1st Set of Cases

G.R. No.
163835
July 7, 2010
11. Tax refunds are in the nature of tax exemptions. As such, they are regarded in derogation of sovereign authority and to be construed in strictissimi juris against
the person or entity claiming the exemption. The burden is upon him who claims the exemption in his favour and he must be able to justify his claim by the clearest
COMMISSIONER
OF
INTERNAL
REVENUE,
grant of organic or statute law and cannot be permitted to exist upon vague implication x x x;
Petitioner,
vs.
EASTERN TELECOMMUNICATIONS PHILIPPINES, INC., Respondent.
12. Taxes paid and collected are presumed to have been made in accordance with the laws and regulations; and
DECISION
13. It is incumbent upon the taxpayer to establish its right to the refund and failure to sustain the burden is fatal to the claim for refund.9
BRION, J.:
Ruling in favor of Eastern, the CTA found that Eastern has a valid claim for the refund/credit of the unapplied input taxes, not on the basis of the "in lieu of all taxes" provision of its
legislative franchise,10 but rather, on Section 106(B) of the Tax Code, which states:
Through a petition for review on certiorari,1 petitioner Commissioner of Internal Revenue (CIR) seeks to set aside the decision dated October 1, 2003 2 and the resolution dated
May 26, 20043 of the Court of Appeals (CA) in CA G.R. SP No. 61157. The assailed CA rulings affirmed the decision dated July 17, 20004 of the Court of Tax Appeals (CTA) in CTA
SECTION 106. Refunds or tax credits of input tax.
Case No. 5551, partially granting respondent Eastern Telecommunications Philippines, Inc.s (Easterns) claim for refund of unapplied input tax from its purchase and importation of
capital goods.
xxxx
THE FACTUAL ANTECEDENTS
(b) Capital goods. - A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the
extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the
Eastern is a domestic corporation granted by Congress with a telecommunications franchise under Republic Act (RA) No. 7617 on June 25, 1992. Under its franchise, Eastern is
importation or purchase was made.11 [Emphases supplied.]
allowed to install, operate, and maintain telecommunications system throughout the Philippines.
The CTA ruled that Eastern had satisfactorily shown that it was entitled to the claimed refund/credit as all the elements of the above provision were present: (1) Eastern was a VATFrom July 1, 1995 to December 31, 1996, Eastern purchased various imported equipment, machineries, and spare parts necessary in carrying out its business activities. The
registered entity which paid 10% input taxes on its importations of capital equipment; (2) this input VAT remained unapplied as of the first quarter of 1997; and (3) Eastern
importations were subjected to a 10% value-added tax (VAT) by the Bureau of Customs, which was duly paid by Eastern.
seasonably filed its application for refund/credit within the two-year period stated in the law. However, the CTA noted that Eastern was able to substantiate only P21,487,702.00 of
its claimed amount of P22,013,134.00. The difference represented input taxes that were allegedly paid but were not supported by the corresponding receipts, as found by an
independent auditor. Moreover, it excluded P5,360,634.00 in input taxes on imported equipment for the year 1995, even when these were properly documented as they were
On September 19, 1997, Eastern filed with the CIR a written application for refund or credit of unapplied input taxes it paid on the imported equipment during the taxable years 1995
already booked by Eastern as part of the cost. Once input tax becomes part of the cost of capital equipment, it necessarily forms part of depreciation. Thus, to grant the refund of
and 1996 amounting to P22,013,134.00. In claiming for the tax refund, Eastern principally relied on Sec. 10 of RA No. 7617, which allows Eastern to pay 3% of its gross receipts in
the 1995 creditable input tax amounts to twice giving Eastern the tax benefit. Thus, in its July 17, 2000 decision, the CTA granted in part Easterns appeal by declaring it entitled to a
lieu of all taxes on this franchise or earnings thereof.5 In the alternative, Eastern cited Section 106(B) of the National Internal Revenue Code of 1977 6 (Tax Code) which authorizes
tax refund of P16,229,100.00, representing unapplied input taxes on imported capital goods for the taxable year 1996.12
a VAT-registered taxpayer to claim for the issuance of a tax credit certificate or a tax refund of input taxes paid on capital goods imported or purchased locally to the extent that such
input taxes7 have not been applied against its output taxes.8
The CIR filed, on August 3, 2000, a motion for reconsideration13 of the CTAs decision. About a month and a half later, it filed a supplemental motion for reconsideration dated
September 15, 2000.14 The CTA denied the CIRs motion for reconsideration in its resolution dated September 20, 2000.15 The CIR then elevated the case to the CA through a
To toll the running of the two-year prescriptive period under the same provision, Eastern filed an appeal with the CTA on September 25, 1997 without waiting for the CIRs decision
petition for review under Rule 43 of the Rules of Court. The CA affirmed the CTA ruling through its decision dated October 1, 2003 16 and its resolution dated May 26, 2004,17
on its application for refund. The CIR filed an Answer to Easterns appeal in which it raised the following special and affirmative defenses:
denying the motion for reconsideration. Hence, the present petition.

6. [Easterns] claim for refund/tax credit is pending administrative investigation;
THE PETITIONERS ARGUMENTS
xxxx
The CIR takes exception to the CAs ruling that Eastern is entitled to the full amount of unapplied input taxes paid for its purchase of imported capital goods that were substantiated
by the corresponding receipts and invoices. The CIR posits that, applying Section 104(A) of the Tax Code on apportionment of tax credits, Eastern is entitled to a tax refund of only
8. [Easterns] exempting clause under its legislative franchise x x x should be understood or interpreted as written, meaning, the 3% franchise tax shall be collected
as substitute for any internal revenue taxes x x x imposed on its franchise or gross receipts/earnings thereof x x x;
9. The [VAT] on importation under Section 101 of the [1977] Tax Code is neither a tax on franchise nor on gross receipts or earnings thereof. It is a tax on the
Taxable Sales + Zero-rated Sales

x Input Tax as found by the CTA
= Refundable input tax
x 16,229,100.00
= P8,814,790.15
Total Sales
privilege of importing goods whether or not the taxpayer is engaged in business, and regardless of whether the imported goods are intended for sale, barter or
exchange;
7,924,403.96 + 557,445,384.97
10. The VAT under Section 101(A) of the Tax Code x x x replaced the advance sales tax and compensating tax x x x. Accordingly, the 3% franchise tax did not
1,040,907,129.77
substitute the 10% [VAT] on [Easterns] importation of equipment, machineries and spare parts for the use of its telecommunication system;
P8,814,790.15, instead of the P16,229,100.00 adjudged by the CTA and the CA. Section 104(A) of the Tax Code states:
SEC. 104. Tax Credits.
Moreover, in raising the question of whether Eastern was in fact engaged in transactions not subject to VAT and whether the unapplied input taxes can be directly attributable to
transactions subject to VAT, Eastern posits that the CIR is effectively raising factual questions that cannot be the subject of an appeal by certiorari before the Court.
(a) Creditable Input tax. Even if the CIRs arguments were considered, Eastern insists that the petition should nevertheless be denied since the CA found that there was no evidence in the claim that it was
engaged in non-VAT transactions. The CA has ruled that:
xxxx
The following requirements must be present before [Section 104(A)] of the [1977 Tax Code] can be applied, to wit:
A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed input tax credit as follows:
1. The person claiming the creditable input tax must be VAT-registered;
(A) Total input tax which can be directly attributed to transactions subject to value-added tax; and
2. Such person is engaged in a transaction subject to VAT;
(B) A ratable portion of any input tax which cannot be directly attributed to either activity.18 [Emphases supplied.]
To be entitled to a tax refund of the full amount of P16,229,100.00, the CIR asserts that Eastern must prove that (a) it was engaged in purely VAT taxable transactions and (b) the
3. The person is also engaged in other transactions not subject to VAT; and
unapplied input taxes it claims as refund were directly attributable to transactions subject to VAT. The VAT returns of Eastern for the 1st, 2nd, 3rd, and 4th quarters of 1996,
however, showed that it earned income from both transactions subject to VAT and transactions exempt from VAT;19 the returns reported income earned from taxable sales, zero-
4. The ratable portion of any input tax cannot be directly attributed to either activity.
rated sales, and exempt sales in the following amounts:

1996
Taxable Sales
Zero-Rated Sales
Exempt Sales
1st Quarter
820,673.70
---
---
2nd Quarter
3,361,618.59
225,088,899.07
140,111,655.85
3rd Quarter
2,607,168.96
169,821,537.80
187,712,657.16
4th Quarter
1,134,942.71
162,530,947.40
147,717,028.53
TOTAL
7,924,403.96
557,441,384.27
475,541,341.54
In the case at bar, the third and fourth requisites are not extant. It is undisputed that [Eastern] is VAT-registered and the importation of [Easterns] telecommunications equipment,
machinery, spare parts, fiber optic cables, and the like, as found by the CTA, is a transaction subject to VAT. However, there is no evidence on record that would evidently show that
respondent is also engaged in other transactions that are not subject to VAT. [Emphasis supplied.]22
Given the parties arguments, the issue for resolution is whether the rule in Section 104(A) of the Tax Code on the apportionment of tax credits can be applied in appreciating
Easterns claim for tax refund, considering that the matter was raised by the CIR only when he sought reconsideration of the CTA ruling?
THE COURTS RULING
Total Amount of Sales
1,040,907,129.77
We find the CIRs petition meritorious.
The Rules of Court prohibits raising new issues on appeal; the question of the applicability of Section 104(A) of the Tax Code was already raised but the tax court did not rule on it
The taxable sales and zero-rated sales are considered transactions subject to VAT,20 while exempt sales refer to transactions not subject to VAT.
Section 15, Rule 44 of the Rules of Court embodies the rule against raising new issues on appeal:
Since the VAT returns clearly reflected income from exempt sales, the CIR asserts that this constitutes as an admission on Easterns part that it engaged in transactions not subject
to VAT. Hence, the proportionate allocation of the tax credit to VAT and non-VAT transactions provided in Section 104(A) of the Tax Code should apply. Eastern is then entitled to
only P8,814,790.15 as the ratable portion of the tax credit, computed in the following manner:
SEC. 15. Questions that may be raised on appeal. Whether or not the appellant has filed a motion for new trial in the court below, he may include in his assignment of errors any
question of law or fact that has been raised in the court below and which is within the issues framed by the parties.
The general rule is that appeals can only raise questions of law or fact that (a) were raised in the court below, and (b) are within the issues framed by the parties therein. 23 An issue
which was neither averred in the pleadings nor raised during trial in the court below cannot be raised for the first time on appeal. 24 The rule was made for the benefit of the adverse
THE RESPONDENTS ARGUMENTS
party and the trial court as well. Raising new issues at the appeal level is offensive to the basic rules of fair play and justice and is violative of a partys constitutional right to due
process of law. Moreover, the trial court should be given a meaningful opportunity to consider and pass upon all the issues, and to avoid or correct any alleged errors before those
Eastern objects to the arguments raised in the petition, alleging that these have not been raised in the Answer filed by the CIR before the CTA. In fact, the CIR only raised the
issues or errors become the basis for an appeal.25
applicability of Section 104(A) of the Tax Code in his supplemental motion for reconsideration of the CTAs ruling which, notably, was filed a month and a half after the original
motion was filed, and thus beyond the 15-day reglementary period.21 Accordingly, the applicability of Section 104(A) was never validly presented as an issue before the CTA; this,
Eastern posits that since the CIR raised the applicability of Section 104(A) of the Tax Code only in his supplemental motion for reconsideration of the CTA decision (which was even
Eastern presumes, is the reason why it was not discussed in the CTAs resolution denying the motion for reconsideration. Eastern claims that for the CIR to raise such an issue now
belatedly filed), the issue was not properly and timely raised and, hence, could not be considered by the CTA. By raising the issue in his appeal before the CA, the CIR has violated
would constitute a violation of its right to due process; following settled rules of procedure and fair play, the CIR should not be allowed at the appeal level to change his theory of the
the above-cited procedural rule.
case.
Contrary to Easterns claim, we find that the CIR has previously questioned the nature of Easterns transactions insofar as they affected the claim for tax refund in his motion for
reconsideration of the CTA decision, although it did not specifically refer to Section 104(A) of the Tax Code. We quote relevant portions of the motion:
[W]e maintain that [Easterns] claims are not creditable input taxes under [Section 104(A) of the Tax Code]. What the law contemplates as creditable input taxes are only those paid
The mere fact that [Easterns] Quarterly VAT Returns confirm that [Easterns] transactions involved zero-rated sales and exempt sales do not sufficiently establish that the same
on purchases of goods and services specifically enumerated under [Section 104 (A)] and that such input tax must have been paid by a VAT[-]registered person/entity in the course
were derived from [Easterns] transactions that are not subject to VAT. On the contrary, the transactions from which [Easterns] sales were derived are subject to VAT but are either
of trade or business. It must be noted that [Eastern] failed to prove that such purchases were used in their VAT[-]taxable business. [Easterns pieces of] evidence are not purchases
zero[-]rated (0%) or otherwise exempted for falling within the transactions enumerated in [Section 102(B) or Section 103] of the Tax Code.32 [Emphasis supplied.]
of capital goods and do not fall under the enumeration x x x.

Section 103 of the Tax Code33 is an enumeration of transactions exempt from VAT. Explaining the relation between exempt transactions in Section 103 and claims for tax refunds,
It is significant to point out here that refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT[-]taxable business. x x x a
the Court declared in CIR v. Toshiba Equipment (Phils.), Inc. that:
perusal of the evidence submitted before [the CTA] does not show that the alleged capital goods were used in VAT[-]taxable business of [Eastern] x x x. [Emphases supplied.]26
Section 103 x x x of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt transactions. These are transactions exempted from VAT by special
In raising these matters in his motion for reconsideration, the CIR put forward the applicability of Section 104(A) because, essentially, the applicability of the provision boils down to
laws or international agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT, the sellers cannot pass on any output VAT to the purchasers
the question of whether the purchased capital goods which a taxpayer paid input taxes were also used in a VAT-taxable business, i.e., transactions that were subject to VAT, in order
of goods, properties, or services, and they may not claim tax credit/refund of the input VAT they had paid thereon.34
for them to be refundable/creditable. Once proved that the taxpayer used the purchased capital goods in a both VAT taxable and non-VAT taxable business, the proportional
allocation of tax credits stated in the law necessarily applies. This rule is also embodied in Section 4.106-1 of Revenue Regulation No. 7-95, entitled Consolidated Value-Added Tax
Regulations, which states:
The mere declaration of exempt sales in the VAT returns, whether based on Section 103 of the Tax Code or some other special law, should have prompted the CA to apply Section
104(A) of the Tax Code to Easterns claim. It was thus erroneous for the appellate court to rule that the declaration of exempt sales in Easterns VAT return, which may correspond
to exempt transactions under Section 103, does not indicate that Eastern was also involved in non-VAT transactions.
SEC. 4.106-1. Refunds or tax credits of input tax. x x x x

Exception to general rule; taxpayer claiming refund has the duty to prove entitlement thereto
(b) Capital Goods. Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased. The
refund shall be allowed to the extent that such input taxes have not been applied against output taxes. The application should be made within two (2) years after the close of the
Another exemption from the rule against raising new issues on appeal is when the question involves matters of public importance.35
taxable quarter when the importation or purchase was made.

The power of taxation is an inherent attribute of sovereignty; the government chiefly relies on taxation to obtain the means to carry on its operations. Taxes are essential to its very
Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations, the input
tax refundable shall only be the ratable portion corresponding to the taxable operations. [Emphasis supplied.]
existence;36 hence, the dictum that "taxes are the lifeblood of the government." For this reason, the right of taxation cannot easily be surrendered; statutes granting tax exemptions
are considered as a derogation of the sovereign authority and are strictly construed against the person or entity claiming the exemption. Claims for tax refunds, when based on
statutes granting tax exemption or tax refund, partake of the nature of an exemption; thus, the rule of strict interpretation against the taxpayer-claimant similarly applies.37
That the CTA failed to rule on this question when it resolved the CIRs motion for reconsideration should not be taken against the CIR. It was the CTA which committed an error
when it failed to avail of that "meaningful opportunity to avoid or correct any alleged errors before those errors become the basis for an appeal."271avvphi1
The taxpayer is charged with the heavy burden of proving that he has complied with and satisfied all the statutory and administrative requirements to be entitled to the tax refund.
This burden cannot be offset by the non-observance of procedural technicalities by the governments tax agents when the non-observance of the remedial measure addressing it
Exceptions to the general rule; Easterns VAT returns reporting income from exempt sales are matters of record that the tax court should have considered
does not in any manner prejudice the taxpayers due process rights, as in the present case.
The rule against raising new issues on appeal is not without exceptions; it is a procedural rule that the Court may relax when compelling reasons so warrant or when justice requires
Eastern cannot validly claim to have been taken by surprise by the CIRs arguments on the relevance of Section 104(A) of the Tax Code, considering that the arguments were
it. What constitutes good and sufficient cause that would merit suspension of the rules is discretionary upon the courts. 28 Former Senator Vicente Francisco, a noted authority in
based on the reported exempt sales in the VAT returns that Eastern itself prepared and formally offered as evidence. Even if we were to consider the CIRs act as a lapse in the
procedural law, cites an instance when the appellate court may take up an issue for the first time:
observance of procedural rules, such lapse does not work to entitle Eastern to a tax refund when the established and uncontested facts have shown otherwise. Lapses in the literal
observance of a rule of procedure may be overlooked when they have not prejudiced the adverse party and especially when they are more consistent with upholding settled
The appellate court may, in the interest of justice, properly take into consideration in deciding the case matters of record having some bearing on the issue submitted which the
principles in taxation.
parties failed to raise or the lower court ignored, although they have not been specifically raised as issues by the pleadings. This is in consonance with the liberal spirit that
pervades the Rules of Court, and the modern trend of procedure which accord the courts broad discretionary power, consistent with the orderly administration of justice, in the
WHEREFORE, we GRANT the petitioners petition for review on certiorari, and REVERSE the decision of the Court of Appeals in CA G.R. SP No. 61157, promulgated on October
decision of cases brought before them.29 [Emphasis supplied.]
1, 2003, as well as its resolution of May 26, 2004. We order the REMAND of the case to the Court of Tax Appeals to determine the proportionate amount of tax credit that
respondent is entitled to, consistent with our ruling above. Costs against the respondent.
As applied in the present case, even without the CIR raising the applicability of Section 104(A), the CTA should have considered it since all four of Easterns VAT returns
corresponding to each taxable quarter of 1996 clearly stated that it earned income from exempt sales, i.e., non-VAT taxable sales. Easterns quarterly VAT returns are matters of
record. In fact, Eastern included them in its formal offer of evidence before the CTA "to prove that [it is] engaged in VAT taxable, VAT exempt, and VAT zero-rated sales." By
declaring income from exempt sales, Eastern effectively admitted that it engaged in transactions not subject to VAT. In VAT-exempt sales, the taxpayer/seller shall not bill any output
tax on his sales to his customers and, corollarily, is not allowed any credit or refund of the input taxes he paid on his purchases. 30 This non-crediting of input taxes in exempt
transactions is the underlying reason why the Tax Code adopted the rule on apportionment of tax credits under Section 104(A) whenever a VAT-registered taxpayer engages in both
VAT taxable and non-VAT taxable sales. In the face of these disclosures by Eastern, we thus find the CAs the conclusion that "there is no evidence on record that would evidently
show that [Eastern] is also engaged in other transactions that are not subject to VAT" to be questionable.31
Also, we disagree with the CAs declaration that:
SO ORDERED.
x-------------------------x
G.R. No. 168207
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R.
OSMEA
III,
Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE, GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE, Respondent.
x-------------------------x
G.R. No. 168461
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO; PETRON DEALERS ASSOCIATION represented by its President,
RUTH E. BARBIBI; ASSOCIATION OF CALTEX DEALERS OF THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing business
under the name and style of "ANB NORTH SHELL SERVICE STATION"; LOURDES MARTINEZ doing business under the name and style of "SHELL GATE N. DOMINGO";
BETHZAIDA TAN doing business under the name and style of "ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing business under the name and style of "NEW
LAMUAN SHELL SERVICE STATION"; EFREN SOTTO doing business under the name and style of "RED FIELD SHELL SERVICE STATION"; DONICA CORPORATION
represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI doing business under the name and style of "R&R PETRON STATION"; PETER M. UNGSON doing business
under the name and style of "CLASSIC STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE doing business under the name and style of "NTE GASOLINE &
SERVICE STATION"; JULIAN CESAR P. POSADAS doing business under the name and style of "STARCARGA ENTERPRISES"; ADORACION MAEBO doing business under
the name and style of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA doing business under the name and style of "LEONAS GASOLINE STATION and SERVICE CENTER";
CARMELITA BALDONADO doing business under the name and style of "FIRST CHOICE SERVICE CENTER"; MERCEDITAS A. GARCIA doing business under the name and style
of "LORPED SERVICE CENTER"; RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT GAS STATION"; MA. ISABEL VIOLAGO doing business under
the name and style of "VIOLAGO-PTT SERVICE CENTER"; MOTORISTS HEART CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HARVARD CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HERITAGE CORPORATION represented
by its Vice-President for Operations, JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; ROMEO MANUEL doing business under the name and style of "ROMMAN GASOLINE STATION"; ANTHONY ALBERT CRUZ III doing business under the name
and
style
of
"TRUE
SERVICE
STATION",
Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of Internal
Revenue, Respondent.
x-------------------------x
G.R. No. 168463
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA, RODOLFO G. PLAZA, DARLENE ANTONINO-CUSTODIO, OSCAR G.
MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO B. MAGTUBO,
JOSEPH A.
SANTIAGO, TEOFISTO DL. GUINGONA III,
RUY ELIAS
C.
LOPEZ,
RODOLFO
Q. AGBAYANI and TEODORO A.
CASIO, Petitioners,
vs.
G.R. No. 168056 September 1, 2005
CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, and EDUARDO R.
ERMITA, in his capacity as Executive Secretary, Respondent.
ABAKADA
GURO
PARTY
LIST
(Formerly
AASJAS)
OFFICERS
SAMSON
S.
ALCANTARA
and
ED
VINCENT
S.
ALBANO,
Petitioners,
vs.
x-------------------------x
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE
COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondent.
G.R. No. 168730
BATAAN
GOVERNOR
ENRIQUE
T.
GARCIA,
JR.
Petitioner,
vs.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the President, who signed the same into law on May 24, 2005. Thus, came
R.A. No. 9337.
HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his
capacity as the OIC Commissioner of the Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC Commissioner of the Bureau of Customs,
Respondent.
DECISION
July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court issued a temporary restraining order, effective immediately and continuing until further orders,
enjoining respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of
the temporary restraining order on July 1, 2005, to wit:
AUSTRIA-MARTINEZ, J.:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little background. You know when the law took effect on July 1, 2005, the Court
The expenses of government, having for their object the interest of all, should be borne by everyone, and the more man enjoys the advantages of society, the more he ought to hold
issued a TRO at about 5 oclock in the afternoon. But before that, there was a lot of complaints aired on television and on radio. Some people in a gas station were complaining that
himself honored in contributing to those expenses.
the gas prices went up by 10%. Some people were complaining that their electric bill will go up by 10%. Other times people riding in domestic air carrier were complaining that the
prices that theyll have to pay would have to go up by 10%. While all that was being aired, per your presentation and per our own understanding of the law, thats not true. Its not
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments for health workers, and wider coverage for full value-added tax
true that the e-vat law necessarily increased prices by 10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
benefits these are the reasons why Republic Act No. 9337 (R.A. No. 9337)1 was enacted. Reasons, the wisdom of which, the Court even with its extensive constitutional power
of review, cannot probe. The petitioners in these cases, however, question not only the wisdom of the law, but also perceived constitutional infirmities in its passage.
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the Petroleum companies some subsidy . . . interrupted
Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners failed to justify their call for the invalidity of the law. Hence, R.A. No.
J. PANGANIBAN : Thats correct . . .
9337 is not unconstitutional.

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
LEGISLATIVE HISTORY
J. PANGANIBAN : . . . mitigating measures . . .
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate Bill No. 1950.
ATTY. BANIQUED : Yes, Your Honor.
House Bill No. 35552was introduced on first reading on January 7, 2005. The House Committee on Ways and Means approved the bill, in substitution of House Bill No. 1468,
which Representative (Rep.) Eric D. Singson introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate enactment. On January 27, 2005, the
House of Representatives approved the bill on second and third reading.
House Bill No. 37053on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise Tax and the import duties. That is why, it is not correct to say that the
VAT as to petroleum dealers increased prices by 10%.
"mother bill" is House Bill No. 3555. The House Committee on Ways and Means approved the bill on February 2, 2005. The President also certified it as urgent on February 8,
2005. The House of Representatives approved the bill on second and third reading on February 28, 2005.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-Vat tax. If you consider the excise tax and the import duties, the Net
Tax would probably be in the neighborhood of 7%? We are not going into exact figures I am just trying to deliver a point that different industries, different products, different services
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504on March 7, 2005, "in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into
are hit differently. So its not correct to say that all prices must go up by 10%.
consideration House Bill Nos. 3555 and 3705." Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens.
Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill on March 11, 2005, and was approved by the Senate on second and third reading on
April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a committee conference on the disagreeing provisions of the proposed bills.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also
removed as a mitigating measure. So, therefore, there is no justification to increase the fares by 10% at best 7%, correct?
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950, "after having met and discussed in
full free and conference," recommended the approval of its report, which the Senate did on May 10, 2005, and with the House of Representatives agreeing thereto the next day,
May 11, 2005.
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first day, were being increased arbitrarily by 10%. And thats one reason among many others
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers, Inc., et al., assailing the following provisions of R.A. No. 9337:
this Court had to issue TRO because of the confusion in the implementation. Thats why we added as an issue in this case, even if its tangentially taken up by the pleadings of the
parties, the confusion in the implementation of the E-vat. Our people were subjected to the mercy of that confusion of an across the board increase of 10%, which you yourself now
admit and I think even the Government will admit is incorrect. In some cases, it should be 3% only, in some cases it should be 6% depending on these mitigating measures and the
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall be amortized over a 60-month period, if the acquisition, excluding the
VAT components, exceeds One Million Pesos (P1, 000,000.00);
location and situation of each product, of each service, of each company, isnt it?
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a
J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the clarification of all these and we wish the government will take time to clarify all these by
means of a more detailed implementing rules, in case the law is upheld by this Court. . . .6
The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
5% final withholding tax on gross payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of goods and properties) and 108 (sale of services and
use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or property without due process of law under Article III, Section 1 of the Constitution.
According to petitioners, the contested sections impose limitations on the amount of input tax that may be claimed. Petitioners also argue that the input tax partakes the nature of a
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5
property that may not be confiscated, appropriated, or limited without due process of law. Petitioners further contend that like any other property or property right, the input tax credit
and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and
may be transferred or disposed of, and that by limiting the same, the government gets to tax a profit or value-added even if there is no profit or value-added.
properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned
provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any
of the following conditions have been satisfied, to wit:
Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law under Article III, Section 1 of the Constitution, as the limitation on the
creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital equipment; or (3) has several transactions with the government, is not based on real and
substantial differences to meet a valid classification.
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any
of the following conditions has been satisfied:
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of the Constitution, and that it is the smaller businesses with higher
input tax to output tax ratio that will suffer the consequences thereof for it wipes out whatever meager margins the petitioners make.
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or
G.R. No. 168463
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition for certiorari on June 30, 2005. They question the constitutionality of
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the
R.A. No. 9337 on the following grounds:
1987 Philippine Constitution.

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of Article VI, Section 28(2) of the Constitution;
G.R. No. 168207
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125, 7 148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950,
Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on the ground that it amounts to an undue delegation of legislative power,
violates Article VI, Section 24(1) of the Constitution, which provides that all appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives
petitioners also contend that the increase in the VAT rate to 12% contingent on any of the two conditions being satisfied violates the due process clause embodied in Article III,
Section 1 of the Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1) the 12% increase is ambiguous because it does not state if the rate would
G.R. No. 168730
be returned to the original 10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to
year; and (3) the increase in the VAT rate, which is supposed to be an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should
only be based on fiscal adequacy.
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20, 2005, alleging unconstitutionality of the law on the ground that the limitation
on the creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle that tax collection and revenue
should be solely allocated for public purposes and expenditures. Petitioner Garcia further claims that allowing these establishments to pass on the tax to the consumers is
Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral Conference Committee is a violation of the "no-amendment rule" upon
inequitable, in violation of Article VI, Section 28(1) of the Constitution.
last reading of a bill laid down in Article VI, Section 26(2) of the Constitution.
RESPONDENTS COMMENT
G.R. No. 168461
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents contend that R.A. No. 9337 enjoys the presumption of
As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT), as the confusion and inevitably, litigation, breeds from a fallacious
constitutionality and petitioners failed to cast doubt on its validity.
notion of its nature.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and services. 8 Being an indirect tax on expenditure, the
seller of goods or services may pass on the amount of tax paid to the buyer, 9 with the seller acting merely as a tax collector.10 The burden of VAT is intended to fall on the
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral proceedings, exclusive origination of revenue measures and the power
immediate buyers and ultimately, the end-consumers.
of the Senate concomitant thereto, have already been settled. With regard to the issue of undue delegation of legislative power to the President, respondents contend that the law is
complete and leaves no discretion to the President but to increase the rate to 12% once any of the two conditions provided therein arise.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without transferring the burden to someone else. 11 Examples are
individual and corporate income taxes, transfer taxes, and residence taxes.12
Respondents also refute petitioners argument that the increase to 12%, as well as the 70% limitation on the creditable input tax, the 60-month amortization on the purchase or
importation of capital goods exceeding P1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and confiscatory, and that it violates the
In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode. Prior to 1978, the system was a single-stage tax computed under
constitutional principle on progressive taxation, among others.
the "cost deduction method" and was payable only by the original sellers. The single-stage system was subsequently modified, and a mixture of the "cost deduction method" and
"tax credit method" was used to determine the value-added tax payable.13 Under the "tax credit method," an entity can credit against or subtract from the VAT charged on its sales
Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform agenda. A reform in the value-added system of taxation is the core revenue
or outputs the VAT paid on its purchases, inputs and imports.14
measure that will tilt the balance towards a sustainable macroeconomic environment necessary for economic growth.
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system was rationalized by imposing a multi-stage tax rate of 0% or 10% on
ISSUES
The Court defined the issues, as follows:
all sales using the "tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,16 R.A. No. 8241 or the Improved VAT Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally,
the presently beleaguered R.A. No. 9337, also referred to by respondents as the VAT Reform Act.
PROCEDURAL ISSUE
The Court will now discuss the issues in logical sequence.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
PROCEDURAL ISSUE
a. Article VI, Section 24, and
I.
b. Article VI, Section 26(2)
Whether R.A. No. 9337 violates the following provisions of the Constitution:
SUBSTANTIVE ISSUES
a. Article VI, Section 24, and
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded its authority by:
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the
following provisions of the Constitution:
b. Article III, Section 1
RULING OF THE COURT
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.
the provisions in the compromise bill submitted by the bicameral conference committee. It was argued that such irregularities in the passage of the law nullified R.A. No. 9006, or
the Fair Election Act.
It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative body for, as unerringly elucidated by Justice Story, "[i]f the power did
not exist, it would be utterly impracticable to transact the business of the nation, either at all, or at least with decency, deliberation, and order. "19 Thus, Article VI, Section
Striking down such argument, the Court held thus:
16 (3) of the Constitution provides that "each House may determine the rules of its proceedings." Pursuant to this inherent constitutional power to promulgate and implement its own
rules of procedure, the respective rules of each house of Congress provided for the creation of a Bicameral Conference Committee.
Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate President and the certification of the Secretaries of both Houses of Congress that
it was passed are conclusive of its due enactment. A review of cases reveals the Courts consistent adherence to the rule. The Court finds no reason to deviate from the
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:
salutary rule in this case where the irregularities alleged by the petitioners mostly involved the internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral
Conference Committee by the House. This Court is not the proper forum for the enforcement of these internal rules of Congress, whether House or Senate.
Sec. 88. Conference Committee. In the event that the House does not agree with the Senate on the amendment to any bill or joint resolution, the differences may be settled by the
conference committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and support the House Bill. If the differences with the Senate are so substantial
that they materially impair the House Bill, the panel shall report such fact to the House for the latters appropriate action.
Parliamentary rules are merely procedural and with their observance the courts have no concern. Whatever doubts there may be as to the formal validity of Rep. Act
No. 9006 must be resolved in its favor. The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:
But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power to inquire into allegations that, in enacting a law, a House of
Congress failed to comply with its own rules, in the absence of showing that there was a violation of a constitutional provision or the rights of private individuals. In
Osmea v. Pendatun, it was held: "At any rate, courts have declared that the rules adopted by deliberative bodies are subject to revocation, modification or waiver at the pleasure
of the body adopting them. And it has been said that "Parliamentary rules are merely procedural, and with their observance, the courts have no concern. They may be
Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently explicit statement of the changes in or amendments to the subject measure.
waived or disregarded by the legislative body." Consequently, "mere failure to conform to parliamentary usage will not invalidate the action (taken by a deliberative
body) when the requisite number of members have agreed to a particular measure."21 (Emphasis supplied)
...
The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities committed by the conference committee in introducing changes or deleting
The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the voting thereon. The House shall vote on the Conference Committee
provisions in the House and Senate bills. Akin to the Farias case,22 the present petitions also raise an issue regarding the actions taken by the conference committee on matters
Report in the same manner and procedure as it votes on a bill on third and final reading.
regarding Congress compliance with its own internal rules. As stated earlier, one of the most basic and inherent power of the legislature is the power to formulate rules for its
proceedings and the discipline of its members. Congress is the best judge of how it should conduct its own business expeditiously and in the most orderly manner. It is also the sole
Rule XII, Section 35 of the Rules of the Senate states:

concern of Congress to instill discipline among the members of its conference committee if it believes that said members violated any of its rules of proceedings. Even the
Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any bill or joint resolution, the differences shall be settled by a
conference committee of both Houses which shall meet within ten (10) days after their composition. The President shall designate the members of the Senate Panel in the
expanded jurisdiction of this Court cannot apply to questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the internal proceedings
of a co-equal branch of government.
conference committee with the approval of the Senate.

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,23the Court already made the pronouncement that " [i]f a change is
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in, or amendments to the subject measure, and shall be signed by a
majority of the members of each House panel, voting separately.
desired in the practice [of the Bicameral Conference Committee] it must be sought in Congress since this question is not covered by any constitutional provision but is
only an internal rule of each house."24 To date, Congress has not seen it fit to make such changes adverted to by the Court. It seems, therefore, that Congress finds the
practices of the bicameral conference committee to be very useful for purposes of prompt and efficient legislative action.
A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof with the explanatory statement of the conference committee shall be
attached to the report.
Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral conference committees, the Court deems it necessary to dwell on the
issue. The Court observes that there was a necessity for a conference committee because a comparison of the provisions of House Bill Nos. 3555 and 3705 on one hand, and
Senate Bill No. 1950 on the other, reveals that there were indeed disagreements. As pointed out in the petitions, said disagreements were as follows:
...
House Bill No. 3555
The creation of such conference committee was apparently in response to a problem, not addressed by any constitutional provision, where the two houses of Congress find
themselves in disagreement over changes or amendments introduced by the other house in a legislative bill. Given that one of the most basic powers of the legislative branch is to
formulate and implement its own rules of proceedings and to discipline its members, may the Court then delve into the details of how Congress complies with its internal rules or
With regard to "Stand-By Authority" in favor of President
how it conducts its business of passing legislation? Note that in the present petitions, the issue is not whether provisions of the rules of both houses creating the bicameral
conference committee are unconstitutional, but whether the bicameral conference committee has strictly complied with the rules of both houses, thereby remaining within
the jurisdiction conferred upon it by Congress.
Provides for 12% VAT on every sale of goods or properties (amending Sec. 106 of NIRC); 12% VAT on importation of goods (amending Sec. 107 of NIRC); and 12% VAT on sale of services and use
In the recent case of Farias vs. The Executive Secretary,20 the Court En Banc, unanimously reiterated and emphasized its adherence to the "enrolled bill doctrine," thus,
declining therein petitioners plea for the Court to go behind the enrolled copy of the bill. Assailed in said case was Congresss creation of two sets of bicameral conference
committees, the lack of records of said committees proceedings, the alleged violation of said committees of the rules of both houses, and the disappearance or deletion of one of
With regard to the "no pass-on" provision
exceeds one million Pesos (P1,000,000.00): PROVIDED, however, that if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes,
then the input VAT shall be spread over such shorter period: . . .
No similar provision
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax
exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: PROVIDED that the input tax inclusive of input VAT carried over from the previous
quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales
by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, . . .
With regard to 70% limit on input tax credit
With
regardother
to the
amendments
to other
provisions
on amount
corporate
income
tax, and
franchise,
percentage
and excise
taxes,inthe
conference
to input
include
Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally distributed over 5 years or the depreciable life of such capital goods; the input tax credit for goods 4.
and
services
than
capital goods
shall not
exceed of
5%the
of NIRC
the total
of such
goods
services;
and for persons
engaged
retail
trading ofcommittee
goods, thedecided
allowable
tax credit shall not
such amendments and basically adopted the provisions found in Senate Bill No. 1950, with some changes as to the rate of the tax to be imposed.
total amount of goods purchased.
Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral Conference Committee is mandated to settle the differences between the
With regard to amendments to be made to NIRC provisions regarding income and excise taxes
disagreeing provisions in the House bill and the Senate bill. The term "settle" is synonymous to "reconcile" and "harmonize." 25 To reconcile or harmonize disagreeing provisions,
the Bicameral Conference Committee may then (a) adopt the specific provisions of either the House bill or Senate bill, (b) decide that neither provisions in the House bill or the
Provided for amendments to several NIRC provisions

provisions in the Senate bill would
regarding corporate income, percentage, franchise and
excise taxes
The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on
electricity generation, transmission and distribution companies should not be passed on to consumers, as proposed in the Senate bill, or both the VAT imposed on electricity
be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions were meant only to reconcile and harmonize the disagreeing
provisions for it did not inject any idea or intent that is wholly foreign to the subject embraced by the original provisions.
generation, transmission and distribution companies and the VAT imposed on sale of petroleum products should not be passed on to consumers, as proposed in the House bill; (3)
in what manner input tax credits should be limited; (4) and whether the NIRC provisions on corporate income taxes, percentage, franchise and excise taxes should be amended.
The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate is retained until such time that certain conditions arise when the 12%
VAT wanted by the House shall be imposed, appears to be a compromise to try to bridge the difference in the rate of VAT proposed by the two houses of Congress. Nevertheless,
There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the Bicameral Conference Committee was mandated by the rules of both
such compromise is still totally within the subject of what rate of VAT should be imposed on taxpayers.
houses of Congress to act on the same by settling said differences and/or disagreements. The Bicameral Conference Committee acted on the disagreeing provisions by making the
following changes:
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman
of the Senate Panel, explained the reason for deleting the no pass-on provision in this wise:
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference Committee Report that the Bicameral Conference Committee tried to
bridge the gap in the difference between the 10% VAT rate proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed by the House, by striking a
compromise whereby the present 10% VAT rate would be retained until certain conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product
(GDP) of the previous year exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year exceeds 1%, when the President, upon recommendation
of the Secretary of Finance shall raise the rate of VAT to 12% effective January 1, 2006.
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector should be a beneficiary of legislative grace, neither should any sector be
discriminated on. The VAT is an indirect tax. It is a pass on-tax. And lets keep it plain and simple. Lets not confuse the bill and put a no pass-on provision. Two-thirds of the world
have a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no pass-though provision. So, the thinking of the Senate is basically simple, lets keep the VAT
simple.26 (Emphasis supplied)
2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission and distribution companies should not be passed on to consumers or
whether both the VAT imposed on electricity generation, transmission and distribution companies and the VAT imposed on sale of petroleum products may be passed on to
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really enjoyed the support of either House."27
consumers, the Bicameral Conference Committee chose to settle such disagreement by altogether deleting from its Report any no pass-on provision.
With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee came to a compromise on the percentage rate of the limitation or cap
3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral Conference Committee decided to adopt the position of the House by putting
on such input tax credit, but again, the change introduced by the Bicameral Conference Committee was totally within the intent of both houses to put a cap on input tax that may be
a limitation on the amount of input tax that may be credited against the output tax, although it crafted its own language as to the amount of the limitation on input tax credits and the
manner of computing the same by providing thus:
credited against the output tax. From the inception of the subject revenue bill in the House of Representatives, one of the major objectives was to "plug a glaring loophole in the tax
policy and administration by creating vital restrictions on the claiming of input VAT tax credits . . ." and "[b]y introducing limitations on the claiming of tax credit, we are capping a
(A) Creditable Input Tax. . . .
...
major leakage that has placed our collection efforts at an apparent disadvantage."28
As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No. 1950, since said provisions were among those referred to it, the
conference committee had to act on the same and it basically adopted the version of the Senate.
Provided,The input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code, shall be
spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof,
Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack or excess of jurisdiction committed by the Bicameral
Conference Committee. In the earlier cases of Philippine Judges Association vs. Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized the long-standing
34(B)(1)
Inter-corporate Dividends
116
Tax on Persons Exempt from VAT
117
Percentage Tax on domestic carriers and keepers of Garage
119
Tax on franchises
121
Tax on banks and Non-Bank Financial Intermediaries
Article VI, Sec. 26 (2) of the Constitution, states:
148
Excise Tax on manufactured oils and other fuels
No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its
151
Excise Tax on mineral products
236
Registration requirements
237
Issuance of receipts or sales or commercial invoices
288
Disposition of Incremental Revenue
legislative practice of giving said conference committee ample latitude for compromising differences between the Senate and the House. Thus, in the Tolentino case, it was held
that:
. . . it is within the power of a conference committee to include in its report an entirely new provision that is not found either in the House bill or in the Senate bill. If the committee
can propose an amendment consisting of one or two provisions, there is no reason why it cannot propose several provisions, collectively considered as an "amendment in the
nature of a substitute," so long as such amendment is germane to the subject of the bills before the committee. After all, its report was not final but needed the approval of both
houses of Congress to become valid as an act of the legislative department. The charge that in this case the Conference Committee acted as a third legislative chamber is
thus without any basis.31(Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-Amendment Rule"
Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last
reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal.
Petitioners argument that the practice where a bicameral conference committee is allowed to add or delete provisions in the House bill and the Senate bill after these had passed
three readings is in effect a circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate from its ruling in the
Tolentino case that:
Nor is there any reason for requiring that the Committees Report in these cases must have undergone three readings in each of the two houses. If that be the case, there would be
no end to negotiation since each house may seek modification of the compromise bill. . . .
Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House. They aver that House Bill No. 3555 proposed amendments only
regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus,
Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in either house of Congress, not to the conference committee
the other sections of the NIRC which the Senate amended but which amendments were not found in the House bills are not intended to be amended by the House of
report.32 (Emphasis supplied)
Representatives. Hence, they argue that since the proposed amendments did not originate from the House, such amendments are a violation of Article VI, Section 24 of the
Constitution.
The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by each house of Congress with regard to bills initiated in each of
said respective houses, before said bill is transmitted to the other house for its concurrence or amendment . Verily, to construe said provision in a way as to proscribe any
The argument does not hold water.
further changes to a bill after one house has voted on it would lead to absurdity as this would mean that the other house of Congress would be deprived of its constitutional power to
amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral Conference Committee of
Article VI, Section 24 of the Constitution reads:
amendments and modifications to disagreeing provisions in bills that have been acted upon by both houses of Congress is prohibited.
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of Revenue Bills
Representatives but the Senate may propose or concur with amendments.
Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate income taxes and percentage, excise taxes. Petitioners refer to the
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move for amending provisions of the NIRC dealing mainly with the value-
following provisions, to wit:
added tax. Upon transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC provisions on the valueadded tax but also amendments to NIRC provisions on other kinds of taxes. Is the introduction by the Senate of provisions not dealing directly with the value- added tax, which is
Section 27
Rates of Income Tax on Domestic Corporation
the only kind of tax being amended in the House bills, still within the purview of the constitutional provision authorizing the Senate to propose or concur with amendments to a
revenue bill that originated from the House?
28(A)(1)
Tax on Resident Foreign Corporation

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:
28(B)(1)
Inter-corporate Dividends
. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to "originate exclusively" in the House of Representatives. It is important to
emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At this point, what is
important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute and not only the bill which initiated the legislative
bills. It can provide for ways that would soften the impact of the VAT measure on the consumer, i.e., by distributing the burden across all sectors instead of putting it entirely on the
process culminating in the enactment of the law must substantially be the same as the House bill would be to deny the Senates power not only to " concur with
shoulders of the consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation were included is worth quoting:
amendments" but also to "propose amendments." It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior
to the Senate.
All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in additional revenues annually even while by mitigating prices of power, services and
petroleum products.
However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the VAT on twelve goods and services. The rest of the tab P10.5 billion- will be picked by
Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even with respect to bills which are required by the
corporations.
Constitution to originate in the House.

What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should the latter bear all the pain? Why should the fiscal salvation be only
...
on the burden of the consumer?
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of local
The corporate worlds equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up to 2008 only. This will raise P10.5 billion a year. After that, the rate
application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more
will slide back, not to its old rate of 32 percent, but two notches lower, to 30 percent.
sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national
perspective. Both views are thereby made to bear on the enactment of such laws.33 (Emphasis supplied)
Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that will be in effect for 1,200 days, while we put our fiscal house in order.
This fiscal medicine will have an expiry date.
Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief. We would like to assure them that not because there is a light at the
constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and
end of the tunnel, this government will keep on making the tunnel long.
franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by the Senate
to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the House bills are still in furtherance of the intent of the House in
initiating the subject revenue bills. The Explanatory Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later substituted by House Bill No. 3555,
The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to share the burden.35
As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions in the tax on income of corporations are germane to the purpose of
the house bills which is to raise revenues for the government.
stated:
Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to the VAT system, as these sections would cushion the effects of VAT
One of the challenges faced by the present administration is the urgent and daunting task of solving the countrys serious financial problems. To do this, government expenditures
must be strictly monitored and controlled and revenues must be significantly increased. This may be easier said than done, but our fiscal authorities are still optimistic the
government will be operating on a balanced budget by the year 2009. In fact, several measures that will result to significant expenditure savings have been identified by the
on consumers. Considering that certain goods and services which were subject to percentage tax and excise tax would no longer be VAT-exempt, the consumer would be burdened
more as they would be paying the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften the impact of VAT. Again, in his sponsorship speech, Sen.
Recto said:
administration. It is supported with a credible package of revenue measures that include measures to improve tax administration and control the leakages in revenues
from income taxes and the value-added tax (VAT). (Emphasis supplied)
However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen the effect of a VAT on this product.
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.
In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of our agenda must be the restoration of the health of our fiscal
system.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain, we will however bring down the excise tax on socially sensitive products
such as diesel, bunker, fuel and kerosene.
In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget by the year 2009, we need to seize windows of opportunities
which might seem poignant in the beginning, but in the long run prove effective and beneficial to the overall status of our economy. One such opportunity is a review
...
of existing tax rates, evaluating the relevance given our present conditions.34 (Emphasis supplied)
What do all these exercises point to? These are not contortions of giving to the left hand what was taken from the right. Rather, these sprang from our concern of softening the
Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in sizeable revenues for the government
to supplement our countrys serious financial problems, and improve tax administration and control of the leakages in revenues from income taxes and value-added taxes. As these
house bills were transmitted to the Senate, the latter, approaching the measures from the point of national perspective, can introduce amendments within the purposes of those
impact of VAT, so that the people can cushion the blow of higher prices they will have to pay as a result of VAT.36
The other sections amended by the Senate pertained to matters of tax administration which are necessary for the implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the house bills, which is to supplement our countrys fiscal deficit, among
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
others. Thus, the Senate acted within its power to propose those amendments.
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
SUBSTANTIVE ISSUES
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties
I.
(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
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the Constitution:
services: provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %). (Emphasis supplied)
A. No Undue Delegation of Legislative Power
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual abdication by Congress of its exclusive power to tax because such
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107
delegation is not within the purview of Section 28 (2), Article VI of the Constitution, which provides:
and 108, respectively, of the NIRC giving the President the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is met, constitutes undue delegation
of the legislative power to tax.
The Congress may, by law, authorize the President to fix within specified limits, and 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.
The assailed provisions read as follows:

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services, which cannot be included within the
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
purview of tariffs under the exempted delegation as the latter refers to customs duties, tolls or tribute payable upon merchandise to the government and usually imposed on goods
or merchandise imported or exported.
SEC. 106. Value-Added Tax on Sale of Goods or Properties.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative power to tax is contrary to republicanism. They insist that
accountability, responsibility and transparency should dictate the actions of Congress and they should not pass to the President the decision to impose taxes. They also argue that
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent
(10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: provided, thatthe
the law also effectively nullified the Presidents power of control, which includes the authority to set aside and nullify the acts of her subordinates like the Secretary of Finance, by
mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance.
President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the conditions provided by the law to bring about either or both the conditions
precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the 12% rate would be subject to the whim of the Secretary of Finance,
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
an unelected bureaucrat, contrary to the principle of no taxation without representation. They submit that the Secretary of Finance is not mandated to give a favorable
recommendation and he may not even give his recommendation. Moreover, they allege that no guiding standards are provided in the law on what basis and as to how he will make
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:
his recommendation. They claim, nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by the President since the former is a mere alter
ego of the latter, such that, ultimately, it is the President who decides whether to impose the increased tax rate or not.
SEC. 107. Value-Added Tax on Importation of Goods.

A brief discourse on the principle of non-delegation of powers is instructive.
(A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by
the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release
The principle of separation of powers ordains that each of the three great branches of government has exclusive cognizance of and is supreme in matters falling within its own
of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be
constitutionally allocated sphere.37 A logical
based on the landed cost plus excise taxes, if any: provided, further, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent (12%) after any of the following conditions has been satisfied.
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim: potestas delegata non delegaripotest which means
"what has been delegated, cannot be delegated."38 This doctrine is based on the ethical principle that such as delegated power constitutes not only a right but a duty to be
performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of another.39
With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative power shall be vested in the Congress of the Philippines which shall consist
In other words, the legislature, as it is its duty to do, determines that, under given circumstances, certain executive or administrative action is to be taken, and that,
of a Senate and a House of Representatives." The powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively, legislative. Purely
under other circumstances, different or no action at all is to be taken. What is thus left to the administrative official is not the legislative determination of what public
legislative power, which can never be delegated, has been described as the authority to make a complete law complete as to the time when it shall take effect and as to
policy demands, but simply the ascertainment of what the facts of the case require to be done according to the terms of the law by which he is governed. The
whom it shall be applicable and to determine the expediency of its enactmen t.40 Thus, the rule is that in order that a court may be justified in holding a statute
efficiency of an Act as a declaration of legislative will must, of course, come from Congress, but the ascertainment of the contingency upon which the Act shall take
unconstitutional as a delegation of legislative power, it must appear that the power involved is purely legislative in nature that is, one appertaining exclusively to the legislative
effect may be left to such agencies as it may designate. The legislature, then, may provide that a law shall take effect upon the happening of future specified
department. It is the nature of the power, and not the liability of its use or the manner of its exercise, which determines the validity of its delegation.
contingencies leaving to some other person or body the power to determine when the specified contingency has arisen. (Emphasis supplied).46
Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized limitations or exceptions:
In Edu vs. Ericta,47 the Court reiterated:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them; the test is the completeness of the statute in all its terms and provisions
when it leaves the hands of the legislature. To determine whether or not there is an undue delegation of legislative power, the inquiry must be directed to the scope and definiteness
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;
of the measure enacted. The legislative does not abdicate its functions when it describes what job must be done, who is to do it, and what is the scope of his authority.
For a complex economy, that may be the only way in which the legislative process can go forward. A distinction has rightfully been made between delegation of power to
make the laws which necessarily involves a discretion as to what it shall be, which constitutionally may not be done, and delegation of authority or discretion as to its
(3) Delegation to the people at large;
execution to be exercised under and in pursuance of the law, to which no valid objection can be made. The Constitution is thus not to be regarded as denying the legislature
the necessary resources of flexibility and practicability. (Emphasis supplied).48
(4) Delegation to local governments; and

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or conditions, or the happening of contingencies, on which the operation of
(5) Delegation to administrative bodies.
a statute is, by its terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority.49 While the power to tax cannot be
delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them, including the power to determine the existence
In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to
of facts on which its operation depends.50
be executed, carried out, or implemented by the delegate;41 and (b) fixes a standard the limits of which are sufficiently determinate and determinable to which the delegate
must conform in the performance of his functions.42 A sufficient standard is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is not of itself a legislative function, but is simply ancillary to legislation.
agency to apply it. It indicates the circumstances under which the legislative command is to be effected.43 Both tests are intended to prevent a total transference of legislative
Thus, the duty of correlating information and making recommendations is the kind of subsidiary activity which the legislature may perform through its members, or which it may
authority to the delegate, who is not allowed to step into the shoes of the legislature and exercise a power essentially legislative.44
delegate to others to perform. Intelligent legislation on the complicated problems of modern society is impossible in the absence of accurate information on the part of the
legislators, and any reasonable method of securing such information is proper.51 The Constitution as a continuously operative charter of government does not require that
In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent of delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire whether the statute was complete in all its terms and provisions when it
left the hands of the legislature so that nothing was left to the judgment of any other appointee or delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the delegation of power to make the law, which necessarily involves a discretion as to what it shall be, and
conferring an authority or discretion as to its execution, to be exercised under and in pursuance of the law. The first cannot be done; to the latter no valid objection can
Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself detailed determinations which it has declared to be prerequisite to application of legislative policy
to particular facts and circumstances impossible for Congress itself properly to investigate.52
In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied:
be made.
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or
...
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the legislature. It is true that laws may be made effective on certain
contingencies, as by proclamation of the executive or the adoption by the people of a particular community. In Wayman vs. Southard, the Supreme Court of the United States ruled
The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate
that the legislature may delegate a power not legislative which it may itself rightfully exercise. The power to ascertain facts is such a power which may be delegated. There is
under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire
nothing essentially legislative in ascertaining the existence of facts or conditions as the basis of the taking into effect of a law. That is a mental process common to all
operation or non-operation of the 12% rate upon factual matters outside of the control of the executive.
branches of the government. Notwithstanding the apparent tendency, however, to relax the rule prohibiting delegation of legislative authority on account of the complexity arising
from social and economic forces at work in this modern industrial age, the orthodox pronouncement of Judge Cooley in his work on Constitutional Limitations finds restatement in
Prof. Willoughby's treatise on the Constitution of the United States in the following language speaking of declaration of legislative power to administrative agencies: The
principle which permits the legislature to provide that the administrative agent may determine when the circumstances are such as require the application of a law is
defended upon the ground that at the time this authority is granted, the rule of public policy, which is the essence of the legislative act, is determined by the legislature.
No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in the common proviso. The use of the word shall
connotes a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. 53 Where the law is clear and unambiguous, it must
be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed.54
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a duty which cannot be
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth therein are satisfied, the President shall increase the VAT rate to 12%. The
evaded by the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a clear directive to impose
provisions of the law are clear. It does not provide for a return to the 10% rate nor does it empower the President to so revert if, after the rate is increased to 12%, the VAT collection
the 12% VAT rate when the specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon
goes below the 24/5 of the GDP of the previous year or that the national government deficit as a percentage of GDP of the previous year does not exceed 1%.
the ascertainment of certain facts or conditions by a person or body other than the legislature itself.
Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be introduced where none is provided for. Rewriting the law is a forbidden
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law effectively nullified the Presidents power of control over the Secretary of
ground that only Congress may tread upon.60
Finance by mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance. The Court cannot also subscribe to the position of petitioners
Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds none, petitioners argument is, at best, purely speculative. There is no
Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the recommendation of the Secretary of Finance." Neither does the Court find
basis for petitioners fear of a fluctuating VAT rate because the law itself does not provide that the rate should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no
persuasive the submission of petitioners Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed aside by the President since the former is a
longer present. The rule is that where the provision of the law is clear and unambiguous, so that there is no occasion for the court's seeking the legislative intent, the law must be
mere alter ego of the latter.
taken as it is, devoid of judicial addition or subtraction.61
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of the Department of Finance he is the assistant and agent of the Chief
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous
Executive. The multifarious executive and administrative functions of the Chief Executive are performed by and through the executive departments, and the acts of the secretaries
year, should be based on fiscal adequacy.
of such departments, such as the Department of Finance, performed and promulgated in the regular course of business, are, unless disapproved or reprobated by the Chief
Executive, presumptively the acts of the Chief Executive.The Secretary of Finance, as such, occupies a political position and holds office in an advisory capacity, and, in the
language of Thomas Jefferson, "should be of the President's bosom confidence" and, in the language of Attorney-General Cushing, is "subject to the direction of the President." 55
In the present case, in making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the
Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another condition, i.e., the national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1 %).
Respondents explained the philosophy behind these alternative conditions:
President or even her subordinate. In such instance, he is not subject to the power of control and direction of the President. He is acting as the agent of the legislative department,
to determine and declare the event upon which its expressed will is to take effect.56 The Secretary of Finance becomes the means or tool by which legislative policy is determined
and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His function is to
1. VAT/GDP Ratio > 2.8%
gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in such instance is in reality
but a projection of that of Congress. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or nullify, or set aside the findings of the
The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, it means that government has weak or no capability of
Secretary of Finance and to substitute the judgment of the former for that of the latter.
implementing the VAT or that VAT is not effective in the function of the tax collection. Therefore, there is no value to increase it to 12% because such action will also be ineffectual.
Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether by December 31, 2005, the value-added tax collection as a
2. Natl Govt Deficit/GDP >1.5%
percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1%). If either of these two instances has occurred, the Secretary of Finance, by legislative mandate, must submit such
information to the President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no undue delegation of legislative power but only of
the discretion as to the execution of a law. This is constitutionally permissible.57 Congress does not abdicate its functions or unduly delegate power when it describes what
The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government has reached a relatively sound position or is towards the direction of
a balanced budget position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than
1.5%, there is indeed a need to increase the VAT rate.62
job must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently the only way in which the legislative process can go forward.58
That the first condition amounts to an incentive to the President to increase the VAT collection does not render it unconstitutional so long as there is a public purpose for which the
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the legislative power to tax is contrary to the principle of republicanism, the
law was passed, which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.
same deserves scant consideration. Congress did not delegate the power to tax but the mere implementation of the law. The intent and will to increase the VAT rate to 12% came
from Congress and the task of the President is to simply execute the legislative policy. That Congress chose to do so in such a manner is not within the province of the Court to
inquire into, its task being to interpret the law.59
The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in his Canons of Taxation (1776), as:
The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the conditions to bring about either or both the conditions precedent
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of
does not deserve any merit as this argument is highly speculative. The Court does not rule on allegations which are manifestly conjectural, as these may not exist at all. The Court
the state.63
deals with facts, not fancies; on realities, not appearances. When the Court acts on appearances instead of realities, justice and law will be short-lived.
It simply means that sources of revenues must be adequate to meet government expenditures and their variations.64
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the Bicameral Conference Committee hearing, then Finance Secretary Purisima
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax burden on the people. Petitioners also argue that the 12% increase,
bluntly depicted the countrys gloomy state of economic affairs, thus:
dependent on any of the 2 conditions set forth in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned to the original 10% if the rates
are no longer satisfied. Petitioners also argue that such rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year.
First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90 percent of our revenue is used for debt service. So, for every peso of
revenue that we currently raise, 90 goes to debt service. Thats interest plus amortization of our debt. So clearly, this is not a sustainable situation. Thats the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow money from that international financial markets. Our debt to GDP is
Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law.
approximately equal to our GDP. Again, that shows you that this is not a sustainable situation.
The doctrine is that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proof
The third thing that Id like to point out is the environment that we are presently operating in is not as benign as what it used to be the past five years.
of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.68
What do I mean by that?
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax that may be credited against the output tax. It states, in part:
"[P]rovided, that the input tax inclusive of the input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the
In the past five years, weve been lucky because we were operating in a period of basically global growth and low interest rates. The past few months, we have seen an inching up,
output VAT: "
in fact, a rapid increase in the interest rates in the leading economies of the world. And, therefore, our ability to borrow at reasonable prices is going to be challenged. In fact,
ultimately, the question is our ability to access the financial markets.
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a VAT-registered person on the importation of goods or local
purchase of good and services, including lease or use of property, in the course of trade or business, from a VAT-registered person, and Output Tax is the value-added tax due on
When the President made her speech in July last year, the environment was not as bad as it is now, at least based on the forecast of most financial institutions. So, we were
the sale or lease of taxable goods or properties or services by any person registered or required to register under the law.
assuming that raising 80 billion would put us in a position where we can then convince them to improve our ability to borrow at lower rates. But conditions have changed on us
because the interest rates have gone up. In fact, just within this room, we tried to access the market for a billion dollars because for this year alone, the Philippines will have to
Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In effect, a portion of the input tax that has already been paid cannot
borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We were trying to access last week and the
now be credited against the output tax.
market was not as favorable and up to now we have not accessed and we might pull back because the conditions are not very good.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and therefore, the input tax in excess of 70% remains uncredited. However, to the
So given this situation, we at the Department of Finance believe that we really need to front-end our deficit reduction. Because it is deficit that is causing the increase of the debt
extent that the input tax is less than 70% of the output tax, then 100% of such input tax is still creditable.
and we are in what we call a debt spiral. The more debt you have, the more deficit you have because interest and debt service eats and eats more of your revenue. We need to get
out of this debt spiral. And the only way, I think, we can get out of this debt spiral is really have a front-end adjustment in our revenue base.65
More importantly, the excess input tax, if any, is retained in a businesss books of accounts and remains creditable in the succeeding quarter/s. This is explicitly allowed by Section
110(B), which provides that "if the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters." In addition, Section 112(B) allows a VAT-
The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe. Whether the law is indeed sufficient to answer the states economic
registered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that such input taxes have not been applied against the
dilemma is not for the Court to judge. In the Farias case, the Court refused to consider the various arguments raised therein that dwelt on the wisdom of Section 14 of R.A. No.
output taxes. Such unused input tax may be used in payment of his other internal revenue taxes.
9006 (The Fair Election Act), pronouncing that:

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly contend. Their analysis of the effect of the 70% limitation is
. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the political branches of the government. It is not for this Court to look into
incomplete and one-sided. It ends at the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the fact that such
the wisdom or propriety of legislative determination. Indeed, whether an enactment is wise or unwise, whether it is based on sound economic theory, whether it is the best means to
unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over provision of Section 110(B) or that it may later on be refunded through a tax
achieve the desired results, whether, in short, the legislative discretion within its prescribed limits should be exercised in a particular manner are matters for the judgment of the
credit certificate under Section 112(B).
legislature, and the serious conflict of opinions does not suffice to bring them within the range of judicial cognizance.66
Therefore, petitioners argument must be rejected.
In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy, given that it is not for the judiciary to "pass upon questions of wisdom,
justice or expediency of legislation."67
On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation on the input tax. According to petitioner, the limitation on the creditable
input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, which violates the principle that tax collection and revenue should be for public
II.
purposes and expenditures
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output tax meanwhile is the tax due to the person when he sells
following provisions of the Constitution:
goods. In computing the VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid and passed on by the suppliers, then no payment is required;
b. Article III, Section 1
Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to the Bureau of Internal Revenue (BIR);69 and
A. Due Process and Equal Protection Clauses
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively
zero-rated transactions, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the taxpayers option. 70
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337,
amending Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the constitutional right against deprivation of life, liberty
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input tax only up to the extent of 70% of the output tax. In laymans
of property without due process of law, as embodied in Article III, Section 1 of the Constitution.
term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-added taxes that is due to him on a taxable
transaction. There is no retention of any tax collection because the person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such
(C) Withholding of Value-added Tax. The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations
input tax to the BIR. The party directly liable for the payment of the tax is the seller. 71 What only needs to be done is for the person/taxpayer to apply or credit these input taxes, as
(GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this
evidenced by receipts, against his output taxes.
Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties or
property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited
payment shall be considered as the withholding agent.
without due process of law.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made.
The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-registered persons entitlement to the creditable input tax is a
mere statutory privilege.
Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT withholding system. The government in this case is constituted as a
withholding agent with respect to their payments for goods and services.
The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory privileges. The state may change or take away
rights, which were created by the law of the state, although it may not take away property, which was vested by virtue of such rights.72
Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3% on gross payments for purchases of goods; 6% on gross payments for
services supplied by contractors other than by public works contractors; 8.5% on gross payments for services supplied by public work contractors; or 10% on payment for the lease
Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable from the taxes payable, although it becomes part of the cost, which
is deductible from the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of the input tax paid on
or use of properties or property rights to nonresident owners. Under the present Section 114(C), these different rates, except for the 10% on lease or property rights payment to
nonresidents, were deleted, and a uniform rate of 5% is applied.
purchase or importation of goods and services by VAT-registered persons against the output tax was introduced.73 This was adopted by the Expanded VAT Law (R.A. No. 7716),74
and The Tax Reform Act of 1997 (R.A. No. 8424).75 The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can
The Court observes, however, that the law the used the word final. In tax usage, final,as opposed to creditable, means full. Thus, it is provided in Section 114(C): "final value-added
remove, or in this case, limit.
tax at the rate of five percent (5%)."
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC, which provides:
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of final withholding tax on income was explained, to wit:
SEC. 110. Tax Credits.
SECTION 2.57. Withholding of Tax at Source
(A) Creditable Input Tax.
(A) Final Withholding Tax. Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as full and final payment of the
income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code, shall
tax or in case of underwithholding, the deficiency tax shall be collected from the payor/withholding agent.
be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof,
exceeds One million pesos (P1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less than five (5) years, as used for depreciation purposes,
(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due
then the input VAT shall be spread over such a shorter period: Provided, finally, That in the case of purchase of services, lease or use of properties, the input tax shall be creditable
of the payee on said income. Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation
to the purchaser, lessee or license upon payment of the compensation, rental, royalty or fee.
income (referred to in Sec. 2.78 also of these regulations) are creditable in nature.
The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or importation of capital goods with acquisition cost of P1 Million
As applied to value-added tax, this means that taxable transactions with the government are subject to a 5% rate, which constitutes as full payment of the tax payable on the
pesos, exclusive of the VAT component. Such spread out only poses a delay in the crediting of the input tax. Petitioners argument is without basis because the taxpayer is not
transaction. This represents the net VAT payable of the seller. The other 5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of the actual input VAT
permanently deprived of his privilege to credit the input tax.
directly or attributable to the taxable transaction.79
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts to a 4-year interest-free loan to the government. 76 In the same
The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat differently taxable transactions with the government. 80 This is supported by
breath, Congress also justified its move by saying that the provision was designed to raise an annual revenue of 22.6 billion. 77 The legislature also dispelled the fear that the
the fact that under the old provision, the 5% tax withheld by the government remains creditable against the tax liability of the seller or contractor, to wit:
provision will fend off foreign investments, saying that foreign investors have other tax incentives provided by law, and citing the case of China, where despite a 17.5% noncreditable VAT, foreign investments were not deterred.78 Again, for whatever is the purpose of the 60-month amortization, this involves executive economic policy and legislative
SEC. 114. Return and Payment of Value-added Tax.
wisdom in which the Court cannot intervene.

(C) Withholding of Creditable Value-added Tax. The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled
With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable transactions, Section 12 of R.A. No. 9337, which amended Section 114
of the NIRC, reads:
corporations (GOCCs) shall, before making payment on account of each purchase of goods from sellers and services rendered by contractors which are subject to the value-added
tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods
and six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax liability
SEC. 114. Return and Payment of Value-added Tax.
of the seller or contractor: Provided, however, That in the case of government public works contractors, the withholding rate shall be eight and one-half percent (8.5%): Provided,
further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this
purpose, the payor or person in control of the payment shall be considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made. (Emphasis supplied)
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Different articles may be taxed at different amounts
provided that the rate is uniform on the same class everywhere with all people at all times.86
As amended, the use of the word final and the deletion of the word creditable exhibits Congresss intention to treat transactions with the government differently. Since it has not
been shown that the class subject to the 5% final withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as petroleum dealers,
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,
are not the only ones subjected to the 5% final withholding tax. It applies to all those who deal with the government.
107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use or lease of
properties. These same sections also provide for a 0% rate on certain sales and transaction.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005
issued by the BIR, provides that should the actual input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should the actual input tax be less than
Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input tax, 5-year amortization of input tax paid on
5%, the difference is treated as income.81
purchase of capital goods or the 5% final withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive Congress of the power to classify
subjects of taxation, and only demands uniformity within the particular class.87
Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a profit or value-added even if there is no profit or value-added.
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual
Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a legal joust where premises are what ifs, arguments, theoretical and
facts, uncertain. Any disquisition by the Court on this point will only be, as Shakespeare describes life in Macbeth,82 "full of sound and fury, signifying nothing."
Whats more, petitioners contention assumes the proposition that there is no profit or value-added. It need not take an astute businessman to know that it is a matter of exception
that a business will sell goods or services without profit or value-added. It cannot be overstressed that a business is created precisely for profit.
sales or receipts not exceeding P1,500,000.00.88 Also, basic marine and agricultural food products in their original state are still not subject to the tax, 89 thus ensuring that prices
at the grassroots level will remain accessible. As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in business with an aggregate gross annual sales exceeding
P200,000.00. Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, so that the costs of
basic food and other necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public.
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."83
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those with high profit margins. Congress was not oblivious to this. Thus,
to equalize the weighty burden the law entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross
annual sales and/or receipts not exceeding P1.5 Million. This acts as a equalizer because in effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers
The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established. Whether it relates to the subject of taxation, the kind
stand on equal-footing.
of property, the rates to be levied, or the amounts to be raised, the methods of assessment, valuation and collection, the States power is entitled to presumption of validity. As a
rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness.84
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those previously exempt. Excise taxes on petroleum products 91 and natural
gas92 were reduced. Percentage tax on domestic carriers was removed.93 Power producers are now exempt from paying franchise tax.94
Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or invests in capital equipment, or has several transactions with the
government, is not based on real and substantial differences to meet a valid classification.
Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden of taxation. Domestic, foreign, and non-resident corporations are
now subject to a 35% income tax rate, from a previous 32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to 15% final withholding tax but the tax
The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of taxation, the kind of property, the rates to be levied or the amounts to
be raised, the methods of assessment, valuation and collection. Petitioners alleged distinctions are based on variables that bear different consequences. While the implementation
credit allowed on the corporations domicile was increased to 20%.96 The Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore.97
Even the sale by an artist of his works or services performed for the production of such works was not spared.
of the law may yield varying end results depending on ones profit margin and value-added, the Court cannot go beyond what the legislature has laid down and interfere with the
affairs of business.
All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A. No.
9337 is equitable.
The equal protection clause does not require the universal application of the laws on all persons or things without distinction. This might in fact sometimes result in unequal
protection. What the clause requires is equality among equals as determined according to a valid classification. By classification is meant the grouping of persons or things similar
to each other in certain particulars and different from all others in these same particulars.85
Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmea III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House
Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the 70% limitation by increasing the same to 90%. This, according to petitioners, supports their
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller business with higher input tax-output tax ratio that will suffer the
consequences.
stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to say that these are still proposed legislations. Until Congress amends the law, and absent any
unequivocal basis for its unconstitutionality, the 70% limitation stays.
Progressive taxation is built on the principle of the taxpayers ability to pay. This principle was also lifted from Adam Smiths Canons of Taxation, and it states:
B. Uniformity and Equitability of Taxation
I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the
revenue which they respectively enjoy under the protection of the state.
Article VI, Section 28(1) of the Constitution reads:

Taxation is progressive when its rate goes up depending on the resources of the person affected.98
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT
paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income earned by a person or profit margin marked by a business,
such that the higher the income or profit margin, the smaller the portion of the income or profit that is eaten by VAT. A converso, the lower the income or profit margin, the bigger the
G.R. No. 160756
March 9, 2010
part that the VAT eats away. At the end of the day, it is really the lower income group or businesses with low-profit margins that is always hardest hit.
CHAMBER
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is that Congress shall "evolve a progressive system of
taxation." The Court stated in the Tolentino case, thus:
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.
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress shall evolve a progressive
system of taxation. The constitutional provision has been interpreted to mean simply that direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be
DECISION
minimized. (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a
progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII, 17 (1) of the
CORONA, J.:
1973 Constitution from which the present Art. VI, 28 (1) was taken. Sales taxes are also regressive.
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
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability
Republic Act (RA) 84242 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding
to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of
taxes.3
the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4 amending 103 of the NIRC)99
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
CONCLUSION
Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid measure to resuscitate an economy in distress. The Court is neither blind
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
nor is it turning a deaf ear on the plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other cases, the Court cannot strike
as ordinary assets.
down a law as unconstitutional simply because of its yokes.

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
Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should stand ready to afford relief. There are undoubtedly many wrongs the
levies income tax even if there is no realized gain.
judicature may not correct, for instance, those involving political questions. . . .
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
Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all political or social ills; We should not forget that the Constitution has
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
judiciously allocated the powers of government to three distinct and separate compartments; and that judicial interpretation has tended to the preservation of the independence of
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,
the three, and a zealous regard of the prerogatives of each, knowing full well that one is not the guardian of the others and that, for official wrong-doing, each may be brought to
much less, to base the CWT on the gross selling price or fair market value of the real properties classified as ordinary assets.
account, either by impeachment, trial or by the ballot box.100

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
The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered, there is no raison d'tre for the unconstitutionality of R.A. No. 9337.
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.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207, 168461, 168463, and 168730, are hereby DISMISSED.
The issues to be resolved are as follows:
There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the temporary restraining order issued by the Court on July 1, 2005 is
LIFTED upon finality of herein decision.
(1) whether or not this Court should take cognizance of the present case;
SO ORDERED.
(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
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corporate income tax imposed under Section 27(A).4 If 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:
(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.
Section 27 (E). [MCIT] on Domestic Corporations. xxx
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(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.
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:
(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
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
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which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.
(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
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.
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
(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
Those which are exempt from a withholding tax at source as prescribed in
bring them to their present location and use.
Sec. 2.57.5 of these regulations.
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
1.5%
the goods are actually sold including insurance while the goods are in transit.
With a selling price of five hundred thousand pesos (P500,000.00) or less.
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
3.0%
manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
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).
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
5.0%
of supplies: Provided, however, that in the case of banks, "cost of services" shall include interest expense.
With selling price of more than two million pesos (P2,000,000.00)
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.
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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.
(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.
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. 2.58.2. 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.
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
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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
xxx
of imposing the MCIT, among others. The pertinent portions thereof state:
(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
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;
schedule:
Exempt
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;
Where the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of these regulations.
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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.
(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.
3.0%
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With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more than Two Million Pesos
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(P2,000,000.00).
5.0%
c. In the case of domestic corporations.
With a selling price of more than two Million Pesos (P2,000,000.00).

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(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
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.
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.
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However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply:
We shall now tackle the issues raised.
(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.
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
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)
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
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
[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
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
advisory opinion that does not really settle legal issues.10
year in and year out, through under-declaration of income or over-deduction of expenses otherwise called tax shelters.23
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
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
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
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.
challenging it.12
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
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
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
already being implemented. As we stated in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
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
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.
of deductions and other stratagems. Since the tax base was broader, the tax rate was lowered.
Indeed, even a singular violation of the Constitution and/or the law is enough to awaken judicial duty.14
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once and for all.
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
Respondents next argue that petitioner has no legal standing to sue:
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
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
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
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
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:
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
[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 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
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
the issues raised and their overreaching significance to society make it proper for us to take cognizance of this petition.20
deductions and exemptions. Of course the different countries have different basis for that minimum income tax.
Concept and Rationale of the MCIT
The other thing youll notice is the preponderance of Latin American countries that employed this method. Okay, those are additional Latin American countries.29
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-
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of the MCIT.30
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
MCIT Is Not Violative of Due Process
deliberations on this are illuminating:

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
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
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
public life and our economic advancement.22

We disagree.
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.
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
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
the State whose social contract with its citizens obliges it to promote public interest and the common good.33
paying no taxes.
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
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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
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
shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.
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
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 AMT bore a reasonable relation.55
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.
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
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 measure 39 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
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.
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
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
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
MCIT resulted in the confiscation of their property.
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:
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
(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
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:
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 lieuof 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.
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
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
income.
We now proceed to the issues involving the CWT.
state to impose; or constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of taxation.50
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
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
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
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
(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
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
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
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
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
ordinary assets remains to be the net taxable income:
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
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
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
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;
base, modes of collection and payment of taxes on income from the sale of capital and ordinary assets.
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Petitioners arguments have no merit.

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;
Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property Considered as Ordinary Assets
xxx
xxx
xxx
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
(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 theordinary 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.
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
xxx
xxx
xxx
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
c. In the case of domestic corporations.
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:
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 theordinary 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)
SEC. 57. Withholding of Tax at Source.

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
xxx
xxx
xxx
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.
(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 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
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%-
reasonably known or knowable by him in connection with the performance of his duties as a withholding agent.
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.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate Business
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
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.
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
Petitioner is wrong.
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:
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
FWT
CWT
(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.
a) The amount of income tax withheld by the withholding agent is
a) Taxes withheld on certain income payments are intended to equal or at least
constituted as a full and final payment of the income tax due
approximate the tax due of the payee on said income.
from the payee on the said income.
(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:
b)The liability for payment of the tax rests primarily on the payor
b) Payee of income is required to report the income and/or pay the difference between
as a withholding agent.
the tax withheld and the tax due on the income. The payee also has the right to ask for a
if the income is generated in the active pursuit and performance of the corporations primary purposes, the same is not passive income76
refund if the tax withheld is more than the tax due.

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
c) The payee is not required to file an income tax return for the
c) The income recipient is still required to file an income tax return, as prescribed in Sec.
particular income.73
51 and Sec. 52 of the NIRC, as amended.74
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.
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
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
provisions of RA 8424.
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
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,
will apply to based on what is feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight and respect by the courts 78 in view of the rule-making
payment and assessment of income tax involving ordinary assets.75
authority given to those who formulate them and their specific expertise in their respective fields.
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
No Deprivation of Property Without Due Process
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.
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.
No Rule that Only Passive

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
Incomes Can Be Subject to CWT
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
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 payment.
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:
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
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 payor-corporation and/or person and paid in
the same manner and subject to the same conditions as provided in Section 58 of this Code.
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
(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
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
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
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
the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)
not a fundamental right which can be demanded from the court or from the government.
Conclusion
No Violation of Equal Protection
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
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
an income tax measure, it has to contend not only with Einsteins observation but also with the vast and well-established jurisprudence in support of the plenary powers of Congress
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
to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the imposition of MCIT and CWT is unconstitutional.
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
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.
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. 90 Under 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.
G.R. No. 159796
July 17, 2007
ROMEO
P.
GEROCHI,
KATULONG
NG
BAYAN
(KB)
and
ENVIRONMENTALIST
CONSUMERS
NETWORK,
INC.
(ECN),
Petitioners,
On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-194, praying that the proposed share from the Universal Charge for the Environmental
vs.
charge of P0.0025 per kilowatt-hour (/kWh), or a total of P119,488,847.59, be approved for withdrawal from the Special Trust Fund (STF) managed by respondent Power Sector
DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY COMMISSION (ERC), NATIONAL POWER CORPORATION (NPC), POWER SECTOR ASSETS AND
Assets and
LIABILITIES MANAGEMENT GROUP (PSALM Corp.), STRATEGIC POWER UTILITIES GROUP (SPUG), and PANAY ELECTRIC COMPANY INC. (PECO), Respondents.
Liabilities Management Group (PSALM)10 for the rehabilitation and management of watershed areas.11
DECISION
On December 20, 2002, the ERC issued an Order12 in ERC Case No. 2002-165 provisionally approving the computed amount of P0.0168/kWh as the share of the NPC-SPUG
NACHURA, J.:
from the Universal Charge for Missionary Electrification and authorizing the National Transmission Corporation (TRANSCO) and Distribution Utilities to collect the same from its
end-users on a monthly basis.
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers Network, Inc. (ECN) (petitioners), come before this Court in this original action praying
that Section 34 of Republic Act (RA) 9136, otherwise known as the "Electric Power Industry Reform Act of 2001" (EPIRA), imposing the Universal Charge, 1 and Rule 18 of the
On June 26, 2003, the ERC rendered its Decision13 (for ERC Case No. 2002-165) modifying its Order of December 20, 2002, thus:
Rules and Regulations (IRR)2 which seeks to implement the said imposition, be declared unconstitutional. Petitioners also pray that the Universal Charge imposed upon the
consumers be refunded and that a preliminary injunction and/or temporary restraining order (TRO) be issued directing the respondents to refrain from implementing, charging, and
collecting the said charge.3 The assailed provision of law reads:
WHEREFORE, the foregoing premises considered, the provisional authority granted to petitioner National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the
Order dated December 20, 2002 is hereby modified to the effect that an additional amount of P0.0205 per kilowatt-hour should be added to the P0.0168 per kilowatt-hour
provisionally authorized by the Commission in the said Order. Accordingly, a total amount of P0.0373 per kilowatt-hour is hereby APPROVED for withdrawal from the Special Trust
SECTION 34. Universal Charge. Within one (1) year from the effectivity of this Act, a universal charge to be determined, fixed and approved by the ERC, shall be imposed on all
Fund managed by PSALM as its share from the Universal Charge for Missionary Electrification (UC-ME) effective on the following billing cycles:
electricity end-users for the following purposes:

(a) June 26-July 25, 2003 for National Transmission Corporation (TRANSCO); and
(a) Payment for the stranded debts4 in excess of the amount assumed by the National Government and stranded contract costs of NPC 5 and as well as qualified
stranded contract costs of distribution utilities resulting from the restructuring of the industry;
(b) Missionary electrification;6
(b) July 2003 for Distribution Utilities (Dus).
Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount of P0.0373 per kilowatt-hour and remit the same to PSALM on or before the 15th day of the
succeeding month.
(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis--vis imported energy fuels;
In the meantime, NPC-SPUG is directed to submit, not later than April 30, 2004, a detailed report to include Audited Financial Statements and physical status (percentage of
(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour ( P0.0025/kWh), which shall accrue to an environmental fund to be used solely
completion) of the projects using the prescribed format.1avvphi1
for watershed rehabilitation and management. Said fund shall be managed by NPC under existing arrangements; and
Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities (Dus).
(e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years.
SO ORDERED.
The universal charge shall be a non-bypassable charge which shall be passed on and collected from all end-users on a monthly basis by the distribution utilities. Collections by the
distribution utilities and the TRANSCO in any given month shall be remitted to the PSALM Corp. on or before the fifteenth (15th) of the succeeding month, net of any amount due to
the distribution utility. Any end-user or self-generating entity not connected to a distribution utility shall remit its corresponding universal charge directly to the TRANSCO. The
On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC, among others, 14 to set aside the above-mentioned Decision, which the ERC granted in its
Order dated October 7, 2003, disposing:
PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which shall be disbursed only for the purposes specified herein in an open and transparent manner. All
amount collected for the universal charge shall be distributed to the respective beneficiaries within a reasonable period to be provided by the ERC.
WHEREFORE, the foregoing premises considered, the "Motion for Reconsideration" filed by petitioner National Power Corporation-Small Power Utilities Group (NPC-SPUG) is
hereby GRANTED. Accordingly, the Decision dated June 26, 2003 is hereby modified accordingly.
The Facts
Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:
Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect.7
1. Projects for CY 2002 undertaken;
On April 5, 2002, respondent National Power Corporation-Strategic Power Utilities Group 8 (NPC-SPUG) filed with respondent Energy Regulatory Commission (ERC) a petition for
the availment from the Universal Charge of its share for Missionary Electrification, docketed as ERC Case No. 2002-165.9
2. Location
3. Actual amount utilized to complete the project;
4. Period of completion;
ERC in the exercise of the powers granted to it. Lastly, respondents argue that the imposition of the Universal Charge is not oppressive and confiscatory since it is an exercise of
the police power of the State and it complies with the requirements of due process.23
5. Start of Operation; and

On its part, respondent PECO argues that it is duty-bound to collect and remit the amount pertaining to the Missionary Electrification and Environmental Fund components of the
6. Explanation of the reallocation of UC-ME funds, if any.
Universal Charge, pursuant to Sec. 34 of the EPIRA and the Decisions in ERC Case Nos. 2002-194 and 2002-165. Otherwise, PECO could be held liable under Sec. 46 24 of the
EPIRA, which imposes fines and penalties for any violation of its provisions or its IRR.25
SO ORDERED.15
The Issues
Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the NPC to draw up to P70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation Budget
subject to the availability of funds for the Environmental Fund component of the Universal Charge.16
On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO) charged petitioner Romeo P. Gerochi and all other end-users with the Universal Charge
The ultimate issues in the case at bar are:
1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and
as reflected in their respective electric bills starting from the month of July 2003.17
2) Whether or not there is undue delegation of legislative power to tax on the part of the ERC.26
Hence, this original action.
Before we discuss the issues, the Court shall first deal with an obvious procedural lapse.
Petitioners submit that the assailed provision of law and its IRR which sought to implement the same are unconstitutional on the following grounds:
Petitioners filed before us an original action particularly denominated as a Complaint assailing the constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and Rule
1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be implemented under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to
be collected from all electric end-users and self-generating entities. The power to tax is strictly a legislative function and as such, the delegation of said power to any
18 of the EPIRA's IRR. No doubt, petitioners have locus standi. They impugn the constitutionality of Sec. 34 of the EPIRA because they sustained a direct injury as a result of the
imposition of the Universal Charge as reflected in their electric bills.
executive or administrative agency like the ERC is unconstitutional, giving the same unlimited authority. The assailed provision clearly provides that the Universal
Charge is to be determined, fixed and approved by the ERC, hence leaving to the latter complete discretionary legislative authority.
However, petitioners violated the doctrine of hierarchy of courts when they filed this "Complaint" directly with us. Furthermore, the Complaint is bereft of any allegation of grave
abuse of discretion on the part of the ERC or any of the public respondents, in order for the Court to consider it as a petition for certiorari or prohibition.
2) The ERC is also empowered to approve and determine where the funds collected should be used.
Article VIII, Section 5(1) and (2) of the 1987 Constitution27 categorically provides that:
3) The imposition of the Universal Charge on all end-users is oppressive and confiscatory and amounts to taxation without representation as the consumers were
not given a chance to be heard and represented.18
SECTION 5. The Supreme Court shall have the following powers:
Petitioners contend that the Universal Charge has the characteristics of a tax and is collected to fund the operations of the NPC. They argue that the cases 19 invoked by the
1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls, and over petitions for certiorari, prohibition, mandamus, quo
respondents clearly show the regulatory purpose of the charges imposed therein, which is not so in the case at bench. In said cases, the respective funds 20 were created in order
warranto, and habeas corpus.
to balance and stabilize the prices of oil and sugar, and to act as buffer to counteract the changes and adjustments in prices, peso devaluation, and other variables which cannot be
adequately and timely monitored by the legislature. Thus, there was a need to delegate powers to administrative bodies. 21 Petitioners posit that the Universal Charge is imposed
2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the rules of court may provide, final judgments and orders of lower courts in:
not for a similar purpose.

(a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or
On the other hand, respondent PSALM through the Office of the Government Corporate Counsel (OGCC) contends that unlike a tax which is imposed to provide income for public
regulation is in question.
purposes, such as support of the government, administration of the law, or payment of public expenses, the assailed Universal Charge is levied for a specific regulatory purpose,
which is to ensure the viability of the country's electric power industry. Thus, it is exacted by the State in the exercise of its inherent police power. On this premise, PSALM submits
that there is no undue delegation of legislative power to the ERC since the latter merely exercises a limited authority or discretion as to the execution and implementation of the
provisions of the EPIRA.22
But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, and habeas corpus, while concurrent with that of the regional trial courts and the Court
of Appeals, does not give litigants unrestrained freedom of choice of forum from which to seek such relief. 28 It has long been established that this Court will not entertain direct
resort to it unless the redress desired cannot be obtained in the appropriate courts, or where exceptional and compelling circumstances justify availment of a remedy within and call
for the exercise of our primary jurisdiction.29 This circumstance alone warrants the outright dismissal of the present action.
Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor General (OSG), share the same view that the Universal Charge is not a tax because
it is levied for a specific regulatory purpose, which is to ensure the viability of the country's electric power industry, and is, therefore, an exaction in the exercise of the State's police
power. Respondents further contend that said Universal Charge does not possess the essential characteristics of a tax, that its imposition would redound to the benefit of the
electric power industry and not to the public, and that its rate is uniformly levied on electricity end-users, unlike a tax which is imposed based on the individual taxpayer's ability to
pay. Moreover, respondents deny that there is undue delegation of legislative power to the ERC since the EPIRA sets forth sufficient determinable standards which would guide the
This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised herein. We are aware that if the constitutionality of Sec. 34 of the EPIRA is not resolved
now, the issue will certainly resurface in the near future, resulting in a repeat of this litigation, and probably involving the same parties. In the public interest and to avoid
unnecessary delay, this Court renders its ruling now.
The instant complaint is bereft of merit.
(i) To provide for an orderly and transparent privatization of the assets and liabilities of the National Power Corporation (NPC);
TheFirst Issue
(j) To establish a strong and purely independent regulatory body and system to ensure consumer protection and enhance the competitive operation of the electricity
market; and
To resolve the first issue, it is necessary to distinguish the States power of taxation from the police power.
(k) To encourage the efficient use of energy and other modalities of demand side management.
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 that is to pay it.30 It is based on the principle that taxes are the lifeblood of the government, and their
From the aforementioned purposes, it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise of the State's police power. Public welfare is
prompt and certain availability is an imperious need.31 Thus, the theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its
surely promoted.
mandate of promoting the general welfare and well-being of the people.32

Moreover, it is a well-established doctrine that the taxing power may be used as an implement of police power.38 In Valmonte v. Energy Regulatory Board, et al.39 and in Gaston v.
On the other hand, police power is the power of the state to promote public welfare by restraining and regulating the use of liberty and property. 33 It is the most pervasive, the least
Republic Planters Bank,40 this Court held that the Oil Price Stabilization Fund (OPSF) and the Sugar Stabilization Fund (SSF) were exactions made in the exercise of the police
limitable, and the most demanding of the three fundamental powers of the State. The justification is found in the Latin maxims salus populi est suprema lex (the welfare of the
power. The doctrine was reiterated in Osmea v. Orbos41 with respect to the OPSF. Thus, we disagree with petitioners that the instant case is different from the aforementioned
people is the supreme law) and sic utere tuo ut alienum non laedas (so use your property as not to injure the property of others). As an inherent attribute of sovereignty which
cases. With the Universal Charge, a Special Trust Fund (STF) is also created under the administration of PSALM. 42 The STF has some notable characteristics similar to the OPSF
virtually extends to all public needs, police power grants a wide panoply of instruments through which the State, as parens patriae, gives effect to a host of its regulatory powers.34
and the SSF, viz.:
We have held that the power to "regulate" means the power to protect, foster, promote, preserve, and control, with due regard for the interests, first and foremost, of the public, then
of the utility and of its patrons.35
1) In the implementation of stranded cost recovery, the ERC shall conduct a review to determine whether there is under-recovery or over recovery and adjust (trueup) the level of the stranded cost recovery charge. In case of an over-recovery, the ERC shall ensure that any excess amount shall be remitted to the STF. A
The conservative and pivotal distinction between these two powers rests in the purpose for which the charge is made. If generation of revenue is the primary purpose and regulation
separate account shall be created for these amounts which shall be held in trust for any future claims of distribution utilities for stranded cost recovery. At the end of
is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax.36
the stranded cost recovery period, any remaining amount in this account shall be used to reduce the electricity rates to the end-users.43
In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power, particularly its regulatory dimension, is invoked. Such can be deduced from Sec.
2) With respect to the assailed Universal Charge, if the total amount collected for the same is greater than the actual availments against it, the PSALM shall retain
34 which enumerates the purposes for which the Universal Charge is imposed 37 and which can be amply discerned as regulatory in character. The EPIRA resonates such
the balance within the STF to pay for periods where a shortfall occurs.44
regulatory purposes, thus:

3) Upon expiration of the term of PSALM, the administration of the STF shall be transferred to the DOF or any of the DOF attached agencies as designated by the
SECTION 2. Declaration of Policy. It is hereby declared the policy of the State:
DOF Secretary.45
(a) To ensure and accelerate the total electrification of the country;
The OSG is in point when it asseverates:
(b) To ensure the quality, reliability, security and affordability of the supply of electric power;
Evidently, the establishment and maintenance of the Special Trust Fund, under the last paragraph of Section 34, R.A. No. 9136, is well within the pervasive and non-waivable power
and responsibility of the government to secure the physical and economic survival and well-being of the community, that comprehensive sovereign authority we designate as the
(c) To ensure transparent and reasonable prices of electricity in a regime of free and fair competition and full public accountability to achieve greater operational and
police power of the State.46
economic efficiency and enhance the competitiveness of Philippine products in the global market;
This feature of the Universal Charge further boosts the position that the same is an exaction imposed primarily in pursuit of the State's police objectives. The STF reasonably serves
(d) To enhance the inflow of private capital and broaden the ownership base of the power generation, transmission and distribution sectors;
(e) To ensure fair and non-discriminatory treatment of public and private sector entities in the process of restructuring the electric power industry;
(f) To protect the public interest as it is affected by the rates and services of electric utilities and other providers of electric power;
and assures the attainment and perpetuity of the purposes for which the Universal Charge is imposed, i.e., to ensure the viability of the country's electric power industry.
The Second Issue
The principle of separation of powers ordains that each of the three branches of government has exclusive cognizance of and is supreme in matters falling within its own
constitutionally allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim potestas
(g) To assure socially and environmentally compatible energy sources and infrastructure;
(h) To promote the utilization of indigenous and new and renewable energy resources in power generation in order to reduce dependence on imported energy;
delegata non delegari potest (what has been delegated cannot be delegated). This is based on the ethical principle that such delegated power constitutes not only a right but a duty
to be performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of another. 47
In the face of the increasing complexity of modern life, delegation of legislative power to various specialized administrative agencies is allowed as an exception to this principle. 48
Given the volume and variety of interactions in today's society, it is doubtful if the legislature can promulgate laws that will deal adequately with and respond promptly to the
minutiae of everyday life. Hence, the need to delegate to administrative bodies - the principal agencies tasked to execute laws in their specialized fields - the authority to promulgate
Thus, the law is complete and passes the first test for valid delegation of legislative power.
rules and regulations to implement a given statute and effectuate its policies. All that is required for the valid exercise of this power of subordinate legislation is that the regulation be
germane to the objects and purposes of the law and that the regulation be not in contradiction to, but in conformity with, the standards prescribed by the law. These requirements
are denominated as the completeness test and the sufficient standard test.
As to the second test, this Court had, in the past, accepted as sufficient standards the following: "interest of law and order;"51 "adequate and efficient instruction;"52 "public
interest;"53 "justice and equity;"54 "public convenience and welfare;"55 "simplicity, economy and efficiency;"56 "standardization and regulation of medical education;"57 and "fair
and equitable employment practices."58 Provisions of the EPIRA such as, among others, "to ensure the total electrification of the country and the quality, reliability, security and
Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature such that when it reaches the delegate, the only thing he will have to do is
affordability of the supply of electric power"59 and "watershed rehabilitation and management"60 meet the requirements for valid delegation, as they provide the limitations on the
to enforce it. The second test mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate's authority and prevent the delegation from running
ERCs power to formulate the IRR. These are sufficient standards.
riot.49
It may be noted that this is not the first time that the ERC's conferred powers were challenged. In Freedom from Debt Coalition v. Energy Regulatory Commission,61 the Court had
The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is complete in all its essential terms and conditions, and that it contains sufficient
occasion to say:
standards.
In determining the extent of powers possessed by the ERC, the provisions of the EPIRA must not be read in separate parts. Rather, the law must be read in its entirety, because a
Although Sec. 34 of the EPIRA merely provides that "within one (1) year from the effectivity thereof, a Universal Charge to be determined, fixed and approved by the ERC, shall be
statute is passed as a whole, and is animated by one general purpose and intent. Its meaning cannot to be extracted from any single part thereof but from a general consideration
imposed on all electricity end-users," and therefore, does not state the specific amount to be paid as Universal Charge, the amount nevertheless is made certain by the legislative
of the statute as a whole. Considering the intent of Congress in enacting the EPIRA and reading the statute in its entirety, it is plain to see that the law has expanded the jurisdiction
parameters provided in the law itself. For one, Sec. 43(b)(ii) of the EPIRA provides:
of the regulatory body, the ERC in this case, to enable the latter to implement the reforms sought to be accomplished by the EPIRA. When the legislators decided to broaden the
jurisdiction of the ERC, they did not intend to abolish or reduce the powers already conferred upon ERC's predecessors. To sustain the view that the ERC possesses only the
SECTION 43. Functions of the ERC. The ERC shall promote competition, encourage market development, ensure customer choice and penalize abuse of market power in the
powers and functions listed under Section 43 of the EPIRA is to frustrate the objectives of the law.
restructured electricity industry. In appropriate cases, the ERC is authorized to issue cease and desist order after due notice and hearing. Towards this end, it shall be responsible
for the following key functions in the restructured industry:
In his Concurring and Dissenting Opinion62 in the same case, then Associate Justice, now Chief Justice, Reynato S. Puno described the immensity of police power in relation to the
delegation of powers to the ERC and its regulatory functions over electric power as a vital public utility, to wit:
xxxx
Over the years, however, the range of police power was no longer limited to the preservation of public health, safety and morals, which used to be the primary social interests in
(b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance with law, a National Grid Code and a Distribution Code which shall include, but not
limited to the following:
earlier times. Police power now requires the State to "assume an affirmative duty to eliminate the excesses and injustices that are the concomitants of an unrestrained industrial
economy." Police power is now exerted "to further the public welfare a concept as vast as the good of society itself." Hence, "police power is but another name for the
governmental authority to further the welfare of society that is the basic end of all government." When police power is delegated to administrative bodies with regulatory functions,
its exercise should be given a wide latitude. Police power takes on an even broader dimension in developing countries such as ours, where the State must take a more active role in
xxxx
balancing the many conflicting interests in society. The Questioned Order was issued by the ERC, acting as an agent of the State in the exercise of police power. We should have
exceptionally good grounds to curtail its exercise. This approach is more compelling in the field of rate-regulation of electric power rates. Electric power generation and distribution
(ii) Financial capability standards for the generating companies, the TRANSCO, distribution utilities and suppliers: Provided, That in the formulation of the financial capability
standards, the nature and function of the entity shall be considered: Provided, further, That such standards are set to ensure that the electric power industry participants meet the
minimum financial standards to protect the public interest. Determine, fix, and approve, after due notice and public hearings the universal charge, to be imposed on all electricity
is a traditional instrument of economic growth that affects not only a few but the entire nation. It is an important factor in encouraging investment and promoting business. The
engines of progress may come to a screeching halt if the delivery of electric power is impaired. Billions of pesos would be lost as a result of power outages or unreliable electric
power services. The State thru the ERC should be able to exercise its police power with great flexibility, when the need arises.
end-users pursuant to Section 34 hereof;

This was reiterated in National Association of Electricity Consumers for Reforms v. Energy Regulatory Commission63 where the Court held that the ERC, as regulator, should have
Moreover, contrary to the petitioners contention, the ERC does not enjoy a wide latitude of discretion in the determination of the Universal Charge. Sec. 51(d) and (e) of the
sufficient power to respond in real time to changes wrought by multifarious factors affecting public utilities.
EPIRA50 clearly provides:

From the foregoing disquisitions, we therefore hold that there is no undue delegation of legislative power to the ERC.
SECTION 51. Powers. The PSALM Corp. shall, in the performance of its functions and for the attainment of its objective, have the following powers:
Petitioners failed to pursue in their Memorandum the contention in the Complaint that the imposition of the Universal Charge on all end-users is oppressive and confiscatory, and
xxxx
amounts to taxation without representation. Hence, such contention is deemed waived or abandoned per Resolution64 of August 3, 2004.65 Moreover, the determination of whether
or not a tax is excessive, oppressive or confiscatory is an issue which essentially involves questions of fact, and thus, this Court is precluded from reviewing the same.66
(d) To calculate the amount of the stranded debts and stranded contract costs of NPC which shall form the basis for ERC in the determination of the universal
charge;
(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other property contributed to it, including the proceeds from the universal
charge.
As a penultimate statement, it may be well to recall what this Court said of EPIRA:
One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It established a new policy, legal structure and regulatory framework for the electric
power industry. The new thrust is to tap private capital for the expansion and improvement of the industry as the large government debt and the highly capital-intensive character of
the industry itself have long been acknowledged as the critical constraints to the program. To attract private investment, largely foreign, the jaded structure of the industry had to be
addressed. While the generation and transmission sectors were centralized and monopolistic, the distribution side was fragmented with over 130 utilities, mostly small and
uneconomic. The pervasive flaws have caused a low utilization of existing generation capacity; extremely high and uncompetitive power rates; poor quality of service to consumers;
dismal to forgettable performance of the government power sector; high system losses; and an inability to develop a clear strategy for overcoming these shortcomings.
Thus, the EPIRA provides a framework for the restructuring of the industry, including the privatization of the assets of the National Power Corporation (NPC), the transition to a
competitive structure, and the delineation of the roles of various government agencies and the private entities. The law ordains the division of the industry into four (4) distinct
sectors, namely: generation, transmission, distribution and supply.
Corollarily, the NPC generating plants have to privatized and its transmission business spun off and privatized thereafter.67
G.R. No. L-77194 March 15, 1988
Finally, every law has in its favor the presumption of constitutionality, and to justify its nullification, there must be a clear and unequivocal breach of the Constitution and not one that
is doubtful, speculative, or argumentative.68 Indubitably, petitioners failed to overcome this presumption in favor of the EPIRA. We find no clear violation of the Constitution which
VIRGILIO GASTON, HORTENCIA STARKE, ROMEO GUANZON, OSCAR VILLANUEVA, JOSE ABELLO, REMO RAMOS, CAROLINA LOPEZ, JESUS ISASI, MANUEL
would warrant a pronouncement that Sec. 34 of the EPIRA and Rule 18 of its IRR are unconstitutional and void.
LACSON, JAVIER LACSON, TITO TAGARAO, EDUARDO SUATENGCO, AUGUSTO LLAMAS, RODOLFO SIASON, PACIFICO MAGHARI, JR., JOSE JAMANDRE, AURELIO
GAMBOA,
WHEREFORE, the instant case is hereby DISMISSED for lack of merit.
ET
AL.,
petitioners,
vs.
REPUBLIC PLANTERS BANK, PHILIPPINE SUGAR COMMISSION, and SUGAR REGULATORY ADMINISTRATION, respondents, ANGEL H. SEVERINO, JR., GLICERIO
SO ORDERED.
JAVELLANA, GLORIA P. DE LA PAZ, JOEY P. DE LA PAZ, ET AL., and NATIONAL FEDERATION OF SUGARCANE PLANTERS, intervenors.
MELENCIO-HERRERA, J.:
Petitioners are sugar producers, sugarcane planters and millers, who have come to this Court in their individual capacities and in representation of other sugar producers, planters
and millers, said to be so numerous that it is impracticable to bring them all before the Court although the subject matter of the present controversy is of common interest to all
sugar producers, whether parties in this action or not.
Respondent Philippine Sugar Commission (PHILSUCOM, for short) was formerly the government office tasked with the function of regulating and supervising the sugar industry
until it was superseded by its co-respondent Sugar Regulatory Administration (SRA, for brevity) under Executive Order No. 18 on May 28, 1986. Although said Executive Order
abolished the PHILSUCOM, its existence as a juridical entity was mandated to continue for three (3) more years "for the purpose of prosecuting and defending suits by or against it
and enables it to settle and close its affairs, to dispose of and convey its property and to distribute its assets."
Respondent Republic Planters Bank (briefly, the Bank) is a commercial banking corporation.
Angel H. Severino, Jr., et al., who are sugarcane planters planting and milling their sugarcane in different mill districts of Negros Occidental, were allowed to intervene by the Court,
since they have common cause with petitioners and respondents having interposed no objection to their intervention. Subsequently, on January 14,1988, the National Federation of
Sugar Planters (NFSP) also moved to intervene, which the Court allowed on February 16,1988.
Petitioners and Intervenors have come to this Court praying for a Writ of mandamus commanding respondents:
TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF REPUBLIC PLANTERS BANK BY THE TRANSFER AND DISTRIBUTION OF THE
SHARES OF STOCK IN THE SAID BANK; NOW HELD BY AND STILL CARRIED IN THE NAME OF THE PHILIPPINE SUGAR COMMISSION, TO
THE SUGAR PRODUCERS, PLANTERS AND MILLERS, WHO ARE THE TRUE BENEFICIAL OWNERS OF THE 761,416 COMMON SHARES
VALUED AT P36,548.000.00, AND 53,005,045 PREFERRED SHARES (A, B & C) WITH A TOTAL PAR VALUE OF P254,424,224.72, OR A TOTAL
INVESTMENT OF P290,972,224.72, THE SAID INVESTMENT HAVING BEEN FUNDED BY THE DEDUCTION OF Pl.00 PER PICUL FROM
SUGAR PROCEEDS OF THE SUGAR PRODUCERS COMMENCING THE YEAR 1978-79 UNTIL THE PRESENT AS STABILIZATION FUND
demonstrated that the very administrative agency which is the source of such regulation would place a burden on itself ( Batchelder v. Central Bank of the Philippines, L-25071, July
PURSUANT TO P.D. # 388.
29,1972,46 SCRA 102, citing People v. Que Po Lay, 94 Phil. 640 [1954]).
Respondent Bank does not take issue with either petitioners or its correspondents as it has no beneficial or equitable interest that may be affected by the ruling in this Petition, but
Neither can petitioners place reliance on the history of respondents Bank. They recite that at the beginning, the Bank was owned by the Roman-Rojas Group. Because it underwent
welcomes the filing of the Petition since it will settle finally the issue of legal ownership of the questioned shares of stock.
difficulties early in the year 1978, Mr. Roberto S. Benedicto, then Chairman of the PHILSUCOM, submitted a proposal to the Central Bank for the rehabilitation of the Bank. The
Central Bank acted favorably on the proposal at the meeting of the Monetary Board on March 31, 1978 subject to the infusion of fresh capital by the Benedicto Group. Petitioners
Respondents PHILSUCOM and SRA, for their part, squarely traverse the petition arguing that no trust results from Section 7 of P.D. No. 388; that the stabilization fees collected are
considered government funds under the Government Auditing Code; that the transfer of shares of stock from PHILSUCOM to the sugar producers would be irregular, if not illegal;
and that this suit is barred by laches.
The Solicitor General aptly summarizes the basic issues thus: (1) whether the stabilization fees collected from sugar planters and millers pursuant to Section 7 of P.D. No. 388 are
funds in trust for them, or public funds; and (2) whether shares of stock in respondent Bank paid for with said stabilization fees belong to the PHILSUCOM or to the different sugar
planters and millers from whom the fees were collected or levied.
maintain that this infusion of fresh capital was accomplished, not by any capital investment by Mr. Benedicto, but by PHILSUCOM, which set aside the proceeds of the P1.00 per
picul stabilization fund to pay for its subscription in shares of stock of respondent Bank. It is petitioners' submission that all shares were placed in PHILSUCOM's name only out of
convenience and necessity and that they are the true and beneficial owners thereof.
In point of fact, we cannot see our way clear to upholding petitioners' position that the investment of the proceeds from the stabilization fund in subscriptions to the capital stock of
the Bank were being made for and on their behalf. That could have been clarified by the Trust Agreement, dated May 28, 1986, entered into between PHILSUCOM, as "Trustor"
acting through Mr. Fred J. Elizalde as Officer-in-Charge, and respondent RPB- Trust Department' as "Trustee," acknowledging that PHILSUCOM holds said shares for and in behalf
of the sugar producers," the latter "being the true and beneficial owners thereof." The Agreement, however, did not get off the ground because it failed to receive the approval of the
P. D. No. 388, promulgated on February 2,1974, which created the PHILSUCOM, provided for the collection of a Stabilization Fund as follows:
SEC. 7. Capitalization, Special Fund of the Commission, Development and Stabilization Fund. There is hereby established a fund for the
commission for the purpose of financing the growth and development of the sugar industry and all its components, stabilization of the domestic
PHILSUCOM Board of Commissioners as required in the Agreement itself.
The SRA, which succeeded PHILSUCOM, neither approved the Agreement because of the adverse opinion of the SRA, Resident Auditor, dated June 25,1986, which was aimed by
the Chairman of the Commission on Audit, on January 26,1987.
market including the foreign market to beadministeredintrust by the Commission and deposited in the Philippine National Bank derived in the manner
herein below cited from the following sources:
On February 19, 1987, the SRA, resolved to revoke the Trust Agreement "in the light of the ruling of the Commission on Audit that the aforementioned Agreement is of doubtful
validity."
a. Stabilization fund shall be collected as provided for in the various provisions of this Decree.
From the legal standpoint, we find basis for the opinion of the Commission on Audit reading:
b. Stabilization fees shall be collected from planters and millers in the amount of Two (P2.00) Pesos for every picul produced and milled for a period
of five years from the approval of this Decree and One (Pl.00) Peso for every picul produced and milled every year thereafter.
That the government, PHILSUCOM or its successor-in-interest, Sugar Regulatory Administration, in particular, owns and stocks. While it is true that
the collected stabilization fees were set aside by PHILSUCOM to pay its subscription to RPB, it did not collect said fees for the account of the sugar
Provided: That fifty (P0.50) centavos per picul of the amount levied on planters, millers and traders under Section 4(c) of this Decree will be used for
producers. That stabilization fees are charges/levies on sugar produced and milled which accrued to PHILSUCOM under PD 338, as amended. ...
the payment of salaries and wages of personnel, fringe benefits and allowances of officers and employees for the purpose of accomplishing and
employees for the purpose of accomplishing the efficient performance of the duties of the Commission.
The stabilization fees collected are in the nature of a tax, which is within the power of the State to impose for the promotion of the sugar industry ( Lutz vs. Araneta, 98 Phil. 148).
They constitute sugar liens (Sec. 7[b], P.D. No. 388). The collections made accrue to a "Special Fund," a "Development and Stabilization Fund," almost Identical to the "Sugar
Provided, further: That said amount shall constitute a lien on the sugar quedan and/or warehouse receipts and shall be paid immediately by the
planters and mill companies, sugar centrals and refineries to the Commission. (paragraphing and bold supplied).
Section 7 of P.D. No. 388 does provide that the stabilization fees collected "shall be administered in trust by the Commission." However, while the element of an intent to create a
trust is present, a resulting trust in favor of the sugar producers, millers and planters cannot be said to have ensued because the presumptive intention of the parties is not
reasonably ascertainable from the language of the statute itself.
The doctrine of resulting trusts is founded on the presumed intention of the parties; and as a general rule, it arises where, and only where such may
be reasonably presumed to be the intention of the parties, as determined from the facts and circumstances existing at the time of the transaction out
of which it is sought to be established (89 C.J.S. 947).
Adjustment and Stabilization Fund" created under Section 6 of Commonwealth Act 567. 1The tax collected is not in a pure exercise of the taxing power. It is levied with a regulatory
purpose, to provide means for the stabilization of the sugar industry. The levy is primarily in the exercise of the police power of the State (Lutz vs. Araneta, supra.).
The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly or indirectly affecting the welfare of
so great a portion of the population of the State is affected to such an extent by public interests as to be within the police power of the sovereign.
(Johnson vs. State ex rel. Marey, 128 So. 857, cited in Lutz vs. Araneta, supra).
The stabilization fees in question are levied by the State upon sugar millers, planters and producers for a special purpose that of "financing the growth and development of the
sugar industry and all its components, stabilization of the domestic market including the foreign market the fact that the State has taken possession of moneys pursuant to law is
sufficient to constitute them state funds, even though they are held for a special purpose (Lawrence vs. American Surety Co., 263 Mich 586, 249 ALR 535, cited in 42 Am. Jur. Sec.
2, p. 718). Having been levied for a special purpose, the revenues collected are to be treated as a special fund, to be, in the language of the statute, "administered in trust' for the
purpose intended. Once the purpose has been fulfilled or abandoned, the balance, if any, is to be transferred to the general funds of the Government. That is the essence of the
No implied trust in favor of the sugar producers either can be deduced from the imposition of the levy. "The essential Idea of an implied trust involves a certain antagonism between
the cestui que trust and the trustee even when the trust has not arisen out of fraud nor out of any transaction of a fraudulent or immoral character (65 CJ 222). It is not clearly shown
from the statute itself that the PHILSUCOM imposed on itself the obligation of holding the stabilization fund for the benefit of the sugar producers. It must be categorically
trust intended (See 1987 Constitution, Article VI, Sec. 29(3), lifted from the 1935 Constitution, Article VI, Sec. 23(l]). 2
The character of the Stabilization Fund as a special fund is emphasized by the fact that the funds are deposited in the Philippine National Bank and not in the Philippine Treasury,
The Solicitor General for petitioner.
moneys from which may be paid out only in pursuance of an appropriation made by law (1987) Constitution, Article VI, Sec. 29[1],1973 Constitution, Article VIII, Sec. 18[l]).
Palaez, Adriano & Gregorio for private respondent.
That the fees were collected from sugar producers, planters and millers, and that the funds were channeled to the purchase of shares of stock in respondent Bank do not convert
the funds into a trust fired for their benefit nor make them the beneficial owners of the shares so purchased. It is but rational that the fees be collected from them since it is also they
who are to be benefited from the expenditure of the funds derived from it. The investment in shares of respondent Bank is not alien to the purpose intended because of the Bank's
character as a commodity bank for sugar conceived for the industry's growth and development. Furthermore, of note is the fact that one-half, (1/2) or PO.50 per picul, of the amount
levied under P.D. No. 388 is to be utilized for the "payment of salaries and wages of personnel, fringe benefits and allowances of officers and employees of PHILSUCOM" thereby
REGALADO, J.:
immediately negating the claim that the entire amount levied is in trust for sugar, producers, planters and millers.
The judicial proceedings over the present controversy commenced with CTA Case No. 4099, wherein the Court of Tax Appeals ordered herein petitioner Commissioner of Internal
To rule in petitioners' favor would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private
persons. The Stabilization Fund is to be utilized for the benefit of the entire sugar industry, "and all its components, stabilization of the domestic market," including the foreign market
the industry being of vital importance to the country's economy and to national interest.
Revenue to grant a refund to herein private respondent Citytrust Banking Corporation (Citytrust) in the amount of P13,314,506.14, representing its overpaid income taxes for 1984
and 1985, but denied its claim for the alleged refundable amount reflected in its 1983 income tax return on the ground of prescription. 1That judgment of the tax court was affirmed
by
respondent
Court
of
Appeals
in
its
judgment
in
CA-G.R.
SP
No. 26839. 2The case was then elevated to us in the present petition for review on certiorari wherein the latter judgment is impugned and sought to be nullified and/or set aside.
WHEREFORE, the Writ of mandamus is denied and the Petition hereby dismissed. No costs.
It appears that in a letter dated August 26, 1986, herein private respondent corporation filed a claim for refund with the Bureau of Internal Revenue (BIR) in the amount of
P19,971,745.00 representing the alleged aggregate of the excess of its carried-over total quarterly payments over the actual income tax due, plus carried-over withholding tax
This Decision is immediately executory.
payments on government securities and rental income, as computed in its final income tax return for the calendar year ending December 31, 1985. 3
SO ORDERED
Two days later, or on August 28, 1986, in order to interrupt the running of the prescriptive period, Citytrust filed a petition with the Court of Tax Appeals, docketed therein as CTA
Case No. 4099, claiming the refund of its income tax overpayments for the years 1983, 1984 and 1985 in the total amount of P19,971,745.00. 4
In the answer filed by the Office of the Solicitor General, for and in behalf of therein respondent commissioner, it was asserted that the mere averment that Citytrust incurred a net
loss in 1985 does not ipso facto merit a refund; that the amounts of P6,611,223.00, P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income tax overpayment, taxes
withheld on proceeds of government securities investments, as well as on rental income, respectively, are not properly documented; that assuming arguendo that petitioner is
entitled
to
refund,
the
right
to
claim
the
same
has
prescribed
with respect to income tax payments prior to August 28, 1984, pursuant to Sections 292 and 295 of the National Internal Revenue Code of 1977, as amended, since the petition
was filed only on August 28, 1986. 5
On February 20, 1991, the case was submitted for decision based solely on the pleadings and evidence submitted by herein private respondent Citytrust. Herein petitioner could not
present any evidence by reason of the repeated failure of the Tax Credit/Refund Division of the BIR to transmit the records of the case, as well as the investigation report thereon, to
the Solicitor General. 6
However, on June 24, 1991, herein petitioner filed with the tax court a manifestation and motion praying for the suspension of the proceedings in the said case on the ground that
the claim of Citytrust for tax refund in the amount of P19,971,745.00 was already being processed by the Tax Credit/Refund Division of the BIR, and that said bureau was only
awaiting the submission by Citytrust of the required confirmation receipts which would show whether or not the aforestated amount was actually paid and remitted to the BIR. 7
Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals already acquired jurisdiction over the case, it could no longer be divested of the same; and,
further, that the proceedings therein could not be suspended by the mere fact that the claim for refund was being administratively processed, especially where the case had already
been
submitted
for
decision.
It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y, Y-1, Y-2 and Y-3 adduced in the case, which clearly showed that there was an overpayment of
income taxes and for which a tax credit or refund was due to Citytrust. The Foregoing exhibits are allegedly conclusive proof of and an admission by herein petitioner that there had
G.R. No. 106611 July 21, 1994
been an overpayment of income taxes. 8

COMMISSIONER
OF
INTERNAL
REVENUE,
vs.
COURT OF APPEALS, CITYTRUST BANKING CORPORATION and COURT OF TAX APPEALS, respondents.
petitioner,
The tax court denied the motion to suspend proceedings on the ground that the case had already been submitted for decision since February 20, 1991. 9
Thereafter, said court rendered its decision in the case, the decretal portion of which declares:
Oppositions to both the basic and supplemental motions for reconsideration were filed by private respondent Citytrust. 14Thereafter, the Court of Tax Appeals issued a resolution
denying
WHEREFORE, in view of the foregoing, petitioner is entitled to a refund but only for the overpaid taxes incurred in 1984 and 1985. The refundable
amount as shown in its 1983 income tax return is hereby denied on the ground of prescription. Respondent is hereby ordered to grant a refund to
petitioner Citytrust Banking Corp. in the amount of P13,314,506.14 representing the overpaid income taxes for 1984 and 1985, recomputed as
both
motions
for
the
reason
that
Section
52
(b)
of
the
Tax
Code,
as
implemented
by
Revenue
Regulation
6-85, only requires that the claim for tax credit or refund must show that the income received was declared as part of the gross income, and that the fact of withholding was duly
established. Moreover, with regard to the argument raised in the supplemental motion for reconsideration anent the deficiency tax assessment against herein petitioner, the tax
court ruled that since that matter was not raised in the pleadings, the same cannot be considered, invoking therefor the salutary purpose of the omnibus motion rule which is to
obviate multiplicity of motions and to discourage dilatory pleadings. 15
follows:
1984 Income tax due P 4,715,533.00

Less: 1984 Quarterly payments P 16,214,599.00*
As indicated at the outset, a petition for review was filed by herein petitioner with respondent Court of Appeals which in due course promulgated its decision affirming the judgment
of the Court of Tax Appeals. Petitioner eventually elevated the case to this Court, maintaining that said respondent court erred in affirming the grant of the claim for refund of
Citytrust, considering that, firstly, said private respondent failed to prove and substantiate its claim for such refund; and, secondly, the bureau's findings of deficiency income and
1984 Tax Credits

W/T on int. on gov't. sec. 1,921,245.37*
business tax liabilities against private respondent for the year 1984 bars such payment. 16
W/T on rental inc. 26,604.30* 18,162,448.67

After a careful review of the records, we find that under the peculiar circumstances of this case, the ends of substantial justice and public interest would be better subserved by the
Tax Overpayment (13,446,915.67)
remand of this case to the Court of Tax Appeals for further proceedings.
Less: FCDU payable 150,252.00
It is the sense of this Court that the BIR, represented herein by petitioner Commissioner of Internal Revenue, was denied its day in court by reason of the mistakes and/or
Amount refundable for 1984 P (13,296,663.67)
negligence of its officials and employees. It can readily be gleaned from the records that when it was herein petitioner's turn to present evidence, several postponements were
sought by its counsel, the Solicitor General, due to the unavailability of the necessary records which were not transmitted by the Refund Audit Division of the BIR to said counsel, as
1985 Income tax due (loss) P 0

Less: W/T on rentals 36,716.47*
well as the investigation report made by the Banks/Financing and Insurance Division of the said bureau/ despite repeated requests. 17It was under such a predicament and in
deference to the tax court that ultimately, said records being still unavailable, herein petitioner's counsel was constrained to submit the case for decision on February 20, 1991
without presenting any evidence.
Tax Overpayment (36,716.47)*

Less: FCDU payable 18,874.00
Amount Refundable for 1985 P (17,842.47)
For that matter, the BIR officials and/or employees concerned also failed to heed the order of the Court of Tax Appeals to remand the records to it pursuant to Section 2, Rule 7 of
the Rules of the Court of Tax Appeals which provides that the Commissioner of Internal Revenue and the Commissioner of Customs shall certify and forward to the Court of Tax
Appeals, within ten days after filing his answer, all the records of the case in his possession, with the pages duly numbered, and if the records are in separate folders, then the
folders shall also be numbered.
* Note:
The aforestated impass came about due to the fact that, despite the filing of the aforementioned initiatory petition in CTA Case No. 4099 with the Court of Tax Appeals, the Tax
These credits are smaller than the claimed amount because only the above figures are well supported by the various
exhibits presented during the hearing.
No pronouncement as to costs.
Refund Division of the BIR still continued to act administratively on the claim for refund previously filed therein, instead of forwarding the records of the case to the Court of Tax
Appeals as ordered. 18
It is a long and firmly settled rule of law that the Government is not bound by the errors committed by its agents. 19In the performance of its governmental functions, the State
cannot be estopped by the neglect of its agent and officers. Although the Government may generally be estopped through the affirmative acts of public officers acting within their
SO ORDERED. 10
authority, their neglect or omission of public duties as exemplified in this case will not and should not produce that effect.
The order for refund was based on the following findings of the Court of Tax Appeals: (1) the fact of withholding has been established by the statements and certificates of
Nowhere is the aforestated rule more true than in the field of taxation. 20It is axiomatic that the Government cannot and must not be estopped particularly in matters involving taxes.
withholding taxes accomplished by herein private respondent's withholding agents, the authenticity of which were neither disputed nor controverted by herein petitioner; (2) no
Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents.
evidence was presented which could effectively dispute the correctness of the income tax return filed by herein respondent corporation and other material facts stated therein; (3)
21The errors of certain administrative officers should never be allowed to jeopardize the Government's financial position, 22especially in the case at bar where the amount involves
no deficiency assessment was issued by herein petitioner; and (4) there was an audit report submitted by the BIR Assessment Branch, recommending the refund of overpaid taxes
millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy.
for the years concerned (Exhibits Y to Y-3), which enjoys the presumption of regularity in the performance of official duty. 11
Further, it is also worth nothing that the Court of Tax Appeals erred in denying petitioner's supplemental motion for reconsideration alleging bringing to said court's attention the
A motion for the reconsideration of said decision was initially filed by the Solicitor General on the sole ground that the statements and certificates of taxes allegedly withheld are not
existence of the deficiency income and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably intertwined with
conclusive evidence of actual payment and remittance of the taxes withheld to the BIR. 12A supplemental motion for reconsideration was thereafter filed, wherein it was contended
the right of respondent bank to claim for a tax refund for the same year. To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in
for the first time that herein private respondent had outstanding unpaid deficiency income taxes. Petitioner alleged that through an inter-office memorandum of the Tax
conceptual effects. Herein private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the same year.
Credit/Refund Division, dated August 8, 1991, he came to know only lately that Citytrust had outstanding tax liabilities for 1984 in the amount of P56,588,740.91 representing
deficiency income and business taxes covered by Demand/Assessment Notice No. FAS-1-84-003291-003296. 13
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not yet
final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot
be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of Citytrust was filed, provides that "(w)hen an assessment is
made in case of any list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or
PANGANIBAN, J.:
Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated,
any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom.
undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent and
did not contain any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of
oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be
filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved. 23This would necessarily require and entail
Statement of the Case
This principium is applied by the Court in resolving this petition for review under Rule 45 of the Rules of Court, assailing the Decision 1 of Respondent Court of Appeals 2 in CA-GR
SP No. 34581 dated September 26, 1994, which affirmed the June 21, 1994 Decision 3 of the Court of Tax Appeals 4 in CTA Case No. 3574. The dispositive portion of the CTA
Decision affirmed by Respondent Court reads:
additional efforts and expenses on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the collection of much-needed revenue
for governmental operations.
WHEREFORE, judgment is hereby rendered ordering the respondent to refund to the petitioner the amount of P2,923.15 representing the partial
refund of specific taxes paid on manufactured oils and fuels. 5
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the deficiency tax assessment
against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, 24it would be only just and fair that the taxpayer and the Government alike be given equal opportunities to avail
of remedies under the law to defeat each other's claim and to determine all matters of dispute between them in one single case. It is important to note that in determining whether or
not petitioner is entitled to the refund of the amount paid, it would necessary to determine how much the Government is entitled to collect as taxes. This would necessarily include
the determination of the correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof
or necessarily involved therein.
The Court cannot end this adjudication without observing that what caused the Government to lose its case in the tax court may hopefully be ascribed merely to the ennui or
ineptitude of officialdom, and not to syndicated intent or corruption. The evidential cul-de-sac in which the Solicitor General found himself once again gives substance to the public
perception and suspicion that it is another proverbial tip in the iceberg of venality in a government bureau which is pejoratively rated over the years. What is so distressing, aside
The Antecedent Facts
The facts are undisputed. 6 Petitioner is a licensed forest concessionaire possessing a Timber License Agreement granted by the Ministry of Natural Resources (now Department of
Environment and Natural Resources). From July 1, 1980 to January 31, 1982 petitioner purchased, from various oil companies, refined and manufactured mineral oils as well as
motor and diesel fuels, which it used exclusively for the exploitation and operation of its forest concession. Said oil companies paid the specific taxes imposed, under Sections 153
and 156 7 of the 1977 National Internal Revenue Code (NIRC), on the sale of said products. Being included in the purchase price of the oil products, the specific taxes paid by the
oil companies were eventually passed on to the user, the petitioner in this case.
On December 13, 1982, petitioner filed before Respondent Commissioner of Internal Revenue (CIR) a claim for refund in the amount of P120,825.11, representing 25% of the
specific taxes actually paid on the above-mentioned fuels and oils that were used by petitioner in its operations as forest concessionaire. The claim was based on Insular Lumber
Co. vs. Court of Tax Appeals8 and Section 5 of RA 1435 which reads:
from the financial losses to the Government, is the erosion of trust in a vital institution wherein the reputations of so many honest and dedicated workers are besmirched by the acts
or omissions of a few. Hence, the liberal view we have here taken pro hac vice, which may give some degree of assurance that this Court will unhesitatingly react to any bane in the
Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and bridge funds of the political subdivision for whose
government service, with a replication of such response being likewise expected by the people from the executive authorities.
benefit the tax is collected: Provided, however, That whenever any oils mentioned above are used by miners or forest concessionaires in their
operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon submission of proof
WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839 is hereby SET ASIDE and the case at bar is REMANDED to the Court of Tax Appeals for
further proceedings and appropriate action, more particularly, the reception of evidence for petitioner and the corresponding disposition of CTA Case No. 4099 not otherwise
inconsistent with our adjudgment herein.
of actual use of oils and under similar conditions enumerated in subparagraphs one and two of section one hereof, amending section one hundred
forty-two of the Internal Revenue Code: Provided, further, That no new road shall be constructed unless the routes or location thereof shall have
been approved by the Commissioner of Public Highways after a determination that such road can be made part of an integral and articulated route in
the Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of 1953.
SO ORDERED.
It is an unquestioned fact that petitioner complied with the procedure for refund, including the submission of proof of the actual use of the aforementioned oils in its forest
G.R. No. 117359 July 23, 1998
concession as required by the above-quoted law. Petitioner, in support of its claim for refund, submitted to the CIR the affidavits of its general manager, the president of the
Philippine Wood Products Association, and three disinterested persons, all attesting that the said manufactured diesel and fuel oils were actually used in the exploitation and
operation of its forest concession.
DAVAO GULF LUMBER CORPORATION, petitioner,

On January 20, 1983, petitioner filed at the CTA a petition for review docketed as CTA Case No. 3574. On June 21, 1994, the CTA rendered its decision finding petitioner entitled to
vs.
a partial refund of specific taxes the latter had paid in the reduced amount of P2,923.15. The CTA ruled that the claim on purchases of lubricating oil (from July 1, 1980 to January
19, 1981) and on manufactured oils other than lubricating oils (from July 1, 1980 to January 4, 1981) had prescribed. Disallowed on the ground that they were not included in the
COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.
original claim filed before the CIR were the claims for refund on purchases of manufactured oils from January 1, 1980 to June 30, 1980 and from February 1, 1982 to June 30,
1982. In regard to the other purchases, the CTA granted the claim, but it computed the refund based on rates deemed paid under RA 1435, and not on the higher rates actualhy
Petitioner Entitled to Refund
paid by petitioner under the NIRC.

Under Sec. 5 of RA 1435
Insisting that the basis for computing the refund should be the increased rates prescribed by Sections 153 and 156 of the NIRC, petitioner elevated the matter to the Court of
Appeals. As noted earlier, the Court of Appeals affirmed the CTA Decision. Hence, this petition for review. 9
At the outset, it must be stressed that petitioner is entitled to a partial refund under Section 5 of RA 1435, which was enacted to provide means for increasing the Highway Special
Fund.
Public Respondent's Ruling

The rationale for this grant of partial refund of specific taxes paid on purchases of manufactured diesel and fuel oils rests on the character of the Highway Special Fund. The specific
In its petition before the Court of Appeals, petitioner raised the following arguments:
taxes collected on gasoline and fuel accrue to the Fund, which is to be used for the construction and maintenance of the highway system. But because the gasoline and fuel
purchased by mining and lumber concessionaires are used within their own compounds and roads, and their vehicles seldom use the national highways, they do not directly benefit
I. The respondent Court of Tax Appeals failed to apply the Supreme Court's Decision in Insular Lumber Co. v. Court of Tax Appeals which granted
the claim for partial refund of specific taxes paid by the claimant, without qualification or limitation.
from the Fund and its use. Hence, the tax refund gives the mining and the logging companies a measure of relief in light of their peculiar situation. 13 When the Highway Special
Fund was abolished in 1985, the reason for the refund likewise ceased to exist. 14 Since petitioner purchased the subject manufactured diesel and fuel oils from July 1, 1980 to
January 31, 1982 and submitted the required proof that these were actually used in operating its forest concession, it is entitled to claim the refund under Section 5 of RA 1435.
II. The respondent Court of Tax Appeals ignored the increase in rates imposed by succeeding amendatory laws,under which the petitioner paid the
specific taxes on manufactured and diesel fuels.
III. In its decision, the respondent Court of Tax Appeals ruled contrary to established tenets of law when it lent itself to interpreting Section 5 of R.A.
Tax Refund Strictly Constrtued
Against the Grantee
1435, when the construction of said law is not necessary.

Petitioner submits that it is entitled to the refund of 25 percent of the specific taxes it had actually paid for the petroleum products used in its operations. In other words, it claims a
IV. Sections 1 and 2 of R.A. 1435 are not the operative provisions to be applied but rather, Sections 153 and 156 of the National Internal Revenue
Code, as amended.
refund based on the increased rates under Sections 153 and 156 of the NIRC. 15 Petitioner argues that the statutory grant of the refund privilege, specifically the phrase "twentyfive per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue," is "clear and unambiguous" enough to require construction or qualification
thereof. 16 In addition, it cites our pronouncement in Insular Lumber vs. Court of Tax Appeals: 17
V. To rule that the basis for computation of the refunded taxes should be Sections 1 and 2 of R.A. 1435 rather than Section 153 and 156 of the
National Internal Revenue Code is unfair, erroneous, arbitrary, inequitable and oppressive. 10
. . . Sec. 5 [of RA 1435] makes reference to subparagraphs 1 and 2 of Section 1 only for the purpose of prescribing the procedure for refund. This
express reference cannot be expanded in scope to include the limitation of the period of refund. If the limitation of the period of refund of specific
The Court of Appeals held that the claim for refund should indeed be computed on the basis of the amounts deemed paid under Sections 1 and 2 of RA 1435. In so ruling, it cited
our pronouncement in Commissioner of Internal Revenue v. Rio Tuba Nickel Mining Corporation11 and subsequent Resolution dated June 15, 1992 clarifying the said Decision.
Respondent Court further ruled that the claims for refund which prescribed and those which were not filed at the administrative level must be excluded.
taxes paid on oils used in aviation and agriculture is intended to cover similar taxes paid on oil used by miners and forest concessionaires, there
would have been no need of dealing with oil used by miners and forest concessions separately and Section 5 would very well have been included in
Section 1 of Republic Act No. 1435, notwithstanding the different rate of exemption.
Petitioner then reasons that "the express mention of Section 1 of RA 1435 in Section 5 cannot be expanded to include a limitation on the tax rates to be applied . . . [otherwise,]
The Issue
Section 5 should very well have been included in Section 1 . . . ." 18
In its Memorandum, petitioner raises one critical issue:
Whether or not petitioner is entitled under Republic Act No. 1435 to the refund of 25% of the amount of specific taxes it actually paid on various
refined and manufactured mineral oils and other oil products taxed under Sec. 153 and Sec. 156 of the 1977 (Sec. 142 and Sec. 145 of the 1939)
The Court is nor persuaded. The relevant statutory provisions do not clearly support petitioner's claim for refund. RA 1435 provides:
Sec. 1 Section one hundred and forty-two of the National Internal Revenue Code, as amended, is further amended to read as follows:
National Internal Revenue Code. 12

Sec. 142. Specific tax on manufactured oils and other fuels. On refined and manufactured mineral oils and motor fuels, there shall be collected
In the main, the question before us pertains only to the computation of the tax refund. Petitioner argues that the refund should be based on the increased rates of specific taxes
the following taxes:
which it actually paid, as prescribed in Sections 153 and 156 of the NIRC. Public respondent, on the other hand, contends that it should be based on specific taxes deemed paid
under Sections 1 and 2 of RA 1435.
The Court's Ruling
The petition is not meritorious.
(a) Kerosene or petroleum, per liter of volume capacity, two and one-half centavos;
(b) Lubricating oils, per liter of volume capacity, seven centavos;
(c) Naptha, gasoline, and all other similar products of distillation, per liter of volume capacity, eight centavos; and
(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo: Provided, That if the denatured alcohol is mixed with
(c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity, ninety-one centavos: Provided, That on premium and
gasoline, the specific tax on which has already been paid, only the alcohol content shall be subject to the tax herein prescribed. For the purpose of
aviation gasoline, the tax shall be one peso per liter of volume capacity;
this subsection, the removal of denatured alcohol of not less than one hundred eighty degrees proof (ninety per centum absolute alcohol) shall be
deemed to have been removed for motive power, unless shown to the contrary.
(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo: Provided, That unless otherwise provided for by
special laws, if the denatured alcohol is mixed with gasoline, the specific tax on which has already been paid, only the alcohol content shall be
Whenever any of the oils mentioned above are, during the five years from June eighteen, nineteen hundred and fifty two, used in agriculture and
subject to the tax herein prescribed. For the purposes of this subsection, the removal of denatured alcohol of not less than one hundred eighty
aviation, fifty per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon the submission of the following:
degrees proof (ninety per centum absolute alcohol) shall be deemed to have been removed for motive power, unless shown to the contrary;
(1) A sworn affidavit of the producer and two disinterested persons proving that the said oils were actually used in agriculture, or in lieu thereof.
(e) Processed gas, per liter of volume capacity, three centavos;
(2) Should the producer belong to any producers' association or federation, duly registered with the Securities and Exchange Commission, the
(f) Thinners and solvents, per liter of volume capacity, fifty-seven centavos;
affidavit of the president of the association or federation, attesting to the fact that the oils were actually used in agriculture.
(g) Liquefied petroleum gas, per kilogram, fourteen centavos: Provided, That liquefied petroleum gas used for motive power shall be taxed at the
(3) In the case of aviation oils, a sworn certificate satisfactory to the Collector proving that the said oils were actually used in aviation: Provided, That
equivalent rate as the specific tax on diesel fuel oil;
no such refunds shall be granted in respect to the oils used in aviation by citizens and corporations of foreign countries which do not grant equivalent
refunds or exemptions in respect to similar oils used in aviation by citizens and corporations of the Philippines.
Sec. 2 Section one hundred and forty-five of the National Internal Revenue Code, as amended, is further amended to read as follows:
Sec. 145. Specific Tax on Diesel fuel oil. On fuel oil, commercially known as diesel fuel oil, and on all similar fuel oils, having more or less the
(h) Asphalts, per kilogram, eight centavos;
(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;
(j) Aviation turbo jet fuel, per liter of volume capacity, fifty-five centavos. (As amended by Sec. 1, P.D. No. 1672.)
same generating power, there shall be collected, per metric ton, one peso.
xxx xxx xxx
xxx xxx xxx
Sec. 156. Specific tax on diesel fuel oil. On fuel oil, commercially known as diesel fuel oil, and on all similar fuel oils, having more or less the same
Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and bridge funds of the political subdivision for whose
benefit the tax is collected: Provided, however, That whenever any oils mentioned above are used by miners or forest concessionaires in their
generating power, per liter of volume capacity, seventeen and one-half centavos, which tax shall attach to this fuel oil as soon as it is in existence as
such.
operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon submission of proof
of actual use of oils and under similar conditions enumerated in subparagraphs one and two of section one hereof, amending section one hundred
forty-two of the Internal Revenue Code: Provided, further, That no new road shall be constructed unless the route or location thereof shall have been
Then on March 21, 1981, these provisions were amended by EO 672 to read:
approved by the Commissioner of Public Highways after a determination that such road can be made part of an integral and articulated route in the
Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of 1953.
the following taxes which shall attach to the articles hereunder enumerated as soon as they are in existence as such:
Subsequently the 1977 NIRC, PD 1672 and EO 672 amended the first two provisions, renumbering them and prescribing higher rates. Accordingly, petitioner paid specific taxes on
petroleum products purchased from July 1, 1980 to January 31, 1982 under the following statutory provisions.
From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided as follows:
the following taxes which shall attach to the articles hereunder enumerated as soon as they are in existence as such:
(a) Kerosene, per liter of volume capacity, seven centavos;
(a) Kerosene, per liter of volume capacity, nine centavos;
(b) Lubricating oils, per liter of volume capacity, eighty centavos;
(c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity, one peso and six centavos: Provided, That on premium
and aviation gasoline, the tax shall be one peso and ten centavos and one peso, respectively, per liter of volume capacity;
(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo; Provided, That unless otherwise provided for by
special laws, if the denatured alcohol is mixed with gasoline, the specific tax on which has already been paid, only the alcohol content shall be
(b) Lubricating oils, per liter of volume capacity, eighty centavos;
subject to the tax herein prescribed. For the purpose of this subsection, the removal of denatured alcohol of not less than one hundred eighty
degrees proof (ninety per centum absolute alcohol) shall be deemed to have been removed for motive power, unless shown to the contrary;
(e) Processed gas, per liter of volume capacity, three centavos;
In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the Court held that the authorized partial refund under Section 5 of R.A. No.
1435 partakes of the nature of a tax exemption and therefore cannot be allowed unless granted in the most explicit and categorical language. Since
the grant of refund privileges must be strictly construed against the taxpayer, the basis for the refund shall be the amounts deemed paid under
(f) Thinners and solvents, per liter of volume capacity, sixty-one centavos;
Sections 1 and 2 of R.A. No. 1435.

(g) Liquefied petroleum gas, per kilogram, twenty-one centavos: Provided, That, liquified petroleum gas used for motive power shall be taxed at the
ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The private respondent's CLAIM for REFUND is GRANTED, computed
equivalent rate as the specific tax on diesel fuel oil;
on the basis of the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435, without interest. 24
(h) Asphalts, per kilogram, twelve centavos;
We rule, therefore, that since Atlas's claims for refund cover specific taxes paid before 1985, it should be granted the refund based on the rates
specified by Sections 1 and 2 of R.A. No. 1435 and not on the increased rates under Sections 153 and 156 of the Tax Code of 1977, provided the
(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;
claims are not yet barred by prescription. (Emphasis supplied.)
(j) Aviation turbo-jet fuel, per liter of volume capacity, sixty-four centavos.
Insular Lumber Co. and First Atlas Case
xxx xxx xxx
Not Inconsistent With Rio Tuba
Sec. 156. Specific tax on diesel fuel oil. On fuel oil, commercially known as diesel fuel oil, and all similar fuel oils, having more or less the same
and Second Atlas Case
generating power, per liter of volume capacity, twenty-five and one-half centavos, which tax shall attach to this fuel oil as soon as it is in existence as
such.
Petitioner argues that the applicable jurisprudence in this case should be Commissioner of Internal Revenue vs. Atlas Consolidated and Mining Corp. (the first Atlas case), an
A tax cannot be imposed unless it is supported by the clear and express language of a statute; 19 on the other hand, once the tax is unquestionably imposed, "[a] claim of
exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken." 20 Since the partial refund authorized under Section 5, RA 1435,
is in the nature of a tax exemption, 21 it must be construed strictissimiJuris against the grantee. Hence, petitioner's claim of refund on the basis of the specific taxes it actually paid
must expressly be granted in a statute stated in a language too clear to be mistaken.
petitioner. The mere fact that the privilege of refund was included in Section 5, and not in Section 1, is insufficient to support petitioner's claim. When the law itself does not explicitly
provide that a refund under RA 1435 may be based on higher rates which were nonexistent at the time of its enactment, this Coure cannot presume otherwise. A legislative lacuna
cannot be filled by judicial fiat. 22
issue
is
not
really
novel.
In
Commissioner
of
Internal
Revenue
Atlas case, both decided by Divisions, in view of Insular which was decided en banc. Petitioner posits that "[I]n view of the similarity of the situation of herein petitioner with Insular
Lumber Company (claimant in Insular Lumber) and Rio Tuba Nickel Mining Corporation (claimant in Rio Tuba), a dilemma has been created as to whether or not Insular Lumber,
which has been decided by the Honorable Court en banc, or Rio Tuba, which was decided only [by] the Third Division of the Honorable Court, should
apply." 26
We have carefully scrutinized RA 1435 and the subsequent pertinent statutes and found no expression of a legislative will authorizing a refund based on the higher rates claimed by
The
unsigned resolution, and Insular Lumber Co. vs. Court of Tax Appeals, an en banc decision. 25 Petitioner also asks the Court to take a "second look" at Rio Tuba and the second
vs.
Court
of
Appeals
and
Atlas
Consolidated
Mining
and
Development
Corporation23 (the second Atlas case), the CIR contended that the refund should be based on Sections 1 and 2 of RA 1435, not Sections 153 and 156 of the NIRC of 1977. In
We find no conflict between these two pairs of cases. Neither Insular Lumber Co. nor the first Atlas case ruled on the issue of whether the refund privilege under Section 5 should
be computed based on the specific tax deemed paid under Sections 1 and 2 of RA 1435, regardless of what was actually paid under the increased rates. Rio Tuba and the second
Atlas case did.
Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum products purchased in the year 1963, when the increased rates under the NIRC of 1977 were nor
yet in effect. Thus, the issue now before us did not exist at the time, since the applicable rates were still those prescribed under Sections 1 and 2 of RA 1435.
categorically ruling that Private Respondent Atlas Consolidated Mining and Development Corporation was entitled to a refund based on Sections 1 and 2 of RA 1435, the Court,
through Mr. Justice Hilario G. Davide, Jr., reiterated our pronouncement in Commissioner of Internal Revenue vs. Rio Tuba Nickel and Mining Corporation:
On the other hand, the issue raised in the first Atlas case was whether the claimant was entitled to the refund under Section 5, notwithstanding its failure to pay any additional tax
under a municipal or city ordinance. Although Atlas purchased petroleum products in the years, 1976 to 1978 when the rates had already been changed, the Court did not decide or
Our Resolution of 25 March 1992 modifying our 30 September 1991 Decision in the Rio Tuba case sets forth the controlling doctrine. In that
make any pronouncement on the issue in that case.
Resolution, we stated:
Clearly, it is impossible for these two decisions to clash with our pronouncement in Rio Tuba and second Atlas case, in which we ruled that the refund granted be computed on the
Since the private respondent's claim for refund covers specific taxes paid from 1980 to July 1983 then we find that the private respondent is entitled
to a refund. It should be made clear, however, that Rio Tuba is not entitled to the whole amount it claims as refund.
The specific taxes on oils which Rio Tuba paid for the aforesaid period were no longer based on the rates specified by Sections 1 and 2 of R.A. No.
1435 but on the increased rates mandated under Sections 153 and 156 of the National Internal Revenue Code of 1977. We note however, that the
basis of the amounts deemed paid under Sections 1 and 2 of RA 1435. In this light, we find no basis for petitioner's invocation of the constitutional proscription that "no doctrine or
principle of law laid down by the Court in a decision rendered en banc or in division may be modified or reversed except by the Court sitting en banc. 27
Finally, petitioner asserts that "equity and justice demand that the computation of the tax refunds be based on actual amounts paid under Sections 153 and 156 of the NIRC." 28 We
disagree. According to an eminent authority on taxation, "there is no tax exemption solely on the, ground of equity." 29
latter law does not specifically provide for a refund to these mining and lumber companies of specific taxes paid on manufactured and diesel fuel oils.
WHEREFORE, the petition is hereby DENIED and the assailed Decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
The facts on record show the antecedent circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its quarterly income tax returns for the first
and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos and accordingly,
the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise reported a net
loss of P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985
and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first
and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for
P234,077.69.
G.R. No. 112024 January 28, 1999
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals
(CTA). The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs. Commissioner of Internal Revenue."
PHILIPPINE
BANK
OF
COMMUNICATIONS,
petitioner,
vs.
The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS, respondent.
1985 1986

QUISUMBING, J.:
Net Income (Loss) (P25,317,288.00) (P14,129,602.00)
This petition for review assails the Resolution 1of the Court of Appeals dated September 22, 1993 affirming the Decision 2 and a Resolution 3 of the Court Of Tax Appeals which
denied the claims of the petitioner for tax refund and tax credits, and disposing as follows:
IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due course. The Decision of the Court of Tax Appeals dated May 20,
Tax Due NIL NIL
Quarterly tax.
1993 and its resolution dated July 20, 1993, are hereby AFFIRMED in toto.
Payments Made 5,016,954.00
SO ORDERED. 4
Tax Withheld at Source 282,795.50 234,077.69
The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the amount of P5,299,749.95 is hereby denied for having
been filed beyond the reglementary period. The 1986 claim for refund amounting to P234,077.69 is likewise denied since petitioner has opted and in
all likelihood automatically credited the same to the succeeding year. The petition for review is dismissed for lack of merit.
SO ORDERED. 5
Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five centavo difference was noted.
xxx xxx xxx
On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the
It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of overpaid income tax with the Court
ground that it was filed beyond the two-year reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the
of Tax Appeals within the two-year period from the date of payment, in accordance with sections 292 and 295 of the National Internal Revenue Code.
assumption that it was automatically credited by PBCom against its tax payment in the succeeding year.
It is obvious that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax credit.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was denied due course for lack of merit. 6
It should he noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of Sections 292 and 295 of the Tax Code.
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in
In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or claim for automatic tax credit. To
toto the CTA's resolution dated July 20, 1993. Hence this petition now before us.
insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes, this Office
has promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in processing said returns. Under these
procedures, the returns are merely pre-audited which consist mainly of checking mathematical accuracy of the figures of the return. After which, the
The issues raised by the petitioner are:
refund or tax credit is granted, and, this procedure was adopted to facilitate immediate action on cases like this.
I. Whether taxpayer PBCom which relied in good faith on the formal assurances of BIR in RMC No. 7-85 and did
not immediately file with the CTA a petition for review asking for the refund/tax credit of its 1985-86 excess quarterly
income tax payments can be prejudiced by the subsequent BIR rejection, applied retroactivity, of its assurances in
RMC No. 7-85 that the prescriptive period for the refund/tax credit of excess quarterly income tax payments is not two
In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to preserve the right to claim refund or tax
credit the two year period. As already stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax returns.
Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the Tax Code
within 10 years from the date of payment considering that it is an obligation created by law (Article 1144 of the Civil Code). 9 (Emphasis supplied.)
years but ten (10). 7
II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBCom's claim for the
refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof, that there were taxes due
Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting
Corporation vs. Court of Tax Appeals 10 petitioner claims that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive effect if it would be
prejudicial to taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting a position inconsistent with one previously taken where injustice would
in 1987 and that PBCom availed of tax-crediting that year. 8
result therefrom or where there has been a misrepresentation to the taxpayer.

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription, despite petitioner's
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows:
reliance on RMC No. 7-85, changing the prescriptive period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1,
1985. The circular states that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for
Sec. 246 Non-retroactivity of rulings Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with
the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers except in the following cases:
the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular reads:
a). where the taxpayer deliberately misstates or omits material facts from his return or
REVENUE MEMORANDUM CIRCULAR NO. 7-85
in any document required of him by the Bureau of Internal Revenue;

SUBJECT:
PROCESSING
OF
REFUND
OR
TAX
CREDIT
OF
EXCESS
CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE FINAL

ADJUSTMENT RETURN.
TO: All Internal Revenue Officers and Others Concerned.
Sec. 85 And 86 Of the National Internal Revenue Code provide:
b). where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based;
c). where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year prescriptive period for filing tax cases in court concerning income tax payments
of Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As precedents,
xxx xxx xxx
respondent Commissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal Revenuevs.
TMX Sales, Inc., et al.. 12Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be
filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner stresses that when the petitioner filed the case before
The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide;
the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to petitioner's cause of action.
After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is contrary to the provisions and spirit of Act.
85 is not warranted as it disregards the two-year prescriptive period set by law.
No 4003 as amended, because whereas the prohibition prescribed in said Fisheries Act was for any single period of time not exceeding five years
duration, FAO No 37-1 fixed no period, that is to say, it establishes an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No.
37-1 was probably due to an oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy, the basic
Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the
Act prevails, for the reason that the regulation or rule issued to implement a law cannot go beyondthe terms and provisions of the
common weal. 13 Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the
latter. . . . In this connection, the attention of the technical men in the offices of Department Heads who draft rules and regulation is called to the
government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be
importance and necessity of closely following the terms and provisions of the law which they intended to implement, this to avoid any possible
summary and interfered with as little as possible. 14
misunderstanding or confusion as in the present case. 23

From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes,
its functions should not be unduly delayed or hampered by incidental matters.
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. 24 As pointed out by the respondent courts, the
nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding for the recovery of
being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.
tax erroneously or illegally collected, viz.:

It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is estopped by the principle of non-retroactively
of BIR rulings. Again We do not agree. The Memorandum Circular, stating that a taxpayer may recover the excess income tax paid within 10 years
Sec. 230. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained in any court for the recovery of any national
from date of payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal Revenue. On the other hand,
internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
the decision, stating that the taxpayer should still file a claim for a refund or tax credit and corresponding petition fro review within the
without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly
two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten years would be adverse to public policy
filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or
and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no
duress.
application in the case at bar because it was not the Commissioner of Internal Revenue who denied petitioner's claim of refund or tax credit. Rather,
it was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of
In any case, no such suit or proceedings shall begun after the expiration of two years from the date of payment of the tax or penalty regardless of
Internal Revenue is an administrative interpretation which is out of harmony with or contrary to the express provision of a statute (specifically Sec.
any supervening cause that may arise after payment; Provided however, That the Commissioner may, even without a written claim therefor, refund
230, NIRC), hence, cannot be given weight for to do so would in effect amend the statute. 25
or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.
(Emphasis supplied)
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that
level of recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.
respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same.
27 Moreover, the non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by
respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15 this Court explained the application of Sec. 230 of 1977 NIRC, as follows:
exemption and should be construed in strictissimi juris against the taxpayer. 28
Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986),
after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16,
based on mere speculation, without proof, that PBCom availed of the automatic tax credit in 1987.
1986. . . . As we have earlier said in the TMX Sales case, Sections 68. 1669, 17 and 70 18on Quarterly Corporate Income Tax Payment and Section
321 should be considered in conjunction with it 19
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or
final corporate income tax return, shall either(a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax
succeeding taxable year.
payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.
The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for
an automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are
issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to
As stated by respondent Court of Appeals:
enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. 20 Thus, courts will not
countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement. 21
Finally, as to the claimed refund of income tax over-paid in 1986 the Court of Tax Appeals, after examining the adjusted final corporate annual
income tax return for taxable year 1986, found out that petitioner opted to apply for automatic tax credit. This was the basis used (vis-avis the fact
In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter.
that the 1987 annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed
of and applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and tax
credit are alternative. 30
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact
which we must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to contovert said fact. Thus, we are bound by the findings of
fact by respondent courts, there being no showing of gross error or abuse on their part to disturb our reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is AFFIRMED, with COSTS against the petitioner.1wphi1.nt
SO ORDERED.
G.R. No. 134062
April 17, 2007
COMMISSIONER
OF
INTERNAL
REVENUE,
Petitioner,
vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
DECISION
CORONA, J.:
This is a petition for review on certiorari1 of a decision2 of the Court of Appeals (CA) dated May 29, 1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision 3 and
resolution4 of the Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA Case No. 4715.
In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed respondent Bank of the Philippine Islands (BPIs) deficiency percentage and
documentary stamp taxes for the year 1986 in the total amount of P129,488,656.63:
1986 Deficiency Percentage Tax

Deficiency percentage tax
P 7, 270,892.88
Add: 25% surcharge
1,817,723.22
20% interest from 1-21-87 to 10-28-88
3,215,825.03
15,000.00
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE
P12,319,441.13
1986 Deficiency Documentary Stamp Tax

Deficiency percentage tax
P93,723,372.40
Add: 25% surcharge
23,430,843.10
On appeal, the CA reversed the tax courts decision and resolution and remanded the case to the CTA 14 for a decision on the merits.15 It ruled that the October 28, 1988 notices
were not valid assessments because they did not inform the taxpayer of the legal and factual bases therefor. It declared that the proper assessments were those contained in the
15,000.00
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE
May 8, 1991 letter which provided the reasons for the claimed deficiencies.16 Thus, it held that BPI filed the petition for review in the CTA on time.17 The CIR elevated the case to
this Court.
P117,169,215.50.5
This petition raises the following issues:
Both notices of assessment contained the following note:
1) whether or not the assessments issued to BPI for deficiency percentage and documentary stamp taxes for 1986 had already become final and unappealable and
Please be informed that your [percentage and documentary stamp taxes have] been assessed as shown above. Said assessment has been based on return (filed by you) (as
2) whether or not BPI was liable for the said taxes.
verified) (made by this Office) (pending investigation) (after investigation). You are requested to pay the above amount to this Office or to our Collection Agent in the Office of
the City or Deputy Provincial Treasurer of xxx6
In a letter dated December 10, 1988, BPI, through counsel, replied as follows:
The former Section 27018 (now renumbered as Section 228) of the NIRC stated:
Sec. 270. Protesting of assessment. When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer
of his findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the [CIR]
1. Your "deficiency assessments" are no assessments at all. The taxpayer is not informed, even in the vaguest terms, why it is being assessed a deficiency. The
shall issue an assessment based on his findings.
very purpose of a deficiency assessment is to inform taxpayer why he has incurred a deficiency so that he can make an intelligent decision on whether to pay or to
protest the assessment. This is all the more so when the assessment involves astronomical amounts, as in this case.
We therefore request that the examiner concerned be required to state, even in the briefest form, why he believes the taxpayer has a deficiency documentary and
xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
percentage taxes, and as to the percentage tax, it is important that the taxpayer be informed also as to what particular percentage tax the assessment refers to.
The first issue for our resolution is whether or not the October 28, 1988 notices19 were valid assessments. If they were not, as held by the CA, then the correct assessments were
2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise forged between your office and the Bankers Association of the Philippines
[BAP] on this issue and of BPIs submission of its computations under this compromise. There is therefore no basis whatsoever for this assessment, assuming it is
on the subject of the BAP compromise. On the other hand, if it relates to documentary stamp tax on some other issue, we should like to be informed about what
in the May 8, 1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked for a reconsideration of the findings which the CIR denied in his
December 12, 1991 letter, received by BPI on January 21, 1992. Consequently, the petition for review filed by BPI in the CTA on February 18, 1992 would be well within the 30-day
period provided by law.20
those issues are.

The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid assessments. He asserts that he used BIR Form No. 17.08 (as revised in November
3. As to the alleged deficiency percentage tax, we are completely at a loss on how such assessment may be protested since your letter does not even tell the
taxpayer what particular percentage tax is involved and how your examiner arrived at the deficiency. As soon as this is explained and clarified in a proper letter of
1964) which was designed for the precise purpose of notifying taxpayers of the assessed amounts due and demanding payment thereof. 21 He contends that there was no law or
jurisprudence then that required notices to state the reasons for assessing deficiency tax liabilities.22
assessment, we shall inform you of the taxpayers decision on whether to pay or protest the assessment.7
BPI counters that due process demanded that the facts, data and law upon which the assessments were based be provided to the taxpayer. It insists that the NIRC, as worded now
On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:
although in all respects, your letter failed to qualify as a protest under Revenue Regulations No. 12-85 and therefore not deserving of any rejoinder by this office as no valid issue
(referring to Section 228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void."
was raised against the validity of our assessment still we obliged to explain the basis of the assessments.
According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what due process requires even under the former Section 270.
xxx xxx xxx
BPIs contention has no merit. The present Section 228 of the NIRC provides:
this constitutes the final decision of this office on the matter.8
Sec. 228. Protesting of Assessment. When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer
On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIRs May 8, 1991 letter. 9 This was denied in a letter dated December 12, 1991, received by BPI
of his findings: Provided, however, That a preassessment notice shall not be required in the following cases:
on January 21, 1992.10

xxx xxx xxx
On February 18, 1992, BPI filed a petition for review in the CTA.11 In a decision dated November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject
assessments had become final and unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the National Internal Revenue Code (NIRC) of 1986 and
Section 7 in relation to Section 11 of RA 1125.12 It denied reconsideration in a resolution dated May 27, 1996.13
The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.
xxx xxx xxx (emphasis supplied)
We disagree.
Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of the deficiency taxes were made. He merely notified BPI of his findings, consisting
Indeed, the underlying reason for the law was the basic constitutional requirement that "no person shall be deprived of his property without due process of law." 32 We note,
only of the computation of the tax liabilities and a demand for payment thereof within 30 days after receipt.
however, what the CTA had to say:
In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997). 23
xxx xxx xxx
In CIR v. Reyes,24 we held that:

From the foregoing testimony, it can be safely adduced that not only was [BPI] given the opportunity to discuss with the [CIR] when the latter issued the former a Pre-Assessment
In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate taxes had been made. She was merely notified of the findings by
Notice (which [BPI] ignored) but that the examiners themselves went to [BPI] and "we talk to them and we try to [thresh] out the issues, present evidences as to what they need."
the CIR, who had simply relied upon the provisions of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the Tax Reform Act of 1997.
Now, how can [BPI] and/or its counsel honestly tell this Court that they did not know anything about the assessments?
First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIR's findings was
Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,] contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro,
changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the assessment itself would be invalid.
Assistant Manager of the Accounting Department of [BPI]. He testified to the fact that he prepared worksheets which contain his analysis regarding the findings of the [CIRs]
examiner, Mr. San Pedro and that the same worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI].
It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998, the final estate tax assessment notice, as well as demand
letter, was also issued. During those dates, RA 8424 was already in effect. The notice required under the old law was no longer sufficient under the new law.25 (emphasis
xxx xxx xxx
supplied; italics in the original)

From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the nature and basis of the assessments, and was given all the opportunity to contest the
Accordingly, when the assessments were made pursuant to the former Section 270, the only requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing
same but ignored it despite the notice conspicuously written on the assessments which states that "this ASSESSMENT becomes final and unappealable if not protested within 30
in the old law required a written statement to the taxpayer of the law and facts on which the assessments were based. The Court cannot read into the law what obviously was not
days after receipt." Counsel resorted to dilatory tactics and dangerously played with time. Unfortunately, such strategy proved fatal to the cause of his client.33
intended by Congress. That would be judicial legislation, nothing less.

The CA never disputed these findings of fact by the CTA:
Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax liabilities, the amount the taxpayer was to pay and a demand for payment
within a prescribed period.26 Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the requirements of a valid assessment under the old law and
jurisprudence.
[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise
on the subject, and its conclusions will not be overturned unless there has been an abuse or improvident exercise of authority. Such findings can only be disturbed on appeal if they
are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the [CTA].34
The sentence
Under the former Section 270, there were two instances when an assessment became final and unappealable: (1) when it was not protested within 30 days from receipt and (2)
[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void
when the adverse decision on the protest was not appealed to the CTA within 30 days from receipt of the final decision:35
was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997. Evidently, the legislature saw the need to modify the former Section 270 by
Sec. 270. Protesting of assessment.1a\^/phi1.net
inserting the aforequoted sentence.27 The fact that the amendment was necessary showed that, prior to the introduction of the amendment, the statute had an entirely different
meaning.28
Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an affirmation of what the law required under the former Section 270. The
amendment introduced by RA 8424 was an innovation and could not be reasonably inferred from the old law.29Clearly, the legislature intended to insert a new provision regarding
xxx xxx xxx
Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be prescribed by the implementing
regulations within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final and unappealable.
the form and substance of assessments issued by the CIR.30

If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal to the [CTA] within thirty (30) days
In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:
xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI] of the legal and factual basis of the formers decision to charge the latter for
from receipt of the said decision; otherwise, the decision shall become final, executory and demandable.
Implications Of A Valid Assessment
deficiency documentary stamp and gross receipts taxes.31

Considering that the October 28, 1988 notices were valid assessments, BPI should have protested the same within 30 days from receipt thereof. The December 10, 1988 reply it
In other words, the CAs theory was that BPI was deprived of due process when the CIR failed to inform it in writing of the factual and legal bases of the assessments even if
these were not called for under the old law.
sent to the CIR did not qualify as a protest since the letter itself stated that "[a]s soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the
taxpayers decision on whether to pay or protest the assessment."36 Hence, by its own declaration, BPI did not regard this letter as a protest against the assessments. As a
matter of fact, BPI never deemed this a protest since it did not even consider the October 28, 1988 notices as valid or proper assessments.
The inevitable conclusion is that BPIs failure to protest the assessments within the 30-day period provided in the former Section 270 meant that they became final and
CRUZ, J.:
unappealable. Thus, the CTA correctly dismissed BPIs appeal for lack of jurisdiction. BPI was, from then on, barred from disputing the correctness of the assessments or invoking
any defense that would reopen the question of its liability on the merits.37 Not only that. There arose a presumption of correctness when BPI failed to protest the assessments:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so
Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the
that the real purpose of taxation, which is the promotion of the common good, may be achieved.
performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in
favor of the correctness of tax assessments.38
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was
Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed to have failed to appeal the CIRs final decision regarding the disputed
assessments within the 30-day period provided by law. The CIR, in his May 8, 1991 response, stated that it was his "final decision on the matter." BPI therefore had 30 days from
made on time and in accordance with law.
the time it received the decision on June 27, 1991 to appeal but it did not. Instead it filed a request for reconsideration and lodged its appeal in the CTA only on February 18, 1992,
way beyond the reglementary period. BPI must now suffer the repercussions of its omission. We have already declared that:
We deal first with the procedural question.
the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied activities, received a letter from
determination on the disputed assessment, as contemplated by Sections 7 and 11 of [RA 1125], as amended. On the basis of his statement indubitably showing that the
the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or
Commissioner's communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at
request for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2On March 12, 1965, a warrant of distraint and levy was presented to the
the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues.
private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case
proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4On April 7, 1965, Atty. Guevara was
The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment and, consequently,
finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5Sixteen
the collection of the amount demanded as taxes by repeated requests for recomputation and reconsideration. On the part of the [CIR], this would encourage his office to
days later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6
conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the [CIR] from
unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would
meet a pressing need for fair play, regularity, and orderliness in administrative action.39 (emphasis supplied)
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9being
"tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special circumstance in the case at bar that prevents application of this
Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the subject tax assessments.
accepted doctrine.
We realize that these assessments (which have been pending for almost 20 years) involve a considerable amount of money. Be that as it may, we cannot legally presume the
existence of something which was never there. The state will be deprived of the taxes validly due it and the public will suffer if taxpayers will not be held liable for the proper taxes
assessed against them:
The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account
before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the
protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served.
Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, 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 common good. The theory behind the exercise of the
power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.40
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of
suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started
running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence,
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of Appeals in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.
when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
SO ORDERED.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. The Court of
Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment
was in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate Development Company.
G.R. No. L-28896 February 17, 1988
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding company income 12 but later conformed to the decision
COMMISSIONER
OF
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
INTERNAL
REVENUE,
petitioner,
of the respondent court rejecting this assertion. 13In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It
has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing
process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil
Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus
the PSEDC properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to
has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in
the aforenamed individuals. 16
inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean
feat and should be, as it was, sufficiently recompensed.
There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 17The Court of Tax
Appeals also found, after examining the evidence, that no distribution of dividends was involved. 18
It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite
the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the
The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as
to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt
to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each
government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of
power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the
prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.
payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was
understandable, however, in view of the close relationship among the persons in the family corporation.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also
find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the
private respondent was P125,000.00. 21 After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.
60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business
may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the
case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and deductibility in the case
of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be
further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of
whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond
or bear a close relationship to the stockholdings of the officers of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. 23
SO ORDERED.
It has been shown in this case that 1) the petitioner has complied with the mentioned statutory requirement by having filed a written claim for refund
within the two-year period from date of payment; 2) the respondent has not issued any deficiency assessment nor disputed the correctness of the tax
returns and the corresponding amounts of prepaid income and percentage taxes; and 3) the chartered vessel sailed out of the Philippine port with
absolutely no cargo laden on board as cleared and certified by the Customs authorities; nonetheless 4) respondent's apparent bit of reluctance in
validating the legal merit of the claim, by and large, is tacked upon the "examiner who is investigating petitioner's claim for refund which is the
subject matter of this case has not yet submitted his report. Whether or not respondent will present his evidence will depend on the said report of the
examiner." (Respondent's Manifestation and Motion dated September 7, 1982). Be that as it may the case was submitted for decision by respondent
on the basis of the pleadings and records and by petitioner on the evidence presented by counsel sans the respective memorandum.
An examination of the records satisfies us that the case presents no dispute as to relatively simple material facts. The circumstances obtaining amply
justify petitioner's righteous indignation to a more expeditious action. Respondent has offered no reason nor made effort to submit any controverting
documents to bash that patina of legitimacy over the claim. But as might well be, towards the end of some two and a half years of seeming impotent
anguish over the pendency, the respondent Commissioner of Internal Revenue would furnish the satisfaction of ultimate solution by manifesting that
"it is now his turn to present evidence, however, the Appellate Division of the BIR has already recommended the approval of petitioner's claim for
G.R. No. L-68252 May 26, 1995
refund subject matter of this petition. The examiner who examined this case has also recommended the refund of petitioner's claim. Without
COMMISSIONER
OF
INTERNAL
REVENUE,
prejudice to withdrawing this case after the final approval of petitioner's claim, the Court ordered the resetting to September 7, 1983." (Minutes of
petitioner,
June 9, 1983 Session of the Court) We need not fashion any further issue into an apparently settled legal situation as far be it from a comedy of
vs.
errors it would be too much of a stretch to hold and deny the refund of the amount of prepaid income and common carrier's taxes for which petitioner
TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF TAX APPEALS, respondents.
could no longer be made accountable.
On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence, this petition for review on certiorari.
PUNO, J.:
Petitioner now contends: (1) private respondent has the burden of proof to support its claim of refund; (2) it failed to prove that it did not realize any receipt from its charter
agreement; and (3) it suppressed evidence when it did not present its charter agreement.
For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit for amounts representing pre-payment of income and common
carrier's taxes under the National Internal Revenue Code, section 24 (b) (2), as amended. 1
We find no merit in the petition.
Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia. In
December 1980, NASUTRA 2 chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. 3 On December 23, 1980, Mr. Edilberto Lising, the operations
There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal Revenue Code which at that time provides as follows:
supervisor of Soriamont Agency, 4 paid the required income and common carrier's taxes in the respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE
PESOS and SEVENTY-FIVE CENTAVOS (P59,523.75) and FORTY-SEVEN THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN
A corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be
THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) based on the expected gross receipts of the vessel. 5 Upon arriving, however,
taxable as provided in subsection (a) of this section upon the total net income derived in the preceding taxable year from all sources within the
at Guimaras Port of Iloilo, the vessel found no sugar for loading. On January 10, 1981, NASUTRA and private respondent's agent mutually agreed to have the vessel sail for Japan
Philippines: Provided, however, That international carriers shall pay a tax of two and one-half per cent (2 1/2%) on their gross Philippine billings:
without any cargo.
"Gross Philippine Billings" include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the
Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from the charter agreement, private respondent instituted a claim for
tax credit or refund of the sum ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner
Commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim, hence, on May 14, 1981, private respondent filed a petition for review 6 before
Philippines. The gross revenue realized from the said cargo or mail include the gross freight charge up to final destination. Gross revenue from
chartered flights originating from the Philippines shall likewise form part of "Gross Philippine Billings" regardless of the place or payment of the
passage documents . . . . .
public respondent Court of Tax Appeals.

Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount of income it derives from sources within the
Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that taxes are presumed to have been collected in accordance with law; that in an
Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to have earned income sourced from the Philippines.
action for refund, the burden of proof is upon the taxpayer to show that taxes are erroneously or illegally collected, and the taxpayer's failure to sustain said burden is fatal to the
action for refund; and that claims for refund are construed strictly against tax claimants. 7
We agree with petitioner that a claim for refund is in the nature of a claim for exemption 8 and should be construed in strictissimi juris against the taxpayer. 9 Likewise, there can be
no disagreement with petitioner's stance that private respondent has the burden of proof to establish the factual basis of its claim for tax refund.
After trial, respondent tax court decided in favor of the private respondent. It held:
The pivotal issue involves a question of fact whether or not the private respondent was able to prove that it derived no receipts from its charter agreement, and hence is entitled
to a refund of the taxes it pre-paid to the government.
The respondent court held that sufficient evidence has been adduced by the private respondent proving that it derived no receipt from its charter agreement with NASUTRA. This
finding of fact rests on a rational basis, and hence must be sustained. Exhibits "E", "F," and "G" positively show that the tramper vessel M/V "Gardenia" arrived in Iloilo on January
10, 1981 but found no raw sugar to load and returned to Japan without any cargo laden on board. Exhibit "E" is the Clearance Vessel to a Foreign Port issued by the District
Collector of Customs, Port of Iloilo while Exhibit "F" is the Certification by the Officer-in-Charge, Export Division of the Bureau of Customs Iloilo. The correctness of the contents of
these documents regularly issued by officials of the Bureau of Customs cannot be doubted as indeed, they have not been contested by the petitioner. The records also reveal that in
the course of the proceedings in the court a quo, petitioner hedged and hawed when its turn came to present evidence. At one point, its counsel manifested that the BIR examiner
and the appellate division of the BIR have both recommended the approval of private respondent's claim for refund. The same counsel even represented that the government would
withdraw its opposition to the petition after final approval of private respondents' claim. The case dragged on but petitioner never withdrew its opposition to the petition even if it did
not present evidence at all. The insincerity of petitioner's stance drew the sharp rebuke of respondent court in its Decision and for good reason. Taxpayers owe honesty to
government just as government owes fairness to taxpayers.
In its last effort to retain the money erroneously prepaid by the private respondent, petitioner contends that private respondent suppressed evidence when it did not present its
charter agreement with NASUTRA. The contention cannot succeed. It presupposes without any basis that the charter agreement is prejudicial evidence against the private
respondent. 10 Allegedly, it will show that private respondent earned a charter fee with or without transporting its supposed cargo from Iloilo to Japan. The allegation simply
remained an allegation and no court of justice will regard it as truth. Moreover, the charter agreement could have been presented by petitioner itself thru the proper use of a
subpoena duces tecum. It never did either because of neglect or because it knew it would be of no help to bolster its position. 11 For whatever reason, the petitioner cannot take to
task the private respondent for not presenting what it mistakenly calls "suppressed evidence."
We cannot but bewail the unyielding stance taken by the government in refusing to refund the sum of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS
AND SEVENTY FIVE CENTAVOS (P107,142.75) erroneously prepaid by private respondent. The tax was paid way back in 1980 and despite the clear showing that it was
erroneously paid, the government succeeded in delaying its refund for fifteen (15) years. After fifteen (15) long years and the expenses of litigation, the money that will be finally
refunded to the private respondent is just worth a damaged nickel. This is not, however, the kind of success the government, especially the BIR, needs to increase its collection of
taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that BIR should refund without any unreasonable delay what it has erroneously collected. Our
ruling in Roxas v. Court of Tax Appeals12 is apropos to recall:
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in
order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.
PILIPINAS
IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated September 15, 1983, is AFFIRMED in toto. No costs.
SHELL
PETROLEUM
CORPORATION,
Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
SO ORDERED.
DECISION
G.R. No. 172598
December 21, 2007

VELASCO, JR., J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45 assailing the April 28, 2006 Decision 1 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 64, which upheld
respondents assessment against petitioner for deficiency excise taxes for the taxable years 1992 and 1994 to 1997. Said En Banc decision reversed and set aside the August 2,
2004 Decision2 and January 20, 2005 Resolution3 of the CTA Division in CTA Case No. 6003 entitled Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue,
which ordered the withdrawal of the April 22, 1998 collection letter of respondent and enjoined him from collecting said deficiency excise taxes.
The Facts
Petitioner Pilipinas Shell Petroleum Corporation (PSPC) is the Philippine subsidiary of the international petroleum giant Shell, and is engaged in the importation, refining and sale of
PSPC protested13 the assessment letter, but the protest was denied by the BIR, constraining it to file another petition for review 14 before the CTA, docketed as CTA Case No.
petroleum products in the country.
6003.
From 1988 to 1997, PSPC paid part of its excise tax liabilities with Tax Credit Certificates (TCCs) which it acquired through the Department of Finance (DOF) One Stop Shop Inter-
Parenthetically, on March 30, 2004, Republic Act No. (RA) 928215 was promulgated amending RA 1125,16 expanding the jurisdiction of the CTA and enlarging its membership. It
Agency Tax Credit and Duty Drawback Center (Center) from other Board of Investment (BOI)-registered companies. The Center is a composite body run by four government
became effective on April 23, 2004 after its due publication. Thus, CTA Case No. 6003 was heard and decided by a CTA Division.
agencies, namely: the DOF, Bureau of Internal Revenue (BIR), Bureau of Customs (BOC), and BOI.
The Ruling of the Court of Tax Appeals Division
Through the Center, PSPC acquired for value various Center-issued TCCs which were correspondingly transferred to it by other BOI-registered companies through Centerapproved Deeds of Assignments. Subsequently, when PSPC signified its intent to use the TCCs to pay part of its excise tax liabilities, said payments were duly approved by the
(CTA Case No. 6003)
Center through the issuance of Tax Debit Memoranda (TDM), and the BIR likewise accepted as payments the TCCs by issuing its own TDM covering said TCCs, and the
corresponding Authorities to Accept Payment for Excise Taxes (ATAPETs).
However, on April 22, 1998, the BIR sent a collection letter4 to PSPC for alleged deficiency excise tax liabilities of PhP 1,705,028,008.06 for the taxable years 1992 and 1994 to
1997, inclusive of delinquency surcharges and interest. As basis for the collection letter, the BIR alleged that PSPC is not a qualified transferee of the TCCs it acquired from other
BOI-registered companies. These alleged excise tax deficiencies covered by the collection letter were already paid by PSPC with TCCs acquired through, and issued and duly
On August 2, 2004, the CTA Division rendered a Decision17 granting the PSPCs petition for review. The dispositive portion reads:
[T]he instant petition is hereby GRANTED. Accordingly, the assessment issued by the respondent dated November 15, 1999 against petitioner is hereby CANCELLED and SET
ASIDE.18
authorized by the Center, and duly covered by TDMs of both the Center and BIR, with the latter also issuing the corresponding ATAPETs.
In granting PSPCs petition for review, the CTA Division held that respondent failed to prove with convincing evidence that the TCCs transferred to PSPC were fraudulently issued
PSPC protested the April 22, 1998 collection letter, but the protest was denied by the BIR through the Regional Director of Revenue Region No. 8. PSPC filed its motion for
reconsideration. However, due to respondents inaction on the motion, on February 2, 1999, PSPC filed a petition for review before the CTA, docketed as CTA Case No. 5728.
On July 23, 1999, the CTA rendered a Decision5 in CTA Case No. 5728 ruling, inter alia, that the use by PSPC of the TCCs was legal and valid, and that respondents attempt to
collect alleged delinquent taxes and penalties from PSPC without an assessment constitutes denial of due process. The dispositive portion of the July 23, 1999 CTA Decision reads:
as respondents finding of alleged fraud was merely speculative. The CTA Division found that neither the respondent nor the Center could state what sales figures were used as
basis for the TCCs to issue, as they merely based their conclusions on the audited financial statements of the transferors which did not clearly show the actual export sales of
transactions from which the TCCs were issued.
In the same vein, the CTA Division held that the machinery and equipment cannot be the basis in concluding that transferor could not have produced the volume of products
indicated in its BOI registration. It further ruled that the Center erroneously based its findings of fraud on two possibilities: either the transferor did not declare its export sales or
underdeclare them. Thus, no specific fraudulent acts were identified or proven. The CTA Division concluded that the TCCs transferred to PSPC were not fraudulently issued.
[T]he instant petition for review is GRANTED. The collection letter issued by the Respondent dated April 22, 1998 is considered withdrawn and he is ENJOINED from any attempts
to collect from petitioner the specific tax, surcharge and interest subject of this petition.6
On the issue of whether a TCC transferee should be a supplier of either capital equipment, materials, or supplies, the CTA Division ruled in the negative as the Memorandum of
Agreement (MOA)19 between the DOF and BOI executed on August 29, 1989 specifying such requirement was not incorporated in the Implementing Rules and Regulations (IRR)
Respondent elevated the July 23, 1999 CTA Decision in CTA Case No. 5728 to the Court of Appeals (CA) through a petition for review 7 docketed as CA-G.R. SP No. 55329. This
case was subsequently consolidated with the similarly situated case of Petron Corporation under CA-G.R. SP No. 55330. To date, these consolidated cases are still pending
resolution before the CA.
Meanwhile, in late 1999, and despite the pendency of CA-G.R. SP No. 55329, the Center sent several letters to PSPC dated August 31, 1999, 8 September 1, 1999,9 and October
18, 1999.10 The first required PSPC to submit copies of pertinent sales invoices and delivery receipts covering sale transactions of PSPC products to the TCC assignors/transferors
purportedly in connection with an ongoing post audit. The second letter similarly required submission of the same documents covering PSPC Industrial Fuel Oil (IFO) deliveries to
of Executive Order No. (EO) 226.20 The CTA Division found that only the October 5, 1982 MOA between the then Ministry of Finance (MOF) and BOI was incorporated in the IRR
of EO 226. It held that while the August 29, 1989 MOA indeed amended the October 5, 1982 MOA still it was not incorporated in the IRR. Moreover, according to the CTA Division,
even if the August 29, 1989 MOA was elevated or incorporated in the IRR of EO 226, still, it is ineffective and could not bind nor prejudice third parties as it was never published.
Anent the affidavits of former Officers or General Managers of transferors attesting that no IFO deliveries were made by PSPC, the CTA Division ruled that such cannot be given
probative value as the affiants were not presented during trial of the case. However, the CTA Division said that the November 15, 1999 assessment was not precluded by the prior
CTA Case No. 5728 as the latter concerned the validity of the transfer of the TCCs, while CTA Case No. 6003 involved alleged fraudulent procurement and transfer of the TCCs.
Spintex International, Inc. The third letter is in reply to the September 29, 1999 letter sent by PSPC requesting a list of the serial numbers of the TCCs assigned or transferred to it
by various BOI-registered companies, either assignors or transferors.
Respondent forthwith filed his motion for reconsideration of the above decision which was rejected on January 20, 2005. And, pursuant to Section 11 21 of RA 9282, respondent
appealed the above decision through a petition for review22 before the CTA En Banc.
In its letter dated October 29, 1999 and received by the Center on November 3, 1999, PSPC emphasized that the required submission of these documents had no legal basis, for
the applicable rules and regulations on the matter only require that both the assignor and assignee of TCCs be BOI-registered entities. 11 On November 3, 1999, the Center
informed PSPC of the cancellation of the first batch of TCCs transferred to PSPC and the TDM covering PSPCs use of these TCCs as well as the corresponding TCC assignments.
The Ruling of the Court of Tax Appeals En Banc
PSPCs motion for reconsideration was not acted upon.

(CTA EB No. 64)
On November 22, 1999, PSPC received the November 15, 1999 assessment letter12 from respondent for excise tax deficiencies, surcharges, and interest based on the first batch
of cancelled TCCs and TDM covering PSPCs use of the TCCs. All these cancelled TDM and TCCs were also part of the subject matter in CTA Case No. 5728, now pending before
the CA in CA-G.R. SP No. 55329.
The CTA En Banc, however, rendered the assailed April 28, 2006 Decision23 setting aside the August 2, 2004 Decision and the January 20, 2005 Resolution of the CTA Division.
The fallo reads:
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. The assailed Decision and Resolution dated August 2, 2004 and January 20, 2005, respectively,
Thus, PSPC filed this petition with the following issues:
are hereby SET ASIDE and a new one entered dismissing respondent Pilipinas Shell Petroleum Corporations Petition for Review filed in C.T.A. Case No. 6003 for lack of merit.
Accordingly, respondent is ORDERED TO PAY the petitioner the amount of P570,577,401.61 as deficiency excise tax for the taxable years 1992 and 1994 to 1997, inclusive of 25%
surcharge and 20% interest, computed as follows:

WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY ERRED IN ORDERING PETITIONER PSPC TO PAY THE AMOUNT OF TWO HUNDRED
Basic Tax P285,766,987.00
EIGHTY FIVE MILLION SEVEN HUNDRED SIXTY SIX THOUSAND NINE HUNDRED EIGHTY SEVEN PESOS (P285,766,987.00), AS ALLEGED DEFICIENCY
EXCISE TAXES, FOR THE TAXABLE YEARS, 1992 AND 1994 TO 1997.
Add:
II
Surcharge (25%) 71,441,746.75
WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY ERRED IN ISSUING THE QUESTIONED DECISION DATED 28 APRIL 2006 UPHOLDING THE
Interest (20%) 213,368,667.86
CANCELLATION OF THE TAX CREDIT CERTIFICATES UTILIZED BY PETITIONER PSPC IN PAYING ITS EXCISE TAX LIABILITIES.
Total Tax Due P570,577,401.61
III
In addition, respondent is hereby ORDERED TO PAY 20% delinquency interest thereon per annum computed from December 4, 1999 until full payment thereof, pursuant to
WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY ERRED IN IMPOSING SURCHARGES AND INTERESTS ON THE ALLEGED DEFICIENCY
Sections 248 and 249 of the NIRC of 1997.
EXCISE TAX OF PETITIONER PSPC.
SO ORDERED.24
IV
The CTA En Banc resolved respondents appeal by holding that PSPC was liable to pay the alleged excise tax deficiencies arising from the cancellation of the TDM issued against
WHETHER OR NOT THE ASSESSMENT DATED 15 NOVEMBER 1999 IS VOID CONSIDERING THAT IT FAILED TO COMPLY WITH THE STATUTORY AS WELL
its TCCs which were used to pay some of its excise tax liabilities for the years 1992 and 1994 to 1997. It ratiocinated in this wise, to wit:
AS REGULATORY REQUIREMENTS IN THE ISSUANCE OF ASSESSMENTS.26
First, the finding of the DOF that the TCCs had no monetary value was undisputed. Consequently, there was a non-payment of excise taxes corresponding to the value of the TCCs
The Courts Ruling
used for payment. Since it was PSPC which acquired the subject TCCs from a third party and utilized the same to discharge its own obligations, then it must bear the loss.
The petition is meritorious.
Second, the TCCs carry a suspensive condition, that is, their issuance was subject to post audit in order to determine if the holder is indeed qualified to use it. Thus, until final
determination of the holders right to the issuance of the TCCs, there is no obligation on the part of the DOF or BIR to recognize the rights of the holder or assignee. And,
First Issue: Assessment of excise tax deficiencies
considering that the subject TCCs were canceled after the DOFs finding of fraud in its issuance, the assignees must bear the consequence of such cancellation.
PSPC contends that respondent had no basis in issuing the November 15, 1999 assessment as PSPC had no pending unpaid excise tax liabilities. PSPC argues that under the
Third, PSPC was not an innocent purchaser for value of the TCCs as they contained liability clauses expressly stipulating that the transferees are solidarily liable with the
transferors for any fraudulent act or violation of pertinent laws, rules, or regulations relating to the transfer of the TCC.
IRR of EO 226, it is allowed to use TCCs transferred from other BOI-registered entities. On one hand, relative to the validity of the transferred TCCs, PSPC asserts that the TCCs
are not subject to a suspensive condition; that the post-audit of a transferred TCC refers only to computational discrepancy; that the solidary liability of the transferor and transferee
refers to computational discrepancy resulting from the transfer and not from the issuance of the TCC; that a post-audit cannot affect the validity and effectivity of a TCC after it has
Fourth, the BIR was not barred by estoppel as it is a settled rule that in the performance of its governmental functions, the State cannot be estopped by the neglect of its agents and
been utilized by the transferee; and that the BIR duly acknowledged the use of the subject TCCs, accepting them as payment for the excise tax liabilities of PSPC. On the other
officers. Although the TCCs were confirmed to be valid in view of the TDM, the subsequent finding on post audit by the Center declaring the TCCs to be fraudulently issued is
hand, PSPC maintains that if there was indeed fraud in the issuance of the subject TCCs, of which it had no knowledge nor participation, the Centers remedy is to go after the
entitled to the presumption of regularity. Thus, the cancellation of the TCCs was legal and valid.
transferor for the value of the TCCs the Center may have erroneously issued.
Fifth, the BIRs assessment did not prescribe considering that no payment took effect as the subject TCCs were canceled upon post audit. Consequently, the filing of the tax return
PSPC likewise assails the BIR assessment on prescription for having been issued beyond the three-year prescriptive period under Sec. 203 of the National Internal Revenue Code
sans payment due to the cancellation of the TCCs resulted in the falsity and/or omission in the filing of the tax return which put them in the ambit of the applicability of the 10-year
(NIRC); and neither can the BIR use the 10-year prescriptive period under Sec. 222(a) of the NIRC, as PSPC has neither failed to file a return nor filed a false or fraudulent return
prescriptive period from the discovery of falsity, fraud, or omission.
with intent to evade taxes.
Finally, however, the CTA En Banc applied Aznar v. Court of Tax Appeals,25 where this Court held that without proof that the taxpayer participated in the fraud, the 50% fraud
Respondent, on the other hand, counters that petitioner is liable for the tax liabilities adjudged by the CTA En Banc since PSPC, as transferee of the subject TCCs, is bound by the
surcharge is not imposed, but the 25% late payment and the 20% interest per annum are applicable.
liability clause found at the dorsal side of the TCCs which subjects the genuineness, validity, and value of the TCCs to the outcome of the post-audit to be conducted by the Center.
He relies on the CTA En Bancs finding of the presence of a suspensive condition in the issuance of the TCCs. Thus, according to him, with the finding by the Center that the TCCs
Art.1181 tells us that the condition is suspensive when the acquisition of rights or demandability of the obligation must await the occurrence of the condition. 28 However, Art. 1181
were fraudulently procured the subsequent cancellation of the TCCs resulted in the non-payment by PSPC of its excise tax liabilities equivalent to the value of the canceled TCCs.
does not apply to the present case since the parties did NOT agree to a suspensive condition. Rather, specific laws, rules, and regulations govern the subject TCCs, not the general
provisions of the Civil Code. Among the applicable laws that cover the TCCs are EO 226 or the Omnibus Investments Code, Letter of Instructions No. 1355, EO 765, RP-US Military
Respondent likewise posits that the Center erred in approving the transfer and issuance of the TDM, and of the TDM and ATAPETs issued by the BIR in accepting the utilization by
PSPC of the subject TCCs, as payments for excise taxes cannot prejudice the BIR from assessing the tax deficiencies of PSPC resulting from the non-payment of the deficiencies
Agreement, Sec. 106(c) of the Tariff and Customs Code, Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others. Nowhere in the aforementioned laws does the postaudit become necessary for the validity or effectivity of the TCCs. Nowhere in the aforementioned laws is it provided that a TCC is issued subject to a suspensive condition.
after due cancellation by the Center of the subject TCCs and corresponding TDM.
The CTA En Bancs holding of the presence of a suspensive condition is untenable as the subject TCCs duly issued by the Center are immediately effective and valid. The
Respondent concludes that due to the fraudulent procurement of the subject TCCs, his right to assess has not yet prescribed. He relies on the finding of the Center that the fraud
was discovered only after the post-audit was conducted; hence, Sec. 222(a) of the NIRC applies, reckoned from October 24, 1999 or the date of the post-audit report. In fine, he
points that what is at issue is the resulting non-payment of PSPCs excise tax liabilities from the cancellation of subject TCCs and not the amount of deficiency taxes due from
PSPC, as what was properly assessed on November 15, 1999 was the amount of tax declared and found in PSPCs excise tax returns covered by the subject TCCs.
We find for PSPC.
The CTA En Banc upheld respondents theory by holding that the Center has the authority to do a post-audit on the TCCs it issued; the TCCs are subject to the results of the postaudit since their issuance is subject to a suspensive condition; the transferees of the TCCs are solidarily liable with the transferors on the result of the post-audit; and the
suspensive condition as ratiocinated by the CTA En Banc is one where the transfer contract was duly effected on the day it was executed between the transferee and the transferor
but the TCC cannot be enforced until after the post-audit has been conducted. In short, under the ruling of the CTA En Banc, even if the TCC has been issued, the real and true
application of the tax credit happens only after the post-audit confirms the TCCs validity and not before the confirmation; thus, the TCC can still be canceled even if it has already
been ostensibly applied to specific internal revenue tax liabilities.
We are not convinced.
We cannot subscribe to the CTA En Bancs holding that the suspensive condition suspends the effectivity of the TCCs as payment until after the post-audit. This strains the very
nature of a TCC.
cancellation of the subject TCCs resulted in PSPC having to bear the loss anchored on its solidary liability with the transferor of the subject TCCs.
A tax credit is not specifically defined in our Tax Code,29 but Art. 21 of EO 226 defines a tax credit as "any of the credits against taxes and/or duties equal to those actually paid or
We can neither sustain respondents theory nor that of the CTA En Banc.
would have been paid to evidence which a tax credit certificate shall be issued by the Secretary of Finance or his representative, or the Board (of Investments), if so delegated by
the Secretary of Finance." Tax credits were granted under EO 226 as incentives to encourage investments in certain businesses. A tax credit generally refers to an amount that may
First, in overturning the August 2, 2004 Decision of the CTA Division, the CTA En Banc applied Article 1181 of the Civil Code in this manner:
To completely understand the matter presented before Us, it is worth emphasizing that the statement on the subject certificate stating that it is issued subject to post-audit is in the
nature of a suspensive condition under Article 1181 of the Civil Code, which is quoted hereunder for ready reference, to wit:
In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes
the condition.
be "subtracted directly from ones total tax liability."30 It is therefore an "allowance against the tax itself"31 or "a deduction from what is owed"32 by a taxpayer to the government. In
RR 5-2000,33 a tax credit is defined as "the amount due to a taxpayer resulting from an overpayment of a tax liability or erroneous payment of a tax due."34
A TCC is
a certification, duly issued to the taxpayer named therein, by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the
prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally entitled a tax credit, the money value of which may be used in payment or in satisfaction of
any of his internal revenue tax liability (except those excluded), or may be converted as a cash refund, or may otherwise be disposed of in the manner and in accordance with the
limitations, if any, as may be prescribed by the provisions of these Regulations.35
The above-quoted article speaks of obligations. These conditions affect obligations in diametrically opposed ways. If the suspensive condition happens, the obligation arises; in
other words, if the condition does not happen, the obligation does not come into existence. On the other hand, the resolutory condition extinguishes rights and obligations already
existing; in other words, the obligations and rights already exist, but under the threat of extinction upon the happening of the resolutory condition. (8 Manresa 130-131, cited on
page 140, Civil Code of the Philippines, Tolentino, 1962 ed., Vol. IV).
In adopting the foregoing provision of law, this Court rules that the issuance of the tax credit certificate is subject to the condition that a post-audit will subsequently be conducted in
order to determine if the holder is indeed qualified for its issuance. As stated earlier, the holder takes the same subject to the outcome of the post-audit. Thus, unless and until there
is a final determination of the holders right to the issuance of the certificate, there exists no obligation on the part of the DOF or the BIR to recognize the rights of then holder or
From the above definitions, it is clear that a TCC is an undertaking by the government through the BIR or DOF, acknowledging that a taxpayer is entitled to a certain amount of tax
credit from either an overpayment of income taxes, a direct benefit granted by law or other sources and instances granted by law such as on specific unused input taxes and excise
taxes on certain goods. As such, tax credit is transferable in accordance with pertinent laws, rules, and regulations.
Therefore, the TCCs are immediately valid and effective after their issuance. As aptly pointed out in the dissent of Justice Lovell Bautista in CTA EB No. 64, this is clear from the
Guidelines and Instructions found at the back of each TCC, which provide:
transferee. x x x
1. This Tax Credit Certificate (TCC) shall entitle the grantee to apply the tax credit against taxes and duties until the amount is fully utilized , in accordance with the pertinent
xxxx
The validity and propriety of the TCC to effectively constitute payment of taxes to the government are still subject to the outcome of the post-audit. In other words, when the issuing
tax and customs laws, rules and regulations.
xxxx
authority (DOF) finds, as in the case at bar, circumstances which may warrant the cancellation of the certificate, the holder is inevitably bound by the outcome by the virtue of the
express provisions of the TCCs.27
The CTA En Banc is incorrect.
4. To acknowledge application of payment, the One-Stop-Shop Tax Credit Center shall issue the corresponding Tax Debit Memo (TDM) to the grantee .
The authorized Revenue Officer/Customs Collector to which payment/utilization was made shall accomplish the Application of Tax Credit portion at the back of the certificate and
Third, the post-audit the Center conducted on the transferred TCCs, delving into their issuance and validity on alleged violations by PSPC of the August 29, 1989 MOA between the
affix his signature on the column provided. (Emphasis supplied.)
DOF and BOI, is completely misplaced. As may be recalled, the Center required PSPC to submit copies of pertinent sales invoices and delivery receipts covering sale transactions
of PSPC products to the TCC assignors/transferors purportedly in connection with an ongoing post audit. As correctly protested by PSPC but which was completely ignored by the
The foregoing guidelines cannot be clearer on the validity and effectivity of the TCC to pay or settle tax liabilities of the grantee or transferee, as they do not make the effectivity and
validity of the TCC dependent on the outcome of a post-audit. In fact, if we are to sustain the appellate tax court, it would be absurd to make the effectivity of the payment of a TCC
Center, PSPC is not required by law to be a capital equipment provider or a supplier of raw material and/or component supplier to the transferors. What the law requires is that the
transferee be a BOI-registered company similar to the BOI-registered transferors.
dependent on a post-audit since there is no contemplation of the situation wherein there is no post-audit. Does the payment made become effective if no post-audit is conducted?
Or does the so-called suspensive condition still apply as no law, rule, or regulation specifies a period when a post-audit should or could be conducted with a prescriptive period?
The IRR of EO 226, which incorporated the October 5, 1982 MOA between the MOF and BOI, pertinently provides for the guidelines concerning the transferability of TCCs:
Clearly, a tax payment through a TCC cannot be both effective when made and dependent on a future event for its effectivity. Our system of laws and procedures abhors ambiguity.
[T]he MOF and the BOI, through their respective representatives, have agreed on the following guidelines to govern the transferability of tax credit certificates:
Moreover, if the TCCs are considered to be subject to post-audit as a suspensive condition, the very purpose of the TCC would be defeated as there would be no guarantee that the
TCC would be honored by the government as payment for taxes. No investor would take the risk of utilizing TCCs if these were subject to a post-audit that may invalidate them,
1) All tax credit certificates issued to BOI-registered enterprises under P.D. 1789 may be transferred under conditions provided herein;
without prescribed grounds or limits as to the exercise of said post-audit.

2) The transferee should be a BOI-registered firm;
The inescapable conclusion is that the TCCs are not subject to post-audit as a suspensive condition, and are thus valid and effective from their issuance. As such, in the present
case, if the TCCs have already been applied as partial payment for the tax liability of PSPC, a post-audit of the TCCs cannot simply annul them and the tax payment made through
3) The transferee may apply such tax credit certificates for payment of taxes, duties, charges or fees directly due to the national government for as long as it enjoys
said TCCs. Payment has already been made and is as valid and effective as the issued TCCs. The subsequent post-audit cannot void the TCCs and allow the respondent to
incentives under P.D. 1789. (Emphasis supplied.)
declare that utilizing canceled TCCs results in nonpayment on the part of PSPC. As will be discussed, respondent and the Center expressly recognize the TCCs as valid payment of
PSPCs tax liability.
The above requirement has not been amended or repealed during the unfolding of the instant controversy. Thus, it is clear from the above proviso that it is only required that a TCC
Second, the only conditions the TCCs are subjected to are those found on its face. And these are:
1. Post-audit and subsequent adjustment in the event of computational discrepancy;
transferee be BOI-registered. In requiring PSPC to submit sales documents for its purported post-audit of the TCCs, the Center gravely abused its discretion as these are not
required of the transferee PSPC by law and by the rules.
While the October 5, 1982 MOA appears to have been amended by the August 29, 1989 MOA between the DOF and BOI, such may not operate to prejudice transferees like PSPC.
For one, the August 29, 1989 MOA remains only an internal agreement as it has neither been elevated to the level of nor incorporated as an amendment in the IRR of EO 226. As
2. A reduction for any outstanding account/obligation of herein claimant with the BIR and/or BOC; and
3. Revalidation with the Center in case the TCC is not utilized or applied within one (1) year from date of issuance/date of last utilization.
aptly put by the CTA Division:
If the 1989 MOA has validly amended the 1982 MOA, it would have been incorporated either expressly or by reference in Rule VII of the Implementing Rules and Regulations
(IRRs) of E.O. 226. To date, said Rule VII has not been repealed, amended or otherwise modified. It is noteworthy that the 1999 edition of the official publication by the BOI of E.O.
The above conditions clearly show that the post-audit contemplated in the TCCs does not pertain to their genuineness or validity, but on computational discrepancies that may have
226 and its IRRs (Exhibit R) which is the latest version, as amended, has not mentioned expressly or by reference [sic] 1989 MOA. The MOA mentioned therein is still the 1982
resulted from the transfer and utilization of the TCC.
MOA.
This is shown by a close reading of the first and second conditions above; the third condition is self explanatory. Since a tax credit partakes of what is owed by the State to a
The 1982 MOA, although executed as a mere agreement between the DOF and the BOI was elevated to the status of a rule and regulation applicable to the general public by
taxpayer, if the taxpayer has an outstanding liability with the BIR or the BOC, the money value of the tax credit covered by the TCC is primarily applied to such internal revenue
reason of its having been expressly incorporated in Rule VII of the IRRs. On the other hand, the 1989 MOA which purportedly amended the 1982 MOA, remained a mere
liabilities of the holder as provided under condition number two. Elsewise put, the TCC issued to a claimant is applied first and foremost to any outstanding liability the claimant may
agreement between the DOF and the BOI because, unlike the 1982 MOA, it was never incorporated either expressly or by reference to any amendment or revision of the said IRRs.
have with the government. Thus, it may happen that upon post-audit, a TCC of a taxpayer may be reduced for whatever liability the taxpayer may have with the BIR which remains
Thus, it cannot be the basis of any invalidation of the transfers of TCCs to petitioner nor of any other sanction against petitioner.36
unpaid due to inadvertence or computational errors, and such reduction necessarily affects the balance of the monetary value of the tax credit of the TCC.
For another, even if the August 29, 1989 MOA has indeed amended the IRR, which it has not, still, it is ineffective and cannot prejudice third parties for lack of publication as
For example, Company A has been granted a TCC in the amount of PhP 500,000 through its export transactions, but it has an outstanding excise tax liability of PhP 250,000 which
mandatorily required under Chapter 2 of Book VII, EO 292, otherwise known as the Administrative Code of 1987, which pertinently provides:
due to inadvertence was erroneously assessed and paid at PhP 225,000. On post-audit, with the finding of a deficiency of PhP 25,000, the utilization of the TCC is accordingly
corrected and the tax credit remaining in the TCC correspondingly reduced by PhP 25,000. This is a concrete example of a computational discrepancy which comes to light after a
post-audit is conducted on the utilization of the TCC. The same holds true for a transferees use of the TCC in paying its outstanding internal revenue tax liabilities.
Other examples of computational errors would include the utilization of a single TCC to settle several internal revenue tax liabilities of the taxpayer or transferee, where errors
Section 3. Filing.(1) Every agency shall file with the University of the Philippines Law Center three (3) certified copies of every rule adopted by it. Rules in force on the date of
effectivity of this Code which are not filed within three (3) months from the date shall not thereafter be the basis of any sanction against any party or person.
(2) The records officer of the agency, or his equivalent functionary, shall carry out the requirements of this section under pain of disciplinary action.
committed in the reduction of the credit tax running balance are discovered in the post-audit resulting in the adjustment of the TCC utilization and remaining tax credit balance.
(3) A permanent register of all rules shall be kept by the issuing agency and shall be open to public inspection.
Section 4. Effectivity.In addition to other rule-making requirement provided by law not inconsistent with this Book, each rule shall become effective fifteen (15) days from the date
PSPC claims to be a transferee in good faith of the subject TCCs. It believed that its tax obligations for 1992 and 1994 to 1997 had in fact been paid when it applied the subject
of filing as above provided unless a different date is fixed by law, or specified in the rule in cases of imminent danger to public health, safety and welfare, the existence of which
TCCs, considering that all the necessary authorizations and approvals attendant to the transfer and utilization of the TCCs were present. It is undisputed that the transfers of the
must be expressed in a statement accompanying the rule. The agency shall take appropriate measures to make emergency rules known to persons who may be affected by them.
TCCs from the original holders to PSPC were duly approved by the Center, which is composed of a number of government agencies, including the BIR. Such approval was
annotated on the reverse side of the TCCs, and the Center even issued TDM which is proof of its approval for PSPC to apply the TCCs as payment for the tax liabilities. The BIR
Section 5. x x x x
issued its own TDM, also signifying approval of the TCCs as payment for PSPCs tax liabilities. The BIR also issued ATAPETs covering the aforementioned BIR-issued TDM, further
proving its acceptance of the TCCs as valid tax payments, which formed part of PSPCs total tax payments along with checks duly acknowledged and received by BIRs authorized
(2) Every rule establishing an offense or defining an act which pursuant to law, is punishable as a crime or subject to a penalty shall in all cases be published in full text.
It is clear that the Center or DOF cannot compel PSPC to submit sales documents for the purported post-audit, as PSPC has duly complied with the requirements of the law and
rules to be a qualified transferee of the subject TCCs.
Fourth, we likewise fail to see the liability clause at the dorsal portion of the TCCs to be a suspensive condition relative to the result of the post-audit. Said liability clause indicates:
agent banks.
Several approvals were secured by PSPC before it utilized the transferred TCCs, and it relied on the verification of the various government agencies concerned of the genuineness
and authenticity of the TCCs as well as the validity of their issuances. Furthermore, the parties stipulated in open court that the BIR-issued ATAPETs for the taxes covered by the
subject TCCs confirm the correctness of the amount of excise taxes paid by PSPC during the tax years in question.
Thus, it is clear that PSPC is a transferee in good faith and for value of the subject TCCs and may not be prejudiced with a re-assessment of excise tax liabilities it has already
settled when due with the use of the subject TCCs. Logically, therefore, the excise tax returns filed by PSPC duly covered by the TDM and ATAPETs issued by the BIR confirming
LIABILITY CLAUSE
the full payment and satisfaction of the excise tax liabilities of PSPC, have not been fraudulently filed. Consequently, as PSPC is a transferee in good faith and for value, Sec.
222(a) of the NIRC does not apply in the instant case as PSPC has neither been shown nor proven to have committed any fraudulent act in the transfer and utilization of the subject
Both the TRANSFEROR and the TRANSFEREE shall be jointly and severally liable for any fraudulent act or violation of the pertinent laws, rules and regulations relating to the
TCCs. With more reason, therefore, that the three-year prescriptive period for assessment under Art. 203 of the NIRC has already set in and bars respondent from assessing anew
transfer of this TAX CREDIT CERTIFICATE. (Emphasis supplied.)
PSPC for the excise taxes already paid in 1992 and 1994 to 1997. Besides, even if the period for assessment has not prescribed, still, there is no valid ground for the assessment
as the excise tax liabilities of PSPC have been duly settled and paid.
The above clause to our mind clearly provides only for the solidary liability relative to the transfer of the TCCs from the original grantee to a transferee. There is nothing in the above
clause that provides for the liability of the transferee in the event that the validity of the TCC issued to the original grantee by the Center is impugned or where the TCC is declared
Fifth, PSPC cannot be blamed for relying on the Centers approval for the transfers of the subject TCCs and the Centers acceptance of the TCCs for the payment of its excise tax
to have been fraudulently procured by the said original grantee. Thus, the solidary liability, if any, applies only to the sale of the TCC to the transferee by the original grantee. Any
liabilities. Likewise, PSPC cannot be faulted in relying on the BIRs acceptance of the subject TCCs as payment for its excise tax liabilities. This reliance is supported by the fact that
fraud or breach of law or rule relating to the issuance of the TCC by the Center to the transferor or the original grantee is the latters responsibility and liability. The transferee in
the subject TCCs have passed through stringent reviews starting from the claims of the transferors, their issuance by the Center, the Centers approval for their transfer to PSPC,
good faith and for value may not be unjustly prejudiced by the fraud committed by the claimant or transferor in the procurement or issuance of the TCC from the Center. It is not only
the Centers acceptance of the TCCs to pay PSPCs excise tax liabilities through the issuance of the Centers TDM, and finally the acceptance by the BIR of the subject TCCs as
unjust but well-nigh violative of the constitutional right not to be deprived of ones property without due process of law. Thus, a re-assessment of tax liabilities previously paid
payment through the issuance of its own TDM and ATAPETs.
through TCCs by a transferee in good faith and for value is utterly confiscatory, more so when surcharges and interests are likewise assessed.
Therefore, PSPC cannot be prejudiced by the Centers turnaround in assailing the validity of the subject TCCs which it issued in due course.
A transferee in good faith and for value of a TCC who has relied on the Centers representation of the genuineness and validity of the TCC transferred to it may not be legally
required to pay again the tax covered by the TCC which has been belatedly declared null and void, that is, after the TCCs have been fully utilized through settlement of internal
revenue tax liabilities. Conversely, when the transferee is party to the fraud as when it did not obtain the TCC for value or was a party to or has knowledge of its fraudulent issuance,
said transferee is liable for the taxes and for the fraud committed as provided for by law.
In the instant case, a close review of the factual milieu and the records reveals that PSPC is a transferee in good faith and for value. No evidence was adduced that PSPC
participated in any way in the issuance of the subject TCCs to the corporations who in turn conveyed the same to PSPC. It has likewise been shown that PSPC was not involved in
the processing for the approval of the transfers of the subject TCCs from the various BOI-registered transferors.
Sixth, we are of the view that the subject TCCs cannot be canceled by the Center as these had already been canceled after their application to PSPCs excise tax liabilities. PSPC
contends they are already functus officio, not quite in the sense of being no longer effective, but in the sense that they have been used up. When the subject TCCs were accepted
by the BIR through the latters issuance of TDM and the ATAPETs, the subject TCCs were duly canceled.
The tax credit of a taxpayer evidenced by a TCC is used up or, in accounting parlance, debited when applied to the taxpayers internal revenue tax liability, and the TCC canceled
after the tax credit it represented is fully debited or used up. A credit is a payable or a liability. A tax credit, therefore, is a liability of the government evidenced by a TCC. Thus, the
tax credit of a taxpayer evidenced by a TCC is debited by the BIR through a TDM, not only evidencing the payment of the tax by the taxpayer, but likewise deducting or debiting the
existing tax credit with the amount of the tax paid.
Respondent, through the Center, made much of the alleged non-payment through non-delivery by PSPC of the IFOs it purportedly sold to the transferors covered by supply
agreements which were allegedly the basis of the Center for the approval of the transfers. Respondent points to the requirement under the August 29, 1989 MOA between the DOF
and BOI, specifying the requirement that "[t]he transferee should be a BOI-registered firm which is a domestic capital equipment supplier, or a raw material and/or component
supplier of the transferor."37
For example, a transferee or the tax claimant has a TCC of PhP 1 million, which was used to pay income tax liability of PhP 500,000, documentary stamp tax liability of PhP
100,000, and value-added tax liability of PhP 350,000, for an aggregate internal revenue tax liability of PhP 950,000. After the payments through the PhP 1 million TCC have been
approved and accepted by the BIR through the issuance of corresponding TDM, the TCC money value is reduced to only PhP 50,000, that is, a credit balance of PhP 50,000. In this
sense, the tax credit of the TCC has been canceled or used up in the amount of PhP 950,000. Now, let us say the transferee or taxpayer has excise tax liability of PhP 250,000,
As discussed above, the above amendment to the October 5, 1982 MOA between BOI and MOF cannot prejudice any transferee, like PSPC, as it was neither incorporated nor
s/he only has the remaining PhP 50,000 tax credit in the TCC to pay part of said excise tax. When the transferee or taxpayer applies such payment, the TCC is canceled as the
elevated to the IRR of EO 226, and for lack of due publication. The pro-forma supply agreements allegedly executed by PSPC and the transferors covering the sale of IFOs to the
money value of the tax credit it represented has been fully debited or used up. In short, there is no more tax credit available for the taxpayer to settle his/her other tax liabilities.
transferors have been specifically denied by PSPC. Moreover, the above-quoted requirement is not required under the IRR of EO 226. Therefore, it is incumbent for respondent to
present said supply agreements to prove participation by PSPC in the approval of the transfers of the subject TCCs. Respondent failed to do this.
In the instant case, with due application, approval, and acceptance of the payment by PSPC of the subject TCCs for its then outstanding excise tax liabilities in 1992 and 1994 to
1997, the subject TCCs have been canceled as the money value of the tax credits these represented have been used up. Therefore, the DOF through the Center may not now
cancel the subject TCCs as these have already been canceled and used up after their acceptance as payment for PSPCs excise tax liabilities. What has been used up, debited,
In a Memorandum39 addressed to then Ombudsman Aniano A. Desierto, the Special Prosecutor Leonardo P. Tamayo recommended dropping Pacifico Cruz as accused in Criminal
and canceled cannot anymore be declared to be void, ineffective, and canceled anew.
Case Nos. 25940-25962 entitled People of the Philippines v. Antonio P. Belicena, et al., pending before the Sandiganbayan Fifth Division for lack of probable cause. Special
Besides, it is indubitable that with the issuance of the corresponding TDM, not only is the TCC canceled when fully utilized, but the payment is also final subject only to a post-audit
Prosecutor Tamayo found that Cruzs involvement in the transfers of the subject TCCs came after the applications for the transfers had been duly processed and approved; and that
on computational errors. Under RR 5-2000, a TDM is
Cruz could not have been part of the conspiracy as he cannot be presumed to have knowledge of the irregularity, because the 1989 MOA, which prescribed the additional
requirement that the transferee of a TCC should be a supplier of the transferor, was not yet published and made known to private parties at the time the subject TCCs were
a certification, duly issued by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the prescribed formalities,
acknowledging that the taxpayer named therein has duly paid his internal revenue tax liability in the form of and through the use of a Tax Credit Certificate, duly issued and existing
transferred to PSPC. The Memorandum of Special Prosecutor Tamayo was duly approved by then Ombudsman Desierto. Consequently, on May 31, 2000, the Sandiganbayan Fifth
Division, hearing Criminal Case Nos. 25940-25962, dropped Cruz as accused.40
in accordance with the provisions of these Regulations. The Tax Debit Memo shall serve as the official receipt from the BIR evidencing a taxpayers payment or satisfaction
of his tax obligation. The amount shown therein shall be charged against and deducted from the credit balance of the aforesaid Tax Credit Certificate.
But even assuming that fraud attended the procurement of the subject TCCs, it cannot prejudice PSPCs rights as earlier explained since PSPC has not been shown or proven to
have participated in the perpetration of the fraudulent acts, nor is it shown that PSPC committed fraud in the transfer and utilization of the subject TCCs.
Thus, with the due issuance of TDM by the Center and TDM by the BIR, the payments made by PSPC with the use of the subject TCCs have been effected and consummated as
the TDMs serve as the official receipts evidencing PSPCs payment or satisfaction of its tax obligation. Moreover, the BIR not only issued the corresponding TDM, but it also issued
On the issue of the authority to cancel duly issued TCCs, we agree with respondent that the Center has concurrent authority with the BIR and BOC to cancel the TCCs it issued.
ATAPETs which doubly show the payment of the subject excise taxes of PSPC.
The Center was created under Administrative Order No. (AO) 266 in relation to EO 226. A scrutiny of said executive issuances clearly shows that the Center was granted the
authority to issue TCCs pursuant to its mandate under AO 266. Sec. 5 of AO 266 provides:
Based on the above discussion, we hold that respondent erroneously and without factual and legal basis levied the assessment. Consequently, the CTA En Banc erred in sustaining
respondents assessment.
SECTION 5. Issuance of Tax Credit Certificates and/or Duty Drawback.The Secretary of Finance shall designate his representatives who shall, upon the recommendation of
the CENTER, issue tax credit certificates within thirty (30) working days from acceptance of applications for the enjoyment thereof. (Emphasis supplied.)
Second Issue: Cancellation of TCCs

On the other hand, it is undisputed that the BIR under the NIRC and related statutes has the authority to both issue and cancel TCCs it has issued and even those issued by the
PSPC argues that the CTA En Banc erred in upholding the cancellation by the Center of the subject TCCs it used in paying some of its excise tax liabilities as the subject TCCs
were genuine and authentic, having been subjected to thorough and stringent procedures, and approvals by the Center. Moreover, PSPC posits that both the CTAs Division and En
Center, either upon full utilization in the settlement of internal revenue tax liabilities or upon conversion into a tax refund of unutilized TCCs in specific cases under the conditions
provided.41 AO 266 however is silent on whether or not the Center has authority to cancel a TCC it itself issued. Sec. 3 of AO 266 reveals:
Banc duly found that PSPC had neither knowledge, involvement, nor participation in the alleged fraudulent issuance of the subject TCCs, and, thus, as a transferee in good faith
and for value, it cannot be held solidarily liable for any fraud attendant to the issuance of the subject TCCs. PSPC further asserts that the Center has no authority to cancel the
SECTION 3. Powers, Duties and Functions.The Center shall have the following powers, duties and functions:
subject TCCs as such authority is lodged exclusively with the BOI. Lastly, PSPC said that the Centers Excom Resolution No. 03-05-99 which the Center relied upon as basis for the
cancellation is defective, ineffective, and cannot prejudice third parties for lack of publication.
As we have explained above, the subject TCCs after being fully utilized in the settlement of PSPCs excise tax liabilities have been canceled, and thus cannot be canceled anymore.
a. To promulgate the necessary rules and regulations and/or guidelines for the effective implementation of this administrative order;
xxxx
For being immediately effective and valid when issued, the subject TCCs have been duly utilized by transferee PSPC which is a transferee in good faith and for value.
g. To enforce compliance with tax credit/duty drawback policy and procedural guidelines;
On the issue of the fraudulent procurement of the TCCs, it has been asseverated that fraud was committed by the TCC claimants who were the transferors of the subject TCCs. We
see no need to rule on this issue in view of our finding that the real issue in this petition does not dwell on the validity of the TCCs procured by the transferor from the Center but on
whether fraud or breach of law attended the transfer of said TCCs by the transferor to the transferee.
The finding of the CTA En Banc that there was fraud in the procurement of the subject TCCs is, therefore, irrelevant and immaterial to the instant petition. Moreover, there are
xxxx
l. To perform such other functions/duties as may be necessary or incidental in the furtherance of the purpose for which it has been established. (Emphasis supplied.)
pending criminal cases arising from the alleged fraud. We leave the matter to the anti-graft court especially considering the failure of the affiants to the affidavits to appear, making
these hearsay evidence.
Sec. 3, letter l. of AO 266, in relation to letters a. and g., does give ample authority to the Center to cancel the TCCs it issued. Evidently, the Center cannot carry out its mandate if it
cannot cancel the TCCs it may have erroneously issued or those that were fraudulently issued. It is axiomatic that when the law and its implementing rules are silent on the matter
We note in passing that PSPC and its officers were not involved in any fraudulent act that may have been undertaken by the transferors of subject TCCs, supported by the finding of
the Ombudsman Special Prosecutor Leonardo P. Tamayo that Pacifico R. Cruz, PSPC General Manager of the Treasury and Taxation Department, who was earlier indicted as
accused in OMB-0-99-2012 to 2034 for violation of Sec. 3(e) and (j) of RA 3019, as amended, otherwise known as the "Anti-Graft and Corrupt Practices Act," for allegedly
conspiring with other accused in defrauding and causing undue injury to the government,38 did not in any way participate in alleged fraudulent activities relative to the transfer and
use of the subject TCCs.
of cancellation while granting explicit authority to issue, an inherent and incidental power resides on the issuing authority to cancel that which was issued. A caveat however is
required in that while the Center has authority to do so, it must bear in mind the nature of the TCCs immediate effectiveness and validity for which cancellation may only be
exercised before a transferred TCC has been fully utilized or canceled by the BIR after due application of the available tax credit to the internal revenue tax liabilities of an innocent
transferee for value, unless of course the claimant or transferee was involved in the perpetration of the fraud in the TCCs issuance, transfer, or utilization. The utilization of the TCC
will not shield a guilty party from the consequences of the fraud committed.
While we agree with respondent that the State in the performance of governmental function is not estopped by the neglect or omission of its agents, and nowhere is this truer than
in the field of taxation,42 yet this principle cannot be applied to work injustice against an innocent party. In the case at bar, PSPCs rights as an innocent transferee for value must
be protected. Therefore, the remedy for respondent is to go after the claimant companies who allegedly perpetrated the fraud. This is now the subject of a criminal prosecution
Center informed PSPC of the cancellation of the subject TCCs and the TDM covering the application of the TCCs to PSPCs excise tax liabilities. The objections of PSPC were
before the Sandiganbayan docketed as Criminal Case Nos. 25940-25962 for violation of RA 3019.
brushed aside by the Center and the assessment was issued by respondent on November 15, 1999, without following the statutory and procedural requirements clearly provided
under the NIRC and applicable regulations.
On the issue of the publication of the Centers Excom Resolution No. 03-05-99 providing for the "Guidelines and Procedures for the Cancellation, Recall and Recovery of
Fraudulently Issued Tax Credit Certificates," we find that the resolution is invalid and unenforceable. It authorizes the cancellation of TCCs and TDM which are found to have been
What is applicable is RR 12-99, which superseded RR 12-85, pursuant to Sec. 244 in relation to Sec. 245 of the NIRC implementing Secs. 6, 7, 204, 228, 247, 248, and 249 on the
granted without legal basis or based on fraudulent documents. The cancellation of the TCCs and TDM is covered by a penal provision of the assailed resolution. Such being the
assessment of national internal revenue taxes, fees, and charges. The procedures delineated in the said statutory provisos and RR 12-99 were not followed by respondent,
case, it should have been published and filed with the National Administrative Register of the U.P. Law Center in accordance with Secs. 3, 4, and 5, Chapter 2 of Book VII, EO 292
depriving PSPC of due process in contesting the formal assessment levied against it. Respondent ignored RR 12-99 and did not issue PSPC a notice for informal conference 44 and
or the Administrative Code of 1987.
a preliminary assessment notice, as required.45 PSPCs November 4, 1999 motion for reconsideration of the purported Center findings and cancellation of the subject TCCs and
the TDM was not even acted upon.1wphi1
We explained in People v. Que Po Lay43 that a rule which carries a penal sanction will bind the public if the public is officially and specifically informed of the contents and penalties
prescribed for the breach of the rule. Since Excom Resolution No. 03-05-99 was neither registered with the U.P.
PSPC was merely informed that it is liable for the amount of excise taxes it declared in its excise tax returns for 1992 and 1994 to 1997 covered by the subject TCCs via the formal
letter of demand and assessment notice. For being formally defective, the November 15, 1999 formal letter of demand and assessment notice is void. Paragraph 3.1.4 of Sec. 3,
Law Center nor published, it is ineffective and unenforceable. Even if the resolution need not be published, the punishment for any alleged fraudulent act in the procurement of the
RR 12-99 pertinently provides:
TCCs must not be visited on PSPC, an innocent transferee for value, which has not been shown to have participated in the fraud. Respondent must go after the perpetrators of the
fraud.
3.1.4 Formal Letter of Demand and Assessment Notice.The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized
representative. The letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter of demand and assessment notice shall be void . The same shall be sent to the taxpayer only by registered mail or by
Third Issue: Imposition of surcharges and interests
personal delivery. x x x (Emphasis supplied.)

PSPC claims that having no deficiency excise tax liabilities, it may not be liable for the late payment surcharges and annual interests.
In short, respondent merely relied on the findings of the Center which did not give PSPC ample opportunity to air its side. While PSPC indeed protested the formal assessment,
This issue has been mooted by our disquisition above resolving the first issue in that PSPC has duly settled its excise tax liabilities for 1992 and 1994 to 1997. Consequently, there
is no basis for the imposition of a late payment surcharges and for interests, and no need for further discussion on the matter.
Fourth
Issue:
Non-compliance
with
statutory
and
procedural due process
Finally, PSPC avers that its statutory and procedural right to due process was violated by respondent in the issuance of the assessment. PSPC claims respondent violated RR 1299 since no pre-assessment notice was issued to PSPC before the November 15, 1999 assessment. Moreover, PSPC argues that the November 15, 1999 assessment effectively
deprived it of its statutory right to protest the pre-assessment within 30 days from receipt of the disputed assessment letter.
While this has likewise been mooted by our discussion above, it would not be amiss to state that PSPCs rights to substantive and procedural due process have indeed been
violated. The facts show that PSPC was not accorded due process before the assessment was levied on it. The Center required PSPC to submit certain sales documents relative to
supposed delivery of IFOs by PSPC to the TCC transferors. PSPC contends that it could not submit these documents as the transfer of the subject TCCs did not require that it be a
supplier of materials and/or component supplies to the transferors in a letter dated October 29, 1999 which was received by the Center on November 3, 1999. On the same day, the
such does not denigrate the fact that it was deprived of statutory and procedural due process to contest the assessment before it was issued. Respondent must be more
circumspect in the exercise of his functions, as this Court aptly held in Roxas v. Court of Tax Appeals:
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in the order to maintain the general publics trust and confidence in the
Government this power must be used justly and not treacherously.46
WHEREFORE, the petition is GRANTED. The April 28, 2006 CTA En Banc Decision in CTA EB No. 64 is hereby REVERSED and SET ASIDE, and the August 2, 2004 CTA
Decision in CTA Case No. 6003 disallowing the assessment is hereby REINSTATED. The assessment of respondent for deficiency excise taxes against petitioner for 1992 and
1994 to 1997 inclusive contained in the April 22, 1998 letter of respondent is canceled and declared without force and effect for lack of legal basis. No pronouncement as to costs.
SO ORDERED.

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G.R. No.

SECTION 106. Refunds or tax credits of input tax.

THE FACTUAL ANTECEDENTS

importation or purchase was made.11 [Emphases supplied.]

denying the motion for reconsideration. Hence, the present petition.

Taxable Sales + Zero-rated Sales

= Refundable input tax

SEC. 104. Tax Credits.

1. The person claiming the creditable input tax must be VAT-registered;

2. Such person is engaged in a transaction subject to VAT;

rated sales, and exempt sales in the following amounts:

THE COURTS RULING

Total Amount of Sales

We find the CIRs petition meritorious.

issues or errors become the basis for an appeal.25

the above-cited procedural rule.

of capital goods and do not fall under the enumeration x x x.

the Court declared in CIR v. Toshiba Equipment (Phils.), Inc. that:

SEC. 4.106-1. Refunds or tax credits of input tax. x x x x

taxable quarter when the importation or purchase was made.

decision of cases brought before them.29 [Emphasis supplied.]

Also, we disagree with the CAs declaration that:

G.R. No. 168207

G.R. No. 168461

G.R. No. 168463

SANTIAGO, TEOFISTO DL. GUINGONA III,

Q. AGBAYANI and TEODORO A.

G.R. No. 168730

himself honored in contributing to those expenses.

-Anne Robert Jacques Turgot (1727-1781)

French statesman and economist

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : Thats correct . . .

9337 is not unconstitutional.

ATTY. BANIQUED : Yes, Your Honor.

ATTY. BANIQUED : Youre right, Your Honor.

ATTY. BANIQUED : I guess so, Your Honor, yes.

G.R. No. 168056

R.A. No. 9337 on the following grounds:

1987 Philippine Constitution.

G.R. No. 168730

inequitable, in violation of Article VI, Section 28(1) of the Constitution.

constitutionality and petitioners failed to cast doubt on its validity.

notion of its nature.

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

immediate buyers and ultimately, the end-consumers.

constitutional principle on progressive taxation, among others.

or outputs the VAT paid on its purchases, inputs and imports.14

The Court defined the issues, as follows:

all sales using the "tax credit method."15

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

Striking down such argument, the Court held thus:

Rule XII, Section 35 of the Rules of the Senate states:

conference committee with the approval of the Senate.

With regard to "Stand-By Authority" in favor of President

With regard to the "no pass-on" provision

With regard to 70% limit on input tax credit

total amount of goods purchased.

Provided for amendments to several NIRC provisions

(A) Creditable Input Tax. . . .

Tax on Persons Exempt from VAT

Percentage Tax on domestic carriers and keepers of Garage