EN BANC

[G.R. No. L-9141. September 25, 1956.]

Testate Estate of OLIMPIO FERNANDEZ, deceased. REPUBLIC OF THE PHILIPPINES, claimant-Appellee, vs.
ANGELINA OASAN VDA DE FERNANDEZ, PRISCILLA O. FERNANDEZ, and ESTELA O.
FERNANDEZ, Oppositors-Appellants.

DECISION
LABRADOR, J.:
Appeal from a decision of the Court of Tax Appeals sustaining the validity of a tax amounting to P7,614.60 against the
estate of Olimpio Fernandez under the War Profits Tax Law (Republic Act No. 55).
Olimpio Fernandez and his wife Angelina Oasan had a net worth of P8,600 on December 8, 1941. During the Japanese
occupation the spouses acquired several real properties, and at the time of his death on February 11, 1945 he had a
net worth of P31,489. The Collector of Internal Revenue assessed a war profits tax on the estate of the deceased at
P7,614.60, which his administratrix refused to pay. The case was brought to the Court of Tax Appeals which sustained
the validity and legality of the assessment. The administratrix has appealed this decision to this Court.
The most important questions raised by the Appellant are:chanroblesvirtuallawlibrary (a) the unconstitutionality of the
war profits tax law for the reason that it is retroactive; chan roblesvirtualawlibrary(b) the inapplicability of said law to
the estate of the deceased Olimpio Fernandez, because the law taxes individuals; chan roblesvirtualawlibraryand (c)
the separate taxation of the estate of the deceased Olimpio Fernandez from that of his wifes, because Olimpio
Fernandez died before the law was passed.
Appellants contention that the law is invalid or unconstitutional because it acts retroactively, thus violating the due
process of law clause, is not supported by reason or authority. The tax, insofar as applicable to the estate of the
deceased Olimpio Fernandez, is both a property tax and a tax on income. It is a property tax in relation to the
properties that Fernandez had in December, 1941; chan roblesvirtualawlibraryand it is an income tax in relation to the
properties which he purchased during the Japanese occupation. In both cases, however, the war profits tax may not
be considered as unconstitutional.
The doctrine of unconstitutionality raised by Appellant is based on the prohibition against ex post facto laws. But this
prohibition applies only to criminal or penal matters, and not to laws which concern civil matters or proceedings
generally, or which affect or regulate civil or private rights (Ex parte Garland, 18 Law Ed., 366; chan
roblesvirtualawlibrary16 C.J. S., 889-891).
At an early day it was settled by authoritative decisions, in opposition to what might seem the more natural and
obvious meaning of the term ex post facto, that in their scope and purpose these provisions were confined to laws
respecting criminal punishments, and had no relation whatever to retrospective legislation of any other description.
And it has, therefore, been repeatedly held, that retrospective laws, when not of a criminal nature, do not come in
conflict with the national Constitution, unless obnoxious to its provisions on other grounds than their respective
character. (1 Cooley, Constitutional Limitations, 544-545.)
We have applied the above principle in the cases of Mekin vs. Wolf, 2 Phil. 74 and Ongsiako vs. Gamboa, 47 Off. Gaz.,
No. 11, 5613, 5616.
It has also been held that property taxes and benefit assessments on real estate, retroactively applied, are not open
to the objection that they infringe upon the due process of law clause of the Constitution (Wagner vs. Baltimore, 239
U. S. 207, 60 L. Ed. 230); chan roblesvirtualawlibrarythat taxes on income are not subject to the constitutional
objection because of their retroactivity. The universal practice has been to increase taxes on incomes already
earned; chan roblesvirtualawlibraryyet notwithstanding this retroactive operation, income taxes have not been
successfully assailed as invalid. The uniform ruling of the courts in the United States has been to reject the contention
that the retroactive application of revenue acts is a denial of the due process guaranteed by the Fifth Amendment
(Welch vs. Henry, 305 U. S. 134, 83 L. Ed. 87).
It has also been held that in order to declare a tax as transgressing the constitutional limitation, it must be so harsh
and oppressive in its retroactive application (Idem.). But we hold that far from being unjust or harsh and oppressive
our war profits tax is both wise and just. The last Pacific war and the Japanese occupation of the Islands have wrought
divergent effects upon the different sectors of the population. The quiet and the timid, who were afraid to go out of
their homes or who refused to have any dealings with the enemy, stopped from exercising their callings or
professions, losing their incomes; chan roblesvirtualawlibraryand they supported themselves with properties they
already owned, selling these from time to time to raise funds with which to purchase their daily needs. These were
reduced to penury and want. But the bold and the daring, as well as those who were callous to the criticism of being
collaborators, engaged in trading in all forms or sorts of commodities, from foodstuffs to war materials, earning
fabulous incomes and acquiring properties with their earnings. Those who were able to retain their properties found
themselves possessed of increased wealth because inflation set in, the currency dropped in value and properties
soared in prices. It would have been unrealistic for the legislature to have ignored all these facts and circumstances.
After the war it could not, with justice to all concerned, apportion the expenses of government equally on all the
people irrespective of the vicissitudes of war, equally on those who had their properties decimated as on those who
had become fabulously rich after the war. Those who were fortunate to increase their wealth during the troubulous
period of the war were made to contribute a portion of their newly-acquired wealth for the maintenance of the
government and defray its expenses. Those who in turn were reduced to penury or whose incomes suffered reductions
could not be compelled to share in the expenses to the same extent as those who grew rich. This in effect is what the
legislature did when it enacted the War Profits Tax Law. The law may not be considered harsh and oppressive because
the force of its impact fell on those who had amassed wealth or increased their wealth during the war, but did not
touch the less fortunate. The policy followed is the same as that which underlies the Income Tax Law, imposing the
burden upon those who have and relieving those who have not. No one can dare challenge the law as harsh and
oppressive. We declare it to be just and sound and overrule the objection thereto on the ground of unconstitutionality.
The contention that the deceased Olimpio Fernandez or his estate should not be responsible because he died in 1945
and was no longer living when the law was enacted at a later date, in 1946, is absolutely without merit. Fernandez
died immediately before the liberation and the actual cessation of hostilities. He profited by the war; chan
roblesvirtualawlibrarythere is no reason why the incident of his death should relieve his estate from the tax. On this
matter we agree with the Court of Tax Appeals that the provisions of section 18 of the Internal Revenue Code have
been incorporated in Republic Act No. 55 by virtue of Section 9 thereof, which provides:chanroblesvirtuallawlibrary
SEC. 9. Administrative remedies. All administrative, special and general provisions of law, including the laws in
relation to the assessment, remission, collection and refund of national internal revenue taxes, not inconsistent with
the provisions of the Act, are hereby extended and made applicable to all the provisions of this law, and to the tax
herein imposed.
Under section 84 of the National Internal Revenue Code, the term person means an individual, a trust, estate,
corporation, or a duly registered general co-partnership. If the individual is already dead, property or estate left by
him should be subject to the tax in the same manner as if he were alive.
The last contention is also without merit. The property which Olimpio Fernandez was possessed of in December, 1941
is presumed to be conjugal property and so are the properties which were acquired by him during the war, because at
that time he was married. There is no claim or evidence to support the claim that any of the properties were
paraphernal properties of the wife; chan roblesvirtualawlibraryso the presumption stands that they were conjugal
properties of the husband and wife. Under these circumstances they cannot be considered as properties belonging to
two individuals, each of which shall be subject to the tax independently of the other.
For the foregoing considerations, the judgment appealed from is hereby affirmed, with costs against the Appellants.
Paras, C.J., Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J.B.L., Endencia, and Felix,JJ.,
concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-9408 December 10, 1914

DEMETRIA CACHO, petitioner-appellant,

vs.
THE GOVERNMENT OF THE UNITED STATES, objector-appellee.

Ledesma, Lim & Irureta Goyena for appellant.

Attorney-General Avancea for appellee.

CARSON, J.:

The appellant in these proceedings prays for the adjudication and registration in her name of a tract of land lying
within the "Camp Overton military reservation."

The Honorable Jesse George, the trial judge, in an interesting and exhaustive opinion discusses at length the grounds
upon which he based his judgment denying in part and granting in part the prayer of appellant's petition. After a
careful review of the whole record we are well satisfied that the findings of facts by the trial judge are fully sustained
by the evidence adduced in the court below. Accepting these findings of fact we think that the reasoning upon which
the trial judge bases his conclusions of law and of fact sufficiently and satisfactorily disposes of all the contentions of
counsel for the appellant.

There is much of general and public interest in the opinion filed in the court below, and we think we can best dispose
of this appeal by reproducing that opinion in full, holding as we do that it correctly and satisfactorily disposes of the
issues raised in these proceedings.

The applicant, Doa Demetria Cacho, applies for the registration of a parcel of land in each of the cases above
enumerated, both parcel being situated in the municipality of Iligan, Moro Province, Philippine Islands.

The parcel applied for in each case is particularly described in the corresponding application and plan of both
parcel is attached to the record in case 9608, marked "Exhibit A." Both of the parcels are situated within the
limits of military reservation No. 43, pending in this court, which military reservation is generally known as
"Camp Overton."

The registration is opposed by the Government of the United States represented by the commanding general
of the Division of the Philippines, on the ground that the two parcels applied for and the property of the United
States, acquired by cession from Spain by virtue of the Treaty of Paris, and that said parcels form a part of
the military reservation mentioned.1awphil.net

The applicant appeared personally, represented by her attorney D. Leocadio J. Italia, and the commanding
general appeared, represented by Capt. H. H. Evans, of the Eighth Infantry; Capt, Guy S. Nurvell, of the
Eighth Cavalry; and Liuet. Milton G. Holliday, of the Eight Cavalry. Neither the Attorney-General, nor any one
else, appeared for the Director of Lands or the Government of the Philippine Islands.

By agreement of both parties the two cases were heard together.

From the proofs taken at the trial and the ocular inspection of the premises made in the presence of the
parties, the court finds:

1. The parcel of land described in case No. 6908 was purchased by the applicant, Doa Demetria Cacho y
Soriano from Gabriel Salzos. The deed of Gabriel Salzos, Exhibit C of said case in favor of the applicant, is
dated September 14, 1904, but according to the deed itself the land was sold by Salzos to her on December
17, 1903. The title of Gabriel Salzos is founded on a deed of sale in his favor, executed and signed by a Moro
woman named Alanga, who acted for her husband, a Moro named Darondon. This deed is Exhibit B of case
No. 6908. No power of attorney or authorization, required by law, from Moro Darondon in favor of his wife
Alanga has been presented.

2. The parcel, object of case No. 6909, was purchased by the applicant Doa Demetria Cacho from the Moro,
Dotto Bunglay. The deed of sale in favor of the applicant is dated January 15, 1904, but was not
acknowledged before the notary public until March 15, 1910. This deed is Exhibit G of case No. 6909.

3. It is not proven that either of the deeds of the Moros mentioned were executed with the consent of the
United States of the Government of the Philippine Islands.
4. The parcel described in case No. 6908 was cleared, tilled, and planted to coco, mango, lanzones, and other
fruit trees by the Moro Dorondon and his wife Alanga during their marriage many years ago, and the court is
satisfied that the greater part of the cocos are 20 or 25 years of age. Datto Duroc, witness for the
Government, testified that Dorondon, who, according to the witness, is also a datto, married his (the witness')
sister Alanga and that this parcel of land belonged to them because they planted the coco trees with his
permission, or rather without his opposition.

As will be seen hereafter, Datto Duroc claimed as his own all the land now in question between the River
Nunucan and the River Agus, with the exception of this parcel and a small part of the parcel subject of case
No. 6909, which, according to his testimony, belonged to his uncle, Datto Anandog. Datto Duroc testified also
that Datto Darondon is still alive and that according to the Moro custom the wife cannot sell the land of her
husband while he is still alive.

This parcel, object of case No. 6908, is small, the fruit trees are distributed over the whole parcel, and the
court is satisfied that Datto Darondon and his wife Alanga have possessed, occupied, administered, and
cultivated the land continuously, openly, pacifically, and as owners for at least twenty-five years.

5. The parcel of land claimed by the applicant in case No. 6909 is the larger of the two parcels and contains
37.87 hectares, or more than 90 acres. It is long narrow strip of land stretching along the beach in a
southwesterly direction between the mouths of the Nunucan and Agus River. It is almost 2 kilometers long,
and includes all the target range of Camp Overton.

The testimony of the witnesses as to the cultivation of this parcel is somewhat contradictory and not very
satisfactory. To better understand the testimony it is necessary to take into account the fact that the Moro
Dalano has a small parcel of land between this parcel and the Nunucan River which separates this land from
the other parcel subject of the application in case No. 6908.1awphil.net

Datto Bunglay who sold this land to the applicant, as the court understands from his declaration, claims to
have acquired part of it by inheritance from his uncle, Datto Anandog, who died without issue, and the
balance by his own possession and cultivation. The testimony of this witness is somewhat confused and
contradictory. But he testified that his uncle Anandog cleared the land, and that he helped clear portions of it
himself, That they planted about 70 cocos, 12 mango, 45 nanca, and about 150 cacao trees; that 12 of the
coco trees and all of the other fruit trees except the 3 manga trees were planted by his uncle Datto Anandog
on the southwestern portion of the land near the River Agus; that 58 coco trees were planted by himself on
the northern portion near the River Nunucan; and that these coco trees were not bearing fruit yet at the time
when the land was sold to the applicant Doa Demetria Cacho. He further testified that he planted a hedge
of tubatuba on the boundary line of the parcel; that his house was on the northeast part of the land partly
near the three mango trees, and partly near point 25 of the boundary line marked on the plan; that the house
of his uncle was on the southern portion near the River Agus where the fruit trees planted by him, mentioned
above, were located. There are 3 mango trees yet standing on the west side of the road which leads from
Camp Overton to Camp Keithly near point 25 of the plan, and the court can very well believe that there was
formerly a house in the vicinity of these mango trees. There were also some fruit trees and a house on the
western portion of the land near the River Agus, and some of the fruit trees and portions of the house still
remain.

The court is satisfied also that there were formerly cocos and perhaps nanca and other fruit trees near the
River Nunucan; but it appears that these trees were on land of the Moro Dalano. The portion of the land not
cleared by the military for use as target range is a wooded jungle very similar to the land across the road from
it, which is marked on the plan as Government land and which nobody claims has ever been cultivated. There
are trees 2 or 3 feet in diameter on the part of the land not cleared, and the court noted fallen trunks of about
the same diameter on the part cleared near the beach. But there are not many large trees on this land nor on
the adjoining Government land.

The court tried to find the remains of the tubatuba hedge, which, according to the witness Bunglay, was
planted on the boundary line of the land, not only on the day of the ocular inspection but also on another day
when the court was on the land for more than an hour. No traces of this hedge could be found. It is possible
that the hedge has been destroyed by the military; but the greater part of the line between this land and the
Government land adjoining has not been cleared and the court believes that if such a hedge had ever existed
there would be traces of it remaining. The court has made many ocular inspections of agricultural lands, and
has often found remains of tubatuba hedges on lands abandoned for years and overgrown with brush. Nor is
there cogon grass on the part not cleared by the military. The court noted some abandoned lands covered
with cogon between Camp Overton and Iligan not far from this land and the court is convinced that the
vicinity is no exception to the general rule that abandoned lands first up with cogon and afterwards become
covered with timber.itc-alf

As to the portion of the land cleared by the military, which id marked approximately on the plan with the
words "cleared ground, Camp Overton target range," the court finds that before it was occupied by the
military in the latter part of the year 1902, it was a jungle and forest of the same general character as the
portions not cleared. The military forces of the United States first occupied this land in October or November,
1902. This fact is established by the testimony of the witnesses present when it was first occupied,
corroborated by various documents and official letters attached to the record, written at that time in "Camp
No. 1" or "Camp Nunucan." One of these letters, Exhibit 5, is dated November 26, 1902, at "Camp No. 1."
Part of the Tenth Cavalry were the first troops to occupy the land; and when it was first occupied it was known
as "Camp No. 1" and also "Camp Nunucan." A large part of the land was cleared to established the camp
thereon, but after two or three months the troops were removed to the north side of the Nunucan River on the
present site of Camp Overton. The land was occupied anew as a target range in 1904.
It is proven by the witnesses who helped clear the land, that when it was first occupied by the troops it was
not inhabited nor did Moros or others live in the vicinity, except on the banks of the Nunucan River; and it
appears to the court from the proofs that these Moros were the ones living on the first parcel ad on the land of
Datto Dalano. Nor were there houses or fences on the land. The land was a jungle and forest with some trees
of considerable size, and there were no signs of cultivation except the cocos and other already mentioned, and
two small patches of land that appeared to have been planted at some time to tobacco. The brush was so tall
and thick, that, according to one witness, it was necessary to open roads or paths for the horses to pass.
When the troops were transferred to Camp Overton, north of the River Nunucan, the land was abandoned
until 1904, as already stated, and during this period it was examined and purchased by Seor Vidal,
representing his wife Doa Demetria Cacho, the applicant.

It will be seen by the declaration of Seor Vidal that he arrived in Iligan December 31, 1902, and visited this
land in 1903, undoubtedly after the troops were transferred to another place, and it is not strange therefore,
that, due to the cleared condition of the land, the existence of the three manga trees by the side of the road
and the cocos on the southern part, Seor Vidal should have concluded that the larger portion of the land had
been cultivated. Seor Vidal testified also that there were some houses near the River Nunucan. It is possible
that these houses were on the land of Dalano. But admitting that they were on this land, it is not strange that
they existed at the date of the first visit of Senior Vidal. It is well known that houses are built up quickly
around military posts by employees and traders. Seor Vidal himself purchased the small parcel for his wife
for the purpose of building a house and opening up a store to do business with the military.

It will be seen also that Datto Duroc, called sultan of Dumarao, claimed all the land in question between the
River Nunucan and the River Agus. His claim was the object of an investigation by Maj. R. L. Bullard of the
Twenty-eight Infantry, who certified under date of February 23, 1904, that his claim of ownership and
dominion was generally accepted by all of the Moros of the vicinity. (See Exhibit 1 of the Government.) This
certificate has no value as a title, but it shows that on the date indicated Datto Duroc was claiming the land
now inquestion, publicly and before the only governmental authority existing in the place at the time. It
appears also found the proofs that Major Bullard was investigating the title of the Moros for the purpose of
acquiring and paying for their lands.

In order to better understand the character of the possession of the various Moro claimants and properly
appreciate their claims, the court believes it necessary to consider the laws, customs, form of government,
habits, and industries of the Moros, and especially as to agriculture and the cultivation of land.

The government before the arrival of the Americans, as also afterwards, except wherein it is modified by the
American administrator, was tribal and patriarchal. The population of the Moro country was not numerous and
was scattered as compared with the other islands of the Archipelago. This population was governed by
numerous petty dattos. The most powerful of these dattos did not have under his jurisdiction more than 1,000
men. Each datto had certain territorial jurisdiction, or a certain amount of land under his control. Within this
land he and his sacopes, slaves, and subjects constructed a fortress called a cotta and inside and around
the cotta, he and his subjects lived. They took refuge in the fortress to defend themselves when attacked.
There were conflicts of territorial jurisdiction between the various dattos. From time immemorial there were
petty encounters and wars between them. These wars and the lack of exportation of products operated
against the development of agriculture on an extensive scale, and, with the exception of a few Moros in the
Cotabato Valley they rarely planted more than was necessary for their own consumption.

A tract of land 37 hectares in area, which is the extent of the land under discussion, is larger than is cultivated
ordinarily by the Christian Filipinos. In the Zamboanga cadastral case of thousands of parcels now on trial
before this court, the average size of the parcels is not above 3 or 4 hectares, and the court doubts very mush
if a Moro with all his family could cultivate as extensive a parcel of land as the one in question. The court has
observed the old cottas ad the lands cultivated in the vicinity of them on the shores of Lake Lanao, and
especially the cotta where the municipality of Dansalan is established on lands purchased of the Moro owners;
and it does not appear to the court that the whole extent of cultivated land surrounding any of these
old cottas would equal 37 hectares. Due to the establishment of Camp Keithley in recent years, the Moros
have planted exclusively around said camp, and are, as the court is informed, producing rice for commerce.
But this is an exceptional case and is due to peace and the fact that they now have a market for their
products. Although the territorial jurisdiction of each datto was often extensive, the land planted by him and
his sacopes was generally only a few hectares around his cotta. The plantings outside of this were generally
accidental and temporary. In times of peace a Moro could plant in any part of the jurisdiction of his datto. Nor
did the planting of land necessarily indicate that the person planting it was owner or claimant of the land
planted, as will be seen further on.

The laws governing all the Moro tribes collectively are so vague and irregular in their application that the
American Government found it useless to codify them and make them of permanent application, in accordance
with the provisions of Act No. 787. the Organic Act of the Moro Province. See as a basis of what we have set
forth as to the customs and laws of the Moros, the reports of the Philippine Commission and especially the
report for the year 1904, part 1, pages 5 to 14; report of Gen. Leonard Wood dated September 9, 1904; the
data contained in the Philippine census reports; and the collection of data of the Jesuit fathers entitled "El
Archipelago Filipino."

The laws of most general application among the Moros of Mindanao are found in the "Luwaran" Code brought
to Mindanao by the Mohammedan conquerors and amended by them to make them applicable to local
conditions. A translation of this code from the Arabic manuscript made by Br. Najeweb M. Saleeby, is found in
volume 4, part 1, of the publications of the Ethnological Survey. A translation of the marginal annotations in
the original manuscript, modifying the provisions to make them applicable to local conditions, is found in the
same volume.
There is no provision in this code nor in any other law of the Moros, examined by the Court, for the acquiring
or transfer of lands by private parties. There is absolutely nothing relating to the prescription, or the cession,
or sale of lands. Were it not for a provision (Art. XLVII) of said code regulating the renting of cultivated lands,
the court would believe that there was no private ownership of lands among the Moros. Due to the
sangnuinary struggles between the dattos and the fact that they and their Moro subjects lived principally by
means of fishing, hunting, robbery, and sometimes piracy, neither their habitations nor their cottas were fixed
permanently, but were moved from one place to another with facility and frequency. From the declaration of
Datto Bunglay himself it will be seen that neither he nor his uncle Anandig lived continuously on the land
under discussion. They lived in other places outside of it also. It appears that a Moro could cultivate any
occupied land of his datto or tribe and the fruits of his planting would be his, even though the land passed into
the possession of some other Moro. This right is recognized by Article XLVI of the "Luwaran Code" which
provides that if a man finds his cattle or his trees in the possession of another, he has a right top the proceeds
even though they continue in the possession of the second party.

It appears that in the beginning the Americans believed that the title to all of the land in the possession of a
datto or Moro tribe was in the datto himself, or the tribes, as common property; and it appears probable that
Act No. 718 prohibiting all cessions, deeds, and contracts of lease or rent by such dattos or tribes was
promulgated under this belief. And it appears to the court that there was some foundation for this belief, and
that in general the lands were the common property of the tribe. It is doubtful, at least, that the property of a
Moro in the lands cultivated by him was any other than the right of usufruct or a property in the crops or trees
planted. The writer of this opinion has been unable to find a single instance of sale or transfer of land from
one Moro to another. a Moro can readily put a price on his animals or other personal property, but he has idea
whatever of the value of his land. Generally, he will answer such a question, saying that he has never sold
land and does not know the value of it. The large parcel of land in question is level, and though sandy in some
places, it appears to the court to be good agricultural land. Its value, taking as a basis the minimum price of
P10 per hectare fixed for the sale of public lands by the Government under the provisions of Act No. 926,
would be P370, and it appears, to the court to be of far greater value than that. The applicant insists that the
just rental value which the Government should pay her as damages for the retention of this land during the
past eight years would not be less than P12,000 or P15,000 per year. Datto Bunglay sold all this land to the
applicant for the insignificant sum of P250, a shown by the deed. Due, no doubt, to the abundance of land,
the fact that a Moro could occupy and cultivate any unoccupied land of his tribe and the other circumstances
already mentioned, it appears that the Moros were not accustomed to sell land; nor did they generally have
any idea of its just value. Nor does it appear that a Moro datto distinguished clearly between the lands of his
own cultivation and those under his jurisdiction as datto. All this demonstrates that the Philippine Commission
worked wisely when it placed restrictions on the sale of lands by Moro dattos and Moro tribes.

Nevertheless the court is convinced that a certain extent under the laws and customs of the Moros, a Moro
was recognized as owner of the land cultivated by him for many years, and on which he had his home and the
graves of his ancestors. All the land outside of this was the common property of the tribe on which any Moro
of the tribe might plant. Generally the tracts of land cultivated by the Moros were smaller in extent than those
of the Christian Filipinos.

6th. The court is convinced from the proofs that the small parcel of land sold by the Moro woman Alanga was
the home of herself and her husband, Darondon, and was their conjugal property; and the court so finds.

The court is also convinced from the proofs that the small portion in the southern part of the larger parcel,
where, according to the proofs, Datto Anandog had his house and where there still exist some cocos and fruit
trees, was the home of the said Moro Datto Anandog; and the court so finds. As to the rest of the large parcel
the court does not find the title of Datto Bunglay established. According to his own declaration his residence
on this land commenced only a few days before the sale. He admitted that the coco trees he is supposed to
have planted had not yet begun to bear fruit at the time of the sale, and were very small. Datto Duroc
positively denies that Bunglay lived on the land, and it clearly appears that he was not on the land when it
was first occupied by the military. Nor does Datto Bunglay claim to have planted the three mango trees by the
roadside near point 25 of the plan. The court believes that all the rest of this parcel, not occupied nor
cultivated by Datto Anandog, was land claimed by Datto Duroc and also by Datto Anandog and possibly by
other dattos as a part of their general jurisdiction, and that it is the class of land that Act No. 718 prohibits the
sale, by the dattos, without the express approval of the Government.

It is also found that Datto Bunglay is the nephew of Dato Anandog, and that the Moro woman Alanga, grantor
of the small parcel, is the sister of Datto Anandog, and that he died without issue.

It is insisted by the Government that the sale to the applicant is void under the provisions of Act No. 718,
which prohibits all grants, deeds, patents, and leases, from Moro sultans or dattos or the chiefs of non-
Christian tribes conveying rights in land, made without the authority of the Spanish Government of the United
States or of the Insular Government since the sovereignty was transferred to the United States. But the court
does not find this contention well founded. Undoubtedly the law prohibits the cession of rights in land the
common property of the tribes, but does not prohibit the cession of his own land by an individual Moro or
other non-Christian. The law in question is very similar, almost a copy, of section 2116 of the Revised Statutes
of the United States, which prohibits the sale or transfer of lands by the chiefs of Indian tribes. The Supreme
Court of the United States in the case of Jones vs. Meehan (volume 175, page 1, of the Supreme Court
Reports), has decided that the prohibition is against the chiefs or tribes only, and that the sale by an Indian of
his own private land is not prohibited by said law.

As we have seen, the deed on which applicant's title to the small parcel rests, is executed only by the Moro
woman Alanga, wife of Datto Darondon, which is not permitted either by the Moro laws or the Civil Code of
the Philippine Islands. It appears that the husband of Alanga, Datto Darondon, is alive yet, and before
admitting this parcel to registration it is ordered that a deed from Datto Darondon, husband of Alanga, be
presented renouncing all his rights in the small parcel of land object of Case No. 6908, in favor of the
applicant.

It appears also that according to the provisions of the Civil Code as also the provisions of the 'Luwaran Code'
of the Moros, the Moro woman Alanga has an interest in the portion of land left by her deceased brother,
Datto Anandog. By article LXXXV, section 3, of the 'Luwaran Code,' Demetria Cacho. But the Moro woman,
Alanga, having appeared as a witness for the applicant, Doa Demetria Cacho. But the Moro woman, Alanga,
having appeared as a witness for the applicant without having made any claim to the land, the court finds
from this fact that she has ratified the sale made by her nephew.

The court therefore finds that the applicant Doa Demetria Cacho is owner of the portion of land occupied and
planted by the deceased Datto Anandog in the southern part of the large object of expediente No. 6909 only;
and her application as to all the rest of the land solicited in said case is denied. And it is ordered that a new
survey of the land be made and a corrected plan be presented, excluding all the land not occupied and
cultivated by Dato Anandog; that said survey be made and the corrected plan presented on or before the 30th
day of March, 1913, with previous notice to the commanding general of the Division of the Philippines.

On the 8th day of December, the court was at Camp Overton and had another ocular inspection of the land for
the purpose of fixing the limits of the part cultivated by Datto Anandog, so often mentioned herein, with
previous notice to the applicant and her husband and representative, Seor Dionisio Vidal. Having arrived late,
Seor Vidal did not assist in the ocular inspection, which was fixed for 3 o'clock, p.m. of the day mentioned.
But the court, nevertheless, set stakes marking the N.E., S. E., and S. W. corners of the land found to have
been cultivated by the deceased Anandog. The N. E. limit of said land is a brook, and the N. W. corner is the
point where the brook intersects the shore line of the sea, the other corners mentioned being marked with
pine stakes. And it is ordered that the new survey be made in accordance with the points mentioned, by
tracing four straight lines connecting these four points. Between the portion cultivated by Datto Anandog and
the mouth of the River Agus there is a high steep hill and the court does not believe it possible to cultivate
said hill, it being covered with rocks and forest.

The attorney for the applicant insists in his brief that neither the commanding general of the Division of the
Philippines nor the officers who appeared to represent him were authorized, or had any right to represent the
United States. This question was not raised at the trial, and the applicant did not oppose the representation in
any manner. It appeals to the court that the objection should not be considered now. Furthermore both Act
No. 496 and Act No. 627 seem to permit the representation.

Nobody having appeared to oppose the applications up to this date, December 10, except the Government of
the United States represented by the commanding general of the Division of the Philippines, a general defualt
against all the world except said Government is ordered, and the allegations of the applications are taken as
confessed by all the world, with the exception of the Government of the United States.

It is further ordered that one-half of the costs of the new survey by paid by the applicant and the other by the
Government the corresponding deed from Datto Darondon on or before the above-mentioned 30th day of
March, 1913. Final decision in these cases is reversed until the presentation of the said deed and the new
plan.

It is so ordered.
 Republic of the Philippines
SUPREME COURT
Baguio City

THIRD DIVISION

G.R. No. 115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY, respondents.

PANGANIBAN, J.:

In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine Culture,
is the Ateneo de Manila University performing the work of an independent contractor and thus taxable within the
purview of then Section 205 of the National Internal Revenue Code levying a three percent contractor's tax? This
question is answer by the Court in the negative as it resolves this petition assailing the Decision 1 of the Respondent
Court of Appeals 2 in CA-G.R. SP No. 31790 promulgated on April 27, 1994 affirming that of the Court of Tax
Appeals. 3

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed by
the parties.

Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches
all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has
no legal personality separate and distinct from that of private respondent. The IPC is a Philippine unit
engaged in social science studies of Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international organizations, private foundations and
government agencies.

On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a
demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged
deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of P1,141,837 for
alleged deficiency income tax, both for the fiscal year ended March 31, 1978. Denying said tax
liabilities, private respondent sent petitioner a letter-protest and subsequently filed with the latter a
memorandum contesting the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency
income tax but modifying the assessment for deficiency contractor's tax by increasing the amount due
to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or reinvestigation of
the modified assessment. At the same time, it filed in the respondent court a petition for review of the
said letter-decision of the petitioner. While the petition was pending before the respondent court,
petitioner issued a final decision dated August 3, 1988 reducing the assessment for deficiency
contractor's tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest.

On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads:

WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The

deficiency contractor's tax assessment in the amount of P46,516.41 exclusive of
surcharge and interest for the fiscal year ended March 31, 1978 is hereby CANCELED.
No pronouncement as to cost.

SO ORDERED.

Not in accord with said decision, petitioner has come to this Court via the present petition for review raising
the following issues:

1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF

INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX

UNDER SECTION 205 OF THE TAX CODE.

The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:
 Sec. 205. Contractor, proprietors or operators of dockyards, and others. A contractor's tax of
three per centum of the gross receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors except persons, associations
and corporations under contract for embroidery and apparel for export, as well as their
agents and contractors and except gross receipts of or from a pioneer industry
registered with the Board of Investments under Republic Act No. 5186:

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not

enumerated above (but not including individuals subject to the occupation tax under
Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all
kinds of services for a fee regardless of whether or not the performance of the service
calls for the exercise or use of the physical or mental faculties of such contractors or
their employees.

xxx xxx xxx

Petitioner contends that the respondent court erred in holding that private respondent is not an
"independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the term
"independent contractor", as defined by the Code, encompasses all kinds of services rendered for a
fee and that the only exceptions are the following:

a. Persons, association and corporations under contract for embroidery and apparel for export and
gross receipts of or from pioneer industry registered with the Board of Investment under R.A. No.
5186;

b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b] of
the Tax Code); and

c. Regional or area headquarters established in the Philippines by multinational corporations, including

their alien executives, and which headquarters do not earn or derive income from the Philippines and
which act as supervisory, communication and coordinating centers for their affiliates, subsidiaries or
branches in the Asia Pacific Region (Section 205 of the Tax Code).

Petitioner thus submits that since private respondent falls under the definition of an "independent
contractor" and is not among the aforementioned exceptions, private respondent is therefore subject
to the 3% contractor's tax imposed under the same Code. 4

The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed
decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for
review.

The Issues

Petitioner submits before us the following issues:

1) Whether or not private respondent falls under the purview of independent contractor pursuant to
Section 205 of the Tax Code.

2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax
Code. 5

In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch
the Institute of Philippine Culture performing the work of an independent contractor and, thus, subject to the three
percent contractor's tax levied by then Section 205 of the National Internal Revenue Code?

The Court's Ruling

The petition is unmeritorious.

Interpretation of Tax Laws

The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:

Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of
three per centum of the gross receipts is hereby imposed on the following:

xxx xxx xxx

 (16) Business agents and other independent contractors, except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer industry registered with the Board of
Investments under the provisions of Republic Act No. 5186;

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not enumerated above (but
not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not
the performance of the service calls for the exercise or use of the physical or mental faculties of such
contractors or their employees.

The term "independent contractor" shall not include regional or area headquarters established in the
Philippines by multinational corporations, including their alien executives, and which headquarters do
not earn or derive income from the Philippines and which act as supervisory, communications and
coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region.

The term "gross receipts" means all amounts received by the prime or principal contractor as the total
contract price, undiminished by amount paid to the subcontractor, shall be excluded from the taxable
gross receipts of the subcontractor.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls
within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is
properly a subject of the three percent contractor's tax levied by the foregoing provision of law. 6 Petitioner states that
the "term 'independent contractor' is not specifically defined so as to delimit the scope thereof, so much so that any
person who . . . renders physical and mental service for a fee, is now indubitably considered an independent
contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo has the burden of proof to show its
exemption from the coverage of the law.

We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without
first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical
and impractical to determine who are exempted without first determining who are covered by the aforesaid provision.
The Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its
exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws
that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously . .
. (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions
of a taxing act are not to be extended by implication." 8 Parenthetically, in answering the question of who is subject to
tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the government
and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond
what statutes expressly and clearly import." 9

To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor
be engaged in the business of selling its services. Hence, to impose the three percent contractor's tax on Ateneo's
Institute of Philippine Culture, it should be sufficiently proven that the private respondent is indeed selling its services
for a fee in pursuit of an independent business. And it is only after private respondent has been found clearly to be
subject to the provisions of Sec. 205 that the question of exemption therefrom would arise. Only after such coverage
is shown does the rule of construction that tax exemptions are to be strictly construed against the taxpayer
come into play, contrary to petitioner's position. This is the main line of reasoning of the Court of Tax Appeals in its
decision, 10 which was affirmed by the CA.

The Ateneo de Manila University Did Not Contract

for the Sale of the Service of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its
services for a fee to anyone or was ever engaged in a business apart from and independently of the academic
purposes of the university.

Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner Commissioner of
Internal Revenue contends that "the tax is due on its activity of conducting researches for a fee. The tax is due on the
gross receipts made in favor of IPC pursuant to the contracts the latter entered to conduct researches for the benefit
primarily of its clients. The tax is imposed on the exercise of a taxable activity. . . . [T]he sale of services of private
respondent is made under a contract and the various contracts entered into between private respondent and its
clients are almost of the same terms, showing, among others, the compensation and terms of payment." 11(Emphasis
supplied.)

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that Ateneo's IPC
in fact contracted to sell its research services for a fee. Clearly then, as found by the Court of Appeals and the Court
of Tax Appeals, petitioner's theory is inapplicable to the established factual milieu obtaining in the instant case.

In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed, contracts for sale
of services were ever entered into by the private respondent. As appropriately pointed out by the latter:
 An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals
shows that only the following documentary evidence was presented:

Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field Audit Report

3 Adjustments to Sales/Receipts

4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.

None of the foregoing evidence even comes close to purport to be contracts between private
respondent and third parties. 12

Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the Ateneo de
Manila University are technically not a fee. They may however fall as gifts or donations which are tax-exempt" as
shown by private respondent's compliance with the requirement of Section 123 of the National Internal Revenue Code
providing for the exemption of such gifts to an educational institution. 13

Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:

To our mind, private respondent hardly fits into the definition of an "independent contractor".

For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in
business. Undisputedly, private respondent is mandated by law to undertake research activities to
maintain its university status. In fact, the research activities being carried out by the IPC is focused
not on business or profit but on social sciences studies of Philippine society and culture. Since it can
only finance a limited number of IPC's research projects, private respondent occasionally accepts
sponsorship for unfunded IPC research projects from international organizations, private foundations
and governmental agencies. However, such sponsorships are subject to private respondent's terms
and conditions, among which are, that the research is confined to topics consistent with the private
respondent's academic agenda; that no proprietary or commercial purpose research is done; and that
private respondent retains not only the absolute right to publish but also the ownership of the results
of the research conducted by the IPC. Quite clearly, the aforementioned terms and conditions belie the
allegation that private respondent is a contractor or is engaged in business.

For another, it bears stressing that private respondent is a non-stock, non-profit educational
corporation. The fact that it accepted sponsorship for IPC's unfunded projects is merely incidental. For,
the main function of the IPC is to undertake research projects under the academic agenda of the
private respondent. Moreover the records do not show that in accepting sponsorship of research work,
IPC realized profits from such work. On the contrary, the evidence shows that for about 30 years, IPC
had continuously operated at a loss, which means that sponsored funds are less than actual expenses
for its research projects. That IPC has been operating at a loss loudly bespeaks of the fact that
education and not profit is the motive for undertaking the research projects.

Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact still
remains that there is no proof that part of such earnings or profits was ever distributed as dividends to
any stockholder, as in fact none was so distributed because they accrued to the benefit of the private
respondent which is a non-profit educational institution. 14

Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of
a fee or price in exchange for the performance of a service or delivery of an object. Rather, the amounts are in the
nature of an endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the
research with no strings attached. As found by the two courts below, such sponsorships are subject to IPC's terms and
conditions. No proprietary or commercial research is done, and IPC retains the ownership of the results of the
research, including the absolute right to publish the same. The copyrights over the results of the research are owned
by
Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15 The amounts given to IPC,
therefore, may not be deemed, it bears stressing as fees or gross receipts that can be subjected to the three percent
contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed
either as a contract of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties
obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price
certain in money or its equivalent." 16 By its very nature, a contract of sale requires a transfer of ownership. Thus,
Article 1458 of the Civil Code "expressly makes the obligation to transfer ownership as an essential element of the
contract of sale, following modern codes, such as the German and the Swiss. Even in the absence of this express
requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have
considered such transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating
that the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting ownership.
Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the
case of a contract for a piece of work, "the contractor binds himself to execute a piece of work for the employer, in
consideration of a certain price or compensation. . . . If the contractor agrees to produce the work from materials
furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the thing, . .
." 18 Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of ownership is involved and
a party necessarily walks away with an object. 19 In the case at bench, it is clear from the evidence on record that
there was no sale either of objects or services because, as adverted to earlier, there was no transfer of ownership
over the research data obtained or the results of research projects undertaken by the Institute of Philippine Culture.

Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of
maintaining Ateneo's university status and not in the course of an independent business of selling such research with
profit in mind. This is clear from a reading of the regulations governing universities:

31. In addition to the legal requisites an institution must meet, among others, the following
requirements before an application for university status shall be considered:

xxx xxx xxx

(e) The institution must undertake research and operate with a competent qualified staff at least three
graduate departments in accordance with the rules and standards for graduate education. One of the
departments shall be science and technology. The competence of the staff shall be judged by their
effective teaching, scholarly publications and research activities published in its school journal as well
as their leadership activities in the profession.

(f) The institution must show evidence of adequate and stable financial resources and support, a
reasonable portion of which should be devoted to institutional development and research. (emphasis
supplied)

xxx xxx xxx

32. University status may be withdrawn, after due notice and hearing, for failure to maintain
satisfactorily the standards and requirements therefor. 20

Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently
erroneous because the former is not an independent juridical entity that is separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally
Conclusive

In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for the purpose
of reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether" 21 Ateneo
de Manila University may be deemed a subject of the three percent contractor's tax "through the evidence presented
before it." Consequently, "as a matter of principle, this Court will not set aside the conclusion reached by . . . the
Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration
of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or
improvident exercise of authority . . ." 22 This point becomes more evident in the case before us where the findings
and conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of
authority, much less grave abuse of discretion. Thus, we find the decision of the latter affirming that of the former
free from any palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it was
Ateneo de Manila University itself that had funded the research projects of the institute, and it was only when Ateneo
could no longer produce the needed funds that the institute sought funding from outside. The testimony of Ateneo's
Director for Accounting Services, Ms. Leonor Wijangco, provides significant insight on the academic and nonprofit
nature of the institute's research activities done in furtherance of the university's purposes, as follows:

Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of Philippine
Culture) that as far as grants from sponsored research it is possible that the grant sometimes is less
than the actual cost. Will you please tell us in this case when the actual cost is a lot less than the
grant who shoulders the additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university has to have its
own research institute. 24

So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine Culture when
it undisputedly loses not an insignificant amount in the process? The plain and simple answer is that private
respondent is not a contractor selling its services for a fee but an academic institution conducting these researches
pursuant to its commitments to education and, ultimately, to public service. For the institute to have tenaciously
continued operating for so long despite its accumulation of significant losses, we can only agree with both the Court of
Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive for undertaking the research
projects." 25
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is hereby
AFFIRMED in full.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-17725 February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.

Arthur Tordesillas for defendants-appellants.

BARRERA, J.:

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay to plaintiff
Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of the filing of the complaint
until fully paid, plus costs, defendant Mambulao Lumber Company interposed the present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a) under the first cause of
action, for forest charges covering the period from September 10, 1952 to May 24, 1953, defendants admitted
that they have a liability of P587.37, which liability is covered by a bond executed by defendant General
Insurance & Surety Corporation for Mambulao Lumber Company, jointly and severally in character, on July 29,
1953, in favor of herein plaintiff; (b) under the second cause of action, both defendants admitted a joint and
several liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated November 27, 1953;
and (c) under the third cause of action, both defendants admitted a joint and several liability in favor of
plaintiff for P3,928.30, also covered by a bond dated July 20, 1954. These three liabilities aggregate to
P4,802.37. If the liability of defendants in favor of plaintiff in the amount already mentioned is admitted, then
what is the defense interposed by the defendants? The defense presented by the defendants is quite unusual
in more ways than one. It appears from Exh. 3 that from July 31, 1948 to December 29, 1956, defendant
Mambulao Lumber Company paid to the Republic of the Philippines P8,200.52 for 'reforestation charges' and
for the period commencing from April 30, 1947 to June 24, 1948, said defendant paid P927.08 to the Republic
of the Philippines for 'reforestation charges'. These reforestation were paid to the plaintiff in pursuance of
Section 1 of Republic Act 115 which provides that there shall be collected, in addition to the regular forest
charges provided under Section 264 of Commonwealth Act 466 known as the National Internal Revenue Code,
the amount of P0.50 on each cubic meter of timber... cut out and removed from any public forest for
commercial purposes. The amount collected shall be expended by the director of forestry, with the approval of
the secretary of agriculture and commerce, for reforestation and afforestation of watersheds, denuded areas
... and other public forest lands, which upon investigation, are found needing reforestation or afforestation ....
The total amount of the reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the
contention of the defendant Mambulao Lumber Company that since the Republic of the Philippines has not
made use of those reforestation charges collected from it for reforesting the denuded area of the land covered
by its license, the Republic of the Philippines should refund said amount, or, if it cannot be refunded, at least it
should be compensated with what Mambulao Lumber Company owed the Republic of the Philippines for
reforestation charges. In line with this thought, defendant Mambulao Lumber Company wrote the director of
forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of which said defendant requested "that our
account with your bureau be credited with all the reforestation charges that you have imposed on us from July
1, 1947 to June 14, 1956, amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber
Company was answered by the director of forestry on March 12, 1957, marked Exh. 2, in which the director of
forestry quoted an opinion of the secretary of justice, to the effect that he has no discretion to extend the
time for paying the reforestation charges and also explained why not all denuded areas are being reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-appellant company to
plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or applied to the payment of the sum of
P4,802.37 as forest charges due and owing from appellant to appellee. It is appellant's contention that said sum of
P9,127.50, not having been used in the reforestation of the area covered by its license, the same is refundable to it or
may be applied in compensation of said sum of P4,802.37 due from it as forest charges.1wph1.t

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided for under Section two
hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six, known as the National
Internal Revenue Code, the amount of fifty centavos on each cubic meter of timber for the first and second
groups and forty centavos for the third and fourth groups cut out and removed from any public forest for
commercial purposes. The amount collected shall be expended by the Director of Forestry, with the approval
of the Secretary of Agriculture and Natural Resources (commerce), for reforestation and afforestation of
watersheds, denuded areas and cogon and open lands within forest reserves, communal forest, national
parks, timber lands, sand dunes, and other public forest lands, which upon investigation, are found needing
reforestation or afforestation, or needing to be under forest cover for the growing of economic trees for
timber, tanning, oils, gums, and other minor forest products or medicinal plants, or for watersheds protection,
or for prevention of erosion and floods and preparation of necessary plans and estimate of costs and for
 reconnaisance survey of public forest lands and for such other expenses as may be deemed necessary for the
proper carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and from the
sale of barks, medical plants and other products derived from plantations as herein provided shall constitute a
fund to be known as Reforestation Fund, to be expended exclusively in carrying out the purposes provided for
under this Act. All provincial or city treasurers and their deputies shall act as agents of the Director of Forestry
for the collection of the revenues or incomes derived from the provisions of this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation charges from a timber licenses or
concessionaire shall constitute a fund to be known as the Reforestation Fund, and that the same shall be expended by
the Director of Forestry, with the approval of the Secretary of Agriculture and Natural Resources for the reforestation
or afforestation, among others, of denuded areas which, upon investigation, are found to be needing reforestation or
afforestation. Note that there is nothing in the law which requires that the amount collected as reforestation charges
should be used exclusively for the reforestation of the area covered by the license of a licensee or concessionaire, and
that if not so used, the same should be refunded to him. Observe too, that the licensee's area may or may not be
reforested at all, depending on whether the investigation thereof by the Director of Forestry shows that said area
needs reforestation. The conclusion seems to be that the amount paid by a licensee as reforestation charges is in the
nature of a tax which forms a part of the Reforestation Fund, payable by him irrespective of whether the area covered
by his license is reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out the
purposes provided for thereunder, namely, the reforestation or afforestation, among others, of denuded areas needing
reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code 2 is applicable, such that
the sum of P9,127.50 paid by it as reforestation charges may compensate its indebtedness to appellee in the sum of
P4,802.37 as forest charges. But in the view we take of this case, appellant and appellee are not mutually creditors
and debtors of each other. Consequently, the law on compensation is inapplicable. On this point, the trial court
correctly observed: .

Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors
and debtors of each other. With respect to the forest charges which the defendant Mambulao Lumber
Company has paid to the government, they are in the coffers of the government as taxes collected, and the
government does not owe anything, crystal clear that the Republic of the Philippines and the Mambulao
Lumber Company are not creditors and debtors of each other, because compensation refers to mutual debts.
..

And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can be
the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an
action or any indebtedness of the state or municipality to one who is liable to the state or municipality for
taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no set-off is admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general rule is
based, is that taxes are not in the nature of contracts between the party and party but grow out of a duty to,
and are the positive acts of the government, to the making and enforcing of which, the personal consent of
individual taxpayers is not required. ... If the taxpayer can properly refuse to pay his tax when called upon by
the Collector, because he has a claim against the governmental body which is not included in the tax levy, it is
plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer's claim is disputed,
the collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial affairs of the
government will be thrown into great confusion. (47 Am. Jur. 766-767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with costs against the
defendant-appellant. So ordered.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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

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

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

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

Benedicto and Martinez for respondents.

LABRADOR, J.:

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

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

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

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

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

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of debts and
expenses of administration. The proper procedure is for the court to order the sale of personal estate or the
sale or mortgage of real property of the deceased and all debts or expenses of administrator and with the
written notice to all the heirs legatees and devisees residing in the Philippines, according to Rule 89, section 3,
and Rule 90, section 2. And when sale or mortgage of real estate is to be made, the regulations contained in
Rule 90, section 7, should be complied with.1wph1.t

Execution may issue only where the devisees, legatees or heirs have entered into possession of their
respective portions in the estate prior to settlement and payment of the debts and expenses of administration
and it is later ascertained that there are such debts and expenses to be paid, in which case "the court having
jurisdiction of the estate may, by order for that purpose, after hearing, settle the amount of their several
liabilities, and order how much and in what manner each person shall contribute, and may issue execution if
circumstances require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not
the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate of a
deceased person, the properties belonging to the estate are under the jurisdiction of the court and such jurisdiction
continues until said properties have been distributed among the heirs entitled thereto. During the pendency of the
proceedings all the estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of the court
judgment, to seize the properties but to ask the court for an order to require the administrator to pay the amount due
from the estate and required to be paid.

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

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

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

The petition is, therefore, dismissed, without costs.

 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

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

ENGRACIO FRANCIA, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

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

The antecedent facts are as follows:

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

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

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

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

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

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

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

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended
complaint and ordering:

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

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's
fees. (p. 30, Record on Appeal)

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

Hence, this petition for review.

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

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

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

III

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

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

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

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

There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the
case do not satisfy the requirements provided by Article 1279, to wit:

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

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

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

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

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

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

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

There are other factors which compel us to rule against the petitioner. The tax was due to the city government while
the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before
the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by
the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from
the deposit so that he could pay the tax obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he
pocketed the notice of the auction sale without reading it.

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

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

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

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by proof and
the general rule is that the purchaser of a tax title is bound to take upon himself the burden of
showing the regularity of all proceedings leading up to the sale. (emphasis supplied)

There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his
property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This
is actually an exception to the rule that administrative proceedings are presumed to be regular.

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

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

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

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

A. I just signed it because I was not able to read the same. It was just sent by mail
carrier.

Q. So you admit that you received the original of Exhibit I and you signed upon receipt
thereof but you did not read the contents of it?

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

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

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

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

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

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

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash. 162,
61 P. 2d, 1290):

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

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

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

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

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

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the respondent
court is affirmed.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 125704 August 28, 1998

PHILEX MINING CORPORATION, petitioner,

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

ROMERO, J.:

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

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

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE

TAX DUE

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

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

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

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39

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

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

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3

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

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

In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position. Since these pending
claims have not yet been established or determined with certainty, it follows that no legal compensation can take
place. Hence, the BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt
of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its excise tax
obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. 7 In the course of the
proceedings, the BIR issued Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the
total tax liabilities of Philex of P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.

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

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

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

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

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

WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated
March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 1996. 13

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

Period Covered Tax Credit Date

By Claims For Certificate of

VAT refund/credit Number Issue Amount

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

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

1989 007732 11 July 1996 P37,322,799.19

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

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

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

We see no merit in this contention.

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

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically held that taxes cannot
be subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that
the government owes him an amount equal to or greater than the tax being collected. The collection
of a tax cannot await the results of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on
Audit, 20 which reiterated that:

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

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines Inc., wherein we
ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been
approved by the Commissioner, 21 is no longer without any support in statutory law.

It is important to note, that the premise of our ruling in the aforementioned case was anchored on Section 51 (d) of
the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the
same provision upon which the Itogon-Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine
enunciated in Itogon-Suyoc cannot be invoked by Philex.

Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of surcharge and
interest for the non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory
that it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still has pending
claims for VAT input credit/refund with BIR. 23

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

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

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

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

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

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

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

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

To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or employees, especially
BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in
acting upon the taxpayer's claim for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the
manner prescribed by law. 38 Second, if the inaction can be characterized as willful neglect of duty, then recourse
under the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:

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

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

xxx xxx xxx

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

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

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

WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of
Appeals dated April 8, 1996 is hereby AFFIRMED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-52306 October 12, 1981

ABS-CBN BROADCASTING CORPORATION, petitioner,

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

MELENCIO-HERRERA, J.:

This is a Petition for Review on certiorari of the Decision of the Court of Tax Appeals in C.T.A. Case No. 2809, dated
November 29, 1979, which affirmed the assessment by the Commissioner of Internal Revenue, dated April 16, 1971,
of a deficiency withholding income tax against petitioner, ABS-CBN Broadcasting Corporation, for the years 1965,
1966, 1967 and 1968 in the respective amounts of P75,895.24, P99,239.18, P128,502.00 and P222, 260.64, or a
total of P525,897.06.

During the period pertinent to this case, petitioner corporation was engaged in the business of telecasting local as well
as foreign films acquired from foreign corporations not engaged in trade or business within the Philippines. for which
petitioner paid rentals after withholding income tax of 30%of one-half of the film rentals.

In so far as the income tax on non-resident corporations is concerned, section 24 (b) of the National Internal Revenue
Code, as amended by Republic Act No. 2343 dated June 20, 1959, used to provide:

(b) Tax on foreign corporations.(1) Non-resident corporations. There shall be levied, collected, and
paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount
received by every foreign corporation not engaged in trade or business within the Philippines, from an
sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains,
profits, and income, a tax equal to thirty per centum of such amount. (Emphasis supplied)

On April 12, 1961, in implementation of the aforequoted provision, the Commissioner of Internal Revenue issued
General Circular No. V-334 reading thus:

In connection with Section 24 (b) of Tax Code, the amendment introduced by Republic Act No. 2343,
under which an income tax equal to 30% is levied upon the amount received by every foreign
corporation not engaged in trade or business within the Philippines from all sources within this country
as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical gains, profits, and income, it has
been determined that the tax is still imposed on income derived from capital, or labor, or both
combined, in accordance with the basic principle of income taxation (Sec. 39, Income Tax
Regulations), and that a mere return of capital or investment is not income (Par. 5,06, 1 Mertens Law
of Federal 'Taxation). Since according to the findings of the Special Team who inquired into business
of the non-resident foreign film distributors, the distribution or exhibition right on a film is invariably
acquired for a consideration, either for a lump sum or a percentage of the film rentals, whether from a
parent company or an independent outside producer, apart of the receipts of a non-resident foreign
film distributor derived from said film represents, therefore, a return of investment.

xxx xxx xxx

4. The local distributor should withhold 30% of one-half of the film rentals paid to the non-resident
foreign film distributor and pay the same to this office in accordance with law unless the non- resident
foreign film distributor makes a prior settlement of its income tax liability. (Emphasis ours).

Pursuant to the foregoing, petitioner dutifully withheld and turned over to the Bureau of Internal Revenue the amount
of 30% of one-half of the film rentals paid by it to foreign corporations not engaged in trade or business within the
Philippines. The last year that petitioner withheld taxes pursuant to the foregoing Circular was in 1968.

On June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the Tax Code increasing the tax rate from 30 %
to 35 % and revising the tax basis from "such amount" referring to rents, etc. to "gross income," as follows:

(b) Tax on foreign corporations.(1) Non-resident corporations.A foreign corporation not engaged in
trade or business in the Philippines including a foreign life insurance company not engaged in the life
insurance business in the Philippines shall pay a tax equal to thirty-five per cent of the gross income
received during each taxable year from all sources within the Philippines, as interests, dividends,
rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical
services or otherwise, emoluments or other fixed or determinable annual, periodical or casual gains,
 profits, and income, and capital gains, Provided however, That premiums shah not include reinsurance
premiums. (Emphasis supplied)

On February 8, 1971, the Commissioner of Internal Revenue issued Revenue Memorandum Circular No. 4-71,
revoking General Circular No. V-334, and holding that the latter was "erroneous for lack of legal basis," because "the
tax therein prescribed should be based on gross income without deduction whatever," thus:

After a restudy and analysis of Section 24 (b) of the National Internal Revenue Code, as amended by
Republic Act No. 5431, and guided by the interpretation given by tax authorities to a similar provision
in the Internal Revenue Code of the United States, on which the aforementioned provision of our Tax
Code was patterned, this Office has come to the conclusion that the tax therein prescribed should be
based on gross income without t deduction whatever. Consequently, the ruling in General Circular No.
V-334, dated April 12, 1961, allowing the deduction of the proportionate cost of production or
exhibition of motion picture films from the rental income of non- resident foreign corporations, is
erroneous for lack of legal basis.

In view thereof, General Circular No. V-334, dated April 12, 1961, is hereby revoked and henceforth,
local films distributors and exhibitors shall deduct and withhold 35% of the entire amount payable by
them to non-resident foreign corporations, as film rental or royalty, or whatever such payment may be
denominated, without any deduction whatever, pursuant to Section 24 (b), and pay the withheld taxes
in accordance with Section 54 of the Tax Code, as amended.

All rulings inconsistent with this Circular is likewise revoked. (Emphasis ours)

On the basis of this new Circular, respondent Commissioner of Internal Revenue issued against petitioner a letter of
assessment and demand dated April 15, 1971, but allegedly released by it and received by petitioner on April 12,
1971, requiring them to pay deficiency withholding income tax on the remitted film rentals for the years 1965 through
1968 and film royalty as of the end of 1968 in the total amount of P525,897.06 computed as follows:

1965

Total amount remitted P 511,059.48

Withholding tax due 153,318.00

thereon

Less: Amount already 89,000.00

assessed

Balance P64,318.00

Add: 1/2% mo. int. fr. 4- 11,577.24

16-66 to 4-16-69

Total amount due & P 75,895.24

collectible

1966

Total amount remitted P373,492.24

Withholding tax due 112,048.00

thereon

Less: Amount already 27,947.00

assessed

Balance 84,101.00

Add: 11/2%mo. int. fr. 15,138.18

4-16-67 to 4-116-70

Total amount due & P99,239.18

collectible

1967

Total amount P601,160.65

remitted

Withholding tax due 180,348.00

thereon
 Less: Amount 71,448.00
already assessed

Balance 108,900.00

Add: 1/2% mo. int. 19,602.00

fr. 4-16-68 to 4-16-
71

Total amount due & P128,502.00

collectible

1968

Total amount remitted P881,816.92

Withholding tax due 291,283.00

thereon

Less: Amount already 92,886.00

assessed

Balance P198,447.00

Add: 1/2% mo. int. fr. 23,813.64

4-16-69 to 4-29-71

Total amount due & P222,260.44 1

collectible

On May 5, 1971, petitioner requested for a reconsideration and withdrawal of the assessment. However, without
acting thereon, respondent, on April 6, 1976, issued a warrant of distraint and levy over petitioner's personal as well
as real properties. The petitioner then filed its Petition for Review with the Court of Tax Appeals whose Decision, dated
November 29, 1979, is, in turn, the subject of this review. The Tax Court held:

For the reasons given, the Court finds the assessment issued by respondent on April 16, 1971 against
petitioner in the amounts of P75,895.24, P 99,239.18, P128,502.00 and P222,260.64 or a total of
P525,897.06 as deficiency withholding income tax for the years 1965, 1966, 1967 and 1968,
respectively, in accordance with law. As prayed for, the petition for review filed in this case is
dismissed, and petitioner ABS-CBN Broadcasting Corporation is hereby ordered to pay the sum of
P525,897.06 to respondent Commissioner of Internal Revenue as deficiency withholding income tax
for the taxable years 1965 thru 1968, plus the surcharge and interest which have accrued thereon
incident to delinquency pursuant to Section 51 (e) of the National Internal Revenue Code, as
amended.

WHEREFORE, the decision appealed from is hereby affirmed at petitioner's cost.

SO ORDERED. 2

The issues raised are two-fold:

I. Whether or not respondent can apply General Circular No. 4-71 retroactively and issue a deficiency
assessment against petitioner in the amount of P 525,897.06 as deficiency withholding income tax for
the years 1965, 1966, 1967 and 1968.

II. Whether or not the right of the Commissioner of Internal Revenue to assess the deficiency
withholding income tax for the year 196,5 has prescribed. 3

Upon the facts and circumstances of the case, review is warranted.

In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by Republic Act No. 6110 on August 9, 1969, it
provides:

Sec. 338-A. Non-retroactivity of rulings. Any revocation, modification, or reversal of and of the
rules and regulations promulgated in accordance with the preceding section or any of the rulings or
circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive
application if the relocation, modification, or reversal will be prejudicial to the taxpayers, except in the
following cases: (a) where the taxpayer deliberately mis-states or omits material facts from his return
or any document required of him by the Bureau of Internal Revenue: (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling
is based; or (c) where the taxpayer acted in bad faith. (italics for emphasis)
It is clear from the foregoing that rulings or circulars promulgated by the Commissioner of Internal Revenue have no
retroactive application where to so apply them would be prejudicial to taxpayers. The prejudice to petitioner of the
retroactive application of Memorandum Circular No. 4-71 is beyond question. It was issued only in 1971, or three
years after 1968, the last year that petitioner had withheld taxes under General Circular No. V-334. The assessment
and demand on petitioner to pay deficiency withholding income tax was also made three years after 1968 for a period
of time commencing in 1965. Petitioner was no longer in a position to withhold taxes due from foreign corporations
because it had already remitted all film rentals and no longer had any control over them when the new Circular was
issued. And in so far as the enumerated exceptions are concerned, admittedly, petitioner does not fall under any of
them.

Respondent claims, however, that the provision on non-retroactivity is inapplicable in the present case in that General
Circular No. V-334 is a nullity because in effect, it changed the law on the matter. The Court of Tax Appeals sustained
this position holding that: "Deductions are wholly and exclusively within the power of Congress or the law-making
body to grant, condition or deny; and where the statute imposes a tax equal to a specified rate or percentage of the
gross or entire amount received by the taxpayer, the authority of some administrative officials to modify or change,
much less reduce, the basis or measure of the tax should not be read into law." 4Therefore, the Tax Court concluded,
petitioner did not acquire any vested right thereunder as the same was a nullity.

The rationale behind General Circular No. V-334 was clearly stated therein, however: "It ha(d) been determined that
the tax is still imposed on income derived from capital, or labor, or both combined, in accordance with the basic
principle of income taxation ...and that a mere return of capital or investment is not income ... ." "A part of the
receipts of a non-resident foreign film distributor derived from said film represents, therefore, a return of investment."
The Circular thus fixed the return of capital at 50% to simplify the administrative chore of determining the portion of
the rentals covering the return of capital." 5

Were the "gross income" base clear from Sec. 24 (b), perhaps, the ratiocination of the Tax Court could be upheld. It
should be noted, however, that said Section was not too plain and simple to understand. The fact that the issuance of
the General Circular in question was rendered necessary leads to no other conclusion than that it was not easy of
comprehension and could be subjected to different interpretations.

In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of General Circular No. V-334, was
just one in a series of enactments regarding Sec. 24 (b) of the Tax Code. Republic Act No. 3825 came next on June
22, 1963 without changing the basis but merely adding a proviso (in bold letters).

(b) Tax on foreign corporation.(1) Non-resident corporations. There shall be levied, collected and
paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount
received by every foreign corporation not engaged in trade or business within the Philippines, from all
sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains,
profits, and income, a tax equal to thirty per centum of such amount: PROVIDED, HOWEVER, THAT
PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS. (double emphasis ours).

Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the proviso and inserting some words
(also in bold letters).

(b) Tax on foreign corporations.(1) Non-resident corporations.There shall be levied, collected and
paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount
received by every foreign corporation not engaged in trade or business within the Philippines, from all
sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or periodical OR
CASUAL gains, profits and income, AND CAPITAL GAINS, a tax equal to thirty per centum of such
amount. 6 (double emphasis supplied)

The principle of legislative approval of administrative interpretation by re-enactment clearly obtains in this case. It
provides that "the re-enactment of a statute substantially unchanged is persuasive indication of the adoption by
Congress of a prior executive construction. 7 Note should be taken of the fact that this case involves not a mere
opinion of the Commissioner or ruling rendered on a mere query, but a Circular formally issued to "all internal revenue
officials" by the then Commissioner of Internal Revenue.

It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of Revenue Memorandum
Circular No. 4-71, that Sec. 24 (b) was amended to refer specifically to 35% of the "gross income."

This Court is not unaware of the well-entrenched principle that the Government is never estopped from collecting
taxes because of mistakes or errors on the part of its
agents. 8 In fact, utmost caution should be taken in this regard. 9 But, like other principles of law, this also admits of
exceptions in the interest of justice and fairplay. The insertion of Sec. 338-A into the National Internal Revenue Code,
as held in the case of Tuason, Jr. vs. Lingad, 10 is indicative of legislative intention to support the principle of good
faith. In fact, in the United States, from where Sec. 24 (b) was patterned, it has been held that the Commissioner of
Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result
therefrom, 11 or where there has been a misrepresentation to the taxpayer. 12

We have also noted that in its Decision, the Court of Tax Appeals further required the petitioner to pay interest and
surcharge as provided for in Sec. 51 (e) of the Tax Code in addition to the deficiency withholding tax of P 525,897.06.
This additional requirement is much less called for because the petitioner relied in good faith and religiously complied
with no less than a Circular issued "to all internal revenue officials" by the highest official of the Bureau of Internal
Revenue and approved by the then Secretary of Finance. 13

With the foregoing conclusions arrived at, resolution of the issue of prescription becomes unnecessary.

WHEREFORE, the judgment of the Court of Tax Appeals is hereby reversed, and the questioned assessment set aside.
No costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX
APPEALS, respondents.

T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION

FELICIANO, J.:

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private
respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its
parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to
P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%)
withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for
refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1)
of the National Internal Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the applicable rate of
withholding tax on the dividends remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the
dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for
review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the
CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax credit in the amount of
P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held that:

(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit
here involved;

(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US
tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to twenty percent
(20%) which represents the difference between the regular tax of thirty-five percent (35%) on corporations
and the tax of fifteen percent (15%) on dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends
received by its non-resident parent company in the US (P&G-USA) may be subject to the preferential tax rate
of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in this
Resolution resolving that Motion.

1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for
refund or tax credit, which need to be examined. This question was raised for the first time on appeal, i.e., in the
proceedings before this Court on the Petition for Review filed by the Commissioner of Internal Revenue. The question
was not raised by the Commissioner on the administrative level, and neither was it raised by him before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for
refund by raising this question of alleged incapacity for the first time on appeal before this Court. This is clearly a
matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to
run away, as it were, with the refund instead of transmitting such refund or tax credit to its parent and sole
stockholder. It is commonplace that in the absence of explicit statutory provisions to the contrary, the government
must follow the same rules of procedure which bind private parties. It is, for instance, clear that the government is
held to compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants
are held to such compliance, save only in respect of the matter of filing fees from which the Republic of the Philippines
is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise
for the first time on appeal questions which had not been litigated either in the lower court or on the administrative
level. For, if petitioner had at the earliest possible opportunity, i.e., at the administrative level, demanded that P&G-
Phil. produce an express authorization from its parent corporation to bring the claim for refund, then P&G-Phil. would
have been able forthwith to secure and produce such authorization before filing the action in the instant case. The
action here was commenced just before expiration of the two (2)-year prescriptive period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which, as
will be seen below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is
essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:

Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any
sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner of Internal Revenue; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no
such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after payment: . . . (Emphasis supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.The Commissioner may:

xxx xxx xxx

(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years
after the payment of the tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under Section
309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring to "any person subject to taximposed by
the Title [on Tax on Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC, the
withholding agent who is "required to deduct and withhold any tax" is made " personally liable for such tax" and
indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the
amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding
agent, P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that should be withheld from
the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments,
surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that
should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." 4 The
terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal
interest, to bring a suit for refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a
withholding agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is
not an ordinary government agent:

The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel
the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the
collection of the tax as well as the payment thereof is concentrated upon the person over whom the
Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and
the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In
regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is
the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent especially
because under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas the
Commissioner and his deputies are not made liable by law. 6 (Emphasis supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax
return and with respect to actual payment of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an
action for recovery of such claim. This implied authority is especially warranted where, is in the instant case, the withholding agent is the wholly owned subsidiary of the parent-
stockholder and therefore, at all times, under the effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied
authority of P&G-Phil. to claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's authority
to claim the refund or tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual payment of the
refund or issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the
Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not demand a written
confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly
authorized to file the claim for refund and the suit to recover such claim.

II

1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided
for in the following portion of Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.

(1) Non-resident corporation. A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income
receipt during its taxable year from all sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends received from a domestic
corporation liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as provided in Section 53 (d) of this Code,
subject to the condition that the country in which the non-resident foreign corporation, is domiciled shall allow a credit against the tax due from the non-resident
foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent
(15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable
against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate
is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such
tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between
the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by
the Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-
corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed
paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines.

2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:

Sec. 901 Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of
section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been
paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a
claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against the tax imposed by section 531 (relating to
the tax on accumulated earnings), against the additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or under section 1351
(relating to recoveries of foreign expropriation losses), or against the personal holding company tax imposed by section 541.

(b) Amount allowed. Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):

(a) Citizens and domestic corporations. In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war
profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and

xxx xxx xxx

Sec. 902. Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting
stock of a foreign corporation from which it receives dividends in any taxable year shall

xxx xxx xxx

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which
such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess
profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to
such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.

xxx xxx xxx

(c) Applicable Rules

(1) Accumulated profits defined. For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,
 (A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of
the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and
excess profits taxes imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such divi dends were paid, treating
dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction
shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earning. . . .
(Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7 shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax
actually paid (i.e., withheld) from the dividend remittances to P&G-USA;

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8 for a proportionate part
of the corporate income tax actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was actually paid by its Philippine
subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and
deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine
corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines
through the medium of P&G-Phil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine
corporate income taxes actually paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax
actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits
are allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream. 9

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate
under Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and which
hence goes to P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the
Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:

P100.00 Pretax net corporate income earned by P&G-Phil.

x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.

P100.00
-35.00

P65.00 Available for remittance as dividends to P&G-USA

P65.00 Dividends remittable to P&G-USA

x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax

P65.00 Dividends remittable to P&G-USA

x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax
 P22.75 Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00 Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax
credit that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as
follows:

P65.00 Dividends remittable to P&G-USA

- 9.75 Dividend tax withheld at the reduced (15%) rate

P55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.

to the BIR

Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed
by Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and clearly
complies with the requirements of Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902
of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of
this Court, the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal Revenue
Code, we find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax
"deemed paid" to the Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of
income tax paid by the corporation declaring the dividend in addition to the tax withheld from the dividend remitted. In other words, the U.S. government
will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a portion of the income tax paid
by the corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay
P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be
declared as dividend to the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S. Internal
Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its U.S. tax payable on said dividends the amount of P30,000
composed of:

(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 = P18,750

100,000 **

(2) The amount of 15% of

P75,000 withheld = 11,250

P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine
subsidiary is clearly more than 20% requirement of Presidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above
example, amounts to P15,000.00 only.
 In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by your
client to its parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the ruling,
are not revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on
dividends remitted by a foreign corporation to a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to
Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the
CTA and this Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid"
tax credit found in our NIRC and which Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United States) and which,
therefore, pay income taxes to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.In computing net income, there shall be allowed as deductions . . .

(c) Taxes. . . .

xxx xxx xxx

(3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of this paragraphs, the tax
imposed by this Title shall be credited with . . .

(a) Citizen and Domestic Corporation. In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war profits or
excess profits, taxes paid or accrued during the taxable year to any foreign country. (Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US governmente.g., for
taxes collected by the US government on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax
Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:

(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-
profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign corporation from
which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount of tax
deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is taken which the amount of
such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. The term "accumulated
profits" when used in this subsection reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-
profits, and excess-profits taxes imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue shall have full power
to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of any year as
having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating
dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the income, war-
profits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the word "year" as used in this
subsection shall be construed to mean such accounting period. (Emphasis supplied)

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for
taxes paid to the US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRC to have paid
a proportionate part of the US corporate income tax paid by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine
parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law
allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no
more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the reduced
rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the
amount required by Section 24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation arising after the legal
question has been answered. The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the
reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates
to the administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate
goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA
"shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued by the Secretary of
Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate
becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax
rate is legally applicable.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second Division in effect held that
the reduced dividend tax rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal Revenue
Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which means that

It is this practical or operating circularity that is in fact

the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11

avoided by our BIR when it issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of
Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for
applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to
withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for the applicability, as
a matter of law, of a particular tax rate. Upon the other hand, upon the determination or recognition of the
applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing implementing regulations that
would require P&G Phil., or any Philippine corporation similarly situated, to certify to the BIR the amount of the
"deemed paid" tax credit actually subsequently granted by the US tax authorities to P&G-USA or a US parent
corporation for the taxable year involved. Since the US tax laws can and do change, such implementing regulations
could also provide that failure of P&G-Phil. to submit such certification within a certain period of time, would result in
the imposition of a deficiency assessment for the twenty (20) percentage points differential. The task of this Court is
to settle which tax rate is applicable, considering the state of US law at a given time. We should leave details relating
to administrative implementation where they properly belong with the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone,
necessarily the correct reading of the statute. There are many tax statutes or provisions which are designed, not to
trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic
objectives. The task of our Court is to give effect to the legislative design and objectives as they are written into the
statute even if, as in the case at bar, some revenues have to be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent
(35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended
Section 24 (b) (1), NIRC, into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing

economy foremost of which is the financing of economic development programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their earnings
from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be
imposed on dividends received by non-resident foreign corporations in the same manner as the tax imposed
on interest on foreign loans;

xxx xxx xxx

(Emphasis supplied)

More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines
by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor.
The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home
country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would simply have
more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor additional tax credits which
would be applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires the
home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to
the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption that a positive
incentive effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00 Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25 Dividends actually remitted to P&G-USA

P55.25
x 46% Maximum US corporate income tax rate

 P25.415US corporate tax payable by P&G-USA
without tax credits

P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)

P15.66 US corporate income tax payable after Section 901
tax credit.

P55.25
- 15.66

P39.59 Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.

P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)

- 0 - US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.

P55.25 Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate
income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after US
tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine taxes. In
the calculation of the Philippine Government, this should encourage additional investment or re-investment in the
Philippines by P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on
Income,"15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty
percent (20%) of the gross amount of dividends paid to US parent corporations:

Art 11. Dividends

xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that
Contracting State by a resident of the other Contracting State shall not exceed

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of
the paying corporation's taxable year which precedes the date of payment of the dividend and during the
whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the
paying corporation was owned by the recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall
allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate
amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] . 16 This is, of course, precisely the
"deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above. Clearly, there is here on the part
of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is
a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of
US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from
a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration
dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and in
lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31
January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement as to costs.

Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.
Separate Opinions

CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.

As I understand it, the intention of Section 24 (b) of our Tax Code is to attract foreign investors to this country by
reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at least equal in
amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to
their home state. In effect, both the Philippines and the home state of the foreign investors reduce their respective
tax "take" of those profits and the investors wind up with more left in their pockets. Under this arrangement, the total
taxes to be paid by the foreign investors may be confined to the 35% corporate income tax and 15% dividend tax
only, both payable to the Philippines, with the US tax liability being offset wholly or substantially by the US "deemed
paid" tax credits.

Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate
income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or more on the same
amount of dividends. In this circumstance, it is not likely that many such foreign investors, given the onerous burden
of the two-tier system, i.e., local state plus home state, will be encouraged to do business in the local state.

It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the
Republic from the foreign investor is considerably reduced. This may appear unacceptable to the superficial viewer.
But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our country and
contribute to our economic development. The benefit to us may not be immediately available in instant revenues but
it will be realized later, and in greater measure, in terms of a more stable and robust economy.

BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add some
observations of my own, since I happen to be the ponente in Commissioner of Internal Revenue v. Wander
Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is diametrically opposite to that
sought to be reached in the instant Motion for Reconsideration.

1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner Commissioner
of Internal Revenue to raise before the Court of Tax Appeals the issue of who should be the real party in interest in
claiming a refund cannot prejudice the government, as such failure is merely a procedural defect; and that moreover,
the government can never be in estoppel, especially in matters involving taxes. In a word, the dissenting opinion
insists that errors of its agents should not jeopardize the government's position.

The above rule should not be taken absolutely and literally; if it were, the government would never lose any litigation
which is clearly not true. The issue involved here is not merely one of procedure; it is also one of fairness: whether
the government should be subject to the same stringent conditions applicable to an ordinary litigant. As the Court had
declared in Wander:

. . . To allow a litigant to assume a different posture when he comes before the court and challenge the
position he had accepted at the administrative level, would be to sanction a procedure whereby the
Court which is supposed to review administrative determinations would not review, but determine and
decide for the first time, a question not raised at the administrative forum. . . . (160 SCRA at 566-577)

Had petitioner been forthright earlier and required from private respondent proof of authority from its parent
corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would doubtless have
been able to show proof of such authority. By any account, it would be rank injustice not at this stage to require
petitioner to submit such proof.

2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the actual
amount credited by the US government against the income tax due from P & G USA on the dividends received from
private respondent; (2) to present the 1975 income tax return of P & G USA when the dividends were received; and
(3) to submit any duly authenticated document showing that the US government credited the 20% tax deemed paid in
the Philippines.

I agree with the main opinion of my colleague, Feliciano J., specifically in page 23 et seq. thereof, which, as I
understand it, explains that the US tax authorities are unable to determine the amount of the "deemed paid" credit to
be given P & G USA so long as the numerator of the fraction, i.e., dividends actually remitted by P & G-Phil. to P & G
USA, is still unknown. Stated in other words, until dividends have actually been remitted to the US (which
presupposes an actual imposition and collection of the applicable Philippine dividend tax rate), the US tax authorities
cannot determine the "deemed paid" portion of the tax credit sought by P & G USA. To require private respondent to
show documentary proof of its parent corporation having actually received the "deemed paid" tax credit from the
proper tax authorities, would be like putting the cart before the horse. The only way of cutting through this (what
Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the effect that the tax
laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in our tax code for applicability of the
reduced 15% dividend tax rate. Thereafter, the taxpayer can be required to submit, within a reasonable period, proof
of the amount of "deemed paid" tax credit actually granted by the foreign tax authority. Imposing such a resolutory
condition should resolve the knotty problem of circularity.

3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax
exemptions, are to be construed strictissimi juris against the person or entity claiming the exemption; and that
refunds cannot be permitted to exist upon "vague implications."

Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain and give
effect to the legislative intent embodied in a particular provision of law. If a statute (including a tax statute reducing a
certain tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning and applied without
interpretation. In the instant case, the dissenting opinion of Paras, J., itself concedes that the basic purpose of Pres.
Decree No. 369, when it was promulgated in 1975 to amend Section 24(b), [11 of the National Internal Revenue
Code, was "to decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced dividend tax rate "is
premised on reciprocity."

4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one find reciprocity
specified as a condition for the granting of the reduced dividend tax rate in Section 24 (b), [1], NIRC. Upon the other
hand, where the law-making authority intended to impose a requirement of reciprocity as a condition for grant of a
privilege, the legislature does so expressly and clearly. For example, the gross estate of non-citizens and non-
residents of the Philippines normally includes intangible personal property situated in the Philippines, for purposes of
application of the estate tax and donor's tax. However, under Section 98 of the NIRC (as amended by P.D. 1457), no
taxes will be collected by the Philippines in respect of such intangible personal property if the law or the foreign
country of which the decedent was a citizen and resident at the time of his death allows a similar exemption from
transfer or death taxes in respect of intangible personal property located in such foreign country and owned by
Philippine citizens not residing in that foreign country.

There is no statutory requirement of reciprocity imposed as a condition for grant of the reduced dividend tax rate of
15% Moreover, for the Court to impose such a requirement of reciprocity would be to contradict the basic policy
underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was promulgated in the effort to promote the
inflow of foreign investment capital into the Philippines. A requirement of reciprocity, i.e., a requirement that the U.S.
grant a similar reduction of U.S. dividend taxes on remittances by the U.S. subsidiaries of Philippine corporations,
would assume a desire on the part of the U.S. and of the Philippines to attract the flow of Philippine capital into the
U.S.. But the Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had
surplus capital to export, it would not need to import foreign capital into the Philippines. In other words, to require
dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine corporations to invest
outside the Philippines, which would be inconsistent with the notion of attracting foreign capital into the Philippines in
the first place.

5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:

Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only 15%. The
mere fact that in this Procter and Gamble case, the BIR desires to charge 35% indicates that the BIR ruling
cited in Wander has been obviously discarded today by the BIR. Clearly, there has been a change of mind on
the part of the BIR.

As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of Tax
Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late as 1987, recognized the
"deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling has been issued by
the BIR.

For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote
accordingly.

PARAS, J., dissenting:

I dissent.

The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs. Procter &
Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on April 15, 1988 is sought to be
reviewed in the Motion for Reconsideration filed by private respondent. Procter & Gamble Philippines (PMC-Phils., for
brevity) assails the Court's findings that:

(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax credit;

(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a credit against the U.S.
tax due from PMC-U.S.A. of taxes deemed to have been paid in the Phils. equivalent to 20% which represents
the difference between the regular tax of 35% on corporations and the tax of 15% on dividends;
 (c) private respondent failed to meet certain conditions necessary in order that the dividends received by the
non-resident parent company in the U.S. may be subject to the preferential 15% tax instead of 35%. (pp.
200-201, Motion for Reconsideration)

Private respondent's position is based principally on the decision rendered by the Third Division of this Court in the
case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals," G.R. No.
68375, promulgated likewise on April 15, 1988 which bears the same issues as in the case at bar, but held an
apparent contrary view. Private respondent advances the theory that since the Wander decision had already become
final and executory it should be a precedent in deciding similar issues as in this case at hand.

Yet, it must be noted that the Wander decision had become final and executory only by reason of the failure of the
petitioner therein to file its motion for reconsideration in due time. Petitioner received the notice of judgment on April
22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or after the decision had already become final
and executory on May 9, 1988. Considering that entry of final judgment had already been made on May 9, 1988, the
Third Division resolved to note without action the said Motion. Apparently therefore, the merits of the motion for
reconsideration were not passed upon by the Court.

The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or in Division
may be modified or reversed by the court en banc. The case is now before this Court en banc and the decision that
will be handed down will put to rest the present controversy.

It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to the Philippine
government the tax on the income of the taxpayer, PMC-U.S.A. (parent company). However, such fact does not
necessarily connote that private respondent is the real party in interest to claim reimbursement of the tax alleged to
have been overpaid. Payment of tax is an obligation physically passed off by law on the withholding agent, if any, but
the act of claiming tax refund is a right that, in a strict sense, belongs to the taxpayer which is private respondent's
parent company. The role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to
insure the collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMC-U.S.A.,"
the non-resident foreign corporation not engaged in trade or business in the Philippines, as "PMC-U.S.A." is subject to
tax equivalent to thirty five percent (35%) of the gross income received from "PMC-Phils." in the Philippines "as . . .
dividends . . ." (Sec. 24 [b], Phil. Tax Code). Being a mere withholding agent of the government and the real party in
interest being the parent company in the United States, private respondent cannot claim refund of the alleged
overpaid taxes. Such right properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a
series of cases, the action in the Court of Tax Appeals as well as in this Court should have been brought in the name
of the parent company as petitioner and not in the name of the withholding agent. This is because the action should
be brought under the name of the real party in interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125;
Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9
SCRA 113; Gabutas v. Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep. v. PNB, L-16485, January 30, 1945).

Rule 3, Sec. 2 of the Rules of Court provides:

Sec. 2. Parties in interest. Every action must be prosecuted and defended in the name of the real party in
interest. All persons having an interest in the subject of the action and in obtaining the relief demanded shall
be joined as plaintiffs. All persons who claim an interest in the controversy or the subject thereof adverse to
the plaintiff, or who are necessary to a complete determination or settlement of the questions involved therein
shall be joined as defendants.

It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance tax is
paid, or if what was paid is less than what is due. From this, Justice Feliciano claims that in case of
an overpayment (or claim for refund) the agent must be given the right to sue the Commissioner by itself (that is, the
agent here is also a real party in interest). He further claims that to deny this right would be unfair. This is not so.
While payment of the tax due is an OBLIGATION of the agent the obtaining of a refund is a RIGHT. While every
obligation has a corresponding right (and vice-versa), the obligation to pay the complete tax has the corresponding
right of the government to demand the deficiency; and the right of the agent to demand a refund corresponds to the
government's duty to refund. Certainly, the obligation of the withholding agent to pay in full does not correspond to
its right to claim for the refund. It is evident therefore that the real party in interest in this claim for reimbursement is
the principal (the mother corporation) and NOT the agent.

This suit therefore for refund must be DISMSSED.

In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals the
issue relating to the real party in interest to claim the refund cannot, and should not, prejudice the government. Such
is merely a procedural defect. It is axiomatic that the government can never be in estoppel, particularly in matters
involving taxes. Thus, for example, the payment by the tax-payer of income taxes, pursuant to a BIR assessment
does not preclude the government from making further assessments. The errors or omissions of certain administrative
officers should never be allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co.
v. Coll. of Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen
Wood McGrath, L-12710, L-12721, Feb. 28, 1961; Perez v. Perez, L-14874, Sept, 30, 1960; Republic v. Caballero, 79
SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27, 1963).

As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States Foreign Tax Credit
equivalent to at least 20 percentage paid portion spared or waived as otherwise deemed waived by the government,
We reiterate our ruling that while apparently, a tax-credit is given, there is actually nothing in Section 902 of the U.S.
Internal Revenue Code, as amended by Public Law-87-834 that would justify tax return of the disputed 15% to the
private respondent. This is because the amount of tax credit purportedly being allowed is not fixed or ascertained,
hence we do not know whether or not the tax credit contemplated is within the limits set forth in the law. While the
mathematical computations in Justice Feliciano's separate opinion appear to be correct, the computations suffer from
a basic defect, that is we have no way of knowing or checking the figure used as premises. In view of the ambiguity of
Sec. 902 itself, we can conclude that no real tax credit was really intended. In the interpretation of tax statutes, it is
axiomatic that as between the interest of multinational corporations and the interest of our own government, it would
be far better, in the absence of definitive guidelines, to favor the national interest. As correctly pointed out by the
Solicitor General:

. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid by the
foreign taxing authority, the host country.

In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of PMC-
U.S.A. would be reduced to fifteen (15%) percent if & only if reciprocally PMC-U.S.A's home country, the
United States, not only would allow against PMC-U.SA.'s U.S. income tax liability a foreign tax credit for the
fifteen (15%) percentage-point portion of the thirty five (35%) percent Phil. dividend tax actually paid or
accrued but also would allow a foreign tax "sparing" credit for the twenty (20%)' percentage-point portion
spared, waived, forgiven or otherwise deemed as if paid by the Phil. govt. by virtue of the "tax credit sparing"
proviso of Sec. 24(b), Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240).

Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S. corporate taxpayers,
whether directly or indirectly. Nowhere under a statute or under a tax treaty, does the U.S. government recognize
much less permit any foreign tax credit for spared or ghost taxes, as in reality the U.S. foreign-tax credit mechanism
under Sections 901-905 of the U.S. Intemal Revenue Code does not apply to phantom dividend taxes in the form of
dividend taxes waived, spared or otherwise considered "as if" paid by any foreign taxing authority, including that of
the Philippine government.

Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S. government against
the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income
tax return of its parent company for 1975 when the dividends were received; and (3) to submit any duly
authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.

Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority
and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon
him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or
statute law . . . and cannot be permitted to exist upon vague implications. (Asiatic Petroleum Co. v. Llanes, 49 Phil.
466; Northern Phil Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968;
Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v.
Commissioner of Custom, 44 SCRA 122). Thus, when tax exemption is claimed, it must be shown indubitably to exist,
for every presumption is against it, and a well founded doubt is fatal to the claim (Farrington v. Tennessee & Country
Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L-29987, Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847,
Oct. 22, 1975, 67 SCRA 451).

It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the Philippines
was amplified in Presidential Decree No. 369 promulgated in 1975, the purpose of which was to "encourage more
capital investment for large projects." And its ultimate purpose is to decrease the tax liability of the corporation
concerned. But this granting of a preferential right is premised on reciprocity, without which there is clearly a
derogation of our country's financial sovereignty. No such reciprocity has been proved, nor does it actually exist. At
this juncture, it would be useful to bear in mind the following observations:

The continuing and ever-increasing transnational movement of goods and services, the emergence of multinational
corporations and the rise in foreign investments has brought about tremendous pressures on the tax system to
strengthen its competence and capability to deal effectively with issues arising from the foregoing phenomena.

International taxation refers to the operationalization of the tax system on an international level. As it is, international
taxation deals with the tax treatment of goods and services transferred on a global basis, multinational corporations
and foreign investments.

Since the guiding philosophy behind international trade is free flow of goods and services, it goes without saying that
the principal objective of international taxation is to see through this ideal by way of feasible taxation arrangements
which recognize each country's sovereignty in the matter of taxation, the need for revenue and the attainment of
certain policy objectives.

The institution of feasible taxation arrangements, however, is hard to come by. To begin with, international tax
subjects are obviously more complicated than their domestic counter-parts. Hence, the devise of taxation
arrangements to deal with such complications requires a welter of information and data build-up which generally are
not readily obtainable and available. Also, caution must be exercised so that whatever taxation arrangements are set
up, the same do not get in the way of free flow of goods and services, exchange of technology, movement of capital
and investment initiatives.

A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of
double taxation (i.e., taxing an item more than once) arises because of global movement of goods and services.
Double taxation also occurs because of overlaps in tax jurisdictions resulting in the taxation of taxable items by the
country of source or location (source or situs rule) and the taxation of the same items by the country of residence or
nationality of the taxpayer (domiciliary or nationality principle).
An item may, therefore, be taxed in full in the country of source because it originated there, and in another country
because the recipient is a resident or citizen of that country. If the taxes in both countries are substantial and no tax
relief is offered, the resulting double taxation would serve as a discouragement to the activity that gives rise to the
taxable item.

As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral convention (but may be
made multilateral) entered into between sovereign states for purposes of eliminating double taxation on income and
capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax
treatment to foreign residents or nationals. 2

A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or an item of deduction.

Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be derived therefrom.

A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments.
For instance, if the usual tax rate is 35 percent but a concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax sparing
provision may be stipulated. With tax sparing, taxes exempted or reduced are considered as having been fully paid.

To illustrate:

"X" Foreign Corporation income 100

Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15

1. "X" Foreign Corp. Tax Liability without Tax Sparing

"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55

2. "X" Foreign Corp. Tax Liability with Tax Sparing

"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35

By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the reversal of the Procter & Gamble decision for the following
reasons:

1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the same day the decision of the Second Division was
promulgated, and while Wander has attained finality this is simply because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for
Reconsideration was theoretically never taken into account by said Third Division.

2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said: "More pregnant than anything else is that the court shall
be right." We hereby cite settled doctrines from a treatise on Civil Law:

We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for reasons of stability in the law. The doctrine, which is really
"adherence to precedents," states that once a case has been decided one way, then another case, involving exactly the same point at issue, should be decided in the
same manner.

Of course, when a case has been decided erroneously such an error must not be perpetuated by blind obedience to the doctrine of stare decisis. No matter how
sound a doctrine may be, and no matter how long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The principle of stare
decisis does not and should not apply when there is a conflict between the precedent and the law (Tan Chong v. Sec. of Labor, 79 Phil. 249).

While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as precedent, no longer rules. More pregnant than anything else is
that the court shall be right (Phil. Trust Co. v. Mitchell, 59 Phil. 30).

3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending tax treaty; our Procter & Gamble case deals with relations
between the Philippines and the United States, a country with which we had no tax treaty, at the time the taxes herein were collected.

4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case the B.I.R.
desires to charge 35% indicates that the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part of
the B.I.R.
5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is evident that without reciprocity the desired consequences of
the tax credit under P.D. No. 369 would be rendered unattainable.

6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been presented, and therefore even were we inclined to grant the tax
credit claimed, we find ourselves unable to compute the proper amount thereof.

7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to bring up the case.

ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of our own deci sion should be DENIED.

Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.

# Separate Opinions

CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.

As I understand it, the intention of Section 24(b) of our Tax Code is to attract foreign investors to this country by reducing their 35% dividend tax rate to 15% if their own state
allows them a deemed paid tax credit at least equal in amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to their
home state. In effect, both the Philippines and the home state of the foreign investors reduce their respective tax "take" of those profits and the investors wind up with more left
in their pockets. Under this arrangement, the total taxes to be paid by the foreign investors may be confined to the 35% corporate income tax and 15% dividend tax only, both
payable to the Philippines, with the US tax hability being offset wholly or substantially by the Us "deemed paid' tax credits.

Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate income tax) a 35% dividend tax and another 35% or more to
their home state or a total of 70% or more on the same amount of dividends. In this circumstance, it is not likely that many such foreign investors, given the onerous burden of
the two-tier system, i.e., local state plus home state, will be encouraged to do business in the local state.

It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the Republic from the foreign investor is considerably reduced. This
may appear unacceptable to the superficial viewer. But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our country and contribute
to our economic development. The benefit to us may not be immediately available in instant revenues but it will be realized l ater, and in greater measure, in terms of a more
stable and robust economy.

BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add some observations of my own, since I happen to be
the ponente in Commissioner of Internal Revenue v. Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is diametrically opposite to that
sought to be reached in the instant Motion for Reconsideration.

1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner Commissioner of Internal Revenue to raise before the Court of Tax
Appeals the issue of who should be the real party in interest in claiming a refund cannot prejudice the government, as such failure is merely a procedural defect; and that
moreover, the government can never in estoppel, especially in matters involving taxes. In a word, the dissenting opinion insists that errors of its agents should not jeopardize
the government's position.

The above rule should not be taken absolutely and literally; if it were, the government would never lose any litigation which is clearly not true. The issue involved here is not
merely one of procedure; it is also one of fairness: whether the government should be subject to the same stringent conditions applicable to an ordinary litigant. As the Court
had declared in Wander:

. . . To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at the administrative level, would be
to sanction a procedure whereby the Court which is supposed to review administrative determinations would not review, but determine and decide for the first
time, a question not raised at the administrative forum. ... (160 SCRA at 566-577)

Had petitioner been forthright earlier and required from private respondent proof of authority from its parent corporation, Procter and Gamble USA, to prosecute the claim for
refund, private respondent would doubtless have been able to show proof of such authority. By any account, it would be rank injustice not at this stage to require petitioner to
submit such proof.

2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the actual amount credited by the US government against the income
tax due from P & G USA on the dividends received from private respondent; (2) to present the 1975 income tax return of P & G USA when the dividends were received; and (3)
to submit any duly authenticated document showing that the US government credited the 20% tax deemed paid in the Philippines.

I agree with the main opinion of my colleagues, Feliciano J., specifically in page 23 et seq. thereof, which, as I understand it, explains that the US tax authorities are unable to
determine the amount of the "deemed paid" credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends actually remitted by P & G-Phil. to P & G USA,
is still unknown. Stated in other words, until dividends have actually been remitted to the US (which presupposes an actual imposition and collection of the applicable Philippine
dividend tax rate), the US tax authorities cannot determine the "deemed paid" portion of the tax credit sought by P & G USA. To require private respondent to show documentary
proof of its parent corporation having actually received the "deemed paid" tax credit from the proper tax authorities, would be like putting the cart before the horse. The only
way of cutting through this (what Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the effect that the tax laws of particular foreign
jurisdictions, e.g., USA, comply with the requirements in our tax code for applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be required to submit,
within a reasonable period, proof of the amount of "deemed paid" tax credit actually granted by the foreign tax authority. Imposing such a resolutory condition should resolve the
knotty problem of circularity.

3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax exemptions, are to be construed strictissimi juris against the person
or entity claiming the exemption; and that refunds cannot be permitted to exist upon "vague implications."

Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain and give effect to the legislative intent embodied in a particular
provision of law. If a statute (including a tax statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning and applied
without interpretation. In the instant case, the dissenting opinion of Paras, J., itself concedes that the basic purpose of Pres. Decree No. 369, when it was promulgated in 1975 to
amend Section 24(b), [11 of the National Internal Revenue Code, was "to decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced dividend tax rate "is premised on reciprocity."

4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one find reciprocity specified as a condition for the granting of the reduced
dividend tax rate in Section 24 (b), [1], NIRC. Upon the other hand. where the law-making authority intended to impose a requirement of reciprocity as a condition for grant of a
privilege, the legislature does so expressly and clearly. For example, the gross estate of non-citizens and non-residents of the Philippines normally includes intangible personal
property situated in the Philippines, for purposes of application of the estate tax and donor's tax. However, under Section 98 of the NIRC (as amended by P.D. 1457), no taxes
will be collected by the Philippines in respect of such intangible personal property if the law or the foreign country of which the decedent was a citizen and resident at the time of
his death allows a similar exemption from transfer or death taxes in respect of intangible personal property located in such foreign country and owned by Philippine citizens not
residing in that foreign country.

There is no statutory requirement of reciprocity imposed as condition for grant of the reduced dividend tax rate of 15% Moreover, for the Court to impose such a requirement of
reciprocity would be to contradict the basic policy underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was promulgated in the effort to promote the inflow of
foreign investment capital into the Philippines. A requirement of reciprocity, i.e., a requirement that the U.S. grant a similar reduction of U.S. dividend taxes on remittances by
the U.S. subsidiary of Philippine corporations, would assume a desire on the part of the U.S. and of the Philippines to attract the flow of Philippine capital into the U.S.. But the
Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had surplus capital to export, it would not need to import foreign capital into the
Philippines. In other words, to require dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine corporations to invest outside the Philippines,
which would be inconsistent with the notion of attracting foreign capital into the Philippines in the first place.

5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:

Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case, the BIR
desires to charge 35% indicates that the BIR ruling cited in Wander has been obviously discarded today by the BIR. Clearly, there has been a change of mind on the
part of the BIR.

As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of Tax Appeals and this Court, the administrative rulings issued by
the BIR from 1976 until as late as 1987, recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling has been issued by the
BIR.

For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote accordingly.

PARAS, J., dissenting:

I dissent.

The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation, et al.," G.R. No.
66838, promulgated on April 15,1988 is sought to be reviewed in the Motion for Reconsideration filed by private respondent. Procter & Gamble Philippines (PMC-Phils., for
brevity) assails the Court's findings that:

(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax aredit;

(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a credit against the U.S. tax due from PMC-U.S.A. of taxes deemed to have been
paid in the Phils. equivalent to 20% which represents the difference between the regular tax of 35% on corporations and the tax of 15% on dividends;

(c) private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the U.S. may be
subject to the preferential 15% tax instead of 35%. (pp, 200-201, Motion for Reconsideration)

Private respondent's position is based principally on the decision rendered by the Third Division of this Court in the case of "Commissioner of Internal Revenue vs. Wander
Philippines, Inc. and the Court of Tax Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the same issues as in the case at bar, but held an apparent
contrary view. Private respondent advances the theory that since the Wander decision had already become final and executory it should be a precedent in deciding similar issues
as in this case at hand.

Yet, it must be noted that the Wander decision had become final and executory only by reason of the failure of the petitioner therein to file its motion for reconsideration in due
time. Petitioner received the notice of judgment on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or after the decision had already become final and
executory on May 9, 1988. Considering that entry of final judgment had already been made on May 9, 1988, the Third Division resolved to note without action the said Motion.
Apparently therefore, the merits of the motion for reconsideration were not passed upon by the Court.

The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or in Division may be modified or reversed by the court en banc. The case is
now before this Court en banc and the decision that will be handed down will put to rest the present controversy.
It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to the Philippine government the tax on the income of the taxpayer, PMC-
U.S.A. (parent company). However, such fact does not necessarily connote that private respondent is the real party in interest to claim reimbursement of the tax alleged to have
been overpaid. Payment of tax is an obligation physically passed off by law on the withholding agent, if any, but the act of claiming tax refund is a right that, in a strict sense,
belongs to the taxpayer which is private respondent's parent company. The role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to insure the
collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMC-U.S.A.," the non-resident foreign corporation not engaged in trade or business
in the Philippines, as "PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of the gross income received from "PMC-Phils." in the Philippines "as ... dividends
..."(Sec. 24[b],Phil. Tax Code). Being a mere withholding agent of the government and the real party in interest being the parent company in the United States, private
respondent cannot claim refund of the alleged overpaid taxes. Such right properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a series of
cases, the action in the Court of Tax Appeals as well as in this Court should have been brought in the name of the parent company as petitioner and not in the name of the
withholding agent. This is because the action should be brought under the name of the real party in interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125;
Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA 113; Gabutas v. Castellanes, L-17323, June 23, 1965,
14 SCRA 376; Rep. v. PNB, I, 16485, January 30, 1945).

Rule 3, Sec. 2 of the Rules of Court provides:

Sec. 2. Parties in interest. Every action must be prosecuted and defended in the name of the real party in interest. All persons having an interest in the subject of
the action and in obtaining the relief demanded shall be joined as plaintiffs. All persons who claim an interest in the controversy or the subject thereof adverse to the
plaintiff, or who are necessary to a complete determination or settlement of the questions involved therein shall be joined as defendants.

It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance tax is paid, or if what was paid is less than what is due. From this,
Justice Feliciano claims that in case of an overpayment (or claim for refund) the agent must be given the right to sue the Commissioner by itself (that is, the agent here is also a
real party in interest). He further claims that to deny this right would be unfair. This is not so. While payment of the tax due is an OBLIGATION of the agent, the obtaining of a
refund la a RIGHT. While every obligation has a corresponding right (and vice-versa), the obligation to pay the complete tax has the corresponding right of the government to
demand the deficiency; and the right of the agent to demand a refund corresponds to the government's duty to refund. Certainly, the obligation of the withholding agent to pay
in full does not correspond to its right to claim for the refund. It is evident therefore that the real party in interest in this claim for reimbursement is the principal (the mother
corporation) and NOT the agent.

This suit therefore for refund must be DISMSSED.

In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals the issue relating to the real party in interest to claim the refund
cannot, and should not, prejudice the government. Such is merely a procedural defect. It is axiomatic that the government can never be in estoppel, particularly in matters
involving taxes. Thus, for example, the payment by the tax-payer of income taxes, pursuant to a BIR assessment does not preclude the government from
making further assessments. The errors or omissions of certain administrative officers should never be allowed to jeopardize the government's financial position. (See: Phil. Long
Distance Tel. Co. v. Con. of Internal Revenue, 9(, Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen Wood McGrath, L-12710, L-12721, Feb.
28,1961; Perez v. Perez, L-14874, Sept. 30,1960; Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27,1963).

As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at least 20 percentage paid portion spared or
waived as otherwise deemed waived by the government, We reiterate our ruling that while apparently, a tax-credit is given, there is actually nothing in Section 902 of the U.S.
Internal Revenue Code, as amended by Public Law-87-834 that would justify tax return of the disputed 15% to the private respondent. This is because the amount of tax credit
purportedly being allowed is not fixed or ascertained, hence we do not know whether or not the tax credit contemplated is within the limits set forth in the law. While the
mathematical computations in Justice Feliciano's separate opinion appear to be correct, the computations suffer from a basic defect, that is we have no way of knowing or
checking the figure used as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax credit was really intended. In the interpretation of tax
statutes, it is axiomatic that as between the interest of multinational corporations and the interest of our own government, it would be far better, in the absence of definitive
guidelines, to favor the national interest. As correctly pointed out by the Solicitor General:

. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid by the foreign taxing authority, the host country.

In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of PMC-U.S.A. would be reduced to fifteen (15%) percent if & only
if reciprocally PMC-U.S.A's home country, the United States, not only would allow against PMC-U.SA.'s U.S. income tax liability a foreign tax credit for the fifteen
(15%) percentage-point portion of the thirty five (35%) percent Phil. dividend tax actually paid or accrued but also would allow a foreign tax 'sparing' credit for the
twenty (20%)' percentage-point portion spared, waived, forgiven or otherwise deemed as if paid by the Phil. govt. by virtue of . he "tax credit sparing" proviso of
Sec. 24(b), Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240).

Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S. corporate taxpayers, whether directly or indirectly. Nowhere under a statute or
under a tax treaty, does the U.S. government recognize much less permit any foreign tax credit for spared or ghost taxes, as in reality the U.S. foreign-tax credit mechanism
under Sections 901-905 of the U.S. Internal Revenue Code does not apply to phantom dividend taxes in the form of dividend taxes waived, spared or otherwise considered "as if'
paid by any foreign taxing authority, including that of the Philippine government.

Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends
received from private respondent; (2) to present the income tax return of its parent company for 1975 when the dividends were received; and (3) to submit any duly
authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.

Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or
entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify, his claim by the clearest grant of organic or
statute law... and cannot be permitted to exist upon vague implications (Asiatic Petroleum Co. v. Llanes. 49 Phil. 466; Northern Phil Tobacco Corp. v. Mun. of Agoo, La Union, 31
SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v. Commissioner of
Custom, 44 SCRA 122' Thus, when tax exemption is claimed. it must be shown indubitably to exist, for every presumption is against it, and a well founded doubt is fatal to the
claim (Farrington v. Tennessee & Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera. L-29987. Oct. 22. 1975: Manila Electric Co. v. Vera, L-29987, Oct. 22, 1975;
Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).

It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the Philippines was amplified in Presidential Decree 4 No. 369
promulgated in 1975, the purpose of which was to "encourage more capital investment for large projects." And its ultimate purpose it to decrease the tax liability of the
corporation concerned. But this granting of a preferential right is premised on reciprocity, without which there is clearly a derogation of our country's financial sovereignty. No
such reciprocity has been proved, nor does it actually exist. At this juncture, it would be useful to bear in mind the following observations:
The continuing and ever-increasing transnational movement of goods and services, the emergence of multinational corporations and the rise in foreign investments has brought
about tremendous pressures on the tax system to strengthen its competence and capability to deal effectively with issues arising from the foregoing phenomena.

International taxation refers to the operationalization of the tax system on an international level. As it is, international taxation deals with the tax treatment of goods and
services transferred on a global basis, multinational corporations and foreign investments.

Since the guiding philosophy behind international trade is free flow of goods and services, it goes without saying that the principal objective of international taxation is to see
through this ideal by way of feasible taxation arrangements which recognize each country's sovereignty in the matter of taxation, the need for revenue and the attainment of
certain policy objectives.

The institution of feasible taxation arrangements, however, is hard to come by. To begin with, international tax subjects are obviously more complicated than their domestic
counter-parts. Hence, the devise of taxation arrangements to deal with such complications requires a welter of information and data buildup which generally are not readily
obtainable and available. Also, caution must be exercised so that whatever taxation arrangements are set up, the same do not get in the way of free flow of goods and services,
exchange of technology, movement of capital and investment initiatives.

A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of double taxation (i.e., taxing an item more than once) arises
because of global movement of goods and services. Double taxation also occurs because of overlaps in tax jurisdictions resulting in the taxation of taxable items by the country
of source or location (source or situs rule) and the taxation of the same items by the country of residence or nationality of the taxpayer (domiciliary or nationality principle).

An item may, therefore, be taxed in full in the country of source because it originated there, and in another country because the recipient is a resident or citizen of that country.
If the taxes in both countries are substantial and no tax relief is offered, the resulting double taxation would serve as a discouragement to the activity that gives rise to the
taxable item.

is a bilateral convention (but may be made multilateral) entered

As a way out of double taxation, countries enter into tax treaties. A tax treaty 1

into between sovereign states for purposes of eliminating double taxation on income and capital, preventing fiscal
evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign residents
or nationals. 2

A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or an item of deduction.

Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be derived therefrom.

A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments.
For instance, if the usual tax rate is 35 percent but a concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax sparing
provision may be stipulated. With tax sparing, taxes exempted or reduced are considered as having been frilly paid.

To illustrate:

"X" Foreign Corporation income 100

Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15

1. "X" Foreign Corp. Tax Liability without Tax Sparing

"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55

2. "X" Foreign Corp. Tax Liability with Tax Sparing

"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35

By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the reversal of the Procter & Gamble decision for the following
reasons:

1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the same day the decision of the Second Division was
promulgated, and while Wander has attained finality this is simply because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for
Reconsideration was theoretically never taken into account by said Third Division.
2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said: "More pregnant than anything else is that the court shall
be right." We hereby cite settled doctrines from a treatise on Civil Law:

We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for reasons of stability in the law. The doctrine, which is really
'adherence to precedents,' states that once a case has been decided one way, then another case, involving exactly the same point at issue, should be decided in the
same manner.

Of course, when a case has been decided erroneously such an error must not be perpetuated by blind obedience to the doctrine of stare decisis. No matter how
sound a doctrine may be, and no matter how long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The principle of stare
decisis does not and should not apply when there is a conflict between the precedent and the law (Tan Chong v. Sec. of Labor, 79 Phil . 249).

While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as precedent, no longer rules. More pregnant than anything else is
that the court shall be right (Phil. Trust Co. v. Mitchell, 69 Phil. 30).

3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending tax treaty; our Procter & Gamble case deals with relations
between the Philippines and the United States, a country with which we had no tax treaty, at the time the taxes herein were collected.

4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case the B.I.R.
desires; to charge 35% indicates that the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part of
the B.I.R.

5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is evident that without reciprocity the desired consequences of
the tax credit under P.D. No. 369 would be rendered unattainable.

6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been presented, and therefore even were we inclined to grant the tax
credit claimed, we find ourselves unable to compute the proper amount thereof.

7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to bring up the case.

ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of our own decision should be DENIED.

Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.

Footnotes

1 We refer here (unless otherwise expressly indicated) to the provisions of the NIRC as they existed during the relevant taxable years and at the time the claim for
refund was made. We shall hereafter refer simply to the NIRC.

2 Section 20 (n), NIRC (as renumbered and re-arranged by Executive Order No. 273, 1 January 1988).

3 E.g., Section 51 (e), NIRC:

Sec. 51. Returns and payment of taxes withheld at source.. . .

xxx xxx xxx

(e) Surcharge and interest for failure to deduct and withhold.If the withholding agent, in violation of the provisions of the preceding section and implementing
regulations thereunder, fails to deduct and withhold the amount of tax required under said section and regulations, he shall be liable to pay in addition to the tax
required to be deducted and withheld, a surcharge of fifty per centum if the failure is due to willful neglect or with intent to defraud the Government, or twenty-
five per centum if the failure is not due to such causes, plus interest at the rate of fourteen per centum per annum from the time the tax is required to be withheld
until the date of assessment.

xxx xxx xxx

Section 251 (Id.):

Sec. 251. Failure of a withholding agent to collect and remit tax. Any person required to collect, account for, and remit any tax imposed by this Code who willfully
fails to collect such tax, or account for and remit such tax, or willfully assists in any manner to evade any such tax or the payment thereof, shall, in addition to other
penalties provided for under this Chapter, be liable to a penalty equal to the total amount of the tax not collected, or not accounted for and remitted. (Emphasis
supplied)

4 Houston Street Corporation v. Commissioner of Internal Revenue, 84 F. 2nd. 821 (1936); Bank of America v. Anglim, 138 F. 2nd. 7 (1943).

5 15 SCRA 1 (1965).

6 15 SCRA at 4.

7 The following detailed examination of the tenor and import of Sections 901 and 902 of the US Tax Code is, regrettably, made necessary by the fact that the original
decision of the Second Division overlooked those Sections in their entirety. In the original opinion in 160 SCRA 560 (1988), immediately after Section 902, US Tax
 Code is quoted, the following appears: "To Our mind, there is nothing in the aforecited provision that would justify tax return of the disputed 15% to the private
respondent" (160 SCRA at 567). No further discussion of Section 902 was offered.

8 Sometimes also called a "derivative" tax credit or an "indirect" tax credit; Bittker and Ebb, United States Taxation of Foreign Income and Foreign Persons, 319 (2nd
Ed., 1968).

9 American Chicle Co. v. U.S. 316 US 450, 86 L. ed. 1591 (1942); W.K. Buckley, Inc. v. C.I.R., 158 F. 2d. 158 (1946).

10 In his dissenting opinion, Paras, J. writes that "the amount of the tax credit purportedly being allowed is not fixed or ascertained, hence we do not know whether
or not the tax credit contemplated is within the limits set forth in the law" (Dissent, p. 6) Section 902 US Tax Code does not specify particular fixed amounts or
percentages as tax credits; what it does specify in Section 902(A) (2) and (C) (1) (B) is a proportion expressed in the fraction:

dividends actually remitted by P&G-Phil. to P&G-USA

amount of accumulated profits earned by P&G-Phil. in

excess of income tax

The actual or absolute amount of the tax credit allowed by Section 902 will obviously depend on the actual values of the numerator and the denominator used in the
fraction specified. The point is that the establishment of the proportion or fraction in Section 902 renders the tax credit there allowed determinate and determinable.

** The denominator used by Com. Plana is the total pre-tax income of the Philippine subsidiary. Under Section 902 (c) (1) (B), US Tax Code, quoted earlier, the
denominator should be the amount of income of the subsidiary in excess of [Philippine] income tax.

11 The US tax authorities cannot determine the amount of the "deemed paid" credit to be given because the correct proportion cannot be determined: the numerator
of the fraction is unknown, until remittance of the dividends by P&G-Phil. is in fact effected. Please see computation, supra, p. 17.

12 BIR Ruling dated 21 March 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and Company.

13 BIR Ruling dated 13 October 1981, addressed to Mr. A.R. Sarvino, Manager-Securities, Hongkong and Shanghai Banking Corporation.

14 BIR Ruling dated 31 January 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and Company.

15 Text in 7 Philippine Treaty Series 523; signed on 1 October 1976 and effective on 16 October 1982 upon ratification by both Governments and exchange of
instruments of ratification.

16 Art. 23 (1), Tax Convention; the same treaty imposes a similar obligation upon the Philippines to give to the Philippine parent of a US subsidiary a tax credit for
the appropriate amount of US taxes paid by the US subsidiary. (Art. 23[2], id) Thus, Sec. 902 US Tax Code and Sec. 30(c) (8), NIRC, have been in effect been
converted into treaty commitments of the United States and the Philippines, respectively, in respect of US and Philippine corporations.

PARAS, J., dissenting:

1 There are two types of credit systems. The first, is the underlying credit system which requires the other contracting state to credit not only the 15% Philippine tax
into company dividends but also the 35% Philippine tax on corporations in respect of profits out of which such dividends were paid. The Philippine corporation is
assured of sufficient creditable taxes to cover their total tax liabilities in their home country and in effect will no longer pay taxes therein. The other type provides
that if any tax relief is given by the Philippines pursuant to its own development program, the other contracting state will grant credit for the amount of the Philippine
tax which would have been payable but for such relief.

2 The Philippines, for one, has entered into a number of tax treaties in pursuit of the foregoing objectives. The extent of tax treaties entered into by the Philippines
may be seen from the following tabulation:

Table 1 RP Tax Treaties

RP-West Germany Ratified on Jan. 1, 1985

RP-Malaysia Ratified on Jan. 1, 1985
RP-Nigeria, Concluded in September,
Netherlands and October and November, 1985,
Spain respectively (documents ready for
signature)
RP-Yugoslavia Negotiated in Belgrade,
Sept. 30-Oct. 4,1985
Pending Ratification Signed Ratified
RP-Italy Dec. 5, 1980 Nov. 28,
1983
RP-Brazil Sept. 29, 1983
RP-East Germany Feb. 17, 1984
RP-Korea Feb. 21, 1984
Pending Signature Negotiations conluded on
RP Sweden (renegotiated) May 11, 1978
RP Romania Feb. 1, 1983
RP Sri Lanka 30,477.00
RP Norway Nov. 11, 1983
RP India 30,771.00
RP Nigeria Sept. 27, 1985
RP Netherlands Oct. 8, 1985
RP Spain Nov. 22, 1985.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21609 September 29, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
KER & COMPANY, LTD., defendant-appellant.

Office of the Solicitor General for plaintiff-appellant.

Leido, Andrada, Perez and Associates for defendant-appellant.

BENGZON, J.P., J.:

Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the years 1947, 1948, 1949 and 1950 on the
following dates:

Year Date Filed

1947 April 12, 1948
1948 April 30, 1949
1949 May 15, 1950
1950 May 9, 1951

It amended its income tax returns for 1948 and 1949 on May 11, 1949 and June 30, 1950, respectively.

In 1953 the Bureau of Internal Revenue examined and audited Ker & Co., Ltd.'s returns and books of accounts and
subsequently issued the following assessments for deficiency income tax:

Year Amount Date Assessed

1947 P42,342.30 July 25, 1953
1948 18,651.87 Feb. 16, 1953
1949 139.67 Feb. 16, 1953
1950 12,813.00 Feb. 16, 1953

due and payable on dates indicated in the accompanying notices of assessment. The assessments for 1948 and 1950
carried the surcharge of 50% authorized under Section 72 of the Tax Code for the filing of fraudulent returns.

Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its counsel, the Bureau of Internal Revenue reduced the
assessments for the year 1947 from P42,342.30 to P27,026.28 and for the year 1950 from P12,813.00 to P8,542.00,
imposed the 50% surcharge for the year 1947 and eliminated the same surcharge from the assessment for the year
1950. The assessments for years 1948 and 1949 remained the same.

On March 1, 1956 Ker & Co., Ltd. filed with the Court of Tax Appeals a petition for review with preliminary injunction.
No preliminary injunction was issued, for said court dismissed the appeal for having been instituted beyond the 30-
day period provided for in Section 11 of Republic Act 1125. We affirmed the order of dismissal of L-12396. 1

On March 15, 1962, the Bureau of Internal Revenue demanded payment of the aforesaid assessments together with a
surcharge of 5% for late payment and interest at the rate of 1% monthly. Ker & Co., Ltd. refused to pay, instead in its
letters dated March 28, 1962 and April 10, 1962 it set up the defense of prescription of the Commissioner's right to
collect the tax. Subsequently, the Republic of the Philippines filed on March 27, 1962 a complaint with the Court of
First Instance of Manila seeking collection of the aforesaid deficiency income tax for the years 1947, 1948, 1949 and
1950. The complaint did not allege fraud in the filing of any of the income tax returns for the years involved, nor did it
pray for the payment of the corresponding 50% surcharge, but it prayed for the payment of 5% surcharge for late
payment and interest of 1% per month without however specifying from what date interest started to accrue.

Summons was served not on the defendant taxpayer but upon Messrs. Leido and Associates, its counsel in the
proceedings before the Bureau of Internal Revenue and the Court of Tax Appeals.

On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido, Andrada, Perez & Associates, moved for the dismissal of
the complaint on the ground that the court did not acquire jurisdiction over the person of the defendant and that
plaintiff's cause of action has prescribed. This motion was denied and defendant filed a motion for reconsideration.
Resolution on said motion, however, was deferred until trial of the case on the merits.
On May 18, 1962, Ker & Co., Ltd. filed its answer to the complaint interposing therein the defense set up in its motion
to dismiss of April 14, 1962.

On September 18, 1962 the Republic of the Philippines amended its complaint, in answer to which Ker & Co., Ltd.
adopted the same answer which it had filed on May 18, 1962.

On January 30, 1963 the Court of First Instance rendered judgment, the dispositive portion of which states:

WHEREFORE, this Court dismisses the claim for the collection of deficiency income taxes for 1947, but orders
defendant taxpayer to pay the deficiency income taxes for 1948, 1949 and 1950, in the amounts of
P18,651.87, P139.67 and P8,542.00, respectively, plus 5% surcharge thereon on each amount and interest of
1% a month computed from March 27, 1962 and until full payment thereof is made, plus the costs of suit.

On February 20, 1963 the Republic of the Philippines filed a motion for reconsideration contending that the right of the
Commissioner of Internal Revenue to collect the deficiency assessment for 1947 has not prescribed by a lapse of
merely five years and three months, because the taxpayer's income tax return was fraudulent in which case
prescription sets in ten years from October 31, 1951, the date of discovery of the fraud, pursuant to Section 332 (a)
of the Tax Codes and that the payment of delinquency interest of 1% per month should commence from the date it
fell due as indicated in the assessment notices instead of on the date the complaint was filed.

On March 6, 1963 Ker & Co., Ltd. also filed a motion for reconsideration reiterating its assertion that the Court of First
Instance did not acquire jurisdiction over its person, and maintaining that since the complaint was filed nine years,
one month and eleven days after the deficiency assessments for 1948, 1949 and 1950 were made and since the filing
of its petition for review in the Court of Tax Appeals did not stop the running of the period of limitations, the right of
the Commissioner of Internal Revenue to collect the tax in question has prescribed.

The two motions for reconsideration having been denied, both parties appealed directly to this Court.

The issues in this case are:

1. Did the Court of First Instance acquire jurisdiction over the person of defendant Ker & Co., Ltd.? .

2. Did the right of the Commissioner of Internal Revenue to assess deficiency income tax for the year 1947
prescribe? .

3. Did the filing of a petition for review by the taxpayer in the Court of Tax Appeals suspend the running of the
statute of limitations to collect the deficiency income for the years 1948, 1949 and 1950?

4. When did the delinquency interest on the deficiency income tax for the years 1948, 1949 and 1950 accrue?

First Issue

Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction over its person inasmuch as summons was
not served upon it but upon Messrs. Leido and Associates who do not come under any of the class of persons upon
whom summons should be served as enumerated in Section 13, Rule 7 of the Rules of Court, 2which reads:

SEC. 13. Service upon private domestic corporation or partnership.If the defendant is a corporation formed
under the laws of the Philippines or a partnership duly registered, service may be made on the president,
manager, secretary, cashier, agent, or any of its directors.

Messrs. Leido and Associates acted as counsel for Ker Co., Ltd. when this tax case was in its administrative stage. The
same counsel represented Ker & Co., Ltd., when it appealed said case to the Court of Tax Appeals and later to this
Court. Subsequently, when the Deputy Commissioner of Internal Revenue, by letter dated March 15, 1962, demanded
the payment of the deficiency income tax in question, it was Messrs. Leido, Andrada, Perez & Associates who replied
in behalf of Ker & Co., Ltd. in two letters, dated March 28, 1962 and April 10, 1962, both after the complaint in this
case was filed. At least therefore on April 2, 1962 when Messrs. Leido and Associates received the summons, they
were still acting for and in behalf of Ker & Co., Ltd. in connection with its tax liability involved in this case. Perforce,
they were the taxpayer's agent when summons was served. Under Section 13 of Rule 7, aforequoted, service upon
the agent of a corporation is sufficient.

We observe that the motion to dismiss filed on April 14, 1962, aside from disputing the lower court's jurisdiction over
defendant's person, prayed for dismissal of the complaint on the ground that plaintiff's cause of action has prescribed.
By interposing such second ground in its motion to dismiss, Ker & Co., Ltd. availed of an affirmative defense on the
basis of which it prayed the court to resolve controversy in its favor. For the court to validly decide the said plea of
defendant Ker & Co., Ltd., it necessarily had to acquire jurisdiction upon the latter's person, who, being the proponent
of the affirmative defense, should be deemed to have abandoned its special appearance and voluntarily submitted
itself to the jurisdiction of the court.3

Voluntary appearance cures defects of summons, if any.4 Such defect, if any, was further cured when defendant filed
its answer to the complaint.5 A defendant can not be permitted to speculate upon the judgment of the court by
objecting to the court's jurisdiction over its person if the judgment is adverse to it, and acceding to jurisdiction over
its person if and when the judgment sustains its defenses.
 Second Issue

Ker & Co., Ltd. contends that under Section 331 of the Tax Code the right of the Commissioner of Internal Revenue to
assess against it a deficiency income tax for the year 1947 has prescribed because the assessment was issued on July
25, 1953 after a lapse of five years, three months and thirteen days from the date (April 12, 1948) it filed its income
tax return. On the other hand, the Republic of the Philippines insists that the taxpayer's income tax return was
fraudulent, therefore the Commissioner of Internal Revenue may assess the tax within ten years from discovery of the
fraud on October 31, 1951 pursuant to Section 322(a) of the Tax Code.

The stand of the Republic of the Philippines hinges on whether or not taxpayer's income tax return for 1947 was
fraudulent.

The court a quo, confining itself to determining whether or not the assessment of the tax for 1947 was issued within
the five-year period provided for in Section 331 of the Tax Code, ruled that the right of the Commissioner of Internal
Revenue to assess the tax has prescribed. Said the lower court:

The Court resolves the second issue in the negative, because Section 331 of the Revenue Code explicitly
provides, in mandatory terms, that "Internal Revenue taxes shall be assessed within 5 years after the return
was filed, and no proceedings in court without assessment, for the collection of such taxes, shall be
begun after expiration of such period. The attempt by the Commissioner of Internal Revenue to make an
assessment on July 25, 1953, on the basis of a return filed on April 12, 1948, is an exercise of authority
against the aforequoted explicit and mandatory limitations of statutory law. Settled in our system is the rule
that acts committed against the provisions of mandatory or prohibitory laws shall be void (Art. 5, New Civil
Code). . . .

Said court resolved the issue without touching upon fraudulence of the return. The reason is that the complaint
alleged no fraud, nor did the plaintiff present evidence to prove fraud.

In reply to the lower court's conclusion, the Republic of the Philippines maintains in its brief that Ker & Co., Ltd. filed a
false return and since the fraud penalty of 50% surcharge was imposed in the deficiency income tax assessment,
which has become final and executory, the finding of the Commissioner of Internal Revenue as to the existence of the
fraud has also become final and need not be proved. This contention suffers from a flaw in that it fails to consider the
well-settled principle that fraud is a question of fact6 which must be alleged and proved.7 Fraud is a serious charge
and, to be sustained, it must be supported by clear and convincing proof.8Accordingly, fraud should have been alleged
and proved in the lower court. On these premises We therefore sustain the ruling of the lower court upon the point of
prescription.

It would be worth mentioning that since the assessment for deficiency income tax for 1947 has become final and
executory, Ker & Co., Ltd. may not anymore raise defenses which go into the merits of the assessment, i.e.,
prescription of the Commissioner's right to assess the tax. Such was our ruling in previous cases. 9 In this case
however, Ker & Co., Ltd. raised the defense of prescription in the proceedings below and the Republic of the
Philippines, instead of questioning the right of the defendant to raise such defense, litigated on it and submitted the
issue for resolution of the court. By its actuation, the Republic of the Philippines should be considered to have waived
its right to object to the setting up of such defense.

Third Issue

Ker & Co., Ltd. impresses upon Us that since the Republic of the Philippines filed the complaint for the collection of the
deficiency income tax for the years 1948, 1949 and 1950 only on March 27, 1962, or nine years, one month and
eleven days from February 16, 1953, the date the tax was assessed, the right to collect the same has prescribed
pursuant to Section 332 (c) of the Tax Code. The Republic of the Philippines however contends that the running of the
prescriptive period was interrupted by the filing of the taxpayer's petition for review in the Court of Tax Appeals on
March 1, 1956.

If the period during which the case was pending in the Court of Tax Appeals and in the Supreme Court were not
counted in reckoning the prescriptive period, less than five years would have elapsed, hence, the right to collect the
tax has not prescribed.

The taxpayer counters that the filing of the petition for review in the Court of Tax Appeals could not have stopped the
running of the prescriptive period to collect because said court did not have jurisdiction over the case, the appeal
having been interposed beyond the 30-day period set forth in Section 11 of Republic Act 1125. Precisely, it adds, the
Tax Court dismissed the appeal for lack of jurisdiction and said dismissal was affirmed by the Supreme Court in L-
12396 aforementioned.

Under Section 333 of the Tax Code, quoted hereunder:

SEC. 333. Suspension of running of statute.The running of the statute of limitations provided in Section 331
or three hundred thirty-two on the making of assessments and the beginning, of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which
the Collector of Internal Revenue is prohibited from making the assessment or beginning distraint or levy or a
proceeding in court, and for sixty days thereafter.

the running of the prescriptive period to collect the tax shall be suspended for the period during which the
Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a proceeding in
court, and for sixty days thereafter.
Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court have the effect of
legally preventing the Commissioner of Internal Revenue from instituting an action in the Court of First Instance for
the collection of the tax? Our view is that it did.

From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals contesting the legality
of the assessments in question, until the termination of its appeal in the Supreme Court, the Commissioner of Internal
Revenue was prevented, as recognized in this Court's ruling in Ledesma, et al. v. Court of Tax Appeals, 10 from filing
an ordinary action in the Court of First Instance to collect the tax. Besides, to do so would be to violate the judicial
policy of avoiding multiplicity of suits and the rule on lis pendens. 11

It would be interesting to note that when the Commissioner of Internal Revenue issued the final deficiency
assessments on January 5, 1954, he had already lost, by prescription, the right to collect the tax (except that for
1950) by the summary method of warrant of distraint and levy. Ker & Co., Ltd. immediately thereafter requested
suspension of the collection of the tax without penalty incident to late payment pending the filing of a memorandum in
support of its views. As requested, no tax was collected. On May 22, 1954 the projected memorandum was filed, but
as of that date the Commissioner's right to collect by warrant of distraint and levy the deficiency tax for 1950 had
already prescribed. So much so, that on March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of
Tax Appeals, the Commissioner of Internal Revenue had but one remedy left to collect the tax, that is, by judicial
action. 12 However, as stated, an independent ordinary action in the Court of First Instance was not available to the
Commissioner pursuant to Our ruling in Ledesma, et al. v. Court of Tax Appeals, supra, in view of the pendency of the
taxpayer's petition for review in the Court of Tax Appeals. Precisely he urgently filed a motion to dismiss the
taxpayer's petition for review with a view to terminating therein the proceedings in the shortest possible time in order
that he could file a collection case in the Court of First Instance before his right to do so is cut off by the passage of
time. As moved, the Tax Court dismissed the case and Ker & Co., Ltd. appealed to the Supreme Court. By the time
the Supreme Court affirmed the order of dismissal of the Court of Tax Appeals in L-12396 on January 31, 1962 more
than five years had elapsed since the final assessments were made on January 5, 1954. Thereafter, the Commissioner
of Internal Revenue demanded extra-judicially the payment of the deficiency tax in question and in reply the
taxpayer, by its letter dated March 28, 1962, advised the Commissioner of Internal Revenue that the right to collect
the tax has prescribed pursuant to Section 332 (c) of the Tax Code.1awphl.nt

Thus, did the taxpayer produce the effect of temporarily staying the hands of the Commissioner of Internal Revenue
simply through a choice of remedy. And, if We were to sustain the taxpayer's stand, We would be encouraging
taxpayers to delay the payment of taxes in the hope of ultimately avoiding the same.

Under the circumstances, the Commissioner of Internal Revenue was in effect prohibited from collecting the tax in
question. This being so, the provisions of Section 333 of the Tax Code will apply.

Fourth Issue

The Republic of the Philippines maintains that the delinquency interest on the deficiency income tax for 1948, 1949
and 1950 accrued and should commence from the date of the assessments as shown in the assessment notices,
pursuant to Section 51(e) of the Tax Code, instead of from the date the complaint was filed as determined in the
decision appealed from.

Section 51 (e) of the Tax Code states:

SEC. 51(e). Surcharge and interest in case of delinquency.To any sum or sums due and unpaid after the
dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the sum of
five per centum on the amount of tax unpaid and interest at the rate of one per centum a month upon said
tax from the time the same became due, except from the estates of insane, deceased, or insolvent persons.
(emphasis supplied)

Exhibit "F" the letter of assessment shows that the deficiency income tax for 1948 and 1949 became due on
March 15, 1953 and that for 1950 accrued on February 15, 1954 in accordance with Section 51(d) of the Tax Code.
Since the tax in question remained unpaid, delinquency interest accrued and became due starting from said due
dates. The decision appealed from should therefore be modified accordingly.

WHEREFORE, the decision appealed from is affirmed with the modification that the delinquency interest at the rate of
1% per month shall be computed from March 15, 1953 for the deficiency income tax for 1948 and 1949 and from
February 15, 1954 for the deficiency income tax for 1950. With costs against Ker & Co., Ltd. So ordered.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 165109 December 14, 2009

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

vs.
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN, ALDEGUNDO Q. CAYOSA, JR., NORMAN A.
AGATEP, ESTRELLA P. FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA MAEVE T. LAYOS,
PREFERRED VENTURES CORP., ASSET BUILDERS CORP., RIZAL COMMERCIAL BANKING CORPORATION,
MALAYAN INSURANCE CO., and LAND BANK OF THE PHILIPPINES, Respondents.

DECISION

DEL CASTILLO, J.:

The decision to entertain a taxpayers suit is discretionary upon the Court. It can choose to strictly apply the rule or
take a liberal stance depending on the controversy involved. Advocates for a strict application of the rule believe that
leniency would open floodgates to numerous suits, which could hamper the government from performing its job. Such
possibility, however, is not only remote but also negligible compared to what is at stake - "the lifeblood of the State".
For this reason, when the issue hinges on the illegal disbursement of public funds, a liberal approach should be
preferred as it is more in keeping with truth and justice.

This Petition for Review on Certiorari with prayer for a Temporary Restraining Order/Writ of Preliminary Injunction,
under Rule 45 of the Rules of Court, seeks to set aside the April 27, 2004 Order 1 of the Regional Trial Court (RTC),
Branch 5, Tuguegarao City, dismissing the Petition for Annulment of Contracts and Injunction with prayer for the
issuance of a Temporary Restraining Order/Writ of Preliminary Injunction, 2 docketed as Civil Case No. 6283. Likewise
assailed in this Petition is the August 20, 2004 Resolution 3 of RTC, Branch 1, Tuguegarao City denying the Motion for
Reconsideration of the dismissal.

Factual Antecedents

On November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed Resolution No. 2001-272 4 authorizing
Governor Edgar R. Lara (Gov. Lara) to engage the services of and appoint Preferred Ventures Corporation as financial
advisor or consultant for the issuance and flotation of bonds to fund the priority projects of the governor without cost
and commitment.

On November 19, 2001, the Sangguniang Panlalawigan, through Resolution No. 290-2001, 5 ratified the Memorandum
of Agreement (MOA) 6 entered into by Gov. Lara and Preferred Ventures Corporation. The MOA provided that the
provincial government of Cagayan shall pay Preferred Ventures Corporation a one-time fee of 3% of the amount of
bonds floated.

On February 15, 2002, the Sangguniang Panlalawigan approved Resolution No. 2002-061-A 7 authorizing Gov. Lara to
negotiate, sign and execute contracts or agreements pertinent to the flotation of the bonds of the provincial
government in an amount not to exceed 500 million for the construction and improvement of priority projects to be
approved by the Sangguniang Panlalawigan.

On May 20, 2002, the majority of the members of the Sangguniang Panlalawigan of Cagayan approved Ordinance No.
19-2002, 8 authorizing the bond flotation of the provincial government in an amount not to exceed 500 million to
fund the construction and development of the new Cagayan Town Center. The Resolution likewise granted authority to
Gov. Lara to negotiate, sign and execute contracts and agreements necessary and related to the bond flotation
subject to the approval and ratification by the Sangguniang Panlalawigan.

On October 20, 2003, the Sangguniang Panlalawigan approved Resolution No. 350-2003 9 ratifying the Cagayan
Provincial Bond Agreements entered into by the provincial government, represented by Gov. Lara, to wit:

a. Trust Indenture with the Rizal Commercial Banking Corporation (RCBC) Trust and Investment Division
and Malayan Insurance Company, Inc. (MICO).

b. Deed of Assignment by way of security with the RCBC and the Land Bank of the Philippines (LBP).

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

d. Guarantee Agreement with the RCBC Trust and Investment Division and MICO.

e. Underwriting Agreement with RCBC Capital Corporation.

On even date, the Sangguniang Panlalawigan also approved Resolution No. 351-2003, 10 ratifying the Agreement for
the Planning, Design, Construction, and Site Development of the New Cagayan Town Center 11 entered into by the
provincial government, represented by Gov. Lara and Asset Builders Corporation, represented by its President, Mr.
Rogelio P. Centeno.

On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders Corporation, giving to the latter the
planning, design, construction and site development of the town center project for a fee of 213,795,732.39. 12

Proceedings before the Regional Trial Court

On December 12, 2003, petitioners Manuel N. Mamba, Raymund P. Guzman and Leonides N. Fausto filed a Petition for
Annulment of Contracts and Injunction with prayer for a Temporary Restraining Order/Writ of Preliminary
Injunction 13 against Edgar R. Lara, Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A.
Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui, Cecilia Maeve T. Layos, Preferred Ventures
Corporation, Asset Builders Corporation, RCBC, MICO and LBP.1avvphi1

At the time of the filing of the petition, Manuel N. Mamba was the Representative of the 3rd Congressional District of
the province of Cagayan 14 while Raymund P. Guzman and Leonides N. Fausto were members of the Sangguniang
Panlalawigan of Cagayan. 15

Edgar R. Lara was sued in his capacity as governor of Cagayan, 16 while Jenerwin C. Bacuyag, Wilson O. Puyawan,
Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui and Cecilia
Maeve T. Layos were sued as members of the Sangguniang Panlalawigan of Cagayan. 17Respondents Preferred
Ventures Corporation, Asset Builders Corporation, RCBC, MICO and LBP were all impleaded as indispensable or
necessary parties.

Respondent Preferred Ventures Corporation is the financial advisor of the province of Cagayan regarding the bond
flotation undertaken by the province. 18 Respondent Asset Builders Corporation was awarded the right to plan, design,
construct and develop the proposed town center. 19 Respondent RCBC, through its Trust and Investment Division, is
the trustee of the seven-year bond flotation undertaken by the province for the construction of the town
center, 20 while respondent MICO is the guarantor. 21 Lastly, respondent LBP is the official depositary bank of the
province. 22

In response to the petition, public respondents filed an Answer with Motion to Dismiss, 23 raising the following
defenses: a) petitioners are not the proper parties or they lack locus standi in court; b) the action is barred by the
rule on state immunity from suit and c) the issues raised are not justiciable questions but purely political.

For its part, respondent Preferred Ventures Corporation filed a Motion to Dismiss 24 on the following grounds: a)
petitioners have no cause of action for injunction; b) failure to join an indispensable party; c) lack of personality to
sue and d) lack of locus standi. Respondent MICO likewise filed a Motion to Dismiss 25 raising the grounds of lack of
cause of action and legal standing. Respondent RCBC similarly argued in its Motion to Dismiss 26 that: a) petitioners
are not the real parties-in-interest or have no legal standing to institute the petition; b) petitioners have no cause of
action as the flotation of the bonds are within the right and power of both respondent RCBC and the province of
Cagayan and c) the viability of the construction of a town center is not a justiciable question but a political question.

Respondent Asset Builders Corporation, on the other hand, filed an Answer 27 interposing special and affirmative
defenses of lack of legal standing and cause of action. Respondent LBP also filed an Answer 28 alleging in the main
that petitioners have no cause of action against it as it is not an indispensable party or a necessary party to the case.

Two days after the filing of respondents respective memoranda on the issues raised during the hearing of the special
and/or affirmative defenses, petitioners filed a Motion to Admit Amended Petition 29 attaching thereto the amended
petition. 30 Public respondents opposed the motion for the following reasons: 1) the motion was belatedly filed; 2) the
Amended Petition is not sufficient in form and in substance; 3) the motion is patently dilatory and 4) the Amended
Petition was filed to cure the defect in the original petition. 31

Petitioners also filed a Consolidated Opposition to the Motion to Dismiss 32 followed by supplemental pleadings 33in

support of their prayer for a writ of preliminary injunction.

On April 27, 2004, the RTC issued the assailed Order denying the Motion to Admit Amended Petition and dismissing
the petition for lack of cause of action. It ruled that:

The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil Procedure dealing on the filing of an amended
pleading is quite clear. As such, the Court rules that the motion was belatedly filed. The granting of leave to file
amended pleadings is a matter peculiarly within the sound discretion of the trial court. But the rule allowing
amendments to pleadings is subject to the general but inflexible limitation that the cause of action or defense shall
not be substantially changed or the theory of the case altered to the prejudice of the other party (Avecilla vs. Yatcvo,
103 Phil. 666).

On the assumption that the controversy presents justiciable issues which this Court may take cognizance of,
petitioners in the present case who presumably presented legitimate interests in the controversy are not parties to the
questioned contract. Contracts produce effect as between the parties who execute them. Only a party to the contract
can maintain an action to enforce the obligations arising under said contract (Young vs. CA, 169 SCRA 213). Since a
contract is binding only upon the parties thereto, a third person cannot ask for its rescission if it is in fraud of his
rights. One who is not a party to a contract has no rights under such contract and even if the contrary may be
voidable, its nullity can be asserted only by one who is a party thereto; a third person would have absolutely no
personality to ask for the annulment (Wolfson vs. Estate of Martinez, 20 Phil. 340; Ibaez vs. Hongkong & Shanghai
Bank, 22 Phil. 572; Ayson vs. CA, G.R. Nos. L-6501 & 6599, May 21, 1955).
It was, however, held that a person who is not a party obliged principally or subsidiarily in a contract may exercise an
action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties and can
show the detriment which would positively result to him from the contract in which he had no intervention (Baez vs.
CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA 110, 112-113; Leodovica vs. CA, 65 SCRA 154-155). In the case at
bar, petitioners failed to show that they were prejudiced in their rights [or that a] detriment x x x would positively
result to them. Hence, they lack locus standi in court.

xxxx

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

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

It is [a] well-recognized principle that purely administrative and discretionary functions may not be interfered with by
the courts (Adm. Law Test & Cases, 2001 Ed., De Leon, De Leon, Jr.).

The case therefore calls for the doctrine of ripeness for judicial review. This determines the point at which courts may
review administrative action. The basic principle of ripeness is that the judicial machinery should be conserved for
problems which are real and present or imminent and should not be squandered on problems which are future,
imaginary or remote. This case is not ripe for judicial determination since there is no imminently x x x substantial
injury to the petitioners.

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

xxxx

Indeed, adjudication of the procedural issues presented for resolution by the present action would be a futile exercise
in exegesis.

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

xxxx

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

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

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

Upon the foregoing considerations, the case is hereby dismissed without costs.

SO ORDERED. 34

Petitioners filed a Motion for Reconsideration 35 to which respondents filed their respective Oppositions. 36Petitioners
then filed a Motion to Inhibit, which the court granted. Accordingly, the case was re-raffled to Branch 1 of the RTC of
Tuguegarao City. 37

On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a Resolution denying petitioners plea for
reconsideration. The court found the motion to be a mere scrap of paper as the notice of hearing was addressed only
to the Clerk of Court in violation of Section 5, Rule 15 of the Rules of Court. As to the merits, the court sustained the
findings of Branch 5 that petitioners lack legal standing to sue and that the issue involved is political.

Issues

Hence, the present recourse where petitioners argue that:

A. The lower court decided a question of substance in a way not in accord with law and with the applicable
decision of the Supreme Court, and

B. The lower court has so far departed from the accepted and usual course of judicial proceedings as to call for
an exercise of the power of supervision in that:

I. It denied locus standi to petitioners;

II. [It] determined that the matter of contract entered into by the provincial government is in the
nature of a political question;

III. [It] denied the admission of Amended Petition; and

IV. [It] found a defect of substance in the petitioners Motion for Reconsideration. 38

Our Ruling

The petition is partially meritorious.

Petitioners have legal standing to sue as taxpayers

A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the public money
is being deflected to any improper purpose, or that there is wastage of public funds through the enforcement of an
invalid or unconstitutional law. 39 A person suing as a taxpayer, however, must show that the act complained of
directly involves the illegal disbursement of public funds derived from taxation. 40 He must also prove that he has
sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a direct
injury because of the enforcement of the questioned statute or contract. 41 In other words, for a taxpayers suit to
prosper, two requisites must be met: (1) public funds derived from taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some irregularity is committed and (2) the petitioner is directly
affected by the alleged act. 42

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

a taxpayer need not be a party to the contract to challenge its validity. 43 As long as taxes are involved, people have a
right to question contracts entered into by the government.

In this case, although the construction of the town center would be primarily sourced from the proceeds of the bonds,
which respondents insist are not taxpayers money, a government support in the amount of 187 million would still be
spent for paying the interest of the bonds. 44 In fact, a Deed of Assignment 45 was executed by the governor in favor
of respondent RCBC over the Internal Revenue Allotment (IRA) and other revenues of the provincial government as
payment and/or security for the obligations of the provincial government under the Trust Indenture Agreement dated
September 17, 2003. Records also show that on March 4, 2004, the governor requested the Sangguniang
Panlalawigan to appropriate an amount of 25 million for the interest of the bond. 46Clearly, the first requisite has
been met.

As to the second requisite, the court, in recent cases, has relaxed the stringent "direct injury test" bearing in mind
that locus standi is a procedural technicality. 47 By invoking "transcendental importance", "paramount public interest",
or "far-reaching implications", ordinary citizens and taxpayers were allowed to sue even if they failed to show direct
injury. 48 In cases where serious legal issues were raised or where public expenditures of millions of pesos were
involved, the court did not hesitate to give standing to taxpayers. 49

We find no reason to deviate from the jurisprudential trend.

To begin with, the amount involved in this case is substantial. Under the various agreements entered into by the
governor, which were ratified by the Sangguniang Panlalawigan, the provincial government of Cagayan would incur
the following costs: 50

Compensation to Preferred Ventures - 6,150,000.00

(3% of P205M) 51 Resolution No. 290-2001

Management and Underwriting Fees - 3,075,000.00

(1.5% of P205M) 52

Documentary Tax - 1,537,500.00

 (0.75% of P205M) 53

Guarantee Fee 54 - 7,350,000.00

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

Total Cost - 231,908,232.39

What is more, the provincial government would be shelling out a total amount of 187 million for the period of seven
years by way of subsidy for the interest of the bonds. Without a doubt, the resolution of the present petition is of
paramount importance to the people of Cagayan who at the end of the day would bear the brunt of these agreements.

Another point to consider is that local government units now possess more powers, authority and resources at their
disposal, 56 which in the hands of unscrupulous officials may be abused and misused to the detriment of the public. To
protect the interest of the people and to prevent taxes from being squandered or wasted under the guise of
government projects, a liberal approach must therefore be adopted in determining locus standi in public suits.

In view of the foregoing, we are convinced that petitioners have sufficient standing to file the present suit.
Accordingly, they should be given the opportunity to present their case before the RTC.

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

The controversy involved is justiciable

A political question is a question of policy, which is to be decided by the people in their sovereign capacity or by the
legislative or the executive branch of the government to which full discretionary authority has been delegated. 57

In filing the instant case before the RTC, petitioners seek to restrain public respondents from implementing the bond
flotation and to declare null and void all contracts related to the bond flotation and construction of the town center. In
the petition before the RTC, they alleged grave abuse of discretion and clear violations of law by public respondents.
They put in issue the overpriced construction of the town center; the grossly disadvantageous bond flotation; the
irrevocable assignment of the provincial governments annual regular income, including the IRA, to respondent RCBC
to cover and secure the payment of the bonds floated; and the lack of consultation and discussion with the community
regarding the proposed project, as well as a proper and legitimate bidding for the construction of the town center.

Obviously, the issues raised in the petition do not refer to the wisdom but to the legality of the acts complained of.
Thus, we find the instant controversy within the ambit of judicial review. Besides, even if the issues were political in
nature, it would still come within our powers of review under the expanded jurisdiction conferred upon us by Section
1, Article VIII of the Constitution, which includes the authority to determine whether grave abuse of discretion
amounting to excess or lack of jurisdiction has been committed by any branch or instrumentality of the
government. 58

The Motion to Admit Amended Petition was properly denied

However, as to the denial of petitioners Motion to Admit Amended Petition, we find no reason to reverse the same.
The inclusion of the province of Cagayan as a petitioner would not only change the theory of the case but would also
result in an absurd situation. The provincial government, if included as a petitioner, would in effect be suing itself
considering that public respondents are being sued in their official capacity.

In any case, there is no need to amend the petition because petitioners, as we have said, have legal standing to sue
as taxpayers.

Section 5, Rule 15 of the Rules of Court was substantially complied with

This brings us to the fourth and final issue.

A perusal of the Motion for Reconsideration filed by petitioners would show that the notice of hearing was addressed
only to the Clerk of Court in violation of Section 5, Rule 15 of the Rules of Court, which requires the notice of hearing
to be addressed to all parties concerned. This defect, however, did not make the motion a mere scrap of paper. The
rule is not a ritual to be followed blindly. 59 The purpose of a notice of hearing is simply to afford the adverse parties a
chance to be heard before a motion is resolved by the court. 60 In this case, respondents were furnished copies of the
motion, and consequently, notified of the scheduled hearing. Counsel for public respondents in fact moved for the
postponement of the hearing, which the court granted. 61 Moreover, respondents were afforded procedural due
process as they were given sufficient time to file their respective comments or oppositions to the motion. From the
foregoing, it is clear that the rule requiring notice to all parties was substantially complied with. 62 In effect, the defect
in the Motion for Reconsideration was cured.

We cannot overemphasize that procedural rules are mere tools to aid the courts in the speedy, just and inexpensive
resolution of cases. 63 Procedural defects or lapses, if negligible, should be excused in the higher interest of justice as
technicalities should not override the merits of the case. Dismissal of cases due to technicalities should also be
avoided to afford the parties the opportunity to present their case. Courts must be reminded that the swift unclogging
of the dockets although a laudable objective must not be done at the expense of substantial justice. 64
WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27, 2004 Order of Branch 5 and the August 20,
2004 Resolution of Branch 1 of the Regional Trial Court of Tuguegarao City are hereby REVERSED and SET
ASIDE insofar as the dismissal of the petition is concerned. Accordingly, the case is hereby REMANDED to the
court a quo for further proceedings.

SO ORDERED.
 FIRST DIVISION

G.R. No. 147188 September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and
Mario Luza Bautista, respondents.

DECISION

DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation
constitutes tax evasion that would justify an assessment of deficiency income tax.

The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799
affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,3 which held that
the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance
Corporation (CIC) in the amount of 79,099,999.22 for the year 1989, and ordered the cancellation and setting aside
of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.

The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for
deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala Avenue, Makati City.

On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding
capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not
less than 90 million.4

On 30 August 1989, Toda purportedly sold the property for 100 million to Rafael A. Altonaga, who, in turn, sold the
same property on the same day to Royal Match Inc. (RMI) for 200 million. These two transactions were evidenced by
Deeds of Absolute Sale notarized on the same day by the same notary public.5

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of 10 million. 6

On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring, among other things,
its gain from the sale of real property in the amount of 75,728.021. After crediting withholding taxes of 254,497.00,
it paid 26,341,2078 for its net taxable income of 75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for 12.5 million, as evidenced by a
Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice 10 and demand letter to the CIC
for deficiency income tax for the year 1989 in the amount of 79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and
not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken
to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.11

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and
Mario Luza Bautista, received a Notice of Assessment12 dated 9 January 1995 from the Commissioner of Internal
Revenue for deficiency income tax for the year 1989 in the amount of 79,099,999.22, computed as follows:

Income Tax 1989

Net Income per return 75,987,725.00

Add: Additional gain on sale of real property

taxable under ordinary corporate income but were
substituted with individual capital gains(200M 100,000,000.00
100M)

Total Net Taxable Income per investigation 175,987,725.00

 Tax Due thereof at 35% 61,595,703.75

Less: Payment already made

1. Per return 26,595,704.00

2. Thru Capital Gains Tax made

by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of tax due

24,999,999.75

Add: 50% Surcharge 12,499,999.88

25% Surcharge 6,249,999.94

Total 43,749,999.57

Add: Interest 20% from

4/16/90-4/30/94 (.808) 35,349,999.65

TOTAL AMT. DUE & COLLECTIBLE 79,099,999.22

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

The Estate thereafter filed a letter of protest.13

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was
deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of 100
million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and
the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%.

On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the Commissioner erred in
holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed.

In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a
single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the
seller of the same property to RMI. The additional gain of 100 million (the difference between the second simulated
sale for 200 million and the first simulated sale for 100 million) realized by CIC was taxed at the rate of only 5%
purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income
tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such
falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well
within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which
provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being
tainted with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner
of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the
name of the individual directors of CIC, should be held liable for the deficiency income tax, especially because the
gains realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is
already dead, his estate shall answer for his liability.

In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to
deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by
CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction,
the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three
years after the last day prescribed by law for the filing of the return. Thus, the governments right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also
ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for
piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency
income tax of 79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner
on 9 January 1995.

In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the
result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy,
and a close business associate of the former, having held his office in a property owned by CIC and derived his salary
from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA
denied20 the motion for reconsideration, prompting the Commissioner to file a petition for review 21 with the Court of
Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that
the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better
situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda
Estate."22

Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the
following grounds:
 I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO
EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF
CIBELES INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT
FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.

The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles
property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She
further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done
simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was
notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of
Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20,
Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received 40 million from RMI, and
not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in
Cibeles Building. The substantial portion of 40 million was withdrawn by Toda through the declaration of cash
dividends to all its stockholders.

For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to
prove that the latter is financially incapable of purchasing the Cibeles property.

To resolve the grounds raised by the Commissioner, the following questions are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer
in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and
when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. 23

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an
accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not
accidental"; and (3) a course of action or failure of action which is unlawful.24

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received 40 million from
RMI,25 and not from Altonaga. That 40 million was debited by RMI and reflected in its trial balance 26 as "other inv.
Cibeles Bldg." Also, as of 31 July 1989, another 40 million was debited and reflected in RMIs trial balance as "other
inv. Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary
Altonaga.lavvphi1.net

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many
trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC
and an old timer in the company.27 But Mr. Prieto did not testify on this matter, hence, that information remains to be
hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of
Altonaga was unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the
tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared:

Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred
percent. But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a
lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock,
changing the structure of the property and the tax to be paid. As long as it is done legally, changing the
structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be
faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC
to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted
with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage
to another, or by which an undue and unconscionable advantage is taken of another."30

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that
the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35%
corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same
day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and
burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic
substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of
reducing the consequent income tax liability.lavvphi1.net

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of
tax liabilities than for legitimate business purposes constitutes one of tax evasion.31

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.32 The
incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a
sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the
transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation
of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using
the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by
mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the
tax policies of Congress.33

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity
when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale
to Altonaga should be disregarded for income tax purposes.34 The two sale transactions should be treated as a single
direct sale by CIC to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of
the Tax Reform Act of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, and partnerships, no matter how created or organized but not
including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand
pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains
tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of
1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.

Has the period of assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false
or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a
proceeding in court after the collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for collection thereof .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a
return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the
case may be.

It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the
tax consequence of the two sale transactions.36 Thus, the BIR was amply informed of the transactions even prior to
the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with
the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate
the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even
assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was
false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was
done with intent to evade or reduce tax liability.

As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the
discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been
discovered only on 8 March 1991.37 The assessment for the 1989 deficiency income tax of CIC was issued on 9
January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the
prescriptive period.

Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the
owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and
vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of
cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the
corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing
its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other
persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action. 38

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily
held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989.
Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations,
contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited
financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part hereof. The
business of Cibeles has at all times been conducted in full compliance with all applicable laws, rules and
regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all
income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.39[Underscoring Supplied].

When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of
Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of
31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered
ordering respondent Estate of Benigno P. Toda Jr. to pay 79,099,999.22 as deficiency income tax of Cibeles
Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.

Costs against respondent.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-41919-24 May 30, 1980

QUIRICO P. UNGAB, petitioner,

vs.
HON. VICENTE N. CUSI, JR., in his capacity as Judge of the Court of First Instance, Branch 1, 16TH Judicial
District, Davao City, THE COMMISSIONER OF INTERNAL REVENUE, and JESUS N. ACEBES, in his capacity as
State Prosecutor, respondents.

CONCEPCION JR., J:

Petition for certiorari and prohibition with preliminary injunction and restraining order to annul and set aside the
informations filed in Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the Court of First Instance of
Davao, all entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused;" and to restrain the
respondent Judge from further proceeding with the hearing and trial of the said cases.

It is not disputed that sometime in July, 1974, BIR Examiner Ben Garcia examined the income tax returns filed by the
herein petitioner, Quirico P. Ungab, for the calendar year ending December 31, 1973. In the course of his
examination, he discovered that the petitioner failed to report his income derived from sales of banana saplings. As a
result, the BIR District Revenue Officer at Davao City sent a "Notice of Taxpayer" to the petitioner informing him that
there is due from him (petitioner) the amount of P104,980.81, representing income, business tax and forest charges
for the year 1973 and inviting petitioner to an informal conference where the petitioner, duly assisted by counsel, may
present his objections to the findings of the BIR Examiner. 1 Upon receipt of the notice, the petitioner wrote the BIR
District Revenue Officer protesting the assessment, claiming that he was only a dealer or agent on commission basis
in the banana sapling business and that his income, as reported in his income tax returns for the said year, was
accurately stated. BIR Examiner Ben Garcia, however, was fully convinced that the petitioner had filed a fraudulent
income tax return so that he submitted a "Fraud Referral Report," to the Tax Fraud Unit of the Bureau of Internal
Revenue. After examining the records of the case, the Special Investigation Division of the Bureau of Internal Revenue
found sufficient proof that the herein petitioner is guilty of tax evasion for the taxable year 1973 and recommended
his prosecution: t.hqw

(1) For having filed a false or fraudulent income tax return for 1973 with intent to evade his just taxes
due the government under Section 45 in relation to Section 72 of the National Internal Revenue Code;

(2) For failure to pay a fixed annual tax of P50.00 a year in 1973 and 1974, or a total of unpaid fixed
taxes of P100.00 plus penalties of 175.00 or a total of P175.00, in accordance with Section 183 of the
National Internal Revenue Code;

(3) For failure to pay the 7% percentage tax, as a producer of banana poles or saplings, on the total
sales of P129,580.35 to the Davao Fruit Corporation, depriving thereby the government of its due
revenue in the amount of P15,872.59, inclusive of surcharge. 2

In a second indorsement to the Chief of the Prosecution Division, dated December 12, 1974, the Commissioner of
Internal Revenue approved the prosecution of the petitioner. 3

Thereafter, State Prosecutor Jesus Acebes who had been designated to assist all Provincial and City Fiscals throughout
the Philippines in the investigation and prosecution, if the evidence warrants, of all violations of the National Internal
Revenue Code, as amended, and other related laws, in Administrative Order No. 116 dated December 5, 1974, and to
whom the case was assigned, conducted a preliminary investigation of the case, and finding probable cause, filed six
(6) informations against the petitioner with the Court of First Instance of Davao City, to wit: t.hqw

(1) Criminal Case No. 1960 Violation of Sec. 45, in relation to Sec. 72 of the National Internal-
Revenue Code, for filing a fraudulent income tax return for the calendar year ending December 31,
1973; 4

(2) Criminal Case No. 1961 Violation of Sec. 182 (a), in relation to Secs. 178, 186, and 208 of the
National Internal Revenue Code, for engaging in business as producer of saplings, from January, 1973
to December, 1973, without first paying the annual fixed or privilege tax thereof; 5

(3) Criminal Case No. 1962 Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross
quarterly sales, receipts and earnings in his business as producer of banana saplings and to pay the
percentage tax due thereon, for the quarter ending December 31, 1973; 6

(4) Criminal Case No. 1963 Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross
 quarterly sales receipts and earnings in his business as producer of saplings, and to pay the
percentage tax due thereon, for the quarter ending on March 31, 1973; 7

(5) Criminal Case No. 1964 Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross
quarterly sales, receipts and earnings in his business as producer of banana saplings for the quarter
ending on June 30, 1973, and to pay the percentage tax due thereon; 8

(6) Criminal Case No. 1965 Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross
quarterly sales, receipts and earnings as producer of banana saplings, for the quarter ending on
September 30, 1973, and to pay the percentage tax due thereon. 9

On September 16, 1975, the petitioner filed a motion to quash the informations upon the grounds that: (1) the
informations are null and void for want of authority on the part of the State Prosecutor to initiate and prosecute the
said cases; and (2) the trial court has no jurisdiction to take cognizance of the above-entitled cases in view of his
pending protest against the assessment made by the BIR Examiner. 10 However, the trial court denied the motion on
October 22, 1975. 11 Whereupon, the petitioner filed the instant recourse. As prayed for, a temporary restraining
order was issued by the Court, ordering the respondent Judge from further proceeding with the trial and hearing of
Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the Court of First Instance of Davao, all
entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused."

The petitioner seeks the annulment of the informations filed against him on the ground that the respondent State
Prosecutor is allegedly without authority to do so. The petitioner argues that while the respondent State Prosecutor
may initiate the investigation of and prosecute crimes and violations of penal laws when duly authorized, certain
requisites, enumerated by this Court in its decision in the case of Estrella vs. Orendain, 12should be observed before
such authority may be exercised; otherwise, the provisions of the Charter of Davao City on the functions and powers
of the City Fiscal will be meaningless because according to said charter he has charge of the prosecution of all crimes
committed within his jurisdiction; and since "appropriate circumstances are not extant to warrant the intervention of
the State Prosecution to initiate the investigation, sign the informations and prosecute these cases, said informations
are null and void." The ruling adverted to by the petitioner reads, as follows: t.hqw

In view of all the foregoing considerations, it is the ruling of this Court that under Sections 1679 and
1686 of the Revised Administrative Code, in any instance where a provincial or city fiscal fails, refuses
or is unable, for any reason, to investigate or prosecute a case and, in the opinion of the Secretary of
Justice it is advisable in the public interest to take a different course of action, the Secretary of Justice
may either appoint as acting provincial or city fiscal to handle the investigation or prosecution
exclusively and only of such case, any practicing attorney or some competent officer of the
Department of Justice or office of any city or provincial fiscal, with complete authority to act therein in
all respects as if he were the provincial or city fiscal himself, or appoint any lawyer in the government
service, temporarily to assist such city of provincial fiscal in the discharge of his duties, with the same
complete authority to act independently of and for such city or provincial fiscal provided that no such
appointment may be made without first hearing the fiscal concerned and never after the
corresponding information has already been filed with the court by the corresponding city or provincial
fiscal without the conformity of the latter, except when it can be patently shown to the court having
cognizance of the case that said fiscal is intent on prejudicing the interests of justice. The same sphere
of authority is true with the prosecutor directed and authorized under Section 3 of Republic Act 3783,
as amended and/or inserted by Republic Act 5184. The observation in Salcedo vs. Liwag, supra,
regarding the nature of the power of the Secretary of Justice over fiscals as being purely over
administrative matters only was not really necessary, as indicated in the above relation of the facts
and discussion of the legal issues of said case, for the resolution thereof. In any event, to any extent
that the opinion therein may be inconsistent herewith the same is hereby modified.

The contention is without merit. Contrary to the petitioner's claim, the rule therein established had not been violated.
The respondent State Prosecutor, although believing that he can proceed independently of the City Fiscal in the
investigation and prosecution of these cases, first sought permission from the City Fiscal of Davao City before he
started the preliminary investigation of these cases, and the City Fiscal, after being shown Administrative Order No.
116, dated December 5, 1974, designating the said State Prosecutor to assist all Provincial and City fiscals throughout
the Philippines in the investigation and prosecution of all violations of the National Internal Revenue Code, as
amended, and other related laws, graciously allowed the respondent State Prosecutor to conduct the investigation of
said cases, and in fact, said investigation was conducted in the office of the City Fiscal. 13

The petitioner also claims that the filing of the informations was precipitate and premature since the Commissioner of
Internal Revenue has not yet resolved his protests against the assessment of the Revenue District Officer; and that he
was denied recourse to the Court of Tax Appeals.

The contention is without merit. What is involved here is not the collection of taxes where the assessment of the
Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal prosecution for
violations of the National Internal Revenue Code which is within the cognizance of courts of first instance. While there
can be no civil action to enforce collection before the assessment procedures provided in the Code have been
followed, there is no requirement for the precise computation and assessment of the tax before there can be a
criminal prosecution under the Code. t.hqw

The contention is made, and is here rejected, that an assessment of the deficiency tax due is
necessary before the taxpayer can be prosecuted criminally for the charges preferred. The crime is
 complete when the violator has, as in this case, knowingly and willfully filed fraudulent returns with
intent to evade and defeat a part or all of the tax. 14

An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat
and evade the income tax. A crime is complete when the violator has knowingly and willfuly filed a
fraudulent return with intent to evade and defeat the tax. The perpetration of the crime is grounded
upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the
government's failure to discover the error and promptly to assess has no connections with the
commission of the crime. 15

Besides, it has been ruled that a petition for reconsideration of an assessment may affect the suspension of the
prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action for violation of
law. 16 Obviously, the protest of the petitioner against the assessment of the District Revenue Officer cannot stop his
prosecution for violation of the National Internal Revenue Code. Accordingly, the respondent Judge did not abuse his
discretion in denying the motion to quash filed by the petitioner.

WHEREFORE, the petition should be, as it is hereby dismissed. The temporary restraining order heretofore issued is
hereby set aside. With costs against the petitioner.

SO ORDERED.