liability, nor
provide compensation or indemnity for loss. The underwriting of risks is the prerogative of insurers, the
great majority of which are incorporated insurance companies23 like respondents.
Granting of Mortgage and
other Loans are Investment
Practices that are Part of the
Insurance Business.
True, respondents granted mortgage and other kinds of loans. However, this was not done
independently of respondents insurance business. The granting of certain loans is one of several
means of investment allowed to insurance companies. No less than the Insurance Code mandates and
regulates this practice.24
Unlike the practice of lending investors, the lending activities of insurance companies are
circumscribed and strictly regulated by the State. Insurance companies cannot freely lend to
"themselves or others" as lending investors can, 25 nor can insurance companies grant simply any kind
of loan. Even prior to 1978, the Insurance Code prescribed strict rules for the granting of loans by
insurance companies.26 These provisions on mortgage, collateral and policy loans were reiterated in
the Insurance Code of 1978 and are still in force today.
Petitioner concedes that respondents investment practices are as much a part of the insurance
business as the task of underwriting. Nevertheless, petitioner argues that such investment practices
are separately taxable under CA 466.
The CTA and the Court of Appeals found that the investment of premiums and other funds received by
respondents through the granting of mortgage and other loans was necessary to respondents
business and hence, should not be taxed separately.
Insurance companies are required by law to possess and maintain substantial legal reserves to meet
their obligations to policyholders.27 This obviously cannot be accomplished through the collection of
premiums alone, as the legal reserves and capital and surplus insurance companies are obligated to
maintain run into millions of pesos. As such, the creation of "investment income" has long been held to
be generally, if not necessarily,essential to the business of insurance. 28
The creation of investment income in the manner sanctioned by the laws on insurance is thus part of
the business of insurance, and the fruits of these investments are essentially income from the
insurance business. This is particularly true if the invested assets are held either as reserved funds to
provide for policy obligations or as capital and surplus to provide an extra margin of safety which will
be attractive to insurance buyers.29
The Court has also held that when a company is taxed on its main business, it is no longer taxable
further for engaging in an activity or work which is merely a part of, incidental to and is necessary to
its main business.30Respondents already paid percentage and fixed taxes on their insurance business.
To require them to pay percentage and fixed taxes again for an activity which is necessarily a part of
the same business, the law must expressly require such additional payment of tax. There is, however,
no provision of law requiring such additional payment of tax.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require insurance companies to pay double
percentage and fixed taxes. They merely tax lending investors, not lending activities. Respondents

were not transformed into lending investors by the mere fact that they granted loans, as these
investments were part of, incidental and necessary to their insurance business.
Different Tax Treatment of
Insurance Companies and
Lending Investors.
Section 182(A)(3) of CA 466 accorded different tax treatments to lending investors and insurance
companies. The relevant portions of Section 182 state:
Sec. 182. Fixed taxes. (A) On business xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount
stated being for the whole year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;
3. In fourth and fifth class municipalities and municipal districts, one hundred and
twenty-five pesos; Provided, That lending investors who do business as such in more
than one province shall pay a tax of five hundred pesos.
xxx
(gg) Banks, insurance companies, finance and investment companies doing business in the
Philippines and franchise grantees, five hundred pesos.
xxx (Emphasis supplied.)
The separate provisions on lending investors and insurance companies demonstrate an intention to
treat these businesses differently. If Congress intended insurance companies to be taxed as lending
investors, there would be no need for Section 182(A)(3)(gg). Section 182(A)(3)(dd) would have been
sufficient. That insurance companies were included with banks, finance and investment companies
also supports the CTAs conclusion that insurance companies had more in common with the latter
enterprises than with lending investors. As the CTA pointed out, banks also regularly lend money at
interest, but are not taxable as lending investors.
We find no merit in petitioners contention that Congress intended to subject respondents to two
percentage taxes and two fixed taxes. Petitioners argument goes against the doctrine of strict
interpretation of tax impositions.
Petitioners argument is likewise not in accord with existing jurisprudence. In Commissioner of
Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,31 the Court ruled that the different tax
treatment accorded to pawnshops and lending investors in the NIRC of 1977 and the NIRC of 1986
showed "the intent of Congress to deal with both subjects differently." The same reasoning applies
squarely to the present case.

Even the current tax law does not treat insurance companies as lending investors. Under Section
108(A)32 of the NIRC of 1997, lending investors and non-life insurance companies, except for their crop
insurances, are subject to value-added tax ("VAT"). Life insurance companies are exempt from VAT, but
are subject to percentage tax under Section 123 of the NIRC of 1997.
Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466 failed to mention insurance
companies already implies the latters exclusion from the coverage of these provisions. When a statute
enumerates the things upon which it is to operate, everything else by implication must be excluded
from its operation and effect.33
Definition of Lending
Investors in CA 466 is Not
New.
Petitioner does not dispute that it issued a ruling in 1920 to the effect that the lending of money at
interest was a necessary incident of the insurance business, and that insurance companies were thus
not subject to the tax on money lenders. Petitioner argues only that the 1920 ruling does not apply to
the instant case because RA 6110 introduced the definition of lending investors to CA 466 only in
1969.
The subject definition was actually introduced much earlier, at a time when lending investors were still
referred to as money lenders. Sections 45 and 46 of the Internal Revenue Law of 1914 34 ("1914 Tax
Code") state:
SECTION 45. Amount of Tax on Business. Fixed taxes on business shall be collected as
follows, the amount stated being for the whole year, when not otherwise specified:
xxx
(x) Money lenders, eighty pesos;
xxx
SECTION 46. Words and Phrases Defined. In applying the provisions of the preceding section
words and phrases shall be taken in the sense and extension indicated below:
xxx
"Money lender" includes all persons who make a practice of lending money for
themselves or others at interest. (Emphasis supplied)
As can be seen, the definitions of "money lender" under the 1914 Tax Code and "lending investor"
under CA 466 are identical. The term "money lender" was merely changed to "lending investor" when
Act No. 3963 amended the Revised Administrative Code in 1932. 35 This same definition of lending
investor has since appeared in Section 194(u) of CA 466 and later tax laws.
Note that insurance companies were not included among the businesses subject to an annual fixed tax
under the 1914 Tax Code.36 That Congress later saw the need to introduce Section 182(A)(3)(gg) in CA
466 bolsters our view that there was no legislative intent to tax insurance companies as lending
investors. If insurance companies were already taxed as lending investors, there would have been no
need for a separate provision specifically requiring insurance companies to pay fixed taxes.

The Court Accords Great

Weight to the Factual Findings
of the CTA.
Dedicated exclusively to the study and consideration of tax problems, the CTA has necessarily
developed an expertise in the subject of taxation that this Court has recognized time and again. For
this reason, the findings of fact of the CTA, particularly when affirmed by the Court of Appeals, are
generally conclusive on this Court absent grave abuse of discretion or palpable error, 37 which are not
present in this case.
WHEREFORE, we DENY the instant petition and AFFIRM the Decision of 7 January 2000 of the Court of
Appeals in CA-G.R. SP No. 36816.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
11. G.R. No. 172087

March 15, 2011

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO
BUAG, in his official capacity as COMMISSIONER OF INTERNAL REVENUE, Public Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under the authority of
Respondent.Public and Private Respondents.
DECISION
PERALTA, J.:
For resolution of this Court is the Petition for Certiorari and Prohibition 1 with prayer for the issuance of
a Temporary Restraining Order and/or Preliminary Injunction, dated April 17, 2006, of petitioner
Philippine Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section
1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue
Code of 1997, by excluding petitioner from exemption from corporate income tax for being repugnant
to Sections 1 and 10 of Article III of the Constitution. Petitioner further seeks to prohibit the
implementation of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being
contrary to law.
The undisputed facts follow.
PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A) was issued exempting
PAGCOR from the payment of any type of tax, except a franchise tax of five percent (5%) of the gross
revenue.4 Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's
exemption.5

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869 6 was issued.
Section 13 thereof reads as follows:
Sec. 13. Exemptions. x x x
(1) Customs Duties, taxes and other imposts on importations. - All importations of equipment,
vehicles, automobiles, boats, ships, barges, aircraft and such other gambling paraphernalia,
including accessories or related facilities, for the sole and exclusive use of the casinos, the
proper and efficient management and administration thereof and such other clubs, recreation
or amusement places to be established under and by virtue of this Franchise shall be exempt
from the payment of duties, taxes and other imposts, including all kinds of fees, levies, or
charges of any kind or nature.
Vessels and/or accessory ferry boats imported or to be imported by any corporation having
existing contractual arrangements with the Corporation, for the sole and exclusive use of the
casino or to be used to service the operations and requirements of the casino, shall likewise be
totally exempt from the payment of all customs duties, taxes and other imposts, including all
kinds of fees, levies, assessments or charges of any kind or nature, whether National or Local.
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges, or levies of whatever nature, whether National or Local,
shall be assessed and collected under this Franchise from the Corporation; nor shall any form
of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of
five percent (5%)of the gross revenue or earnings derived by the Corporation from its
operation under this Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind,
nature or description, levied, established, or collected by any municipal, provincial or national
government authority.
(b) Others: The exemption herein granted for earnings derived from the operations
conducted under the franchise, specifically from the payment of any tax, income or
otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of
and extend to corporation(s), association(s), agency(ies), or individual(s) with whom
the Corporation or operator has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted under this Franchise and to
those receiving compensation or other remuneration from the Corporation as a result
of essential facilities furnished and/or technical services rendered to the Corporation or
operator.
The fee or remuneration of foreign entertainers contracted by the Corporation or operator in
pursuance of this provision shall be free of any tax.
(3) Dividend Income. Notwithstanding any provision of law to the contrary, in the event the
Corporation should declare a cash dividend income corresponding to the participation of the
private sector shall, as an incentive to the beneficiaries, be subject only to a final flat income
rate of ten percent (10%) of the regular income tax rates. The dividend income shall not in
such case be considered as part of the beneficiaries' taxable income; provided, however, that
such dividend income shall be totally exempted from income or other form of taxes if invested
within six (6) months from the date the dividend income is received in the following:
(a) operation of the casino(s) or investments in any affiliate activity that will ultimately
redound to the benefit of the Corporation; or any other corporation with whom the

Corporation has any existing arrangements in connection with or related to the

operations of the casino(s);
(b) Government bonds, securities, treasury notes, or government debentures; or
(c) BOI-registered or export-oriented corporation(s).7
PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by
Letter of Instruction No. 1430, which was issued in September 1984.
On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue Code of 1997,
took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled
corporations (GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government
Service and Insurance Corporation, the Social Security System, the Philippine Health Insurance
Corporation, and the Philippine Charity Sweepstakes Office, thus:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of
existing special general laws to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement
and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations engaged in similar business, industry, or
activity.9
With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is
Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of
1997 by excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of
corporate income tax, thus:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of
existing special general laws to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax
upon their taxable income as are imposed by this Section upon corporations or associations engaged
in similar business, industry, or activity.
Different groups came to this Court via petitions for certiorari and prohibition11 assailing the validity
and constitutionality of R.A. No. 9337, in particular:
1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties;
Section 5, which imposes a 10% VAT on importation of goods; and Section 6, which imposes a
10% VAT on sale of services and use or lease of properties, all contain a uniform
proviso authorizing the President, upon the recommendation of the Secretary of Finance, to
raise the VAT rate to 12%. The said provisions were alleged to be violative of Section 28 (2),
Article VI of the Constitution, which section vests in Congress the exclusive authority to fix the
rate of taxes, and of Section 1, Article III of the Constitution on due process, as well as of
Section 26 (2), Article VI of the Constitution, which section provides for the "no amendment
rule" upon the last reading of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or
the guarantee of equal protection of the laws, and Section 28 (1), Article VI of the Constitution;
and
3) other technical aspects of the passage of the law, questioning the manner it was passed.
On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No.
9337.12
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,13 specifically
identifying PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of the
National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The said revenue regulation, in
part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected Services.
xxxx
(h) x x x
Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code,
regardless of how their franchisees may have been granted, shall be subject to the 10% VAT imposed
under Sec.108 of the Tax Code. This includes, among others, the Philippine Amusement and Gaming
Corporation (PAGCOR), and its licensees or franchisees.
Hence, the present petition for certiorari.
PAGCOR raises the following issues:
I
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO
THE EQUAL PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO
THE NON-IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR
BEING BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID
REGULATION IMPOSED VAT ON THE SERVICES OF THE PETITIONER AS WELL AS PETITIONERS
LICENSEES OR FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED BY APPLICABLE JURISPRUDENCE,
DOES NOT IMPOSE VAT ON PETITIONER OR ON PETITIONERS LICENSEES OR FRANCHISEES. 14
The BIR, in its Comment15 dated December 29, 2006, counters:
I

SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND CONSTITUTIONAL
PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE
EFFECT TO ALL OF THEIR PROVISIONS WHENEVER POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III OF THE
1987 CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL STRICKEN DOWN BY
LAWFUL AUTHORITIES.
The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,16 concurred with
the arguments of the petitioner. It added that although the State is free to select the subjects of
taxation and that the inequity resulting from singling out a particular class for taxation or exemption is
not an infringement of the constitutional limitation, a tax law must operate with the same force and
effect to all persons, firms and corporations placed in a similar situation. Furthermore, according to the
OSG, public respondent BIR exceeded its statutory authority when it enacted RR No. 16-2005, because
the latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.
The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the
enactment of R.A. No. 9337.
After a careful study of the positions presented by the parties, this Court finds the petition partly
meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of
1977, petitioner is no longer exempt from corporate income tax as it has been effectively omitted from
the list of GOCCs that are exempt from it. Petitioner argues that such omission is unconstitutional, as it
is violative of its right to equal protection of the laws under Section 1, Article III of the Constitution:
Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any
person be denied the equal protection of the laws.
In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of equal protection, thus:
Equal protection requires that all persons or things similarly situated should be treated alike, both as to
rights conferred and responsibilities imposed. Similar subjects, in other words, should not be treated
differently, so as to give undue favor to some and unjustly discriminate against others. The guarantee
means that no person or class of persons shall be denied the same protection of laws which is enjoyed
by other persons or other classes in like circumstances. The "equal protection of the laws is a pledge of
the protection of equal laws." It limits governmental discrimination. The equal protection clause
extends to artificial persons but only insofar as their property is concerned.
xxxx
Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable,
the law may operate only on some and not all of the people without violating the equal protection

clause. The classification must, as an indispensable requisite, not be arbitrary. To be valid, it must
conform to the following requirements:
1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class. 18
It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs
exempted from payment of corporate income tax as shown in R.A. No. 8424, Section 27 (c) of which,
reads:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of
existing special or general laws to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement
and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations engaged in similar business, industry, or
activity.19
A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on
Means dated October 27, 1997 would show that the exemption of PAGCOR from the payment of
corporate income tax was due to the acquiescence of the Committee on Ways on Means to the request
of PAGCOR that it be exempt from such tax.20 The records of the Bicameral Conference Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.
HON. R. DIAZ. Tinanggal na ba natin yon?
CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal
basis, we included a tax on cockfighting winnings.
CHAIRMAN ENRILE. No, we removed the --HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.
CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will
accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.

HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would
reflect the VAT and other sales taxes--CHAIRMAN ENRILE. No, were talking of this measure only. We will not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that when we release
the money into the hands of the public, they will not use that to --- for wallpaper. They will spend that
eh, Mr. Chairman. So when they spend that--CHAIRMAN ENRILE. Theres a VAT.
HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a quantification? Is
there an approximation?
CHAIRMAN JAVIER. Not anything.
HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating in
the economy which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government, somebody
receives it in the form of wages and supplies and other services and other goods. They are not being
taken from the public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income for the taxpayers.
HON. ROXAS. Precisely, so they will be spending it. 21
The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying
corporate income tax was not based on a classification showing substantial distinctions which make for
real differences, but to reiterate, the exemption was granted upon the request of PAGCOR that it be
exempt from the payment of corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been excluded
from the enumeration of GOCCs that are exempt from paying corporate income tax. The records of the
Bicameral Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of
Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be
subject to the payment of corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent of the amendment.
SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we
want to show the world who our creditors, that we are increasing official revenues that go to the
national budget. Unfortunately today, Pagcor is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying some
small taxes that they are subjected to. Of the 9.7 billion, they claim they remitted to national
government seven billion. Pagkatapos, there are other specific remittances like to the Philippine Sports
Commission, etc., as mandated by various laws, and then about 400 million to the President's Social
Fund. But all in all, their net profit today should be about 12 billion. That's why I am questioning this
two billion. Because while essentially they claim that the money goes to government, and I
will accept that just for the sake of argument. It does not pass through the appropriation

process. And I think that at least if we can capture 35 percent or 32 percent through the
budgetary process, first, it is reflected in our official income of government which is
applied to the national budget, and secondly, it goes through what is constitutionally
mandated as Congress appropriating and defining where the money is spent and not
through a board of directors that has absolutely no accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.
There is wisdom in the comments of my good friend from Cebu, Senator Osmea.
SEN. OSMEA. And Negros.
REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not want to put my
friends from the Department of Finance in a difficult position, but may we know your comments on this
knowing that as Senator Osmea just mentioned, he said, "I accept that that a lot of it is going to
spending for basic services," you know, going to most, I think, supposedly a lot or most of it should go
to government spending, social services and the like. What is your comment on this? This is going to
affect a lot of services on the government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEA. It goes from pocket to the other, Monico.
REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you may have your
own pre-judgment on this and I don't blame you. I don't blame you. And I know you have your own
research. But will this not affect a lot, the disbursements on social services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier for
you to explain to, say, foreign creditors, how do you explain to them that if there is a fiscal gap some
of our richest corporations has [been] spared [from] taxation by the government which is one rich
source of revenues. Now, why do you save, why do you spare certain government corporations on that,
like Pagcor? So, would it be easier for you to make an argument if everything was exposed to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we call Congressman
Teves?
MR. PURISIMA. Thank you, Mr. Chair.
Yes, from definitely improving the collection, it will help us because it will then enter as an
official revenue although when dividends declare it also goes in as other income. (sic)
xxxx
REP. TEVES. Mr. Chairman.
xxxx
THE CHAIRMAN (REP. LAPUS). Congressman Teves.

REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are
talking here on value-added tax. Do you mean to say we are going to amend it from income
tax to value-added tax, as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with regard to the
exemption from income tax of Pagcor.
xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that are
VATable? What will we VAT in Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?
xxxx
REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their contract, which
basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does not discuss a
VAT on Pagcor but it just takes away their exemption from non-payment of income tax. 22
Taxation is the rule and exemption is the exception.23 The burden of proof rests upon the party claiming
exemption to prove that it is, in fact, covered by the exemption so claimed. 24 As a rule, tax exemptions
are construed strongly against the claimant.25 Exemptions must be shown to exist clearly and
categorically, and supported by clear legal provision. 26
In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax,
considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue
Code of 1997 by omitting PAGCOR from the exemption. The legislative intent, as shown by the
discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax;
hence, the omission or removal of PAGCOR from exemption from the payment of corporate income tax.
It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius.27 Thus, the express mention of the GOCCs exempted from payment of corporate income tax
excludes all others. Not being excepted, petitioner PAGCOR must be regarded as coming within the
purview of the general rule that GOCCs shall pay corporate income tax, expressed in the maxim:
exceptio firmat regulam in casibus non exceptis.28
PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative
records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and
Means, show that PAGCORs exemption from payment of corporate income tax, as provided in Section
27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a

valid classification based on substantial distinctions and the other requirements of a reasonable
classification by legislative bodies, so that the law may operate only on some, and not all, without
violating the equal protection clause. The legislative records show that the basis of the grant of
exemption to PAGCOR from corporate income tax was PAGCORs own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the
non-impairment clause of the Constitution. Petitioner avers that laws form part of, and is read into, the
contract even without the parties expressly saying so. Petitioner states that the private
parties/investors transacting with it considered the tax exemptions, which inure to their benefit, as the
main consideration and inducement for their decision to transact/invest with it. Petitioner argues that
the withdrawal of its exemption from corporate income tax by R.A. No. 9337 has the effect of changing
the main consideration and inducement for the transactions of private parties with it; thus, the
amendatory provision is violative of the non-impairment clause of the Constitution.
Petitioners contention lacks merit.
The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides
that no law impairing the obligation of contracts shall be passed. The non-impairment clause is limited
in application to laws that derogate from prior acts or contracts by enlarging, abridging or in any
manner changing the intention of the parties.29 There is impairment if a subsequent law changes the
terms of a contract between the parties, imposes new conditions, dispenses with those agreed upon or
withdraws remedies for the enforcement of the rights of the parties. 30
As regards franchises, Section 11, Article XII of the Constitution 31 provides that no franchise or right
shall be granted except under the condition that it shall be subject to amendment, alteration, or repeal
by the Congress when the common good so requires.32
In Manila Electric Company v. Province of Laguna,33 the Court held that a franchise partakes the nature
of a grant, which is beyond the purview of the non-impairment clause of the Constitution. 34 The
pertinent portion of the case states:
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as
being in the nature of contracts and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions,
in the real sense of the term and where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such as those contained in
government bonds or debentures, lawfully entered into by them under enabling laws in which the
government, acting in its private capacity, sheds its cloak of authority and waives its governmental
immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of
contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions
granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of
the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution,
like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except under the condition that such privilege shall be
subject to amendment, alteration or repeal by Congress as and when the common good so requires. 35
In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and
other recreation or amusement places, sports, gaming pools, i.e., basketball, football, lotteries, etc.,
whether on land or sea, within the territorial jurisdiction of the Republic of the Philippines. 36 Under
Section 11, Article XII of the Constitution, PAGCORs franchise is subject to amendment, alteration or
repeal by Congress such as the amendment under Section 1 of R.A. No. 9377. Hence, the provision in
Section 1 of R.A. No. 9337, amending Section 27 (c) of R.A. No. 8424 by withdrawing the exemption of

PAGCOR from corporate income tax, which may affect any benefits to PAGCORs transactions with
private parties, is not violative of the non-impairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT
is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner
can be subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from
the payment of corporate income tax, which was already addressed above by this Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k)
thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:
Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax:
xxxx
(k) Transactions which are exempt under international agreements to which the Philippines is a
signatory orunder special laws, except Presidential Decree No. 529.37
Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a special
law that grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which
retained Section 108 (B) (3) of R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further
amended to read as follows:
SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate;
xxxx
(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to
zero percent (0%) rate;
x x x x38
As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No.
8424 by imposing VAT on other services not previously covered, it did not amend the portion of Section

108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons to persons
or entities whose exemption under special laws or international agreements to which the Philippines is
a signatory effectively subjects the supply of such services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and
extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation.39 Acesite was the owner and operator of the Holiday Inn Manila Pavilion Hotel. It leased a
portion of the hotels premises to PAGCOR. It incurred VAT amounting to P30,152,892.02 from its rental
income and sale of food and beverages to PAGCOR from January 1996 to April 1997. Acesite tried to
shift the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR. However,
PAGCOR refused to pay the taxes because of its tax-exempt status. PAGCOR paid only the amount due
to Acesite minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount of P30,152,892.02
to the Commissioner of Internal Revenue, fearing the legal consequences of its non-payment. In May
1998, Acesite sought the refund of the amount it paid as VAT on the ground that its transaction with
PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that
PAGCOR and Acesite were both exempt from paying VAT, thus:
xxxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the
payment of taxes. Section 13 of P.D. 1869 pertinently provides:
Sec. 13. Exemptions.
xxxx
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as
well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any
way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross
revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall
be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes,
levies, fees or assessments of any kind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted under
the franchise specifically from the payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to be conducted under this Franchise and to
those receiving compensation or other remuneration from the Corporation or operator as a result of
essential facilities furnished and/or technical services rendered to the Corporation or operator.
Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to
indirect taxes, like the VAT.
We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is
also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers
to PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect taxes,
PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or
entities contracting with PAGCOR in casino operations. Although, differently worded, the provision
clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt
status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that
PAGCOR is not liable for the P30, 152,892.02 VAT and neither is Acesite as the latter is effectively
subject to zero percent rate under Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in
the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties,
or services subject to VAT. Thus,by extending the tax exemption to entities or individuals
dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to
indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said tax.
It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or
leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the
value. Verily, the seller or lessor has the option to follow either way in charging its clients and
customer. In the instant case, Acesite followed the latter method, that is, charging an additional 10% of
the gross sales and rentals. Be that as it may, the use of either method, and in particular, the first
method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not
liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the
indirect tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as
amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:
Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person
engaged in the sale of services x x x; Provided, that the following services performed in the Philippines
by VAT registered persons shall be subject to 0%.
xxxx
(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to
zero (0%) rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such
exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from
the 1987 case ofCommissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute
tax exemption of the World Health Organization (WHO) upon an international agreement was upheld.
We held in said case that the exemption of contractee WHO should be implemented to mean that the

entity or person exempt is the contractor itself who constructed the building owned by contractee
WHO, and such does not violate the rule that tax exemptions are personal because the manifest
intention of the agreement is to exempt the contractor so that no contractor's tax may be shifted to
the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals
dealing with PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be
shifted to PAGCOR.40
Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner
of Internal Revenue v. Acesite (Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax
Code, as amended, which section was retained as Section 108 (B) (3) in R.A. No. 8424, 41 it is still
applicable to this case, since the provision relied upon has been retained in R.A. No. 9337. 421avvphi1
It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to
implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the
terms and provisions of the basic law.43 RR No. 16-2005, therefore, cannot go beyond the provisions of
R.A. No. 9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its authority
in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory provision is hereby
nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section
27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement
and Gaming Corporation from the enumeration of government-owned and controlled corporations
exempted from corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 162005 insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary to the National
Internal Revenue Code of 1997, as amended by Republic Act No. 9337.
No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
12. G.R. No. 195909

September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
CARPIO, J.:

The Case
These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing
the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1
March 2011 in CTA Case No. 6746. This Court resolves this case on a pure question of law, which
involves the interpretation of Section 27(B) vis--vis Section 30(E) and (G) of the National Internal
Revenue Code of the Philippines (NIRC), on the income tax treatment of proprietary non-profit
hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to
the sick, diseased and disabled persons; provided that purely medical and surgical services
shall be performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;
(b) To provide a career of health science education and provide medical services to the
community through organized clinics in such specialties as the facilities and resources of the
corporation make possible;
(c) To carry on educational activities related to the maintenance and promotion of health as
well as provide facilities for scientific and medical researches which, in the opinion of the Board
of Trustees, may be justified by the facilities, personnel, funds, or other requirements that are
available;
(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;
xxxx

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting toP76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount
to P63,935,351.57 during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax
rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's. According to
the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the exemption on
non-profit hospitals that were previously categorized as non-stock, non-profit corporations under
Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock, non-profit charitable
institutions and civic organizations promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of P1,730,367,965
or approximately P1.73 billion from patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was P218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating
expenses) ofP334,642,615. 8 St. Luke's also claimed that its income does not inure to the benefit of any
individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA
that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment of
Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section 30
of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR prays
that St. Luke's be ordered to payP57,659,981.19 as deficiency income and expanded withholding tax
for 1998 with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of
a part of its income, 9 as well as the payment of surcharge and delinquency interest. There is no
ground for this Court to undertake such a factual review. Under the Constitution 10 and the Rules of
Court, 11 this Court's review power is generally limited to "cases in which only an error or question of
law is involved." 12 This Court cannot depart from this limitation if a party fails to invoke a recognized
exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated
23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the
amount of P110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby
ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable year
1998 in the respective amounts of P5,496,963.54 and P778,406.84 or in the sum of P6,275,370.38, x x
x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the
total amount of P6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.
SO ORDERED.

13

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came
from charitable activities. The CTA cancelled the remainder of the P63,113,952.79 deficiency assessed
by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was
not applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section
30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services to
its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's Medical
Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes of St. Luke's
under its articles of incorporation and various documents 17 identifying St. Luke's as a charitable
institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a
charitable institution does not lose its charitable character and its consequent exemption from taxation
merely because recipients of its benefits who are able to pay are required to do so, where funds
derived in this manner are devoted to the charitable purposes of the institution x x x." 19 The
generation of income from paying patients does not per se destroy the charitable nature of St. Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled
that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those
corporations or associations which, otherwise, would be subject thereto, because of the existence of x
x x net income." 22 The NIRC of 1997 substantially reproduces the provision on charitable institutions of
the old NIRC. Thus, in rejecting the argument that tax exemption is lost whenever there is net income,
the Court in Jesus Sacred Heart College declared: "[E]very responsible organization must be run to at
least insure its existence, by operating within the limits of its own resources, especially its regular
income. In other words, it should always strive, whenever possible, to have a surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained
that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit." On the
other hand, Congress specifically used the word "non-stock" to qualify a charitable "corporation or
association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the present tax code,
indicating an intent to exempt this type of charitable organization from income tax. Section 27(B) does
not require that the hospital be "non-stock." The CTA stated, "it is clear that non-stock, non-profit
hospitals operated exclusively for charitable purpose are exempt from income tax on income received
by them as such, applying the provision of Section 30(E) of the NIRC of 1997, as amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise
only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider
relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving.
The CTA declared that it has "gone through the records of this case and found no other evidence aside
from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge
under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time
prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20%
delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the
amount of P6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32
The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section
27(B) in the NIRC of 1997 vis--vis Section 30(E) and (G) on the income tax exemption of charitable
and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that Congress
intended to remove the exemption that non-profit hospitals previously enjoyed under Section 27(E) of
the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the NIRC of
1997. 33 Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall
be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational institution or hospital of its
primary purpose or function. A 'proprietary educational institution' is any private school maintained
and administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED),
or the Technical Education and Skills Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's focus
on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable
institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30
state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under
this Title in respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed under this Code. (Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of
the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section
30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be

construed together without the removal of such tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary nonprofit educational institutions 36 and proprietary non-profit hospitals, among the institutions covered by
Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate
rate under the last paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary nonprofit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any private school maintained and administered
by private individuals or groups" with a government permit. "Non-profit" means no net income or asset
accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino
Inc. de Cebu,37 this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course. 38 The
club was non-profit because of its purpose and there was no evidence that it was engaged in a profitmaking enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or [by] otherwise lessening the burden of government." 41 A non-profit club for the
benefit of its members fails this test. An organization may be considered as non-profit if it does not
distribute any part of its income to stockholders or members. However, despite its being a tax exempt
institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private entities already assume a part of the
burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works which would have been funded by
appropriations from the Treasury. 42
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a
tax exemption are specified by the law granting it. The power of Congress to tax implies the power to
exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o
law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress." 43 The requirements for a tax exemption are strictly construed against the
taxpayer 44 because an exemption restricts the collection of taxes necessary for the existence of the
government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for
the purpose of exemption from real property taxes. This ruling uses the same premise as Hospital de
San Juan 45and Jesus Sacred Heart College 46 which says that receiving income from paying patients
does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined in
the hospital, or receives subsidies from the government, so long as the money received is devoted or

used altogether to the charitable object which it is intended to achieve; and no money inures to the
private benefit of the persons managing or operating the institution. 47
For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions, churches
and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation." 48 The test of exemption is not strictly a
requirement on the intrinsic nature or character of the institution. The test requires that the institution
use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove from the
tax exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of
the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the
NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not define a charitable institution, but requires that the
institution "actually, directly and exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted "exclusively"
for charitable purposes. The organization of the institution refers to its corporate form, as shown by its
articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is distributable as dividends to its members,
trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized." 50 However, under Lung Center, any profit by a charitable institution must not only be
plowed back "whenever necessary or proper," but must be "devoted or used altogether to the
charitable object which it is intended to achieve." 51
The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
"no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and improvements of the institution is but a
part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso
facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property "actually, directly and exclusively" for charitable
purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be "organized and operated exclusively" for charitable purposes. Likewise, to be
exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed under this Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or
association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x." It
likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever
kind and character" of a charitable institution "from any of its activities conducted for profit, regardless
of the disposition made of such income, shall be subject to tax." Prior to the introduction of Section
27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate under
Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately P1.73 billion from paying patients is not an
institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are
income received from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived
profits from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of P218,187,498. In its Comment in G.R. No.
195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998. 53
REVENUES FROM SERVICES TO PATIENTS

P1,730,367,965.00

OPERATING EXPENSES
Professional care of patients

P1,016,608,394.00

Administrative

287,319,334.00

Household and Property

91,797,622.00
P1,395,725,350.00

INCOME FROM OPERATIONS

P334,642,615.00

100%

Free Services

-218,187,498.00

-65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES

P116,455,117.00

34.80%

OTHER INCOME

17,482,304.00

EXCESS OF REVENUES OVER EXPENSES

P133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the
words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous
with exclusively. 54
The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC.
Services to paying patients are activities conducted for profit. They cannot be considered any other
way. There is a "purpose to make profit over and above the cost" of services. 55 The P1.73 billion total
revenues from paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498
for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said that
the income is "devoted or used altogether to the charitable object which it is intended to
achieve." 56 The income is plowed back to the corporation not entirely for charitable purposes, but for
profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income
from activities for profit is taxable "regardless of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
"any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco,
who was a member of the Committee of Conference for the Senate, which introduced the phrase "or
from any activity conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es una
actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?
xxxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero
considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posicin social econmica, lo que se paga por estos enfermos debe estar sujeto a 'income tax',
y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any activity
conducted for profit.' 57
The question was whether having a hospital is essential to an educational institution like the College of
Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid
rooms generally occupied by people of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted the phrase "or any activity conducted
for profit."
The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation.
Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities from
being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not
only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain
text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be
"operated exclusively" for charitable or social welfare purposes to be completely exempt from income
tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its
for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is
merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10%
rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.1wphi1
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax
exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B)
of the NIRC as long as it does not distribute any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined
that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus exempt
from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said
that "good faith and honest belief that one is not subject to tax on the basis of previous interpretation
of government agencies tasked to implement the tax law, are sufficient justification to delete the
imposition of surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is
ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate
under Section 27(B) of the National Internal Revenue Code. However, it is not liable for surcharges and
interest on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue
Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule
45 of the Rules of Court.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

13. G.R. No. L-54908 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.

MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT

CORPORATION and the COURT OF TAX APPEALS, respondents.
G.R. No. 80041 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and the COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for respondents.

REGALADO, J.:
These cases, involving the same issue being contested by the same parties and having originated from
the same factual antecedents generating the claims for tax credit of private respondents, the same
were consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation
(Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines, for
purposes of the projected expansion of the productive capacity of the former's mines in Toledo, Cebu.
Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00,
United States currency, for the installation of a new concentrator for copper production. Atlas, in turn
undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of
fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used for the
purchase of the concentrator machinery from Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short)
obviously for purposes of its obligation under said contract. Its loan application was approved on May
26, 1970 in the sum of 4,320,000,000.00, at about the same time as the approval of its loan for
2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent
to $20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the
Bureau of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject
to the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for
importing copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan
by September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to
the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in
the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the
National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the
Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later
noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed
a waiver and disclaimer of its interest in the claim for tax credit in favor of
Atlas. 4

The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed
a petition for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was
grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution
owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank,
if it may be so called, is the basis for private repondents' claim for exemption from paying the tax on
the interest payments on the loan as earlier stated. It was further claimed that the interest payments
on the loan from the consortium of Japanese banks were likewise exempt because said loan
supposedly came from or were financed by Eximbank. The provision of the National Internal Revenue
Code relied upon is Section 29 (b) (7) (A), 6 which excludes from gross income:
(A) Income received from their investments in the Philippines in loans, stocks, bonds or
other domestic securities, or from interest on their deposits in banks in the Philippines
by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying
refinancing from them, and (3) international or regional financing institutions
established by governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later
reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment
was still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show
that on November 16, 1976, the said division recommended to petitioner the approval of private
respondent's claim. However, before action could be taken thereon, respondent court scheduled the
case for hearing on September 30, 1977, during which trial private respondents presented their
evidence while petitioner submitted his case on the basis of the records of the Bureau of Internal
Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in
favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted
the material averments of private respondents when he supposedly prayed "for judgment on the
pleadings without off-spring proof as to the truth of his allegations." 8 Furthermore, the court declared
that all papers and documents pertaining to the loan of 4,320,000,000.00 obtained by Mitsubishi from
Eximbank show that this was the same amount given to Atlas. It also observed that the money for the
loans from the consortium of private Japanese banks in the sum of 2,880,000,000.00 "originated"
from Eximbank. From these, respondent court concluded that the ultimate creditor of Atlas was
Eximbank with Mitsubishi acting as a mere "arranger or conduit through which the loans flowed from
the creditor Export-Import Bank of Japan to the debtor Atlas Consolidated Mining & Development
Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal
to this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the
amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was
withheld and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner,
repeating the same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals
docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter
to private respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or
legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered
judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for

reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated
September 7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with respondent
court and a petition for review was filed with this Court on December 19, 1987. Said later case is now
before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.
The principal issue in both petitions is whether or not the interest income from the loans extended to
Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax
code and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or
not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose
investments in the Philippines on loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that
petitioner should be deemed to have admitted the allegations of the private respondents when it
submitted the case on the basis of the pleadings and records of the bureau. There is nothing to
indicate such admission on the part of petitioner nor can we accept respondent court's pronouncement
that petitioner did not offer to prove the truth of its allegations. The records of the Bureau of Internal
Revenue relevant to the case were duly submitted and admitted as petitioner's supporting evidence.
Additionally, a hearing was conducted, with presentation of evidence, and the findings of respondent
court were based not only on the pleadings but on the evidence adduced by the parties. There could,
therefore, not have been a judgment on the pleadings, with the theorized admissions imputed to
petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the
highest respect and can only be disturbed on appeal if they are not supported by substantial evidence
or if there is a showing of gross error or abuse on the part of the tax court. 11 Thus, ordinarily, we could
give due consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank.
Compelling circumstances obtaining and proven in these cases, however, warrant a departure from
said general rule since we are convinced that there is a misapprehension of facts on the part of the tax
court to the extent that its conclusions are speculative in nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential
reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the
contract of loan and Atlas as the seller of the copper concentrates. From the categorical language used
in the document, one prestation was in consideration of the other. The specific terms and the
reciprocal nature of their obligations make it implausible, if not vacuous to give credit to the cavalier
assertion that Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi
stated in its loan application with the former was that the amount being procured would be used as a
loan to and in consideration for importing copper concentrates from Atlas. 12 Such an innocuous
statement of purpose could not have been intended for, nor could it legally constitute, a contract of
agency. If that had been the purpose as respondent court believes, said corporations would have
specifically so stated, especially considering their experience and expertise in financial transactions,
not to speak of the amount involved and its purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the
following arguments of petitioner:
The nature of the above contract shows that the same is not just a simple contract of
loan. It is not a mere creditor-debtor relationship. It is more of a reciprocal obligation
between ATLAS and MITSUBISHI where the latter shall provide the funds in the
installation of a new concentrator at the former's Toledo mines in Cebu, while ATLAS in

consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the entire
copper concentrate that will be produced by the installed concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the
specified term was the consideration of the granting of the amount of $20 million to
ATLAS. MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds.
Hence, it had to secure a loan or loans from other sources. And from what sources, it is
immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20
million from the EXIMBANK, of Japan and the consortium of Japanese banks financed
through the EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own independent capacity
as a private entity and not as a conduit of the consortium of Japanese banks or the
EXIMBANK of Japan. While the loans were secured by MITSUBISHI primarily "as a loan
to and in consideration for importing copper concentrates from ATLAS," the fact
remains that it was a loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and
separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter
contract, it is not EXIMBANK, that was intended to be benefited. It is MITSUBISHI which
stood to profit. Besides, the Loan and Sales Contract cannot be any clearer. The only
signatories to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be
inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any
entity, private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule
that when a contract of loan is completed, the money ceases to be the property of the
former owner and becomes the sole property of the obligor (Tolentino and Manio vs.
Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK,
of Japan, said amount ceased to be the property of the bank and became the property
of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of
ATLAS, the former being the owner of the $20 million upon completion of its loan
contract with EXIMBANK of Japan.
The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely
different from the interest income paid by MITSUBISHI to EXIMBANK, of Japan. What
was the subject of the 15% withholding tax is not the interest income paid by
MITSUBISHI to EXIMBANK, but the interest income earned by MITSUBISHI from the loan
to ATLAS. . . . 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself,
does not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted
by other considerations aliunde. The application for the loan was approved on May 20, 1970, or more
than a month after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is
true that under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to
and in consideration for importing copper concentrates from Atlas, but all that this proves is the
justification for the loan as represented by Mitsubishi, a standard banking practice for evaluating the
prospects of due repayment. There is nothing wrong with such stipulation as the parties in a contract

are free to agree on such lawful terms and conditions as they see fit. Limiting the disbursement of the
amount borrowed to a certain person or to a certain purpose is not unusual, especially in the case of
Eximbank which, aside from protecting its financial exposure, must see to it that the same are in line
with the provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it
from making loans except to Japanese individuals and corporations. We are not impressed. Not only is
there a failure to establish such submission by adequate evidence but it posits the unfair and
unexplained imputation that, for reasons subject only of surmise, said financing institution would
deliberately circumvent its own charter to accommodate an alien borrower through a manipulated
subterfuge, but with it as a principal and the real obligee.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming
the truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere
conduit. Furthermore, the remittance of the interest payments may also be logically viewed as an
arrangement in paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon
by Eximbank and Mitsubishi as to the manner or procedure for the payment of the latter's obligation is
their own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the
rate of 75% per annum, while Mitsubishis contract with Atlas merely states that the "interest on the
amount of the loan shall be the actual cost beginning from and including other dates of releases
against loan." 14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the
party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus
petitioners have failed to discharge. Significantly, private respondents are not even among the entities
which, under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should
indispensably be the party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer
due to diminution of much needed funds. Nor can we close this discussion without taking cognizance
of petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in
this case on the nebulous representation that the funds involved in the loans are those of a foreign
government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax
laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans
or other domestic securities with private foreign entities, which in turn will negotiate independently
with their governments, could be availed of to take advantage of the tax exemption law under
discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April
18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

14. G.R. No. 179961

January 31, 2011

KEPCO PHILIPPINES CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure assailing
the May 17, 2007 Decision1 of the Court of Tax Appeals En Banc (CTA), in C.T.A. E.B. No. 186 entitled
"KEPCO Philippines Corporation v. Commissioner of Internal Revenue," which denied petitioners claim
for refund or issuance of tax credit certificate for the unapplied input value-added taxes attributable to
zero-rated sales of services for taxable year 1999, as well as its Resolution, dated September 28, 2007,
which denied the motion for reconsideration of the said decision.
THE FACTS
Petitioner Kepco Philippines Corporation (Kepco) is a domestic corporation duly organized and existing
under and by virtue of the laws of the Republic of the Philippines. It is a value-added tax (VAT)
registered taxpayer engaged in the production and sale of electricity as an independent power
producer. It sells its electricity to the National Power Corporation (NPC). Kepco filed with respondent
Commissioner of Internal Revenue (CIR) an application for effective zero-rating of its sales of electricity
to the NPC.
Kepco alleged that for the taxable year 1999, it incurred input VAT in the amount of P10,527,202.54 on
its domestic purchases of goods and services that were used in its production and sale of electricity to
NPC for the same period. In its 1999 quarterly VAT returns filed with the Bureau of Internal Revenue
(BIR) on March 30, 2000, Kepco declared the said input VAT as follows:
INPUT TAX
Exhibit 1999 Carried-over from This quarter Carried over previous quarter to next quarter
A 1st qtr

100,564,209.14

4,804,974.70

105,369,183.84

B 2nd qtr

105,369,183.84

1,461,960.38

106,831,144.22

C 3rd qtr

106,831,144.22

2,563,288.00

109,394,432.22

D 4th qtr

109,394,432.22

1,696,979.46

111,091,411.68

TOTAL

P10,527,202.54:2

Thus, on January 29, 2001, Kepco filed an administrative claim for refund corresponding to its reported
unutilized input VAT for the four quarters of 1999 in the amount of P10,527,202.54. Thereafter, on April
24, 2001, Kepco filed a petition for review before the CTA pursuant to Section 112(A) of the 1997
National Internal Revenue Code (NIRC), which grants refund of unutilized input taxes attributable to
zero-rated or effectively zero-rated sales. This was docketed as CTA Case No. 6287.
On August 31, 2005, the CTA Second Division rendered a decision 3 denying Kepcos claim for refund for
failure to properly substantiate its effectively zero-rated sales for the taxable year 1999 in the total
amount ofP860,340,488.96, with the alleged input VAT of P10,527,202.54 directly attributable thereto.
The tax court held that Kepco failed to comply with the invoicing requirements in clear violation of

Section 4.108-1 of Revenue Regulations (R.R.) No. 7-95, implementing Section 108(B)(3) in conjunction
with Section 113 of the 1997 NIRC.
In view of the denial of its motion for reconsideration, Kepco filed an appeal via petition for review
before the CTAEn Banc, on the ground that the CTA Second Division erred in not considering the
amount of P10,514,023.92 as refundable tax credit and in failing to appreciate that it was exclusively
selling electricity to NPC, a tax exempt entity.
On May 17, 2007, the CTA En Banc dismissed the petition, reasoning out that Kepcos failure to comply
with the requirement of imprinting the words "zero-rated" on its official receipts resulted in nonentitlement to the benefit of VAT zero-rating and denial of its claim for refund of input tax. The decision
reads in part:
In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion spelled
out in the assailed August 31, 2005 Decision and May 4, 2006 Resolution of the CTA Second Division.
What the instant petition seeks is for the Court En Banc to view and appreciate the evidence in their
own perspective of things, which unfortunately had already been considered and passed upon.
WHEREFORE, the instant Petition is hereby DENIED DUE COURSE and DISMISSED for lack of merit.
SO ORDERED.4
Presiding Justice Ernesto D. Acosta agreed with the majority that services rendered by a VAT-registered
entity to the NPC, a tax-exempt entity, were effectively zero-rated. He was likewise of the view that
Kepcos claim could not be granted because it presented official receipts which were not in sequence
indicating, that it might have sold electricity to entities other than NPC. But, he strongly dissented on
the outright rejection of Kepcos refund claim for failure to comply with the imprinting requirements.
His dissenting opinion states in part:
However, I dissent to the majoritys finding that imprinting the term "zero-rated" as well as the BIR
authority to print or BIR Permit marker on duly registered Value Added Tax (VAT) official
receipts/invoices is necessary such that non-compliance would result to the outright denial of
petitioners claim.
Xxxx
Clearly, the applicable provisions of the Tax Code does not require the word "zero-rated" or the other
information required by the majority in the invoice/official receipt. The "requirement" of imprinting the
questioned information on the VAT invoice or receipt can be found in Section 4.108-1 of Revenue
Regulations No. 7-95 (The Implementing Rules and Regulations of the VAT law). Then again, the said
provision is merely a regulation created for the sole and limited purpose of implementing an otherwise
very exact law.
Moreover, granting for the sake of argument that the Revenue Regulations above cited may validly
impose such requirements, no provision allows the outright rejection of a refund claim as penalty for a
tax-payers failure to abide by the requirements laid down in the said regulations. 5
Kepco filed a motion for reconsideration of the decision but it was denied for lack of merit by the
CTA En Banc in its Resolution6 dated September 28, 2007.
Hence, Kepco interposes this petition praying for the reversal and setting aside of the May 17, 2007
CTA Decision anchored on the following
GROUNDS:
(I)

THE COURT OF TAX APPEALS EN BANC COMMITTED SERIOUS ERROR OF LAW WHEN IT RULED THAT
PETITIONERS FAILURE TO IMPRINT THE WORDS "ZERO-RATED" ON ITS VAT OFFICIAL RECEIPTS ISSUED
TO NPC IS FATAL TO ITS CLAIM FOR REFUND OF UNUTILIZED INPUT TAX CREDITS.
(II)
PETITIONER HAS SUFFICIENTLY PROVEN THAT IT IS RIGHTFULLY ENTITLED TO A REFUND OR ISSUANCE
OF TAX CREDIT CERTIFICATE IN THE AMOUNT OF PHP10,514,023.92. 7
From the foregoing arguments, the principal issue to be resolved is whether Kepcos failure to imprint
the words "zero-rated" on its official receipts issued to NPC justifies an outright denial of its claim for
refund of unutilized input tax credits.
Kepco contends that the provisions of the 1997 Tax Code, specifically Section 113 in relation to Section
237, do not mention the mandatory requirement of imprinting the words "zero-rated" to purchases
covering zero-rated transactions. The only provision which requires the imprinting of the word "zerorated" on VAT invoice or official receipt is Section 4.108-1 of R.R. No. 7-95. Kepco argues that the
condition imposed by the said administrative issuance should not be controlling over Section 113 of
the 1997 Tax Code, "considering the long-settled rule that administrative rules and regulations cannot
expand the letter and spirit of the law they seek to enforce."
Kepco further argues that there is no law or regulation which imposes automatic denial of taxpayers
refund claim for failure to comply with the invoicing requirements. No jurisprudence sanctions the
same, not even the Atlascase,8 cited by the CTA En Banc. According to Kepco, although it agrees with
the CTA ruling that administrative issuances, like BIR regulations, requiring an imprinting of "zerorated" on zero-rating transactions should be strictly complied with, it opposes the outright denial of
refund claim for non-compliance thereof. It insists that such automatic denial is too harsh a penalty
and runs counter to the doctrine of solutio indebiti under Article 2154 of the New Civil Code.
The CIR, in his Comment,9 counters that Kepco is not entitled to a tax refund because it was not able to
substantiate the amount of P10,514,023.92 representing zero-rated transactions for failure to submit
VAT official receipts and invoices imprinted with the wordings "zero-rated" in violation of Section 4.1081 of R.R. 7-95.
The petition is bereft of merit.
The pertinent laws governing the present case is Section 108(B)(3) of the NIRC of 1997 in relation to
Section 13 of Republic Act (R.A.) No. 6395 (The Revised NPC Charter), as amended by Presidential
Decree (P.D.) Nos. 380 and 938, which provide as follows:
Sec. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. x x x
(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
xxx
(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply
of such services to zero percent (0%) rate;
xxx

Sec. 13. Non-profit Character of the Corporation; Exemption from All Taxes, Duties, Fees,
Imposts and Other Charges by the Government and Government Instrumentalities. The
Corporation shall be non-profit and shall devote all its return from its capital investment as well as
excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness
and obligations and in furtherance and effective implementation of the policy enunciated in Section
One of this Act, the Corporation, including its subsidiaries, is hereby declared exempt from the
payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filing
fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings.
Based on the afore-quoted provisions, there is no doubt that NPC is an entity with a special charter and
exempt from payment of all forms of taxes, including VAT. As such, services rendered by any VATregistered person/entity, like Kepco, to NPC are effectively subject to zero percent (0%) rate.
For the effective zero rating of such services, however, the VAT-registered taxpayer must comply with
invoicing requirements under Sections 113 and 237 of the 1997 NIRC as implemented by Section
4.108-1 of R.R. No. 7-95, thus:
Sec. 113. Invoicing and Accounting Requirements for VAT-Registered Persons.
(A) Invoicing Requirements. A VAT-registered person shall, for every sale, issue an
invoice or receipt. In addition to the information required under Section 237, the following
information shall be indicated in the invoice or receipt:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayers
identification number; and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with
the indication that such amount includes the value-added tax.
(B) Accounting Requirements. Notwithstanding the provisions of Section 233, all persons
subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular
accounting records required, maintain a subsidiary sales journal and subsidiary purchase
journal on which the daily sales and purchases are recorded.1wphi1 The subsidiary journals
shall contain such information as may be required by the Secretary of Finance. 10 (Emphasis
supplied)
Sec. 237. Issuance of Receipts or Sales or Commercial Invoices. All persons subject to an
internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at
Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices,
prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of
merchandise or nature of service: Provided, however, That in the case of sales, receipts or transfers in
the amount of One Hundred Pesos (P100.00) or more, or regardless of amount, where the sale or
transfer is made by a person liable to value-added tax to another person also liable to value-added
tax; or where the receipt is issued to cover payment made as rentals, commissions, compensations or
fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address
of the purchaser, customer or client; Provided, further, That where the purchaser is a VAT-registered
person, in addition to the information herein required, the invoice or receipt shall further show the
Taxpayer Identification Number (TIN) of the purchaser.
The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time
the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and
preserve the same in his place of business for a period of three (3) years from the close of the taxable
year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by
the issuer, also in his place of business, for a like period.
The Commissioner may, in meritorious cases, exempt any person subject to an internal revenue tax
from compliance with the provisions of this Section. 11

Section 4.108-1. Invoicing Requirements. All VAT-registered persons shall, for every sale or lease
of goods or properties or services, issue duly registered receipts or sales or commercial invoices which
must show:
1. The name, TIN and address of seller;
2. Date of transaction;
3. Quantity, unit cost and description of merchandise or nature of service;
4. The name, TIN, business style, if any, and address of the VAT-registered purchaser, customer
or client;
5. The word "zero-rated" imprinted on the invoice covering zero-rated sales;
6. The invoice value or consideration.
In the case of sale of real property subject to VAT and where the zonal or market value is higher than
the actual consideration, the VAT shall be separately indicated in the invoice or receipt.
Only VAT-registered persons are required to print their TIN followed by the word "VAT" in
their invoices or receipts and this shall be considered as "VAT Invoice." All purchases covered
by invoices other than "VAT Invoice" shall not give rise to any input tax.
If the taxable person is also engaged in exempt operations, he should issue separate invoices or
receipts for the taxable and exempt operations. A "VAT Invoice" shall be issued only for sales of goods,
properties or services subject to VAT imposed in Sections 100 and 102 of the code.
The invoice or receipt shall be prepared at least in duplicate, the original to be given to the buyer and
the duplicate to be retained by the seller as part of his accounting records. (Emphases supplied)
Also, as correctly noted by the CTA En Banc, in Kepcos approved Application/Certificate for Zero Rate
issued by the CIR on January 19, 1999, the imprinting requirement was likewise specified, viz:
Valid only for sale of services from Jan. 19, 1999 up to December 31, 1999 unless sooner revoked.
Note: Zero-Rated Sales must be indicated in the invoice/receipt.12
Indeed, it is the duty of Kepco to comply with the requirements, including the imprinting of the words
"zero-rated" in its VAT official receipts and invoices in order for its sales of electricity to NPC to qualify
for zero-rating.
It must be emphasized that the requirement of imprinting the word "zero-rated" on the invoices or
receipts under Section 4.108-1 of R.R. No. 7-95 is mandatory as ruled by the CTA En Banc,
citing Tropitek International, Inc. v. Commissioner of Internal Revenue. 13 In Kepco Philippines
Corporation v. Commissioner of Internal Revenue,14the CTA En Banc explained the rationale behind
such requirement in this wise:
The imprinting of "zero-rated" is necessary to distinguish sales subject to 10% VAT, those that are
subject to 0% VAT (zero-rated) and exempt sales, to enable the Bureau of Internal Revenue to properly
implement and enforce the other provisions of the 1997 NIRC on VAT, namely:
1. Zero-rated sales [Sec. 106(A)(2) and Sec. 108(B)];
2. Exempt transactions [Sec. 109] in relation to Sec. 112(A);

3. Tax Credits [Sec. 110]; and

4. Refunds or tax credits of input tax [Sec. 112]
xxx
Records disclose, as correctly found by the CTA that Kepco failed to substantiate the claimed zerorated sales ofP10,514,023.92. The wordings "zero-rated sales" were not imprinted on the VAT official
receipts presented by Kepco (marked as Exhibits S to S-11) for taxable year 1999, in clear violation of
Section 4.108-1 of R.R. No. 7-95 and the condition imposed under its approved Application/Certificate
for Zero-rate as well.
Kepcos claim that Section 4.108-1 of R.R. 7-95 expanded the letter and spirit of Section 113 of 1997
Tax Code, is unavailing. Indubitably, said revenue regulation is merely a precautionary measure to
ensure the effective implementation of the Tax Code. It was not used by the CTA to expound the
meaning of Sections 113 and 237 of the NIRC. As a matter of fact, the provision of Section 4.108-1 of
R.R. 7-95 was incorporated in Section 113 (B)(2)(c) of R.A. No. 9337, 15 which states that "if the sale is
subject to zero percent (0%) value-added tax, the term zero-rated sale shall be written or printed
prominently on the invoice or receipt." This, in effect, and as correctly concluded by the CIR, confirms
the validity of the imprinting requirement on VAT invoices or official receipts even prior to the
enactment of R.A. No. 9337 under the principle of legislative approval of administrative interpretation
by reenactment.
Quite significant is the ruling handed down in the case of Panasonic Communications Imaging
Corporation of the Philippines v. Commissioner of Internal Revenue, 16 to wit:
Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary of
Finance under Section 245 of the 1977 NIRC (Presidential Decree 1158) for the efficient enforcement of
the tax code and of course its amendments. The requirement is reasonable and is in accord with the
efficient collection of VAT from the covered sales of goods and services. As aptly explained by the
CTAs First Division, the appearance of the word "zero-rated" on the face of invoices covering zerorated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT was
actually paid. If, absent such word, a successful claim for input VAT is made, the government would be
refunding money it did not collect.
Further, the printing of the word "zero-rated" on the invoice helps segregate sales that are subject to
10% (now 12%) VAT from those sales that are zero-rated. Unable to submit the proper invoices,
petitioner Panasonic has been unable to substantiate its claim for refund.
To bolster its claim for tax refund or credit, Kepco cites the case of Intel Technology Philippines, Inc. v.
Commissioner of Internal Revenue.17 Kepcos reliance on the said case is misplaced because the
factual milieu there is quite different from that of the case at bench. In the Intel case, the claim for tax
refund or issuance of a tax credit certificate was denied due to the taxpayers failure to reflect or
indicate in the sales invoices the BIR authority to print. The Court held that the BIR authority to print
was not one of the items required by law or BIR regulation to be indicated or reflected in the invoices
or receipts, hence, the BIR erred in denying the claim for refund. In the present case, however, the
principal ground for the denial was the absence of the word "zero-rated" on the invoices, in clear
violation of the invoicing requirements under Section 108(B)(3) of the 1997 NIRC, in conjunction with
Section 4.108-1 of R.R. No. 7-95.
Regarding Kepcos contention, that non-compliance with the requirement of invoicing would only
subject the non-complying taxpayer to penalties of fine and imprisonment under Section 264 of the Tax
Code, and not to the outright denial of the claim for tax refund or credit, must likewise fail. Section 264
categorically provides for penalties in case of "Failure or Refusal to Issue Receipts or Sales or
Commercial Invoices, Violations related to the Printing of such Receipts or Invoices and Other
Violations," but not to penalties for failure to comply with the requirement of invoicing. As recently held
in Kepco Philippines Corporation v. Commissioner of Internal Revenue, 18 "Section 264 of the 1997 NIRC

was not intended to excuse the compliance of the substantive invoicing requirement needed to justify
a claim for refund on input VAT payments."
Thus, for Kepcos failure to substantiate its effectively zero-rated sales for the taxable year 1999, the
claimedP10,527,202.54 input VAT cannot be refunded.
Indeed, in a string of recent decisions on this matter, to wit: Panasonic Communications Imaging
Corporation of the Philippines v. Commissioner of Internal Revenue,19 J.R.A. Philippines, Inc. v.
Commissioner of Internal Revenue,20 Hitachi Global Storage Technologies Philippines Corp. (formerly
Hitachi Computer Products (Asia) Corporations) v. Commissioner of Internal Revenue, 21 and Kepco
Philippines Corporation v. Commissioner of Internal Revenue,22 this Court has consistently held that
failure to print the word "zero-rated" on the invoices or receipts is fatal to a claim for refund or credit of
input VAT on zero-rated sales.
Contrary to Kepcos view, the denial of its claim for refund of input tax is not a harsh
penalty.1wphi1 The invoicing requirement is reasonable and must be strictly complied with, as it is
the only way to determine the veracity of its claim.
Well-settled in this jurisdiction is the fact that actions for tax refund, as in this case, are in the nature of
a claim for exemption and the law is construed in strictissimi juris against the taxpayer. The pieces of
evidence presented entitling a taxpayer to an exemption are also strictissimi scrutinized and must be
duly proven.23
WHEREFORE, the petition is DENIED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
15.G.R. No. 179115

September 26, 2012

ASIA INTERNATIONAL AUCTIONEERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
PERLAS-BERNABE, J.:
Before the Court is a Petition for Review seeking to reverse and set aside the Decision dated August 3,
2007 of the Court of Tax Appeals (CTA) En Banc, 1 and the Resolutions dated November 20, 20062 and
February 22, 20073 of the CTA First Division dismissing Asia International Auctioneers, Inc.s (AIA)
appeal due to its alleged failure to timely protest the Commissioner of Internal Revenues (CIR) tax
assessment.
The Factual Antecedents
AIA is a duly organized corporation operating within the Subic Special Economic Zone. It is engaged in
the importation of used motor vehicles and heavy equipment which it sells to the public through
auction.4

On August 25, 2004, AIA received from the CIR a Formal Letter of Demand, dated July 9, 2004,
containing an assessment for deficiency value added tax (VAT) and excise tax in the amounts
of P 102,535,520.00 and P4,334,715.00, respectively, or a total amount of P 106,870,235.00, inclusive
of penalties and interest, for auction sales conducted on February 5, 6, 7, and 8, 2004. 5
AIA claimed that it filed a protest letter dated August 29, 2004 through registered mail on August 30,
2004.6 It also submitted additional supporting documents on September 24, 2004 and November 22,
2004.7
The CIR failed to act on the protest, prompting AIA to file a petition for review before the CTA on June
20, 2005,8to which the CIR filed its Answer on July 26, 2005. 9
On March 8, 2006, the CIR filed a motion to dismiss10 on the ground of lack of jurisdiction citing the
alleged failure of AIA to timely file its protest which thereby rendered the assessment final and
executory. The CIR denied receipt of the protest letter dated August 29, 2004 claiming that it only
received the protest letter dated September 24, 2004 on September 27, 2004, three days after the
lapse of the 30-day period prescribed in Section 22811 of the Tax Code.12
In opposition to the CIRs motion to dismiss, AIA submitted the following evidence to prove the filing
and the receipt of the protest letter dated August 29, 2004: (1) the protest letter dated August 29,
2004 with attached Registry Receipt No. 3824; 13 (2) a Certification dated November 15, 2005 issued by
Wilfredo R. De Guzman, Postman III, of the Philippine Postal Corporation of Olongapo City, stating that
Registered Letter No. 3824 dated August 30, 2004 , addressed to the CIR, was dispatched under Bill
No. 45 Page 1 Line 11 on September 1, 2004 from Olongapo City to Quezon City; 14 (3) a Certification
dated July 5, 2006 issued by Acting Postmaster, Josefina M. Hora, of the Philippine Postal CorporationNCR, stating that Registered Letter No. 3824 was delivered to the BIR Records Section and was duly
received by the authorized personnel on September 8, 2004;15 and (4) a certified photocopy of the
Receipt of Important Communication Delivered issued by the BIR Chief of Records Division, Felisa U.
Arrojado, showing that Registered Letter No. 3824 was received by the BIR. 16 AIA also presented
Josefina M. Hora and Felisa U. Arrojado as witnesses to testify on the due execution and the contents of
the foregoing documents.
Ruling of the Court of Tax Appeals
After hearing both parties, the CTA First Division rendered the first assailed Resolution dated November
20, 2006 granting the CIRs motion to dismiss. Citing Republic v. Court of Appeals,17 it ruled that "while
a mailed letter is deemed received by the addressee in the course of the mail, still, this is merely a
disputable presumption, subject to controversion, and a direct denial of the receipt thereof shifts the
burden upon the party favored by the presumption to prove that the mailed letter indeed was received
by the addressee."18
The CTA First Division faulted AIA for failing to present the registry return card of the subject protest
letter. Moreover, it noted that the text of the protest letter refers to a Formal Demand Letter dated June
9, 2004 and not the subject Formal Demand Letter dated July 9, 2004. Furthermore, it rejected AIAs
argument that the September 24, 2004 letter merely served as a cover letter to the submission of its
supporting documents pointing out that there was no mention therein of a prior separate protest
letter.19
AIAs motion for reconsideration was subsequently denied by the CTA First Division in its second
assailed Resolution dated February 22, 2007. On appeal, the CTA En Banc in its Decision dated August
3, 2007 affirmed the ruling of the CTA First Division holding that AIAs evidence was not sufficient to
prove receipt by the CIR of the protest letter dated August 24, 2004.

Hence, the instant petition.

Issue Before the Court
Both parties discussed the legal bases for AIAs tax liability, unmindful of the fact that this case
stemmed from the CTAs dismissal of AIAs petition for review for failure to file a timely protest, without
passing upon the substantive merits of the case.
Relevantly, on January 30, 2008, AIA filed a Manifestation and Motion with Leave of the Honorable
Court to Defer or Suspend Further Proceedings 20 on the ground that it availed of the Tax Amnesty
Program under Republic Act 948021 (RA 9480), otherwise known as the Tax Amnesty Act of 2007. On
February 13, 2008, it submitted to the Court a Certification of Qualification 22 issued by the BIR on
February 5, 2008 stating that AIA "has availed and is qualified for Tax Amnesty for the Taxable Year
2005 and Prior Years" pursuant to RA 9480.
With AIAs availment of the Tax Amnesty Program under RA 9480, the Court is tasked to first determine
its effects on the instant petition.
Ruling of the Court
A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of violating a tax law. It partakes of an absolute waiver by the
government of its right to collect what is due it and to give tax evaders who wish to relent a chance to
start with a clean slate.23
A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax
amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in
favor of the taxing authority.24
In 2007, RA 9480 took effect granting a tax amnesty to qualified taxpayers for all national internal
revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued
therefor, that have remained unpaid as of December 31, 2005. 25
The Tax Amnesty Program under RA 9480 may be availed of by any person except those who are
disqualified under Section 8 thereof, to wit:
Section 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the
following persons or cases existing as of the effectivity of this Act:
(a) Withholding agents with respect to their withholding tax liabilities;
(b) Those with pending cases falling under the jurisdiction of the Presidential Commission on
Good Government;
(c) Those with pending cases involving unexplained or unlawfully acquired wealth or under the
Anti-Graft and Corrupt Practices Act;
(d) Those with pending cases filed in court involving violation of the Anti-Money Laundering
Law;

(e) Those with pending criminal cases for tax evasion and other criminal offenses under
Chapter II of Title X of the National Internal Revenue Code of 1997, as amended, and the
felonies of frauds, illegal exactions and transactions, and malversation of public funds and
property under Chapters III and IV of Title VII of the Revised Penal Code; and
(f) Tax cases subject of final and executory judgment by the courts.(Emphasis supplied)
The CIR contends that AIA is disqualified under Section 8(a) of RA 9480 from availing itself of the Tax
Amnesty Program because it is "deemed" a withholding agent for the deficiency taxes. This argument
is untenable.
The CIR did not assess AIA as a withholding agent that failed to withhold or remit the deficiency VAT
and excise tax to the BIR under relevant provisions of the Tax Code. Hence, the argument that AIA is
"deemed" a withholding agent for these deficiency taxes is fallacious.
Indirect taxes, like VAT and excise tax, are different from withholding taxes.1wphi1 To distinguish, in
indirect taxes, the incidence of taxation 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.26 On the other hand, in case of withholding taxes, the incidence
and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not
shifted to the withholding agent who merely collects, by withholding, the tax due from income
payments to entities arising from certain transactions 27and remits the same to the government. Due to
this difference, the deficiency VAT and excise tax cannot be "deemed" as withholding taxes merely
because they constitute indirect taxes. Moreover, records support the conclusion that AIA was
assessed not as a withholding agent but, as the one directly liable for the said deficiency taxes. 28
The CIR also argues that AIA, being an accredited investor/taxpayer situated at the Subic Special
Economic Zone, should have availed of the tax amnesty granted under RA 9399 29 and not under RA
9480. This is also untenable.
RA 9399 was passed prior to the passage of RA 9480. RA 9399 does not preclude taxpayers within its
coverage from availing of other tax amnesty programs available or enacted in futuro like RA 9480.
More so, RA 9480 does not exclude from its coverage taxpayers operating within special economic
zones. As long as it is within the bounds of the law, a taxpayer has the liberty to choose which tax
amnesty program it wants to avail.
Lastly, the Court takes judicial notice of the "Certification of Qualification" 30 issued by Eduardo A.
Baluyut, BIR Revenue District Officer, stating that AlA "has availed and is qualified for Tax Amnesty for
the Taxable Year 2005 and Prior Years" pursuant to RA 9480. In the absence of sufficient evidence
proving that the certification was issued in excess of authority, the presumption that it was issued in
the regular performance of the revenue district officer's official duty stands. 31
WHEREFORE, the petition is DENIED for being MOOT and ACADEMIC in view of Asia International
Auctioneers, Inc.'s (AlA) availment of the Tax Amnesty Program under RA 9480. Accordingly, the
outstanding deficiency taxes of AlA are deemed fully settled.
SO ORDERED.